Deck 4: Accounting for Merchandising Businesses

Question 1

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

Answer 1

True
Explanation: A purchase discount reduces merchandise inventory and accounts payable of the buyer.

Question 2

A purchase allowance is treated as a decrease in expenses by the company that purchased the goods.

Answer 2

False
Explanation: A purchase allowance decreases merchandise inventory and accounts payable, but does not affect expenses.

Question 3

For a company that uses a perpetual inventory system, a physical count of the inventory can reveal the amount of inventory shrinkage the company has experienced.

Answer 3

True
Explanation: A physical count may reveal inventory shrinkage if the physical count is lower than the book inventory.

Question 4

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

Question 5

Merchandising businesses include retail companies and wholesale companies.

Question 6

A multistep income statement separates routine operating results from peripheral or non-operating items.

Question 7

Omega Company sold merchandise that it had purchased with a list price of $6,600 and subject to terms of 2/10, n/30. Assuming that Omega paid for the merchandise during the discount period, the cost of goods sold for this transaction would be $6,468.

Question 8

Costs of selling inventory are product costs.

Question 9

The income statement is not affected by a purchase of merchandise.

Question 10

The term "FOB shipping point" indicates that the seller is responsible for transportation costs.

Question 11

The ending Merchandise Inventory plus Cost of Goods Sold equals the Cost of Goods Available for Sale during the period.

Question 12

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

Question 13

With a perpetual inventory system, assets and equity increase by the amount of the gross margin when inventory is sold.

Question 14

Costs charged to the Merchandise Inventory account are product costs.

Question 15

Retail companies sell goods primarily to other businesses.

Question 16

A multistep income statement shows Sales, Cost of Goods Sold, and Gross Margin.

Question 17

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

Question 18

Gains and losses are recorded for increases and decreases in the market value of assets such as land.

Question 19

A company using a perpetual inventory system treats transportation-out as part of the cost of merchandise.

Question 20

A perpetual inventory system updates the Merchandise Inventory account for all purchases of inventory but not for returns of inventory.

Question 21

Sales discounts adversely affect a company's gross margin percentage.

Question 22

The return on sales ratio indicates the amount of each sales dollar that is left over after covering the cost of goods sold.

Question 23

Net sales is calculated by subtracting cost of goods sold from sales revenue.

Question 24

Which of the following is considered a product cost?

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

Question 25

The Cost of Goods Sold account is classified as:

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

Question 26

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

A)West Consulting
B)Baker's Jewelry Store
C)Sandridge and Associates Law Offices
D)KPM Accounting and Tax Service

Question 27

The entry to record the amount of inventory shrinkage affects the balance sheet, but not the income statement.

Question 28

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 are product costs.

Question 29

With a periodic inventory system, the cost of goods sold is recorded at the time of a sale of merchandise.

Question 30

With a periodic inventory system, inventory costs are recorded in Merchandise Inventory at the time of purchase.

Question 31

A company's amount of cost of goods sold reported on the income statement will be the same with a periodic inventory system as it would be with a perpetual system.

Question 32

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 decrease.
B)Assets will decrease and equity will increase.
C)Assets and equity will increase.
D)None of these.

Question 33

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

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

Question 34

Common size financial statements are prepared by converting dollar amounts to percentages.

Question 35

A common size income statement is prepared by dividing all amounts on the statement by net income.

Question 36

Sales discounts affect net sales, but purchase discounts do not.

Question 37

Which of the following statements is true about period costs?

A)Operating expenses are not period costs.
B)Period costs are expensed when the products associated with these costs are sold.
C)Period costs are usually recorded as assets.
D)Most period costs are expensed in the period the costs are incurreD.Most period costs, such as advertising, salaries and wages, rent, and insurance, are expensed when they are incurred.

Question 38

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

A)Gold's Gym
B)Sam's Clubs
C)Amazon
D)Abercrombie and Fitch

Question 39

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 sold.
D)when the merchandise is purchaseD.Product costs are matched against sales revenue (recognized as expenses) when merchandise is sold. The expense is called cost of goods sold.

Question 40

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 the above is considered a period cost.

Question 41

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 42

On October 1, Snow Company made a $50,000 sale giving the customer terms of 3/10/net 30. The receivable was collected from the customer on Oct. 8. Considering the collection of cash from the receivable, what effect will the transaction have on the company's statements?

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

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?

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

Question 44

The amount of gross margin from the four transactions is:

A)$7,710.
B)$7,740.
C)$6,000.
D)$5,880.

Question 45

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 decrease
C)Total assets decrease
D)Both A and B

Question 46

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

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

Question 47

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 48

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.

Question 49

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

Question 50

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?

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

Question 51

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 exchange transaction
C)an asset use transaction
D)a claims exchange transaction

Question 52

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

A)$5,880.
B)$7,740.
C)$7,710.
D)$6,000.

Question 53

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

A)Assets and equity are reduced by $1,500.
B)Assets and liabilities are reduced by $1,470.
C)Assets and liabilities are reduced by $1,500.
D)None. It is an asset exchange transaction.

Question 54

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 55

Advent 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 56

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-in costs.
C)Purchased inventory on account.
D)Paid cash for transportation-out costs.

Question 57

Andrews Company sold merchandise with a cost of $500 to a customer for $800 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 understated.
B)Total assets will be overstated and total equity will be understated.
C)Total assets and total equity will be overstated.
D)The accounting equation will not be affecteD.If the company fails to record the sale of merchandise on account, assets and equity would be understated by the difference between the cost of the merchandise and its selling price.

Question 58

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

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

Question 59

Greencroft Company sold merchandise costing $1,800 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 increase by $800.
B)Total assets decrease by $2,600 and total equity is decreased by $1,800.
C)Total assets and total equity decrease by $2,600.
D)Total assets and total equity decrease by $800.

Question 60

A company using the perpetual inventory method paid cash for transportation-in. 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 61

Folger Company uses the perpetual inventory method. Folger sold goods that cost $4,600 for $7,200. If the sale was made on account, the sale will:

A)increase total assets by $2,600.
B)increase total equity by $7,200.
C)decrease total assets by $4,600.
D)increase total assets by $7,200.

Question 62

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?

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

Question 63

The balance in the inventory account shown at December 31, 2014 is:

A)$3,200.
B)$600.
C)$15,600.
D)none of the above.

Question 64

Ardent Company uses the perpetual method. The company's inventory account had a $6,500 balance as of December 31, 2013. A physical count of inventory shows only $5,800 of merchandise in stock at December 31, 2013. 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.

Question 65

Morton Company uses the perpetual inventory method. The company purchased an item of inventory for $65 and sold the item to a customer for $100. What effect will the sale have on the company's inventory account?

A)The account will decrease by $100
B)The account will decrease by $65
C)The account will decrease by $35
D)No effect

Question 66

The term "FOB Destination" means

A)The seller pays the shipping cost.
B)The buyer records an increase in inventory.
C)The buyer pays the shipping cost.
D)The buyer assumes ownership of the goods during shipment.

Question 67

Flowers Company purchased $4,000 of merchandise on account. Flowers 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?

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

Question 68

Analyze the following T-account in the ledger of Goldstein 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)periodic inventory method and $400 may represent cost of goods sold.
C)perpetual inventory method and $400 may represent a purchase allowance.
D)Both A and C are correct.

Question 69

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

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

Question 70

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 71

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 are correct.

Question 72

Sanford's gross margin for the year 2014 is:

A)$1,550.
B)$5,450.
C)$6,050.
D)$8,200.

Question 73

The amount of retained earnings at December 31, 2014 is:

A)$1,550.
B)$1,700.
C)$6,500.
D)none of the above.

Question 74

Victoria Garden Supply sold a piece of land for $38,000 that had originally cost $32,500. This event would

A)increase cash flows from investing activities by $38,000.
B)not affect operating income.
C)increase net income by $5,500.
D)all of these.

Question 75

Barstow Company uses the perpetual inventory system. The company purchased $8,000 of merchandise from Andrews Company under the terms 2/10, net/30. Bartstow paid for the merchandise within 10 days and also paid $250 freight to obtain the goods under terms FOB shipping point. All of the merchandise purchased was sold for $15,000 cash. The amount of gross margin for this merchandise is:

A)$6,910
B)$7,000
C)$8,000
D)$6,750

Question 76

The term "FOB Shipping Point" means

A)The buyer records transportation expense.
B)The seller pays the shipping cost.
C)The buyer pays the shipping cost.
D)The buyer does not assume ownership until the goods are receiveD." FOB Shipping Point" means that ownership of the goods is passed to the buyer at the time goods are shipped, and that the buyer (owner of the goods) pays the shipping costs.

Question 77

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

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

Question 78

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

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

Question 79

The Warren Company purchased $22,000 of merchandise from the Garden Wholesale Company. Warren also paid $1,500 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? Warren uses the perpetual inventory system.

A)Total debits to the inventory account would be $22,000.
B)Total debits to the inventory account would be $23,500.
C)Transportation-in would be debited for $1,500.
D)Answers A and C are both true.

Question 80

The credit terms, 2/10, n/30, indicate that a:

A)ten 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 tenth day following the date of the sale.
D)two percent discount can be deducted if the invoice is paid after the tenth day following the sale, but before the thirtieth day.