Deck 4: Accounting for Merchandising Businesses

Question 1

On the income statement, the merchandise inventory at the beginning of the period is added to sales to yield the cost of merchandise sold during the period.

Answer 1

False

Question 2

A criticism of a single-step income statement is that net income is not available for analysis.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

On the income statement, sales returns and allowances and sales discounts are added to gross sales to yield net sales.

Question 5

On the income statement, sales discounts are normally deducted from sales to yield the cost of merchandise sold.

Question 6

Credit memorandum is issued by the seller to customers for return of damaged or defective merchandise.

Question 7

A criticism of the single-step income statement is that gross profit and income from operations are not readily available for analysis.

Question 8

The merchandise inventory account is found on the balance sheet.

Question 9

Revenue from sources other than the primary operating activity of a business is called other income.

Question 10

Interest expense is an example of an expense classified under "other expense."

Question 11

The sales discount account is a contra account to Sales.

Question 12

When merchandise that was sold is returned, the seller decreases accounts payable.

Question 13

Operating expenses are subtracted from fees earned for a service business and from gross profit for a merchandising business.

Question 14

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

Question 15

In a multiple-step income statement, sales will be reduced by sales discounts and sales returns and allowances to arrive at net sales.

Question 16

Sales Returns and Allowances is a contra-asset account.

Question 17

Sales discounts are granted by the seller to customers for payment at the end of the month.

Question 18

Net income or loss may appear on the income statement of both a service business and a merchandising business.

Question 19

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

Question 20

The indirect method of preparing the statement of cash flows reconciles net income with net cash flows from operating activities.

Question 21

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

Question 22

If merchandise costing $2,500, terms FOB destination, 2/10, n/30, with prepaid transportation costs of $100, is paid within 10 days, the amount of the purchases discount is $48.

Question 23

Purchase discounts reduce sales.

Question 24

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

Question 25

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 26

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

Question 27

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 28

It is usual for the credit period to begin with the date the merchandise is received by the buyer.

Question 29

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

Question 30

A sale of $600 on account subject to a sales tax of 5% would increase account receivable by $570.

Question 31

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 32

Merchandise is sold for $2,500, terms FOB destination, 2/10, n/30, with transportation 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 $40.

Question 33

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

Question 34

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

Question 35

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

Question 36

Sales discounts is used in accounting for transactions with customers.

Question 37

Available discounts taken by the buyer for early payment of an invoice are termed sales discounts by the seller.

Question 38

Purchases discounts are discounts given to the seller.

Question 39

The document issued by the seller that informs the buyer of the details of sales returns is called a debit memorandum.

Question 40

Purchases of merchandise increase the merchandise inventory account under the perpetual inventory system.

Question 41

Repayments of bonds would be shown as a cash outflow in the investing section of the statement of cash flows.

Question 42

Gross profit is determined by subtracting the cost of merchandise sold from what?

A) The cost of merchandise purchased
B) Fees earned
C) Accounts receivable
D) Net sales

Question 43

East, Inc. had beginning inventory of $10,000, purchases of $25,000, and ending inventory of $5,000. What is East's cost of merchandise sold?

A) $10,000
B) $25,000
C) $5,000
D) $30,000

Question 44

Cost of Merchandise Sold is used in accounting for transactions by sellers of merchandise.

Question 45

Since merchandise inventory is normally sold within a year, how is it reported on the balance sheet?

A) As a revenue
B) As the cost of merchandise sold
C) It does not appear on the Balance Sheet
D) As a current asset

Question 46

What is subtracted from sales to arrive at net sales?

A) Sales returns and allowances
B) Sales discounts
C) Both sales discounts and sales returns and allowances
D) Neither sales discounts nor sales returns and allowances

Question 47

If merchandise costing $2,500, terms FOB destination, 2/10, n/30, with transportation costs of $100, is paid within 10 days, the amount of the purchases discount is $52.

Question 48

In a transaction where purchased merchandise has been returned, the buyer will increase the Sales Returns and Allowances account and the seller will increase the Purchases Returns and Allowances account.

Question 49

Merchandise inventory shrinkage will increase Merchandise Inventory.

Question 50

Which of the following statements is true?

A) Only cash sales are included in the Sales account.
B) Sales is the total amount charged customers, including cash sales and sales on account.
C) Both sales discounts and sales returns and allowances are added to Sales to arrive at Net Sales.
D) Sales is the revenue account typically used in service businesses.

Question 51

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

Question 52

To determine cash payments for operating expenses for the cash flow statement using the direct method, a decrease in prepaid expenses is added to operating expenses other than depreciation.

Question 53

When someone purchases merchandise and incurs the cost of transportation, these costs of purchasing inventory are added to the cost of the inventory.

Question 54

If cash dividends of $145,000 were declared during the year and the decrease in dividends payable from the beginning to the end of the year was $7,000, the statement of cash flows would report $152,000 in the financing activities section.

Question 55

The difference between sales and cost of merchandise sold for a merchandising business is:

A) sales.
B) net sales.
C) gross sales.
D) gross profit.

Question 56

Which of the following statements is true?

A) The revenue activities of a service business involve providing services to customers.
B) The revenue activities of a merchandising business involve the building of a product.
C) The revenue activities of a service business involve the building of a product.
D) The revenue activities of a merchandising business involve providing services to customers.

Question 57

Generally, the revenue account for a merchandising business is entitled:

A) Sales.
B) Net Sales.
C) Gross Sales.
D) Gross Profit.

Question 58

There are two alternatives to reporting cash flows from operating activities in the statement of cash flows: (1) the direct method and (2) the indirect method.

Question 59

Merchandise inventory shrinkage will decrease Retained Earnings.

Question 60

Which of the following businesses is a merchandising business?

A) H&R Block
B) Becker Law Office
C) Little Tykes Daycare
D) Kohl's

Question 61

Which of the following is not a subsection in a multiple-step income statement?

A) Purchase discounts
B) Gross profit
C) Operating income
D) Income before taxes

Question 62

Which of the following is not an example of selling expenses?

A) Salespersons' salaries
B) Office staff salaries
C) Depreciation of store equipment
D) Advertising

Question 63

Which of the following accounts is a contra account to Sales?

A) Accounts Payable
B) Sales Returns and Allowances
C) Accounts Receivable
D) Interest Revenue

Question 64

Office salaries, depreciation of office equipment, and office supplies are examples of what type of expense?

A) Selling expense
B) Miscellaneous expense
C) Administrative expense
D) Other expense

Question 65

Gross profit is equal to:

A) sales less (sales discounts and sales returns and allowances) plus cost of merchandise sold.
B) sales plus sales returns and allowances less sales discounts less cost of merchandise sold.
C) sales plus sales discounts less sales returns and allowances less cost of merchandise sold.
D) sales less (sales discounts and sales returns and allowances) less cost of merchandise sold.

Question 66

For a merchandising firm, the inventory sold is shown on the income statement as:

A) cost of merchandise sold.
B) purchases.
C) purchases returns and allowances.
D) net purchases.

Question 67

NBC Company had $32,000 in net sales, $15,000 in cost of merchandise sold, $18,000 in operating expenses, and $2,000 in other income. What is NBC Company's gross profit?

A) $17,000
B) $3,000
C) $1,000
D) $(1,000)

Question 68

Which of the following is not an administrative expense?

A) Salespersons' salaries
B) Office staff salaries
C) Depreciation of office equipment
D) Office supplies used

Question 69

Which of the following would be subtracted from gross profit to determine operating income?

A) Operating expenses
B) Other expenses
C) Income taxes
D) All of these

Question 70

Which of the following are subtracted from sales to arrive at net sales?

A) Sales returns
B) Merchandise inventory
C) Accounts receivable
D) Cost of merchandise sold

Question 71

Which of the following is not considered when figuring net purchases?

A) Cost of goods sold
B) Purchase returns
C) Purchases discounts
D) Purchases

Question 72

Deana, Inc. Deana, Inc. purchased merchandise for $500,000, received credit for purchase returns of $25,000, took purchase discounts of $10,000, and paid transportation in of $20,000.
Refer to Deana, Inc. If Deana, Inc. had $20,000 in beginning inventory, and sold goods costing $300,000, what is the ending inventory balance?

A) $165,000
B) $240,000
C) $200,000
D) $185,000

Question 73

Deana, Inc. Deana, Inc. purchased merchandise for $500,000, received credit for purchase returns of $25,000, took purchase discounts of $10,000, and paid transportation in of $20,000.
Refer to Deana, Inc. What is the total cost of merchandise purchased?

A) $520,000
B) $485,000
C) $445,000
D) $480,000

Question 74

The form of income statement that derives its name from the fact that the total of all expenses is deducted from the total of all revenues is called a:

A) multiple-step statement.
B) revenue statement.
C) report-form statement.
D) single-step statement.

Question 75

Merchandise not sold at the end of the period is reported as:

A) cost of goods sold.
B) old stock.
C) merchandise inventory.
D) net purchases.

Question 76

What is the term applied to the excess of net revenue from sales over the cost of merchandise sold?

A) Gross profit
B) Income from operations
C) Net income
D) Gross sales

Question 77

Which expenses are subtracted from gross profit to arrive at income from operations?

A) All expenses
B) Cost of merchandise sold
C) Operating expenses
D) Sales discounts

Question 78

Multiple-step income statements show:

A) gross profit but not income from operations.
B) neither gross profit nor income from operations.
C) both gross profit and income from operations.
D) income from operations but not gross profit.

Question 79

Expenses that are incurred directly or entirely in connection with the sale of merchandise are classified as:

A) selling expenses.
B) general expenses.
C) other expenses.
D) administrative expenses.

Question 80

Dig, Inc. had the following merchandise transactions in October: $\begin{array}{|l|l|}\hline\$ 50,000 & \text { Purchases } \\\hline \$ 4,000 & \text { Purchase retuns } \\\hline \$ 1,000 & \text { Purchase discounts } \\\hline\$ 2,000 & \text { Transportation in } \\\hline & \\\hline\end{array}$
What is the total cost of merchandise purchased for Dig, Inc.?

A) $50,000
B) $47,000
C) $52,000
D) $48,000