Deck 5: Merchandising Operations and the Multiple-Step Income Statement

Question 1

Cost of goods available for sale is considered an operating expense for a merchandising company.

Answer 1

False

Question 2

If merchandise costing $2,500, terms 2/10 n/30, is paid within 10 days, the amount of the purchase discount is $250.

Answer 2

False

Question 3

Freight terms will specify the point at which ownership of the goods is transferred from the seller to the buyer.

Answer 3

True

Question 4

When the terms of sale are FOB shipping point, the seller is responsible for any damages to the goods during shipping.

Question 5

Operating expenses are subtracted from revenue for a service company and from gross profit for a merchandising company.

Question 6

Under the perpetual inventory system, purchases of merchandise for sale are recorded in the Merchandise Inventory account.

Question 7

Cost of Goods Sold is considered an operating expense for a merchandising company.

Question 8

Discounts taken for early payment of an invoice are called sales discounts by the buyer.

Question 9

Under a perpetual inventory system, freight costs incurred by the buyer are added to the Merchandise Inventory account.

Question 10

Sales less operating expenses equal gross profit.

Question 11

The operating cycle of a merchandising company is generally shorter than that of a service company.

Question 12

Freight costs incurred on incoming merchandise are an operating expense to the buyer.

Question 13

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

Question 14

A physical inventory count should be done at least once a year regardless of whether a perpetual or periodic inventory system is being used.

Question 15

The terms 2/10, n/30 mean that a 2% discount is allowed on payments made over 10 days but within the credit period.

Question 16

Prepare entries for purchases under a perpetual inventory system.

Question 17

Gross sales less cost of goods sold is called gross profit.

Question 18

Inventory is usually the largest current asset for a merchandiser.

Question 19

Prepare entries for sales under a perpetual inventory system.

Question 20

Identify the differences between service and merchandising companies.

Question 21

When goods are shipped FOB shipping point, freight costs are an operating expense for the seller.

Question 22

Sales Allowances and Sales Discounts are both designed to encourage customers to pay their accounts promptly.

Question 23

Operating expenses are similar in merchandising and service companies.

Question 24

Under the perpetual inventory system, a discount taken for early payment is credited to the Merchandise Inventory account.

Question 25

Profit from operations appears on both the single-step and multiple-step forms of the income statement.

Question 26

Sales Discounts is a contra revenue account to Sales.

Question 27

The normal balance of Sales Returns and Allowances is a credit.

Question 28

A quantity discount is recorded separately, the same way as a purchase discount.

Question 29

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

Question 30

If a quantity discount of 10% is received on a purchase of $10,000, inventory would be recorded at $9,000.

Question 31

Sales revenues are earned when the goods are transferred from buyer to seller.

Question 32

The multiple-step income statement is considered more useful than the single-step income statement for a merchandising company because it highlights the components of profit.

Question 33

When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period.

Question 34

Sales revenues are recorded by the seller when an order is placed by a buyer.

Question 35

A merchandising company's profit from operations is determined by subtracting cost of goods sold from net sales.

Question 36

Gross profit appears on both the single-step and multiple-step forms of the income statement.

Question 37

Non-operating activities include revenues and expenses that are related to the company's main operations.

Question 38

When returned merchandise is defective, the seller's sales account is debited.

Question 39

Corporations following IFRS must classify their expenses either by nature or by function.

Question 40

Merchandise is sold for $2,500 with terms 1/10, n/30.If $500 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $20.

Question 41

If net sales are $1,000,000 and cost of goods sold is $800,000, the gross profit margin is 20%.

Question 42

Gross profit margin is the same as the gross profit amount.

Question 43

Each of the following companies is a merchandising company except a
(a)wholesale parts company.
(b)candy store.
(c)moving company.
(d)furniture store.

Question 44

Profit margin indicates whether a company is controlling operating expenses relative to sales.

Question 45

The gross profit amount is generally considered to be more informative than the gross profit margin.

Question 46

The time it takes to go from cash to cash in producing revenues is called the
(a)accounting cycle.
(b)purchasing cycle.
(c)operating cycle.
(d)merchandising cycle.

Question 47

Companies following ASPE may classify their expenses by nature, but not by function.

Question 48

The operating cycle of a merchandising company is
(a)always one year in length.
(b)generally longer than that of a service company.
(c)about the same as that of a service company.
(d)generally shorter than that of a service company.

Question 49

Gross profit equals the difference between net sales and
(a)profit.
(b)cost of goods sold.
(c)operating expenses.
(d)cost of goods sold plus operating expenses.

Question 50

Gross profit is a measure of the overall profit of a company.

Question 51

Interest revenue for a merchandising company is usually reported in the non-operating activities section of the income statement.

Question 52

Profit margin is calculated by dividing profit by net sales.

Question 53

Generally, the revenue account for a merchandising company is called
(a)Sales Revenue or Sales.
(b)Investment Revenue.
(c)Gross Profit.
(d)Net Sales.

Question 54

Net sales less cost of goods sold is called
(a)gross profit.
(b)cost of goods sold.
(c)profit.
(d)profit before income taxes.

Question 55

A merchandiser will have profit from operations of exactly $0 when
(a)net sales equals cost of goods sold.
(b)cost of goods sold equals gross profit.
(c)operating expenses equal net sales.
(d)gross profit equals operating expenses.

Question 56

Gross profit is expressed as a percentage of gross sales.

Question 57

Profit will result if gross profit exceeds
(a)cost of goods sold.
(b)operating expenses.
(c)purchases.
(d)cost of goods sold plus operating expenses.

Question 58

The largest current asset for a merchandiser is usually
(a)inventory.
(b)prepaid expenses.
(c)cash.
(d)accounts receivable.

Question 59

The primary source of revenue for a wholesaler is generated by
(a)investments.
(b)providing services.
(c)the sale of merchandise.
(d)the sale of property, plant, and equipment the company owns.

Question 60

Gross profit margin is calculated by dividing cost of goods sold by net sales.

Question 61

Cashmere Corporation purchased merchandise inventory with an invoice price of $16,000 and credit terms of 2/10, n/30.How much cash will Cashmere pay if they pay within the discount period?
(a)$16,000
(b)$15,680
(c)$14,720
(d)$14,400

Question 62

The primary difference between a periodic and a perpetual inventory system is that a periodic system
(a)keeps a detailed record showing the inventory on hand at all times.
(b)provides better control over inventories.
(c)records the cost of goods sold on the date the sale is made.
(d)determines the cost of goods sold at the end of the accounting period.

Question 63

Inventory becomes part of the cost of goods sold when a company
(a)pays for the inventory.
(b)purchases the inventory.
(c)sells the inventory.
(d)receives payment from the customer.

Question 64

Under the perpetual inventory system, which of the following accounts would not be used?
(a)Sales
(b)Purchases
(c)Cost of Goods Sold
(d)Merchandise Inventory

Question 65

Which of the following "formulas" is incorrect?
(a)Gross profit - operating expenses = profit before income tax.
(b)Net sales - cost of goods sold = gross profit.
(c)Net sales - gross profit = cost of goods sold.
(d)Operating expenses - cost of goods sold = gross profit.

Question 66

Under a perpetual inventory system, purchase of inventory is recorded as a debit to the
(a)Supplies account.
(b)Purchases account.
(c)Merchandise Inventory account.
(d)Cost of Goods Sold account.

Question 67

The journal entry by the buyer 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)Merchandise Inventory.

Question 68

Under a perpetual inventory system, the following is determined each time a sale occurs:
(a)Gross Profit.
(b)Cost of Goods Sold.
(c)Purchases.
(d)Accounts Receivable.

Question 69

Which of the following is true 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 to be recorded after each sale.
(d)A perpetual system determines cost of goods sold only at the end of the accounting period.

Question 70

Freight costs incurred by a seller on merchandise sold to customers will cause an increase
(a)in the selling expenses 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 71

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)each time a sale occurs.

Question 72

Under a perpetual inventory system
(a)there is no need for a year-end physical count.
(b)increases in inventory resulting from purchases are debited to Purchases.
(c)accounting records continuously disclose the amount of inventory.
(d)the account Purchase Returns and Allowances is credited when goods are returned to vendors.

Question 73

On July 10, Swant Inc.purchased $1,000 of inventory on terms of 2/10, n/45.The amount due on August 25 is
(a)$1,020.
(b)$1,000.
(c)$980.
(d)$990.

Question 74

Beginning inventory plus purchases equals
(a)cost of goods available for sale.
(b)cost of goods sold.
(c)ending inventory.
(d)total inventory on hand.

Question 75

The abbreviation "FOB" stands for
(a)free on board.
(b)freight on board.
(c)free only (to) buyer.
(d)freight charge on buyer.

Question 76

If a purchaser using a perpetual inventory system pays freight costs, then the
(a)Merchandise Inventory account is increased.
(b)Merchandise Inventory account is not affected.
(c)Freight Out account is increased.
(d)Freight In account is increased.

Question 77

If a company determines cost of goods sold each time a sale occurs, it
(a)must have a computerized 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 78

A company using a perpetual inventory system that returns goods purchased on credit would
(a)debit Accounts Payable and credit Merchandise Inventory.
(b)debit Sales and credit Accounts Payable.
(c)debit Cash and credit Accounts Payable.
(d)debit Accounts Payable and credit Purchases.

Question 79

The physical inventory count is used to determine
(a)cost of inventory purchased during the period.
(b)cost of inventory sold during the period.
(c)the cost of inventory on hand.
(d)the cost of goods available for sale.

Question 80

After gross profit is calculated, operating expenses are deducted to determine
(a)gross margin.
(b)profit (loss) before income tax.
(c)cost of goods sold.
(d)profit margin.