Question 1

Under the periodic inventory system,Cost of goods sold must be computed on the income statement because it is not updated for purchases,sales,and other transactions during the accounting period.

Accepted Answer

Under the periodic inventory system, cost of goods sold is not updated for purchases, sales, and other transactions during the accounting period. Therefore, it must be computed on the income statement at the end of the period.

Question 2

The perpetual inventory system relies on a physical count of merchandise for its balance sheet amount.

Accepted Answer

The perpetual inventory system relies on keeping a continuous record of inventory balances, rather than relying on physical counts. This allows for more accurate and timely tracking of inventory levels and costs.

Question 3

Businesses can be classified as service companies,wholesalers,or retailers.

Accepted Answer

This statement is true. Businesses can indeed be classified as service companies, wholesalers, or retailers.

Question 4

An advantage of using the periodic inventory system is that it requires less recordkeeping than the perpetual inventory system.

Accepted Answer

In a periodic inventory system, inventory levels are only tracked at certain points in time, such as at the end of each month or quarter. This means that less recordkeeping is required compared to a perpetual inventory system where inventory levels are continuously monitored and updated in real-time.

Question 5

A company with a current ratio of 1.0 is considered more liquid than one with a current ratio of 2.0.

Accepted Answer

A higher current ratio indicates that a company has more current assets relative to its current liabilities, which means it has a greater ability to meet its short-term obligations. Therefore, a company with a current ratio of 2.0 is considered more liquid than one with a current ratio of 1.0.

Question 6

Computerization has led to a large increase in the use of the periodic inventory system.

Accepted Answer

Computerization has led to a large increase in the use of the perpetual inventory system, as it allows for real-time tracking of inventory levels.

Question 7

The operating cycle involves the purchase and sale of merchandise inventory as well as the subsequent collection of cash from credit sales.

Accepted Answer

The operating cycle typically includes the purchase of inventory, followed by the sale of that inventory, and then the collection of cash from customers who bought on credit. It is a key measure of how quickly a business can convert its inventory and accounts receivable back into cash.

Question 8

When the terms of sale include a sales discount,it usually is advisable for the buyer to pay within the discount period.

Accepted Answer

If the terms of sale include a sales discount, it means that the seller is offering a discount for paying within a certain period of time. Therefore, it is advisable for the buyer to pay within the discount period to take advantage of the discount and save money. If the buyer pays after the discount period, they will not be eligible for the discount and will have to pay the full amount.

Question 9

Cash flow cannot be managed,but it is a natural component of business operations.

Accepted Answer

Cash flow can indeed be managed through various strategies such as improving collection times, controlling expenses, negotiating better terms with suppliers, and acquiring additional financing. While cash flow is a natural component of business operations, it is not something that should be left to chance or simply accepted as an inevitable outcome. Effective cash flow management is essential for the long-term success of any business.

Question 10

Taking a physical inventory refers to making a count of all merchandise on hand at a particular time.

Accepted Answer

Taking a physical inventory involves physically counting all the merchandise that a business has on hand at a specific time to determine the accurate inventory levels.

Question 11

Computerization has helped to make taking physical inventory a much easier process in both the periodic and perpetual inventory systems.

Accepted Answer

With the help of computerization, physical inventory can be counted and tracked more easily, accurately and efficiently in both periodic and perpetual inventory systems. This is because computerized systems can automatically update inventory levels whenever a transaction is made, whether that's a sale or a new shipment of goods. Additionally, they can generate real-time reports that show the inventory levels for each item in stock, making it easier for businesses to monitor their inventory and make informed decisions about ordering, restocking, and other related tasks.

Question 12

Liquidity management involves planning a business's cash receipts and cash payments.

Accepted Answer

Liquidity management is the process of forecasting, monitoring, and controlling a business's cash inflows and outflows to ensure that it has enough funds readily available to meet its financial obligations. This involves managing the timing and size of cash receipts and payments to maintain sufficient liquidity.

Question 13

When a U.S.company does business with a British company and payment is in U.S.dollars,an exchange gain or loss occurs if the exchange rate between dollars and pounds changes between the date of sale and the date of payment.

Accepted Answer

An exchange gain or loss occurs when the payment is in a foreign currency and the exchange rate changes, not when the payment is in the company's own currency (U.S. dollars in this case).

Question 14

A company would be more likely to know the amount of inventory on hand if it used the perpetual inventory system rather than the periodic inventory system.

Accepted Answer

The perpetual inventory system continuously updates inventory balances after each transaction, providing real-time information on the amount of inventory on hand. In contrast, the periodic system requires a physical count at the end of a certain period to determine the amount of inventory on hand, which may not accurately reflect the current inventory levels during the period.

Question 15

When the periodic inventory system is used,a physical inventory does not need to be taken at the end of the fiscal year.

Accepted Answer

In the periodic inventory system, a physical inventory must be taken to determine the ending inventory and cost of goods sold at the end of the fiscal year or accounting period.

Question 16

Profitability means having enough cash on hand to pay bills when they become due.

Accepted Answer

Profitability refers to the ability of a business to generate profits and positive financial outcomes over time, not just having enough cash on hand to pay bills. While having sufficient cash flow is important for financial stability, it is not the same as profitability.

Question 17

Under the periodic inventory system,cost of goods sold is treated as an account.

Accepted Answer

Under the periodic inventory system, cost of goods sold is not treated as an account. Instead, it is calculated at the end of the accounting period by deducting the ending inventory from the total cost of goods available for sale. This cost of goods sold figure is then reported on the income statement.

Question 18

A large discount chain,like Wal-Mart or Target,most likely would use the perpetual inventory system to maintain control of its inventory.

Accepted Answer

Large discount chains like Wal-Mart and Target have a high volume of sales and inventory turnover, making it more efficient to use a perpetual inventory system to keep track of inventory levels in real-time. A perpetual inventory system continuously updates inventory levels as sales and purchases are made, allowing for better inventory control and management.

Question 19

The periodic inventory system provides an up-to-date amount of inventory on hand.

Accepted Answer

The periodic inventory system only updates inventory levels periodically (such as at the end of the month or quarter) and does not provide an up-to-date amount of inventory on hand.

Question 20

A retail operation would still have to take a physical inventory even if it uses a perpetual inventory system.

Accepted Answer

A perpetual inventory system keeps track of inventory levels in real-time using software and hardware, but it is not foolproof. Physical counting is still necessary to confirm that the inventory levels in the system match the actual inventory on hand. It also helps to identify any lost or stolen items, damaged merchandise, or misplaced products. Therefore, retailers rely on both perpetual inventory and periodic physical counts to manage their inventory levels efficiently.

Quiz 6: The Operating Cycle and Merchandising Operations