Deck 6: Internal Control and Financial Reporting for Cash and Merchandising Operations

Question 1

Most companies report sales revenue,sales returns and allowances,and sales discounts,as well as net sales on their externally reported income statements.

Answer 1

False

Question 2

Sales discounts are discounts that consumers get from buying clearance items at a reduced price.

Answer 2

False

Question 3

If a merchandiser offers a sales discount of 2/10,net/30 on a sale of $1,000,the amount due in 30 days is the net amount of $980.

Answer 3

False

Question 4

When a periodic inventory system is in use,an entry is made at year-end to transfer beginning inventory and net purchases to cost of goods sold.

Question 5

Because it is an expense account,the Sales Returns & Allowances account balance is deducted from the Sales Revenue account balance in determining net sales.

Question 6

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

Question 7

FOB shipping point means that ownership of goods passes to the buyer when the goods reach the buyer.

Question 8

The periodic inventory system uses the Inventory account to keep track of the amount of inventory that is purchased.

Question 9

Generally,a physical count of inventory is performed annually in both a perpetual inventory system and a periodic inventory system.

Question 10

BetterBuy purchases computers from companies like Hewlett Packard and IBM and sells them to consumers.BetterBuy is a:

A) merchandising company at the retail level.
B) service company.
C) merchandising company at the wholesale level.
D) manufacturer.

Question 11

Intel makes microchips from raw materials acquired from suppliers.Intel is a:

A) service company.
B) retail company.
C) manufacturer.
D) merchandising company.

Question 12

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

Question 13

A company performs a service,sells inventory that it purchases from others,or manufacturers a product; it cannot serve more than one of these functions.

Question 14

The periodic inventory system uses the Purchases account to keep track of the amount of inventory that is purchased.

Question 15

Inventory shrinkage is the difference between inventory recorded and inventory counted.

Question 16

The gross profit percentage is computed by dividing operating income by net sales.

Question 17

When a periodic inventory system is in use,the Inventory account is updated only at the end of the period.

Question 18

A retailer is a company that buys products from manufacturers and sells them to wholesalers.

Question 19

Gross profit is not a ledger account name.

Question 20

In a perpetual inventory system,only one journal entry is required to record the sale of inventory.

Question 21

The Ocho Co.had a beginning inventory of $25,000 and an ending inventory of $40,000.Its Cost of Goods Sold for the year was $485,000.What was the amount of purchases that it made for the year?

A) $470,000
B) $500,000
C) $525,000
D) $530,000

Question 22

Which line item would be found on a merchandiser's balance sheet and not on a service firm's?

A) Supplies
B) Cost of Goods Sold
C) Inventory

Question 23

Which of the following is an activity in the operations of a manufacturer,but not in the operations of a merchandising or service company?

A) Selling the good to consumers
B) Receiving cash
C) Selling the good to other firms
D) Buying raw materials

Question 24

McLeod Corporation is a merchandising company.The year began with inventory of $27,000,Purchases for the year were $52,000,and the Ending Inventory was $14,000.What is the Cost of Goods Sold that would be reported on the income statement?

A) $93,000
B) $39,000
C) $11,000
D) $65,000

Question 25

Why is inventory reported as a current asset?

A) Inventory is reported as a current asset because it will be converted into cash within a year of the balance sheet date.
B) Inventory is not reported as a current asset.
C) Inventory is not a current asset; it is a noncurrent asset because inventory is often sold on account and not for cash.
D) Inventory is reported as a current asset because it has been sold.

Question 26

Cost of goods sold reports the:

A) cost of merchandise available to sell
B) cost of merchandise purchased
C) cost times the quantity of goods sold
D) selling price times the quantity of goods sold

Question 27

Which line item would be found on a service firm's income statement and not on a merchandiser's?

A) Inventory
B) Cost of Goods Sold
C) Depreciation Expense
D) Service Revenue

Question 28

The operating cycle involves:

A) generating revenues and collecting from customers
B) purchasing of long-term assets
C) borrowing and repaying of long-term debt
D) issuing of stock

Question 29

Which of the following is an activity common to the operations of merchandising,manufacturing,and service companies?

A) Producing the product
B) Incurring operating expenses
C) Buying goods or raw materials
D) Selling a physical product

Question 30

If a company's ending inventory count was $50,000,cost of goods sold was $27,000,and purchases were $56,000,its beginning inventory must have been:

A) $33,000.
B) $133,000.
C) $79,000.
D) $21,000.

Question 31

Surfshack Corp.buys surfboards,wetsuits,and surf wax from Rip to Shreds,Inc.for sale to consumers.What type of company is Surfshack Corp?

A) Retail merchandiser
B) Wholesale merchandiser
C) Manufacturer
D) Service business

Question 32

Inventory is reported as a(n)______ on the:

A) current asset; balance sheet only
B) current asset; balance sheet and income statement
C) expense; income statement
D) expense; balance sheet

Question 33

Bijoux Company has sales of $40,000,beginning inventory of $5,000,purchases of $25,000,and ending inventory of $7,000.The cost of goods sold is:

A) $23,000
B) $30,000
C) $40,000
D) $17,000

Question 34

Boron Company has sales of $60,000,beginning inventory of $7,000,purchases of $35,000,and ending inventory of $5,000.The cost of goods sold is:

A) $42,000
B) $37,000
C) $23,000
D) $33,000

Question 35

The receipt of cash is one of the operating activities of:

A) companies that sell goods but not companies that sell services.
B) companies that sell to consumers but do not sell to other companies.
C) merchandising, manufacturing, and service companies.
D) companies that sell goods they bought from others but not of companies that make the goods they sell.

Question 36

Sales Revenue reports the:

A) cost of merchandise available to sell
B) cost of merchandise purchased
C) cost times the quantity of goods sold
D) selling price times the quantity of goods sold

Question 37

Which of the following is a merchandising company?

A) General Motors
B) H&R Block
C) The Gap
D) Proctor & Gamble

Question 38

A company buys footwear and clothing from manufacturers,which it resells to discount stores in a large urban area.This company is an example of a:

A) wholesale merchandising company.
B) service company.
C) retail merchandising company.
D) secondary service company.

Question 39

Which of the following is inventory?

A) Goods held for sale in the normal course of business
B) Office supplies that a company plans to use in the next few months
C) Equipment used to manufacture products which will be sold later
D) Raw materials and work in process

Question 40

Inventory reports the:

A) cost of goods available for sale
B) cost of merchandise purchased
C) cost of goods that have been delivered to customers
D) selling price times the quantity of goods sold

Question 41

Under the periodic inventory system:

A) inventory records are updated immediately after each purchase.
B) inventory must be counted at the end of each accounting period.
C) inventory does not have to be counted. (It can be taken from the accounting records.)
D) inventory levels must be counted every day.

Question 42

Companies using a perpetual inventory system:

A) never physically count their inventory.
B) must count their inventory at least once a week.
C) still need to count the inventory at the end of the period.
D) always know the actual amount in inventory from their accounting records.

Question 43

The perpetual inventory method of tracking inventory is considered superior to the periodic method because the perpetual method:

A) makes calculations easier and less technology can be deployed.
B) tells what inventory a company should have at any point in time.
C) saves a company from ever having to count the goods in inventory.
D) is more consistent with how companies calculated inventory in the past.

Question 44

Beginning inventory plus purchases equals:

A) ending inventory.
B) cost of goods sold.
C) goods available for sale.
D) net purchases.

Question 45

Beginning inventory plus purchases minus ending inventory equals:

A) net sales.
B) cost of goods sold.
C) goods available for sale.
D) net purchases.

Question 46

Which of the following statements regarding periodic and perpetual inventory systems is correct?

A) Perpetual inventory systems are inferior for determining optimal times to reorder inventory.
B) Periodic inventory systems require a greater investment in technology.
C) Perpetual inventory systems may assist in determining inventory lost due to shrinkage.
D) Periodic inventory systems allow sales personnel to provide more immediate information regarding availability of inventory.

Question 47

Which of the following statements regarding shrinkage is not correct?

A) Perpetual inventory systems can help managers detect shrinkage.
B) Shrinkage is another term for inventory loss due to theft, error, or fraud.
C) Shrinkage is detected by comparing the balance in the inventory ledger account and the results of the physical inventory count.
D) It is easier to detect shrinkage in a periodic inventory system than in a perpetual inventory system.

Question 48

The Tuck Shop began the current month with inventory costing $10,000,then purchased inventory at a cost of $35,000.The perpetual inventory system indicates that inventory costing $30,000 was sold during the month for $40,000.If an inventory count shows that inventory costing $14,500 is actually on hand at month-end,what amount of shrinkage occurred during the month?

A) $500
B) $5,000
C) $14,495
D) $15,000

Question 49

Shockglass Company had a beginning inventory of $15,000.During the year,the company recorded inventory purchases of $45,000 and cost of goods sold of $50,000.The ending inventory must equal:

A) $10,000.
B) $25,000.
C) $26,000.
D) $27,000.

Question 50

A company starts the period with 100 computers in inventory,purchases 30 more,returns 4 of them to suppliers,and has 83 in inventory at the end of the period.If there is no shrinkage,how many computers were sold?

A) 47
B) 43
C) 17
D) 83

Question 51

In a retail business that uses a perpetual inventory system,scanning a bar code does not:

A) calculate the amount owed by the customer.
B) identify the item sold to be removed from the Inventory account.
C) identify the item sold to be recorded in the Cost of Goods Sold account.
D) calculate the gross profit.

Question 52

Which of the following is the equation for cost of goods sold?

A) Beginning inventory + Purchases - Ending inventory
B) Beginning inventory + Purchases + Ending inventory
C) Net purchases - Ending inventory
D) Ending inventory + Purchases - Beginning inventory

Question 53

Thompson Company had beginning inventory of $6,000,cost of goods sold of $14,000,and ending inventory of $8,000.Purchases were:

A) $12,000.
B) $10,000.
C) $9,000.
D) $16,000.

Question 54

Which of the following statements regarding inventory counts is not correct?

A) Companies need to perform a physical count of their inventory at least yearly regardless of which inventory system is being used.
B) A perpetual inventory system does not require a physical count during the accounting period to determine cost of goods sold.
C) In a perpetual inventory system, the inventory count is compared to the inventory account balance to reveal shrinkage.
D) If a company uses a perpetual inventory system and the inventory count at the end of the accounting period is greater than the balance in the inventory ledger account, there must have been shrinkage.

Question 55

Ace Electronics had cost of goods sold of $20,000.If purchases were
$23,000 and ending inventory was $6,000,Ace's beginning inventory must have been:

A) $3,000
B) $9,000
C) $26,000
D) $17,000

Question 56

A firm's beginning inventory is $35,000,goods purchased during the period cost $120,000,and the cost of goods sold for the period is $140,000.What is the amount of its ending inventory?

A) $45,000
B) $20,000
C) $25,000
D) $15,000

Question 57

A perpetual inventory system will always give updated balances for:

A) Inventory and Cost of Goods Sold.
B) Inventory and Sales Revenue.
C) Goods Available for Sale and Sales Revenue.
D) Accounts Receivable and Inventory.

Question 58

Flynn Company uses a perpetual inventory system and reported $500,000 of inventory at the beginning of the month based on a physical count of inventory.During the month,the company bought $45,000 of inventory and sold inventory that had cost $30,000.At the end of the month,the physical count of inventory shows $510,000 on hand.How much shrinkage occurred during the month?

A) $35,000
B) $25,000
C) $5,000
D) $10,000

Question 59

In order to calculate shrinkage:

A) both periodic and perpetual inventory systems are needed.
B) a periodic inventory system is more effective.
C) a perpetual inventory system requires an occasional count of actual inventory.
D) it does not matter which system one uses.

Question 60

On December 31,2014,you count 300 tie clips in inventory.During the next quarter,you carefully record the effect of each purchase and sale transaction on inventory.You buy 128 tie clips during the next quarter.On March 31,2015,you count 288 tie clips in inventory.Which of the following is not correct?

A) Ending inventory on March 31, 2015 should be 288 tie clips.
B) Your company uses the perpetual inventory method.
C) Your company's records would show that 140 tie clips were sold during the quarter.
D) The amount of shrinkage cannot be determined with this type of inventory system.

Question 61

After performing a physical count of inventory at the end of the accounting period,it was discovered that the amount of inventory on hand was less than the accounting records reported.The entry to record this inventory shrinkage includes:

A) credit to Cost of Goods Sold
B) debit to Inventory
C) credit to Purchase Discounts
D) credit to Inventory

Question 62

Flynn Company uses a perpetual inventory system and had the following transactions during November:
-November 6 - Purchased $5,800 of inventory on account, terms 2/10, n/30.
-November 8 - Returned $800 of defective units and received full credit.
-November 15 - Paid the amount due.
Use the information above to answer the following question.What journal entry will be recorded by Flynn Company on November 8?

A) Debit Inventory and credit Cost of Goods Sold for $800
B) Debit Accounts Payable and credit Inventory for $800
C) Debit Inventory and credit Accounts Payable for $800
D) Debit Accounts Payable and credit Purchase Returns for $800

Question 63

Which inventory system records a change in the Inventory account every time goods are bought,sold or returned?

A) Periodic
B) Perpetual
C) FOB Shipping Point
D) FOB Destination

Question 64

Your company purchases $50,000 of inventory from a wholesaler who allows you 45 days to pay.In addition,the wholesaler offers a 3% discount if payment is made within 12 days.These payment terms would be expressed as:

A) 0.03/12, n/45.
B) n/45, 3/12.
C) n/45, 0.03/12.
D) 3/12, n/45.

Question 65

Goods available for sale can:

A) be sold and then become cost of goods sold on the income statement
B) not be sold and thus are not reported as Cost of Goods Sold on the balance sheet
C) not be sold and thus are reported as Inventory on the income statement
D) be sold and thus reported as Cost of Goods Sold on the balance sheet

Question 66

To determine cost of goods sold for the period requires:

A) subtracting ending inventory from the goods available to sell, which is the beginning inventory plus purchases
B) adding ending inventory to the goods available to sell, which is the beginning inventory plus purchases
C) subtracting beginning inventory from the goods available to sell, which is the ending inventory plus purchases
D) adding beginning inventory to the goods available to sell, which is the ending inventory plus purchases

Question 67

Ace Electronics uses a perpetual inventory system.On May 1,beginning inventory was $100,000.During May,Ace purchased $35,000 of inventory and sold $71,000 of inventory.After the store closed on May 31,employees counted the inventory in the store and found that $60,000 of inventory remained unsold.What was Ace's inventory shrinkage?

A) $4,000
B) $64,000
C) $75,000
D) $46,000

Question 68

When a perpetual system is in used and transportation cost is incurred to obtain inventory,the transportation cost is:

A) added to Inventory.
B) reported as Selling, General & Administrative Expense on the income statement.
C) reported as a contra-account that is subtracted from sales revenue when determining net sales.
D) deducted from the Cost of Goods Sold when determining gross profit.

Question 69

Bennett's Clothing purchased goods on credit costing $50,000 with terms of 3/10 n/30.Payment is made to the seller 7 days after the purchase.How would the payment be recorded?

A) Debit Inventory for $1,500, debit Cash for $48,500, and credit Accounts Payable for $50,000
B) Debit Accounts Payable for $50,000, credit Cash for $48,500, and credit Cost of Goods Sold for $1,500
C) Debit Accounts Payable for $50,000 credit Cash for $48,500, and credit Inventory for $1,500
D) Debit Accounts Payable and credit Cash for $50,000

Question 70

Purrfect Pets uses the perpetual inventory system.At the beginning of the quarter,Purrfect Pets has $30,000 in inventory.During the quarter the company purchases $7,900 of new inventory from a vendor,returned $700 of inventory to the vendor,and took advantage of discounts from the vendor of $200.At the end of the quarter the balance in inventory is $26,500.What is the cost of goods sold?

A) $10,500
B) $11,400
C) $3,500
D) $11,900

Question 71

Purple Corp.purchased $10,000 of merchandise on June 3,subject to the terms,2/10,n/30.On June 9,it pays for all the merchandise purchased on June 3.When the entry relating to this transaction is recorded,that entry will reduce:

A) Accounts Payable by $9,800.
B) net income by $200.
C) stockholders' equity by $200.
D) Inventory by $200.

Question 72

Berkley Company had beginning inventory of $4,000 and purchases of $20,000.If half of its inventory was sold,Berkley's goods available for sale will:

A) be split between cost of goods sold and ending inventory
B) appear only as an expense on the income statement
C) appear only as an expense on the balance sheet
D) appear only as an asset on the income statement

Question 73

Beginning inventory was $5,000.During the month,the company purchased an additional $25,000 of inventory and sold goods that cost $20,000.Ending inventory was:

A) $5,000
B) $50,000
C) $10,000
D) $0

Question 74

Assume that a perpetual inventory system is in use.Which of the following statements regarding the journal entries prepared is correct?

A) "Freight-out" or delivery costs associated with sales should be included in Cost of Goods Sold.
B) When a company receives payment from a customer for a sale, Cash is debited and Accounts Payable is credited.
C) When a company grants an allowance to a customer, Inventory is credited when using a perpetual inventory system.
D) When a customer returns inventory, the seller debits Sales Returns & Allowances under a perpetual inventory system.

Question 75

West Co.returned $500 of merchandise that was purchased on account.As a result of this transaction,assets will:

A) decreased and liabilities will decrease.
B) decreased and net income will decrease.
C) stay the same and net income will decrease.
D) stay the same and liabilities will decrease.

Question 76

On April 6,Lopez Co.purchased $5,000 of inventory,terms 1/15,n/30.Lopez Co.uses a perpetual inventory system.The company paid for the purchase on April 26.The entry to record the payment on April 26 includes which of the following?

A) A credit to Inventory for $50
B) A debit to Accounts Payable for $4,900
C) A credit to Accounts Payable for $5,000
D) A credit to Cash for $5,000

Question 77

Which inventory system updates the inventory account only at the end of the accounting period?

A) LIFO
B) Perpetual
C) FIFO
D) Periodic

Question 78

A company that purchases inventory for $10,000 with terms 2/10,n/30.It then returns $2,000 of the inventory purchased to the supplier and also receives an allowance for defective inventory of $100.The company pays the amount due within the discount period.What is the amount of the discount that will be taken?

A) $200
B) $158
C) $160
D) $198

Question 79

Flynn Company uses a perpetual inventory system and had the following transactions during November:
-November 6 - Purchased $5,800 of inventory on account, terms 2/10, n/30.
-November 8 - Returned $800 of defective units and received full credit.
-November 15 - Paid the amount due.
Use the information above to answer the following question.What journal entry will be recorded by Flynn Company on November 6?

A) Debit Inventory and credit Accounts Payable for $5,800
B) Debit Cost of Goods Sold and credit Accounts Payable for $5,684
C) Debit Purchases and credit Accounts Payable for $5,800
D) Debit Inventory and credit Accounts Payable for $5,684

Question 80

If merchandise purchased on credit is returned to the seller for a full refund,what would be the effect on the accounts listed below?

A) Increase Inventory; No effect on Cost of Goods Sold; Decrease Accounts Payable
B) Decrease Inventory; Decrease Cost of Goods Sold; No effect on Accounts Payable
C) No effect on Inventory; Decrease Cost of Goods Sold; Decrease Accounts Payable
D) Decrease Inventory; No effect on Cost of Goods Sold; Decrease Accounts Payable