Deck 5: Merchandising Operations

Question 1

The operating cycle of a merchandising company is generally shorter than that of a service company.

Answer 1

False

Question 2

A quantity discount is recorded separately, the same way as a purchase discount.

Answer 2

False

Question 3

The terms 2/10, n/30 mean that a 2% discount is allowed on payments made over 10 days but within the credit period.

Answer 3

False

Question 4

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

Question 5

Operating expenses are subtracted from revenue for a service company and from gross profit for a merchandising company.

Question 6

If merchandise costing $2,500, terms 2/10 n/30, is paid within 10 days, the amount of the purchase discount is $250.

Question 7

If a quantity discount of 10% is received on a purchase of $10,000, inventory would be recorded at $9,000.

Question 8

When goods are shipped FOB shipping point, freight costs are an operating expense for the seller.

Question 9

Cost of goods available for sale is considered an operating expense for a merchandising company.

Question 10

Cost of Goods Sold is considered an operating expense for a merchandising company.

Question 11

Freight costs incurred on incoming merchandise are an operating expense to the buyer.

Question 12

Inventory is usually the largest current asset for a merchandiser.

Question 13

When the terms of sale are FOB shipping point, the seller is responsible for any damages to the goods during shipping.

Question 14

When returned merchandise is defective, the seller's sales account is debited.

Question 15

Merchandise is sold for $2,500 with terms 1/10, n/30. If $500 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $20.

Question 16

When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period.

Question 17

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

Question 18

A physical inventory count should be done at least once a year regardless of whether a perpetual or periodic inventory system is being used.

Question 19

Freight terms will specify the point at which ownership of the goods is transferred from the seller to the buyer.

Question 20

Discounts taken for early payment of an invoice are called sales discounts by the buyer.

Question 21

Which of the following "formulas" is incorrect?

A) Gross profit - operating expenses = income before income tax.
B) Net sales - cost of goods sold = gross profit.
C) Net sales - gross profit = cost of goods sold.
D) Operating expenses - cost of goods sold = gross profit.

Question 22

Gross profit equals

A) sales less operating expenses.
B) gross sales less cost of goods sold.
C) cost of goods sold less operating expenses.
D) net sales less cost of goods sold.

Question 23

The multiple-step income statement is considered more useful than the single-step income statement for a merchandising company because it highlights the components of net income.

Question 24

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

A) gross margin.
B) net income (loss) before income tax.
C) cost of goods sold.
D) profit margin.

Question 25

Gross profit appears on both the single-step and multiple-step forms of the income statement.

Question 26

A merchandising company's income from operations is determined by subtracting cost of goods sold from net sales.

Question 27

The operating cycle of a merchandising company is

A) always one year in length.
B) generally longer than that of a service company.
C) about the same as that of a service company.
D) generally shorter than that of a service company.

Question 28

Generally, the revenue account for a merchandising company is called

A) Sales Revenue or Sales.
B) Investment Revenue.
C) Gross Profit.
D) Net Sales.

Question 29

Net sales less cost of goods sold is called

A) gross profit.
B) cost of goods sold.
C) net income.
D) income before income taxes.

Question 30

The primary source of revenue for a wholesaler is generated by

A) investments.
B) providing services.
C) the sale of merchandise.
D) the sale of property, plant, and equipment the company owns.

Question 31

Corporations following IFRS must classify their expenses either by nature or by function.

Question 32

Operating expenses are similar in merchandising and service companies.

Question 33

A merchandiser will have income from operations of exactly $0 when

A) net sales equals cost of goods sold.
B) cost of goods sold equals gross profit.
C) operating expenses equal net sales.
D) gross profit equals operating expenses.

Question 34

The time it takes to go from cash to cash in producing revenues is called the

A) accounting cycle.
B) purchasing cycle.
C) operating cycle.
D) merchandising cycle.

Question 35

Non-operating activities include revenues and expenses that are related to the company's main operations.

Question 36

Income from operations appears on both the single-step and multiple-step forms of the income statement.

Question 37

Gross profit equals the difference between net sales and

A) net income.
B) cost of goods sold.
C) operating expenses.
D) cost of goods sold plus operating expenses.

Question 38

Each of the following companies is a merchandising company except a

A) wholesale parts company.
B) candy store.
C) moving company.
D) furniture store.

Question 39

Net income will result if gross profit exceeds

A) cost of goods sold.
B) operating expenses.
C) purchases.
D) cost of goods sold plus operating expenses.

Question 40

The largest current asset for a merchandiser is usually

A) inventory.
B) prepaid expenses.
C) cash.
D) accounts receivable.

Question 41

The abbreviation "FOB" stands for

A) free on board.
B) freight on board.
C) free only (to) buyer.
D) freight charge on buyer.

Question 42

Under a perpetual inventory system, purchase of inventory is recorded as a debit to the

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

Question 43

Which of the following is true 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 to be recorded after each sale.
D) A perpetual system determines cost of goods sold only at the end of the accounting period.

Question 44

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) each time a sale occurs.

Question 45

Alliance Corporation purchased inventory with an invoice price of $22,000 and credit terms of 1/10, n/15. How much cash will Alliance pay if they pay within the discount period?

A) $22,000
B) $21,780
C) $22,220
D) $18,700

Question 46

The journal entry by the buyer 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) Inventory.

Question 47

Under a perpetual inventory system, the following is determined each time a sale occurs:

A) Gross Profit.
B) Cost of Goods Sold.
C) Purchases.
D) Accounts Receivable.

Question 48

For a company using a perpetual inventory system, the journal entry to record the purchase of $3,500 of goods on account, with terms of 4/10, n/30, would include a

A) debit to Accounts Payable of $3,500.
B) credit to Accounts Payable of $3,360.
C) debit to Inventory of $3,360.
D) debit to Inventory of $3,500.

Question 49

The physical inventory count is used to determine

A) cost of inventory purchased during the period.
B) cost of inventory sold during the period.
C) the cost of inventory on hand.
D) the cost of goods available for sale.

Question 50

Under the perpetual inventory system, which of the following accounts would not be used?

A) Sales
B) Purchases
C) Cost of Goods Sold
D) Inventory

Question 51

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

A) in the selling expenses 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 52

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

A) must have a computerized 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 53

A company using a perpetual inventory system that returns goods purchased on credit would

A) debit Accounts Payable and credit Inventory.
B) debit Sales and credit Accounts Payable.
C) debit Cash and credit Accounts Payable.
D) debit Accounts Payable and credit Purchases.

Question 54

On July 10, Arbour Inc. purchased $5,000 of inventory on terms of 2/10, n/30. The amount due on August 25 is

A) $5,100.
B) $5,000.
C) $4,900.
D) $4,990.

Question 55

The primary difference between a periodic and a perpetual inventory system is that a periodic system

A) keeps a detailed record showing the inventory on hand at all times.
B) provides better control over inventories.
C) records the cost of goods sold on the date the sale is made.
D) determines the cost of goods sold at the end of the accounting period.

Question 56

Under a perpetual inventory system

A) there is no need for a year-end physical count.
B) increases in inventory resulting from purchases are debited to Purchases.
C) accounting records continuously disclose the amount of inventory.
D) the account Purchase Returns and Allowances is credited when goods are returned to vendors.

Question 57

Given a perpetual inventory system which one of the following statements is false?

A) Freight costs incurred by the buyer are added to the Inventory account.
B) Purchases of merchandise for sale are recorded in the Inventory account.
C) A discount taken for early payment is credited to the Inventory account.
D) A return of merchandise is credited to the Purchase Returns and Allowances account.

Question 58

Beginning inventory plus purchases equals

A) cost of goods available for sale.
B) cost of goods sold.
C) ending inventory.
D) total inventory on hand.

Question 59

Inventory becomes part of the cost of goods sold when a company

A) pays for the inventory.
B) purchases the inventory.
C) sells the inventory.
D) receives payment from the customer.

Question 60

If a purchaser using a perpetual inventory system pays freight costs, then the

A) Inventory account is increased.
B) Inventory account is not affected.
C) Freight Out account is increased.
D) Freight In account is increased.

Question 61

A sales invoice is prepared when goods

A) are sold for cash.
B) are sold on credit.
C) sold on credit are returned.
D) are sold on credit or for cash.

Question 62

On September 1, Wilderness Inc. had an inventory of 18 backpacks at a cost of $30 each. The company uses a perpetual inventory system. During September, the following transactions occurred:Sep 4 Purchased 35 backpacks at $30 each from Back Packs Unlimited, terms 3/10, n/30.6 Received credit of $150 for the return of 5 backpacks purchased on Sept. 4 that were defective.9 Sold 20 backpacks for $50 each to University Supply, terms 2/10, n/30.14 Paid Back Packs Unlimited in full.18 Received payment from University Supply.InstructionsRecord the September transactions for Wilderness Inc.

Question 63

The entry to record a sale of $525 with terms of 2/10, n/30 will include a

A) debit to Sales Discounts for $10.50.
B) debit to Sales for $514.50.
C) credit to Accounts Receivable for $525.
D) credit to Sales for $525.

Question 64

The entry to record the return of goods from a customer would include a

A) debit to Sales.
B) credit to Sales.
C) debit to Sales Returns and Allowances.
D) credit to Sales Returns and Allowances.

Question 65

Jun 4 Willem Corporation purchased $4,000 worth of merchandise, terms 2/10, n/30 from Cate Corporation. The cost of the merchandise to Cate was $2,600.10 Willem returned $700 worth of goods to Cate for full credit. The goods had a cost of $450 to Cate and were placed back into inventory.26 Willem paid the account.InstructionsPrepare the journal entries to record these transactions in
a. Willem's records and
b. Cate's records. Both companies use the perpetual inventory system.

Question 66

Under the perpetual inventory system, in addition to making the entry to record the sale, the seller would

A) debit Inventory and credit Cost of Goods Sold.
B) debit Cost of Goods Sold and credit Purchases.
C) debit Cost of Goods Sold and credit Inventory.
D) make no additional entry until the end of the period.

Question 67

Sales revenues are usually considered earned when

A) cash is received from credit sales.
B) an order is received.
C) goods have been transferred from the seller to the buyer.
D) adjusting entries are made.

Question 68

Presented below are selected transactions for Manclave Corporation during July.Jul 1 Sold merchandise to Regina Inc. for $1,000, terms 3/10, n/30. The merchandise sold cost $600.2 Purchased merchandise from Novalle Corporation for $5,200, terms 4/10, n/30.3 Paid freight charges of $150 on items purchased on July 2.4 Purchased merchandise from Ollie Company Ltd. for $7,500, n/30.10 Received payment from Regina Inc. for purchase of July 1.11 Paid Novalle Corporation for July 2 purchase.Instructions
a. Record the above transactions for Manclave Corporation, assuming a perpetual inventory system is used. The cost of goods sold on July 1 was determined to be $400.
b. Record the above transactions for Manclave Corporation, assuming a periodic inventory system is used.

Question 69

A purchase invoice is a document that

A) provides support for goods sold for cash.
B) provides evidence of operating expenses incurred.
C) provides evidence of credit purchases.
D) serves only as a customer receipt.

Question 70

Freight paid by the seller to a customer's business is recorded as a

A) credit to Sales.
B) debit to Sales.
C) debit to an operating expense.
D) credit to Cost of Goods Sold.

Question 71

Sales Allowances and Sales Discounts

A) are both designed to encourage customers to pay their accounts promptly.
B) are both contra revenue accounts to Sales.
C) both have a normal credit balance.
D) both have a normal debit balance and are therefore regarded as expense accounts.

Question 72

Sales Discounts is a(n)

A) contra revenue account.
B) contra asset account.
C) revenue account.
D) expense account.

Question 73

If a customer agrees to keep defective merchandise because the seller is willing to reduce the selling price, this transaction is known as a sales

A) discount.
B) return.
C) contra asset.
D) allowance.

Question 74

On July 1, Racquets Plus had an inventory of 20 tennis racquets at a cost of $125 each. Racquets Plus uses a perpetual inventory system. During the month of July, the following transactions occurred:Jul 4 Purchased 25 racquets at a cost of $125 each from the Tennis Gear Corporation, terms 2/10, n/30.5 Paid freight of $100 on the July 4 purchase.6 Sold 10 racquets from the July 1 inventory to Team Canada for $225 each, terms 2/10, n/30.7 Received a credit from Tennis Gear for the return of 2 defective racquets.8 Sold two racquets from the July 1 inventory for $550 cash.13 Issued a credit memo to Team Canada for the return of a defective racquet.14 Paid Tennis Gear in full.15 Received payment from Team Canada.InstructionsRecord the July transactions for Racquets Plus.

Question 75

The collection of a $2,000 account within the 2 percent discount period will result in a

A) debit to Sales Discounts for $40.
B) debit to Accounts Receivable for $1,960.
C) credit to Cash for $1,960.
D) credit to Accounts Receivable for $1,960.

Question 76

Gia's Gymnastics Gear uses a perpetual inventory system. The following transactions occurred in July:Jul 6 Purchased $1,800 of merchandise on credit, terms 1/10, n/30.8 Because some of the items purchased on July 6 had a small defect, Gia's Gymnastics Gear received a purchase allowance of $175.9 Paid freight charges of $75 on the items purchased July 6.19 Sold merchandise on credit for $1,800, terms 2/10, n/30. The merchandise had a cost of $900.22 Of the merchandise sold on July 19, $200 of it was returned. The items had cost Gia's$100 and were returned to inventory.28 Received payment from the customer of July 19.31 Paid for the merchandise purchased on July 6.InstructionsRecord the July transactions for Gia's Gymnastics Gear.

Question 77

Gross sales less sales returns and allowances less sales discounts equals

A) collectible sales.
B) net sales.
C) total sales.
D) operating sales.

Question 78

When goods from a cash sale are returned, the effect on the seller's accounts will be

A) an increase in net sales.
B) a decrease in gross sales.
C) an increase in gross sales.
D) a decrease in net sales.

Question 79

Sales Returns and Allowances is a(n)

A) asset account.
B) contra asset account.
C) expense account.
D) contra revenue account.

Question 80

Evidence of cash sales is usually supported by

A) purchase invoices.
B) sales invoices.
C) purchase orders.
D) cash register tapes.