Question 1

Which of the following statements is true regarding profit margin?
A) Profit margin can be improved by decreasing the gross profit rate and/or controlling operating expenses and other costs
B) Profit margin does not vary across industries.
C) Discount stores with high merchandise turnover generally have higher profit margins.
D) If the profit margin has a higher value, this suggests favorable return on each dollar of sales.

Accepted Answer

If the profit margin has a higher value, it suggests a favorable return on each dollar of sales. Profit margin is calculated as net income divided by total revenue and represents the percentage of revenue that a company keeps as profit after accounting for all expenses. Option A is incorrect because decreasing the gross profit rate would decrease the profit margin. Option B is incorrect because profit margin varies widely across industries. Option C is also incorrect because merchandise turnover does not necessarily correlate with profit margin.

Question 2

Haverty Industries increased its gross profit rate from 18.4% in 2013 to 23.7% in 2014. Which of the following would be a possible explanation for this change?
A) Haverty's global sourcing efforts at the beginning of 2014 resulted in a lower cost of merchandise sold.
B) Haverty's new profit lines with lower margins in 2014 became a larger component of their sales.
C) Haverty increased its product markdowns in 2014.
D) Haverty's average margin between the selling price and the inventory cost decreased over this two-year period.

Accepted Answer

A lower cost of merchandise sold would increase the gross profit rate, as gross profit is calculated as sales minus the cost of goods sold.

Question 3

Andrea's Fashions sold merchandise for $95,000 cash during the month of July. Returns that month totaled $2,000. If the company's gross profit rate is 40%, Andrea's will report monthly net sales revenue and cost of goods sold of
A) $95,000 and $57,000.
B) $93,000 and $37,200.
C) $93,000 and $55,800.
D) $95,000 and $55,800.

Accepted Answer

Net sales revenue is calculated as total sales minus returns, which is $95,000 - $2,000 = $93,000. The cost of goods sold is calculated by subtracting the gross profit from net sales. With a gross profit rate of 40%, the gross profit is 40% of $93,000, which is $37,200. Therefore, the cost of goods sold is $93,000 - $37,200 = $55,800.

Question 4

During the year, Sarah's Pet Shop's merchandise inventory decreased by $40,000. If the company's cost of goods sold for the year was $600,000, purchases would have been
A) $640,000.
B) $560,000.
C) $520,000.
D) Unable to determine.

Accepted Answer

The formula for cost of goods sold is: Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold. Since the inventory decreased by $40,000, purchases would be $600,000 - (-$40,000) = $560,000.

Question 5

If Hostell Company has net sales of $500,000 and cost of goods sold of $325,000, Hostell's gross profit rate is
A) 50%.
B) 35%.
C) 54%.
D) 100%.

Accepted Answer

Gross profit rate is calculated as (Net Sales - Cost of Goods Sold) / Net Sales. Here, it is ($500,000 - $325,000) / $500,000 = $175,000 / $500,000 = 0.35 or 35%.

Question 6

A company shows the following balances: $$\begin{array} { l r } 
\text { Sales Revenue } & \$ 1,000,000 \
\text { Sales Returns and Allowances } & 175,000 \
\text { Sales Discounts } & 25,000 \
\text { Cost of Goods Sold } & 560,000
\end{array}$$ What is the gross profit rate?
A) 56%
B) 70%
C) 44%
D) 30%

Accepted Answer

The answer of A company shows the following balances: \[\begin{array}...

Question 7

The amount of cost of good available for sale during the year depends on the amounts of
A) beginning merchandise inventory and cost of goods sold.
B) beginning merchandise inventory, net cost of purchases, and ending merchandise inventory.
C) beginning merchandise inventory, cost of goods sold, and ending merchandise inventory.
D) beginning merchandise inventory and net costs of purchases.

Accepted Answer

The cost of goods available for sale is calculated by adding the beginning merchandise inventory to the net cost of purchases made during the year.

Question 8

Sampson Company's accounting records show the following at the year ending on December 31, 2014. $$\begin{array} { l r } 
\text { Purchase Discounts } & \$ , 600 \
\text { Freight-In } & 7,800 \
\text { Purchases } & 350,010 \
\text { Beginning Inventory } & 23,500 \
\text { Ending Inventory } & 28,800 \
\text { Purchase Returns and Allowances } & 6,400
\end{array}$$ Using the periodic system, the cost of goods sold is
A) $351,110.
B) $348,910.
C) $340,510.
D) $359,510.

Accepted Answer

The cost of goods sold (COGS) is calculated as: Beginning Inventory + Net Purchases - Ending Inventory. Net Purchases = Purchases + Freight-In - Purchase Returns and Allowances - Purchase Discounts. So, COGS = $23,500 + ($350,010 + $7,800 - $6,400 - $600) - $28,800 = $340,510.

Question 9

Which of the following is not considered in computing net cost of purchases?
A) Purchases returns and allowances
B) Purchases
C) Freight paid on purchased goods
D) Freight paid on goods shipped to customers

Accepted Answer

Freight paid on goods shipped to customers is not considered in computing net cost of purchases. The net cost of purchases is calculated by subtracting any purchase returns and allowances and any freight paid on purchased goods from the total purchases made during a period.

Question 10

A company shows the following balances: $$\begin{array} { l r } 
\text { Sales Revenue } & \$ 800,000 \
\text { Sales Returns and Allowances } & 75,000 \
\text { Sales Discounts } & 25,000 \
\text { Cost of Goods Sold } & 420,000
\end{array}$$ What is the gross profit rate?
A) 53%
B) 60%
C) 40%
D) 47%

Accepted Answer

The answer of A company shows the following balances: \[\begin{array}...

Question 11

All of the following statements are true regarding the periodic inventory system except
A) Under the periodic inventory system, the balance of cost of goods sold is calculated at the end of the period.
B) Under the periodic inventory system, the balance in ending inventory is calculated at the end of the period.
C) Using the periodic inventory system affects the balance sheet contents differently than when the perpetual system is used.
D) Under the periodic system, a company uses separate accounts to record freight costs, returns, and discounts.

Accepted Answer

The answer of All of the following statements are true...

Question 12

What is a difference between the profit margin and the gross profit rate?
A) None, these are interchangeable terms.
B) The gross profit rate is computed by dividing net sales by gross profit and the profit margin is computed by dividing net sales by net income.
C) The gross profit rate will normally be higher than the profit margin ratio.
D) A profit margin of 7% means that 7 cents of each net sales dollar ends up in net income and a gross profit rate of 7% means that the cost of the goods were 7% of the selling price.

Accepted Answer

The answer of What is a difference between the profit...

Question 13

Bolton Company's gross profit rate last year was 32.0% and this year it is 28.4%. Which of the following would not be a possible cause for this decline in the gross profit rate?
A) Bolton must pay higher prices to suppliers without passing these costs on to customers.
B) Bolton may have begun selling products with a higher markup.
C) Bolton's average margin between selling price and inventory cost is decreasing.
D) Bolton may have seen a decline in total gross profit while maintaining net sales.

Accepted Answer

If Bolton began selling products with a higher markup, this would actually increase the gross profit rate, not decrease it. Therefore, option B would not be a possible cause for the decline in the gross profit rate. Conversely, options A, C, and D could all potentially lead to a decline in the gross profit rate.

Question 14

The gross profit rate is computed by dividing gross profit by
A) sales revenue.
B) cost of goods sold.
C) net sales.
D) operating expenses.

Accepted Answer

The answer of The gross profit rate is computed by...

Question 15

If Indiana Ink, Inc. has net sales of $400,000 and cost of goods sold of $300,000, Indiana Ink's gross profit rate is
A) 75%.
B) 33%
C) 25%.
D) 100%.

Accepted Answer

Gross profit rate is calculated as (Net Sales - Cost of Goods Sold) / Net Sales. Here, it is ($400,000 - $300,000) / $400,000 = $100,000 / $400,000 = 0.25 or 25%.

Question 16

Sampson Company's accounting records show the following for the year ending on December 31, 2014. $$\begin{array} { l r } 
\text { Purchase Discounts } & \$ , 600 \
\text { Freight-In } & 7,800 \
\text { Purchases } & 350,010 \
\text { Beginning Inventory } & 23,500 \
\text { Ending Inventory } & 28,800 \
\text { Purchase Returns and Allowances } & 6,400
\end{array}$$ Using the periodic system, the cost of goods purchased is
A) $330,210.
B) $354,210.
C) $358,610.
D) $345,810.

Accepted Answer

The cost of goods purchased is calculated as Purchases + Freight-In - Purchase Discounts - Purchase Returns and Allowances = $350,010 + $7,800 - $600 - $6,400 = $350,810.

Question 17

Assume Grammar Company uses the periodic inventory system and has a beginning inventory balance of $5,000, purchases of $75,000, and sales of $125,000. Grammar closes its records once a year on December 31. In the accounting records, the inventory account would be expected to have a balance on December 31 prior to adjusting and closing entries that was
A) equal to $5,000.
B) more than $5,000.
C) less than $5,000.
D) indeterminate.

Accepted Answer

The answer of Assume Grammar Company uses the periodic inventory...

Question 18

Betty's Fabrics sold merchandise for $114,000 cash during the month of July. Returns that month totaled $2,400. If the company's gross profit rate is 40%, Betty will report monthly net sales revenue and cost of goods sold of
A) $114,000 and $68,400.
B) $111,600 and $44,640.
C) $111,600 and $66,960.
D) $114,000 and $66,960.

Accepted Answer

Net sales revenue is calculated as total sales minus returns, which is $114,000 - $2,400 = $111,600. The cost of goods sold is calculated as net sales revenue multiplied by (1 - gross profit rate), which is $111,600 * (1 - 0.40) = $66,960.

Question 19

Which of the following provides the best rationale regarding analysts' views about the information value of the gross profit rate versus the gross profit amount?
A) The gross profit amount is more informative than the gross profit rate because it is a dollar amount rather than a ratio.
B) The gross profit amount is less informative than the gross profit rate because the latter presents a meaningful relationship between gross profit and net sales.
C) The gross profit amount is more informative than the gross profit rate because the gross profit rate is only used to describe a few industries while the gross profit amount is universally used.
D) The gross profit amount is more informative than the gross profit rate because high volume operations are able to calculate the gross profit rate but not the gross profit amount.

Accepted Answer

Analysts prefer the gross profit rate because it provides a more meaningful relationship between gross profit and net sales, allowing for easier comparison between companies and industries. The gross profit amount alone can be misleading without context, such as the level of sales generated.

Question 20

A decline in a company's gross profit could be caused by all of the following except
A) selling products with a lower markup.
B) clearance of discontinued inventory.
C) paying lower prices to its suppliers.
D) increasing competition resulting in a lower selling price.

Accepted Answer

Paying lower prices to its suppliers would actually increase the company's gross profit, as it would lower the cost of goods sold and increase the gross margin. The other choices would all lead to a decrease in gross profit.

Quiz 5: Merchandising Operations and the Multiple-Step Income Statement

Which of the following statements is true regarding profit margin?

Haverty Industries increased its gross profit rate from 18.4% in 2013 to 23.7% in 2014. Which of the following would be a possible explanation for this change?

Andrea's Fashions sold merchandise for $95,000 cash during the month of July. Returns that month totaled $2,000. If the company's gross profit rate is 40%, Andrea's will report monthly net sales revenue and cost of goods sold of

During the year, Sarah's Pet Shop's merchandise inventory decreased by $40,000. If the company's cost of goods sold for the year was $600,000, purchases would have been

If Hostell Company has net sales of $500,000 and cost of goods sold of $325,000, Hostell's gross profit rate is

A company shows the following balances: $\begin{array} { l r } \text { Sales Revenue } & \$ 1,000,000 \\\text { Sales Returns and Allowances } & 175,000 \\\text { Sales Discounts } & 25,000 \\\text { Cost of Goods Sold } & 560,000\end{array}$ What is the gross profit rate?

The amount of cost of good available for sale during the year depends on the amounts of

Which of the following is not considered in computing net cost of purchases?

A company shows the following balances: $\begin{array} { l r } \text { Sales Revenue } & \$ 800,000 \\\text { Sales Returns and Allowances } & 75,000 \\\text { Sales Discounts } & 25,000 \\\text { Cost of Goods Sold } & 420,000\end{array}$ What is the gross profit rate?

All of the following statements are true regarding the periodic inventory system except

What is a difference between the profit margin and the gross profit rate?

Bolton Company's gross profit rate last year was 32.0% and this year it is 28.4%. Which of the following would not be a possible cause for this decline in the gross profit rate?

The gross profit rate is computed by dividing gross profit by

If Indiana Ink, Inc. has net sales of $400,000 and cost of goods sold of $300,000, Indiana Ink's gross profit rate is

Betty's Fabrics sold merchandise for $114,000 cash during the month of July. Returns that month totaled $2,400. If the company's gross profit rate is 40%, Betty will report monthly net sales revenue and cost of goods sold of

Which of the following provides the best rationale regarding analysts' views about the information value of the gross profit rate versus the gross profit amount?

A decline in a company's gross profit could be caused by all of the following except