Deck 4: Accounting for Merchandising Operations

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Beginning inventory plus net purchases equals merchandise available for sale.

Answer 3

True

Question 4

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

Question 5

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

Question 6

Gross profit is also called gross margin.

Question 7

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

Question 8

A retailer buys products from manufacturers and sells them to wholesalers.

Question 9

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

Question 10

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

Question 11

Cost of goods sold is also called cost of sales.

Question 12

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

Question 13

Cost of goods sold is an expense,and is reported on the income statement.

Question 14

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

Question 15

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

Question 16

A wholesaler buys products from manufacturers or other wholesalers and sells them to consumers.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

A company's current ratio is 1.2 and its quick ratio is 0.25.This company is probably an excellent credit risk because the ratios reveal no indication of liquidity problems.

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

A company with an acid-test ratio of 4.1 is unlikely to face near-term liquidity problems.

Question 24

Purchase discounts are the same as trade discounts.

Question 25

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

Question 26

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 27

Purchase allowances refer to a price reduction (allowance)granted to a buyer of defective or unacceptable merchandise.

Question 28

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

Question 29

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

Question 30

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

Question 31

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 32

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

Question 33

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 34

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

Question 35

A company's quick assets are $147,000 and its current liabilities are $143,000.This company's acid-test ratio is 1.03.

Question 36

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

Question 37

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 38

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

Question 39

If goods are shipped FOB shipping point,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 40

A company had net sales of $340,500,its cost of goods sold was $257,000,and its net income was $13,750.The company's gross margin ratio equals 24.5%.

Question 41

A buyer of $5,000 in merchandise inventory does not take advantage of a supplier's credit terms of 2/10,n/30,and instead pays the invoice in full at the end of 30 days.The buyer will pay $4,900.

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

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

Question 47

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

Question 48

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

Question 49

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

Question 50

Sales of $350,000 and net sales of $323,000 could reflect sales discounts of $27,000.

Question 51

Under a perpetual inventory system,when a credit customer returns non-defective 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 52

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

Question 53

The perpetual system requires that each sale of merchandise has two entries: the revenue side and the cost side.

Question 54

A journal entry with a debit to cash of $980,a debit to Sales Discounts of $20,and a credit to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for early payment.

Question 55

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 56

Sales discounts has a normal debit balance because it decreases Sales,which has a normal credit balance.

Question 57

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

Question 58

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 59

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

Question 60

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

Question 61

Under the net method of recording purchases,the Discounts Lost account is used when the purchaser fails to take a discount offered by the seller.

Question 62

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

Question 63

Under the net method,when a company uses a perpetual inventory system,an invoice for $2,000 with terms of 2/10,n/30 should be recorded with a debit to Merchandise Inventory and a credit to Accounts Payable of $2,000.

Question 64

Either the gross method or net method may be used to record sales with cash discounts,but the net method requires a period-end adjusting entry to estimate expected future sales discounts taken.

Question 65

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

Question 66

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

Question 67

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

Question 68

A company has sales of $695,000 and cost of goods sold of $278,000.Its gross profit equals:

A)$(417,000).
B)$695,000.
C)$278,000.
D)$417,000.
E)$973,000.

Question 69

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 70

When purchases are recorded at net amounts,any discounts lost as a result of late payments are reported as an expense.

Question 71

Inventory Returns Estimated,which reflects an adjustment to inventory for expected future returns,is a liability account reported in the balance sheet,usually under Current Liabilities.

Question 72

The periodic inventory system requires updating the inventory account only at the end of the period.

Question 73

Inventory Returns Estimated is a current asset account used in a period-end adjusting entry to reflect the inventory estimated to be returned in the future.

Question 74

Under new revenue recognition rules,the gross method requires a period-end adjusting entry to estimate future sales discounts.

Question 75

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 76

A merchandiser:

A)Earns net income by buying and selling merchandise.
B)Receives fees only in exchange for services.
C)Earns profit from commissions only.
D)Earns profit from fares only.
E)Buys products from consumers.

Question 77

New revenue recognition rules require that sellers report sales net of expected sales discounts.

Question 78

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

Question 79

The net method records the invoice at its net amount (net of any cash discount).

Question 80

A company has sales of $375,000 and its gross profit is $157,500.Its cost of goods sold equals:

A)$(217,000).
B)$375,000.
C)$157,500.
D)$217,500.
E)$532,500.