Question 1

The primary purpose of (cash) settlement discounts is to:

Accepted Answer

Settlement discounts are offered to encourage customers to settle their accounts early. This helps the business to receive payment sooner and reduce the risk of bad debt. The discount serves as a reward for the customer for making early payment.

Question 2

B sold goods to A for $2000. A paid his account one month later. What is the correct entry in B's books to record the payment by A? Ignore GST.

Accepted Answer

A paid their account one month later, so the payment would be recorded as a decrease in accounts receivable and an increase in bank. Therefore, the correct entry would be to debit bank $2000 and credit accounts receivable $2000.

Question 3

If the invoice price for services rendered to a client is $4246, including GST, how much GST is to be collected from the client?

Accepted Answer

C

Question 4

Assuming a retailer buys and sells on 30 days credit and from the date of purchase it takes, on average, 14 days to sell inventory. What is the correct order for the steps in the operating cycle?
I Sell goods to customer
II Collect cash from customer
III Pay supplier
IV Buy goods for resale from supplier

Accepted Answer

The correct order for the operating cycle is as follows:
1. Buy goods for resale from supplier (IV)
2. Sell goods to customer (I)
3. Collect cash from customer (II)
4. Pay supplier (III)

This means that the retailer first purchases inventory (IV), then sells it to customers (I), collects payment from the customers (II), and finally pays the supplier for the inventory purchased (III). Choice C is therefore the correct answer.

Question 5

Which of the following need not appear on a tax invoice?

Accepted Answer

The signature of the person authorizing the invoice is not required by the Australian Taxation Office to appear on a tax invoice. However, the words 'tax invoice', the date of issue, and the ABN of the issuing entity must be included on a tax invoice.

Question 6

The main difference between a service and a retail business is that service businesses:

Accepted Answer

Service businesses sell services rather than goods, whereas retail businesses are involved in buying and selling physical products.

Question 7

Goods held for sale by a retailer in the normal course of business are known as:

Accepted Answer

Goods held for sale by a retailer are commonly referred to as stock, inventory, or stock-in-trade, which are terms used to describe items available for sale in the normal course of business.

Question 8

Inventory is reported on the balance sheet as:

Accepted Answer

Inventory is reported as a current asset on the balance sheet because it is expected to be converted into cash or sold within a year. Non-current assets, such as property, plant and equipment, are expected to provide benefits for longer than one year. Inventory is not an investment, which refers to the purchase of assets with the intent of generating a return.

Question 9

What is the correct layout for a retailer's income statement?

Accepted Answer

The correct layout for a retailer's income statement should start with the calculation of gross profit (sales revenue minus cost of sales) followed by the deduction of expenses to arrive at the final profit figure. Option A only calculates gross profit and doesn't deduct expenses, while Option B only deducts expenses from sales revenue without considering cost of sales. Option D deducts expenses from gross profit, which is not the standard format for a retailer's income statement. Therefore, Option C is the correct choice.

Question 10

Sales Returns and Allowances is what type of account?

Accepted Answer

Sales Returns and Allowances is a contra account to Sales Revenue, and reduces the overall balance of revenue. It is used to record returns or allowances granted to customers, which are deductions from the original sale.

Question 11

In the income statement expenses are classified into four categories, cost of sales, selling, administrative and financial. To which category do expenses incurred in borrowing money and collecting debts belong?

Accepted Answer

Expenses incurred in borrowing money and collecting debts are related to financial activities of the company, thus they belong to the financial category of expenses in the income statement.

Question 12

The average length of time it takes for a retail business to acquire inventory, sell it to its customers and collect the cash owing is called the:

Accepted Answer

The operating cycle refers to the time it takes for a retail business to acquire inventory, sell it to its customers, and collect the cash owing. It typically starts with the purchase of inventory and ends with the collection of cash from customers, and it can vary in length depending on the nature of the business and its customer base. The accounting cycle refers to the process of recording and reporting financial transactions, while inventory turnover is a ratio that measures how efficiently a company is managing its inventory. The accounting period refers to the time period during which financial statements are prepared and covers a set number of months.

Question 13

Which of these is usually a retailer's largest expense?

Accepted Answer

The cost of sales, also known as the cost of goods sold (COGS), is typically the largest expense for a retailer. This includes the cost of purchasing the goods that the retailer then sells to its customers.

Question 14

When goods are returned by a customer or the price is adjusted, GST legislation requires the retailer to issue the customer with _________________for all amounts totalling more than $50.

Accepted Answer

GST legislation requires retailers to issue an adjustment note to customers when goods are returned or prices are adjusted, if the total amount is more than $50. An invoice and a reverse tax invoice are used for initial sales, not returns or price adjustments, and a return note is not a recognized document for GST purposes.

Question 15

Which statement relating to inventory is not correct?

Accepted Answer

Inventory is classified as a current asset in the balance sheet, as it is expected to be converted into cash within one year or the operating cycle of the business, whichever is longer.

Question 16

Simon sold goods to Lauren for $3300 including GST. Lauren paid her account within the discount period and received a settlement discount of 2%. Using the gross method, what is the entry in Simon's books to record the payment from Lauren?

Accepted Answer

The correct answer is A because the gross method records the discount as a reduction in the sales revenue. The amount of the discount is calculated as 2% of $3300, which is $66. The entry to record the payment from Lauren is:Debit bank $3234Debit discount allowed $66Credit accounts receivable $3300

Question 17

Which of these should be classified as an administrative expense in the income statement of a retailer?

Accepted Answer

Depreciation on office furniture and equipment is a common administrative expense as it is associated with the non-sales-related costs of maintaining a retail business. Depreciation on the sales manager's motor vehicle would be more appropriately classified as a selling expense, while discount allowed and interest on bank overdraft would be considered financial expenses.

Question 18

The specific term used by a retailer for income is:

Accepted Answer

Retailers specifically refer to their income as "sales," which represents the total amount of goods or services sold within a particular period.

Question 19

Under GST (Goods and Services Tax) legislation in Australia a tax invoice must be issued for all sales in excess of:

Accepted Answer

Under GST legislation in Australia, a tax invoice must be issued for all sales in excess of $75. This is a requirement for businesses to ensure proper accounting and reporting of the Goods and Services Tax.

Question 20

GST is credited to the GST collections account when a sale occurs. If goods are returned or a discount allowed the _______________ account must be debited with an adjustment for GST.

Accepted Answer

When goods are returned or a discount is allowed, the GST collections account is debited with an adjustment for GST to reflect the decrease in sales revenue and corresponding GST collected on the original sale.

Quiz 6: Accounting for Retailing