Deck 6: The Operating Cycle and Merchandising Operations

Question 1

A sale takes place when title to the goods transfers to the buyer.

Answer 1

True

Question 2

The operating cycle is the average days' inventory on hand minus the average number of days to collect credit sales.

Answer 2

False

Question 3

Service businesses can be classified as wholesalers and retailers.

Answer 3

False

Question 4

Financing period represents the time during which merchandizing company has to finance its customers.

Question 5

When a U.S. company does business with a British company and payment is in British pounds, an exchange gain or loss occurs if the exchange rate between dollars and pounds changes between the date of sale and the date of payment.

Question 6

If it takes 30 days to sell inventory, 60 days to collect for the sale, and creditors' terms are 10 days, the financing period is 100 days.

Question 7

Under the perpetual inventory system, the Cost of Goods Sold account is updated only at the end of the period.

Question 8

The faster goods are sold and collection is made, the longer the financing period.

Question 9

If a U.S. company sells goods for a fixed number of British pounds, and the exchange rate has risen from $1.60 per pound to $1.65 per pound by the time collection is made, the U.S. company would record an exchange loss.

Question 10

Exchange gains and losses are reported on the income statement.

Question 11

When customers pay with bank credit cards, sales are considered to have taken place on credit.

Question 12

Under the perpetual inventory system, when merchandise is sold, its cost is transferred from the Merchandise Inventory account to the Sales account.

Question 13

If a U.S. company purchases goods from a British supplier for a fixed number of U.S. dollars, an exchange gain or loss would not arise for the U.S. company, even if the exchange rate has changed between the time of purchase and the time of payment.

Question 14

If it takes 45 days to sell inventory, 30 days to collect for the sale, and creditors' payment terms are 60 days, the financing period is 15 days.

Question 15

A merchandiser's operating cycle concludes with the sale of goods.

Question 16

The financing period is also referred to as the cash gap.

Question 17

Companies that sell goods that have a high unit value tend to use the periodic inventory system.

Question 18

If a U.S. company purchases goods for a fixed number of British pounds, and the exchange rate has fallen from $1.55 per pound to $1.50 per pound by the time payment is made, the U.S. company would record an exchange gain.

Question 19

Under the periodic inventory system, the amount for inventory on hand is accurate only on the balance sheet date.

Question 20

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

Question 21

Sales Discounts and Sales Returns and Allowances have normal credit balances.

Question 22

The periodic inventory system relies on a physical count of merchandise for its balance sheet amount.

Question 23

A company would be more likely to know the amount of inventory on hand if it used the periodic inventory system rather than the perpetual inventory system.

Question 24

Adding together the ending merchandise inventory and cost of goods sold gives the cost of goods available for sale.

Question 25

Terms of "n/10 eom" mean that payment is due 10 days after the end of the month.

Question 26

When the periodic inventory system is used, a physical inventory should be taken at the end of the fiscal year.

Question 27

Taking a physical inventory refers to making a count of all merchandise on hand at a particular time.

Question 28

Computerization has led to a large increase in the use of the perpetual inventory system.

Question 29

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

Question 30

Terms of "2/10, n/30" are an example of a trade discount.

Question 31

A large discount chain, like Wal-Mart or Target, most likely would use the periodic inventory system to maintain control of its inventory.

Question 32

The computerization has helped taking physical inventory to a great extent under the periodic inventory system.

Question 33

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 34

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

Question 35

If a retailer makes a sale of $100 on a MasterCard, and MasterCard takes a 5 percent discount on the sale, the retailer would record Cash for $100 and Accounts Payable for $5.

Question 36

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

Question 37

Under the periodic inventory system, Cost of goods sold must be computed on the income statement because it is not updated for purchases, sales, and other transactions during the accounting period.

Question 38

A retail operation would not have to take a physical inventory if it uses a perpetual inventory system.

Question 39

A trade discount is the same as a sales discount.

Question 40

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

Question 41

FOB shipping point means that the seller incurs the shipping costs.

Question 42

Under the perpetual inventory system, the return of goods from a customer would increase Merchandise Inventory and decrease Cost of Goods Sold.

Question 43

Upon making a credit card sale, a business should record the sale as an accounts receivable until the customer pays his or her credit card bill.

Question 44

Under the perpetual inventory system, the purchase of merchandise is recorded with a debit to Purchases.

Question 45

Freight-in is considered a cost of merchandise purchased.

Question 46

Sale and purchase of goods should be recorded at their list price, less any trade discount involved.

Question 47

Under the perpetual inventory system, the return of goods to the supplier is recorded with a credit to Merchandise Inventory.

Question 48

Cost of goods sold is considered an expense of a merchandising business.

Question 49

On the income statement, freight-in is treated as an operating expense.

Question 50

The difference between gross sales and net sales is equal to the sum of sales discounts and sales returns and allowances.

Question 51

Sales Discounts and Sales Returns and Allowances are contra-revenue accounts.

Question 52

The fee paid by a retailer to a credit card company is considered a contra-revenue account by the retailer.

Question 53

When the buyer bears the transportation charge, it is called freight-out.

Question 54

The net cost of purchases is found by deducting freight-in from net purchases.

Question 55

On the income statement, freight-out is included as part of cost of goods sold.

Question 56

Under the perpetual inventory system, the Cost of Goods Sold and Merchandise Inventory accounts are updated with each sale.

Question 57

The use of major credit cards requires sellers to establish the customer's credit.

Question 58

If insured goods are shipped FOB destination, the seller should file a claim for goods damaged in transit.

Question 59

Under the perpetual inventory system, the return of goods from a customer is recorded with a debit to Sales Returns and Allowances.

Question 60

Under the periodic inventory system, the return of goods to the supplier is recorded with a credit to Purchases Returns and Allowances.

Question 61

If it takes Gledhill Company 45 days to sell inventory, 23 days to collect from the sale, and creditors' payment terms are 30 days, the financing period is

A) 98 days.
B) 23 days.
C) 45 days.
D) 38 days.

Question 62

An American company makes a credit sale of goods to a company in London for 10,000 British pounds. On the date of sale, the exchange rate was $1.60 per pound. However, on the date payment was received, the exchange rate had risen to $1.70 per pound. As a result, the American company would record

A) an exchange gain of $1,000.
B) an exchange loss of $100.
C) an exchange loss of $1,000.
D) no exchange gain or loss.

Question 63

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

A) Fur dealer
B) Car dealership
C) Auto parts store
D) Boat dealership

Question 64

The change in merchandise inventory level from the beginning to the end of the year affects cost of goods sold.

Question 65

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

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

Question 66

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

Question 67

Ending merchandise inventory is included in the calculation of cost of goods available for sale.

Question 68

The calculation of cost of goods available for sale during the year is not affected by the previous year's ending merchandise inventory.

Question 69

Which of the following should not be included in the count of ending merchandise inventory?

A) Damaged goods to be sold at a reduced price
B) Goods in transit to which a company has title
C) Goods in warehouses
D) Goods sold but not yet delivered

Question 70

Which of the following does not represent a sale?

A) Merchandise placed aside for a customer who plans to come in next week and pay with cash
B) Purchase of merchandise by a customer who pays cash
C) Sale of merchandise to a customer who uses a credit card
D) Purchase of merchandise by a customer who uses a debit card

Question 71

An American company makes a credit purchase of goods from a company in London for 1,000 British pounds. On the date of purchase, the exchange rate was $1.65 per pound. However, on the date of payment, the rate had declined to $1.60 per pound. As a result, the American company would record

A) an exchange gain of $50.
B) an exchange loss of $1,600.
C) an exchange loss of $50.
D) no exchange gain or loss.

Question 72

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

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

Question 73

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

Question 74

Freight-in is treated as a deduction in the cost of goods sold section of the income statement.

Question 75

If creditors' payment terms are 60 days, financing period is 20 days, and it takes 30 days to collect the amount from customers. What time does it take to sell the inventory?

A) 60 days.
B) 20 days.
C) 30 days.
D) 50 days.

Question 76

Each of the following companies is a merchandising business except a

A) candy store.
B) car wash.
C) wholesale parts company.
D) furniture store.

Question 77

Which of the following goods would not be included in merchandise inventory for a purchasing company?

A) Goods in transit shipped FOB shipping point
B) Goods on hand in the showroom
C) Goods in transit shipped FOB destination
D) Goods ordered and received from the supplier

Question 78

The last step in the operating cycle is the

A) sale of merchandise inventory for cash or on credit.
B) payment for purchases made on credit.
C) collection of cash from credit sales.
D) purchase of merchandise inventory for cash or on credit.

Question 79

An American company makes a credit purchase of goods from a company in London for $500. On the date of purchase, the exchange rate was $1.50 per pound. However, on the date of payment, the rate had risen to $1.55 per pound. As a result, the American company would record

A) an exchange gain of $25.
B) an exchange loss of $775.
C) an exchange loss of $25.
D) no exchange gain or loss.

Question 80

Adding freight-out expenses to net purchases gives net cost of purchases.