Deck 5: Accounting for Merchandising Operations

Question 1

To grant a customer a sales return, the seller credits Sales Returns and Allowances.

Answer 1

False

Question 2

A company's unadjusted balance in Merchandise Inventory will usually not agree with the actual amount of inventory on hand at year-end.

Answer 2

True

Question 3

A merchandising company has different types of adjusting entries than a service company.

Answer 3

False

Question 4

The revenue recognition principle applies to merchandisers by recognizing sales revenues when they are earned.

Question 5

Retailers and wholesalers are both considered merchandisers.

Question 6

The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.

Question 7

A multiple-step income statement provides users with more information about a company's income performance.

Question 8

A periodic inventory system requires a detailed inventory record of inventory items.

Question 9

Nonoperating activities exclude revenues and expenses that result from secondary or auxiliary operations.

Question 10

Sales minus operating expenses equals gross profit.

Question 11

Net sales appears on both the multiple-step and single-step forms of an income statement.

Question 12

Operating expenses are different for merchandising and service enterprises.

Question 13

Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

Question 14

The multiple-step form of income statement is easier to read than the single-step form.

Question 15

Freight terms of FOB Destination means that the seller pays the freight costs.

Question 16

Sales Allowances and Sales Discounts are both designed to encourage customers to pay their accounts promptly.

Question 17

Sales revenues are earned during the period cash is collected from the buyer.

Question 18

Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.

Question 19

For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.

Question 20

The steps in the accounting cycle are different for a merchandising company than for a service company.

Question 21

Merchandise inventory is reported as a long-term asset on the balance sheet.

Question 22

In a multiple-step income statement, income from operations excludes other revenues and gains and other expenses and losses.

Question 23

The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.

Question 24

Gross profit represents the merchandising profit of a company.

Question 25

Under a periodic inventory system, the acquisition of inventory is charged to the Purchases account.

Question 26

Gain on sale of equipment and interest expense are reported under other revenues and gains in a multiple-step income statement.

Question 27

The gross profit section for a merchandising company appears on both the multiple-step and single-step forms of an income statement.

Question 28

Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.

Question 29

A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.

Question 30

A single-step income statement reports all revenues, both operating and other revenues and gains, at the top of the statement.

Question 31

If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.

Question 32

Gross profit rate is computed by dividing cost of goods sold by net sales.

Question 33

Gross profit is a measure of the overall profitability of a company.

Question 34

Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.

Question 35

Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.

Question 36

Merchandise inventory is classified as a current asset in a classified balance sheet.

Question 37

In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.

Question 38

Sales should be recorded in accordance with the matching principle.

Question 39

Sales returns and allowances and sales discounts are subtracted from sales in reporting net sales in the income statement.

Question 40

Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases to produce net purchases.

Question 41

If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.

Question 42

Sales revenue less cost of goods sold is called

A) gross profit.
B) net profit.
C) net income.
D) marginal income.

Question 43

An enterprise which sells goods to customers is known as a

A) proprietorship.
B) corporation.
C) retailer.
D) service firm.

Question 44

The primary source of revenue for a wholesaler is

A) investment income.
B) service fees.
C) the sale of merchandise.
D) the sale of fixed assets the company owns.

Question 45

If a company determines cost of goods sold each time a sale occurs, it

A) must have a computer accounting system.
B) uses a combination of the perpetual and periodic inventory systems.
C) uses a periodic inventory system.
D) uses a perpetual inventory system.

Question 46

Under a perpetual inventory system, acquisition of merchandise for resale is debited to the

A) Merchandise Inventory account.
B) Purchases account.
C) Supplies account.
D) Cost of Goods Sold account.

Question 47

Which of the following would not be considered a merchandising company?

A) Retailer
B) Wholesaler
C) Service firm
D) Dot Com firm

Question 48

Detailed records of goods held for resale are not maintained under a

A) perpetual inventory system.
B) periodic inventory system.
C) double entry accounting system.
D) single entry accounting system.

Question 49

Two categories of expenses for merchandising companies are

A) cost of goods sold and financing expenses.
B) operating expenses and financing expenses.
C) cost of goods sold and operating expenses.
D) sales and cost of goods sold.

Question 50

A merchandising company that sells directly to consumers is a

A) retailer.
B) wholesaler.
C) broker.
D) service company.

Question 51

Which of the following expressions is incorrect?

A) Gross profit - operating expenses = net income
B) Sales - cost of goods sold - operating expenses = net income
C) Net income + operating expenses = gross profit
D) Operating expenses - cost of goods sold = gross profit

Question 52

The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit

A) Accounts Payable.
B) Purchase Returns and Allowances.
C) Sales.
D) Merchandise Inventory.

Question 53

The Merchandise Inventory account is used in each of the following except the entry to record

A) goods purchased on account.
B) the return of goods purchased.
C) payment of freight on goods sold.
D) payment within the discount period.

Question 54

Cost of goods sold is determined only at the end of the accounting period in

A) a perpetual inventory system.
B) a periodic inventory system.
C) both a perpetual and a periodic inventory system.
D) neither a perpetual nor a periodic inventory system.

Question 55

The major difference between the balance sheets of a service company and a merchandising company is inventory.

Question 56

In a perpetual inventory system, cost of goods sold is recorded

A) on a daily basis.
B) on a monthly basis.
C) on an annual basis.
D) with each sale.

Question 57

After gross profit is calculated, operating expenses are deducted to determine

A) gross margin.
B) net income.
C) gross profit on sales.
D) net margin.

Question 58

Income from operations is gross profit less

A) financing expenses.
B) operating expenses.
C) other expenses and losses.
D) other expenses.

Question 59

Which of the following is a true statement about inventory systems?

A) Periodic inventory systems require more detailed inventory records.
B) Perpetual inventory systems require more detailed inventory records.
C) A periodic system requires cost of goods sold be determined after each sale.
D) A perpetual system determines cost of goods sold only at the end of the accounting period.

Question 60

A perpetual inventory system would likely be used by a(n)

A) automobile dealership.
B) hardware store.
C) drugstore.
D) convenience store.

Question 61

Stan's Market recorded the following events involving a recent purchase of merchandise:
Received goods for $20,000, terms 2/10, n/30.
Returned $400 of the shipment for credit.
Paid $100 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company's merchandise inventory

A) increased by $19,208.
B) increased by $19,700.
C) increased by $19,306.
D) increased by $19,308.

Question 62

The entry to record the receipt of payment within the discount period on a sale of $750 with terms of 2/10, n/30 will include a credit to

A) Sales Discounts for $15.
B) Cash for $735.
C) Accounts Receivable for $750.
D) Sales for $750.

Question 63

Rasner Co. returned defective goods costing $3,000 to Markum Company on March 19, for credit. The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by Rasner Co. on April 19, in receiving full credit is:

Question 64

If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the

A) Merchandise Inventory account will be increased.
B) Merchandise Inventory account will not be affected.
C) seller will bear the freight cost.
D) carrier will bear the freight cost.

Question 65

Geran Company purchased merchandise inventory with an invoice price of $5,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Geran Company pays within the discount period?

A) $5,000
B) $4,900
C) $4,500
D) $4,600

Question 66

On July 9, Neal Company sells goods on credit to Al Dolan for $2,500, terms 1/10, n/60. Neal receives payment on July 18. The entry by Neal on July 18 is:

Question 67

Tony's Market recorded the following events involving a recent purchase of merchandise:
Received goods for $50,000, terms 2/10, n/30.
Returned $1,000 of the shipment for credit.
Paid $250 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company's merchandise inventory

A) increased by $48,020.
B) increased by $49,250.
C) increased by $48,265.
D) increased by $48,270.

Question 68

Company X sells $400 of merchandise on account to Company Y with credit terms of 2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is the amount of Company Y's check?

A) $280
B) $392
C) $360
D) $320

Question 69

Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in

A) Freight Expense
B) Freight - In
C) Merchandise Inventory d Freight - Out

Question 70

The collection of a $600 account within the 2 percent discount period will result in a

A) debit to Sales Discounts for $12.
B) debit to Accounts Receivable for $588.
C) credit to Cash for $588.
D) credit to Accounts Receivable for $588.

Question 71

A buyer would record a payment within the discount period under a perpetual inventory system by crediting

A) Accounts Payable.
B) Merchandise Inventory.
C) Purchase Discounts.
D) Sales Discounts.

Question 72

Hicks Company purchased merchandise from Beyer Company with freight terms of FOB shipping point. The freight costs will be paid by the

A) seller.
B) buyer.
C) transportation company.
D) buyer and the seller.

Question 73

If a company is given credit terms of 2/10, n/30, it should

A) hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.
B) pay within the discount period and recognize a savings.
C) pay within the credit period but don't take the trouble to invest the cash while waiting to pay the bill.
D) recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.

Question 74

Freight costs paid by a seller on merchandise sold to customers will cause an increase

A) in the selling expense of the buyer.
B) in operating expenses for the seller.
C) to the cost of goods sold of the seller.
D) to a contra-revenue account of the seller.

Question 75

Mather Company made a purchase of merchandise on credit from Underwood Company on August 8, for $9,000, terms 3/10, n/30. On August 17, Mather makes the appropriate payment to Underwood. The entry on August 17 for Mather Company is:

Question 76

In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited to

A) Merchandise Inventory.
B) Purchase Discounts.
C) Purchase Allowance.
D) Sales Discounts.

Question 77

Birk Company sells merchandise on account for $2,000 to Kiner Company with credit terms of 2/10, n/30. Kiner Company returns $400 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?

A) $1,960
B) $1,968
C) $1,600
D) $1,568

Question 78

A credit sale of $800 is made on April 25, terms 2/10, n/30, on which a return of $50 is granted on April 28. What amount is received as payment in full on May 4?

A) $735
B) $784
C) $800 d $750

Question 79

Reese Company purchased merchandise with an invoice price of $2,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

A) 20%
B) 24%
C) 36%
D) 72%

Question 80

On November 2, 2010, Griffey Company has cash sales of $4,200 from merchandise having a cost of $3,000. The entries to record the day's cash sales will include:

A) a $3,000 credit to Cost of Goods Sold.
B) a $4,200 credit to Cash.
C) a $3,000 credit to Merchandise Inventory. d a $4,200 debit to Accounts Receivable.