Question 1

Gross margin is equal to the amount of change (increase or decrease)in Merchandise Inventory during a period.

Accepted Answer

Gross margin is equal to net sales minus cost of goods sold.

Question 2

Selling costs are recognized as expenses in the period when goods are sold.

Accepted Answer

Selling costs are recognized as expenses in the period in which they are incurred.

Question 3

A company that purchases merchandise treats a cash discount as a reduction to the cost of merchandise inventory.

Accepted Answer

A purchase discount decreases the purchaser's assets (merchandise inventory)and liabilities (accounts payable).

Question 4

JJ Co.purchased on account merchandise with a list price of $10,000.Payment terms were 1/15,n/45.If collection occurs before the discount expires,what is the effect of the sales discount on the balance sheet?

Accepted Answer

A purchase discount reduces the cost of the inventory and the associated account payable on the balance sheet.

Question 5

The beginning inventory plus cost of goods sold equals the cost of goods available for sale during the period.

Accepted Answer

Beginning inventory + Purchases- Purchase returns and allowances - Purchase discounts + Transportation-in = Cost of goods available for sale
Cost of goods available for sale- Ending inventory = Cost of goods sold
Thus:
Cost of goods available for sale = Ending merchandise inventory + cost of goods sold

Question 6

With a perpetual inventory system,the cost of merchandise inventory is recognized at the time of purchase.

Accepted Answer

In a perpetual system,the cost of merchandise inventory is recognized as cost of goods sold when inventory is sold,not when it is purchased.

Question 7

Costs charged to the Merchandise Inventory account are product costs.

Accepted Answer

Product costs are charged to the merchandise inventory account and expensed when goods are sold.

Question 8

Sam Company reported the following amounts on its income statement:

Based on the information provided,what was the amount of sales reported on the income statement?

Accepted Answer

Gross margin = Sales - Cost of goods sold
$200,000 = X - $400,000
X = $400,000 + $200,000
Sales = $600,000

Question 9

Wholesale companies sell goods primarily to other businesses.

Accepted Answer

Wholesale companies primarily sell goods to other businesses,while retail companies primarily sell goods to the public.

Question 10

The term FOB shipping point indicates that the seller is responsible for freight costs.

Accepted Answer

If goods are delivered FOB shipping point,the buyer,not the seller,is responsible for freight costs.

Question 11

A perpetual inventory system updates the Merchandise Inventory account for all purchases of inventory,as well as returns of inventory to suppliers.

Accepted Answer

In a perpetual system,inventory is updated for purchases,sales,and returns of inventory.

Question 12

Net income is not affected by a purchase of merchandise.

Accepted Answer

Product costs are recognized as expenses when goods are sold,not when they are purchased.

Question 13

In a perpetual inventory system,a purchase allowance is treated as a decrease in expenses by the company that purchased the goods.

Accepted Answer

A purchase allowance decreases assets (merchandise inventory)and liabilities (accounts payable).A purchase allowance does not directly affect the income statement.

Question 14

Jake Co.purchased on account merchandise with a list price of $90,000.Payment terms were 1/15,n/45.If collection occurs within 18 days,what discount will Jake Co.recognize on the merchandise?

Accepted Answer

The terms 1/15,n/45 indicate that the seller will allow a 1 percent discount if the purchaser pays cash within 15 days from the date of purchase.The amount not paid within the first 15 days is due at the end of 45 days from the date of purchase.In this case,Jake Co.did not meet the 15-day requirement.It took Jake Co.18 days to pay which means Jake does not get the 1 percent discount.

Question 15

Merchandising businesses include retail companies and manufacturing companies.

Accepted Answer

Retailers and wholesalers,but not manufacturers,are merchandising companies.

Question 16

Glen Company uses the perpetual inventory system. The company entered into the following events:
1) Purchased merchandise inventory that cost $10,000 under terms of 2/10, n/30.
2) Made payment to the supplier within the discount period.
3) Sold all of the goods to customers on account for $22,000.

What is Glen's cost of goods sold as a result of these three transactions?

Accepted Answer

Cost of goods sold = Purchases - Purchase discount
Cost of goods sold = $10,000 - ($10,000 × 2%)
Cost of goods sold = $9,800

Question 17

Costs of selling inventory are product costs.

Accepted Answer

Selling costs are period costs.

Question 18

With a perpetual inventory system,assets and stockholders' equity increase by the amount of the gross margin when inventory is sold.(Consider the effects of both parts of this event. )

Accepted Answer

When a perpetual inventory system is used,recording the sale increases assets (cash or accounts receivable)and stockholders' equity (retained earnings)by the selling price of the inventory.Sales revenue and net income increase by the same amount.Recording the cost of the merchandise sold decreases assets (merchandise inventory)and stockholders' equity (retained earnings)by the cost of the inventory.The expense (cost of goods sold)increases and net income decreases by that same amount.The net effect on assets and stockholders' equity is an increase to each by the amount of the gross margin (or the selling price minus the cost of the inventory sold).

Question 19

Melbourne Company sold merchandise that it had purchased with a list price of $3,300.The credit terms were of 2/10,n/30.Assuming that Melbourne paid for the merchandise during the discount period,the cost of goods sold for this transaction would be $2,970.

Accepted Answer

Purchase discount = $3,300 × 0.02 = $66
Cost of goods sold = List price of purchase - Purchase discount
Cost of goods sold = $3,300 - $66 = $3,234

Question 20

A company using a perpetual inventory system treats transportation-out as an operating expense.

Accepted Answer

Transportation-out is reported on the income statement as an operating expense in the section below gross margin.

Quiz 4: Accounting for Merchandising Businesses