Deck 6: Merchandising Operations and the Multi-Step Income Statement

Question 1

A periodic inventory system does not track the cost of goods sold during the accounting period.

Answer 1

True

Question 2

A periodic inventory system does not require a physical count to determine inventory levels during the accounting period.

Answer 2

False

Question 3

A company must solely be a service company,a merchandising company,or a manufacturer.

Answer 3

False

Question 4

Only companies that use a periodic inventory system need to perform a physical count of their inventory.

Question 5

Recording sales returns and allowances in a separate account is an important internal control that allows management to evaluate the volume of returns and allowances as a potential indicator of the quality of their products.

Question 6

In a perpetual inventory system,only one journal entry is required when goods are sold from inventory.

Question 7

"Shrinkage" is another term for inventory loss due to theft,error,or fraud.

Question 8

Reductions in the selling price of merchandise that occur before a sale is made is recorded by debiting sales discounts and crediting accounts receivable.

Question 9

Credit terms of "2/10,n/30" mean that if payment is made in two days,a 10% discount may be taken; if not paid within two days,the full invoice price will be due in thirty days.

Question 10

Operating activities involve both inflows and outflows of cash.

Question 11

Perpetual inventory systems often use technology such as bar codes,optical scanners,and computers.

Question 12

The Sales Returns and Allowances account balance should be deducted from the Sales account balance when computing net sales.

Question 13

Sales discounts are offered to delay payments to suppliers.

Question 14

Customers are the biggest source of shrinkage in the retail industry.

Question 15

Merchandise inventory for sale is recorded in the same account as supplies for internal use.

Question 16

Unlike manufacturers and merchandisers,service companies do not incur operating expenses.

Question 17

Sales returns and allowances and sales discounts are expense accounts.

Question 18

The Sales Returns and Allowances account balance should be reported as a reduction of Sales account balance because it is a contra revenue account.

Question 19

Transportation costs associated with acquiring inventory should be included in the inventory account if a perpetual inventory system is used.

Question 20

Most companies report their sales revenue and contra-revenue accounts as well as net sales on their externally reported income statements.

Question 21

Gross margin is net sales minus cost of goods sold.

Question 22

One of the advantages to using gross profit for analysis is that the resulting values should be similar across industries and therefore,provide a means of comparison

Question 23

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

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

Question 24

When a customer returns a defective product for credit,the seller would record the transaction using the Purchase Returns and Allowances account.

Question 25

A buyer bought inventory for $3000 and pays $500 for shipping.The terms of the purchase is 2/10 n/30.If the buyer pays for the purchase within the discount period,the amount of the discount is $70.

Question 26

When using the perpetual inventory system,all inventory transactions are recorded to the Inventory account so to maintain an up-to-date balance.

Question 27

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

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

Question 28

A buyer using a perpetual inventory system uses an account named Purchases Returns and Allowances to record any goods returns to a supplier.

Question 29

A store holding a "25% off" sale will probably hope that the lower gross profit percentage will be offset by higher sales.

Question 30

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

Question 31

Although gross profit percentages vary greatly across industries,they are fairly consistent across firms in the same industry.

Question 32

A rising gross profit percentage indicates management's inability to control production and inventory costs.

Question 33

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 goods to consumers.
B)Receiving cash.
C)Selling goods to other firms.
D)Buying raw materials.

Question 34

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 35

In a perpetual inventory system,when a company purchases merchandise the journal entry includes a debit to Inventory.

Question 36

The terms "sales discounts" and "purchase discounts" are used interchangeably by a company.

Question 37

It is possible for a company to increase both its gross profit percentage and net income without increasing the dollar amount of sales.

Question 38

A company sells $10,000 of goods.The gross profit percentage is 32%.Net income would be $3,200.

Question 39

If the terms of an inventory purchase is FOB destination,ownership transfers to the buyer at the shipping point so the buyer pays for the transportation cost.

Question 40

Using a contra-revenue account for sales returns and allowances instead of directly reducing the sales account allows a retailer the following advantage:

A)Increase profits by using accounting methods.
B)Track the value of goods returned.
C)Create more work for the accounting department.
D)Increase sales by bringing more products.

Question 41

A retailer sells plasma TVs at a selling price of $5,000 each.The total sale on account is for $20,000.Under a perpetual inventory system the journal entries to record the sale will include:

A)$20,000 will be debited to Inventory and $20,000 will be credited to Accounts Payable.
B)$20,000 will be debited to Costs of goods sold and $20,000 will be credited to Inventory.
C)$20,000 will be credited to Inventory and $20,000 will be credited to sales revenue.
D)$20,000 will be debited to Accounts Receivable and $20,000 will be credited to Sales Revenue.

Question 42

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 43

On December 31,2017,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 31,2018,you count 288 tie clips in inventory.Which of the following is true?

A)Ending inventory would be 278 tie clips on March 31,2018.
B)Your company uses the periodic inventory method.
C)Your company's records would show that 140 tie clips were sold during the quarter.
D)All of the answers are acceptable. Ending inventory = Beginning inventory + Purchases - Goods sold 300 + 128 - Goods sold = 288 Goods sold = 140.

Question 44

On June 15,a retailer purchases merchandise on account from a supplier for $2,000 terms 3/10,n/30.On June 18,the retailer returns merchandise purchased for $600 for a reduction in the amount owing.On June 22,the retailer pays their account.Under a perpetual inventory system the journal entry to record the payment includes:

A)$1,400 will be debited to Accounts Payable,$1,358 will be credited to Cash and $42 will be credited to Inventory.
B)$1,358 will be credited to Cash,$1,400 will be debited to Accounts Payable and $42 will be credited to Discounts.
C)$1,358 will be credited to Cash,$1,358 will be debited to Accounts Payable.
D)$1,400 will be credited to Cash,$1,358 will be debited to Accounts Payable,and $42 will be debited to Inventory. $2,000 - 600 = $1400 owing
$1400 × 3% discount = $42
1400-42 = $1,358 amount paid.

Question 45

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 46

In order to calculate shrinkage:

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

Question 47

On June 15,Oakley Inc.sells merchandise on account to Sunglass Hut (SH)for $1,000 terms 2/10,n/30.On June 20,SH returns to Oakley merchandise that SH had purchased for $300.On June 24,SH completely fulfills its obligation to Oakley by making a cash payment.What is the amount of cash paid by SH to Oakley?

A)$680.
B)$686.
C)$700.
D)$1,000. SH returns $300 of merchandise and then pays within the discount period.$1,000 - $300 = $700 * 2% = $14 discount.$700 - $14 = $686.

Question 48

In a retail business that uses a perpetual inventory system,scanning a bar code:

A)calculates the amount owed by the customer.
B)identifies the item sold to be removed from the Inventory account.
C)identifies the item sold to be recorded in the Cost of Goods Sold account.
D)all of the answers are acceptable.

Question 49

An electronics retailer purchases $20,000 of computers for resale.The retailer spends $500 in transportation cost,$2,000 in labour and parts to upgrade the computers,and $300 to advertise them.At this point,what amount should appear in the Inventory account for these computers?

A)$20,000
B)$20,500
C)$22,500
D)$22,800 $20,000 + $500 + $2,000 = $22,500
Advertising,rent,etc are considered operating expenses and not included in the cost of inventory.

Question 50

The largest source of shrinkage in the retail industry is probably:

A)data entry error.
B)consumer shoplifting.
C)theft by suppliers or transportation companies.
D)theft by employees.

Question 51

On July 1,a retailer purchases merchandise on account from a supplier for $2,000 terms 2/10,n/30.On July 5,the retailer returns merchandise purchased for $500 for a reduction in the amount owing.On July 8,the retailer pays their account.What is the amount of cash paid by the retailer?

A)$1,500
B)$1,960
C)$1,470
D)$1,970 $2,000 - 500 = $1500 owing
$1500 × 2% discount = $30
1500-30 = $1,470 amount paid.

Question 52

A retailer sells TVs at a selling price of $20,000 on account.The total cost of the inventory sold is $15,000.Under a perpetual inventory system the journal entries to record the sale will include:

A)$20,000 will be debited to Inventory and $20,000 will be credited to Accounts Payable.
B)$20,000 will be debited to Accounts Receivable and $20,000 will be credited to Sales Revenue.
C)$20,000 will be credited to Inventory and $20,000 will be credited to sales revenue.
D)$20,000 will be debited to costs of goods sold and $20,000 will be credited to Inventory.

Question 53

An electronics retailer purchases $25,000 of computers on account for resale.The retailer returns $5,000 of computers to the supplier and receives a credit on their account.Under a perpetual inventory system the journal entry to record the returned goods will include:

A)$5,000 will be debited to Purchases Returns and $5,000 will be credited to Accounts Payable.
B)$5,000 will be debited to Accounts Payable and $5,000 will be credited to Inventory.
C)$25,000 will be debited to Accounts Payable and $25,000 will be credited to Inventory.
D)$20,000 will be credited to Inventory and $20,000 will be credited to Purchases.

Question 54

A company purchased $6,000 of merchandise.Transportation costs were an additional $100.The company later returned $250 of the merchandise and paid the invoice within the 2% discount period.What is the total amount of cash paid?

A)$5,733
B)$6,100
C)$5,735
D)$5,730 $6,000 - $250 = $5,750 Discount = $5,750 .02 = $115
$5,750 - $115 + $100 = $5,735.

Question 55

Companies using a perpetual inventory system:

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

Question 56

An electronics retailer purchases $20,000 of computers for resale.The retailer spends $500 in cash for transportation cost.Under a perpetual inventory system the journal entry to record the purchase will include:

A)$20,500 will be debited to Inventory,$20,000 will be credited to Accounts Payable,and $500 will be credited to Cash.
B)$20,000 will be debited to Inventory and $20,000 will be credited to Cash.
C)$20,000 will be credited to Inventory and $20,000 will be credited to Purchases.
D)$20,500 will be debited to costs of goods sold and $20,500 will be credited to Accounts Payable.

Question 57

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. Ending inventory = $10,000 + $35,000 - $30,000 = $15,000.$15,000 - $14,500 (actual count)= $500 shrinkage.

Question 58

Thirty years ago,most companies relied mainly upon periodic inventory systems.Why?

A)Theft was an insignificant source of loss compared to today.
B)Tax laws required physical inventory counts.
C)New technology,allowing perpetual inventory systems to be installed more easily and inexpensively,was not available thirty years ago.
D)Before the advent of computers,perpetual systems were less accurate than periodic systems.

Question 59

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 not companies that sell to other companies.
C)merchandising,manufacturing,and service companies.
D)companies that sell goods they bought from others but not companies that make the goods they sell.

Question 60

Businesses need to control their day-to-day operations in order to ensure that:

A)sales are not lost because desired goods are not in stock.
B)money is not tied up in excessive inventory.
C)the loss of inventory and cash to theft is minimized.
D)all of the answers are acceptable.

Question 61

Your store buys ice cream for $1.50 a half litre (not including general and administrative expenses of $0.75)and sells it for $4 a half litre.Which of the following statements is true?

A)Your gross profit per half litre is $2.50.
B)Your gross profit per half litre is $1.75.
C)$2.50 is recorded in an account titled Gross Profit.
D)$1.75 is recorded in an account titled Gross Profit. Net sales - COGS = Gross profit $4.00 - $1.50 = $2.50.

Question 62

Which of the following is not an advantage of perpetual inventory system?

A)It helps reduce expenses and costs.
B)It helps increase productivity of the economy.
C)It is simple and less costly to maintain.
D)It provides up to date information on inventory and cost of goods sold instantly.

Question 63

BetterBuy sells $50,000 of TVs to a customer.The terms include a 2% discount if paid in 7 days and a 1% discount if paid in 8-14 days.BetterBuy receives the money in 12 days.How would the transaction be recorded by BetterBuy?

A)Debit Inventory for $500 and credit Accounts Payable for $500.
B)Debit Cash for $49,500,credit Accounts receivable for $50,000,and debit sales discounts for $500.
C)Debit Accounts receivable for $50,000,credit Cash for $49,500,and credit sales discounts for $500.
D)Debit Accounts Payable for $500 and credit Inventory for $500. The discount would be $500 (.01 * 50,000).The customer would pay $49,500 in cash.The discount is debited to Sales Discount and Account Receivable is credited for $50,000 (the original amount of the sale).

Question 64

Sales discounts where a company offers to give a discount on price if the customer pays earlier are usually given in following types of transactions:

A)Business to Business (B2B)
B)Business to consumers
C)To retail customers
D)To long and frequent customers

Question 65

Purrfect Pets announces that its gross profit rose 5% and its net income fell.Which of the following statements is true?

A)This is not possible given that net income is determined by gross profit.
B)This must mean that other expenses have risen more than 5%.
C)This must mean that other expenses fell.
D)This must mean that sales revenue fell.

Question 66

Your company purchases $50,000 of inventory from a wholesaler that 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)03/12,n/45.
B)n/45,3/12.
C)n/45,.03/12.
D)3/12,n/45.

Question 67

Merchandise was sold on credit for $3,000,terms 1/10,n/30.The correct entry to record the cash collection should be:

A)Debit Cash,$3,000,and credit Accounts Receivable,$3,000,if collected within the discount period.
B)Debit Cash,$3,000,and credit Accounts Receivable,$2,970,and Sales Discount,$30,if collected within the discount period.
C)Debit Cash,$3,000,and credit Accounts Receivable,$2,970,and Sales Discount,$30,if collected after the discount period.
D)Debit Cash,$3,000,and credit Accounts Receivable,$3,000,if collected after the discount period. Sales Discounts is 1% discount ($3,000 * .01 = $30)will be debited when payment is received within the discounted period.If payment is received after the discount period,the gross sales amount ($3,000)is collected.

Question 68

Which is the best form of inventory control for inventory?

A)Establish responsibility.
B)Use a periodic inventory system.
C)Use a perpetual inventory system.
D)Document procedures.

Question 69

If a customer returns an item to the retailer,the retailer will record the return as:

A)sales returns and allowances.
B)shrinkage.
C)sales discounts.
D)purchase returns and allowances.

Question 70

Sales revenue is $367,810 while sales returns and allowances and sales discounts total $24,180.The cost of goods sold is $216,490,operating and other expenses are $28,500,and the company pays $31,640 in income tax.Which of the following is true?

A)Net sales is $127,140 and gross profit is $98,640.
B)Net sales is $67,000 and gross profit is $98,640.
C)Net sales is $343,630 and gross profit is $127,140.
D)Net sales is $367,810 and gross profit is $67,000.

Question 71

BetterBuy sells a computer from inventory for $599 on credit.BetterBuy originally bought the computer from IBM for $395.What are the journal entries Betterbuy would record?

A)Debit Cash for $599,credit Sales for $599; debit Inventory for $395 and credit Cost of Goods Sold for $395.
B)Debit Accounts Receivable for $599,credit Inventory for $395,and credit Retained Earnings for $204.
C)Debit Accounts Receivable for $599,credit Sales for $599; debit Cost of Goods Sold for $395 and credit Inventory for $395.
D)Debit Inventory for $395,debit Cost of Goods Sold for $204,and credit Accounts Receivable for $599.

Question 72

Which of the following is a true statement for a company using a perpetual inventory system?

A)Purchase returns and allowances is a contra-account to revenue.
B)Sales returns and allowances is a contra-account to revenue.
C)Purchase returns and allowances is a contra-account to accounts receivable.
D)Sales returns and allowances is a contra-account to inventory.

Question 73

A company has gross profit of $58,300 and a gross profit percentage of 25%.What is the company's net sales?

A)$233,200.
B)$14,575.
C)$72,825.
D)none of the answers are acceptable. Gross Profit% = Gross Profit/Net Sales $58,300/Net Sales = .25
Net Sales = $233,200.

Question 74

A company had the following partial list of account balances at year-end:

$\begin{array}{c}\begin{array}{|l} \hline\text {Gales Returns and Allowarices }\\ \hline\text {Accourt Receivable }\\ \hline \text { Bales Discouts}\\ \hline \text { Bales Reverue}\\ \hline \text { Bellirg ard Adrniristrative Expenses }\\ \hline\end{array}\begin{array}{|r|} \hline\$500\\ \hline9,000\\ \hline700\\ \hline57,200\\ \hline300\\ \hline\end{array}\end{array}$
The amount of net sales reported on the income statement would be:

A)$57,200.
B)$64,200.
C)$56,000.
D)$55,700.

Question 75

Contra-revenue accounts:

A)are liabilities.
B)are recorded with a credit.
C)are recorded with a debit.
D)are expenses.

Question 76

Central Company sold goods for $5,000 to Western Company on March 12 on credit.Terms of the sale were 2/10,n/30.At the time of the sale,Central recorded the transaction by debiting accounts receivable for $5,000 and crediting sales revenue for $5,000.Western paid the balance due,less the discount,on March 21.To record the March 21 transaction,Central would debit:

A)Cash for $4,900.
B)Accounts Receivable for $4,900.
C)Cash for $5,000.
D)Accounts Receivable for $5,000. If received within the discount period the new amount is 98% of the invoice amount.$5,000(.98)= $4,900.

Question 77

When a company makes a sale and accepts a credit card payment from a customer,the company:

A)debits Cash.
B)credits Accounts Receivable.
C)credits Cash.
D)debits Accounts Receivable.

Question 78

When sales discounts in the current year exceed sales discounts in the prior year,assuming all else remains unchanged,what is the effect on the gross profit percentage?

A)The percentage will not change or it will increase.
B)The percentage will not change or it will decrease.
C)The percentage will decrease.
D)None of the answers are acceptable.

Question 79

Which of the following is a true statement for a company using a perpetual inventory system?

A)Sales discounts is a contra-account to revenue.
B)Purchase discounts is a contra-account to revenue.
C)Purchase discounts is a contra-account to accounts receivable
D)Sales discounts is a contra-account to inventory.

Question 80

When goods are sold to a customer with credit terms of 2/15,n/30,the customer will:

A)receive a 15% discount if they pay within 2 days.
B)receive a 2% discount if they pay 15% of the amount due within 30 days.
C)receive a 15% discount if they pay within 30 days.
D)receive a 2% discount if they pay within 15 days. The credit terms,2/15,n/30 means that 2% of the invoice amount may be deducted if the invoice is paid in 15 days.Otherwise,the gross amount is due in 30 days.