Deck 5: Accounting for Merchandising Operations

Question 1

A wholesaler is an intermediary that buys products from manufacturers or other wholesalers and sells them to consumers.

Answer 1

False

Question 2

A company had a gross profit of $300,000 based on sales of $400,000. Its cost of goods sold equals $700,000.

Answer 2

False

Question 3

A merchandising company's operating cycle begins with the sale of merchandise and ends with the collection of cash from the sale.

Answer 3

False

Question 4

Merchandise inventory is reported in the long-term assets section of the balance sheet.

Question 5

Cost of goods sold is also called cost of sales.

Question 6

Gross profit is also called gross margin.

Question 7

Merchandise inventory consists of products that a company acquires to resell to customers.

Question 8

Beginning merchandise inventory plus the net cost of purchases is the merchandise available for sale.

Question 9

Cash sales shorten the operating cycle for a merchandiser; credit sales lengthen operating cycles.

Question 10

A service company earns net income by buying and selling merchandise.

Question 11

Quick assets include cash, inventory, and current receivables.

Question 12

Assets tied up in inventory are not productive assets.

Question 13

A retailer is an intermediary that buys products from manufacturers and sells them to wholesalers.

Question 14

A perpetual inventory system requires updating of the inventory account only at the beginning of an accounting period.

Question 15

Cost of goods sold represents the cost of buying and preparing merchandise for sale.

Question 16

A company had net sales and cost of goods of $545,000 and $345,000, respectively. Its gross margin equals $890,000.

Question 17

A perpetual inventory system continually updates accounting records for inventory transactions.

Question 18

The acid-test ratio is also called the quick ratio.

Question 19

The acid-test ratio is defined as current assets divided by current liabilities.

Question 20

A company had sales and cost of goods sold of $350,000 and $200,000, respectively. Its gross profit equals $150,000.

Question 21

A common rule of thumb is that a company's acid-test ratio should be at least 2 or a company may face near-term liquidity problems.

Question 22

Under the perpetual inventory system, the cost of merchandise purchased is recorded in the Merchandise Inventory account.

Question 23

A company's quick assets are $147,000 and its current liabilities are $143,000. This company's acid-test ratio is 1.03.
$147,000/$143,000 = 1.03

Question 24

If goods are shipped FOB shipping point, the seller does not record revenue from the sale until the goods arrive at their destination because the transaction is not complete until that point.

Question 25

Successful use of a just-in-time inventory system can narrow the gap between the acid-test and the current ratio.

Question 26

A buyer records the costs of shipping goods in a Delivery Expense, or transportation-out account when the buyer is responsible for these costs.

Question 27

Purchase returns refer to merchandise a buyer acquires but then returns to the seller.

Question 28

If a company sells merchandise with credit terms 2/10 n/60, the credit period is 10 days and the discount period is 60 days.

Question 29

Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.

Question 30

The Merchandise Inventory account balance at the end of the current period is equal to the amount of beginning merchandise inventory for the next period.

Question 31

Credit terms for a purchase include the amounts and timing of payments from a buyer to a seller.

Question 32

Sellers always offer a discount to buyers for prompt payment toward purchases made on credit.

Question 33

Credit terms of 2/10, n/30 imply that the seller offers the purchaser a 2% cash discount if the amount is paid within 10 days of the invoice date. Otherwise, the full amount is due in 30 days.

Question 34

The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit if goods are shipped FOB destination.

Question 35

Purchase discounts are the same as trade discounts.

Question 36

A company had net sales of $340,500, its cost of goods sold was $257,000, and its net income was $13,750. The company's gross margin ratio equals 24.5%.
($340,500 - $257,000)/$340,500 = 24.5%

Question 37

The gross margin ratio is defined as gross margin divided by net sales.

Question 38

The profit margin ratio is gross margin divided by total assets.

Question 39

A company's current ratio is 1.2 and its quick ratio is 0.25. This company is probably an excellent credit risk because the ratios reveal no indication of liquidity problems.

Question 40

A buyer did not take advantage of a supplier's credit terms of 2/10, n/30, and instead paid the invoice in full at the end of 30 days. By not taking the discount the buyer lost the equivalent of 18% annual interest on the amount of the purchase.

Question 41

In a perpetual inventory system, the merchandise inventory account must be closed at the end of the accounting period.

Question 42

Cost of Goods Sold is debited to close the account during the closing process.

Question 43

A single-step income statement includes cost of goods sold as another expense, and shows only one subtotal for total expenses.

Question 44

Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collections efforts.

Question 45

A credit memorandum from a seller informs a buyer of the seller's credit to its Accounts Payable account arising from a sales return or allowance.

Question 46

When a company has no reportable nonoperating activities, its income from operations is simply labeled net income.

Question 47

Sales of $350,000 and net sales of $323,000 could reflect sales discounts of $27,000.
$350,000 - $323,000 = $27,000

Question 48

Sales Discounts and Sales Returns and Allowances are credited to close the accounts during the closing process.

Question 49

A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20, and a credit to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for early payment.
$20/$1,000 = 2% discount

Question 50

Because sellers assume that their customers will pay within the discount period, the seller usually records the discount at the time of the sale.

Question 51

Operating expenses are classified into two categories: selling expenses and cost of goods sold.

Question 52

A perpetual inventory system is able to directly measure and monitor inventory shrinkage and there is no need for a physical count of inventory.

Question 53

A merchandiser's classified balance sheet reports merchandise inventory as a current asset.

Question 54

The adjusting entry to reflect inventory shrinkage is a debit to Income Summary and a credit to Inventory Shrinkage Expense.

Question 55

Selling expenses support a company's overall operations and include expenses related to accounting, human resource management, and financial management.

Question 56

FOB shipping point (or FOB factory) implies that ownership of goods transfers to the buyer at the buyer's place of business.

Question 57

Each sales transaction for a seller that uses a perpetual inventory system involves recognizing both revenue and cost of merchandise sold.

Question 58

A multiple-step income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items.

Question 59

When a credit customer returns merchandise to the seller, under a perpetual inventory system, the seller would debit Sales Returns and Allowances and credit Accounts Receivable and also debit Merchandise Inventory and credit Cost of Goods Sold.

Question 60

Sales discounts is a contra revenue account, meaning that the Sales Discounts account is added to the Sales account when computing a company's net sales.

Question 61

Cost of goods sold:

A) Is another term for merchandise sales.
B) Is the term used for the cost of buying and preparing merchandise for sale.
C) Is another term for revenue.
D) Is also called gross margin.
E) Is a term only used by service firms.

Question 62

ABC Corporation's total quick assets were $5,888,000, its current assets were $11,700,000 and its current liabilities were $8,000,000. Its acid-test ratio equals:

A) 0.50.
B) 0.68.
C) 0.74.
D) 1.50.
E) 2.20.

Question 63

A company's current assets were $17,980, its quick assets were $11,420 and its current liabilities were $12,190. Its quick ratio equals:

A) 0.94.
B) 1.07.
C) 1.48.
D) 1.57.
E) 2.40.

Question 64

A company had sales of $695,000 and cost of goods sold of $278,000. Its gross margin equals:

A) $(417,000).
B) $695,000.
C) $278,000.
D) $417,000.
E) $973,000.

Question 65

Delivery expense is reported as part of general and administrative expense in the seller's income statement.

Question 66

The following statements are true regarding the operating cycle of a merchandising company except:

A) The operating cycle begins with the purchase of merchandise.
B) The operating cycle is shortened by credit sales.
C) The operating cycle ends with the collection of cash from the sale of merchandise.
D) The operating cycle can vary in length among different merchandising companies.
E) The operating cycle sometimes involves accounts receivable.

Question 67

Under both the periodic and perpetual inventory systems, the temporary account Purchases Returns and Allowances is used to accumulate the cost of all returns and allowances for a period.

Question 68

The quick assets are defined as:

A) Cash, short-term investments, and inventory.
B) Cash, short-term investments, and current receivables.
C) Cash, inventory, and current receivables.
D) Cash, noncurrent receivables, and prepaid expenses.
E) Accounts receivable, inventory, and prepaid expenses.

Question 69

A merchandising company:

A) Earns net income by buying and selling merchandise.
B) Receives fees only in exchange for services.
C) Earns profit from commissions only.
D) Earns profit from fares only.
E) Buys products from consumers.

Question 70

The acid-test ratio:

A) Is also called the quick ratio.
B) Measures profitability.
C) Measures inventory turnover.
D) Is generally greater than the current ratio.
E) Measures return on assets.

Question 71

In a periodic inventory system, cost of goods sold is recorded as each sale occurs.

Question 72

The following statements regarding gross profit are true except:

A) Gross profit is also called gross margin.
B) Gross profit less other operating expenses equals income from operations.
C) Gross profit is not calculated on the multiple-step income statement.
D) Gross profit must cover all operating expenses to yield a return for the owner of the business.
E) Gross profit equals net sales less cost of goods sold.

Question 73

Beginning inventory plus net purchases is:

A) Cost of goods sold.
B) Merchandise available for sale.
C) Ending inventory.
D) Sales.
E) Shown on the balance sheet.

Question 74

The operating cycle for a merchandiser that sells only for cash moves from:

A) Purchases of merchandise to inventory to cash sales.
B) Purchases of merchandise to inventory to accounts receivable to cash sales.
C) Inventory to purchases of merchandise to cash sales.
D) Accounts receivable to purchases of merchandise to inventory to cash sales.
E) Accounts receivable to inventory to cash sales.

Question 75

The following statements regarding merchandise inventory are true except:

A) Merchandise inventory is reported on the balance sheet as a current asset.
B) Merchandise inventory refers to products a company owns and intends to sell.
C) Merchandise inventory can include the cost of shipping the goods to the store and making them ready for sale.
D) Merchandise inventory does not appear on the balance sheet of a service company.
E) Merchandise inventory purchases are not considered part of the operating cycle for a business.

Question 76

Under a periodic inventory system, purchases, purchases returns and allowances, purchase discounts, and transportation in transactions are recorded in separate temporary accounts

Question 77

The periodic inventory system requires updating the inventory account only at the end of the period to reflect the quantity and cost of both the goods available and the goods sold.

Question 78

Merchandise inventory:

A) Is a long-term asset.
B) Is a current asset.
C) Includes supplies.
D) Is classified with investments on the balance sheet.
E) Must be sold within one month.

Question 79

A company had sales of $375,000 and its gross profit was $157,500. Its cost of goods sold equals:

A) $(217,000).
B) $375,000.
C) $157,500.
D) $217,500.
E) $532,500.

Question 80

The current period's ending inventory is:

A) The next period's beginning inventory.
B) The current period's cost of goods sold.
C) The prior period's beginning inventory.
D) The current period's net purchases.
E) The current period's beginning inventory.