Deck 6: Merchandising Activities

Question 1

In a retail department store with an efficient perpetual inventory system, the quantities of goods actually on hand are probably somewhat more than the quantities indicated in the accounting records.

Answer 1

False

Question 2

The accounting cycle of a merchandising business is the length of time covered by the company's income statement.

Answer 2

True

Question 3

Purchase Discounts Lost is shown as a reduction of cost of goods sold in the income statement.

Answer 3

False

Question 4

Gross profit margin is the dollar amount of gross profit expressed as a percentage of gross sales.

Question 5

Net Sales is computed as total sales revenue less sales returns and allowances less sales discounts.

Question 6

The operating cycle of a merchandising company consists of (1) purchases of merchandise; (2) sales of the merchandise; and (3) collection of accounts receivable.

Question 7

In a periodic inventory system, the Inventory and Cost of Goods Sold accounts are kept up-to-date throughout the accounting period.

Question 8

Inventory shrinkage refers to unrecorded decreases in inventory resulting from breakage, theft, and sales of inventory.

Question 9

Under the periodic inventory system, no effort is made to keep up-to-date records of either Inventory or Cost of Goods Sold as transactions occur.

Question 10

In a perpetual inventory system, when merchandise is purchased, it is debited to an account called Purchases.

Question 11

In preparing monthly bills to be sent to individual credit customers, the billing department will use the accounts payable subsidiary ledger, rather than the general ledger.

Question 12

In a periodic inventory system, the Cost of Goods Sold account may be created during the closing process by debiting Cost of Goods Sold and crediting the Beginning Inventory and the Purchases account.

Question 13

Today, most large merchandising companies use a perpetual inventory system.

Question 14

A perpetual inventory system requires the capability of recording the cost of the goods sold in individual sales transactions.

Question 15

When using a perpetual inventory system, the Purchases account is debited when merchandise is acquired.

Question 16

The manager of National Software wants to know how many Microsoft Excel programs the store sold in June. This information is contained in the Inventory controlling account.

Question 17

Inventories are assets that a company holds for sale in the ordinary course of business.

Question 18

The contra-revenue accounts, Sales Returns and Allowances and Sales Discounts, should be closed by crediting these accounts and debiting Income Summary for each account.

Question 19

Wholesalers buy from retailers and sell to the general public.

Question 20

Inventory is a relatively liquid asset and usually appears above Accounts Receivable on the balance sheet.

Question 21

If ending inventory and cost of goods sold are added together, they should equal gross profit.

Question 22

Which account listed below is classified as a contra-revenue account?

A) Cost of Goods Sold.
B) Gross profit.
C) Sales Discounts.
D) Purchases.

Question 23

Which of the following companies would be more likely to use a periodic inventory system?

A) IBM.
B) 1^st Bank of New York.
C) Sears.
D) A newspaper stand.

Question 24

Which of the following businesses is likely to have the shortest operating cycle?

A) A food store.
B) A department store.
C) An art store.
D) A car store.

Question 25

In a periodic inventory system, the ending inventory can be determined from the accounting records, and a physical count of the merchandise on hand will confirm the amount.

Question 26

Operating income is:

A) A measure of profitability after deducting cost of sales from net sales.
B) A measure of profitability after deducting cost of sales and all expenses incurred in operating the business from net sales.
C) A measure of liquidity after deducting cost of sales from net sales.
D) The equivalent of net sales.

Question 27

Instead of paying for merchandise purchased on account, Olympic Corp. returned this merchandise to the supplier. Olympic should record this transaction by debiting Accounts Payable and crediting Sales Returns and Allowances.

Question 28

The Cost of Goods Sold account is closed by:

A) Debiting Cost of Goods Sold and crediting Income Summary.
B) Debiting Cost of Goods Sold and crediting Retained Earnings.
C) Debiting Income Summary and crediting Cost of Goods Sold.
D) Debiting Retained Earnings and crediting Cost of Goods Sold.

Question 29

If ending inventory and cost of goods sold are added together, they should equal cost of goods available for sale.

Question 30

When using a perpetual inventory system, the Purchases account is debited when merchandise is acquired.

Question 31

Sales discounts and allowances:

A) When properly recorded will reduce net profit.
B) When properly recorded will increase net profit.
C) Will not affect net profit.
D) Are always immaterial and need not be recorded.

Question 32

In a perpetual inventory system, the Inventory and Cost of Goods Sold accounts are kept up-to-date throughout the accounting period.

Question 33

Which of the following should not be classified as inventory in the balance sheet of a large automobile dealership?

A) Pickup trucks offered for sale.
B) Used cars taken in trade and offered for sale on the company's used-car lot.
C) Spark plugs, oil filters, and other parts which are intended for use by the service department in repairing and servicing customers' cars.
D) "Company cars" provided to specific company executives for their personal use.

Question 34

Under the perpetual inventory system, two entries are required when goods are sold.

Question 35

In a periodic inventory system, the cost of goods sold is determined by the following end-of-period computation: Beginning Inventory + Purchases - Ending inventory = Cost of Goods Sold.

Question 36

A large company with many different kinds of low-cost items would tend to use a perpetual inventory system.

Question 37

Which of the following factors would suggest the use of a perpetual inventory system?

A) A small company.
B) A high volume of many different, low-cost items.
C) A desire to minimize record-keeping requirements.
D) Only annual reporting is required.

Question 38

The average gross profit margin is a measure of relative profitability.

Question 39

Which of the following would not tend to make a manufacturer choose a perpetual inventory system?

A) Management wants information about quantities of specific products.
B) A low volume of sales transactions and a computerized accounting system.
C) A high volume of sales transactions and a manual accounting system.
D) Items in inventory with high per unit costs.

Question 40

Merchandising companies that are small and do not use a perpetual inventory system may elect to use:

A) A physical inventory system.
B) A periodic inventory system.
C) An inventory shrinkage method.
D) An inventory subsidiary ledger system.

Question 41

Sales revenue is recognized in the period in which:

A) Merchandise is delivered to the customer.
B) The customer orders the merchandise.
C) Cash payment is received by the seller.
D) Purchases are made to replace the merchandise sold.

Question 42

The basic purpose of a subsidiary ledger is to:

A) Provide a chronological record of all business transactions.
B) Provide details about the individual items comprising the balance of a general ledger account.
C) Enable accountants to prepare financial statements.
D) Provide persons outside of the organization with detailed information about the company's operations.

Question 43

Which of the following companies would be more likely to use a perpetual inventory system?

A) Corner deli.
B) Home Depot.
C) James Dean, CPA.
D) A manufacturer of custom sailboats.

Question 44

Which of the following appears in the income statement of a merchandising business, but not in the income statement of a business that renders only services?

A) Interest revenue.
B) Gross profit.
C) Advertising expense.
D) Income tax expense.

Question 45

Cumberland, Inc. has applied to its bank for a loan. The bank asks Cumberland's controller about the total amount of the company's accounts receivable. Assuming that all accounting records are up-to-date, the controller can best answer this question by referring to:

A) The Income Statement.
B) The Accounts Receivable controlling account.
C) The Accounts Receivable subsidiary ledger.
D) Last year's Balance Sheet.

Question 46

Under the perpetual inventory system which journal entry would indicate a purchase of merchandise?

A) Debit, Inventory and credit, Cash.
B) Debit, Purchases and credit, Cash.
C) Debit, Costs of Goods Sold and credit, Inventory.
D) Debit, Inventory and credit, Cost of Goods Sold.

Question 47

Net sales is calculated by:

A) Subtracting cost of sales from sales.
B) Subtracting sales returns and sales discounts from sales.
C) Subtracting sales returns, cost of sales, and sales discounts from sales.
D) Subtracting gross profit from sales.

Question 48

In a perpetual inventory system:

A) Merchandising transactions are recorded as they occur.
B) No effort is made to record the Cost of Goods Sold until year-end.
C) Entries are made in the Cost of Goods Sold account whenever merchandise is purchased or sold.
D) The need for ever taking physical inventory is eliminated.

Question 49

The cost of delivering merchandise to the customer is:

A) Part of cost of goods sold.
B) Used in the calculation of net sales.
C) An operating expense.
D) A reduction of gross profit.

Question 50

The purchasing agent of Superb Service Co. wants to know the dollar amount of inventory purchased on account during the year from a particular supplier. This information can be found most easily in Superb Service's:

A) Inventory subsidiary ledger.
B) Accounts payable controlling account.
C) Inventory controlling account.
D) Accounts payable subsidiary ledger.

Question 51

In comparing a perpetual inventory system with a periodic inventory system, which of the following statements is not correct?

A) Most large companies use perpetual inventory systems.
B) A periodic system does not include an inventory subsidiary ledger.
C) The perpetual method is easier to apply in a manual accounting system.
D) Regardless of the system in use, most businesses take a physical inventory at least once a year.

Question 52

The credit term 2/10, n/30 means:

A) That after 10 days 2% interest is charged.
B) That there is a 10% discount if payment is received within 30 days.
C) That there is a 2% discount if payment is received within 10 days, otherwise, full payment is due within 30 days.
D) There is a 10% discount if paid immediately and 2% if paid within 30 days.

Question 53

In a perpetual inventory system, two entries usually are made to record each sales transaction. The purposes of these entries are best described as follows:

A) One entry recognizes the sales revenue, and the other recognizes the cost of goods sold.
B) One entry records the purchase of the merchandise, and the other records the sale.
C) One entry records the cost of goods sold, and the other reduces the balance in the Inventory account.
D) One entry updates the general ledger, and the other updates the subsidiary ledgers.

Question 54

Gross profit is the difference between:

A) Net sales and the cost of goods sold.
B) The cost of merchandise purchased and the cost of merchandise sold.
C) Net sales and net income.
D) Net sales and all expenses.

Question 55

In a periodic inventory system, the cost of goods sold is:

A) Recorded as sales transactions occur.
B) Determined by a computation which is performed at year-end, after the taking of a complete physical inventory.
C) Equal to the beginning inventory, plus purchases made during the period, less sales revenue for the period.
D) Determined by subtracting the balance in the Gross Profit account from the amount of net sales.

Question 56

Hicksville's Department Store uses a perpetual inventory system. At year-end, the balance in the Inventory controlling account is $1,200,000. Assuming that the inventory records have been maintained properly, a year-end physical inventory:

A) Is unnecessary.
B) Is needed to establish the ending inventory, as the $1,200,000 balance in the Inventory controlling account represents the beginning inventory.
C) Probably will indicate more than $1,200,000 in merchandise on hand.
D) Probably will indicate less than $1,200,000 in merchandise on hand.

Question 57

Jayson Products uses a perpetual inventory system. At year-end, the Inventory account had a balance of $280,000, but a complete year-end physical inventory indicated goods on hand costing only $273,000. Jayson should:

A) Reduce its cost of goods sold by $7,000.
B) Record a $7,000 current liability.
C) Reduce the balance in its Inventory controlling account and inventory subsidiary ledger by $7,000.
D) Reduce the balance in the Inventory controlling account and record a current liability, both in the amount of $7,000.

Question 58

Which of the following factors would suggest the use of a periodic inventory system?

A) A small company.
B) A high volume of sales and a manual accounting system.
C) Neither a small company or a high volume of sales and a manual accounting system.
D) Both a small company and a high volume of sales and a manual accounting system.

Question 59

Which of the following credit terms is the most advantageous to the purchaser of merchandise?

A) 1/10, n/30.
B) 5/10, n/60.
C) 2/10, n/30.
D) 5/10, n/20.

Question 60

In a periodic inventory system, which of the following accounts may be closed by debiting Cost of Goods Sold?

A) Sales, Inventory (beginning), and Gross Profit.
B) Inventory (beginning) and Purchases.
C) Purchases and Inventory (ending).
D) Sales, Inventory (beginning), and Cost of Goods Available for Sale.

Question 61

Which of the following statements about a periodic inventory system is not correct?

A) These systems are used primarily by small businesses with manual accounting systems.
B) The system does not include an up-to-date inventory ledger.
C) The balance in the Inventory account remains unchanged until the end of the period.
D) The Cost of Goods Sold account is updated as sales transactions occur.

Question 62

The basic purpose of offering customers cash discounts such as 2/10, n/30 is to:

A) Increase sales.
B) Reduce net sales.
C) Speed up the collection of accounts receivable.
D) Focus management's attention upon customers that fail to take advantage of all available cash discounts.

Question 63

When making sales, the sales taxes received are:

A) Revenue.
B) A liability.
C) An expense if incurred.
D) A reduction in inventory value.

Question 64

Emerald Co. uses a perpetual inventory system and records purchases of merchandise at net cost. The company recently purchased 200 compact discs at an invoice price of $6,000 and terms of 2/10, n/30. Half of these discs had been mislabeled and were returned immediately to the supplier. The journal entry to record payment of this invoice after the discount period has expired will include a:

A) Debit to Inventory for $3,000.
B) Credit to Cash for $3,000.
C) Debit to an expense account for $60.
D) Credit to Cash for $2,940.

Question 65

The Sales Returns and Allowances account is debited when:

A) Merchandise is returned to a supplier.
B) Merchandise is returned by a customer.
C) Payment is made to a supplier within the discount period.
D) An account receivable is collected within the discount period.

Question 66

The gross profit margin:

A) Is the dollar amount of gross profit expressed as a percentage of cost of sales.
B) May indicate popular products and successful marketing strategies.
C) Must be computed for the business as a whole rather than for specific sales departments.
D) Is equal to cost of goods sold plus gross operating expenses.

Question 67

As a retailer, which of the following percentages is the least attractive to you?

A) Gross profit of 30%.
B) Cost of goods sold as a percentage of net sales equal to 70%.
C) Gross margin of 30%.
D) Sales markup of 30% over cost.

Question 68

During the year 2010, the inventory of Debra's Gift Shop decreased by $50,000. If the income statement for the year 2010 reported cost of goods sold of $350,000, purchases during the year must have amounted to:

A) $400,000.
B) $310,000.
C) $300,000.
D) $350,000.

Question 69

Inventory shrinkage is not caused by:

A) Shoplifting.
B) Breakage.
C) Price reductions by competitors.
D) Spoilage.

Question 70

All of the following accounts normally have debit balances except:

A) Transportation-in.
B) Cost of Goods Sold.
C) Sales Returns & Allowances.
D) Purchase Returns & Allowances.

Question 71

Periodic inventory systems are used primarily by:

A) Small businesses with manual accounting systems.
B) Large manufacturing companies.
C) Small businesses that sell a low volume of high-priced items.
D) Companies that sell a high volume of low-priced items and record sales transactions on point-of-sale terminals.

Question 72

Regal Artworks Co. records purchases net of all available purchase discounts. If the company makes payment after the discount has expired, the entry to record the payment should include a:

A) Debit to Purchase Discounts Lost.
B) Credit to Purchase Discounts Lost.
C) Debit to Sales Discounts.
D) Credit to Sales Discounts.

Question 73

The following information is available: Calculate the gross profit:

A) $0.
B) $1,500.
C) $450.
D) $900.

Question 74

Parkside Pool reports net sales of $625,000, gross profit of $275,000, and net income of $15,000. The company's cost of goods sold is:

A) $335,000.
B) $350,000.
C) $340,000.
D) $325,000.

Question 75

If sales discounts are shown as a separate item in financial statements, they should be shown as a (n):

A) Deduction from accounts receivable.
B) Deduction from gross sales revenue.
C) Operating expense.
D) Current liability.

Question 76

To arrive at net sales:

A) Add sales discounts to sales.
B) Subtract the cost of goods sold from the sales price.
C) Subtract sales returns and sales discounts from sales.
D) Subtract accounts receivable from sales.

Question 77

In a periodic inventory system, the formula used in computing the cost of goods sold may be summarized as follows:

A) Beginning inventory + purchases - ending inventory.
B) Beginning inventory + purchases - net sales.
C) Ending inventory + purchases - net sales.
D) Balance in the Cost of Goods Sold account, less the balance in the Inventory Shrinkage account.

Question 78

Bernice Beverages is not satisfied with the quality of merchandise purchased from Reade Supplies. If American Supplies agrees to settle this matter by granting Bernice Beverages a sales allowance, Bernice Beverages will:

A) Return the entire shipment to Reade Supplies and receive a full refund.
B) Return only that portion of the merchandise that it is unable to sell within the discount period.
C) Keep the merchandise, but pay a reduced purchase price.
D) Keep the merchandise and sell it at a reduced sales price.

Question 79

A company's gross profit rate is computed by dividing:

A) Net sales by gross profit.
B) Cost of goods sold by gross profit.
C) Gross profit by the cost of goods sold.
D) Gross profit by net sales.

Question 80

The cost of the transportation of inventory purchased:

A) Are expensed in the current period.
B) Increases income.
C) Becomes part of the cost of inventory.
D) Reduces the sales price.