Deck 6: Accounting for Merchandising Businesses

Question 1

Under a periodic inventory system, the merchandise on hand at the end of the year is determined by a physical count of the inventory.

Answer 1

True

Question 2

One of the most important differences between a service business and a retail business is in what is sold.

Answer 2

True

Question 3

On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues.

Answer 3

True

Question 4

The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income from operations are readily available.

Question 5

In a multiple-step income statement the dollar amount for income from operations is always the same as net income.

Question 6

Net sales is equal to sales minus cost of merchandise sold.

Question 7

When a merchandising business is compared to a service business, the financial statement that is affected by that change is the Statement of Owner's Equity.

Question 8

In a merchandise business, sales minus operating expenses equals net income.

Question 9

In the periodic inventory system, purchases of merchandise for resale are debited to the Purchases account.

Question 10

Under the periodic inventory system, the cost of merchandise sold is equal to the beginning merchandise inventory plus the cost of merchandise purchased plus the ending merchandise inventory.

Question 11

The ending merchandise inventory for 2010 is the same as the beginning merchandise inventory for 2011.

Question 12

Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends to sell.

Question 13

In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the beginning inventory.

Question 14

Service businesses provide services for income, while a merchandising business sells merchandise.

Question 15

In many retail businesses, inventory is the largest current asset.

Question 16

Income that be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as Other Income on the multiple-step income statement.

Question 17

As we compare a merchandise business to a service business, the financial statement that changes the most is the Balance Sheet.

Question 18

The form of the balance sheet in which assets, liabilities, and owner's equity are presented in a downward sequence is called the report form.

Question 19

In a periodic inventory system, the cost of merchandise purchased includes the cost of freight-in.

Question 20

Gross profit minus selling expenses equals net income.

Question 21

Other income and expenses are items that are related to the primary operating activity.

Question 22

Freight-in is considered a cost of purchasing inventory.

Question 23

The effect of a sales return and allowance is a reduction in sales revenue and a decrease in cash or accounts receivable.

Question 24

Sales Discounts is a revenue account with a credit balance.

Question 25

Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales.

Question 26

In a perpetual inventory system, when merchandise is returned to the seller, Cost of Merchandise Sold is debited as part of the transaction.

Question 27

Sales Returns and Allowances is a contra-revenue account.

Question 28

When merchandise that was sold is returned, a credit to sales returns and allowances is made.

Question 29

Sales to customers who use nonbank credit cards, such as American Express, are generally treated as credit sales.

Question 30

Freight in is the amount paid by the company to deliver merchandise sold to a customer.

Question 31

The service fee that credit card companies charge retailers varies and is the primary reason why some businesses do accept all credit cards.

Question 32

If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30.

Question 33

Under the periodic inventory system, the cost of merchandise sold is recorded when sales are made.

Question 34

In the merchandising income statement, sales will be reduced by sales discounts and sales returns and allowances to arrive at net sales.

Question 35

The cost of merchandise inventory is limited to the purchase price less any purchase discounts.

Question 36

Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are recorded.

Question 37

Cost of Merchandise Sold is often the largest expense on a merchandising company income statement.

Question 38

A seller may grant a buyer a reduction in selling price and this is called a sales allowance.

Question 39

Retailers record all credit card sales as credit sales.

Question 40

Merchandise Inventory normally has a debit balance.

Question 41

If merchandise costing $3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of $125, is paid within 10 days, the amount of the purchases discount is $70.

Question 42

When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount.

Question 43

If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms are stated as FOB destination.

Question 44

When merchandise is sold for $600 plus 6% sales tax, the Sales account should be credited for $636.

Question 45

A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called cash discounts.

Question 46

When the terms of sale are FOB shipping point, the buyer should pay the freight charges.

Question 47

Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150. 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 $65.

Question 48

There is no difference between the recording of cash sales and the recording of MasterCard or VISA sales.

Question 49

Discounts taken by the buyer for early payment of an invoice are credited to Sales Discounts by the buyer.

Question 50

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

Question 51

When companies use a perpetual inventory system, the recording of the purchase of inventory will include a debit to purchases.

Question 52

In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account.

Question 53

The chart of accounts for a merchandise business would include an account called Delivery Expense.

Question 54

Sellers and buyers are required to record trade discounts.

Question 55

The abbreviation FOB stands for Free On Board.

Question 56

When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period.

Question 57

Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system.

Question 58

A sale of $750 on account, subject to a sales tax of 6%, would be recorded as an account receivable of $750.

Question 59

If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination.

Question 60

Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. If payment is made within 10 days of the purchase, the entry to record the payment will include a credit to Cash and a credit to Purchase Discounts.

Question 61

The adjusting entry to record inventory shrinkage would generally include a debit to Cost of Merchandise Sold.

Question 62

The buyer will include the sales tax as part of the cost of items purchased for use.

Question 63

Match each of the following terms with the appropriate definition below.

Question 64

Because many companies use computerized accounting systems, periodic inventory is widely used.

Question 65

If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in the general ledger.

Question 66

Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the buyer.

Question 67

The seller may prepay the freight costs even though the terms are FOB shipping point.

Question 68

Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer's place of business.

Question 69

Which one of the following is not a difference between a retail business and a service business?

A) in what is sold
B) the inclusion of gross profit in the income statement
C) accounting equation
D) merchandise inventory included in the balance sheet

Question 70

The seller records the sales tax as part of the sales amount.

Question 71

Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped FOB shipping point.

Question 72

Computerized systems can be used to capture accounting information such as accounts receivable, inventory items, accounts payable, and sales.

Question 73

Most companies will take a purchases discount, because 1% or 2% discounts are insignificant.

Question 74

A business using the perpetual inventory system, with its detailed subsidiary records, does need to take a physical inventory.

Question 75

The accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and Freight In are found on the balance sheet.

Question 76

Generally, the revenue account for a merchandising business is entitled

A) Sales
B) Fees Earned
C) Gross Sales
D) Gross Profit

Question 78

Net income plus operating expenses is equal to

A) cost of merchandise sold
B) cost of merchandise available for sale
C) net sales
D) gross profit

Question 79

Closing entries for a merchandising business are similar to those for a service business.

Question 80

The ratio of net sales to assets measures how effectively a business is using its assets to generate sales.