Question 1

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

Accepted Answer

Ending inventory and cost of goods sold, when added together, equal the cost of goods available for sale, not the gross profit. Gross profit is calculated by subtracting the cost of goods sold from net sales.

Question 2

Which account listed below is classified as a contra-revenue account?
A) Cost of Goods Sold.
B) Gross profit.
C) Sales Discounts.
D) Purchases.

Accepted Answer

A contra-revenue account refers to a deduction from revenue. Sales Discounts is a contra-revenue account, as it represents discounts given to customers on sales. The other listed accounts are not contra-revenue accounts. Cost of Goods Sold is an expense account that represents the cost of producing goods sold, Gross profit is a figure calculated by subtracting Cost of Goods Sold from Revenue, and Purchases is an asset account that represents the cost of purchasing goods for sale.

Question 3

Which of the following companies would be more likely to use a periodic inventory system? A) IBM. B) 1^st Bank of New York. C) Sears. D) A newspaper stand.

Accepted Answer

A newspaper stand is more likely to use a periodic inventory system as it has a low volume of inventory and does not require constant tracking of its inventory levels.

Question 4

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.

Accepted Answer

A food store is likely to have the shortest operating cycle as it sells perishable goods that have a short shelf life and require constant restocking, leading to a quicker turnover of inventory.

Question 5

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

Accepted Answer

In a periodic inventory system, a physical count of the merchandise on hand is necessary to determine the ending inventory, as there are no real-time accounting records to track inventory levels.

Question 6

Operating income 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.

Accepted Answer

Operating income is calculated by subtracting all expenses incurred in operating the business (including cost of sales) from net sales. Therefore, option B is the correct answer. Option A is incorrect because it only deducts cost of sales from net sales, while option C is incorrect because it mentions liquidity instead of profitability. Option D is incorrect because operating income is not equivalent to net sales.

Question 7

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

Accepted Answer

Olympic should record this transaction by debiting Accounts Payable and crediting Inventory (or Purchases Returns and Allowances if using a periodic inventory system), not Sales Returns and Allowances, as the transaction affects purchases, not sales.

Question 8

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.

Accepted Answer

The Cost of Goods Sold account is closed by debiting the Income Summary account and crediting the Cost of Goods Sold account. This transfers the expense of goods sold during the period to the Income Summary account, which is then used to determine the net income or loss for the period.

Question 9

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

Accepted Answer

This statement is the essence of the equation used in the calculation of cost of goods sold: Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold. Rearranging the equation, we get: Beginning Inventory + Purchases = Ending Inventory + Cost of Goods Sold. Therefore, Cost of Goods Sold + Ending Inventory = Cost of Goods Available for Sale.

Question 10

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

Accepted Answer

The answer of When using a perpetual inventory system, the...

Question 11

Sales discounts and allowances:
A) When properly recorded will reduce net profit.
B) When properly recorded will increase net profit.
C) Will not affect net profit.
D) Are always immaterial and need not be recorded.

Accepted Answer

Sales discounts and allowances will reduce the gross amount of sales and therefore, reduce net profit.

Question 12

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

Accepted Answer

In a perpetual inventory system, Inventory and Cost of Goods Sold accounts are updated continuously as inventory items are bought and sold, and adjustments are made for things such as inventory shrinkage or spoilage. This means that the accounts are kept current throughout the accounting period.

Question 13

Which of the following should not be classified as inventory in the balance sheet 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.

Accepted Answer

"Company cars" provided to specific company executives for their personal use should not be classified as inventory as they are not intended for sale to customers. The other options (A, B, and C) are all examples of inventory for a dealership.

Question 14

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

Accepted Answer

Under the perpetual inventory system, two entries are required when goods are sold - one to record the revenue and the other to reduce the Inventory account.

Question 15

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.

Accepted Answer

In a periodic inventory system, the cost of goods sold is determined by calculating the beginning inventory, adding any purchases made during the period, and then subtracting the ending inventory to arrive at the cost of goods sold.

Question 16

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

Accepted Answer

A perpetual inventory system is suitable for companies that have high volume and many varieties of inventory items. It allows for real-time tracking of inventory levels and is more efficient in managing the inventory turnover of a wide range of products.

Question 17

Which of the following factors would suggest the use of a perpetual inventory system?
A) A small company.
B) A high volume of many different, low-cost items.
C) A desire to minimize record-keeping requirements.
D) Only annual reporting is required.

Accepted Answer

A perpetual inventory system is best suited for businesses that deal with a high volume of many different, low-cost items. This is because it enables continuous tracking of inventory levels, which is necessary for maintaining optimal stock levels and minimizing the risk of stockouts. A small company or a desire to minimize record-keeping requirements does not necessarily require the use of a perpetual system. Similarly, the requirement for only annual reporting does not provide enough information to determine the most suitable inventory system for the business.

Question 18

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

Accepted Answer

The average gross profit margin is calculated by dividing gross profit by revenue, and represents the percentage of revenue that remains after deducting the cost of goods sold. It is commonly used as a measure of profitability, providing insight into how efficiently a company is generating profits from its operations.

Question 19

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.

Accepted Answer

A perpetual inventory system is beneficial for businesses with a high volume of sales transactions or with items in inventory with high per unit costs. It provides real-time information about inventory levels and can help prevent stockouts and overstocking. However, a manual accounting system would make it difficult and time-consuming to continuously update inventory records, making a perpetual inventory system less feasible. A low volume of sales transactions and a computerized accounting system would still benefit from a perpetual inventory system because it can provide accurate and timely inventory information. Management wanting information about specific product quantities is also not a deterrent for choosing a perpetual inventory system.

Question 20

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.

Accepted Answer

Small merchandising companies that do not use a perpetual inventory system may choose to use a periodic inventory system. With this method, the company only updates its inventory records periodically, usually at the end of each reporting period, such as monthly or quarterly, by taking a physical count of the inventory on hand. This is a simpler and less expensive method compared to a perpetual inventory system, which requires more record-keeping and tracking of inventory on an ongoing basis.

Quiz 6: Merchandising Activities

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

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

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

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

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

Operating income is:

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

The Cost of Goods Sold account is closed by:

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

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

Sales discounts and allowances:

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

Which of the following should not be classified as inventory in the balance sheet of a large automobile dealership?

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

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.

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

Which of the following factors would suggest the use of a perpetual inventory system?

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

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

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