Deck 5: The Purchase and Sale of Inventory

Question 1

Which of the following DECREASES the cost of inventory purchased?

A)sales tax
B)purchasing merchandise FOB shipping point
C)purchase allowances
D)payment of accounts payable

Answer 1

C

Question 2

If a company uses a periodic inventory system,it most likely updates its inventory records at the time of every ________.

A)purchase
B)sale
C)return
D)physical inventory count

Answer 2

D

Question 3

A company with a perpetual inventory system purchases inventory on account.What is the effect of this transaction on the accounting equation?

A)increase one asset and decrease another asset
B)increase an asset and decrease retained earnings
C)increase an asset and decrease a liability
D)increase an asset and increase a liability

Answer 3

D

Question 4

Which of the following costs should be included in the inventory account when inventory is purchased FOB shipping point?

A)insurance while the merchandise is in transit
B)the cost of the warehouse
C)the advertising costs
D)the cost of merchandise returned

Question 5

Which statement below best describes how to account for the costs of purchasing inventory?

A)The costs are initially recorded as expenses and depreciated over the estimated useful life.
B)Inventory costs are initially reported as assets and then maintained in the asset accounts for the life of the business.
C)The costs are initially recorded as assets and become expenses when the inventory has an increase in market value.
D)The costs are initially recorded as assets and become expenses when the inventory is sold.

Question 6

If the terms of purchase are FOB shipping point,title to the goods passes from the vendor to the buyer ________.

A)when the merchandise leaves the vendor's warehouse
B)halfway between the vendor's warehouse and the buyer's warehouse
C)when the merchandise reaches the buyer's warehouse
D)when the merchandise is sold to the end user

Question 7

A purchase allowance ________.

A)is the amount of cash the purchasing manager is allowed to spend
B)increases the cost of inventory purchased
C)represents the cost of merchandise returned to the vendor
D)is a cost reduction for keeping merchandise that is damaged or defective

Question 8

A purchase order is a document that is ________.

A)sent to a supplier or vendor requesting that an item be shipped
B)used internally to request that something be purchased
C)used internally to approve a payment for inventory
D)sent to a supplier along with payment for inventory purchased

Question 9

Which statement below best explains the credit terms of 2/10,n/30?

A)The buyer will receive a 2 percent discount if it pays within ten days of the purchase.
B)The buyer will receive a 10 percent discount if it pays within two days.
C)The buyer will receive a 10 percent discount if it pays within thirty days.
D)The buyer will receive a 2 percent discount if it pays within thirty days.

Question 10

A vendor offers terms of 3/10,n/30.What is the ANNUAL interest rate the vendor is charging a buyer who does not pay within 10 days? (Assume there are 360 days in the year.

A)3%
B)36%
C)54%
D)108%

Question 11

Souper Bowls sold $500 of merchandise to a customer for cash.The sales tax was 5%.How much cash did Souper Bowls receive?

A)$525
B)$371
C)$329
D)$210

Question 12

A vendor offers terms of 4/10,n/30.What is the ANNUAL interest rate the vendor is charging a buyer who does not pay within 10 days? (Assume there are 360 days in the year.

A)4%
B)72%
C)54%
D)144%

Question 13

The following information is provided for PO Company: Determine the cost of PO's inventory at the end of the period.

A)$1,850
B)$3,050
C)$1,800
D)$4,800

Question 14

If the terms of purchase are FOB destination,title to the goods passes from the vendor to the buyer ________.

A)when the merchandise leaves the vendor's warehouse
B)halfway between the vendor's warehouse and the buyer's warehouse
C)when the merchandise reaches the buyer's warehouse
D)when the merchandise is sold to the end user

Question 15

Inventory consists of items that ________.

A)are purchased for resale to customers as a normal operating activity
B)are purchased,and will be sold to customers only if they go up in market value
C)are intangible in nature
D)can be stored indefinitely and will be held in the business

Question 16

Up-a-Creek Company had ending inventory of $60,000,purchases of $200,000,beginning accounts payable of $100,000,ending accounts payable of $80,000 and cost of goods sold of $150,000.What was the amount of beginning inventory?

A)$90,000
B)$10,000
C)$30,000
D)$150,000

Question 17

A company reports its unsold merchandise inventory on the ________.

A)balance sheet as a current asset
B)balance sheet as part of Property,plant & equipment
C)balance sheet as a current liability
D)income statement as an expense

Question 18

The operating cycle for a merchandising firm is ________.

A)obtain cash from stockholders,invest cash in equipment,earn more cash
B)borrow cash from lenders,earn cash from customers,repay lenders
C)start with cash,buy inventory,sell inventory to customers,collect cash from customers
D)issue stock to owners,earn a profit,pay dividends to owners

Question 19

A purchase requisition is a document that is ________.

A)sent to a supplier or vendor requesting that an item be shipped
B)used internally to request that something be purchased
C)used internally to approve a payment for inventory
D)sent to a supplier along with payment for inventory purchased

Question 20

Which of the following is inventory for an office supply store such as Office Max?

A)paper used to maintain Office Max's accounting records
B)paper available to sell to Office Max's customers
C)paper used in Office Max's employee washroom
D)office supply storage costs

Question 21

Nadir Company sold $2,000 of merchandise to Acme Company,with terms of 3/10,n/30.Five days later,Acme returned $500 of the merchandise.If Acme does NOT pay within the discount period,how much cash will Nadir receive?

A)$2,000
B)$1,940
C)$1,500
D)$1,455

Question 22

Acme Enterprise sold $150 of merchandise to a customer for cash.The sales tax was 7%.How much cash did Inside Acme receive?

A)$10.50
B)$160.50
C)$150.00
D)$139.50

Question 23

On December 12,Occident,Ltd.,a company in Singapore,ordered merchandise from San Francisco Exports.The merchandise was shipped to Occident on December 29,FOB destination.The merchandise arrived at Occident's warehouse on February 1.Occident paid for the merchandise on March 2.When should Occident record the purchase?

A)December 12
B)December 29
C)February 1
D)March 2

Question 24

Which statement below best explains the credit terms of 2/15,n/30?

A)The buyer will receive a 15 percent discount if it pays within two days of the purchase.
B)The buyer will receive a 15 percent discount if it pays within thirty days.
C)The buyer will receive a 2 percent discount if it pays within fifteen days.
D)The buyer will receive a 2 percent discount if it pays within thirty days.

Question 25

On November 27,Acme,Inc.ordered merchandise from Zenith Company.Zenith shipped the merchandise to Acme on November 29,FOB destination.The merchandise arrived at Acme's warehouse on December 1.Acme paid for the merchandise on January 2.When should Acme record the purchase?

A)November 27
B)November 29
C)December 1
D)January 2

Question 26

Nadir Company sold $2,000 of merchandise to Acme Company,with terms of 3/10,n/30.Five days later,Acme returned $500 of the merchandise.If Acme pays within the discount period,how much cash will Nadir receive?

A)$2,000
B)$1,940
C)$1,500
D)$1,455

Question 27

On May 27,Ace Electronics ordered merchandise from Elmo Company.Elmo shipped the merchandise to Ace on May 31,FOB shipping point.The merchandise arrived at Ace's warehouse on June 2.Ace paid for the merchandise on July 1.When should Elmo recognize revenue?

A)May 27
B)May 31
C)June 2
D)July 1

Question 28

On November 27,Acme,Inc.ordered merchandise from Zenith Company.Zenith shipped the merchandise to Acme on November 29,FOB shipping point.The merchandise arrived at Acme's warehouse on December 1.Acme paid for the merchandise on January 2.When should Zenith recognize revenue?

A)November 27
B)November 29
C)December 1
D)January 2

Question 29

On May 27,Ace Electronics ordered merchandise from Elmo Company.Elmo shipped the merchandise to Ace on May 31,FOB destination.The merchandise arrived at Ace's warehouse on June 2.Ace paid for the merchandise on July 1.When should Ace record the purchase?

A)May 27
B)May 31
C)June 2
D)July 1

Question 30

A vendor offers terms of 1/10,n/30.What is the ANNUAL interest rate the vendor is charging a buyer who does not pay within 10 days? (Assume there are 360 days in the year.

A)1%
B)36%
C)18%
D)54%

Question 31

Ace Company sells goods FOB destination.The shipping costs ________.

A)will not be paid by Ace
B)appear on Ace's income statement as a decrease in Net sales
C)appear on Ace's income statement as an Operating expense
D)appear on Ace's income statement as an increase in Cost of goods sold

Question 32

Sailors,Inc.sold $100,000 of merchandise to Breyer,Inc.with terms of 1/10,n/30.Five days later,Breyer returned $10,000 of the merchandise.If Breyer pays within the discount period,how much cash will Sailors receive?

A)$100,000
B)$99,000
C)$90,000
D)$89,100

Question 33

Zenith Company sold $10,000 of merchandise to Nadir Company,with terms of 2/10,n/30.Five days later,Nadir returned $1,000 of the merchandise.If Nadir does NOT pay within the discount period,how much cash will Zenith receive?

A)10,000
B)$9,800
C)$9,000
D)$8,820

Question 34

On December 12,Occident,Ltd.,a company in Singapore,ordered merchandise from San Francisco Exports.The merchandise was shipped to Occident on December 29,FOB shipping point.The merchandise arrived at Occident's warehouse on February 1.Occident paid for the merchandise on March 2.When should San Francisco Exports recognize revenue?

A)December 12
B)December 29
C)February 1
D)March 2

Question 35

Inside Outfitters sold $200 of merchandise to a customer for cash.The sales tax was 8%.How much sales revenue did Inside Outfitters earn?

A)$200
B)$0
C)$216
D)$184

Question 36

Acme Enterprise sold $150 of merchandise to a customer for cash.The sales tax was 7%.How much sales revenue did Acme earn?

A)$10.50
B)$160.50
C)$150.00
D)$139.50

Question 37

Ace Electronics sold $350 of merchandise to a customer on account.The sales tax was 6%.How much sales revenue did Ace earn?

A)$350
B)$371
C)$329
D)$0

Question 38

Inside Outfitters sold $200 of merchandise to a customer for cash.The sales tax was 8%.How much cash did Inside Outfitters receive?

A)$200
B)$16
C)$216
D)$184

Question 39

Sailors,Inc.sold $100,000 of merchandise to Breyer,Inc.with terms of 1/10,n/30.If Breyer pays the invoice 20 days after receipt of the invoice,how much cash will Sailors receive?

A)$100,000
B)$99,000
C)$90,000
D)$89,100

Question 40

A vendor offers terms of 2/10,n/30.What is the ANNUAL interest rate the vendor is charging a buyer who does not pay within 10 days? (Assume there are 360 days in the year.

A)2%
B)36%
C)54%
D)72%

Question 41

On February 12,Horseshoe Bend Company purchases $25,000 of merchandise from a vendor with credit terms of 2/10,n/30.If Horseshoe Bend pays the vendor on February 21,the amount of the payment should be ________.

A)$25,000
B)$24,500
C)$22,500
D)$27,500

Question 42

On May,2,Breyer,Inc.purchases $25,000 of merchandise from a vendor with credit terms of 2/10,n/30.If Breyer pays the vendor on May 10,the amount of the payment should be ________.

A)$25,000
B)$24,500
C)$22,500
D)$27,500

Question 43

Banner,Inc.purchases $45,000 of merchandise from a vendor with credit terms of 2/10,n/30.Assuming that Banner pays within the discount period,the total cost of the inventory is ________.

A)$45,900
B)$45,000
C)$40,500
D)$44,100

Question 44

On January 5,Boise Cascade Company purchases $5,000 of merchandise from a vendor with credit terms of 2/10,n/30.If Boise Cascade pays the vendor on January 20,the amount of the payment should be ________.

A)$5,000
B)$4,900
C)$4,500
D)$3,500

Question 45

Rigby Company buys merchandise from Shoshone Company with an invoice cost of $100,000 and shipping terms of FOB shipping point.The freight costs amount to $1,000.Which of the following statements is TRUE?

A)Rigby Company will record freight-in costs of $1,000.
B)Shoshone Company will record freight-out costs of $1,000.
C)Shoshone Company will record freight-in costs of $1,000.
D)Rigby Company will have inventory cost of $10,000.

Question 46

Which of the following costs are included in the inventory account when inventory is purchased FOB shipping point?

A)purchase returns
B)warranty costs
C)freight costs
D)allowance for uncollectible accounts

Question 47

Perch X,Inc.purchased goods with an invoice price of $3,000.Purchase terms are 1/10,n/30 and the invoice is paid one week after it was received.The shipping terms are FOB shipping point and the shipping costs are $300.The cost of the inventory purchased equals _______.

A)$3,000
B)$3,300
C)$2,700
D)$3,270

Question 48

Horse Creek Company had beginning inventory of $34,000,purchases of $210,000,purchase returns of $13,000,and ending inventory of $40,000.What was the cost of goods sold?

A)$204,000
B)$198,000
C)$157,000
D)$191,000

Question 49

Horse Creek Company had beginning inventory of $900,000,purchases of $2,000,000,purchase returns of $50,000,ending inventory of $800,000,beginning accounts payable of $200,000 and ending accounts payable of $100,000.What was the cost of goods sold?

A)$2,050,000
B)$1,950,000
C)$2,150,000
D)$1,900,000

Question 50

Rigby Company buys merchandise from Shoshone Company with an invoice cost of $10,000 and shipping terms of FOB destination.The freight costs amount to $7,000.Which of the following statements is TRUE?

A)Rigby Company will record freight-in costs of $7,000.
B)Shoshone Company will record freight-out costs of $7,000.
C)Shoshone Company will record freight-in costs of $7,000.
D)Rigby Company will have inventory cost of $107,000.

Question 51

The Ribbon Company began operations on May 1.The following transactions took place in May: Purchased $400,000 of merchandise on account.
Purchased an additional $200,000 of merchandise for cash.
Paid $3,000 cash for freight to deliver the merchandise purchased.
Paid $25,000 for the store managers' monthly salaries.
The cost of the inventory purchased for the month of May equals ________.

A)$400,000
B)$600,000
C)$603,000
D)$628,000

Question 52

Rigby Company buys merchandise from Shoshone Company with an invoice cost of $10,000 and shipping terms of FOB shipping point.The freight costs amount to $1,000.Which of the following statements is TRUE?

A)Rigby Company will record freight-in costs of $1,000.
B)Shoshone Company will record freight-out costs of $1,000.
C)Shoshone Company will record freight-in costs of $1,000.
D)Rigby Company will have inventory cost of $10,000.

Question 53

On December 29,Perch X,Inc.purchased $2,000 of merchandise from a supplier.The shipping terms were FOB destination.The merchandise did not arrive until after yearend.Perch X should ______.

A)exclude the merchandise from its inventory but should record the related accounts payable as of yearend.
B)include the merchandise in its inventory and record the related accounts payable.
C)exclude both the merchandise from its inventory and the related accounts payable as of yearend.
D)expense the merchandise as cost of goods sold at yearend.

Question 54

On December 29,Perch X,Inc.purchased $2,000 of merchandise from a supplier.The shipping terms were FOB shipping point.The merchandise did not arrive until after yearend.Perch X should ______.

A)exclude the merchandise from its inventory but should record the related accounts payable as of yearend.
B)include the merchandise in its inventory and record the related accounts payable.
C)exclude the merchandise from its inventory and the related accounts payable as of yearend.
D)expense the merchandise as cost of goods sold at yearend.

Question 55

On January 5,Boise Cascade Company purchases $5,000 of merchandise from a vendor with credit terms of 2/10,n/30.If Boise Cascade pays the vendor on January 13,the amount of the payment should be ________.

A)$5,000
B)$4,900
C)$4,500
D)$3,500

Question 56

If the shipping terms are FOB shipping point than the shipping costs are paid by the ________.

A)seller and included as part of the cost of the seller's inventory
B)buyer and included as part of selling expenses at the time of the purchase
C)seller and included as part of the selling expenses at the time of the sale
D)buyer and included as part of the cost of the buyer's inventory at the time of the purchase

Question 57

Boise Cascade Company purchases $5,000 of merchandise from a vender with credit terms of 2/10,n/30.Assuming that Boise Cascade pays within the discount period,the total cost of the inventory is ________.

A)$5,000
B)$4,900
C)$4,500
D)$3,500

Question 58

Net sales equals ________.

A)sales minus cost of goods sold
B)sales minus sales returns and allowances minus sales discounts
C)sales divided by net income
D)net income divided by sales

Question 59

Rigby Company purchased merchandise from a supplier in Hong Kong with an invoice cost of $10,000 and shipping terms of FOB destination.The freight costs amount to $1,000.Rigby should record inventory at a cost of ________.

A)$11,000
B)$10,000
C)$9,000
D)$1,000

Question 60

On February 12,Horseshoe Bend Company purchases $25,000 of merchandise from a vendor with credit terms of 2/10,n/30.On February 15,Horseshoe Bend Company returns $5,000 of the goods because they are defective.If Horseshoe Bend pays the vendor the full amount due on February 20,the amount of the payment is ________.

A)$25,000
B)$20,000
C)$19,600
D)$18,000

Question 61

Idaho Company made the following purchases during the month of October.
Required:
1.Complete the chart below for each of the four purchases.
2.Assuming that the selling company accepts all discounts,what is the total cost of purchases for the month?

Question 62

For each of the purchases below made by Daily Grind,Inc.,fill in the inventory amount net of discounts,and then indicate with an "X" whether you should include or exclude the purchase from Daily Grind's inventory balance at December 31.

Question 63

Shubart Apparel Company purchased 1,000 shirts from Blue Parrot,FOB shipping point.Each shirt had an invoice cost of $18,which includes $1 of tariff paid to import the shirts from Belize.Shubart also paid FedEx $2,000 to have the shirts shipped to its warehouse in Florida,and another $500 to insure the shirts while they were in transit.
Required:
a.Determine the inventory cost that Shubart should record.
b.Explain when the costs described above will become expenses.

Question 64

Montana Company made the following purchases during the month of September:
Required:
1.Complete the chart below for each of the four purchases.
2.Assuming that the selling company accepts all discounts,what is the total cost of purchases for the month?

Question 65

A purchase allowance is a record of the company's request to a vendor for goods or services.

Question 66

The purchase of inventory is recorded as an expense called cost of goods sold.

Question 67

Tiny Toy Company makes toys and sells them to retail stores on account.The company has a December 31 year-end.In the past,Tiny Toy always sold on account but never offered sales discounts to its customers.However,this year on November 1,the beginning of the holiday sales season,Tiny Toy began offering stores terms of 2/90,n/120.The stores can return anything,no questions asked,but only after December 31.
Required:
A.Why would Tiny Toy offer such a liberal credit and return policy?
B.Put an X in the appropriate box to describe the effect of this credit and return policy on Tiny Toy's financial statements for this year.
C.Is Tiny Toy's new credit and return policy ethical?

Question 68

Big Company has a policy of always taking the cash discounts offered by vendors,even if it doesn't pay within the discount period.Big Company thinks that many of the vendors won't notice,or if they do notice won't bother to send another bill for a small amount.
On May 5,Big Company bought $5,000 of merchandise from Little Company,terms 2/10,n/30,FOB destination.Freight on the shipment was $40.
A.How many days does Big Company have to pay the bill and legitimately take the discount?
B.If Big Company pays within the discount period,how much should it pay Little Company?
C.Who should pay the freight on the shipment,Big Company or Little Company?
D.Is it ethical for Big Company to take the cash discount even though it does not pay within the discount period?

Question 69

If the shipping terms are FOB shipping point,the buyer has to pay for freight costs.

Question 70

Describe the operating cycle for a merchandising firm.

Question 71

A purchase requisition is completed after merchandise is received from a vendor.

Question 72

Describe the function and use of a purchase requisition and a purchase order.

Question 73

Sales returns and allowances and Sales discounts are ________.

A)contra-asset accounts and are netted against Accounts receivable on the balance sheet
B)contra-expense accounts and netted against Cost of goods sold on the income statement
C)expense accounts and added to Sales on the income statement
D)contra-revenue accounts and netted against Sales on the income statement

Question 74

Good Health,LLP,completed the following inventory transactions during the month of August:
a.used cash to purchase $620,000 of merchandise
b.purchased $190,000 of merchandise on account
c.paid freight costs of $33,000 on merchandise purchased FOB shipping point
d.returned $12,000 of defective merchandise to the supplier
e.used cash to purchase $210,000 of merchandise
f.paid the purchasing manager's monthly salary of $11,000
g.purchased $45,000 of merchandise on account
h.paid the sales staff's $22,000 salary for the month
i.paid freight costs of $9,000 on merchandise purchased FOB shipping point
j.paid the $17,000 utility bill for the month
Required: Determine the cost of merchandise purchased for the month.

Question 75

If the shipping terms are FOB shipping point,the seller has to pay for freight costs.

Question 76

If the shipping terms are FOB destination,the seller has to pay for freight costs.

Question 77

Freight out is an operating expense recorded on the seller's books for the costs of shipping merchandise to buyers.

Question 78

Sales returns and allowances is a contra-asset account.

Question 79

Credit terms of 2/10,n/30 provide for a 10 percent discount if the buyer pays within 30 days.

Question 80

Net sales is net of ________.

A)goods in transit
B)cost of goods sold
C)sales returns and allowances
D)gross profit