Deck 6: Merchandising Activities

Question 1

When using a perpetual inventory system, the Purchases account is debited when goods is acquired.

Answer 1

False

Question 2

Net Sales is computed as total sales revenue less sales returns and allowances less sales discounts.

Answer 2

True

Question 3

Wholesalers buy from retailers and sell to the general public.

Answer 3

False

Question 4

Inventories are assets that a company holds for sale in the ordinary course of business.

Question 5

In a periodic inventory system, the Inventory and Cost of Goods Sold accounts are kept up-to-date throughout the accounting period.

Question 6

Today, most large merchandising companies use a perpetual inventory system.

Question 7

The contra-revenue accounts, Sales Returns and Allowances and Sales Discounts, should be closed by crediting these accounts and debiting Income Summary for each account.

Question 8

Gross profit rate is the dollar amount of gross profit expressed as a percentage of gross sales.

Question 9

In a periodic inventory system the Cost of Goods Sold account may be created during the closing process by debiting Cost of Goods Sold and crediting the Beginning Inventory and the Purchases account.

Question 10

In a retail department store with an efficient perpetual inventory system, the quantities of goods actually on hand are probably somewhat more than the quantities indicated in the accounting records.

Question 11

The operating cycle of a merchandising company consists of (1) purchases of goods; (2) sales of the goods; and (3) collection of accounts receivable.

Question 12

The manager of National Software wants to know how many Microsoft Excel programs the store sold in June. This information is contained in the Inventory controlling account.

Question 13

Purchase Discounts Lost is shown as a reduction of cost of goods sold in the income statement.

Question 14

Under the periodic inventory system, no effort is made to keep up-to-date records of either Inventory or Cost of Goods Sold as transactions occur.

Question 15

The accounting cycle of a merchandising business is the length of time covered by the company's income statement.

Question 16

A perpetual inventory system requires the capability of recording the cost of the goods sold in individual sales transactions.

Question 17

Inventory shrinkage refers to unrecorded decreases in inventory resulting from breakage, theft and sales of inventory.

Question 18

In preparing monthly bills to be sent to individual credit customers, the billing department will use the accounts payable subsidiary ledger, rather than the general ledger.

Question 19

In a perpetual inventory system when goods are purchased it is debited to an account called Purchases.

Question 20

Inventory is a relatively more liquid asset than Accounts Receivable on the statement of financial position.

Question 21

The Cost of Goods Sold account is closed by

A) Debiting Cost of Goods Sold and crediting Income Summary
B) Debiting Cost of Goods Sold and crediting Retained Earnings
C) Debiting Income Summary and crediting Cost of Goods Sold
D) Debiting Retained Earnings and crediting Cost of Goods Sold

Question 22

Merchandising companies that are small and do not use a perpetual inventory system may elect to use:

A) A physical inventory system
B) A periodic inventory system
C) An inventory shrinkage method
D) An inventory subsidiary ledger system.

Question 23

Sales revenue is recognized in the period in which:

A) Goods are delivered to the customer.
B) The customer orders the goods.
C) Cash payment is received by the seller.
D) Purchases are made to replace the goods sold.

Question 24

The average gross profit rate is a measure of relative profitability.

Question 25

In a periodic inventory system, the ending inventory can be determined from the accounting records, and a physical count of the goods on hand will confirm the amount.

Question 26

A large company with many different kinds of low-cost items would tend to use a perpetual inventory system.

Question 27

Under the perpetual inventory system, two entries are required when goods are sold.

Question 28

Instead of paying for goods purchased on account, Olympic Corp. returned these goods to the supplier. Olympic should record this transaction by debiting Accounts Payable and crediting Sales Returns and Allowances.

Question 29

Operating profit is:

A) A measure of profitability after deducting cost of sales from net sales.
B) A measure of profitability after deducting cost of sales and all expenses incurred in operating the business from net sales.
C) A measure of liquidity after deducting cost of sales from net sales.
D) The equivalent of net sales.

Question 30

Which of the following would not tend to make a manufacturer choose a perpetual inventory system?

A) Management wants information about quantities of specific products
B) A low volume of sales transactions and a computerized accounting system
C) A high volume of sales transactions and a manual accounting system
D) Items in inventory with high per unit costs

Question 31

If ending inventory and cost of goods sold are added together, they should equal cost of goods available for sale.

Question 32

Sales discounts and allowances:

A) When properly recorded will reduce profit for the period.
B) When properly recorded will increase profit for the period.
C) Will not affect profit for the period.
D) Are always immaterial and need not be recorded.

Question 33

Which of the following businesses is likely to have the shortest operating cycle?

A) A food store.
B) A department store.
C) An art store.
D) A car store.

Question 34

Which of the following should not be classified as inventory in the statement of financial position of a large automobile dealership?

A) Pickup trucks offered for sale.
B) Used cars taken in trade and offered for sale on the company's used-car lot.
C) Spark plugs, oil filters, and other parts which are intended for use by the service department in repairing and servicing customers' cars.
D) "Company cars" provided to specific company executives for their personal use.

Question 35

When using a periodic inventory system, the Purchases account is debited when goods is acquired.

Question 36

Which of the following companies would be more likely to use a periodic inventory system?

A) IBM
B) Bank of China
C) Marks & Spencer
D) A newspaper stand

Question 37

If ending inventory and cost of goods sold are added together, they should equal gross profit.

Question 38

Which account listed below is classified as a contra-revenue account?

A) Cost of Goods Sold.
B) Gross profit.
C) Sales Discounts.
D) Purchases.

Question 39

In a perpetual inventory system, the Inventory and Cost of Goods Sold accounts are kept up-to-date throughout the accounting period.

Question 40

In a periodic inventory system, the cost of goods sold is determined by the following end-of-period computation: Beginning Inventory + Purchases - Ending inventory = Cost of Goods Sold.

Question 41

Gross profit is the difference between:

A) Net sales and the cost of goods sold.
B) The cost of goods purchased and the cost of goods sold.
C) Net sales and profit for the period.
D) Net sales and all expenses.

Question 42

The purchasing agent of Superb Service Co. wants to know the dollar amount of inventory purchased on account during the year from a particular supplier. This information can be found most easily in Superb Service's:

A) Inventory subsidiary ledger.
B) Accounts payable controlling account.
C) Inventory controlling account.
D) Accounts payable subsidiary ledger.

Question 43

Under the perpetual inventory system which journal entry would indicate a purchase of goods?

A) Debit, Inventory and credit, Cash.
B) Debit, Purchases and credit, Cash.
C) Debit, Costs of Goods Sold and credit, Inventory.
D) Debit, Inventory and credit, Cost of Goods Sold.

Question 44

In a periodic inventory system, which of the following accounts may be closed by debiting Cost of Goods Sold?

A) Sales, Inventory (beginning), and Gross Profit.
B) Inventory (beginning) and Purchases.
C) Purchases and Inventory (ending).
D) Sales, Inventory (beginning), and Cost of Goods Available for Sale.

Question 45

Regal Artworks Co. records purchases net of all available purchase discounts. If the company makes payment after the discount has expired, the entry to record the payment should include a:

A) Debit to Purchase Discounts Lost.
B) Credit to Purchase Discounts Lost.
C) Debit to Sales Discounts.
D) Credit to Sales Discounts.

Question 46

In a perpetual inventory system:

A) Merchandising transactions are recorded as they occur.
B) No effort is made to record the Cost of Goods Sold until year-end.
C) Entries are made in the Cost of Goods Sold account whenever goods is purchased or sold.
D) The need for ever taking physical inventory is eliminated.

Question 47

Which of the following credit terms is the most advantageous to the purchaser of goods?

A) 1/10, n/30.
B) 5/10, n/60.
C) 2/10, n/30.
D) 5/10, n/20.

Question 48

Jayson Products uses a perpetual inventory system. At year-end the Inventory account had a balance of $280,000, but a complete year-end physical inventory indicated goods on hand costing only $273,000. Jayson should:

A) Reduce its cost of goods sold by $7,000.
B) Record a $7,000 current liability.
C) Reduce the balance in its Inventory controlling account and inventory subsidiary ledger by $7,000.
D) Reduce the balance in the Inventory controlling account and record a current liability, both in the amount of $7,000.

Question 49

Hicksville's Department Store uses a perpetual inventory system. At year-end, the balance in the Inventory controlling account is $1,200,000. Assuming that the inventory records have been maintained properly, a year-end physical inventory:

A) Is unnecessary.
B) Is needed to establish the ending inventory, as the $1,200,000 balance in the Inventory controlling account represents the beginning inventory.
C) Probably will indicate more than $1,200,000 in goods on hand.
D) Probably will indicate less than $1,200,000 in goods on hand.

Question 50

Net sales is calculated by:

A) Subtracting cost of sales from sales.
B) Subtracting sales returns and sales discounts from sales.
C) Subtracting sales returns, cost of sales and sales discounts from sales.
D) Subtracting gross profit from sales.

Question 51

The basic purpose of a subsidiary ledger is to:

A) Provide a chronological record of all business transactions.
B) Provide details about the individual items comprising the balance of a general ledger account.
C) Enable accountants to prepare financial statements.
D) Provide persons outside of the organization with detailed information about the company's operations.

Question 52

Cumberland, Inc., has applied to its bank for a loan. The bank asks Cumberland's controller about the total amount of the company's accounts receivable. Assuming that all accounting records are up-to-date, the controller can best answer this question by referring to:

A) The Income Statement.
B) The Accounts Receivable controlling account.
C) The Accounts Receivable subsidiary ledger.
D) Last year's Statement of financial position.

Question 53

Periodic inventory systems are used primarily by:

A) Small businesses with manual accounting systems.
B) Large manufacturing companies.
C) Small businesses that sell a low volume of high-priced items.
D) Companies that sell a high volume of low-priced items and record sales transactions on point-of-sale terminals.

Question 54

Inventory shrinkage is not caused by:

A) Shoplifting.
B) Breakage.
C) Price reductions by competitors.
D) Spoilage.

Question 55

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

A) Corner deli.
B) Marks and Spencer.
C) James Dean, CPA.
D) A manufacturer of custom sailboats.

Question 56

The cost of delivering goods to the customer is:

A) Part of cost of goods sold.
B) Used in the calculation of net sales.
C) An operating expense.
D) A reduction of gross profit.

Question 57

A company's gross profit rate is computed by dividing:

A) Net sales by gross profit.
B) Cost of goods sold by gross profit.
C) Gross profit by the cost of goods sold.
D) None of the above.

Question 58

The cost of the transportation of inventory purchased:

A) Are expensed in the current period.
B) Increases profit for the period.
C) Becomes part of the cost of inventory.
D) Reduces the sales price.

Question 59

Which of the following appears in the income statement of a merchandising business, but not in the income statement of a business that renders only services?

A) Interest revenue.
B) Gross profit.
C) Advertising expense.
D) Income tax expense.

Question 60

In a perpetual inventory system, two entries usually are made to record each sales transaction. The purposes of these entries are best described as follows:

A) One entry recognizes the sales revenue, and the other recognizes the cost of goods sold.
B) One entry records the purchase of the goods, and the other records the sale.
C) One entry records the cost of goods sold, and the other reduces the balance in the Inventory account.
D) One entry updates the general ledger, and the other updates the subsidiary ledgers.

Question 61

Parkside Pool reports net sales of $625,000, gross profit of $275,000, and profit for the period of $15,000. The company's cost of goods sold is:

A) $335,000.
B) $350,000.
C) $340,000.
D) $325,000.

Question 62

Washington Warehouse is a small retail business that specializes in the sale of top-of-the-line televisions. This year, the store has begun to carry the Flat TV manufactured by Bass Co. Thus far this year, Washington has recorded the following transactions involving the Flat TV:
5 Jan Purchased 8 Flat TVs at a cost of $14,000
18 Jan Purchased 5 additional Flat TVs at $14,000 each
12 Feb Sold 9 Flat TVs to the Duke Hotel for $153,000



-Refer to the information above. Washington maintains a subsidiary ledger account for each type of TV carried in the store. An examination of the account for the Flat TV model at the end of February would show:

A) 4 units on hand with a total value of $14,000.
B) 4 units on hand with a total value of $56,000.
C) 13 units on hand with a total value of $182,000.
D) The amount that Washington owes to Bass.

Question 63

Michael uses its periodic inventory system and the following information is available:
$\begin{array}{|l|r|}\hline \text { Sales } & \$ 43,400 \\\hline \text { Inventory-Beginning } & 11,200 \\\hline \text { Inventory-Ending } & 9,800 \\\hline \text { Purchases } & 32,200 \\\hline & \\\hline\end{array}$


-What is the gross profit?

A) $9,800
B) $33,600
C) $32,200
D) $43,400

Question 64

VanRoy Supplies reports net sales of $1,750,000, profit for the period of $175,000, and gross profit of $300,000. The company's cost of goods sold is:

A) $1,400,000.
B) $475,000.
C) $1,575,000.
D) $1,450,000.

Question 65

Washington Warehouse is a small retail business that specializes in the sale of top-of-the-line televisions. This year, the store has begun to carry the Flat TV manufactured by Bass Co. Thus far this year, Washington has recorded the following transactions involving the Flat TV:
5 Jan Purchased 8 Flat TVs at a cost of $14,000
18 Jan Purchased 5 additional Flat TVs at $14,000 each
12 Feb Sold 9 Flat TVs to the Duke Hotel for $153,000



-Refer to the information above. If Washington uses a perpetual inventory system, the journal entry to record the purchase on 18 January would include which of the following?

A) A debit to the Purchases account for $70,000.
B) A debit to the Cost of Goods Sold for $70,000
C) A credit to Inventory for $70,000.
D) A debit to Inventory for $70,000.

Question 66

If sales discounts are shown as a separate item in financial statements, they should be shown as a(n):

A) Deduction from accounts receivable.
B) Deduction from gross sales revenue.
C) Operating expense.
D) Current liability.

Question 67

Sutton Supplies reports net sales of $3,750,000, net income of $375,000, and gross profit of $900,000. The company's cost of goods sold is:

A) $1,700,000.
B) $1,900,000.
C) $3,375,000.
D) $2,850,000.

Question 68

The Sales Returns and Allowances account is debited when:

A) Goods is returned to a supplier.
B) Goods is returned by a customer.
C) Payment is made to a supplier within the discount period.
D) An account receivable is collected within the discount period.

Question 69

During the year 2013, the inventory of Debra's Gift Shop decreased by $50,000. If the income statement for the year 2013 reported cost of goods sold of $350,000, purchases during the year must have amounted to:

A) $400,000.
B) $310,000.
C) $300,000.
D) $350,000.

Question 70

Michael uses its periodic inventory system and the following information is available:
$\begin{array}{|l|r|}\hline \text { Sales } & \$ 43,400 \\\hline \text { Inventory-Beginning } & 11,200 \\\hline \text { Inventory-Ending } & 9,800 \\\hline \text { Purchases } & 32,200 \\\hline & \\\hline\end{array}$


-What is the cost of goods sold?

A) $9,800.
B) $33,600.
C) $32,200.
D) $43,400.

Question 71

Bernice Beverages is not satisfied with the quality of goods purchased from Kowloon Supplies. If Kowloon Supplies agrees to settle this matter by granting Bernice Beverages a sales allowance, Bernice Beverages will:

A) Return the entire shipment to Kowloon Supplies and receive a full refund.
B) Return only that portion of the goods that it is unable to sell within the discount period.
C) Keep the goods, but pay a reduced purchase price.
D) Keep the goods and sell it at a reduced sales price.

Question 72

The following information is available: $$\begin{array} { | l | l | } \hline \text { Sales } & \$ 2,850 \\\hline \text { Inventory-year-end } & \$ 1,500 \\\hline \text { Purchases } & \$ 1,950 \\\hline \text { Cost of Goods Sold } & \$ 2,400 \\\hline\end{array}$$ Calculate the gross profit:

A) $0.
B) $1,500.
C) $450.
D) $900

Question 73

Washington Warehouse is a small retail business that specializes in the sale of top-of-the-line televisions. This year, the store has begun to carry the Flat TV manufactured by Bass Co. Thus far this year, Washington has recorded the following transactions involving the Flat TV:
5 Jan Purchased 8 Flat TVs at a cost of $14,000
18 Jan Purchased 5 additional Flat TVs at $14,000 each
12 Feb Sold 9 Flat TVs to the Duke Hotel for $153,000



-Refer to the information above. The gross profit on the Flat TVs as of 12 February is:

A) $112,000.
B) $27,000.
C) $41,000.
D) $153,000.

Question 74

Beacon Food Stores purchased canned goods at an invoice price of $4,000 and terms of 2/10, n/30. Half of the goods had been mislabeled and were returned immediately to the supplier. If Beacon Food pays the remaining amount of the invoice within the discount period, the amount paid should be:

A) $1,920.
B) $1,960.
C) $3,920.
D) $4,000.

Question 75

Emerald Co. uses a perpetual inventory system and records purchases of goods at net cost. The company recently purchased 200 compact discs at an invoice price of $6,000 and terms of 2/10, n/30. Half of these discs had been mislabeled and were returned immediately to the supplier. The journal entry to record payment of this invoice after the discount period has expired will include a:

A) Debit to Inventory for $3,000.
B) Credit to Cash for $3,000.
C) Debit to an expense account for $60.
D) Credit to Cash for $2,940.

Question 76

World of Sound is a small retail business that specializes in the sale of top-of-the-line sound systems. This year, the store has begun to carry the Surround Sound manufactured by Carp Co. Thus far, World of Sound has recorded the following transactions involving the Surround Sound
5 May Purchased 18 units at a unit cost of $2,400
18 May Purchased 15 additional units at $2,550 each
12 June Sold 19 units to the Davies Theater


-If World of Sound uses a perpetual inventory system, the journal entry to record the purchase on 18th May would include which of the following?

A) A debit to the Purchases account for $38,250.
B) A debit to the Cost of Goods Sold for $38,250.
C) A credit to Inventory for $38,250.
D) A debit to Inventory for $38,250.

Question 77

If cost of goods sold is $480,000 and the gross profit rate is 40%, what is the gross profit?

A) $320,000.
B) $288,000.
C) $480,000.
D) $1,200,000.

Question 78

Washington Warehouse is a small retail business that specializes in the sale of top-of-the-line televisions. This year, the store has begun to carry the Flat TV manufactured by Bass Co. Thus far this year, Washington has recorded the following transactions involving the Flat TV:
5 Jan Purchased 8 Flat TVs at a cost of $14,000
18 Jan Purchased 5 additional Flat TVs at $14,000 each
12 Feb Sold 9 Flat TVs to the Duke Hotel for $153,000



-Refer to the information above. If Washington uses a perpetual inventory system, the journal entry to record the sale on 12 February would include all of the following except:

A) A debit to the Cost of Goods Sold for $153,000.
B) A credit to Sales Revenue for $182,000.
C) A credit to Purchases for $153,000.
D) A credit to Inventory for $153,000

Question 79

The basic purpose of offering customers cash discounts such as 2/10, n/30 is to:

A) Increase sales.
B) Reduce net sales.
C) Speed up the collection of accounts receivable.
D) Focus management's attention upon customers that fail to take advantage of all available cash discounts.

Question 80

If Bartner Furniture, Inc purchased inventory at $1,200 list price and the terms were 3/10, n/30, what would be the value associated with the inventory if payment was made after 20 days?

A) $1,176.
B) $1,236
C) $1,164.
D) $1,200.