Deck 6: Merchandising Operations and the Multistep Income Statement

Question 1

The main purposes of internal controls include:

A)prevention of error,theft,and fraud.
B)promotion of efficiency.
C)ensuring compliance with laws and regulations.
D)all of the above.

Answer 1

all of the above.

Question 2

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 above.

Answer 2

all of the above.

Question 3

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.

Answer 3

Buying raw materials.

Question 4

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 5

Which of the following is not stated as a primary objective of a company's internal control policies and procedures?

A)The proper recording and authorization of transactions.
B)The maintenance of adequate records.
C)The prevention or detection of unauthorized activities involving a company's records.
D)The provision of current information for outside investors and analysts.

Question 6

Your company makes a bank deposit of $857 in its chequing account.Which of the following describes how this transaction should be accounted for?

A)You add $857 to your recorded cash balance and the bank deducts $857 from your chequing account balance.
B)You deduct $857 from your recorded cash balance and the bank deducts $857 from your chequing account balance.
C)You add $857 to your recorded cash balance and the bank adds $857 to your chequing account balance.
D)You deduct $857 from your recorded cash balance and the bank adds $857 to your chequing account balance.

Question 7

Notification by the bank that a customer's deposited cheque was returned NSF requires that the company make the following adjusting journal entry:

A)
B)
C)
D)No adjusting entry required.

Question 8

DigDug Corporation had outstanding cheques totalling $5,400 on its June bank reconciliation.In July,DigDug issued cheques totalling $38,900.The July bank statement shows that $26,300 in cheques cleared the bank in July.The amount of outstanding cheques on DigDug's July bank reconciliation should be:

A)$12,600.
B)$18,000.
C)$5,400.
D)$7,200.

Question 9

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 10

Before reconciling to its bank statement,Lauren Cosmetics Corporation's general ledger had a month-end balance in the cash account of $5,250.The bank reconciliation for the month contained the following items: Given the above information,what adjusted cash balance should Lauren report at month-end?

A)$4,500.
B)$4,820.
C)$5,160.
D)$5,590.

Question 11

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 12

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

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

Question 13

The following information was available to the accountant of Horton Company when preparing the monthly bank reconciliation: The amount of cash that should appear on the balance sheet following completion of the reconciliation and adjustment of the accounting records is:

A)$660.
B)$640.
C)$620.
D)$305.

Question 14

All of the following bank reconciliation items would result in an adjusting journal entry on the company's books except:

A)interest earned.
B)deposits in transit.
C)service charge.
D)a customer's cheque returned NSF.

Question 15

Your company writes a cheque for $857.Which of the following describes how this transaction should be accounted for?

A)You add $857 to your recorded cash balance and the bank deducts $857 from your chequing account balance.
B)You deduct $857 from your recorded cash balance and the bank deducts $857 from your chequing account balance.
C)You add $857 to your recorded cash balance and the bank adds $857 to your chequing account balance.
D)You deduct $857 from your recorded cash balance and the bank adds $857 to your chequing account balance.

Question 16

Segregation of duties means that a company assigns responsibilities so that:

A)sufficient workers are available to cover all necessary jobs.
B)responsibilities for related activities are assigned to two or more people.
C)employees are restricted to jobs for which they have adequate training.
D)workers are divided into those who make decisions and those who carry them out.

Question 17

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 18

Internal controls are concerned with:

A)only manual systems of accounting.
B)the extent of government regulations.
C)protecting against theft of assets and enhancing the reliability of accounting information.
D)preparing income tax returns.

Question 19

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 20

The internal control principle related to separating employees' duties so that the work of one person can be used to check the work of another person is called:

A)duplication of responsibility.
B)independent internal verification.
C)segregation of duties.
D)rotation of duties.

Question 21

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 above.

Question 22

On October 31,2007,your company's records say that the company has $16,451.03 in its chequing account.A review of the bank statement shows you have three outstanding cheques total-ling $5,643.01,and the bank has paid you interest of $12.19 and charged you $9.00 in fees.The bank statement dated October 31,2007 would report a balance of:

A)$22,090.85.
B)$10,811.21.
C)$22,097.23.
D)$16,454.22

Question 23

Which of the following situations would cause the balance per bank to be more than the balance per books?

A)Deposits in transit.
B)Service charges.
C)Outstanding cheques.
D)Cheques from customers returned as NSF.

Question 24

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 25

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 26

A retailer sells plasma TVs at a selling price of $5,000 each.The total sale is $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 costs of goods sold and $20,000 will be credited to Accounts receivable.

Question 27

When you identify interest received from the bank in performing a bank reconciliation,you must:

A)add the amount of interest to the balance per bank.
B)deduct the amount of interest from the balance per books.
C)add the amount of interest to the balance per books.
D)deduct the amount of interest from the balance per bank.

Question 28

When you identify outstanding cheques in performing a bank reconciliation,you must:

A)deduct the amount of the outstanding cheques from the balance per books.
B)deduct the amount of the outstanding cheques from the balance per bank.
C)add the amount of the outstanding cheques to the balance per books.
D)add the amount of the outstanding cheques to the balance per bank.

Question 29

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 30

Which of the following items on a bank reconciliation would require an adjusting journal entry on the company's books?

A)An error by the bank.
B)Outstanding cheques.
C)A bank service charge.
D)A deposit in transit.

Question 31

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 32

On December 31,2010,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 31,2011,you count 288 tie clips in inventory.Which of the following is true?

A)Ending inventory would be 278 tie clips on March 31,2008.
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 above.

Question 33

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 34

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.

Question 35

Deposits in transit:

A)have been recorded by the company but not yet by the bank.
B)have been recorded by the bank but not yet by the company.
C)have not been recorded by the bank or the company.
D)are customers' cheques that have not yet been received by the company.

Question 36

Which of the following bank reconciliation items would not result in an adjusting journal entry in the company's books?

A)Service charge.
B)Outstanding cheques.
C)A customer's cheque returned NSF.
D)Interest earned on deposits.

Question 37

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

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

Question 38

Which of the following situations would cause the balance per bank to be less than the balance per books?

A)Interest payments made by the bank.
B)Cheques from customers returned as NSF.
C)Outstanding cheques.
D)All of the above.

Question 39

When preparing this month's bank reconciliation,you find that you failed to record a $95 deposit for a payment you received from a customer.You immediately prepare a journal entry to record the deposit.Which of the following describes the actions to be taken when preparing next month's bank reconciliation?

A)You must decrease the balance per bank by $95.
B)You must increase the balance per bank by $95.
C)You must increase the balance per books by $95.
D)No further action is necessary.

Question 40

On October 31,2007,the bank's records say that your company has $12,956.73 in its chequing account.You are aware of three outstanding cheques for a total of $2,112.19.During October 2007,the bank rejected two deposited cheques from customers totalling $654.19 because of insufficient funds and charged you $12.00 in service fees.You had not yet received notice about the bad cheques,but you were aware of and have recorded the $12.00 of service fees.Prior to adjustment on October 31,2007,your Cash account would have a balance of:

A)$14,402.73.
B)$15,711.11.
C)$11,498.73.
D)$10,202.35.

Question 41

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 42

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 43

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 44

Contra-revenue accounts:

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

Question 45

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 46

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 47

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.
E)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 48

A company had the following partial list of account balances at year-end: 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 49

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 50

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.

Question 51

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

Question 52

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.
E)If received within the discount period the new amount is 98% of the invoice amount.$5,000(.98)= $4,900.

Question 53

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.

Question 54

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.
E)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 55

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.
B)The percentage will increase.
C)The percentage will decrease.
D)Either (A)or (B).

Question 56

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 57

Which of the following principle of internal control requires application of need basis?

A)Establish responsibility.
B)Segregate duties.
C)Restrict access.
D)Document procedures.

Question 58

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 costs of goods sold and $20,000 will be credited to Accounts receivable.

Question 59

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 60

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 61

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

Question 62

Operating activities involve both inflows and outflows of cash.
BT: Knowledge

Question 63

Coca-Cola reported net sales revenues of $19.8 billion and cost of goods sold of $6.0 billion.Its gross profit percentage was:

A)30.3%.
B)69.7%.
C)43.5%.
D)None of the above.

Question 64

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 65

A retail chain sells 100 designer sheet sets for $199.99 a set; these sheet sets cost the company $69.95 a set to buy.The company also sells 1,000 basic sheet sets for $49.99 a set; these sheet sets cost the company $24.99 to buy.Other operating expenses total $10,000.Which of the following statements is true?

A)The company's net income is $38,004.
B)Rounded to the nearest whole number,the gross profit percentage is 65% on the designer sheets and 50% on the basic sheets.
C)The company's gross profit is $28,004.
D)All of the above.

Question 66

All of the following are examples of a control procedure except:

A)Collusion of employees
B)Segregation of duties
C)Document procedures
D)Restrict access

Question 67

Coca-Cola reported net sales revenues of $18.8 billion and cost of goods sold of $5.6 billion while PepsiCo reported revenues of $22.3 billion and cost of goods sold of $9.3 billion.Which of the following statements is correct?

A)While PepsiCo generated more revenues than Coca-Cola,PepsiCo generated a lower gross profit percentage.
B)Coca-Cola generated a lower gross profit percentage because their sales revenue was lower.
C)PepsiCo did a better job of controlling product costs as a percentage of sales than did Coca-Cola as shown by their $13.0 billion gross profit.
D)None of the above.

Question 68

The cost of goods sold equation is:

A)Beginning inventory + Purchases + Purchase discounts + Purchase returns and allowances - Counted ending inventory = Cost of Goods Sold.
B)Beginning inventory - Purchases - Purchase discounts - Purchase returns and allowances - Counted ending inventory = Cost of Goods Sold.
C)Beginning inventory + Purchases - Purchase discounts - Purchase returns and allowances - Counted ending inventory = Cost of Goods Sold.
D)Beginning inventory + Purchases - Purchase discounts - Purchase returns and allowances + Counted ending inventory = Cost of Goods Sold.

Question 69

Over a two-year period,Coca-Cola's gross profit percentage went from 70.4% to 69.7%.Which of the following was the cause of this change?

A)Reduced selling prices.
B)Rising product cost as a percentage of sales.
C)Increased competition from Pepsi.
D)All of the above may have caused the change.

Question 70

BC Company has a gross profit percentage of 61% while AB Company has a gross profit percentage of 37%.Which of the following is true?

A)BC Company will report a higher net income than AB Company.
B)AB Company must have a greater sales volume than BC Company.
C)BC Company must be more efficient at controlling selling,general,and administrative expenses than AB Company.
D)None of the above.

Question 71

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

Question 72

Internal controls include the policies and procedures a company implements to protect against theft of assets,to promote efficiency,and to ensure compliance with laws and regulations.
BT: Knowledge

Question 73

Under the periodic inventory system:

A)inventory must be counted at the beginning and end of each accounting period.
B)inventory must only be counted at the end of each accounting period.(The ending inventory from the previous period can be used as the beginning inventory for the next period.)
C)inventory does not have to be counted.(It can be taken from the accounting records.)
D)inventory levels must be counted every day.

Question 74

A company has net sales of $612,850 and cost of goods sold of $441,252.The company's gross profit percentage is:

A)72%.
B)3.57%.
C)0.389%.
D)28%.

Question 75

A company starts the period with 100 computers in inventory,purchases 30 more,returns 4 of them to suppliers,and has 83 in inventory at the end of the period.Which of the following statements is true?

A)Net purchases total 26 computers.
B)Net sales total 51 computers.
C)Net sales total 26 computers.
D)Net purchases total 51 computers.

Question 76

A company sells three different products.The first costs $8 and sells for $16,the second costs $18 and sells for $45,while the third costs $36 and sells for $120.

A)The gross profit percentages on the individual products are 50%,60%,and 70%,respectively.
B)The third product is the highest margin good.
C)If the company can persuade some customers to switch to the third product,overall gross profit percentage will increase.
D)All of the above.

Question 77

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 above.

Question 78

If a company achieves a small increase in its gross profit percentage from one year to the next,the company:

A)will always have a higher net income.
B)must be obtaining products at a lower cost per unit.
C)must have increased its sales revenue.
D)none of the above.

Question 79

At the beginning of the quarter Purrfect Pets has $30,000 in inventory.During the quarter the company purchases $7,900 of new inventory,has purchase returns of $700,and purchase discounts of $200.At the end of the quarter the balance in the Inventory account is $26,500.What is the cost of goods sold?

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

Question 80

Which of the following statements is true?

A)Because gross profit percentages are so consistent from period to period they are not very useful for analyzing one company over time.
B)Because gross profit percentages are so variable across industries they are most useful in comparing companies from different industries.
C)Because gross profit percentages are so variable across industries they are more useful in analyzing one company over time.
D)Because gross profit percentages are so consistent across industries they are most useful in comparing companies from different industries.