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

Question 1

A buyer who acquires merchandise under credit terms of 1/10, n/30 has 20 days after the invoice date to take advantage of the cash discount.

Answer 1

False

Question 2

A periodic inventory system does not require a detailed record of inventory items.

Answer 2

False

Question 3

The periodic inventory system provides an up to date amount of inventory on hand.

Answer 3

False

Question 4

Net sales minus cost of goods sold is called gross profit.

Question 5

Under the periodic inventory system, cost of goods sold is treated as an account.

Question 6

The computer has increased greatly the use of the periodic inventory system.

Question 7

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

Question 8

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

Question 9

The operating cycle involves the purchase and sale of merchandise inventory as well as the subsequent collection of cash from credit sales.

Question 10

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

Question 11

Retailers and wholesalers are both considered merchandising enterprises.

Question 12

Cost of Goods Sold is considered an expense of a merchandising firm.

Question 13

An advantage of using the periodic inventory system is that it requires less record keeping than the perpetual inventory system.

Question 14

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

Question 15

A very small business most likely would have to use the perpetual inventory system.

Question 16

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

Question 17

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

Question 18

Sales revenue minus operating expenses equals gross profit.

Question 19

The purchase of inventory and its eventual sale lengthen the operating cycle of a merchandising company.

Question 20

The terms 2/10, net/30 mean that a 2 percent discount is allowed on payments made within the 10 days discount period.

Question 21

Operating expenses include interest expense and income tax expense.

Question 22

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

Question 23

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

Question 24

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

Question 25

The multiple-step income statement is considered more useful than the single-step income statement because it highlights the components of net income.

Question 26

Sales Discounts and Sales Returns and Allowances both have normal debit balances.

Question 27

The revenue recognition principle applies to merchandising companies by recognizing sales revenues when the performance obligation is satisfied.

Question 28

When an invoice is paid within the discount period, the amount of the discount decreases Inventory.

Question 29

The terms 2/10, n/30 mean that a 2 percent discount is allowed on payments made over 10 but before 30 days after the invoice date.

Question 30

In a single-step income only one step is required in determining net income.

Question 31

Merchandise is sold for $5,000 with terms 1/10, n/30. If $1,000 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $40.

Question 32

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

Question 33

Cash register tapes provide evidence of credit sales.

Question 34

Sales Discounts is a contra revenue account to Sales Revenue.

Question 35

Freight-out appears as an operating expense in the income statement.

Question 36

Nonoperating activities include revenues and expenses that are related to the company's main line of operations.

Question 37

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

Question 38

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

Question 39

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

Question 40

If merchandise costing $5,000, with terms 2/10, n/30, is paid within 10 days, the amount of the purchase discount is $100.

Question 41

A merchandiser will earn an operating income of exactly $0 when

A) net sales equals cost of goods sold.
B) cost of goods sold equals gross margin.
C) operating expenses equal net sales.
D) gross profit equals operating expenses.

Question 42

The quality of earnings ratio is calculated as net income divided by net cash provided by operating activities.

Question 43

Under the periodic system, the purchases account is used to accumulate all purchases of merchandise for resale.

Question 44

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 45

Gross profit equals the difference between

A) net income and operating expenses.
B) sales revenue and cost of goods sold.
C) sales revenue and operating expenses.
D) sales revenue and cost of goods sold plus operating expenses.

Question 46

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

Question 47

Net income 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 48

Under the periodic system, when a customer returns goods, Purchases Returns and Allowances is debited.

Question 49

Under the periodic inventory system, acquisitions of merchandise are not recorded in the Inventory account.

Question 50

A quality of earnings ratio significantly less than 1 suggests that a company may be using more aggressive accounting techniques in order to accelerate income recognition.

Question 51

Which of the following activities is not a component of the operating cycle?

A) Sale of merchandise
B) Payment of employees' salaries
C) Collection of cash from merchandise sales
D) Purchase of merchandise

Question 52

Sales revenues, cost of goods sold, and gross profit are amounts on a merchandising company's income statement not commonly found on the income statement of a service company.

Question 53

Merchandising companies that sell to retailers are known as

A) brokers.
B) corporations.
C) wholesalers.
D) service firms.

Question 54

The income statement for a merchandising company presents only two amounts not shown on a service company income statement.

Question 55

A merchandising company's net income is determined by subtracting operating expenses from gross profit.

Question 56

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

A) Retailer
B) Wholesaler
C) Service firm
D) Merchandising company

Question 57

With the periodic inventory system, goods available for sale must be calculated before cost of goods sold.

Question 58

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

Question 59

Which of the following companies would be most likely to use a perpetual inventory system?

A) Grain company
B) Beauty salon
C) Clothing store
D) Fur dealer

Question 60

If net sales are $750,000 and cost of goods sold is $600,000, the gross profit rate is 20%.

Question 61

Sales revenue less cost of goods sold is called

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

Question 62

Detailed records of goods held for resale are not maintained under a

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

Question 63

A perpetual inventory system would most likely be used by a(n)

A) automobile dealership.
B) hardware store.
C) drugstore.
D) convenience store.

Question 64

Which statement is incorrect?

A) Periodic inventory systems provide better control over inventories than perpetual inventory systems.
B) Computers and electronic scanners allow more companies to use a perpetual inventory system.
C) Freight-in is debited to Inventory when a perpetual inventory system is used.
D) Regardless of the inventory system that is used, companies should take a physical inventory count.

Question 65

Inventory becomes part of 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 66

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 67

Two categories of expenses in 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) other expenses and cost of goods sold.

Question 68

The periodic inventory system is used most commonly by companies that sell

A) low-priced, high-volume merchandise.
B) high-priced, high-volume merchandise.
C) high-priced, low-volume merchandise.
D) high-priced, low and high-volume merchandise.

Question 69

Under a perpetual inventory system

A) accounting records continuously disclose the amount of inventory.
B) increases in inventory resulting from purchases are debited to purchases.
C) there is no need for a year-end physical count.
D) the account purchase returns and allowances is credited when goods are returned to vendors.

Question 70

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 71

The figure for which of the following items is determined at a different time under the perpetual inventory method than under the periodic method?

A) Sales Revenue
B) Cost of Goods Sold
C) Purchases
D) Accounts Receivable

Question 72

The primary source of revenue for a wholesaler is

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

Question 73

The primary difference between a periodic and perpetual inventory system is that a periodic system

A) keeps a record showing the inventory on hand at all time.
B) provides better control over inventories.
C) records the cost of the sale on the date the sale is made.
D) determines the inventory on hand only at the end of the accounting period.

Question 74

Which of the following expressions is incorrect?

A) Gross profit - Operating expenses = Net income
B) Sales revenue - 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 75

Generally, the revenue account for a merchandising enterprise is called

A) Sales Revenue or Sales.
B) Investment Income.
C) Gross Profit.
D) Net Sales.

Question 76

A merchandiser that sells directly to consumers is a

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

Question 77

When using the periodic system the physical inventory count is used to determine

A) only the sales value of goods in the ending inventory.
B) both the cost of the goods in ending inventory and the sales value of goods sold during the period.
C) both the cost of the goods sold and the cost of ending inventory.
D) only the cost of merchandise sold during the period.

Question 78

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.

Question 79

The operating cycle of a merchandising company is

A) always one year in length.
B) ordinarily longer than that of a service company.
C) about the same as that of a service company.
D) ordinarily shorter than that of a service company.

Question 80

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.