Deck 5: Accounting for Merchandising Operations

Question 1

Assets tied up in inventory are not productive assets.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

A company had sales and cost of goods sold of $350,000 and $200,000, respectively. Its gross profit equals $150,000.

Answer 3

True

Question 4

A company had net sales and cost of goods of $545,000 and $345,000, respectively. Its gross margin equals $890,000.

Question 5

Cost of goods sold is also called cost of sales.

Question 6

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

Question 7

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

Question 8

Quick assets include cash, inventory, and current receivables.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

Gross profit is also called gross margin.

Question 14

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

Question 15

A company had a gross profit of $300,000 based on sales of $400,000. Its cost of goods sold equals $700,000.

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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

Question 23

Credit terms of 2/10, n/30 imply that the seller offers 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 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

Purchase discounts are the same as trade discounts.

Question 31

A buyer did not take advantage of a supplier's credit terms of 2/10, n/30, and 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.

Question 32

Credit terms for a purchase include the amounts and timing of payments from a buyer to a seller.

Question 33

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

Question 34

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 35

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 36

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

Question 37

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 38

A buyer records the costs of shipping goods in a Delivery Expense, or transportation-out account when the buyer is responsible for these costs.

Question 39

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%.

Question 40

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

Question 41

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.

Question 42

Inventory is usually less liquid than accounts receivable because inventory must first be sold before cash can be received.

Question 43

A merchandiser's classified balance sheet reports merchandise inventory as a current asset.

Question 44

Sales discounts is a contra revenue account, meaning that the Sales Discounts account is added to the Sales account when computing a company's net sales.

Question 45

A perpetual inventory system is able to directly measure and monitor inventory shrinkage and there is no need for a physical count of inventory.

Question 46

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

Question 47

Under a periodic inventory system, purchases, purchases returns and allowances, purchase discounts, and transportation in transactions are recorded in separate temporary accounts

Question 48

Sales Discounts and Sales Returns and Allowances are credited to close the accounts during the closing process.

Question 49

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

Question 50

A credit memorandum from a seller informs a buyer of the seller's credit to its Accounts Payable account arising from a sales return or allowance.

Question 51

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

Question 52

Cost of Goods Sold is debited to close the account during the closing process.

Question 53

Selling expenses support a company's overall operations and include expenses related to accounting, human resource management, and financial management.

Question 54

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

Question 55

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

Question 56

FOB shipping point (or FOB factory) implies that ownership of goods transfers to the buyer at the buyer's place of business.

Question 57

Because sellers assume that their customers will pay within the discount period, the seller usually records the discount at the time of the sale.

Question 58

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 59

Sales of $350,000 and net sales of $323,000 could reflect sales discounts of $27,000.

Question 60

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

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

The following statements regarding merchandise inventory are except:

A) Merchandise inventory is reported on the balance sheet as a current asset.
B) Merchandise inventory refers to products a company owns and intends to sell.
C) Merchandise inventory can include the cost of shipping the goods to the store and making them ready for sale.
D) Merchandise inventory does not appear on the balance sheet of a service company.
E) Merchandise inventory purchases are not considered part of the operating cycle for a business.

Question 63

Delivery expense is reported as part of general and administrative expense in the seller's income statement.

Question 64

The following statements are regarding the operating cycle of a merchandising company except:

A) The operating cycle begins with the purchase of merchandise.
B) The operating cycle is shortened by credit sales.
C) The operating cycle ends with the collection of cash from the sale of merchandise.
D) The operating cycle can vary in length among different merchandising companies.
E) The operating cycle sometimes involves accounts receivable.

Question 65

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

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

Question 66

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 67

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 68

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 69

A company had sales of $695,000 and 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 70

Beginning inventory plus net 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 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 72

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

Question 73

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

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

Question 74

The following statements regarding gross profit are except:

A) Gross profit is also called gross margin.
B) Gross profit less other operating expenses equals income from operations.
C) Gross profit is not calculated on the income statement.
D) Gross profit must cover all operating expenses to yield a return for the owner of the business.
E) Gross profit equals net sales less cost of goods sold.

Question 75

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) Measures return on assets.

Question 76

Under both the periodic and perpetual inventory systems, the temporary account Purchases Returns and Allowances is used to accumulate the cost of all returns and allowances for a period.

Question 77

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 78

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 79

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 80

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.