Deck 4: Accounting for Merchandising Operations

Question 1

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

Answer 1

False

Question 2

Quick assets include cash and cash equivalents, inventory, and current receivables.

Answer 2

False

Question 3

Beginning inventory plus net purchases equals merchandise available for sale.

Answer 3

True

Question 4

Assets tied up in inventory are not considered productive assets.

Question 5

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

Question 6

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

Question 7

Merchandise inventory refers to products that a company owns and intends to sell to customers.

Question 8

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

Question 9

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

Question 10

Gross profit is also called gross margin.

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

Cost of goods sold is also called cost of sales.

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

If goods are shipped FOB destination, 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 23

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 24

The profit margin ratio is the same as the gross profit ratio.

Question 25

Purchase discounts are the same as trade discounts.

Question 26

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

Question 27

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 28

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 29

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

Question 30

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

Question 31

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

Question 32

A buyer using a perpetual inventory system records the costs of shipping merchandise it purchases in a Delivery Expense account.

Question 33

A common rule of thumb is that a company's acid-test ratio should have a value near or higher than 1 to conclude that a company is unlikely to face near-term liquidity problems.

Question 34

FOB shipping point means that the buyer accepts ownership when the goods arrive at the buyer's place of business.

Question 35

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

Question 36

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

Question 37

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

Question 38

Sales Discounts is added to the Sales account when computing a company's net sales.

Question 39

The Merchandise Inventory account balance at the beginning of the current period is equal to the amount of ending Merchandise Inventory from the previous period.

Question 40

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

Question 41

Cost of goods sold:

A)Is another term for merchandise sales.
B)Is the term used for the expense 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 42

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 43

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

Question 44

Under a periodic inventory system, purchases, purchases returns and allowances, purchase discounts, and transportation in transactions are recorded in the Merchandise Inventory account.

Question 45

Expenses related to accounting, human resource management, and financial management are known as selling expenses.

Question 46

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 47

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

Question 48

Sales Discounts and Sales Returns and Allowances are contra revenue accounts that are debited to close the accounts during the closing process.

Question 49

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

Question 50

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

Question 51

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 52

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

Question 53

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 54

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

Question 55

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

Question 56

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 57

Under a perpetual inventory system, when a credit customer returns merchandise to the seller, the seller debits Sales Returns and Allowances and credits Accounts Receivable and also debits Merchandise Inventory and credits Cost of Goods Sold.

Question 58

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

Question 59

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

Question 60

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

Question 61

Beginning inventory plus net purchases is:

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

Question 62

Merchandise inventory:

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

Question 63

Jasper Company, Inc. is a wholesaler that buys merchandise in large quantities. Its supplier's catalog indicates a list price of $500 on merchandise Jasper intends to purchase, and offers a 30% trade discount for large quantity purchases. The cost of shipping for the merchandise is $7 per unit. Jasper's total purchase price per unit will be:

A)$507
B)$350
C)$357
D)$343
E)$493

Question 64

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 65

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 66

A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. The amount of the cash paid on July 28 equals:

A)$200.
B)$1,564.
C)$1,568.
D)$1,600.
E)$1,800.

Question 67

A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 8, it paid the full amount due. The amount of the cash paid on July 8 equals:

A)$200.
B)$1,564.
C)$1,568.
D)$1,600.
E)$1,800.

Question 68

The gross margin ratio:

A)Is also called the net profit ratio.
B)Indicates the percent of sales revenue remaining after covering the cost of the goods sold.
C)Is also called the profit margin.
D)Is a measure of liquidity and should exceed 2.0 to be acceptable.
E)Should be greater than 1 for merchandising companies.

Question 69

A debit memorandum is:

A)Required whenever a journal entry is recorded.
B)The source document for the purchase of merchandise inventory.
C)Required when a purchase discount is granted.
D)The document a buyer issues to inform the seller of a debit made to the seller's account in the buyer's records.
E)Not necessary in a perpetual inventory system.

Question 70

The amount recorded for merchandise inventory includes all of the following except:

A)Purchase discounts.
B)Returns and allowances.
C)Freight costs paid by the buyer.
D)Freight costs paid by the seller.
E)Trade discounts.

Question 71

Liquidity problems are likely to exist when a company's acid-test ratio:

A)Is less than the current ratio.
B)equals 1.
C)Is higher than 1.
D)Is substantially lower than 1.
E)Is higher than the current ratio.

Question 72

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 73

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

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

Question 74

A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. The correct journal entry to record the purchase on July 5 is:

A)Debit Merchandise Inventory $1,600; credit Cash $1,600.
B)Debit Merchandise Inventory $1,800; credit Accounts Payable $1,800.
C)Debit Merchandise Inventory $1,800; credit Sales Returns $200; credit Cash $1,600.
D)Debit Accounts Payable $1,800; credit Merchandise Inventory $1,800.
E)Debit Accounts Payable $1,800; credit Purchase Returns $200; credit Merchandise Inventory $1,600.

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 may include the costs of freight in and making them ready for sale.
D)Merchandise inventory appears on the balance sheet of a service company.
E)Purchasing merchandise inventory is part of the operating cycle for a business.

Question 76

A company uses the perpetual inventory system and recorded the following entry: $$\begin{array} { | l | r | r | } \hline \text { Accounts Payable } & 2,500 & \\\hline \text { Merchandise Irventory } & & 50 \\\hline \text { Cash } & & 2,450 \\\hline\end{array}$$ This entry reflects a:

A)Purchase of merchandise on credit.
B)Return of merchandise.
C)Sale of merchandise on credit.
D)Payment of the account payable less a 2% cash discount taken.
E)Payment of the account payable less a 1% cash discount taken.

Question 77

A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. The correct journal entry to record the merchandise return on July 7 is:

A)Debit Merchandise Inventory $1,600; credit Cash $1,600.
B)Debit Merchandise Inventory $200; credit Accounts Payable $200.
C)Debit Merchandise Inventory $200; credit Sales Returns $200.
D)Debit Accounts Payable $200; credit Merchandise Inventory $200.
E)Debit Accounts Payable $1,800; credit Purchase Returns $200; credit Merchandise Inventory $1,600.

Question 78

A company had net sales of $752,000 and cost of goods sold of $543,000. Its net income was $17,530. The company's gross margin ratio equals:

A)18.9%
B)24.5%
C)27.8%
D)34.7%
E)35.2%

Question 79

A trade discount is:

A)A term used by a purchaser to describe a cash discount given to customers for prompt payment.
B)A reduction in selling price below the list price.
C)A term used by a seller to describe a cash discount granted to customers for prompt payment.
D)A reduction in price for prompt payment.
E)Also called a rebate.

Question 80

The acid-test ratio differs from the current ratio in that:

A)Liabilities are divided by current assets.
B)Prepaid expenses and inventory are excluded from the calculation of the acid-test ratio.
C)The acid-test ratio measures profitability and the current ratio does not.
D)The acid-test ratio excludes short-term investments from the calculation.
E)The acid-test ratio is a measure of liquidity but the current ratio is not.