Deck 5: Accounting for Retail Businesses

Question 1

The most important differences between a service business and a retail business are reflected in their operating cycles and financial statements.

Answer 1

True

Question 2

Freight-in is considered a cost of purchasing inventory.

Answer 2

True

Question 3

Under a periodic inventory system, the cost of inventory on hand at the end of the accounting period is determined by a physical count of the inventory.

Answer 3

True

Question 4

Service businesses provide services for income, while a merchandising business sells merchandise.

Question 5

Most retailers record all credit card sales as credit sales.

Question 6

When merchandise that was sold is returned, a credit to Customer Refunds Payable is made.

Question 7

In a merchandising business, sales minus operating expenses equals net income.

Question 8

The cost of inventory is limited to the purchase price less any purchase discounts.

Question 9

Under the perpetual inventory system, when a sale is made, both the sale and cost of goods sold are recorded.

Question 10

In retail businesses, inventory is reported as a current asset.

Question 11

The fees associated with credit card sales are periodically recorded as expenses.

Question 12

Customer Refunds Payable is an account used to record merchandise returns from customers.

Question 13

In a perpetual inventory system, the Inventory account is only used to reflect the beginning inventory.

Question 14

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

Question 15

Cost of goods sold is the amount that the merchandising company pays for the merchandise it intends to sell.

Question 16

Buyers and sellers do not normally record the list prices of merchandise and the trade discounts in accounts.

Question 17

If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30.

Question 18

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

Question 19

In a perpetual inventory system, when merchandise is returned to the supplier, Cost of Goods Sold is debited as part of the transaction.

Question 20

Estimated Returns Inventory is an account used when adjusting for expected merchandise sales in the next period.

Question 21

A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called cash discounts.

Question 22

When the terms of sale are FOB shipping point, the buyer pays the freight charges.

Question 23

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

Question 24

Purchases of merchandise are typically credited to the inventory account under the perpetual inventory system.

Question 25

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 sales discount.

Question 26

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 27

The chart of accounts for a merchandising business would include an account called Delivery Expense.

Question 28

A sales discount encourages customers to pay accounts more quickly than if a discount were not available.

Question 29

The abbreviation FOB stands for "free on board."

Question 30

Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. The entry to record the purchase will include a debit to Cash and a credit to Sales.

Question 31

Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150. The sales amount recorded is $3,528.

Question 32

Sellers and buyers are required to record trade discounts.

Question 33

If merchandise costing $3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of $125, is paid within 10 days, the amount of the purchases discount is $70.

Question 34

If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination.

Question 35

A sale of $750 on account subject to a sales tax of 6% would be recorded as an account receivable of $750.

Question 36

Inventory normally has a debit balance.

Question 37

When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount.

Question 38

When merchandise is sold for $600 plus 6% sales tax, the Sales account should be credited for $636.

Question 39

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 40

A seller may grant a buyer a reduction in selling price and this is called a customer discount.

Question 41

Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as Other Revenue on the multiple-step income statement.

Question 42

A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take a physical inventory.

Question 43

Most companies will not take a purchase discount, because 1% or 2% discounts are insignificant.

Question 44

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

Question 45

Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer's place of business.

Question 46

When companies use a perpetual inventory system, the recording of the purchase of inventory will include a debit to Purchases.

Question 47

In the merchandising income statement, sales will be reduced by administrative expenses to arrive at operating income.

Question 48

The seller records the sales tax as part of the sales amount.

Question 49

Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the buyer.

Question 50

Because many companies use computerized accounting systems, periodic inventory is widely used.

Question 51

If the perpetual inventory system is used, an account entitled Cost of Goods Sold is included in the general ledger.

Question 52

Sales is equal to the cost of goods sold less the gross profit.

Question 53

Gross profit minus selling expenses equals net income.

Question 54

In a multiple-step income statement, the dollar amount for income from operations is always the same as net income.

Question 55

The form of the balance sheet in which assets, liabilities, and stockholders' equity are presented in a downward sequence is called the report form.

Question 56

Cost of goods sold is often the largest expense on a merchandising company income statement.

Question 57

Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped FOB shipping point.

Question 58

The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income from operations are not readily available.

Question 59

The seller may prepay the freight costs even though the terms are FOB shipping point.

Question 60

As we compare a merchandising business to a service business, the financial statement that changes the most is the balance sheet.

Question 61

Under the periodic inventory system, the cost of goods sold is recorded when sales are made.

Question 62

Dollar Co. sold merchandise to Pound Co. on account, $25,500, terms 2/15, net 45. Pound Co. paid the invoice within the discount period. What is the sales amount to be recorded in the above transactions?

A) $25,500
B) $26,010
C) $24,990
D) $16,000

Question 63

Calculate income from operations for Jonas Company based on the following data: $$\begin{array} { | l | r | } \hline \text { Sales } & \$ 764,000 \\\hline \text { Operating expenses } & 52,500 \\\hline \text { Cost of goods sold } & 538,000 \\\hline\end{array}$$

A) $485,500
B) $711,500
C) $173,500
D) $226,000

Question 64

In a periodic inventory system, the cost of merchandise purchased includes the cost of freight in.

Question 65

Under a periodic inventory system, the accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and Freight In are found on the balance sheet.

Question 66

When a merchandising business is compared to a service business, the financial statement that is not affected by that change is the statement of stockholders' equity.

Question 67

Calculate the gross profit for Jefferson Company based on the following: $$\begin{array} { | l | r | } \hline \text { Sales } & \$ 764,000 \\\hline \text { Selling expenses } & 42,500 \\\hline \text { Cost of goods sold } & 538,000 \\\hline\end{array}$$

A) $495,500
B) $183,500
C) $721,500
D) $226,000

Question 68

In the periodic inventory system, purchases of merchandise for resale are debited to the Purchases account.

Question 69

Other revenue and expenses are items that are not related to the primary operating activity.

Question 70

Closing entries for a merchandising business are not similar to those for a service business.

Question 71

When comparing a retail business to a service business, the financial statement that changes the most is the

A) balance sheet
B) income statement
C) statement of stockholders' equity
D) statement of cash flows

Question 72

The asset turnover ratio measures how effectively a business is using its assets to generate sales.

Question 73

Which of the following is ,ot a difference between a retail business and a service business?

A) in what is sold
B) the inclusion of gross profit on the income statement
C) accounting equation
D) inventory included on the balance sheet

Question 74

The inventory system employing accounting records that continuously disclose the amount of inventory is called

A) retail
B) periodic
C) physical
D) perpetual

Question 75

Net income plus operating expenses is equal to

A) cost of goods sold
B) cost of merchandise
C) sales
D) gross profit

Question 76

The primary difference between the periodic and perpetual inventory systems is that a

A) periodic system determines the inventory on hand only at the end of the accounting period
B) periodic system keeps a record showing the inventory on hand at all times
C) periodic system provides an easy means to determine inventory shrinkage
D) periodic system records the cost of the sale on the date the sale is made

Question 77

Under the periodic inventory system, the cost of goods sold is equal to the beginning inventory plus the cost of merchandise purchased plus the ending inventory.

Question 78

Gross profit is equal to

A) sales plus cost of goods sold
B) sales plus selling expenses
C) sales less selling expenses
D) sales less cost of goods sold

Question 79

What is the term applied to the excess of sales over the cost of goods sold?

A) gross profit
B) operations
C) net income
D) gross sales

Question 80

Inventory is classified on the balance sheet as a

A) current liability
B) current asset
C) long-term asset
D) long-term liability