Deck 4: Accounting for Merchandising Businesses

Question 1

Xavier Co.sold goods with the terms 2/15,n/30.What do the terms mean?

Answer 1

The customer may take a 2% discount if the balance is paid within 15 days.The entire balance must be paid within 30 days.

Question 2

On June 1,2016,merchandise subject to terms 2/10,n/30 was sold on account to a customer for $26,500.On June 3,the seller issued a credit memorandum for $5,800,accepting merchandise returned by the customer.This was prior to payment by the customer.
a)What is the amount of cash collected by the seller if the payment is made by the customer on June 8,2016?
b)What is the amount of cash collected by the seller if payment is made by the customer on June 21,2016?

Answer 2

a)($26,500 - $5,800)* .98 = $20,286
b)$26,500 - $5,800 = $20,700

Question 3

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Assume that Frank Company uses a perpetual inventory system.

Whetzel Co.paid $40 of freight cost to have merchandise shipped to one of its customers under terms FOB destination.

Answer 3

(D)(N)(D)(N)(I)(D)(D)

Question 4

Give an example of a product cost.At what time are product costs recognized as expenses? What is the name of the expense account?

Question 5

Give three examples of a period cost.At what time are period costs recognized as expenses?

Question 6

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Assume that Frank Company uses a perpetual inventory system.

After a physical count of its inventory,Whetzel Co.discovered that $400 of inventory is missing.Show how the required write-down of inventory would affect Whetzel Co.'s statements.

Question 7

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Assume that Frank Company uses a perpetual inventory system.

Whetzel Co.sold merchandise to a customer for $950 on account.Whetzel's cost of the merchandise was $600.

Question 8

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Assume that Frank Company uses a perpetual inventory system.

A customer returned goods to Whetzel Co.that had been purchased for $60 on account.The goods had originally cost Whetzel $35.Frank credited the customer's account for the return.

Question 9

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Assume that Frank Company uses a perpetual inventory system.

Whetzel Company granted a $70 allowance 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.

Question 10

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Assume that Frank Company uses a perpetual inventory system.

Whetzel Co.discovered that a recent shipment of merchandise it had purchased was not of the same quality it had expected.The seller agreed to grant Whetzel an allowance of $250.Whetzel had not yet paid the amount owed on the shipment.

Question 11

If the buyer is to pay the transportation cost of delivering merchandise,the freight or shipping terms would be stated as:

Question 12

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Assume that Frank Company uses a perpetual inventory system.

Whetzel Co.paid a supplier,Jacobs Company,the amount owed on account related to a purchase of inventory on account with terms of net 30.

Question 13

If goods are shipped FOB destination,who is responsible for the shipping costs?

Question 14

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Assume that Frank Company uses a perpetual inventory system.

Whetzel Co.purchased $10,000 of merchandise inventory on account from a supplier,Jacobs Company.

Question 15

Explain the major difference between a merchandising business and a service business.

Question 16

When merchandise inventory is purchased on account,how is the accounting equation affected? (Assume a perpetual inventory system is in use. )

Question 17

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Assume that Frank Company uses a perpetual inventory system.

Whetzel Company recorded a cash discount on goods recently purchased on account.

Question 18

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Assume that Frank Company uses a perpetual inventory system.

Whetzel Co.paid $100 cash to a freight company for delivering inventory that Whetzel had purchased from Jacobs Company with freight terms FOB shipping point.

Question 19

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Assume that Frank Company uses a perpetual inventory system.

Whetzel Co.sold merchandise to a customer for $1,400 cash.The merchandise had originally cost Whetzel $850.

Question 20

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.Assume that Frank Company uses a perpetual inventory system.

Whetzel Co.returned some defective merchandise it had previously purchased on account from a supplier,Jacobs Company.Jacobs Company agreed to credit Whetzel's account.

Question 21

Explain the difference between "transportation in" and "transportation out".Also indicate whether each is a product cost or period cost,and in which account the costs are recorded.

Question 22

Which of the following is considered a product cost?

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

Question 23

How do gains and losses differ from revenues and expenses? How are they similar?

Question 24

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 25

Which of the following items is not a product cost?

A)Transportation cost on goods delivered 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 26

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 27

a)What is the effect on the accounting equation of the seller for granting an "allowance" for merchandise that the customer is not satisfied with?
b)What is the effect of the above situation on the accounting equation of the purchaser?
For both questions,assume that the merchandise had been sold on account,and the invoice had not yet been paid.

Question 28

What type of financial statement matches sales revenue items with related expense items and distinguishes between recurring operating activities and nonoperating items such as gains and losses?

Question 29

Why are cash discounts given,who benefits by these discounts,and what are the benefits of those discounts?

Question 30

Explain the computation and the meaning of each of the following:
a.Gross margin percentage
b.Return on sales

Question 31

The following entry is taken from the journal of a merchandising company:
What is the effect of this entry on the accounting equation?

A)Assets and equity will increase.
B)Assets and liabilities will increase.
C)Assets and equity will decrease.
D)Assets will decrease and equity will increase.

Question 32

Indicate how accounting for lost and stolen merchandise differs between firms using a perpetual inventory system and those using a periodic inventory system.Which system provides the best way to account for such losses and why?

Question 33

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 34

If a company uses the perpetual inventory method,when would it normally discover that merchandise inventory has been lost or stolen?

Question 35

Which of the following statements is true about period costs?

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 principle.

Question 36

Product costs are matched against 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 37

What is a common size income statement? Explain how a common size income statement is useful to financial statement users.

Question 38

A business firm that primarily sells merchandise to other businesses is known as a:

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

Question 39

Discuss the major differences between a perpetual inventory system and a periodic inventory system.

Question 40

The Cost of Goods Sold account is classified as:

A)a liability.
B)an asset.
C)a contra asset.
D)an expense.

Question 41

Use the following for questions
Assume the perpetual inventory method is used.
1)The company purchased $12,500 of merchandise on account under terms 2/10,n/30.
2)The company returned $1,200 of merchandise to the supplier before payment was made.
3)The liability was paid within the discount period.
4)All of the merchandise purchased was sold for $18,800 cash.

-The net cash flow from operating activities as a result of the four transactions is:

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

Question 42

Use the following for questions
Use the following account numbers and corresponding account titles to answer the next three questions.
55.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: A
Learning Objective: 04-01
Topic Area: Ledger accounts and financial statements
AACSB: Reflective thinking
AICPA: BB Critical thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: Cost of goods sold,transportation-out,selling expense,loss on the sale of land,and sales will all appear on the income statement.

-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 43

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

Question 44

Use the following for questions
Use the following account numbers and corresponding account titles to answer the next three questions.
55.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: A
Learning Objective: 04-01
Topic Area: Ledger accounts and financial statements
AACSB: Reflective thinking
AICPA: BB Critical thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: Cost of goods sold,transportation-out,selling expense,loss on the sale of land,and sales will all appear on the income statement.

-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 45

Abbott Company purchased $6,500 of merchandise inventory on account.Advent uses the perpetual inventory method.Which of the following entries would be required to record this transaction?

A)
B)
C)
D)

Question 46

What is the effect of an entry to record the purchase of inventory on account under the perpetual inventory method?

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

Question 47

Kenyon Company experienced a transaction that had the following effect on the financial statements:
Which transaction would have this effect?

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 48

Galaxy Company sold merchandise costing $1,700 for $2,600 cash.The merchandise was later returned by the customer for a refund.If the perpetual inventory method is used,what effect will the sales return have on the accounting equation?

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

Question 49

Use the following for questions
Assume the perpetual inventory method is used.
1)The company purchased $12,500 of merchandise on account under terms 2/10,n/30.
2)The company returned $1,200 of merchandise to the supplier before payment was made.
3)The liability was paid within the discount period.
4)All of the merchandise purchased was sold for $18,800 cash.

-The amount of gross margin from the four transactions is:

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

Question 50

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

Question 51

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

Question 52

The following general journal entry is taken from the journal of Becker's Bookstore:
Which of the following choices reflects how the entry will affect the company's financial statements?

Question 53

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

A)
B)
C)
D)
E)

Question 54

On April 1,Snell Company made a $50,000 sale giving the customer terms of 3/10/n30.The receivable was collected from the customer on April 8.Considering the collection of cash from the receivable,what effect will the transaction have on the company's statements?

Question 55

A company using the perpetual inventory method paid $250 cash to have goods delivered from one of its suppliers.The payment of $250 for transportation-in is considered:

A)an asset source transaction
B)an asset use transaction
C)an asset exchange transaction
D)a claims exchange transaction

Question 56

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 accounting equation?

A)Total assets and total equity will be overstated.
B)Total assets will be overstated and total equity will be understated.
C)Total assets and total equity will be understated.
D)The accounting equation will not be affected.

Question 57

Middleton Company uses the perpetual inventory method.The company purchased an item of inventory for $130 and sold the item to a customer for $200.What effect will the sale have on the company's inventory account?

A)The account will decrease by $200
B)The account will decrease by $130
C)The account will decrease by $70
D)No effect

Question 58

Use the following for questions
Use the following account numbers and corresponding account titles to answer the next three questions.
55.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: A
Learning Objective: 04-01
Topic Area: Ledger accounts and financial statements
AACSB: Reflective thinking
AICPA: BB Critical thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: Cost of goods sold,transportation-out,selling expense,loss on the sale of land,and sales will all appear on the income statement.

-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 59

Use the following for questions
Assume the perpetual inventory method is used.
1)The company purchased $12,500 of merchandise on account under terms 2/10,n/30.
2)The company returned $1,200 of merchandise to the supplier before payment was made.
3)The liability was paid within the discount period.
4)All of the merchandise purchased was sold for $18,800 cash.

-What effect will the return of merchandise to the supplier have on the accounting equation?

A)Assets and equity are reduced by $1,176.
B)Assets and liabilities are reduced by $1,176.
C)Assets and liabilities are reduced by $1,200.
D)None.It is an asset exchange transaction.

Question 60

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 61

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

Question 62

Use the following for questions
Sanchez Company engaged in the following transactions during 2015:
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 2016:
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.

-The amount of retained earnings at December 31,2016 is:

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

Question 63

The term "FOB Shipping Point" means

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

Question 64

The term "FOB Destination" means

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

Question 65

Vargas Company sold a piece of land for $39,000 that had originally cost $32,500.This event would

A)increase cash flows from investing activities by $39,000.
B)not affect operating income.
C)increase net income by $6,500.
D)all of these answer choices are correct.

Question 66

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?

Question 67

Use the following for questions
Sanchez Company engaged in the following transactions during 2015:
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 2016:
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.

-Sanchez's gross margin for the year 2016 is:

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

Question 68

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

-The gross margin from these transactions of Green Company is

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

Question 69

Use the following for questions
Sanchez Company engaged in the following transactions during 2015:
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 2016:
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.

-The balance in the inventory account shown at December 31,2016 is:

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

Question 70

Foote Company recorded 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 answers reflects the effects of this event on the financial statements?

Question 71

The credit terms,2/15,n/30,indicate that a:

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

Question 72

Yowell Company granted a sales discount of $360 to a customer when it collected the amount due on account.Yowell uses the perpetual inventory system.Which of the following answers reflects the effects on the financial statements of only the discount?

Question 73

Analyze the following T-account in the ledger of Gibbs Company.
If $5,000 in the Inventory account represents merchandise purchased from a supplier,we can assume the company uses the

A)perpetual inventory method and $400 may represent a purchase return.
B)perpetual inventory method and $400 may represent cost of goods sold.
C)perpetual inventory method and $400 may represent a purchase allowance.
D)All of these answer choices are correct.

Question 74

The following entry is taken from the journal of a merchandising company:
This entry results in

A)an increase in operating expenses.
B)an increase in Cost of Goods Sold.
C)an increase in inventory.
D)a decrease in gross margin.

Question 75

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.The amount of gross margin for this merchandise is:

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

Question 76

The Wilson Company purchased $44,000 of merchandise from the Poole Wholesale Company.Wilson also paid $3,000 for freight costs to have the goods shipped to its location.Which of the following statements regarding the necessary entries for the transactions is true? Wilson uses the perpetual inventory system.

A)Total debits to the inventory account would be $47,000.
B)Total debits to the inventory account would be $44,000.
C)Transportation-in would be debited for $3,000.
D)Total debits to the inventory account would be $41,000.

Question 77

A discount given to encourage prompt payment is called:

A)a cash discount.
B)a sales discount by the seller.
C)a purchase discount by the buyer.
D)all of these answer choices are correct.

Question 78

Faust Company uses the perpetual inventory method.Faust sold goods that cost $2,300 for $3,600.If the sale was made on account,the net effect of the sale will:

A)increase total assets by $2,300.
B)increase total equity by $3,600.
C)increase total assets by $1,300.
D)increase total assets by $3,600.

Question 79

Ashton Company uses the perpetual method.The company's inventory account had a $6,600 balance as of December 31,2016.A physical count of inventory shows only $5,900 of merchandise in stock at December 31,2016.The entry to recognize the missing inventory will

A)increase assets.
B)increase expense.
C)decrease cash flow from operating activities.
D)all of these answer choices are correct.

Question 80

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 answers reflects the effects on the financial statements of only the purchase return?