Deck 5: Accounting for Merchandising Operations

Question 1

A company had sales of $350,000 and cost of goods sold of $200,000. Its gross profit equals
$150,000.

Answer 1

True

Question 2

A company had a gross profit of $300,000 based on sales of $400,000. Its cost of goods sold equals
$700,000.

Answer 2

False

Question 3

Cost of goods sold represents the cost of buying and preparing merchandise for sale.

Answer 3

True

Question 4

Quick assets include cash and cash equivalents, inventory, and current receivables.

Question 5

A merchandising company's operating cycle begins with the purchase of merchandise and ends with the collection of cash from the sale.

Question 6

Gross profit is also called gross margin.

Question 7

Cost of goods sold is also called cost of sales.

Question 8

Beginning inventory plus net purchases equals merchandise available for sale.

Question 9

A company had net sales of $545,000 and cost of goods sold of $345,000. Its gross margin equals
$890,000.

Question 10

Merchandise inventory refers to products that a company owns and intends to sell to customers.

Question 11

A service company earns net income by buying and selling merchandise.

Question 12

A perpetual inventory system continually updates accounting records for merchandising transactions.

Question 13

A retailer buys products from manufacturers and sells them to wholesalers.

Question 14

A periodic inventory system requires updating of the inventory account only at the beginning of an accounting period.

Question 15

Merchandise inventory is reported in the long-term assets section of the balance sheet.

Question 16

The acid-test ratio is also called the quick ratio.

Question 17

Cash sales shorten the operating cycle for a merchandiser; credit sales lengthen operating cycles.

Question 18

Cost of goods sold is an expense, and is reported on the income statement.

Question 19

A wholesaler buys products from manufacturers or other wholesalers and sells them to consumers.

Question 20

The acid-test ratio is defined as current assets divided by current liabilities.

Question 21

A company's current ratio is 1.2 and its quick ratio is 0.25. This company is probably an excellent credit risk because the ratios reveal no indication of liquidity problems.

Question 22

The profit margin ratio is the same as the gross profit ratio.

Question 23

Successful use of a just-in-time inventory system can narrow the gap between the acid-test and the current ratio.

Question 24

If goods are shipped FOB shipping point, the seller does not record revenue from the sale until the goods arrive at their destination because the transaction is not complete until that point.

Question 25

If a company sells merchandise with credit terms 2/10 n/60, the credit period is 10 days and the discount period is 60 days.

Question 26

Purchase discounts are the same as trade discounts.

Question 27

Credit terms of 2/10, n/30 imply that the seller offers the purchaser a 2% cash discount if the amount is paid within 10 days of the invoice date. Otherwise, the full amount is due in 30 days.

Question 28

Purchase returns refer to merchandise a buyer acquires but then returns to the seller.

Question 29

Credit terms for a purchase include the amounts and timing of payments from a buyer to a seller.

Question 30

Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.

Question 31

The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit if goods are shipped FOB destination.

Question 32

A common rule of thumb is that a company's acid-test ratio should have a value near or higher than 1 to conclude that a company is unlikely to face near-term liquidity problems.

Question 33

Sellers always offer a discount to buyers for prompt payment toward purchases made on credit.

Question 34

Under the perpetual inventory system, the cost of merchandise purchased is recorded in the Merchandise Inventory account.

Question 35

Purchase allowances refer to a price reduction (allowance)granted to a buyer of defective or unacceptable merchandise.

Question 36

If goods are shipped FOB destination, the seller does not record revenue from the sale until the goods arrive at their destination because the transaction is not complete until that point.

Question 37

The Merchandise Inventory account balance at the beginning of the current period is equal to the amount of ending Merchandise Inventory from the previous period.

Question 38

A company had net sales of $340,500, its cost of goods sold was $257,000, and its net income was
$13,750. The company's gross margin ratio equals 24.5%.

Question 39

A company's quick assets are $147,000 and its current liabilities are $143,000. This company's acid-test ratio is 1.03.

Question 40

The gross margin ratio is defined as gross margin divided by net sales.

Question 41

A buyer using a perpetual inventory system records the costs of shipping merchandise it purchases in a Delivery Expense account.

Question 42

Sales of $350,000 and net sales of $323,000 could reflect sales discounts of $27,000.

Question 43

The adjusting entry to reflect inventory shrinkage is a debit to Income Summary and a credit to Inventory Shrinkage Expense.

Question 44

Each sales transaction for a seller that uses a perpetual inventory system involves recognizing both revenue and cost of merchandise sold.

Question 45

Sales Discounts is added to the Sales account when computing a company's net sales.

Question 46

A perpetual inventory system is able to directly measure and monitor inventory shrinkage and there is no need for a physical count of inventory.

Question 47

Expenses related to accounting, human resource management, and financial management are known as selling expenses.

Question 48

A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20, and a credit to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for early payment.

Question 49

Operating expenses are classified into two categories: selling expenses and cost of goods sold.

Question 50

A merchandiser's classified balance sheet reports merchandise inventory as a current asset.

Question 51

A multiple-step income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items.

Question 52

If a buyer does not take advantage of a supplier's credit terms of 2/10, n/30, and instead pays the invoice in full at the end of 30 days, by not taking the discount the buyer loses the equivalent of 18% annual interest on the amount of the purchase.

Question 53

Cost of Goods Sold is debited to close the account during the closing process.

Question 54

Sales Discounts and Sales Returns and Allowances are contra revenue accounts that are debited to close the accounts during the closing process.

Question 55

Sales discounts has a normal debit balance because it decreases Sales, which has a normal credit balance.

Question 56

Under a perpetual inventory system, when a credit customer returns non-defective merchandise to the seller, the seller debits Sales Returns and Allowances and credits Accounts Receivable and also debits Merchandise Inventory and credits Cost of Goods Sold.

Question 57

Offering sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collections efforts.

Question 58

Each sale of merchandise has two parts: the revenue side and the cost side.

Question 59

In a perpetual inventory system, the Merchandise Inventory account must be closed at the end of the accounting period.

Question 60

FOB shipping point means that the buyer accepts ownership when the goods arrive at the buyer's place of business.

Question 61

Under a periodic inventory system, purchases, purchases returns and allowances, purchase discounts, and transportation in transactions are recorded in the Merchandise Inventory account.

Question 62

A company has sales of $695,000 and cost of goods sold of $278,000. Its gross profit equals:

A)$(417,000).
B)$973,000.
C)$695,000.
D)$417,000.
E)$278,000.

Question 63

Inventory Returns Estimated, which reflects an adjustment to inventory for expected future returns, is a liability account reported in the balance sheet, usually under Current Liabilities.

Question 64

Cost of goods sold:

A)Is another term for revenue.
B)Is another term for merchandise sales.
C)Is also called gross margin.
D)Is a term only used by service firms.
E)Is the term used for the expense of buying and preparing merchandise for sale.

Question 65

Delivery expense is reported as part of general and administrative expense in the seller's income statement.

Question 66

Under both the periodic and perpetual inventory systems, the temporary account Purchases Returns and Allowances is used to accumulate the cost of all returns and allowances for a period.

Question 67

Inventory Returns Estimated is a current asset account used in a period-end adjusting entry to reflect the inventory estimated to be returned in the future.

Question 68

The gross method requires a period-end adjusting entry to estimate future sales discounts.

Question 69

In a periodic inventory system, cost of goods sold is recorded as each sale occurs.

Question 70

The periodic inventory system requires updating the inventory account only at the end of the period to reflect the quantity and cost of goods available for sale and the cost of goods sold.

Question 71

Either the gross method or net method may be used to record sales with cash discounts, but the net method requires a period-end adjusting entry to estimate expected future sales discounts taken.

Question 72

A single-step income statement includes cost of goods sold as another expense and shows only one subtotal for total expenses.

Question 73

When a company has no reportable non-operating activities, its income from operations is simply labeled net income.

Question 74

Under the net method of recording purchases, the Discounts Lost account is used when the purchaser fails to take a discount offered by the seller.

Question 75

The net method initially records the invoice at its net amount (net of any cash discount).

Question 76

Under the net method, when a company uses a perpetual inventory system, an invoice for $2,000 with terms of 2/10, n/30 should be recorded with a debit to Merchandise Inventory and a credit to Accounts Payable of $2,000.

Question 77

New revenue recognition rules require that sellers report sales net of expected sales discounts.

Question 78

When purchases are recorded at net amounts, any discounts lost as a result of late payments are reported as an operating expense.

Question 79

A company has sales of $375,000 and its gross profit is $157,500. Its cost of goods sold equals:

A)$532,500.
B)$157,500.
C)$(217,000).
D)$217,500.
E)$375,000.

Question 80

A merchandiser:

A)Earns net income by buying and selling merchandise.
B)Earns profit from fares only.
C)Earns profit from commissions only.
D)Receives fees only in exchange for services.
E)Buys products from consumers.