Deck 4: Accounting for Merchandising Operations

Question 1

A company had sales of $350,000 and cost of goods sold of $200,000, which means gross profit is equal to $550,000.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

Quick assets include cash, inventory and current receivables.

Question 6

A retailer is an intermediary that buys products from manufacturers and sells them to wholesalers.

Question 7

Gross profit is the same as gross margin.

Question 8

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

Question 9

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

Question 10

A company had net sales of $545,000 and cost of goods sold of $345,000, which means its gross margin is equal to $200,000.

Question 11

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

Question 12

Beginning merchandise inventory plus the net cost of purchases is equal to the merchandise available for sale.

Question 13

Assets tied up in inventory are referred to as non productive assets.

Question 14

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

Question 15

A wholesaler is an intermediary that buys products from manufacturers or other wholesalers and sells them to consumers.

Question 16

Merchandise inventory consists of products that a company acquires to resell to customers.

Question 17

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

Question 18

A company had a gross profit of $300,000 based on sales of $400,000, which means its cost of goods sold is equal to $700,000.

Question 19

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

Question 20

Cost of goods sold is also called cost of sales.

Question 21

A common rule of thumb is that a company's acid-test ratio should be at least 2 or a company may face financial problems in the near future.

Question 22

With credit terms of 2/10, n/30 the seller is offering 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 23

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

Question 24

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

Question 25

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

Question 26

The gross margin ratio reflects the relation between sales and cost of goods sold.

Question 27

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

Question 28

Cost of goods sold is reported on both the income statement and the balance sheet.

Question 29

Credit terms include the specifics regarding the amount owed and timing of payments from a buyer to a seller.

Question 30

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

Question 31

The Merchandise Inventory account balance at the end of one period is equal to the amount of beginning merchandise inventory for the next period.

Question 32

The profit margin ratio is gross margin divided by total assets.

Question 33

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 34

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%.
($340,500 - $257,000)/$340,500 = 24.5%

Question 35

J.C. Penney had net sales of $24,750 million, cost of goods sold of $16,150 million and net income of $837 million. Its gross margin ratio equals 3.4%.
($24,750 - $16,150)/$24,750 = 34.7%

Question 36

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

Question 37

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

Question 38

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

Question 39

Trade discounts are recorded in a Trade Discounts account in the accounting system.

Question 40

In a perpetual inventory system, the merchandise inventory account reflects the cost of goods available for sale.

Question 41

Purchase discounts are the same as trade discounts.

Question 42

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

Question 43

Sales Discounts, Sales Returns and Allowances and Cost of Goods Sold are all closed to the Income Summary account with debits.

Question 44

The periodic inventory system requires updating the inventory account only at the end of the period to reflect the quantity and cost of both the goods available and the goods sold.

Question 45

A buyer did not take advantage of a supplier's credit terms of 2/10, n/30, but instead paid the invoice in full at the end of 30 days. By not taking the discount the buyer lost the equivalent of 18% annual interest on the amount of the purchase.
(365/(30 - 10)) x .02 = 36.5%

Question 46

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 47

When a credit customer returns merchandise a seller that uses the perpetual system would debit Sales Returns and Allowances and credit Accounts Receivable and also debit Merchandise Inventory and credit Cost of Goods Sold.

Question 48

The periodic inventory system uses a temporary account called Purchases.

Question 49

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 50

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

Question 51

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 52

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

Question 53

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.
$20/$1,000 = 2% discount

Question 54

Generally accepted accounting principles require companies to use a specific format for the financial statements.

Question 55

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

Question 56

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 57

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

Question 58

A perpetual inventory system is able to directly measure and monitor inventory shrinkage.

Question 59

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

Question 60

Accounting and reporting for merchandise purchases and sales are treated identically under both GAAP and IFRS.

Question 61

The quick assets are defined as:

A) Cash, short-term investments and inventory
B) Cash, short-term investments and current receivables
C) Cash, inventory and current receivables
D) Cash, noncurrent receivables and prepaid expenses
E) Accounts receivable, inventory and prepaid expenses

Question 62

A company had expenses other than cost of goods sold of $250,000. Determine sales and gross profit given cost of goods sold was $100,000 and net income was $150,000.

A) Sales: $350,000; Gross Profit: $150,000
B) Sales: $350,000; Gross Profit: $50,000
C) Sales: $500,000; Gross Profit: $400,000
D) Sales: $500,000; Gross Profit: $50,000
E) Sales: $400,000; Gross Profit: $500,000

Question 63

When preparing the unadjusted trial balance in a periodic inventory system, the amount that appears as Merchandise Inventory is the ending inventory amount.

Question 64

A company had sales of $695,000 and its cost of goods sold of $278,000. Its gross margin equals:

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

Question 65

A merchandising company:

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 66

Cost of goods sold:

A) Is another term for merchandise sales
B) Is the term used for the cost 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 67

Liquidity problems are likely to exist when a company's acid-test ratio:

A) Is less than the current ratio
B) Is 1 to 1
C) Is higher than 1 to 1
D) Is substantially lower than 1 to 1
E) Is higher than the current ratio

Question 68

A company's current assets were $17,980, its quick assets were $11,420 and its current liabilities were $12,190. Its quick ratio equals:

A) 0.94
B) 1.07
C) 1.48
D) 1.57
E) 2.40

Question 69

The acid-test ratio:

A) Is also called the quick ratio
B) Measures profitability
C) Measures inventory turnover
D) Is generally greater than the current ratio
E) Is not used by merchandise companies

Question 70

Beginning inventory plus net cost of purchases is:

A) Cost of goods sold
B) Merchandise available for sale
C) Ending inventory
D) Sales
E) Shown on the balance sheet

Question 71

A company's cost of goods sold was $4,000. Determine net purchases and ending inventory given goods available for sale were $11,000 and beginning inventory was $5,000.

A) Net Purchases: $15,000; Ending Inventory: $7,000
B) Net Purchases: $10,000; Ending Inventory: $15,000
C) Net Purchases: $9,000; Ending Inventory: $6,000
D) Net Purchases: $6,000; Ending Inventory: $7,000
E) Net Purchases: $16,000; Ending Inventory: $20,000

Question 72

The current period's ending inventory is:

A) The next period's beginning inventory
B) The current period's cost of goods sold
C) The prior period's beginning inventory
D) The current period's net purchases
E) The current period's beginning inventory

Question 73

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

Question 74

A company had sales of $375,000 and its gross profit was $157,500. Its cost of goods sold equal:

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

Question 75

Merchandise inventory:

A) Is a long-term asset
B) Is a current asset
C) Includes supplies
D) Is classified with investments on the balance sheet
E) Must be sold within one month

Question 76

A company had expenses other than cost of goods sold of $51,000. Determine sales and gross profit given cost of goods sold was $25,000 and net income was $60,000.

A) Sales: $136,000; Gross Profit: $111,000
B) Sales: $136,000; Gross Profit: $85,000
C) Sales: $85,000; Gross Profit: $136,000
D) Sales: $111,000; Gross Profit: $136,000
E) Sales: $60,000; Gross Profit: $25,000

Question 77

ABC Corporation had total quick assets $5,888,000, current assets $11,700,000 and current liabilities $8,000,000. Its acid-test ratio equals:

A) 0.50
B) 0.68
C) 0.74
D) 1.50
E) 2.20

Question 78

The acid-test ratio differs from the current ratio in that:

A) Liabilities are divided by current assets
B) Prepaid expenses and inventory are excluded from the calculation of the acid-test ratio
C) The acid-test ratio measures profitability and the current ratio does not
D) The acid-test ratio excludes short-term investments from the calculation
E) The acid-test ratio is a measure of liquidity but the current ratio is not

Question 79

The operating cycle for a merchandiser that sells only for cash moves from:

A) Purchases of merchandise to inventory to cash sales
B) Purchases of merchandise to inventory to accounts receivable to cash sales
C) Inventory to purchases of merchandise to cash sales
D) Accounts receivable to purchases of merchandise to inventory to cash sales
E) Accounts receivable to inventory to cash sales

Question 80

A company had expenses other than cost of goods sold of $175,000. Determine sales and gross profit given cost of goods sold was $622,000 and net loss was ($41,000).

A) Sales: $838,000: Gross Profit: $216,000
B) Sales: $756,000: Gross Profit: $134,000
C) Sales: $797,000: Gross Profit: $756,000
D) Sales: $756,000: Gross Profit: $797,000
E) Sales: $134,000: Gross Profit: $216,000