Deck 6: Accounting for Retailing

Question 1

The primary purpose of (cash) settlement discounts is to:

A) convince the customer to buy the goods on credit.
B) provide discounts to customers who purchase large volumes of goods.
C) to encourage customers to pay for purchases in cash.
D) encourage the customer to settle their account early.

Answer 1

D

Question 2

B sold goods to A for $2000. A paid his account one month later. What is the correct entry in B's books to record the payment by A? Ignore GST.

A) Debit accounts receivable $2000; credit sales $2000
B) Debit bank $2000; credit accounts receivable $2000
C) Debit accounts receivable $2000; credit equity $2000
D) Debit bank $2000; credit sales $2000

Answer 2

B

Question 3

If the invoice price for services rendered to a client is $4246, including GST, how much GST is to be collected from the client?

A) $424.60
B) $467.06
C) $386.00
D) Nil

Answer 3

C

Question 4

Assuming a retailer buys and sells on 30 days credit and from the date of purchase it takes, on average, 14 days to sell inventory. What is the correct order for the steps in the operating cycle?
I Sell goods to customer
II Collect cash from customer
III Pay supplier
IV Buy goods for resale from supplier

A) I, II, III, IV
B) IV, III, II, I
C) IV, I, III, II
D) I, IV, II, III

Question 5

Which of the following need not appear on a tax invoice?

A) The words 'tax invoice'
B) The signature of the person authorising the invoice
C) The date of issue of the invoice
D) The ABN of the issuing entity

Question 6

The main difference between a service and a retail business is that service businesses:

A) sell directly to consumers.
B) buy and sell in bulk.
C) convert raw materials into finished goods.
D) sell services rather than goods.

Question 7

Goods held for sale by a retailer in the normal course of business are known as:

A) merchandise, inventory.
B) inventory, stock, raw materials.
C) stock, inventory, stock-in-trade.
D) stock, inventory work-in-process.

Question 8

Inventory is reported on the balance sheet as:

A) a current asset.
B) a non-current asset.
C) an investment.
D) property, plant and equipment.

Question 9

What is the correct layout for a retailer's income statement?

A) Sales revenue - cost of sales = gross profit
B) Sales revenue - expenses = profit
C) Sales revenue - cost of sales = gross profit - expenses = profit
D) Sales revenue - cost of sales - expenses = gross profit

Question 10

Sales Returns and Allowances is what type of account?

A) Contra to sales revenue
B) Liability
C) Contra to an asset
D) Expense

Question 11

In the income statement expenses are classified into four categories, cost of sales, selling, administrative and financial. To which category do expenses incurred in borrowing money and collecting debts belong?

A) Cost of sales
B) Selling
C) Administrative
D) Financial

Question 12

The average length of time it takes for a retail business to acquire inventory, sell it to its customers and collect the cash owing is called the:

A) accounting cycle.
B) operating cycle.
C) inventory turnover.
D) accounting period.

Question 13

Which of these is usually a retailer's largest expense?

A) Rent
B) Cost of sales
C) Telephone
D) Insurance

Question 14

When goods are returned by a customer or the price is adjusted, GST legislation requires the retailer to issue the customer with _________________for all amounts totalling more than $50.

A) an adjustment note
B) an invoice
C) a reverse tax invoice
D) a return note

Question 15

Which statement relating to inventory is not correct?

A) Another name for inventory is stock-in-trade.
B) It makes up a significant portion of a retailer's assets.
C) It is a very active asset, continually being acquired, sold and replaced.
D) It is classified as a non-current asset in the balance sheet.

Question 16

Simon sold goods to Lauren for $3300 including GST. Lauren paid her account within the discount period and received a settlement discount of 2%. Using the gross method, what is the entry in Simon's books to record the payment from Lauren?

A) Debit bank $3234; debit discount allowed $60; debit GST collections $6; credit accounts receivable $3300
B) Debit bank $3234; debit discount allowed $66; credit accounts receivable $3300
C) Debit bank $3240; debit discount allowed $60; credit accounts receivable $3300
D) Debit bank $3234, debit discount allowed $66; debit GST collections $6; credit accounts receivable $3306

Question 17

Which of these should be classified as an administrative expense in the income statement of a retailer?

A) Depreciation on the sales manager's motor vehicle
B) Depreciation on office furniture and equipment
C) Discount allowed
D) Interest on bank overdraft

Question 18

The specific term used by a retailer for income is:

A) revenue.
B) service income.
C) sales.
D) fees.

Question 19

Under GST (Goods and Services Tax) legislation in Australia a tax invoice must be issued for all sales in excess of:

A) $20.
B) $50.
C) $75.
D) $100.

Question 20

GST is credited to the GST collections account when a sale occurs. If goods are returned or a discount allowed the _______________ account must be debited with an adjustment for GST.

A) GST collections
B) GST outlays
C) purchases
D) discount received

Question 21

To obtain the maximum possible benefit from a cash discount of 2/10, n/30, the buyer should pay the invoice:

A) immediately.
B) on the last day of the discount period, i.e. in 10 days.
C) at the end of the month.
D) when the seller threatens legal action.

Question 22

GST collected on sales is accumulated in a liability account called GST collections and GST paid on purchases is accumulated in an account with a debit balance called GST outlays. What type of account is GST outlays?

A) Asset
B) Expense
C) Contra income
D) Contra liability

Question 23

In Australia, where most accounting is computerised, the use of the periodic inventory system is declining. Which of the following businesses is still most likely to use the periodic approach to accounting for inventory?

A) Chemist shop
B) Supermarket
C) Bookshop
D) Service station

Question 24

Jan sold goods to John for $3300 including GST. John paid his account within the discount period and received a settlement discount of 2%. Using the gross method, which of the following is the correct entry in Jan's books to record the payment by John?

A) Debit bank $3234; debit discount allowed $60; debit GST collections $6; credit accounts receivable $3300
B) Debit bank $3234; debit discount allowed $66; credit accounts receivable $3300
C) Debit bank $3240; debit discount allowed $60; credit accounts receivable $3300
D) Debit bank $3234; debit discount allowed $66; debit GST collections $6; credit accounts receivable $3306

Question 25

Under the perpetual inventory system inventory purchased is debited to which account?

A) Prepaid expenses
B) Cost of sales
C) Purchases
D) Inventory

Question 26

Adelaide sold goods to Perth on credit at a price of $4400 including GST. What is the entry to record this transaction in Adelaide's books under either the perpetual or periodic inventory system? (Ignore the transfer to COS required under the perpetual system.)

A) Debit accounts receivable $4400; credit sales $4400
B) Debit accounts receivable $4000; credit sales $4000
C) Debit accounts receivable $4000; debit GST collections $400; credit sales $4400
D) Debit accounts receivable $4400; credit sales $4000, credit GST collections $400

Question 27

Under the perpetual inventory system, what is the entry to record the cost price of goods sold on credit?

A) Debit inventory, credit cost of sales
B) Debit cost of sales, credit inventory
C) Debit cost of sales, credit inventory, credit GST outlays
D) Debit cost of sales, credit purchases

Question 28

Under the periodic inventory system an income statement cannot be prepared without a/an ____________. It is only after a/an ___________ that the cost of sales can be estimated.

A) error check
B) virus scan
C) stocktake
D) audit

Question 29

Which of these is not an advantage of the perpetual inventory system?

A) Continuous
B) Allows stock losses to be identified
C) Allows cost of sales to be calculated at any time
D) A stock-take is not required

Question 30

Which of the following is not true of the periodic inventory system?

A) Cost of sales can be calculated only after a physical stocktake
B) It uses a purchases account
C) It allows inventory variances to be identified
D) It is the simplest system

Question 31

Under the perpetual inventory system what is the correct entry to record the cost of the sale of 2 reclining chairs sold to a customer at $1100 per chair including GST? The items were originally purchased on credit at $500 each plus GST of $50 per chair.

A) Debit cost of sales $2200; credit sales $2200
B) Debit cost of sales $1000; debit GST outlays $100; credit inventory $1100
C) Debit cost of sales $2000; credit inventory $2000
D) Debit cost of sales $1000; credit inventory $1000

Question 32

Under the periodic inventory system, what is the entry for the credit purchase of 10 electric guitars at $250 per guitar, plus GST of 10%?

A) Debit purchases $2500; debit GST outlays $250; credit accounts payable $2750
B) Debit accounts payable $2750; credit purchases $2500; credit GST outlays $250
C) Debit purchases $2750; credit accounts payable $2750
D) Debit purchases $2750; credit accounts payable $2500; credit GST outlays $250

Question 33

What is the entry to record the return of goods to a supplier under the perpetual inventory system, including GST?

A) Debit inventory, credit purchases returns, credit GST outlays
B) Debit accounts payable, credit purchases, credit GST outlays
C) Debit inventory, debit GST outlays, credit accounts payable
D) Debit accounts payable, credit inventory, credit GST outlays

Question 34

Under the periodic inventory system inventory purchased is debited to which account?

A) Cost of sales
B) Purchases
C) Inventory
D) Selling expenses

Question 35

Freight outward paid by the seller is classified as a/an ____________ expense in the seller's income statement.

A) cost of sales
B) selling
C) administrative
D) financial

Question 36

In relation to discount terms, what does 2/10, n/30 mean?

A) Invoice due on 2^nd October or 30 November
B) 2 10ths = 20% discount, not 30%
C) 20% discount, November 30th
D) 2% discount to be deducted from the invoice price if payment is made within 10 days or the full amount is due within 30 days of the invoice date

Question 37

B sold goods to A on credit for $2 000. What is the correct accounting entry to record this transaction in B's books? Ignore GST and cost of sales.

A) Debit bank $2000; credit sales $2000
B) Debit accounts receivable $2000; credit sales $2000
C) Debit sales $2000; credit accounts receivable $2000
D) Debit sales $2000; credit cost of sales $2000

Question 38

B sold goods to A on credit at a price of $2200 including GST. What is the correct accounting entry to record this transaction in B's books?

A) Debit accounts receivable $2200, credit sales $2200
B) Debit accounts receivable $2000, credit sales $2000
C) Debit accounts receivable $2000, debit GST collections $200; credit sales $2200
D) Debit accounts receivable $2200; credit sales $2000, credit GST collections $200

Question 39

The purpose of offering a credit customer a discount after the sale has occurred is to:

A) encourage early payment of the amount owing
B) increase sales
C) put the customer in a good mood
D) avoid GST

Question 40

Under the perpetual inventory system, what is the entry for the credit purchase of 10 electric guitars at $250 per guitar plus GST of $25 each?

A) Debit inventory $2750; credit accounts payable $2500; credit GST outlays $250
B) Debit inventory $2500; debit GST outlays $250; credit accounts payable $2750
C) Debit inventory $2750; credit accounts payable $2750
D) Credit accounts payable $2750; debit inventory $2500; credit GST collections $250

Question 41

If closing inventory were understated profit for the current period would be:

A) overstated.
B) understated.
C) unaffected.
D) a loss.

Question 42

The system of accounting for inventory that involves keeping a current and continuous record of the movement in each item of inventory is known as the ____________ inventory system.

A) accrual
B) periodic
C) perpetual
D) physical

Question 43

The process of counting and pricing all the inventory on hand on a particular date is known as:

A) a stocktake.
B) the periodic inventory system.
C) merchandise pricing.
D) invoicing.

Question 44

Under the perpetual inventory system, the number of accounting entries required to record a credit sale is:

A) 0.
B) 1.
C) 2.
D) 3.

Question 45

With the periodic inventory system what does the opening balance in the inventory account represent?

A) Inventory on hand at the end of the previous period as determined by a physical stocktake.
B) Inventory on hand at the end of the current period as determined by a physical stocktake.
C) Opening inventory plus purchases less ending inventory.
D) Inventory on hand at the end of the current period before allowance for inventory variance.

Question 46

Under the perpetual inventory system, what is the correct entry for the credit purchase of 20 electric guitars at $250 per guitar plus GST of $25 each?

A) Debit inventory $5500; credit accounts payable $5000; credit GST outlays $500
B) Debit inventory $5000; debit GST outlays $500; credit accounts payable $5500
C) Debit accounts payable $5500; credit inventory $5000; credit GST outlays $500
D) Debit inventory $5500; credit accounts payable $5500

Question 47

Using the periodic approach to record inventory, inventory at start, plus purchases, minus inventory at end as valued in a physical stocktake, is assumed to equal:

A) cost of sales.
B) inventory turnover.
C) gross profit.
D) inventory at end.

Question 48

The account used by the purchaser to record the amount of discount granted by its suppliers for prompt payment is the:

A) discount received account.
B) discount allowed account.
C) discount credit account.
D) financial revenue account.

Question 49

When interim accounting reports are prepared on a worksheet and the periodic method of accounting for inventory is used, closing inventory is:

A) recorded in the income statement debit column as a deduction from cost of sales and in the balance sheet debit column as a current asset.
B) recorded in the income statement credit column as a deduction from cost of sales and in the balance sheet debit column as a current asset.
C) not recorded.
D) is recorded as a debit to the inventory asset account and as credit to the gross profit account.

Question 50

Under the perpetual inventory system an inventory variance can be calculated as the difference between:

A) the periods purchases and ending inventory balance.
B) the ledger balance of the inventory account and the total of the physical stocktake.
C) inventory at start less inventory at end.
D) an inventory loss cannot be calculated using the perpetual inventory system.

Question 51

With regards to the income statement for a retailer, which of the following is true?

A) The cost of sales section is identical no matter whether the periodic or perpetual system of inventory recording is used.
B) Rent revenue is added to sales revenue to calculate gross profit.
C) Under the periodic system freight inwards is added to the cost of purchases.
D) Expenses are classified into the groupings selling expenses, distribution expenses and administrative and finance expenses.

Question 52

The use of computers has been a breakthrough for the perpetual inventory system. Many retail businesses use optical-scan cash registers to read ____________. The scanners record the sale and, at the same time, update the inventory records with the cost of the sale.

A) price lists
B) barcodes
C) cash register tapes
D) the goods

Question 53

Cost of goods available for sale is equal to which of the following?

A) Beginning inventory - ending inventory
B) Beginning inventory + net purchases
C) Beginning inventory + net purchases - ending inventory
D) Net purchases - ending inventory

Question 54

When preparing an income statement for a retailer how will (1) Discount allowed and (2) depreciation of sales-person's motor vehicles be classified?

A) Administrative expenses; administrative expenses
B) Finance and other expenses; finance and other expenses
C) Finance and other expenses; selling and distribution expenses
D) Selling and distribution expenses; selling and distribution expense

Question 55

With a periodic inventory system if inventory at start is $25 000, purchases $123 000 and inventory at end as per physical stocktake is $20 000, what is the estimated cost of sales?

A) $148 000
B) $123 000
C) $168 000
D) $128 000

Question 56

The periodic inventory system is a shortcut system that does not record the ______________ of each sale.

A) cost price
B) selling price
C) date
D) dollar value

Question 57

The account that measures the expense of the inventory sold during the period is called:

A) cost of sales.
B) gross profit.
C) purchases.
D) cost of completed goods.

Question 58

Under the periodic inventory system, what is the correct entry to record the cost of the sale of 2 electric guitars sold to a customer at $550 per guitar including GST? (The guitars were originally purchased on credit at $250 each plus GST of $25 per guitar.)

A) Debit purchases $1100; credit sales $1100
B) Debit purchases $500; credit inventory $500
C) Debit cost of sales $500; credit inventory $500
D) The cost of each sale is not recorded under the periodic inventory system

Question 59

Assuming the use of the perpetual inventory method which of these entries would be a closing entry at the end of the accounting period?

A) Debit inventory; credit profit or loss summary
B) Debit profit or loss summary; credit cost of sales
C) Debit profit or loss summary; credit purchases
D) Debit profit or loss summary; credit inventory

Question 60

If beginning inventory was $25 000, purchases during the period totalled $50 000, freight-in was $1000 and ending inventory was $19 000, calculate the cost of sales?

A) $55 000
B) $50 000
C) $57 000
D) $56 000

Question 61

What is the formula for calculating the gross profit ratio?

A) Gross profit after tax/sales
B) Gross profit /sales
C) Sales/gross profit
D) Cost of sales/sales

Question 62

Which statement concerning the gross profit ratio is not true?

A) A decline in the ratio represents an unfavourable trend.
B) It is calculated as gross profit divided by net sales.
C) It can be compared with ratios for similar businesses.
D) A decline in the ratio can be caused by decreases in the cost of sales.

Question 63

Which of the following statements is true?

A) A gross profit ratio that is declining over time indicates a reduction in the margin between the purchase price and the selling price of goods.
B) An expense to sales ratio of 20% in year 1 and 22% in year 2 indicates that management policies to control expenses are succeeding.
C) Generally speaking the slower the turnover of inventory the greater the profitability of the business.
D) The formula for the inventory turnover ratio is sales divided by average inventory.

Question 64

What is the formula for calculating the gross profit ratio?

A) Gross profit/sales
B) Cost of sales/sales
C) Profit after tax/sales
D) Sales/gross profit

Question 65

Assume that the net price method of recording purchases is used and the business uses the perpetual method of inventory recording. Record the purchase of goods for $5000 on credit, on terms of 3/10, n/30. Ignore GST.

A) Debit inventory $5000; credit accounts payable $5000
B) Debit inventory $4850; debit discount allowed $150: credit accounts payable $5000
C) Debit inventory $4850; credit accounts payable $4850
D) Debit purchases $5000; credit accounts payable $4850; credit discount allowed $150