Question 1

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 throughout the accounting period as each sale and purchase transaction occurs. This allows for real-time visibility into inventory levels and cost of goods sold, unlike periodic inventory systems where adjustments are made only at the end of a reporting period.

Question 2

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

Accepted Answer

The average gross profit margin is calculated by dividing the gross profit by total revenue. It indicates how much profit a company is making on its sales after deducting the cost of goods sold. It is a relative measure of profitability as it measures the profitability in relation to revenue.

Question 3

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

Accepted Answer

Sales Discounts is a contra-revenue account as it represents the reduction in revenue due to discounts offered to customers.

Question 4

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 5

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

Accepted Answer

A food store is likely to have a very short operating cycle because it deals with perishable goods that need to be sold quickly. Other businesses such as a department store, art store, or car store may have longer operating cycles as their inventory may not be as time-sensitive.

Question 6

Operating income is:

Accepted Answer

Operating income is calculated by deducting all expenses incurred in operating the business from net sales, which includes cost of sales and all other operating expenses. This gives a measure of profitability that is specific to the core operations of the business. Option A is incorrect because it does not include all operating expenses, while option C is incorrect because it refers to liquidity, which is a different financial metric altogether. Option D is incorrect because net sales and operating income are two separate financial metrics.

Question 7

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 sale and another to record the reduction of inventory.

Question 8

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

Accepted Answer

Small merchandising companies that do not use perpetual inventory system may elect to use periodic inventory system, where they take a physical count of inventory at the end of the accounting period and adjust the inventory account accordingly. This method is simpler and less expensive than perpetual inventory system.

Question 9

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 10

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

Accepted Answer

A perpetual inventory system requires frequent updates and tracking of inventory levels, which may be difficult and time-consuming with a high volume of sales transactions and a manual accounting system. The other options given could all be reasons why a manufacturer would choose a perpetual inventory system.

Question 11

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 allows for real-time tracking of inventory levels and is more suited for a large company with multiple low-cost items that need to be constantly monitored and restocked.

Question 12

The Cost of Goods Sold account is closed by:

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 13

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

Accepted Answer

"Company cars" provided to specific company executives for their personal use should not be classified as inventory in the balance sheet of a large automobile dealership as they are not intended for sale. A, B, and C are all items that are intended for sale or use in the servicing of customers' cars and should be classified as inventory.

Question 14

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

Accepted Answer

A periodic inventory system is a method of inventory accounting in which the inventory balance is updated periodically, typically at the end of an accounting period. This method is commonly used by small businesses, such as a newspaper stand, because they typically have a lower volume of inventory and it is easier to manually count items. The other companies listed likely have a higher volume of inventory and may prefer a perpetual inventory system to maintain accurate inventory counts in real-time.

Question 15

Sales discounts and allowances:

Accepted Answer

Sales discounts and allowances are considered contra-revenue accounts, which means they reduce total revenue. Since net profit is calculated after deducting all expenses from revenue, any reduction in revenue will ultimately reduce net profit. Therefore, when properly recorded, sales discounts and allowances will reduce net profit.

Question 16

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

This is the correct formula for determining the cost of goods sold in a periodic inventory system.

Question 17

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, the ending inventory is determined by conducting a physical count of the merchandise on hand, and the accounting records are adjusted accordingly to reflect the actual inventory levels.

Question 18

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 true according to the basic accounting equation: Beginning Inventory + Purchases = Cost of Goods Available for Sale. This equation can also be expressed as: Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold. Therefore, Cost of Goods Sold + Ending Inventory = Cost of Goods Available for Sale.

Question 19

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

Accepted Answer

A perpetual inventory system would be most beneficial in a situation where there is a high volume of many different, low-cost items. This is because it allows for real-time tracking of inventory levels, which is important when dealing with a large volume of items.

Question 20

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...

Quiz 6: Merchandising Activities