Deck 4: Accounting for Merchandising Businesses

Question 1

Purchase discounts reduce sales.

Answer 1

False

Question 2

Customer refunds and allowances is a contra-asset account.

Answer 2

False

Question 3

Under the perpetual inventory system, the cost of merchandise sold is recorded when sales are made.

Answer 3

True

Question 4

Purchases discounts are discounts given to the seller.

Question 5

Gross profit percent is calculated by dividing gross profit by net sales.

Question 6

Discounts taken by the buyer for early payment of an invoice are called purchases discounts by the buyer.

Question 7

On the income statement, the merchandise inventory at the beginning of the period is added to sales to yield the cost of merchandise sold during the period.

Question 8

On the income statement, customer refunds and allowances and customer discounts are added to gross sales to yield net sales.

Question 9

Net income or loss may appear on the income statement of both a service business and a retail business.

Question 10

Sales discounts are granted by the seller to customers for payment at the end of the month.

Question 11

In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account.

Question 12

A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take advantage of the cash discount.

Question 13

On the income statement, sales discounts are normally deducted from sales to yield the cost of merchandise sold.

Question 14

Net sales is equal to sales plus cost of merchandise sold.

Question 15

If merchandise costing $2,500, terms FOB destination, 2/10, n/30, with transportation costs of $100, is paid within 10 days, the amount of the purchases discount is $52.

Question 16

A buyer who acquires merchandise under credit terms of 1/10, n/30 has 10 days after the invoice date to take advantage of the cash discount.

Question 17

When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period.

Question 18

The merchandise inventory account is found on the balance sheet.

Question 19

Operating expenses are subtracted from fees earned for a service business and from gross profit for a merchandising business.

Question 20

It is usual for the credit period to begin with the date the merchandise is received by the buyer.

Question 21

If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/eom.

Question 22

If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms are stated as FOB destination.

Question 23

If merchandise costing $2,500, terms FOB destination, 2/10, n/30, with prepaid transportation costs of $100, is paid within 10 days, the amount of the purchases discount is $48.

Question 24

A sale of $600 on account subject to a sales tax of 5% would increase account receivable by $570.

Question 25

Cost of Merchandise Sold is used in accounting for transactions by sellers of merchandise.

Question 26

Merchandise is sold for $2,500, terms FOB destination, 2/10, n/30, with transportation costs of $150.If $500 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $40.

Question 27

In a transaction where purchased merchandise has been returned, the buyer will increase the Customer Refunds Payable account and the seller will increase the Purchases Returns and Allowances account.

Question 28

The sales discount account is a contra account to Sales.

Question 29

Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales.

Question 30

When merchandise that was sold is returned, the seller decreases accounts payable.

Question 31

When the terms of sale are FOB shipping point, the buyer should pay the transportation charges.

Question 32

Available discounts taken by the buyer for early payment of an invoice are termed sales discounts by the seller.

Question 33

The document issued by the seller that informs the buyer of the details of customer refund is called a debit memorandum.

Question 34

The effect of a customer refund and allowance is a reduction in sales revenue and a decrease in cash or accounts receivable.

Question 35

Credit memorandum is issued by the seller to customers for return of damaged or defective merchandise.

Question 36

Freight in is the amount paid by the seller to deliver merchandise sold to a customer.

Question 37

When someone purchases merchandise and incurs the cost of transportation, these costs of purchasing inventory are added to the cost of the inventory.

Question 38

Sales discounts is used in accounting for transactions with customers.

Question 39

Merchandise inventory shrinkage will increase Merchandise Inventory.

Question 40

Purchases of merchandise increase the merchandise inventory account under the perpetual inventory system.

Question 41

Merchandise which is not sold at the end of the year is reported on the balance sheet as _____.

A) accounts receivable
B) capital stock
C) inventory
D) operating income

Question 42

_____ is reported as a current asset on balance sheet.

A) Operating income
B) Cost of goods sold.
C) Merchandise inventory
D) Accounts payable

Question 43

The indirect method of preparing the statement of cash flows reconciles net income with net cash flows from operating activities.

Question 44

Interest expense is an example of an expense classified under "other expense."

Question 45

Which of the following businesses is a retail business?

A) H&R Block
B) Becker Law Office
C) Little Tykes Day care
D) Kohl's

Question 46

Repayments of bonds would be shown as a cash outflow in the investing section of the statement of cash flows.

Question 47

Since merchandise inventory is normally sold within a year, how is it reported on the balance sheet?

A) As a revenue
B) As the cost of merchandise sold
C) It does not appear on the Balance Sheet
D) As a current asset

Question 48

Merchandise inventory shrinkage will decrease Retained Earnings.

Question 49

Revenue from sources other than the primary operating activity of a business is called other revenue.

Question 50

Which of the following statements is true?

A) The revenue activities of a service business involve providing services to customers.
B) The revenue activities of a retail business involve the building of a product.
C) The revenue activities of a service business involve the building of a product.
D) The revenue activities of a retail business involve providing services to customers.

Question 51

The cost of goods sold is subtracted from sales to arrive at _____.

A) net sales
B) Fees earned
C) operating income
D) gross profit

Question 52

There are two alternatives to reporting cash flows from operating activities in the statement of cash flows: (1) the direct method and (2) the indirect method.

Question 53

On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues.

Question 54

Which of the following statements is true about a retail business?

A) The operating cycle for a service business differs from the operating cycle for a retail business in that a service business must purchase merchandise for sale to customers.
B) The revenue activities of a retail business involve the buying and selling of merchandise.
C) The operating cycles of retail businesses and service businesses are exactly the same.
D) The revenue activities of a retail business involve rendering services to customers.

Question 55

In a multiple-step income statement, sales will be reduced by sales discounts and customer refunds and allowances to arrive at net sales.

Question 56

A criticism of a single-step income statement is that net income is not available for analysis.

Question 57

Merchandise not sold at the end of the period is reported as:

A) cost of goods sold.
B) old stock.
C) merchandise inventory.
D) net purchases.

Question 58

A criticism of the single-step income statement is that gross profit and income from operations are not readily available for analysis.

Question 59

To determine cash payments for operating expenses for the cash flow statement using the direct method, a decrease in prepaid expenses is added to operating expenses other than depreciation.

Question 60

If cash dividends of $145,000 were declared during the year and the decrease in dividends payable from the beginning to the end of the year was $7,000, the statement of cash flows would report $152,000 in the financing activities section.

Question 61

The credit terms of a sale are normally indicated on a(n):

A) purchase order.
B) invoice.
C) bill of lading.
D) check.

Question 62

Merchandise is ordered on November 12; the merchandise is shipped by the seller and the invoice is prepared, dated, and mailed by the seller on November 15; the merchandise is received by the buyer on November 17; the transaction is recorded in the buyer's accounts on November 18.The credit period begins with what date?

A) November 12
B) November 15
C) November 17
D) November 18

Question 63

Merchandise with an invoice price of $10,000 is purchased subject to terms of 2/10, n/30, FOB destination.Transportation costs paid by the seller totaled $300.What is the net cost of the merchandise?

A) $10,300
B) $10,100
C) $9,800
D) $9,506

Question 64

When purchases of merchandise are made for cash, under the perpetual inventory system, the transaction:

A) increases Cash; decreases Merchandise Inventory.
B) increases Merchandise Inventory; decreases Cash.
C) increases Merchandise Inventory; decreases Cash Discounts.
D) increases Merchandise Inventory; decreases Purchases.

Question 65

Which of the following is not considered when figuring net purchases?

A) Cost of goods sold
B) Purchase returns
C) Purchases discounts
D) Purchases

Question 66

Galaxy, Inc.had the following merchandise transactions in October: $$\begin{array} { | l | r | } \hline \text { Purchases } & \$ 80,000 \\\hline \text { Purchase returns } & 8,000 \\\hline \text { Purchase discounts } & 7,200 \\\hline \text { Transportation in } & 3,000 \\\hline\end{array}$$ What is the total cost of merchandise purchased for Galaxy, Inc.?

A) $80,000
B) $67,800
C) $83,000
D) $77,000

Question 67

Using a perpetual inventory system, the return of merchandise purchased on account includes a(n):

A) increase in Sales.
B) increase in Merchandise Inventory.
C) decrease in Merchandise Inventory.
D) decrease in Sales.

Question 68

Which of the following is true of the perpetual inventory system?

A) The amount of merchandise available for sale is continuously updated in the inventory records.
B) Physical inventory is used to determine the cost of inventory on hand at the end of the period.
C) The inventory does not show the amount of merchandise sold.
D) The inventory account is updated for each purchase and sale, and related items in the subsidiary ledger are updated on a monthly basis.

Question 69

Which of the following is the effect of purchasing merchandise for cash on a company's liquidity and profitability metrics?​

A) ​There is no effect on liquidity and profitability.
B) ​There is an increase in liquidity, while profitability remains unchanged.
C) ​There is an increase in profitability, while liquidity remains unchanged.
D) ​There is an increase in both liquidity and profitability.

Question 70

Merchandise purchased on account by a company has no effect on its working capital because:​

A) ​inventory and accounts payable are increased by the same amount.
B) ​inventory and accounts receivable are increased by the same amount.
C) ​cash and inventory are increased by the same amount.
D) ​cash and inventory are decreased by the same amount.

Question 71

In credit terms of 1/10, n/30, the "1" represents the:

A) number of days in the discount period.
B) full amount of the invoice.
C) number of days when the entire amount is due.
D) percent of the cash discount.

Question 72

The difference between sales and cost of goods sold for a retail business is:

A) sales.
B) net sales.
C) gross sales.
D) gross profit.

Question 73

Using a perpetual inventory system, the purchase of $30,000 of merchandise on account would include a(n):

A) increase in Sales.
B) increase in Merchandise Inventory.
C) decrease in Merchandise Inventory.
D) decrease in Sales.

Question 74

Surist, Inc.
Surist, Inc.purchased merchandise for $300,000, received credit for purchase returns of $20,000, availed purchase discounts of $5,000, and paid transportation in of $12,000.

-
?
Refer to Surist, Inc.What is the total cost of merchandise purchased?

A) $312,000
B) $287,000
C) $263,000
D) $288,000

Question 75

In credit terms of 1/10, n/30, the "10" represents the:

A) number of days in the discount period.
B) full amount of the invoice.
C) number of days when the entire amount is due.
D) percent of the cash discount.

Question 76

Which of the following is the effect of purchasing merchandise on account with credit terms 2/10, n/30?​

A) ​There is no effect on the liquidity and profitability metrics.
B) ​There is an increase in liquidity, while profitability remains unchanged.
C) ​There is an increase in profitability, while liquidity remains unchanged.
D) ​There is an increase in the liquidity and profitability metrics.

Question 77

Paying an invoice within the discount period _____.​

A) ​increases the profitability metric
B) ​has no effect on the profitability metric
C) ​decreases the liquidity metric
D) ​increases the liquidity metric

Question 78

Surist, Inc. Surist, Inc.purchased merchandise for $300,000, received credit for purchase returns of $20,000, availed purchase discounts of $5,000, and paid transportation in of $12,000.

-
?
Refer to Surist, Inc.If Surist, Inc.had $30,000 in beginning inventory, and sold goods costing $180,000, what is the ending inventory balance?

A) $150,000
B) $162,000
C) $90,000
D) $137,000

Question 79

Which of the following refers to the arrangements between buyers and sellers regarding the payments for merchandise?

A) Credit terms
B) Operating cycle
C) Accounting cycle
D) Markup terms

Question 80

On April 10, 2016, $500 of the merchandise was returned to the seller.

A) $100
B) $30
C) $43
D) $33