Deck 4: Accounting for Merchandising Businesses

Question 1

[The following information applies to the questions displayed below.]
A company's chart of accounts includes, in part, the following account numbers and corresponding account titles:


-Which accounts would appear on the income statement?

A) Account numbers 3, 4, 7, 8, and 9
B) Account numbers 3, 4, 5, 7, and 9
C) Account numbers 2, 3, 7, 8, and 9
D) Account numbers 3, 5, 7, and 8

Answer 1

Account numbers 3, 4, 7, 8, and 9

Question 2

What is the gross margin that results from these four transactions?

A) $5,100
B) $7,726
C) $6,550
D) $11,074

Answer 2

$7,726

Question 3

What is the term used to describe a firm that primarily sells merchandise to other businesses?

A) Wholesale firm
B) Service firm
C) Retail firm
D) Consulting firm

Answer 3

Wholesale firm

Question 4

Which of the following items is not a product cost?

A) Freight cost on goods delivered FOB destination to customers
B) Cost of merchandise purchased for resale
C) Transportation cost on merchandise purchased from suppliers
D) All of these answer choices are product costs

Question 5

Which of the following would be considered as primarily a merchandising business?

A) West Consulting
B) Martin's Supermarket
C) Sandridge and Associates Law Offices
D) KPM Accounting and Tax Service

Question 6

What is the net cash flow from operating activities as a result of the four transactions?

A) $5,100
B) $7,726
C) $6,550
D) $11,074

Question 7

On April 1,Snell Company made a $50,000 sale giving the customer terms of 3/10,n/30.The receivable was collected from the customer on April 8.How does the collection of cash from the customer affect the company's financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 8

Llewelyn Company paid the amount due on a purchase of merchandise on account.Llewelyn uses the perpetual inventory system.Which of the following reflects the effect of the payment on the financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 9

Anchor Company sold merchandise with a cost of $560 to a customer for $890 on account.Due to an error,this sale was never recorded in the accounting records.What effect will the failure to make the necessary entries have on the company's financial statements?

A) Total assets and total stockholders' equity will be overstated.
B) Total assets will be overstated and total stockholders' equity will be understated.
C) Total assets and total stockholders' equity will be understated.
D) The financial statements will not be affected.

Question 10

A company using the perpetual inventory system paid cash for a transportation-in cost.Which of the following choices reflects the effects of this event on the financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 11

When are product costs matched directly with sales revenue?

A) In the period immediately following the purchase
B) In the period immediately following the sale
C) When the merchandise is purchased
D) When the merchandise is sold

Question 12

Which of the following is considered a product cost?

A) Utility expense for the current month
B) Salaries paid to the employees of a merchandiser
C) Transportation cost on goods received from suppliers
D) Transportation cost on goods shipped to customers

Question 13

Galaxy Company sold merchandise costing $1,700 for $2,600 cash.The merchandise was later returned by the customer for a refund.The company uses the perpetual inventory system.What effect will the sales return have on the financial statements? (Consider the effects of both parts of this event.)

A) Total assets and total stockholders' equity decrease by $900.
B) Total assets decrease by $2,600 and total stockholders' equity decreases by $1,700.
C) Total assets and total stockholders' equity decrease by $2,600.
D) Total assets and total stockholders' equity increase by $900.

Question 14

Which of the following statements about period costs is true?

A) Most period costs are expensed in the period the costs are incurred.
B) Period costs are expensed when the products associated with these costs are sold.
C) Period costs are usually recorded as assets.
D) Period costs do not adhere to the matching concept.

Question 15

A company purchased inventory on account.If the perpetual inventory system is used,which of the following choices accurately reflects how the purchase affects the company's financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 16

Kenyon Company experienced a transaction that had the following effect on the financial statements:

Which of the following business events would result in this effect on the financial statements?

A) Paid for merchandise that had been purchased on account
B) A loss on land that was sold for cash
C) Return by a customer of a sale that was made on account
D) Return to a supplier of merchandise purchased on account

Question 17

Which of the following would not be considered as primarily a merchandising business?

A) Abercrombie and Fitch
B) Sam's Clubs
C) Amazon
D) Regal Cinemas

Question 18

Which of the following is considered a period cost?

A) Transportation cost on goods received from suppliers
B) Advertising expense for the current month
C) Cost of merchandise purchased
D) None of these answer choices are considered a period cost

Question 19

What type of account is the Cost of Goods Sold account?

A) Liability
B) Asset
C) Contra asset
D) Expense

Question 20

A company using the perpetual inventory system paid cash for freight costs to purchase merchandise.Which of the following reflects the effects of this event on the financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 21

Faust Company uses the perpetual inventory system.Faust sold goods that cost $2,300 for $3,600.The sale was made on account.What is the net effect of the sale on the company's financial statements? (Consider the effects of both parts of this event.)

A) Increase total assets by $2,300
B) Increase total stockholders' equity by $3,600
C) Increase total assets by $1,300
D) Increase total assets by $3,600

Question 22

[The following information applies to the questions displayed below.]
Sanchez Company engaged in the following transactions during Year 1:
1) Started the business by issuing $42,000 of common stock for cash.
2) The company paid cash to purchase $26,400 of inventory.
3) The company sold inventory that cost $16,000 for $30,600 cash.
"4) Operating expenses incurred and paid during the year, $14,000.
Sanchez Company engaged in the following transactions during Year 2:"
1) The company paid cash to purchase $35,200 of inventory.
2) The company sold inventory that cost $32,800 for $57,000 cash.
"3) Operating expenses incurred and paid during the year, $18,000.
Note: Sanchez uses the perpetual inventory system."

-What is the amount of retained earnings that will be shown on the balance sheet at December 31,Year 2?

A) $6,200
B) $26,000
C) $6,800
D) $38,800

Question 23

Flagler Company purchased $4,000 of merchandise on account.Flagler sold the merchandise to a customer for $7,000 cash.What is the increase in gross margin and the net change in cash flow from operating activities as a result of these transactions? (Consider the effects of both parts of this event.)

A) Option A
B) Option B
C) Option C
D) Option D

Question 24

[The following information applies to the questions displayed below.]
Sanchez Company engaged in the following transactions during Year 1:
1) Started the business by issuing $42,000 of common stock for cash.
2) The company paid cash to purchase $26,400 of inventory.
3) The company sold inventory that cost $16,000 for $30,600 cash.
"4) Operating expenses incurred and paid during the year, $14,000.
Sanchez Company engaged in the following transactions during Year 2:"
1) The company paid cash to purchase $35,200 of inventory.
2) The company sold inventory that cost $32,800 for $57,000 cash.
"3) Operating expenses incurred and paid during the year, $18,000.
Note: Sanchez uses the perpetual inventory system."

-What is the amount of inventory that will be shown on the balance sheet at December 31,Year 2?

A) $2,400
B) $12,800
C) $61,600
D) $28,800

Question 25

Middleton Company uses the perpetual inventory system.The company purchased an item of inventory for $130 and sold the item to a customer for $200.How will the sale affect the company's Inventory account?

A) The Inventory account will decrease by $200.
B) The Inventory account will decrease by $130.
C) The Inventory account will decrease by $70.
D) The Inventory account will not change.

Question 26

[The following information applies to the questions displayed below.]
A company's chart of accounts includes, in part, the following account numbers and corresponding account titles:


-Which accounts would affect gross margin?

A) Account numbers 2 and 9
B) Account numbers 3 and 9
C) Account numbers 3, 4, 7, and 9
D) Account numbers 3, 7, 8, and 9

Question 27

[The following information applies to the questions displayed below.]
A company's chart of accounts includes, in part, the following account numbers and corresponding account titles:


-Which accounts would affect operating income?

A) Account numbers 2, 4, and 9
B) Account numbers 3, 5, 7, and 9
C) Account numbers 3, 4, 7, and 9
D) Account numbers 3, 4, 7, 8, and 9

Question 28

What happens when merchandise is delivered FOB shipping point?

A) The buyer pays the freight cost.
B) The seller pays the freight cost.
C) The buyer records transportation cost as an expense.
D) The seller records transportation-out expense.

Question 29

What is the effect of recording the purchase of inventory on account under the perpetual inventory system?

A) Total assets increase
B) Total liabilities increase
C) Total assets are unaffected
D) Total assets and total liabilities increase

Question 30

When using a perpetual inventory system,which of the following events is an asset use transaction?

A) Paid cash to purchase inventory
B) Paid cash for transportation-out costs
C) Purchased inventory on account
D) Paid cash for transportation-in costs

Question 31

What happens when merchandise is delivered FOB Destination?

A) The seller pays the freight cost.
B) The seller records transportation-out expense.
C) The buyer pays the freight cost.
D) The seller pays the freight cost and records an expense.

Question 32

Leonard Company paid freight costs to have goods shipped to one of its customers.What effect will the payment of these freight costs have on the company's financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 33

[The following information applies to the questions displayed below.]
A company's chart of accounts includes, in part, the following account numbers and corresponding account titles:


-Which accounts would appear on the balance sheet?

A) Account numbers 1, 2, 4, and 5
B) Account numbers 1, 3, 7, and 8
C) Account numbers 1, 2, and 6
D) Account numbers 3, 4, 8, and 9

Question 34

Howell Company granted a sales allowance of $360 to a customer who was not totally satisfied with the quality of goods received.The customer did not return the goods and had not yet paid for them.Which of the following reflects the effects of this event on the financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 35

Ramirez Company returns merchandise previously purchased on account.It had not yet been paid for.Ramirez uses the perpetual inventory system.Which of the following reflects the effects on the financial statements of only the purchase return?

A) Option A
B) Option B
C) Option C
D) Option D

Question 36

Foote Company was granted a purchase discount of $200 on merchandise the company had purchased a few days ago.Foote uses the perpetual inventory system.Which of the following reflects the effects of this event on the financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 37

Ballard Company uses the perpetual inventory system.The company purchased $16,000 of merchandise from Andes Company under the terms 2/10,net/30.Ballard paid for the merchandise within 10 days and also paid $500 freight to obtain the goods under terms FOB shipping point.All of the merchandise purchased was sold for $30,000 cash.What is the amount of gross margin that resulted from these business events?

A) $14,000
B) $13,820
C) $16,000
D) $13,500

Question 38

What do the credit terms,2/15,n/30 mean?

A) A fifteen percent discount can be deducted if the invoice is paid within two days following the date of sale.
B) A two percent discount can be deducted for a period up to thirty days following the date of sale.
C) A two percent discount can be deducted if the invoice is paid before the fifteenth day following the date of the sale.
D) A two percent discount can be deducted if the invoice is paid after the fifteenth day following the sale, but before the thirtieth day.

Question 39

What is (are)the term(s)used to describe a discount given to encourage prompt payment?

A) Cash discount.
B) Sales discount by the seller.
C) Purchase discount by the buyer.
D) All of these answer choices are correct.

Question 40

[The following information applies to the questions displayed below.]
Sanchez Company engaged in the following transactions during Year 1:
1) Started the business by issuing $42,000 of common stock for cash.
2) The company paid cash to purchase $26,400 of inventory.
3) The company sold inventory that cost $16,000 for $30,600 cash.
"4) Operating expenses incurred and paid during the year, $14,000.
Sanchez Company engaged in the following transactions during Year 2:"
1) The company paid cash to purchase $35,200 of inventory.
2) The company sold inventory that cost $32,800 for $57,000 cash.
"3) Operating expenses incurred and paid during the year, $18,000.
Note: Sanchez uses the perpetual inventory system."

-What is Sanchez's gross margin for Year 2?

A) $6,200
B) $24,200
C) $21,800
D) $32,800

Question 41

Which of the following retailers would be expected to have the highest gross margin percentage?

A) Kmart
B) Neiman Marcus
C) Walmart
D) A supermarket chain such as Safeway

Question 42

Vargas Company sold a piece of land for $39,000 that had originally cost $32,500.How does this business event affect the company's financial statements?

A) An increase in cash flows from investing activities by $39,000.
B) No effect on operating income.
C) An increase in net income by $6,500.
D) All of these answer choices are correct.

Question 43

How is the net income percentage calculated?

A) Net Sales divided by net Income
B) Net Income divided by net Sales
C) Total stockholders' equity divided by net sales
D) Net Income divided by Gross Margin

Question 44

[The following information applies to the questions displayed below.]
Assume the perpetual inventory system is used.
1) Green Company purchased merchandise inventory that cost $64,000 under terms of 2/10, n/30 and FOB shipping point.
2) Green Company paid freight cost of $2,400 to have the merchandise delivered.
3) Payment was made to the supplier on the inventory within 10 days.
4) All of the merchandise was sold to customers for $94,000 cash and delivered under terms FOB destination with freight cost amounting to $1,600.

-What is the amount of gross margin that results from these transactions?

A) $31,280
B) $27,280
C) $28,880
D) $29,680

Question 45

[The following information applies to the questions displayed below.]


-Three of the companies are upscale stores and one is a discount store.Which company is most likely to be the discount store?

A) Company A
B) Company B
C) Company C
D) Company D

Question 46

[The following information applies to the questions displayed below.]


-Based on common-sized income statements,which of the companies spent the least on operating expenses in relationship to its sales?

A) Company A
B) Company B
C) Company C
D) Company D

Question 47

Olly Company is a merchandising business that sells dog food.Based on the following information,what is the gross margin for Olly Company?
$\begin{array}{lr}\text { Sales Revenue } & \$ 500,000 \\\text { Cash } & 100,000 \\\text { Accounts Receivable } & 50,000 \\\text { Inventory } & 25,000 \\\text { Cost of goods sold } & 300,000 \\\text { Operating expenses } & 40,000\end{array}$

A) $135,000
B) $160,000
C) $200,000
D) $285,000

Question 48

[The following information applies to the questions displayed below.]
Assume the perpetual inventory system is used.
1) Green Company purchased merchandise inventory that cost $64,000 under terms of 2/10, n/30 and FOB shipping point.
2) Green Company paid freight cost of $2,400 to have the merchandise delivered.
3) Payment was made to the supplier on the inventory within 10 days.
4) All of the merchandise was sold to customers for $94,000 cash and delivered under terms FOB destination with freight cost amounting to $1,600.

-What is the net cash flow from operating activities that results from these transactions?

A) $94,000 inflow
B) $27,280 inflow
C) $66,720 outflow
D) $31,280 inflow

Question 49

The following are the income statements of the Hancock Company for two consecutive years.Increases in which of the expenses contributed to the net loss in Year 2?

A) Cost of goods sold and selling expenses
B) Selling expenses and administrative expenses
C) Cost of goods sold and administrative expenses
D) Administrative expenses

Question 50

Butte Company recognized $24,000 of revenue on the cash sale of merchandise that cost $11,000.How will the sale be reported on the statement of cash flows?

A) Cash inflow from investing activities
B) Cash inflow from operating activities
C) Cash inflow from financing activities
D) Cash inflow from principal activities

Question 51

Ashton Company uses the perpetual inventory system.The company's inventory account had a $6,600 balance as of December 31,Year 1.A physical count of inventory shows only $5,900 of merchandise in stock at December 31,Year 1.How will recognizing the missing inventory affect the company's financial statements?

A) Increase assets.
B) Increase expense.
C) Decrease cash flow from operating activities.
D) All of these answer choices are correct.

Question 52

JCS Incorporated experienced the following transactions during its first year of business.The company purchased $16,000 of merchandise from Kent Company.The company paid $2,000 for selling and administrative expenses and purchased land for $5,000.All of the merchandise purchased was sold for $30,000 cash.What is the company's gross margin?

A) $7,000
B) $14,000
C) $23,000
D) $30,000

Question 53

SX Company sold merchandise on account for $16,000.The merchandise had cost the company $6,000.What is the effect of the sale on the income statement?

A) Revenue increases by $10,000.
B) Expenses increase by $6,000.
C) Net income increases by $16,000.
D) All of these answer choices are correct.

Question 54

Garrett Company uses the perpetual inventory system.The company's records showed a book balance of $18,000 in the Merchandise Inventory account,and a physical count finds only $16,250 of inventory.Which of the following represents the financial statement effect of writing-down the inventory?

A) Option A
B) Option B
C) Option C
D) Option D

Question 55

When a company recognizes cost of goods sold,how does that event impact the elements of the financial statements? (Ignore the effects of recognizing sales revenue.)

A) Assets increase.
B) Liabilities increase.
C) stockholders' equity decreases.
D) Dividends decrease.

Question 56

The following are the income statements for Ace and Diamond Companies.

What are the net income percentages for Ace and Diamond,respectively?

A) 6.09% and 4.25%
B) 1.83% and 1.70%
C) 16.4% and 23.6%
D) 30% and 40%

Question 57

Exeter Company sold merchandise for $10,000 cash.The merchandise had cost the company $4,500.What is the effect of the sale on the balance sheet?

A) Cash increases by $10,000.
B) Inventory decreases by $4,500.
C) Retained earnings Increases by $5,500.
D) All of these answer choices are correct.

Question 58

Which of the following describes the purpose of a common size financial statement?

A) Compare the amount of common stock to other types of stock
B) Make comparisons between firms of different sizes
C) Make comparisons between different time periods
D) Make comparisons between firms of different sizes and between different time periods

Question 59

The following data is from the income statement of Ralston Company:
$\begin{array}{lr}\text { Revenue } & \$ 36,000 \\\text { Cost of goods sold } & (14,400 )\\\text { Operating expenses } & (16,000)\\\text { Net income } & \$ 5,600\end{array}$
What is the company's gross margin percentage?

A) 66.67%
B) 25.93%
C) 60.00%
D) 15.60%

Question 60

During the current year,Gomez Co.had beginning inventory of $2,400 and ending inventory of $1,200.The cost of goods sold was $9,600.What is the amount of inventory purchased during the year?

A) $8,400
B) $9,600
C) $10,800
D) $13,200

Question 61

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

Question 62

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?"

A) $9,000
B) $9,800
C) $10,000
D) $21,800

Question 63

Merchandising businesses include retail companies and manufacturing companies.

Question 64

Wholesale companies sell goods primarily to other businesses.

Question 65

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?

A) $13,500
B) $900
C) $500
D) $0

Question 66

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

Question 67

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

Question 68

Net income is not affected by a purchase of merchandise.

Question 69

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

Question 70

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

Question 71

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

Question 72

The financial statements of Tin Company included the following:
$$\begin{array} { l r } \text { Sales } & \$ 1,000,000 \\\text { Gross margin } & 300,000 \\\text { Ending Irventory } & 100,000\end{array}$$
Based on the information provided,what was the company's cost of goods sold?

A) $200,000
B) $600,000
C) $700,000
D) $900,000

Question 73

Costs charged to the Merchandise Inventory account are product costs.

Question 74

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

Question 75

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?

A) Decreases accounts receivable
B) Decreases inventory
C) Increases accounts payable
D) Increases cash

Question 76

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.

Question 77

Costs of selling inventory are product costs.

Question 78

Sam Company reported the following amounts on its income statement:
$\begin{array}{lr}\text { Net income } & 100,000 \\\text { Cost of goods sold } & 400,000 \\\text { Gross margin } & 200,000\end{array}$
Based on the information provided,what was the amount of sales reported on the income statement?

A) $700,000
B) $600,000
C) $300,000
D) $200,000

Question 79

Which of the following statements regarding a multistep income statement is true?

A) When a company sells inventory for more than its cost, the difference between the sales revenue and the cost of goods sold is called the operating income.
B) A single-step income statement shows sales, gross margin, and net income.
C) Gross margin is calculated as sales revenue minus cost of goods sold.
D) Gross margin equals net income.

Question 80

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.)