Deck 5: Accounting for Merchandising Operations

Question 1

The revenue recognition principle applies to merchandisers by recognizing sales revenues when they are earned.

Answer 1

True

Question 2

A periodic inventory system requires a detailed inventory record of inventory items.

Answer 2

False

Question 3

Companies using a perpetual inventory system record credit purchases of inventory on the statement of financial position by increasing inventory and decreasing liabilities.

Answer 3

False

Question 4

Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.

Question 5

Inventory purchased for $2,500 subject to terms 2/10, net 30 could end up being reported on the statement of financial position at an amount greater than $2,500 if the discount isn't taken by the buyer.

Question 6

Sales revenues are earned during the period cash is collected from the buyer.

Question 7

To grant a customer a sales return, the seller credits Sales Returns and Allowances.

Question 8

Sales of $2,500 subject to terms 2/10, net 30 could end up being reported on the statement of financial position as an account receivable at an amount greater than $2,500 if the discount isn't taken by the buyer.

Question 9

Freight terms of FOB Destination means that the seller pays the freight costs.

Question 10

Companies using a perpetual inventory system record all credit purchases on the statement of financial position by increasing inventory and increasing liabilities.

Question 11

Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

Question 12

Sales allowances and sales discounts are both designed to encourage customers to pay their accounts promptly.

Question 13

Retailers and wholesalers are both considered merchandisers.

Question 14

When the buyer pays an invoice within the discount period, the amount of the discount increases the merchandise inventory account reported on the statement of financial position.

Question 15

The Sales Returns and Allowances account and the Sales Discounts account are both classified as expense accounts.

Question 16

Purchase returns are recorded by the buyer as a decrease to inventory on the statement of financial position.

Question 17

The steps in the accounting cycle are different for a merchandising company than for a service company.

Question 18

Global Care uses a perpetual inventory system and purchased wheelchairs under terms FOB destination. The freight charges associated with the wheelchairs will be added to the inventory account on Global Care's statement of financial position.

Question 19

Companies using International Financial Reporting Standards (IFRS) use a perpetual inventory system, while companies using U.S. GAAP use a periodic inventory system.

Question 20

Sales returns and allowances is reported on the statement of financial position as a contra account to cost of goods sold.

Question 21

Other income and expense excludes revenues and expenses that are unrelated to the company's main line of operations.

Question 22

A merchandising company has different types of adjusting entries than a service company.

Question 23

Closing entries impact the income statement but do not have an impact on the statement of financial position.

Question 24

If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.

Question 25

IFRS requires companies to mark the recorded values of certain types of assets and liabilities to their historical cost at the end of each reporting period.

Question 26

For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.

Question 27

Under International Financial Reporting Standards (IFRS) when operating expenses are presented by nature additional disclosures are required regarding the function of certain expenses.

Question 28

When goods are returned, the seller reduces the account receivable and increases the merchandise inventory accounts reported on the statement of financial position.

Question 29

Gross profit rate is computed by dividing cost of goods sold by net sales.

Question 30

IFRS requires a single-step income statement, but U.S GAAP allows either the single-step or the multiple-step income statement.

Question 31

International Financial Reporting Standards allow different presentation formats for operating expenses including by magnitude.

Question 32

Merchandise inventory is classified as a current asset in a classified statement of financial position.

Question 33

A company's unadjusted balance in Inventory will usually not agree with the actual amount of inventory on hand at year-end.

Question 34

Net sales is sales revenue less sales returns and allowances and sales discounts.

Question 35

Gain on sale of equipment and interest expense are reported under other income and expense in a merchandiser income statement.

Question 36

Gross profit represents the merchandising profit of a company.

Question 37

Under International Financial Reporting Standards (IFRS) use of a worksheet by a merchandising company is strictly optional.

Question 38

Under International Financial Reporting Standards (IFRS) operating expenses may be presented by nature or by function.

Question 39

Operating expenses are different for merchandising and service companies.

Question 40

When goods are returned, the seller records the returned merchandise at its market value on the statement of financial position.

Question 41

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are undertaking a project to rework the structure of financial statements. The proposed structure will adopt the major groupings used on the statement of financial position: current and non-current assets and liabilities, followed by equity.

Question 42

A merchandising company that sells directly to consumers is a

A) retailer.
B) wholesaler.
C) broker.
D) service company.

Question 43

The primary source of revenue for merchandising companies is

A) investment income.
B) service fees.
C) the sale of merchandise.
D) the sale of fixed assets the company owns.

Question 44

Under a periodic inventory system, the acquisition of inventory is charged to the Purchases account.

Question 45

The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.

Question 46

Sales returns and allowances and sales discounts are subtracted from sales revenue in reporting net sales in the income statement.

Question 47

The major difference between the statement of financial position of a service company and a merchandising company is inventory.

Question 48

A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.

Question 49

Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.

Question 50

Merchandise inventory is reported as a long-term asset on the statement of financial position.

Question 51

Net income from operations is gross profit less

A) financing expenses.
B) operating expenses.
C) other income and expense.
D) other expenses.

Question 52

Which of the following would not be considered a merchandising company?

A) Retailer
B) Wholesaler
C) Service firm
D) Dot Com firm

Question 53

Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.

Question 54

If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.

Question 55

Sales should be recorded in accordance with the expense recognition principle.

Question 56

Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.

Question 57

Two categories of expenses for merchandising companies are

A) cost of goods sold and financing expenses.
B) operating expenses and financing expenses.
C) cost of goods sold and operating expenses.
D) sales and cost of goods sold.

Question 58

Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases to produce net purchases.

Question 59

In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.

Question 60

IFRS requires 3 years of income statements, U.S. GAAP requires 2 years of income statements.

Question 61

Which of the following expressions is incorrect?

A) Gross profit - operating expenses = net income
B) Sales - cost of goods sold - operating expenses = net income
C) Net income + operating expenses = gross profit
D) Operating expenses - cost of goods sold = gross profit

Question 62

After gross profit is calculated, operating expenses are deducted to determine

A) gross margin.
B) net income.
C) gross profit on sales.
D) net margin.

Question 63

In a perpetual inventory system, cost of goods sold is recorded

A) on a daily basis.
B) on a monthly basis.
C) on an annual basis.
D) with each sale.

Question 64

Tony's Market recorded the following events involving a recent purchase of merchandise: Received goods for $80,000, terms 2/10, n/30.
Returned $1,600 of the shipment for credit.
Paid $400 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company's inventory

A) increased by $76,832.
B) increased by $78,800.
C) increased by $77,224.
D) increased by $77,232.

Question 65

Detailed records of the cost of each inventory purchase and sale are not maintained under a

A) perpetual inventory system.
B) periodic inventory system.
C) double entry accounting system.
D) single entry accounting system.

Question 66

If a company is given credit terms of 2/10, n/30, it should

A) hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.
B) pay within the discount period and recognize a savings.
C) pay within the credit period but don't take the trouble to invest the cash while waiting to pay the bill.
D) recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.

Question 67

The Inventory account is used in each of the following except the entry to record

A) goods purchased on account.
B) the return of goods purchased.
C) payment of freight on goods sold.
D) payment within the discount period.

Question 68

In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited by the buyer to

A) Inventory.
B) Purchase Discounts.
C) Purchase Allowance.
D) Sales Discounts.

Question 69

The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit

A) Accounts Payable.
B) Purchase Returns and Allowances.
C) Sales.
D) Inventory.

Question 70

Reese Company purchased merchandise with an invoice price of $3,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

A) 20%
B) 24%
C) 36%
D) 72%

Question 71

Hicks Company purchased merchandise from Beyer Company with freight terms of FOB shipping point. The freight costs will be paid by the

A) seller.
B) buyer.
C) transportation company.
D) buyer and the seller.

Question 72

Freight costs paid by a seller on merchandise sold to customers will cause an increase

A) in the selling expense of the buyer.
B) in operating expenses for the seller.
C) to the cost of goods sold of the seller.
D) to a contra-revenue account of the seller.

Question 73

A buyer would record a payment within the discount period under a perpetual inventory system by crediting

A) Accounts Payable.
B) Inventory.
C) Purchase Discounts.
D) Sales Discounts.

Question 74

If a company determines cost of goods sold each time a sale occurs, it

A) must have a computer accounting system.
B) uses a combination of the perpetual and periodic inventory systems.
C) uses a periodic inventory system.
D) uses a perpetual inventory system.

Question 75

Geran Company purchased merchandise inventory with an invoice price of $12,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Geran Company pays within the discount period?

A) $12,000
B) $11,760
C) $10,800
D) $11,040

Question 76

Under a perpetual inventory system, acquisition of merchandise for resale is debited to the

A) Inventory account.
B) Purchases account.
C) Supplies account.
D) Cost of Goods Sold account.

Question 77

Sales revenue less cost of goods sold is called

A) gross profit.
B) net profit.
C) net income.
D) marginal income.

Question 78

If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the

A) Inventory account will be increased.
B) Inventory account will not be affected.
C) seller will bear the freight cost.
D) carrier will bear the freight cost.

Question 79

Cost of goods sold is determined only at the end of the accounting period in

A) a perpetual inventory system.
B) a periodic inventory system.
C) both a perpetual and a periodic inventory system.
D) neither a perpetual nor a periodic inventory system.

Question 80

Which of the following is a true statement about inventory systems?

A) Periodic inventory systems require more detailed inventory records.
B) Perpetual inventory systems require more detailed inventory records.
C) A periodic system requires cost of goods sold be determined after each sale.
D) A perpetual system determines cost of goods sold only at the end of the accounting period.