Deck 4: Accounting for Merchandising Businesses

Question 1

Kenyon Company experienced a transaction that had the following effect on the financial statements:

Which of the following business events would result in this effect on the financial statements?

A)Paid for merchandise that had been purchased on account
B)A loss on land that was sold for cash
C)Return by a customer of a sale that was made on account
D)Return to a supplier of merchandise purchased on account

Answer 1

Return to a supplier of merchandise purchased on account

Question 2

What type of account is the Cost of Goods Sold account?

A)Liability
B)Asset
C)Contra asset
D)Expense

Answer 2

Expense

Question 3

[The following information applies to the questions displayed below.]

Darlington Company entered into the following business events during its first month of operations. The company uses the perpetual inventory system.

1) The company purchased $12,500 of merchandise on account under terms 2/10, n/30.
2) The company returned $1,200 of merchandise to the supplier before payment was made.
3) The liability was paid within the discount period.
4) All of the merchandise purchased was sold for $18,800 cash.


-What is the net cash flow from operating activities as a result of the four transactions?

A)$5,100
B)$7,726
C)$6,550
D)$11,074

Answer 3

$7,726

Question 4

Which of the following is considered a period cost?

A)Transportation cost on goods received from suppliers
B)Advertising expense for the current month
C)Cost of merchandise purchased
D)None of these answer choices are considered a period cost

Question 5

Llewelyn Company paid the amount due on a purchase of merchandise on account.Llewelyn uses the perpetual inventory system.Which of the following reflects the effect of the payment on the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 6

Galaxy Company sold merchandise costing $1,700 for $2,600 cash.The merchandise was later returned by the customer for a refund.The company uses the perpetual inventory system.What effect will the sales return have on the financial statements? (Consider the effects of both parts of this event. )

A)Total assets and total stockholders' equity decrease by $900.
B)Total assets decrease by $2,600 and total stockholders' equity decreases by $1,700.
C)Total assets and total stockholders' equity decrease by $2,600.
D)Total assets and total stockholders' equity increase by $900.

Question 7

The following entry is taken from the journal of a merchandising company:

What is the effect of this entry on the company's financial statements?

A)Assets and stockholders' equity increase.
B)Assets and liabilities increase.
C)Assets and stockholders' equity decrease.
D)Assets decrease and stockholders' equity increases.

Question 8

Which of the following is considered a product cost?

A)Utility expense for the current month
B)Salaries paid to the employees of a merchandiser
C)Transportation cost on goods received from suppliers
D)Transportation cost on goods shipped to customers

Question 9

Which of the following items is not a product cost?

A)Freight cost on goods delivered FOB destination to customers
B)Cost of merchandise purchased for resale
C)Transportation cost on merchandise purchased from suppliers
D)All of these answer choices are product costs

Question 10

Which of the following would not be considered as primarily a merchandising business?

A)Abercrombie and Fitch
B)Sam's Clubs
C)Amazon
D)Regal Cinemas

Question 11

Which of the following would be considered as primarily a merchandising business?

A)West Consulting
B)Martin's Supermarket
C)Sandridge and Associates Law Offices
D)KPM Accounting and Tax Service

Question 12

[The following information applies to the questions displayed below.]

Darlington Company entered into the following business events during its first month of operations. The company uses the perpetual inventory system.

1) The company purchased $12,500 of merchandise on account under terms 2/10, n/30.
2) The company returned $1,200 of merchandise to the supplier before payment was made.
3) The liability was paid within the discount period.
4) All of the merchandise purchased was sold for $18,800 cash.


-What effect will the return of merchandise to the supplier in event (2)have on Darlington's financial statements?

A)Assets and stockholders' equity decrease by $1,176.
B)Assets and liabilities decrease by $1,176.
C)Assets and liabilities decrease by $1,200.
D)None.It is an asset exchange transaction.

Question 13

[The following information applies to the questions displayed below.]

Darlington Company entered into the following business events during its first month of operations. The company uses the perpetual inventory system.

1) The company purchased $12,500 of merchandise on account under terms 2/10, n/30.
2) The company returned $1,200 of merchandise to the supplier before payment was made.
3) The liability was paid within the discount period.
4) All of the merchandise purchased was sold for $18,800 cash.


-What is the gross margin that results from these four transactions?

A)$5,100
B)$7,726
C)$6,550
D)$11,074

Question 14

A company using the perpetual inventory system paid $250 cash to have goods delivered from one of its suppliers.How would the payment of $250 for transportation-in be classified?

A)An asset source transaction
B)An asset use transaction
C)An asset exchange transaction
D)A claims exchange transaction

Question 15

What is the term used to describe a firm that primarily sells merchandise to other businesses?

A)Wholesale firm
B)Service firm
C)Retail firm
D)Consulting firm

Question 16

When are product costs matched directly with sales revenue?

A)In the period immediately following the purchase
B)In the period immediately following the sale
C)When the merchandise is purchased
D)When the merchandise is sold

Question 17

On April 1,Snell Company made a $50,000 sale giving the customer terms of 3/10,n/30.The receivable was collected from the customer on April 8.How does the collection of cash from the customer affect the company's financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 18

Which of the following statements about period costs is true?

A)Most period costs are expensed in the period the costs are incurred.
B)Period costs are expensed when the products associated with these costs are sold.
C)Period costs are usually recorded as assets.
D)Period costs do not adhere to the matching principle.

Question 19

A company purchased inventory on account.If the perpetual inventory system is used,which of the following choices accurately reflects how the purchase affects the company's financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 20

Abbott Company purchased $6,500 of merchandise inventory on account.Abbott uses the perpetual inventory system.Which of the following entries would be required to record this transaction?

A)
B)
C)
D)

Question 21

What is the effect of an entry to record the purchase of inventory on account under the perpetual inventory system?

A)Total assets increase
B)Total liabilities increase
C)Total assets are unaffected
D)Total assets and total liabilities increase

Question 22

Ramirez Company returns merchandise previously purchased on account.It had not yet been paid for.Ramirez uses the perpetual inventory system.Which of the following reflects the effects on the financial statements of only the purchase return?

A)Option A
B)Option B
C)Option C
D)Option D

Question 23

Faust Company uses the perpetual inventory system.Faust sold goods that cost $2,300 for $3,600.The sale was made on account.What is the net effect of the sale on the company's financial statements? (Consider the effects of both parts of this event. )

A)Increase total assets by $2,300
B)Increase total stockholders' equity by $3,600
C)Increase total assets by $1,300
D)Increase total assets by $3,600

Question 24

The Wilson Company purchased $44,000 of merchandise from the Poole Wholesale Company.Wilson also paid $3,000 for freight costs to have the goods shipped to its location.The company uses the perpetual inventory system.Which of the following summarizes the effects of the journal entries required to record these transactions for The Wilson Company? (Consider the effects of both business events. )

A)Total debits to the inventory account would be $47,000.
B)Total debits to the inventory account would be $44,000.
C)Transportation-in would be debited for $3,000.
D)Total debits to the inventory account would be $41,000.

Question 25

A company's chart of accounts includes,in part,the following account numbers and corresponding account titles:


-Which accounts would appear on the balance sheet?

A)Account numbers 1,2,4,and 5
B)Account numbers 1,3,7,and 8
C)Account numbers 1,2,and 6
D)Account numbers 3,4,8,and 9

Question 26

Foote Company was granted a purchase discount of $200 on merchandise the company had purchased a few days ago.Foote uses the perpetual inventory system.Which of the following reflects the effects of this event on the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 27

A company's chart of accounts includes,in part,the following account numbers and corresponding account titles:


-Which accounts would appear on the income statement?

A)Account numbers 3,4,7,8,and 9
B)Account numbers 3,4,5,7,and 9
C)Account numbers 2,3,7,8,and 9
D)Account numbers 3,5,7,and 8

Question 28

Anchor Company sold merchandise with a cost of $560 to a customer for $890 on account.Due to an error,this sale was never recorded in the accounting records.What effect will the failure to make the necessary entries have on the company's financial statements?

A)Total assets and total stockholders' equity will be overstated.
B)Total assets will be overstated and total stockholders' equity will be understated.
C)Total assets and total stockholders' equity will be understated.
D)The financial statements will not be affected.

Question 29

A company using the perpetual inventory system paid cash for a transportation-in cost.Which of the following choices reflects the effects of this event on the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 30

Howell Company granted a sales allowance of $360 to a customer who was not totally satisfied with the quality of goods received.The customer did not return the goods and had not yet paid for them.Which of the following reflects the effects of this event on the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 31

[The following information applies to the questions displayed below.]

Sanchez Company engaged in the following transactions during Year 1:

1) Started the business by issuing $42,000 of common stock for cash.
2) The company paid cash to purchase $26,400 of inventory.
3) The company sold inventory that cost $16,000 for $30,600 cash.
4) Operating expenses incurred and paid during the year, $14,000.

Sanchez Company engaged in the following transactions during Year 2:

1) The company paid cash to purchase $35,200 of inventory.
2) The company sold inventory that cost $32,800 for $57,000 cash.
3) Operating expenses incurred and paid during the year, $18,000.

Note: Sanchez uses the perpetual inventory system.


-What is Sanchez's gross margin for Year 2?

A)$6,200
B)$24,200
C)$21,800
D)$32,800

Question 32

A company using the perpetual inventory system paid cash for freight costs to purchase merchandise.Which of the following reflects the effects of this event on the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 33

A company's chart of accounts includes,in part,the following account numbers and corresponding account titles:


-Which accounts would affect gross margin?

A)Account numbers 2 and 9
B)Account numbers 3 and 9
C)Account numbers 3,4,7,and 9
D)Account numbers 3,7,8,and 9

Question 34

The following general journal entry is taken from the journal of Becker's Bookstore:

Which of the following choices reflects how the entry will affect the company's financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 35

What happens when merchandise is delivered FOB shipping point?

A)The buyer pays the freight cost.
B)The seller pays the freight cost.
C)The buyer records transportation cost as an expense.
D)The seller records transportation-out expense.

Question 36

A company's chart of accounts includes,in part,the following account numbers and corresponding account titles:


-Which accounts would affect operating income?

A)Account numbers 2,4,and 9
B)Account numbers 3,5,7,and 9
C)Account numbers 3,4,7,and 9
D)Account numbers 3,4,7,8,and 9

Question 37

[The following information applies to the questions displayed below.]

Sanchez Company engaged in the following transactions during Year 1:

1) Started the business by issuing $42,000 of common stock for cash.
2) The company paid cash to purchase $26,400 of inventory.
3) The company sold inventory that cost $16,000 for $30,600 cash.
4) Operating expenses incurred and paid during the year, $14,000.

Sanchez Company engaged in the following transactions during Year 2:

1) The company paid cash to purchase $35,200 of inventory.
2) The company sold inventory that cost $32,800 for $57,000 cash.
3) Operating expenses incurred and paid during the year, $18,000.

Note: Sanchez uses the perpetual inventory system.


-What is the amount of inventory that will be shown on the balance sheet at December 31,Year 2?

A)$2,400
B)$12,800
C)$61,600
D)$28,800

Question 38

When using a perpetual inventory system,which of the following events is an asset use transaction?

A)Paid cash to purchase inventory
B)Paid cash for transportation-out costs
C)Purchased inventory on account
D)Paid cash for transportation-in costs

Question 39

Middleton Company uses the perpetual inventory system.The company purchased an item of inventory for $130 and sold the item to a customer for $200.How will the sale affect the company's Inventory account?

A)The Inventory account will decrease by $200.
B)The Inventory account will decrease by $130.
C)The Inventory account will decrease by $70.
D)The Inventory account will not change.

Question 40

[The following information applies to the questions displayed below.]

Sanchez Company engaged in the following transactions during Year 1:

1) Started the business by issuing $42,000 of common stock for cash.
2) The company paid cash to purchase $26,400 of inventory.
3) The company sold inventory that cost $16,000 for $30,600 cash.
4) Operating expenses incurred and paid during the year, $14,000.

Sanchez Company engaged in the following transactions during Year 2:

1) The company paid cash to purchase $35,200 of inventory.
2) The company sold inventory that cost $32,800 for $57,000 cash.
3) Operating expenses incurred and paid during the year, $18,000.

Note: Sanchez uses the perpetual inventory system.


-What is the amount of retained earnings that will be shown on the balance sheet at December 31,Year 2?

A)$6,200
B)$26,000
C)$6,800
D)$38,800

Question 41

The Garrett Company uses the perpetual inventory system.The company's records showed a book balance of $18,000 in the Merchandise Inventory account,and a physical count finds only $16,250 of inventory.Which of the following indicates the effect of the necessary write-down entry?

A)Option A
B)Option B
C)Option C
D)Option D

Question 42

The following are the income statements of the Hancock Company for two consecutive years.Increases in which of the expenses contributed to the net loss in Year 2?

A)Cost of goods sold and selling expenses
B)Selling expenses and administrative expenses
C)Cost of goods sold and administrative expenses
D)Administrative expenses

Question 43

What happens when merchandise is delivered FOB Destination?

A)The seller pays the freight cost.
B)The seller records transportation-out expense.
C)The buyer pays the freight cost.
D)The seller pays the freight cost and records an expense.

Question 44

What is (are)the term(s)used to describe a discount given to encourage prompt payment?

A)Cash discount.
B)Sales discount by the seller.
C)Purchase discount by the buyer.
D)All of these answer choices are correct.

Question 45

-Three of the companies are upscale stores and one is a discount store.Which company is most likely to be the discount store?

A)Company A
B)Company B
C)Company C
D)Company D

Question 46

Flagler Company purchased $4,000 of merchandise on account.Flagler sold the merchandise to a customer for $7,000 cash.What is the increase in gross margin and the net change in cash flow from operating activities as a result of these transactions? (Consider the effects of both parts of this event. )

A)Option A
B)Option B
C)Option C
D)Option D

Question 47

What do the credit terms,2/15,n/30 mean?

A)A fifteen percent discount can be deducted if the invoice is paid within two days following the date of sale.
B)A two percent discount can be deducted for a period up to thirty days following the date of sale.
C)A two percent discount can be deducted if the invoice is paid before the fifteenth day following the date of the sale.
D)A two percent discount can be deducted if the invoice is paid after the fifteenth day following the sale,but before the thirtieth day.

Question 48

Ballard Company uses the perpetual inventory system.The company purchased $16,000 of merchandise from Andes Company under the terms 2/10,net/30.Ballard paid for the merchandise within 10 days and also paid $500 freight to obtain the goods under terms FOB shipping point.All of the merchandise purchased was sold for $30,000 cash.What is the amount of gross margin that resulted from these business events?

A)$14,000
B)$13,820
C)$16,000
D)$13,500

Question 49

Consider the following T-account in the ledger of Gibbs Company.The company uses the perpetual inventory system.

What business event would result in the $400 credit?

A)A purchase return by Gibbs.
B)The cost of goods sold by Gibbs.
C)A purchase allowance granted to Gibbs.
D)All of these answer choices are correct.

Question 50

[The following information applies to the questions displayed below.]

Assume the perpetual inventory system is used.

1) Green Company purchased merchandise inventory that cost $64,000 under terms of 2/10, n/30 and FOB shipping point.
2) Green Company paid freight cost of $2,400 to have the merchandise delivered.
3) Payment was made to the supplier on the inventory within 10 days.
4) All of the merchandise was sold to customers for $94,000 cash and delivered under terms FOB destination with freight cost amounting to $1,600.


-What is the amount of gross margin that results from these transactions?

A)$31,280
B)$27,280
C)$28,880
D)$29,680

Question 51

Which of the following retailers would be expected to have the highest gross margin percentage?

A)Kmart
B)Neiman Marcus
C)Walmart
D)A supermarket chain such as Safeway

Question 52

-Based on common-sized income statements,which of the companies spent the least on operating expenses in relationship to its sales?

A)Company A
B)Company B
C)Company C
D)Company D

Question 53

How does the following journal entry affect a company's financial statements?

A)An increase in operating expenses shown on the income statement
B)An increase in the amount of cost of goods sold shown on the income statement
C)An increase in inventory shown on the balance sheet
D)A decrease in gross margin shown on the income statement

Question 54

Vargas Company sold a piece of land for $39,000 that had originally cost $32,500.How does this business event affect the company's financial statements?

A)An increase in cash flows from investing activities by $39,000.
B)No effect on operating income.
C)An increase in net income by $6,500.
D)All of these answer choices are correct.

Question 55

How is the net income percentage calculated?

A)Net Sales divided by net Income
B)Net Income divided by net Sales
C)Total stockholders' equity divided by net sales
D)Net Income divided by Gross Margin

Question 56

Leonard Company paid freight costs to have goods shipped to one of its customers.What effect will the payment of these freight costs have on the company's financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 57

Ashton Company uses the perpetual inventory system.The company's inventory account had a $6,600 balance as of December 31,Year 1.A physical count of inventory shows only $5,900 of merchandise in stock at December 31,Year 1.How will the entry to recognize the missing inventory affect the company's financial statements?

A)Increase assets.
B)Increase expense.
C)Decrease cash flow from operating activities.
D)All of these answer choices are correct.

Question 58

The following are the income statements for Ace and Diamond Companies.

What are the net income percentages for Ace and Diamond,respectively?

A)6.09% and 4.25%
B)1.83% and 1.70%
C)16.4% and 23.6%
D)30% and 40%

Question 59

Which of the following describes the purpose of a common size financial statement?

A)Compare the amount of common stock to other types of stock
B)Make comparisons between firms of different sizes
C)Make comparisons between different time periods
D)Make comparisons between firms of different sizes and between different time periods

Question 60

[The following information applies to the questions displayed below.]

Assume the perpetual inventory system is used.

1) Green Company purchased merchandise inventory that cost $64,000 under terms of 2/10, n/30 and FOB shipping point.
2) Green Company paid freight cost of $2,400 to have the merchandise delivered.
3) Payment was made to the supplier on the inventory within 10 days.
4) All of the merchandise was sold to customers for $94,000 cash and delivered under terms FOB destination with freight cost amounting to $1,600.


-What is the net cash flow from operating activities that results from these transactions?

A)$94,000 inflow
B)$27,280 inflow
C)$66,720 outflow
D)$31,280 inflow

Question 61

Under a periodic system,the account debited for freight costs on goods received from the vendor is called:

A)Merchandise Inventory
B)Cost of Goods Sold
C)Transportation-out
D)Transportation-in

Question 62

The financial statements of Tin Company included the following:

Based on the information provided,what was the company's cost of goods sold?

A)$200,000
B)$600,000
C)$700,000
D)$900,000

Question 63

Aaron Company uses the periodic inventory system.If Aaron's ending inventory is understated due to an accounting error,what is the effect on net income and the ending balance of retained earnings?

A)Option A
B)Option B
C)Option C
D)Option D

Question 64

Which factor has removed most of the practical limitations associated with use of the perpetual inventory system?

A)A more honest work force
B)Recent changes in GAAP
C)Recent changes in federal and state laws
D)Advancements in technology

Question 65

Exeter Company sold merchandise for $10,000 cash.The merchandise had cost the company $4,500.What is the effect of the sale on the balance sheet?

A)Cash increases by $10,000.
B)Inventory decreases by $4,500.
C)Retained earnings Increases by $5,500.
D)All of these answer choices are correct.

Question 66

SX Company sold merchandise on account for $16,000.The merchandise had cost the company $6,000.What is the effect of the sale on the income statement?

A)Revenue increases by $10,000.
B)Expenses increase by $6,000.
C)Net income increases by $16,000.
D)All of these answer choices are correct.

Question 67

Which of the following account titles is normally used in a periodic inventory system?

A)Transportation-in.
B)Purchases.
C)Purchase Returns and Allowances.
D)All of these answer choices are normally used.

Question 68

Assume a company uses the periodic inventory system.Which of the following accounts would not be used in a journal entry to record purchases and related transactions?

A)Merchandise Inventory
B)Purchase Returns and Allowances
C)Purchase Discounts
D)Purchases

Question 69

What is the chief advantage of the periodic system?

A)Efficiency and ease of recording
B)Immediate feedback on the inventory on hand at any time during the period
C)Timely discovery of losses due to theft
D)Better control over inventory

Question 70

When a company recognizes cost of goods sold,how does that event impact the elements of the financial statements? (Ignore the effects of recognizing sales revenue. )

A)Assets increase.
B)Liabilities increase.
C)Stockholder's equity decreases.
D)Dividends decrease.

Question 71

What event and inventory system may have produced the following journal entry?

A)A return of goods by a customer under the perpetual inventory system.
B)A sale of goods under the periodic inventory system.
C)A return of goods by a customer under the periodic inventory system.
D)A sale of goods under the perpetual inventory system.

Question 72

Which of the following statements regarding a multistep income statement is true?

A)When a company sells inventory for more than its cost,the difference between the sales revenue and the cost of goods sold is called the operating income.
B)A single-step income statement shows sales,gross margin,and net income.
C)Gross margin is calculated as sales revenue minus cost of goods sold.
D)Gross margin equals net income.

Question 73

The following information for Year 2 is taken from the accounts of Tuttle Company.The company uses the periodic inventory system.

Based on this information,what is the inventory at December 31,Year 2?

A)$55,200
B)$24,400
C)$38,800
D)$40,400

Question 74

JCS Incorporated experienced the following transactions during its first year of business.The company purchased $16,000 of merchandise from Kent Company.The company paid $2,000 for selling and administrative expenses and purchased land for $5,000.All of the merchandise purchased was sold for $30,000 cash.What is the company's gross margin?

A)$7,000
B)$14,000
C)$23,000
D)$30,000

Question 75

The following data is from the income statement of Ralston Company:

What is the company's gross margin percentage?

A)66.67%
B)25.93%
C)60.00%
D)15.60%

Question 76

Butte Company recognized $24,000 of revenue on the cash sale of merchandise that cost $11,000.How will the sale be reported on the statement of cash flows?

A)Cash inflow from investing activities
B)Cash inflow from operating activities
C)Cash inflow from financing activities
D)Cash inflow from principal activities

Question 77

During the current year,Gomez Co.had beginning inventory of $2,400 and ending inventory of $1,200.The cost of goods sold was $9,600.What is the amount of inventory purchased during the year?

A)$8,400
B)$9,600
C)$10,800
D)$13,200

Question 78

Olly Company is a merchandising business that sells dog food.Based on the following information,what is the gross margin for Olly Company?

A)$135,000
B)$160,000
C)$200,000
D)$285,000

Question 79

The following T-accounts are from the ledger of Hill Company.Hill uses the periodic inventory system.


Which of the following is true about Hill Company?

A)When merchandise is sold,the Purchases account will be credited for cost of goods sold.
B)The accounts indicate that Hill returned $6,000 of merchandise to a supplier.
C)The balance in the purchases account will appear on the balance sheet at year end.
D)The T-accounts indicate that Hill purchased inventory on account.

Question 80

Sullivan Company uses the periodic inventory system.The following balances were drawn from the accounts of Sullivan Company prior to the closing process:

What is the gross margin that will be shown on the income statement?

A)$8,400
B)$7,200
C)$15,600
D)$18,400