Question 1

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:

Accepted Answer

The sale will increase assets (accounts receivable) and equity (sales revenue) by $7,200 and it will decrease assets (inventory) and equity (increase cost of goods sold) by $4,600. The net effect is an increase to total assets and total equity of $2,600.

Question 2

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?

Accepted Answer

Paying for transportation-out decreases assets (cash) and increases expenses (transportation-out), which decreases net income and equity. It is reported as a cash outflow for operating activities.

Question 3

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

Accepted Answer

$6,600 Purchase - $4,000 COGS + $8,800 Purchase - $8,200 COGS = $3,200

Question 4

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

Accepted Answer

The entry to record the inventory shortage will increase Cost of goods sold (an expense) and decrease inventory.

Question 5

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?

Accepted Answer

The sale will cause the inventory account to decrease by $65, the cost of the item sol

Question 6

The term "FOB Destination" means

Accepted Answer

"FOB Destination" means that ownership of the goods stays with the seller during shipment and the seller (owner of the goods) pays the shipping costs.

Question 7

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?

Accepted Answer

$7,000 Sales - $4,000 COGS = $3,000 Gross margin; The purchase was made on account, and does not affect cash flows until payment is made to the supplier. Therefore, the only effect on cash flows is the inflow from the customer of $7,000.

Question 8

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

Accepted Answer

Both a purchase return and a purchase allowance are recorded as decreases (credits) to merchandise inventory.

Question 9

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?

Accepted Answer

Yancey will reduce its assets (accounts receivable) and equity (sales revenue) when it grants the sales discount. The discount itself does not affect the statement of cash flows. However, cash flows will be affected when the payment is recorde

Question 10

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

Accepted Answer

Transportation-out is an operating expense. The debit to transportation-out increases operating expenses. Transportation in charges would increase inventory and cost of goods sold and decrease gross margin.

Question 11

A discount given to encourage prompt payment is called:

Accepted Answer

The same cash discount is treated as a sales discount by the buyer and as a purchase discount by the buyer.

Question 12

Sanford's gross margin for the year 2014 is:

Accepted Answer

$14,250 Sales - $8,200 COGS = $6,050 Gross margin

Question 13

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

Accepted Answer

2013 Net Income: $7,650 - $4,000 - $3,500 = $150
2014 Net Income: $14,250 - $8,200 - $4,500 = $1,550
Beg. Retained Earnings $150 + $1,550 = $1,700 Ending Retained Earnings

Question 14

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

Accepted Answer

Victoria would record a gain on the sale of land of $5,500 ($32,500 - $38,000). The sale would be reported as a cash inflow from investing activities. The gain would be reported below operating income on the income statement, but would affect net income.

Question 15

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:

Accepted Answer

Sales $15,000 - Cost of goods sold ($8,000 x 0.98 + $250) = $6,910 Gross margin

Question 16

The term "FOB Shipping Point" means

Accepted Answer

"FOB Shipping Point" means that the buyer (owner of the goods) pays the shipping costs. Therefore, choice C, "The buyer pays the shipping cost," is the correct answer. Choice A is incorrect because it implies that the buyer records transportation expense, which may or may not be the case depending on the specific contract terms. Choice B is incorrect because it implies that the seller pays the shipping cost, which is not the case with FOB Shipping Point. Choice D is incorrect because it describes FOB Destination, where the buyer does not assume ownership until the goods are received.

Question 17

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?

Accepted Answer

The purchase return will reduce Ryland's assets (inventory) and liabilities (accounts payable). It will not affect the income statement or the statement of cash flows.

Question 18

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?

Accepted Answer

The purchase discount will reduce assets (inventory) and reduce liabilities (accounts payable). It does not affect the income statement or the statement of cash flows.

Question 19

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.

Accepted Answer

The inventory account would be debited (increased) by both the inventory purchase and the payment for transportation-in.

Question 20

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

Accepted Answer

The credit terms "2/10, n/30" mean that a two percent discount can be deducted if the invoice is paid within ten days following the date of sale. The "n/30" part of the terms mean that the full amount is due within thirty days of the date of sale, with no discount available after the initial ten-day period.

Quiz 4: Accounting for Merchandising Businesses