Deck 6: Accounting for Merchandising Businesses

Question 1

Customer Refunds Payable is an account used to record merchandise returns from customers.

Answer 1

True

Question 2

The cost of merchandise inventory is limited to the purchase price less any purchase discounts.

Answer 2

False

Question 3

In a perpetual inventory system, when merchandise is returned to the supplier, Cost of Merchandise Sold is debited as part of the transaction.

Answer 3

False

Question 4

The fees associated with credit card sales are periodically recorded as expenses.

Question 5

Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales.

Question 6

Most retailers record all credit card sales as credit sales.

Question 7

When merchandise that was sold is returned, a credit to sales returns and allowances is made.

Question 8

The most important differences between a service business and a retail business are reflected in their operating cycles and financial statements.

Question 9

Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends to sell.

Question 10

Freight is considered a cost of inventory under FOB shipping point.

Question 11

Under a perpetual inventory system, the cost of merchandise on hand at the end of the year can only be determined by reviewing the ledger.

Question 12

In a merchandise business, sales minus operating expenses equals net income.

Question 13

In retail businesses, inventory is reported as a current asset.

Question 14

In a perpetual inventory system, the merchandise inventory account is only used to reflect the beginning inventory.

Question 15

Service businesses provide services for income, while a merchandising business sells merchandise.

Question 16

Freight is the amount paid by the seller to deliver merchandise sold to a customer under FOB shipping point.

Question 17

Large businesses that make sales to customers who use credit cards, such as American Express, generally treat these sales as credit sales.

Question 18

Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are recorded.

Question 19

If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30.

Question 20

Estimated Returns Inventory is an account used when adjusting for expected merchandise sales in the next period.

Question 21

The abbreviation FOB stands for "free on board."

Question 22

If the ownership of merchandise passes to the buyer when the seller delivers the merchandise to the carrier, the terms are stated as FOB destination.

Question 23

Merchandise Inventory normally has a debit balance.

Question 24

A sale of $750 on account subject to a sales tax of 6% would be recorded as an account receivable of $750.

Question 25

In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account.

Question 26

If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination.

Question 27

A sales discount encourages customers to pay accounts more quickly than if a discount were not available.

Question 28

Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150. The amount of the sales recorded is $3,528.

Question 29

A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called a cash discount.

Question 30

A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take advantage of the sales discount.

Question 31

Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. The entry to record the purchase will include a debit to Cash and a credit to Sales.

Question 32

Buyers and sellers do not normally record the list prices of merchandise and the trade discounts in accounts.

Question 33

If merchandise costing $3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of $125, is paid within 10 days, the amount of the purchases discount is $70.

Question 34

Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system.

Question 35

When the terms of sale are FOB shipping point, the buyer should pay the freight charges.

Question 36

When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount.

Question 37

A seller may grant a buyer a reduction in selling price and this is called a customer discount.

Question 38

Sellers and buyers are required to record trade discounts.

Question 39

When merchandise is sold for $600 plus a 6% sales tax, the sales account should be credited for $636.

Question 40

When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period.

Question 41

A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take a physical inventory.

Question 42

The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income from operations are not readily available.

Question 43

If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in the general ledger.

Question 44

Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer's place of business.

Question 45

The form of the balance sheet in which assets, liabilities, and owner's equity are presented in a downward sequence is called the report form.

Question 46

On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues.

Question 47

There is no difference between the recording of cash sales and the recording of MasterCard or VISA sales.

Question 48

In a multiple-step income statement, the dollar amount for income from operations is always the same as net income.

Question 49

Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped FOB shipping point.

Question 50

The chart of accounts for a merchandising business would include an account called Delivery Expense.

Question 51

Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as Other Income on the multiple-step income statement.

Question 52

When companies use a perpetual inventory system, the recording of the purchase of inventory will include a debit to Purchases.

Question 53

The seller may prepay the freight costs even though the terms are FOB shipping point.

Question 54

Sales is equal to the cost of merchandise sold less the gross profit.

Question 55

Most companies will not take a purchase discount, because 1% or 2% discounts are insignificant.

Question 56

The adjusting entry to record inventory shrinkage would generally include a debit to Cost of Merchandise Sold.

Question 57

The seller records the sales tax as part of the sales amount.

Question 58

Gross profit minus selling expenses equals net income.

Question 59

Because many companies use computerized accounting systems, periodic inventory is widely used.

Question 60

Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the buyer.

Question 61

When a merchandising business is compared to a service business, the financial statement that is not affected by that change is the statement of owner's equity.

Question 62

As we compare a merchandise business to a service business, the financial statement that changes the most is the balance sheet.

Question 63

What is the term applied to the excess of revenue from sales over the cost of merchandise sold?

A) gross profit
B) income from operations
C) net income
D) gross sales

Question 64

Calculate income from operations for Jonas Company based on the following data: $$\begin{array} { | l | r | } \hline \text { Sales } & \$ 764,000 \\\hline \text { Operating expenses } & 52,500 \\\hline \text { Cost of merchandise sold } & 538,000 \\\hline\end{array}$$

A) $485,500
B) $711,500
C) $173,500
D) $226,000

Question 65

Which of the following is not a difference between a retail business and a service business?

A) in what is sold
B) the inclusion of gross profit on the income statement
C) accounting equation
D) merchandise inventory included on the balance sheet

Question 66

Gross profit is equal to

A) sales plus cost of merchandise sold
B) sales plus selling expenses
C) sales less selling expenses
D) sales less cost of merchandise sold

Question 67

In a merchandising business, operating income plus operating expenses is equal to

A) cost of merchandise sold
B) cost of merchandise available for sale
C) sales
D) gross profit

Question 68

In the merchandising income statement, sales will be reduced by administrative expenses to arrive at operating income.

Question 69

The accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and Freight In are found on the balance sheet.

Question 70

Under the periodic inventory system, the cost of merchandise sold is recorded when sales are made.

Question 71

In the periodic inventory system, purchases of merchandise for resale are debited to the purchases account.

Question 72

In a periodic inventory system, the cost of merchandise purchased includes the cost of freight in.

Question 73

Cost of merchandise sold is often the largest expense on a merchandising company income statement.

Question 74

Merchandise inventory is classified on the balance sheet as a

A) current liability
B) current asset
C) long-term asset
D) long-term liability

Question 75

Under the periodic inventory system, the cost of merchandise sold is equal to the beginning merchandise inventory plus the cost of merchandise purchased plus the ending merchandise inventory.

Question 76

The account form of the balance sheet is presented in a downward sequence in three sections.

Question 77

Closing entries for a merchandising business are not similar to those for a service business.

Question 78

The ratio of sales to assets measures how effectively a business is using its assets to generate sales.

Question 79

Other income and expenses are items that are not related to the primary operating activity.

Question 80

When comparing a retail business to a service business, the financial statement that changes the most is the

A) balance sheet
B) income statement
C) statement of owner's equity
D) statement of cash flows