Fundamental Accounting Principles 23d Edition By John Wild – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

aChapter 05 Accounting for Merchandising Operations

 

MULTIPLE CHOICE QUESTIONS

1)  Merchandise inventory refers to products that a company owns and intends to sell to customers.

1. True
2. False

Answer: A Explanation:

Diff: 1

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

2)  A service company earns net income by buying and selling merchandise.

1. True
2. False

Answer: B Explanation:

Diff: 1

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

3)  Gross profit is also called gross margin.

1. True
2. False

Answer: A Explanation:

Diff: 1

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

4)  Cost of goods sold is also called cost of sales.

1. True
2. False

Answer: A Explanation:

Diff: 1

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

5)  A wholesaler buys products from manufacturers or other wholesalers and sells them to consumers.

1. True
2. False

Answer: B Explanation:

Diff: 1

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

6)  A retailer buys products from manufacturers and sells them to wholesalers.

1. True
2. False

Answer: B Explanation:

Diff: 1

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

7)  Cost of goods sold represents the cost of buying and preparing merchandise for sale.

1. True
2. False

Answer: A Explanation:

Diff: 1

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• A company had sales of $350,000 and cost of goods sold of $200,000. Its gross profit equals

$150,000.

A)  True

1. False

Answer: A Explanation:

Diff: 2

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• A company had net sales of $545,000 and cost of goods sold of $345,000. Its gross margin equals

$890,000.

A)  True

1. False

Answer: B Explanation:

Diff: 2

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• A company had a gross profit of $300,000 based on sales of $400,000. Its cost of goods sold equals

$700,000.

A)  True

1. False

Answer: B Explanation:

Diff: 2

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• A merchandising company’s operating cycle begins with the purchase of merchandise and ends with the collection of cash from the

A)  True

1. False

Answer: A Explanation:

Diff: 2

Topic: Cost Flows of a Merchandiser

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

12)   Merchandise inventory is reported in the long-term assets section of the balance sheet.

1. True
2. False

Answer: B Explanation:

Diff: 1

Topic: Financial Statements for Merchandisers

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

 

13)   Cash sales shorten the operating cycle for a merchandiser; credit sales lengthen operating cycles.

1. True
2. False

Answer: A Explanation:

Diff: 2

Topic: Cost Flows of a Merchandiser

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

14)   Cost of goods sold is an expense, and is reported on the income statement.

1. True
2. False

Answer: A Explanation:

Diff: 1

Topic: Financial Statements for Merchandisers

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• A periodic inventory system requires updating of the inventory account only at the beginning of an accounting

A)  True

1. False

Answer: B Explanation:

Diff: 1

Topic: Periodic Inventory System

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• A perpetual inventory system continually updates accounting records for merchandising

A)  True

1. False

Answer: A Explanation:

Diff: 1

Topic: Cost Flows of a Merchandiser

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

17)   Beginning inventory plus net purchases equals merchandise available for sale.

1. True
2. False

Answer: A Explanation:

Diff: 1

Topic: Cost Flows of a Merchandiser

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

18)   The acid-test ratio is also called the quick ratio.

1. True
2. False

Answer: A Explanation:

Diff: 1

Topic: Acid-Test Ratios

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

 

19)   Quick assets include cash and cash equivalents, inventory, and current receivables.

1. True
2. False

Answer: B Explanation:

Diff: 1

Topic: Acid-Test Ratios

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

 

 

20)   The acid-test ratio is defined as current assets divided by current liabilities.

1. True
2. False

Answer: B Explanation:

Diff: 1

Topic: Acid-Test Ratios

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

 

 

• A common rule of thumb is that a company’s acid-test ratio should have a value near or higher than 1 to conclude that a company is unlikely to face near-term liquidity

A)  True

1. False

Answer: A Explanation:

Diff: 2

Topic: Acid-Test Ratios

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

 

• Successful use of a just-in-time inventory system can narrow the gap between the acid-test and the current

A)  True

1. False

Answer: A Explanation:

Diff: 2

Topic: Acid-Test Ratios

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

 

 

• A company’s quick assets are $147,000 and its current liabilities are $143,000. This company’s acid-test ratio is 03.

A)  True

1. False

Answer: A Explanation:

Diff: 3

Topic: Acid-Test Ratios

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

 

• A company’s current ratio is 2 and its quick ratio is 0.25. This company is probably an excellent credit risk because the ratios reveal no indication of liquidity problems.

A)  True

1. False

Answer: B Explanation:

Diff: 2

Topic: Acid-Test Ratios

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

25)   The gross margin ratio is defined as gross margin divided by net sales.

1. True
2. False

Answer: A Explanation:

Diff: 1

Topic: Gross Margin Ratio

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

 

 

26)   The profit margin ratio is the same as the gross profit ratio.

1. True
2. False

Answer: B Explanation:

Diff: 1

Topic: Gross Margin Ratio

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

 

 

• A company had net sales of $340,500, its cost of goods sold was $257,000, and its net income was

$13,750. The company’s gross margin ratio equals 24.5%.

A)  True

1. False

Answer: A Explanation:

Diff: 3

Topic: Gross Margin Ratio

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

• The Merchandise Inventory account balance at the beginning of the current period is equal to the amount of ending Merchandise Inventory from the previous

A)  True

1. False

Answer: A Explanation:

Diff: 1

Topic: Cost Flows of a Merchandiser

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

29)   Credit terms for a purchase include the amounts and timing of payments from a buyer to a seller.

1. True
2. False

Answer: A Explanation:

Diff: 1

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

30)   Purchase returns refer to merchandise a buyer acquires but then returns to the seller.

1. True
2. False

Answer: A Explanation:

Diff: 1

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

31)   Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.

1. True
2. False

Answer: B Explanation:

Diff: 1

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Purchase allowances refer to a price reduction (allowance) granted to a buyer of defective or unacceptable

A)  True

1. False

Answer: A Explanation:

Diff: 1

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Under the perpetual inventory system, the cost of merchandise purchased is recorded in the Merchandise Inventory

A)  True

1. False

Answer: A Explanation:

Diff: 1

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• Credit terms of 2/10, n/30 imply that the seller offers the purchaser a 2% cash discount if the amount is paid within 10 days of the invoice Otherwise, the full amount is due in 30 days.

A)  True

1. False

Answer: A Explanation:

Diff: 1

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

35)   Sellers always offer a discount to buyers for prompt payment toward purchases made on credit.

1. True
2. False

Answer: B Explanation:

Diff: 1

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

36)   Purchase discounts are the same as trade discounts.

1. True
2. False

Answer: B Explanation:

Diff: 1

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• If a company sells merchandise with credit terms 2/10 n/60, the credit period is 10 days and the discount period is 60

A)  True

1. False

Answer: B Explanation:

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit if goods are shipped FOB

A)  True

1. False

Answer: A Explanation:

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• If goods are shipped FOB destination, the seller does not record revenue from the sale until the goods arrive at their destination because the transaction is not complete until that

A)  True

1. False

Answer: A Explanation:

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• If goods are shipped FOB shipping point, the seller does not record revenue from the sale until the goods arrive at their destination because the transaction is not complete until that

A)  True

1. False

Answer: B Explanation:

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• A buyer using a perpetual inventory system records the costs of shipping merchandise it purchases in a Delivery Expense

A)  True

1. False

Answer: B Explanation:

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• If a buyer does not take advantage of a supplier’s credit terms of 2/10, n/30, and instead pays the invoice in full at the end of 30 days, by not taking the discount the buyer loses the equivalent of 18% annual interest on the amount of the

A)  True

1. False

Answer: B Explanation:

Diff: 3

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

 

• FOB shipping point means that the buyer accepts ownership when the goods arrive at the buyer’s place of

A)  True

1. False

Answer: B Explanation:

Diff: 1

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Each sales transaction for a seller that uses a perpetual inventory system involves recognizing both revenue and cost of merchandise

A)  True

1. False

Answer: A Explanation:

Diff: 1

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Offering sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collections

A)  True

1. False

Answer: A Explanation:

Diff: 1

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

46)   Sales Discounts is added to the Sales account when computing a company’s net sales.

1. True
2. False

Answer: B Explanation:

Diff: 2

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Sales discounts has a normal debit balance because it decreases Sales, which has a normal credit

A)  True

1. False

Answer: A Explanation:

Diff: 1

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Under a perpetual inventory system, when a credit customer returns non-defective merchandise to the seller, the seller debits Sales Returns and Allowances and credits Accounts Receivable and also debits Merchandise Inventory and credits Cost of Goods

A)  True

1. False

Answer: A Explanation:

Diff: 3

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

 

49)   Each sale of merchandise has two parts: the revenue side and the cost side.

1. True
2. False

Answer: A Explanation:

Diff: 2

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20, and a credit to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for early

A)  True

1. False

Answer: B Explanation:

Diff: 3

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

51)   Sales of $350,000 and net sales of $323,000 could reflect sales discounts of $27,000.

1. True
2. False

Answer: A Explanation:

Diff: 2

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• A perpetual inventory system is able to directly measure and monitor inventory shrinkage and there is no need for a physical count of

A)  True

1. False

Answer: B Explanation:

Diff: 1

Topic: Adjusting and Closing Entries for Merchandisers

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Sales Discounts and Sales Returns and Allowances are contra revenue accounts that are debited to close the accounts during the closing

A)  True

1. False

Answer: B Explanation:

Diff: 1

Topic: Adjusting and Closing Entries for Merchandisers

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

54)   Cost of Goods Sold is debited to close the account during the closing process.

1. True
2. False

Answer: B Explanation:

Diff: 1

Topic: Adjusting and Closing Entries for Merchandisers

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• In a perpetual inventory system, the Merchandise Inventory account must be closed at the end of the accounting

A)  True

1. False

Answer: B Explanation:

Diff: 1

Topic: Adjusting and Closing Entries for Merchandisers

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• The adjusting entry to reflect inventory shrinkage is a debit to Income Summary and a credit to Inventory Shrinkage

A)  True

1. False

Answer: B Explanation:

Diff: 2

Topic: Adjusting and Closing Entries for Merchandisers

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• A multiple-step income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of

A)  True

1. False

Answer: A Explanation:

Diff: 1

Topic: Financial Statement Formats

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

 

58)   Operating expenses are classified into two categories: selling expenses and cost of goods sold.

1. True
2. False

Answer: B Explanation:

Diff: 1

Topic: Financial Statement Formats

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

 

 

59)   A merchandiser’s classified balance sheet reports merchandise inventory as a current asset.

1. True
2. False

Answer: A Explanation:

Diff: 1

Topic: Cost Flows of a Merchandiser

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

 

 

• Expenses related to accounting, human resource management, and financial management are known as selling

A)  True

1. False

Answer: B Explanation:

Diff: 1

Topic: Financial Statement Formats

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

 

• When a company has no reportable non-operating activities, its income from operations is simply labeled net

A)  True

1. False

Answer: A Explanation:

Diff: 1

Topic: Financial Statement Formats

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

 

 

• A single-step income statement includes cost of goods sold as another expense and shows only one subtotal for total

A)  True

1. False

Answer: A Explanation:

Diff: 1

Topic: Financial Statement Formats

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

 

 

• Under a periodic inventory system, purchases, purchases returns and allowances, purchase discounts, and transportation in transactions are recorded in the Merchandise Inventory

A)  True

1. False

Answer: B Explanation:

Diff: 1

Topic: Periodic Inventory System

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• The periodic inventory system requires updating the inventory account only at the end of the period to reflect the quantity and cost of goods available for sale and the cost of goods

A)  True

1. False

Answer: A Explanation:

Diff: 1

Topic: Periodic Inventory System

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

65)   In a periodic inventory system, cost of goods sold is recorded as each sale occurs.

1. True
2. False

Answer: B Explanation:

Diff: 1

Topic: Periodic Inventory System

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Under both the periodic and perpetual inventory systems, the temporary account Purchases Returns and Allowances is used to accumulate the cost of all returns and allowances for a

A)  True

1. False

Answer: B Explanation:

Diff: 2

Topic: Accounting for Merchandise Purchases; Periodic Inventory System

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.; 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom’s: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• Delivery expense is reported as part of general and administrative expense in the seller’s income

A)  True

1. False

Answer: B Explanation:

Diff: 2

Topic: Financial Statement Formats

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

68)   New revenue recognition rules require that sellers report sales net of expected sales discounts.

1. True
2. False

Answer: A Explanation:

Diff: 2

Topic: Adjustments for sales discounts, returns and allowances

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

69)   The gross method requires a period-end adjusting entry to estimate future sales discounts.

1. True
2. False

Answer: A Explanation:

Diff: 2

Topic: Adjustments for sales discounts, returns and allowances

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• Inventory Returns Estimated, which reflects an adjustment to inventory for expected future returns, is a liability account reported in the balance sheet, usually under Current

A)  True

1. False

Answer: B Explanation:

Diff: 2

Topic: Adjustments for sales discounts, returns and allowances

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

 

 

• Inventory Returns Estimated is a current asset account used in a period-end adjusting entry to reflect the inventory estimated to be returned in the

A)  True

1. False

Answer: A Explanation:

Diff: 2

Topic: Adjustments for sales discounts, returns and allowances

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

 

 

• Under the net method, when a company uses a perpetual inventory system, an invoice for $2,000 with terms of 2/10, n/30 should be recorded with a debit to Merchandise Inventory and a credit to Accounts Payable of $2,000.

A)  True

1. False

Answer: B Explanation:

Diff: 2

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• When purchases are recorded at net amounts, any discounts lost as a result of late payments are reported as an operating

A)  True

1. False

Answer: A Explanation:

Diff: 2

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

74)   The net method initially records the invoice at its net amount (net of any cash discount).

1. True
2. False

Answer: A Explanation:

Diff: 2

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• Either the gross method or net method may be used to record sales with cash discounts, but the net method requires a period-end adjusting entry to estimate expected future sales discounts

A)  True

1. False

Answer: B Explanation:

Diff: 2

Topic: Adjustments for sales discounts, returns and allowances

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

 

• Under the net method of recording purchases, the Discounts Lost account is used when the purchaser fails to take a discount offered by the

A)  True

1. False

Answer: A Explanation:

Diff: 2

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

 

 

77)   A merchandiser:

1. Earns net income by buying and selling
2. Earns profit from fares
3. Earns profit from commissions
4. Receives fees only in exchange for
5. Buys products from Answer: A

Explanation:     A)

B)

C)

D)

E)

Diff: 1

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

78)   Cost of goods sold:

1. Is another term for
2. Is another term for merchandise
3. Is also called gross
4. Is a term only used by service
5. Is the term used for the expense of buying and preparing merchandise for Answer: E

Explanation:     A)

B)

C)

D)

E)

Diff: 1

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

79)   A company has sales of $695,000 and cost of goods sold of $278,000. Its gross profit equals: A) $(417,000).

1. B) $973,000. C) $695,000. D) $417,000. E) $278,000.

Answer: D

Explanation:     A) Gross Margin = Sales – Cost of Goods Sold

Gross Margin = $695,000 – $278,000 = $417,000

1. Gross Margin = Sales – Cost of Goods Sold Gross Margin = $695,000 – $278,000 = $417,000
2. Gross Margin = Sales – Cost of Goods Sold Gross Margin = $695,000 – $278,000 = $417,000
3. Gross Margin = Sales – Cost of Goods Sold Gross Margin = $695,000 – $278,000 = $417,000
4. Gross Margin = Sales – Cost of Goods Sold Gross Margin = $695,000 – $278,000 = $417,000

Diff: 2

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

80)   A company has sales of $375,000 and its gross profit is $157,500. Its cost of goods sold equals: A) $532,500.

500. B) $157,500. C) $(217,000). D) $217,500. E) $375,000.

Answer: D

Explanation:     A) Gross Margin = Sales – Cost of Goods Sold

Cost of Goods Sold = $375,000 – $157,500 = $217,500

1. Gross Margin = Sales – Cost of Goods Sold

Cost of Goods Sold = $375,000 – $157,500 = $217,500

1. Gross Margin = Sales – Cost of Goods Sold

Cost of Goods Sold = $375,000 – $157,500 = $217,500

1. Gross Margin = Sales – Cost of Goods Sold

Cost of Goods Sold = $375,000 – $157,500 = $217,500

1. Gross Margin = Sales – Cost of Goods Sold

Cost of Goods Sold = $375,000 – $157,500 = $217,500

Diff: 3

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

81)   The following statements regarding gross profit are true except:

1. Gross profit less other operating expenses equals income from
2. Gross profit is not calculated on the multiple-step income
3. Gross profit equals net sales less cost of goods
4. Gross profit is also called gross
5. Gross profit must cover all operating expenses to yield a return for the owner of the Answer: B

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Merchandising Activities

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

82)   The following statements regarding merchandise inventory are true except:

1. Merchandise inventory refers to products a company owns and intends to
2. Merchandise inventory appears on the balance sheet of a service
3. Purchasing merchandise inventory is part of the operating cycle for a
4. Merchandise inventory is reported on the balance sheet as a current
5. Merchandise inventory may include the costs of freight in and making them ready for Answer: B

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Cost Flows of a Merchandiser

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• The following statements are true regarding the operating cycle of a merchandising company

except:

A)  The operating cycle is shortened by credit sales.

1. The operating cycle ends with the collection of cash from the sale of
2. The operating cycle begins with the purchase of
3. The operating cycle can vary in length among different merchandising
4. The operating cycle sometimes involves accounts Answer: A

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Cost Flows of a Merchandiser

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

84)   Merchandise  inventory:

1. Is a long-term
2. Is classified with investments on the balance
3. Is a current
4. Must be sold within one
5. Includes supplies the company will use in future Answer: C

Explanation:     A)

B)

C)

D)

E)

Diff: 1

Topic: Cost Flows of a Merchandiser

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

85)   The operating cycle for a merchandiser that sells only for cash moves from:

1. Accounts receivable to inventory to cash
2. Accounts receivable to purchases of merchandise to inventory to cash
3. Inventory to purchases of merchandise to cash
4. Purchases of merchandise to inventory to accounts receivable to cash
5. Purchases of merchandise to inventory to cash Answer: E

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Cost Flows of a Merchandiser

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

86)   The current period’s ending inventory is:

1. The current period’s cost of goods
2. The current period’s net
3. The prior period’s beginning
4. The current period’s beginning
5. The next period’s beginning Answer: E

Explanation:     A)

B)

C)

D)

E)

Diff: 1

Topic: Cost Flows of a Merchandiser

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

87)   Beginning inventory plus net purchases is:

1. Ending
2. Cost of goods
3. Shown on the balance
4. Merchandise (goods) available for

Answer: D Explanation:     A)

B)

C)

D)

E)

Diff: 1

Topic: Cost Flows of a Merchandiser

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

88)   The acid-test ratio:

1. Measures return on
2. Is also called the quick
3. Is generally greater than the current
4. Measures
5. Measures inventory Answer: B

Explanation:     A)

B)

C)

D)

E)

Diff: 1

Topic: Acid-Test Ratios

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

 

 

89)   Quick assets are defined as:

1. Cash, noncurrent receivables, and prepaid
2. Accounts receivable, inventory, and prepaid
3. Cash, inventory, and current
4. Cash, short-term investments, and current
5. Cash, short-term investments, and Answer: D

Explanation:     A)

B)

C)

D)

E)

Diff: 1

Topic: Acid-Test Ratios

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

 

• KLM Corporation’s quick assets are $5,888,000, its current assets are $11,700,000 and its current liabilities are $8,000,000. Its acid-test ratio equals:

A) 1.50.                    B) 0.74.                    C) 0.50.                    D) 0.68.                    E) 2.20.

Answer: B

Explanation:     A) Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $5,888,000/$8,000,000 = 0.74

1. Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $5,888,000/$8,000,000 = 74
2. Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $5,888,000/$8,000,000 = 74
3. Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $5,888,000/$8,000,000 = 74
4. Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $5,888,000/$8,000,000 = 74

Diff: 3

Topic: Acid-Test Ratios

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

 

• A company’s current assets are $17,980, its quick assets are $11,420 and its current liabilities are

$12,190. Its quick ratio equals:

A) 2.40.                    B) 0.94.                    C) 1.48.                    D) 1.57.                    E) 1.07.

Answer: B

Explanation:     A) Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $11,420/$12,190 = 0.94

1. Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $11,420/$12,190 = 94
2. Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $11,420/$12,190 = 94
3. Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $11,420/$12,190 = 94
4. Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $11,420/$12,190 = 94

Diff: 3

Topic: Acid-Test Ratios

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

92)   Liquidity problems are likely to exist when a company’s acid-test ratio:

1. Is substantially lower than
2. Is less than the current
3. Equals
4. Is higher than the current
5. Is higher than

Answer: A Explanation:                       A)

B)

C)

D)

E)

Diff: 2

Topic: Acid-Test Ratios

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

 

93)   The acid-test ratio differs from the current ratio in that:

1. The acid-test ratio measures profitability and the current ratio does
2. The acid-test ratio excludes short-term investments from the
3. The acid-test ratio is a measure of liquidity but the current ratio is
4. Prepaid expenses and inventory are excluded from the calculation of the acid-test
5. Liabilities are divided by current Answer: D

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Acid-Test Ratios

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

 

• Using the following year-end information for Calvin’s Clothing, calculate the current ratio and acid-test ratio for the business:

 

Cash	$ 52,000
Short-term  investments	12,000
Accounts  receivable	54,000
Inventory	325,000

 

 

Prepaid expenses	17,500
Accounts payable	106,500
Other current payables	25,000

 

 

A) 1.97 and 1.52

1. B) 80 and 0.90
2. C) 50 and 0.90
3. 80 and 1
4. E) 73 and 1.52

Answer: C

Explanation:     A) Current Ratio = Current Assets/Current Liabilities Current Ratio = $460,500/$131,500 = 3.50

 

Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $118,000/$131,500 = 0.90

3. Current Ratio = Current Assets/Current Liabilities Current Ratio = $460,500/$131,500 = 50

 

Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $118,000/$131,500 = 0.90

3. Current Ratio = Current Assets/Current Liabilities Current Ratio = $460,500/$131,500 = 50

 

Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $118,000/$131,500 = 0.90

3. Current Ratio = Current Assets/Current Liabilities Current Ratio = $460,500/$131,500 = 50

 

Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $118,000/$131,500 = 0.90

3. Current Ratio = Current Assets/Current Liabilities Current Ratio = $460,500/$131,500 = 50

 

 

 

 

 

 

Diff: 3

Topic: Acid-Test Ratios

Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $118,000/$131,500 = 0.90

 

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

95)   The gross margin ratio:

1. Indicates the percent of sales revenue remaining after covering the cost of the goods
2. Should be greater than 1 for merchandising
3. Is a measure of liquidity and should exceed 0 to be acceptable.
4. Is also called the net profit
5. Is also called the profit Answer: A

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Gross Margin Ratio

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• A company’s gross profit was $83,750 and its net sales were $347,800. Its gross margin ratio equals:

A) 24.1%.                 B) $264,050.            C) 75.9%.                 D) 4.2%.                   E) $83,750.

Answer: A

Explanation:     A) Gross Margin Ratio = Gross Profit/Net Sales

Gross Margin Ratio = $83,750/$347,800 = 24.1%

24. Gross Margin Ratio = Gross Profit/Net Sales Gross Margin Ratio = $83,750/$347,800 = 1%
25. Gross Margin Ratio = Gross Profit/Net Sales Gross Margin Ratio = $83,750/$347,800 = 1%
26. Gross Margin Ratio = Gross Profit/Net Sales Gross Margin Ratio = $83,750/$347,800 = 1%
27. Gross Margin Ratio = Gross Profit/Net Sales Gross Margin Ratio = $83,750/$347,800 = 1%

Diff: 3

Topic: Gross Margin Ratio

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

• A company’s net sales were $676,600, its cost of goods sold was $236,810 and its net income was

$33,750. Its gross margin ratio equals:

A) 35%.                    B) 9.6%.                   C) 5%.                      D) 285.7%.               E) 65%.

Answer: E

Explanation:     A) Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($676,600 – $236,810)/$676,600 = 65%

1. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($676,600 – $236,810)/$676,600 = 65%
2. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($676,600 – $236,810)/$676,600 = 65%
3. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($676,600 – $236,810)/$676,600 = 65%
4. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($676,600 – $236,810)/$676,600 = 65%

Diff: 2

Topic: Gross Margin Ratio

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

 

• A company had net sales of $752,000 and cost of goods sold of $543,000. Its net income was

$17,530. The company’s gross margin ratio equals:

A) 18.9%                  B) 34.7%                  C) 35.2%                  D) 27.8%                  E) 24.5%

Answer: D

Explanation:     A) Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($752,000 – $543,000)/$752,000 = 27.8%

27. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($752,000 – $543,000)/$752,000 = 8%
28. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($752,000 – $543,000)/$752,000 = 8%
29. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($752,000 – $543,000)/$752,000 = 8%
30. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($752,000 – $543,000)/$752,000 = 8%

Diff: 2

Topic: Gross Margin Ratio

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

• Mega Skateboard Supplier had net sales of $2.8 million, its cost of goods sold was $1.6 million, and its net income was $0.9 Its gross margin ratio equals:

A) 175%.                  B) 32%.                    C) 43%.                    D) 57%.                    E) 56%.

Answer: C

Explanation:     A) Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($2.8 – $1.6)/$2.8 = 43%

2. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($2.8 – $1.6)/$2.8 = 43%
3. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($2.8 – $1.6)/$2.8 = 43%
4. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($2.8 – $1.6)/$2.8 = 43%
5. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($2.8 – $1.6)/$2.8 = 43%

Diff: 2

Topic: Gross Margin Ratio

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

 

100)   The credit terms 2/10, n/30 are interpreted as:

1. 10% cash discount if the amount is paid within 2 days, or the balance due in 30
2. 2% cash discount if the amount is paid within 10 days, or the balance due in 30
3. 30% discount if paid within 10
4. 2% discount if paid within 30
5. 30% discount if paid within 2 Answer: B

Explanation:     A)

B)

C)

D)

E)

Diff: 1

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

101)   A trade discount is:

1. A reduction in price for prompt
2. Also called a
3. A reduction in selling price below the list
4. A term used by a seller to describe a cash discount granted to customers for prompt
5. A term used by a purchaser to describe a cash discount given to customers for prompt

Answer: C Explanation:                       A)

B)

C)

D)

E)

Diff: 1

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Jasper Company is a wholesaler that buys merchandise in large Its supplier’s catalog indicates a list price of $500 per unit on merchandise Jasper intends to purchase, and offers a 30% trade discount for large quantity purchases. The cost of shipping for the merchandise is $7 per unit. Jasper’s total purchase price per unit will be:

A) $350                    B) $507                    C) $343                    D) $357                    E) $493

Answer: D

Explanation:     A) Trade discount = $500 * 30% = $150

Total purchase price per unit = $500 – $150 + $7 = $357

1. Trade discount = $500 * 30% = $150

Total purchase price per unit = $500 – $150 + $7 = $357

1. Trade discount = $500 * 30% = $150

Total purchase price per unit = $500 – $150 + $7 = $357

1. Trade discount = $500 * 30% = $150

Total purchase price per unit = $500 – $150 + $7 = $357

1. Trade discount = $500 * 30% = $150

Total purchase price per unit = $500 – $150 + $7 = $357

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

 

• Fragment Company is a wholesaler that sells merchandise in large Its catalog indicates a list price of $300 per unit on a particular product and a 40% trade discount is offered for quantity purchases of 50 units or more. The cost of shipping the merchandise is $7 per unit under terms FOB shipping point. If a customer purchases 100 units of this product, what is the amount of sales revenue that Fragment will record from this sale?

A) $30,000               B) $29,300               C) $18,700               D) $30,700               E) $18,000

Answer: E

Explanation:     A) Trade discount = $300 * 40% = $120

Total sales price per unit = $300 – $120 = $180 Total sales = $180 * 100 units = $18,000

1. Trade discount = $300 * 40% = $120

Total sales price per unit = $300 – $120 = $180 Total sales = $180 * 100 units = $18,000

1. Trade discount = $300 * 40% = $120

Total sales price per unit = $300 – $120 = $180 Total sales = $180 * 100 units = $18,000

1. Trade discount = $300 * 40% = $120

Total sales price per unit = $300 – $120 = $180 Total sales = $180 * 100 units = $18,000

1. Trade discount = $300 * 40% = $120

Total sales price per unit = $300 – $120 = $180 Total sales = $180 * 100 units = $18,000

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

 

104)   The amount recorded for merchandise inventory includes all of the following except:

1. Purchase
2. Returns and
3. Freight costs paid by the
4. Trade
5. Freight costs paid by the Answer: E

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• A company uses the perpetual inventory system and recorded the following entry:

 

 

Accounts Payable	2,500
Merchandise Inventory		50
Cash		2,450

 

This entry reflects a:

A)  Return of merchandise.

1. Payment of the account payable less a 1% cash discount
2. Payment of the account payable less a 2% cash discount
3. Sale of merchandise on
4. Purchase of merchandise on Answer: C

Explanation:     A)

B)

C)

D)

E)

Diff: 3

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

106)   A debit memorandum is:

1. Required when a purchase discount is
2. Not necessary in a perpetual inventory
3. Required whenever a journal entry is
4. The source document for the purchase of merchandise
5. The document a buyer issues to inform the seller of a debit made to the seller’s account payable in the buyer’s

Answer: E Explanation:                       A)

B)

C)

D)

E)

Diff: 1

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of On July 8, it paid the full amount due. The amount of the cash paid on July 8 equals:

A) $200.                   B) $1,800.                C) $1,568.                D) $1,564.                E) $1,600.

Answer: C

Explanation:     A) Cash Paid = ($1,800 – $200) * .98 = $1,568 B) Cash Paid = ($1,800 – $200) * .98 = $1,568 C) Cash Paid = ($1,800 – $200) * .98 = $1,568 D) Cash Paid = ($1,800 – $200) * .98 = $1,568 E) Cash Paid = ($1,800 – $200) * .98 = $1,568

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of On July 28, it paid the full amount due. The amount of the cash paid on July 28 equals:

A) $1,600.                B) $1,800.                C) $1,568.                D) $1,564.                E) $200.

Answer: A

Explanation:     A) Cash Paid = ($1,800 – $200) = $1,600

No discount may be taken because the payment was not within 10 days of the purchase.

1. B) Cash Paid = ($1,800 – $200) = $1,600

No discount may be taken because the payment was not within 10 days of the purchase.

1. C) Cash Paid = ($1,800 – $200) = $1,600

No discount may be taken because the payment was not within 10 days of the purchase.

1. D) Cash Paid = ($1,800 – $200) = $1,600

No discount may be taken because the payment was not within 10 days of the purchase.

1. E) Cash Paid = ($1,800 – $200) = $1,600

No discount may be taken because the payment was not within 10 days of the purchase.

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, The correct journal entry to record the purchase on July 5 is:

A)  Debit Accounts Payable $1,800; credit Merchandise Inventory $1,800.

600. Debit Merchandise Inventory $1,600; credit Cash $1,600.
601. Debit Accounts Payable $1,800; credit Purchase Returns $200; credit Merchandise Inventory

$1,600.

D)  Debit Merchandise Inventory $1,800; credit Accounts Payable $1,800.

600. Debit Merchandise Inventory $1,800; credit Sales Returns $200; credit Cash $1,600. Answer: D

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the merchandise return on July 7 is:

A)  Debit Merchandise Inventory $200; credit Accounts Payable $200.

200. Debit Accounts Payable $200; credit Merchandise Inventory $200.
201. Debit Merchandise Inventory $200; credit Sales Returns $200.
202. Debit Accounts Payable $1,800; credit Purchase Returns $200; credit Merchandise Inventory

$1,600.

E)  Debit Merchandise Inventory $1,600; credit Cash $1,600. Answer: B

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the payment on July 28 is:

A)  Debit Accounts Payable $1,800; credit Cash $1,800.

600. Debit Cash $1,600; credit Accounts Payable $1,600.
601. Debit Merchandise Inventory $1,600; credit Cash $1,600.
602. Debit Accounts Payable $1,600; credit Cash $1,600.
603. Debit Accounts Payable $1,600; credit Merchandise Inventory $32; credit Cash $1,568. Answer: D

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of On July 12, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the payment on July 12 is:

A)  Debit Accounts Payable $1,800; credit Cash $1,800.

600. Debit Accounts Payable $1,600; credit Cash $1,600.
601. Debit Accounts Payable $1,600; credit Merchandise Inventory $32; credit Cash $1,568.
602. Debit Cash $1,600; credit Accounts Payable $1,600.
603. Debit Merchandise Inventory $1,600; credit Cash $1,600. Answer: C

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• A company purchased $4,000 worth of Transportation costs were an additional $350. The company returned $275 worth of merchandise and then paid the invoice within the 2% cash discount period. The total cost of this merchandise is:

A) $3,995.00.           B) $4,075.00.           C) $4,000.50.           D) $3,725.00.           E) $3,925.00.

Answer: C

Explanation:     A) Cash Paid = [($4,000 – $275) * .98] + $350 = $4,000.50 No discount may be taken on the transportation costs.

1. B) Cash Paid = [($4,000 – $275) * .98] + $350 = $4,000.50

No discount may be taken on the transportation costs.

1. C) Cash Paid = [($4,000 – $275) * .98] + $350 = $4,000.50

No discount may be taken on the transportation costs.

1. D) Cash Paid = [($4,000 – $275) * .98] + $350 = $4,000.50

No discount may be taken on the transportation costs.

1. E) Cash Paid = [($4,000 – $275) * .98] + $350 = $4,000.50

No discount may be taken on the transportation costs.

Diff: 3

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• A buyer failed to take advantage of the vendor’s credit terms of 2/15, n/45, but instead paid the invoice in full at the end of 45 By not taking advantage of the cash discount, the equivalent annual interest lost on the amount of the purchase is:

A) 24.5%                  B) 16.2%                  C) 24.3%                  D) 18.9%                  E) 12.2%

Answer: C

Explanation:     A) Interest Rate = [365/(45 – 15)] * .02 = 24.3% B) Interest Rate = [365/(45 – 15)] * .02 = 24.3% C) Interest Rate = [365/(45 – 15)] * .02 = 24.3% D) Interest Rate = [365/(45 – 15)] * .02 = 24.3% E) Interest Rate = [365/(45 – 15)] * .02 = 24.3%

Diff: 3

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

115)   Sales returns:

1. Refer to reductions in the selling price of merchandise sold to
2. Represent trade
3. Are not recorded under the perpetual inventory system until the end of each accounting

D)  Refer to merchandise that customers return to the seller after the sale.

1. Represent cash Answer: D

Explanation:     A)

B)

C)

D)

E)

Diff: 1

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

116)   All of the following statements regarding sales returns and allowances are true except:

1. Sales returns and allowances are rarely disclosed in published financial
2. Sales returns and allowances are recorded in a separate contra-revenue
3. There is no relationship between sales returns and allowances and the possibility of lost future

D)  Sales returns and allowances are closed to the Income Summary account.

1. A reduction in the selling price because of damaged merchandise is included in sales returns and

Answer: C Explanation:                       A)

B)

C)

D)

E)

Diff: 2

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

117)   A debit to Sales Returns and Allowances and a credit to Accounts Receivable:

1. Reflects an increase in amount due from a
2. Is recorded when a customer takes a
3. Records the cost side of a sales
4. Reflects a decrease in amount due to a
5. Recognizes that a customer returned merchandise and/or received an Answer: E

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

118)   Sales less sales discounts less sales returns and allowances equals:

1. Net
2. Cost of goods
3. Gross
4. Net
5. Net

Answer: D Explanation:                       A)

B)

C)

D)

E)

Diff: 1

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Garza Company had sales of $135,000, sales discounts of $2,000, and sales returns of $3,200. Garza Company’s net sales equals:

A) $140,200.            B) $5,200.                C) $129,800.            D) $135,000.            E) $133,000.

Answer: C

Explanation:     A) Net Sales = $135,000 – $2,000 – $3,200 = $129,800 B) Net Sales = $135,000 – $2,000 – $3,200 = $129,800 C) Net Sales = $135,000 – $2,000 – $3,200 = $129,800 D) Net Sales = $135,000 – $2,000 – $3,200 = $129,800 E) Net Sales = $135,000 – $2,000 – $3,200 = $129,800

Diff: 3

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On May 1, Shilling Company sold merchandise in the amount of $5,800 to Anders, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Shilling uses the perpetual inventory system and the gross method The journal entry or entries that Shilling will make on May 1 is:

A)

Accounts  receivable	4,000
Sales		4,000

 

B)

Sales	5,800
Accounts  receivable		5,800

 

C)

Accounts  receivable	5,800
Sales		5,800
Cost of goods sold	4,000
Merchandise Inventory		4,000

 

D)

Sales	5,800
Accounts  receivable		5,800
Cost of goods sold	4,000
Merchandise Inventory		4,000

 

E)

Accounts  receivable	5,800
Sales		5,800

 

 

Answer: C Explanation:                       A)

B)

C)

D)

E)

Diff: 2

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On May 1, Anders Company purchased merchandise in the amount of $5,800 from Shilling, with credit terms of 2/10, n/30. Anders uses the perpetual inventory system and the gross method The journal entry or entries that Anders will make on May 1 is:

A)

Merchandise Inventory	5,800
Cash		5,800

 

B)

Merchandise Inventory	5,800
Accounts payable		5,800

 

C)

Purchases	5,800
Accounts payable		5,800

 

D)

Accounts payable	5,800
Sales		5,800

 

E)

Sales	5,800
Accounts  receivable		5,800

 

 

Answer: B Explanation:                       A)

B)

C)

D)

E)

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On February 3, Smart Company sold merchandise in the amount of $5,800 to Truman Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Smart uses the perpetual inventory system and the gross method Truman pays the invoice on February 8, and takes the appropriate discount. The journal entry that Smart makes on February 8 is:

A)

Cash	5,684
Sales discounts	116
Accounts  receivable		5,800

 

B)

Cash	5,684
Accounts  receivable		5,684

 

C)

Cash	5,800
Accounts  receivable		5,800

 

D)

Cash	4,000
Accounts  receivable		4,000

 

E)

Cash	3,920
Sales discounts	80
Accounts  receivable		4,000

 

 

Answer: A

Explanation:     A) Sales Discounts = $5,800 * .02 = $116

Cash = $5,800 – $116 = $5,684

1. Sales Discounts = $5,800 * .02 = $116 Cash = $5,800 – $116 = $5,684
2. Sales Discounts = $5,800 * .02 = $116 Cash = $5,800 – $116 = $5,684
3. Sales Discounts = $5,800 * .02 = $116 Cash = $5,800 – $116 = $5,684
4. Sales Discounts = $5,800 * .02 = $116 Cash = $5,800 – $116 = $5,684

Diff: 2

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On July 1, Ferguson Company sold merchandise in the amount of $5,800 to Tracey Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ferguson uses the perpetual inventory system and the gross method On July 5, Tracey returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Ferguson must make on July 5 is:

A)

Sales returns and allowances	350
Accounts  receivable		350

 

B)

Accounts  receivable	500
Sales returns and allowances		500

 

C)

Accounts  receivable	500
Sales returns and allowances		500
Cost of goods sold	350
Merchandise  inventory		350

 

D)

Sales returns and allowances	500
Accounts  receivable		500
Merchandise  inventory	350
Cost of goods sold		350

 

E)

Sales returns and allowances	500
Accounts  receivable		500

 

 

Answer: D Explanation:                       A)

B)

C)

D)

E)

Diff: 3

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• Juniper Company uses a perpetual inventory system and the gross method of accounting for The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The amount of the cash paid on August 16 equals:

A) $8,152.50.           B) $8,167.50.           C) $9,750.00.           D) $8,250.00.           E) $9,652.50.

Answer: B

Explanation:     A) Cash Paid = ($9,750 – $1,500) * .99 = $8,167.50 B) Cash Paid = ($9,750 – $1,500) * .99 = $8,167.50 C) Cash Paid = ($9,750 – $1,500) * .99 = $8,167.50 D) Cash Paid = ($9,750 – $1,500) * .99 = $8,167.50 E) Cash Paid = ($9,750 – $1,500) * .99 = $8,167.50

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• Juniper Company uses a perpetual inventory system and the gross method of accounting for The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 26, it paid the full mount due. The amount of the cash paid on August 26 equals:

A) $9,652.50.           B) $8,250.00.           C) $9,750.00.           D) $8,167.50.           E) $8,152.50.

Answer: B

Explanation:     A) Cash Paid = ($9,750 – $1,500) = $8,250

No discount may be taken because the payment was not within 10 days of the purchase.

1. B) Cash Paid = ($9,750 – $1,500) = $8,250

No discount may be taken because the payment was not within 10 days of the purchase.

1. C) Cash Paid = ($9,750 – $1,500) = $8,250

No discount may be taken because the payment was not within 10 days of the purchase.

1. D) Cash Paid = ($9,750 – $1,500) = $8,250

No discount may be taken because the payment was not within 10 days of the purchase.

1. E) Cash Paid = ($9,750 – $1,500) = $8,250

No discount may be taken because the payment was not within 10 days of the purchase.

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• Juniper Company uses a perpetual inventory system and the gross method of accounting for The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The correct journal entry to record the purchase on August 7 is:

A)  Debit Merchandise Inventory $9,750; credit Sales Returns $1,500; credit Cash $8,250.

750. Debit Accounts Payable $8,250; debit Purchase Returns $1,500; credit Merchandise Inventory $9,750.

C)  Debit Accounts Payable $9,750; credit Merchandise Inventory $9,750.

750. Debit Merchandise Inventory $9,750; credit Cash $9,750.
751. Debit Merchandise Inventory $9,750; credit Accounts Payable $9,750. Answer: E

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• Juniper Company uses a perpetual inventory system and the gross method of accounting for The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 26, it paid the full amount due. The correct journal entry to record the merchandise return on August 11 is:

A)  Debit Accounts Payable $1,500; credit Purchase Returns $1,500.

500. Debit Accounts Payable $1,500; credit Cash $1,500.
501. Debit Accounts Payable $1,500; credit Merchandise Inventory $1,500.
502. Debit Merchandise Inventory $1,500; credit Cash $1,500.
503. Debit Merchandise Inventory $1,500; credit Sales Returns $1,500. Answer: C

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• Juniper Company uses a perpetual inventory system and the gross method of accounting for The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The correct journal entry to record the payment on August 16 is:

A)  Debit Accounts Payable $8,250; credit Merchandise Inventory $82.50; credit Cash $8,167.50.

250. Debit Cash $8,250; credit Accounts Payable $8,250.
251. Debit Accounts Payable $9,750; credit Merchandise Inventory $97.50; credit Cash $9,652.50.
252. Debit Accounts Payable $8,167.50; credit Cash $8,167.50.
253. Debit Merchandise Inventory $8,250; credit Cash $8,250. Answer: A

Explanation:     A) Cash Paid = ($9,750 – $1,500) * .99 = $8,167.50

167. B) Cash Paid = ($9,750 – $1,500) * .99 = $8,167.50 C) Cash Paid = ($9,750 – $1,500) * .99 = $8,167.50 D) Cash Paid = ($9,750 – $1,500) * .99 = $8,167.50 E) Cash Paid = ($9,750 – $1,500) * .99 = $8,167.50

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• A company records the following journal entry: debit Cash $1,470, debit Sales Discounts $30, and credit Accounts Receivable $1,500. This means that a customer has taken what percentage cash discount for early payment?

A) 5%                       B) 10%                     C) 2%                       D) 15%                     E) 1%

Answer: C

Explanation:     A) Discount = $30/$1,500 = 2%

1. B) Discount = $30/$1,500 = 2% C) Discount = $30/$1,500 = 2% D) Discount = $30/$1,500 = 2% E) Discount = $30/$1,500 = 2%

Diff: 3

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

130)   All of the following statements regarding inventory shrinkage are true except:

1. Inventory shrinkage refers to the loss of
2. Inventory shrinkage can be caused by theft or
3. Inventory shrinkage is recognized by debiting an operating
4. Inventory shrinkage is determined by comparing a physical count of inventory with recorded inventory

E)  Inventory shrinkage is recognized by debiting Cost of Goods Sold. Answer: C

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Adjusting and Closing Entries for Merchandisers

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Frisco Company’s Merchandise Inventory account at year-end has a balance of $62,115, but a physical count reveals that only $61,900 of inventory The adjusting entry to record this $215 of inventory shrinkage is:

A)

Cost of goods sold	215
Merchandise Inventory		215

 

B)

Merchandise Inventory	215
Inventory shrinkage expense		215

 

C)

Cost of goods sold	215
Purchases discounts		215

 

D)

Inventory shrinkage expense	215
Cost of goods sold		215

 

E)

Purchases discounts	215
Cost of goods sold		215

 

 

Answer: A Explanation:                       A)

B)

C)

D)

E)

Diff: 2

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

132)   Which of the following accounts would be closed at the end of the accounting period with a debit?

1. Operating
2. Cost of Goods
3. Sales Returns and
5. Sales

Answer: D Explanation:                       A)

B)

C)

D)

E)

Diff: 2

Topic: Adjusting and Closing Entries for Merchandisers

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• An income statement that includes cost of goods sold as another expense and shows only one subtotal for total expenses is a:

A)  Combined income statement.

1. Simplified income
2. Balanced income
3. Single-step income
4. Multiple-step income Answer: D

Explanation:     A)

B)

C)

D)

E)

Diff: 1

Topic: Financial Statement Formats

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

 

 

• Expenses that support the overall operations of a business and include the expenses relating to accounting, human resource management, and financial management are called:

A)  Cost of goods sold.

1. Non-operating
2. General and administrative
3. Purchasing
4. Selling

Answer: C Explanation:                       A)

B)

C)

D)

E)

Diff: 1

Topic: Financial Statements for Merchandisers

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

 

• Prentice Company had cash sales of $94,275, credit sales of $83,450, sales returns and allowances of $1,700, and sales discounts of $3,475. Prentice’s net sales for this period equal:

A) $176,025.            B) $172,550.            C) $94,275.              D) $177,725.            E) $174,250.

Answer: B

Explanation:     A) Net Sales = $94,275 + $83,450 – $1,700 – $3,475 = $172,550 B) Net Sales = $94,275 + $83,450 – $1,700 – $3,475 = $172,550 C) Net Sales = $94,275 + $83,450 – $1,700 – $3,475 = $172,550 D) Net Sales = $94,275 + $83,450 – $1,700 – $3,475 = $172,550 E) Net Sales = $94,275 + $83,450 – $1,700 – $3,475 = $172,550

Diff: 2

Topic: Financial Statements for Merchandisers

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

136)   Multiple-step income statements:

1. Are only used in perpetual inventory
2. Are required by the FASB and
3. Are required for the periodic inventory
4. Contain more detail than a simple listing of revenues and
5. List cost of goods sold as an operating Answer: D

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Financial Statement Formats

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Reporting

 

• Expenses to promote sales by displaying and advertising merchandise, make sales, and deliver goods to customers are known as:

A)  Cost of goods sold.

1. Selling
2. Non-operating
3. Purchasing
4. General and administrative Answer: B

Explanation:     A)

B)

C)

D)

E)

Diff: 1

Topic: Financial Statements for Merchandisers

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

 

 

• A company has net sales of $752,000 and cost of goods sold of $543,000. Its net income is

$17,530. The company’s gross margin and operating expenses, respectively, are:

A) $227,000 and $525,470 B) $209,000 and $191,470 C) $191,470 and $209,000 D) $525,470 and $227,000 E) $734,000 and $191,470

Answer: B

Explanation:     A) Gross Margin = Net Sales – Cost of Goods Sold; $752,000 – $543,000 = $209,000 Operating Expenses = Gross Margin – Net Income; $209,000 – $17,530 = $191,470

1. Gross Margin = Net Sales – Cost of Goods Sold; $752,000 – $543,000 = $209,000 Operating Expenses = Gross Margin – Net Income; $209,000 – $17,530 = $191,470
2. Gross Margin = Net Sales – Cost of Goods Sold; $752,000 – $543,000 = $209,000 Operating Expenses = Gross Margin – Net Income; $209,000 – $17,530 = $191,470
3. Gross Margin = Net Sales – Cost of Goods Sold; $752,000 – $543,000 = $209,000 Operating Expenses = Gross Margin – Net Income; $209,000 – $17,530 = $191,470
4. Gross Margin = Net Sales – Cost of Goods Sold; $752,000 – $543,000 = $209,000 Operating Expenses = Gross Margin – Net Income; $209,000 – $17,530 = $191,470

Diff: 3

Topic: Financial Statements for Merchandisers

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• Which of the following accounts is used in the periodic inventory system but not used in the perpetual inventory system?

A)  Sales

1. Merchandise Inventory
2. Purchases
3. Accounts Payable
4. Sales Returns and Allowances Answer: C

Explanation:     A)

B)

C)

D)

E)

Diff: 1

Topic: Periodic Inventory System

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• When preparing an unadjusted trial balance using a periodic inventory system, the amount shown for Merchandise Inventory is:

A)  The beginning inventory amount.

1. Equal to the cost of goods
2. Equal to the gross
3. Equal to the cost of goods
4. The ending inventory Answer: A

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Periodic Inventory System

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander uses the periodic inventory system and the gross method of accounting for The journal entry or entries that Vander will make on September 12 is:

A)

Sales	5,800
Accounts  receivable		5,800
Cost of goods sold	4,000
Merchandise Inventory		4,000

 

B)

Sales	5,800
Accounts  receivable		5,800

 

C)

Accounts  receivable	5,800
Sales		5,800

 

D)

Accounts  receivable	4,000
Sales		4,000

 

E)

Accounts  receivable	5,800
Sales		5,800
Cost of goods sold	4,000
Merchandise Inventory		4,000

 

 

Answer: C Explanation:                      A)

B)

C)

D)

E)

Diff: 3

Topic: Periodic Inventory System

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Jepson uses the periodic inventory system and the gross method of accounting for The journal entry that Jepson will make on September 12 is:

A)

Purchases	5,800
Accounts payable		5,800

 

B)

Purchases	5,800
Accounts  receivable		5,800

 

C)

Merchandise  inventory	5,800
Accounts payable		5,800

 

D)

Accounts payable	4,000
Merchandise  inventory		4,000

 

E)

Purchases	4,000
Accounts  receivable		4,000

 

 

Answer: A Explanation:                      A)

B)

C)

D)

E)

Diff: 3

Topic: Periodic Inventory System

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander uses the periodic inventory system and the gross method of accounting for Jepson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Vander makes on September 18 is:

 

A)

Cash	5,800
Accounts  receivable		5,800

 

B)

Cash	5,684
Accounts  receivable		5,684

 

C)

Cash	3,920
Sales discounts	80
Accounts  receivable		4,000

 

D)

Cash	4,000
Accounts  receivable		4,000

 

E)

Cash	5,684
Sales discounts	116
Accounts  receivable		5,800

 

 

Answer: E

Explanation:     A) Sales Discounts = $5,800 * .02 = $116

Cash = $5,800 – $116 = $5,684

1. Sales Discounts = $5,800 * .02 = $116 Cash = $5,800 – $116 = $5,684
2. Sales Discounts = $5,800 * .02 = $116 Cash = $5,800 – $116 = $5,684
3. Sales Discounts = $5,800 * .02 = $116 Cash = $5,800 – $116 = $5,684
4. Sales Discounts = $5,800 * .02 = $116 Cash = $5,800 – $116 = $5,684

Diff: 2

Topic: Periodic Inventory System

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Jepson uses the periodic inventory system and the gross method of accounting for Jepson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Jepson makes on September 18 is:

A)

Accounts payable	5,800
Purchases discounts		116
Cash		5,684

 

B)

Cash	5,684
Accounts  receivable		5,684

 

C)

Cash	5,684
Purchases discounts	116
Accounts payable		5,800

 

D)

Accounts payable	5,800
Merchandise  inventory		116
Cash		5,684

 

E)

Purchases	5,684
Cash		5,684

 

 

Answer: A

Explanation:     A) Purchases Discounts = $5,800 * .02 = $116

Cash = $5,800 – $116 = $5,684

1. Purchases Discounts = $5,800 * .02 = $116 Cash = $5,800 – $116 = $5,684
2. Purchases Discounts = $5,800 * .02 = $116 Cash = $5,800 – $116 = $5,684
3. Purchases Discounts = $5,800 * .02 = $116 Cash = $5,800 – $116 = $5,684
4. Purchases Discounts = $5,800 * .02 = $116 Cash = $5,800 – $116 = $5,684

 

Diff: 2

Topic: Periodic Inventory System

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander uses the periodic inventory system and the gross method of accounting for On September 14, Jepson returns some of the non-defective merchandise, which is restored to inventory. The selling price of the returned merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Vander must make on September 14 is:

A)

Sales returns and allowances	350
Accounts  receivable		350

 

B)

Accounts  receivable	500
Sales returns and allowances		500

 

C)

Sales returns and allowances	500
Accounts  receivable		500
Merchandise  inventory	350
Cost of goods sold		350

 

D)

Sales returns and allowances	500
Accounts  receivable		500

 

E)

Accounts  receivable	500
Sales returns and allowances		500
Cost of goods sold	350
Merchandise  inventory		350

 

 

Answer: D Explanation:                      A)

B)

C)

D)

 

 

 

Diff: 3

DE))

 

Topic: Periodic Inventory System

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander uses the periodic inventory system and the gross method of accounting for On September 14, Jepson returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. Jepson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Vander makes on September 18 is:

A)

Cash	5,194
Sales discounts	106
Accounts  receivable		5,300

 

B)

Cash	5,684
Sales discounts	116
Accounts  receivable		5,800

 

C)

Cash	5,684
Accounts  receivable		5,684

 

D)

Cash	4,000
Accounts  receivable		4,000

 

E)

Cash	5,800
Accounts  receivable		5,800

 

 

Answer: A

Explanation:     A) Accounts Receivable = $5,800 – $500 = $5,300 Sales Discounts = $5,300 * .02 = $106

Cash = $5,300 – $106 = $5,194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diff: 3

1. Accounts Receivable = $5,800 – $500 = $5,300 Sales Discounts = $5,300 * .02 = $106

Cash = $5,300 – $106 = $5,194

1. Accounts Receivable = $5,800 – $500 = $5,300 Sales Discounts = $5,300 * .02 = $106

Cash = $5,300 – $106 = $5,194

1. Accounts Receivable = $5,800 – $500 = $5,300 Sales Discounts = $5,300 * .02 = $106

Cash = $5,300 – $106 = $5,194

1. Accounts Receivable = $5,800 – $500 = $5,300 Sales Discounts = $5,300 * .02 = $106

Cash = $5,300 – $106 = $5,194

 

Topic: Periodic Inventory System

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• Cushman Company had $800,000 in net sales, $350,000 in gross profit, and $200,000 in operating Cost of goods sold equals:

A) $150,000.            B) $450,000.            C) $200,000.            D) $350,000.            E) $800,000.

Answer: B

Explanation:     A) Cost of Goods Sold = Net Sales – Gross Profit; $800,000 – $350,000 = $450,000

1. Cost of Goods Sold = Net Sales – Gross Profit; $800,000 – $350,000 = $450,000
2. Cost of Goods Sold = Net Sales – Gross Profit; $800,000 – $350,000 = $450,000
3. Cost of Goods Sold = Net Sales – Gross Profit; $800,000 – $350,000 = $450,000
4. Cost of Goods Sold = Net Sales – Gross Profit; $800,000 – $350,000 = $450,000

Diff: 3

Topic: Cost Flows of a Merchandiser

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• Cushman Company had $800,000 in sales, sales discounts of $12,000, sales returns and allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating Gross profit equals:

A) $770,000.            B) $408,000.            C) $115,000.            D) $402,000.            E) $390,000.

Answer: E

Explanation:     A) Gross Profit (Margin) = $800,000 – $12,000 – $18,000 – $380,000 = $390,000 B) Gross Profit (Margin) = $800,000 – $12,000 – $18,000 – $380,000 = $390,000 C) Gross Profit (Margin) = $800,000 – $12,000 – $18,000 – $380,000 = $390,000 D) Gross Profit (Margin) = $800,000 – $12,000 – $18,000 – $380,000 = $390,000 E) Gross Profit (Margin) = $800,000 – $12,000 – $18,000 – $380,000 = $390,000

Diff: 2

Topic: Financial Statements for Merchandisers

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• Cushman Company had $800,000 in sales, sales discounts of $12,000, sales returns and allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating Net income equals:

A) $402,000.            B) $390,000.            C) $408,000.            D) $115,000.             E) $770,000.

Answer: D

Explanation:     A) Net Income = $800,000 – $12,000 – $18,000 – $380,000 – $275,000 = $115,000 B) Net Income = $800,000 – $12,000 – $18,000 – $380,000 – $275,000 = $115,000 C) Net Income = $800,000 – $12,000 – $18,000 – $380,000 – $275,000 = $115,000 D) Net Income = $800,000 – $12,000 – $18,000 – $380,000 – $275,000 = $115,000 E) Net Income = $800,000 – $12,000 – $18,000 – $380,000 – $275,000 = $115,000

Diff: 2

Topic: Financial Statements for Merchandisers

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• A company purchased $10,000 of merchandise on June 15 with terms of 3/10, n/45. On June 20, it returned $800 of that On June 24, it paid the balance owed for the merchandise taking any discount it was entitled to. The cash paid on June 24 equals:

A) $9,700.                B) $9,800.                C) $10,000.              D) $8,724.                E) $8,924.

Answer: E

Explanation:     A) Cash Paid = ($10,000 – $800) * .97 = $8,924 B) Cash Paid = ($10,000 – $800) * .97 = $8,924 C) Cash Paid = ($10,000 – $800) * .97 = $8,924 D) Cash Paid = ($10,000 – $800) * .97 = $8,924 E) Cash Paid = ($10,000 – $800) * .97 = $8,924

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• A company purchased $10,000 of merchandise on June 15 with terms of 3/10, n/45, and FOB shipping The freight charge, $500, was added to the invoice amount. On June 20, it returned

$800 of that merchandise. On June 24, it paid the balance owed for the merchandise taking any discount it is entitled to. The cash paid on June 24 equals:

A) $10,300.              B) $9,224.                C) $9,424.                D) $10,200.              E) $10,500.

Answer: C

Explanation:     A) Cash Paid = $10,000 – $800 = $9,200 * .97 = $8,924 + $500 = $9,424 B) Cash Paid = $10,000 – $800 = $9,200 * .97 = $8,924 + $500 = $9,424 C) Cash Paid = $10,000 – $800 = $9,200 * .97 = $8,924 + $500 = $9,424 D) Cash Paid = $10,000 – $800 = $9,200 * .97 = $8,924 + $500 = $9,424 E) Cash Paid = $10,000 – $800 = $9,200 * .97 = $8,924 + $500 = $9,424

Diff: 3

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• A company’s current assets are $23,420, its quick assets are $13,890 and its current liabilities are

$12,220. Its acid-test ratio equals:

A) 1.14.                    B) 1.41.                    C) .52.                      D) 0.88.                    E) 1.91.

Answer: A

Explanation:     A) Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $13,890/$12,220 = 1.14

1. Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $13,890/$12,220 = 14
2. Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $13,890/$12,220 = 14
3. Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $13,890/$12,220 = 14
4. Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $13,890/$12,220 = 14

Diff: 2

Topic: Acid-Test Ratios

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

 

• Using the following year-end information for Bauman, LLC, calculate the current ratio and acid-test ratio:

 

Cash	$ 48,000
Short-term  investments	12,000
Accounts  receivable	45,000
Inventory	225,000
Prepaid expenses	12,500
Accounts payable	86,500
Other current payables	22,000

 

 

A) 3.01 and 1.21

3. B) 16 and 1.21
4. C) 04 and 1.21
5. D) 16 and .97
6. E) 09 and 4.77

Answer: D

Explanation:     A) Current Ratio = Current Assets/Current Liabilities Current Ratio = $342,500/$108,500 = 3.16

 

Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $105,000/$108,500 = 0.97

 

3. Current Ratio = Current Assets/Current Liabilities Current Ratio = $342,500/$108,500 = 16

 

Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $105,000/$108,500 = 0.97

3. Current Ratio = Current Assets/Current Liabilities Current Ratio = $342,500/$108,500 = 16

 

Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $105,000/$108,500 = 0.97

3. Current Ratio = Current Assets/Current Liabilities Current Ratio = $342,500/$108,500 = 16

 

Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $105,000/$108,500 = 0.97

3. Current Ratio = Current Assets/Current Liabilities Current Ratio = $342,500/$108,500 = 16

 

 

 

 

 

 

Diff: 3

Topic: Acid-Test Ratios

Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $105,000/$108,500 = 0.97

 

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

• A company’s net sales are $775,420, its costs of goods sold are $413,890, and its net income is

$117,220. Its gross margin ratio equals:

A) 40.5%.                 B) 46.6%.                 C) 31.5%.                 D) 53.4%.                 E) 28.3%.

Answer: B

Explanation:     A) Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($775,420 – $413,890)/$775,420 = 46.6%

46. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($775,420 – $413,890)/$775,420 = 6%
47. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($775,420 – $413,890)/$775,420 = 6%
48. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($775,420 – $413,890)/$775,420 = 6%
49. Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($775,420 – $413,890)/$775,420 = 6%

Diff: 3

Topic: Gross Margin Ratio

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

 

 

155)   All of the following statements related to U.S. GAAP and IFRS are true except:

1. Neither system defines operating
2. S. GAAP offers little guidance about the presentation order of expenses.
3. Accounting for basic inventory transactions is the same under the two
4. Neither system requires separate disclosure of items when their size, nature, or frequency are

E)  The closing process for merchandisers is the same under both systems. Answer: D

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Financial Statements for Merchandisers

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Understand

AACSB: Communication

AICPA: FN Reporting; BB Global

 

• A company purchases merchandise with a catalog price of $20,000. The company receives a 35% trade discount from the The seller also offers credit terms of 2/10, n/30. Assuming no returns were made and that payment was made within the discount period, what is the net cost of the merchandise?

A) $19,600.              B) $13,000.              C) $13,720.              D) $6,860.                E) $12,740.

Answer: E

Explanation:     A) Cost of Merchandise = $20,000 * .65 = $13,000; $13,000 * .98 = $12,740 B) Cost of Merchandise = $20,000 * .65 = $13,000; $13,000 * .98 = $12,740 C) Cost of Merchandise = $20,000 * .65 = $13,000; $13,000 * .98 = $12,740 D) Cost of Merchandise = $20,000 * .65 = $13,000; $13,000 * .98 = $12,740 E) Cost of Merchandise = $20,000 * .65 = $13,000; $13,000 * .98 = $12,740

Diff: 2

Topic: Accounting for Merchandise Purchases

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• A company has net sales of $825,000 and cost of goods sold of $547,000. Its net income is

$98,500. The company’s gross margin and operating expenses, respectively, are:

A) $179,500 and $98,500 B) $645,500 and $179,500 C) $209,000 and $191,470 D) $278,000 and $98,500 E) $278,000 and $179,500

Answer: E

Explanation:     A) Gross Margin = Net Sales – Cost of Goods Sold; $825,000 – $547,000 = $278,000 Operating Expenses = Gross Margin – Net Income; $278,000 – $98,500 =

$179,500

1. Gross Margin = Net Sales – Cost of Goods Sold; $825,000 – $547,000 = $278,000 Operating Expenses = Gross Margin – Net Income; $278,000 – $98,500 =

$179,500

1. Gross Margin = Net Sales – Cost of Goods Sold; $825,000 – $547,000 = $278,000 Operating Expenses = Gross Margin – Net Income; $278,000 – $98,500 =

$179,500

1. Gross Margin = Net Sales – Cost of Goods Sold; $825,000 – $547,000 = $278,000 Operating Expenses = Gross Margin – Net Income; $278,000 – $98,500 =

$179,500

1. Gross Margin = Net Sales – Cost of Goods Sold; $825,000 – $547,000 = $278,000 Operating Expenses = Gross Margin – Net Income; $278,000 – $98,500 =

$179,500

Diff: 3

Topic: Financial Statements for Merchandisers

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for The journal entry or entries that Klein will make on March 12 is:

A)

Accounts  receivable	7,800
Sales		7,800
Cost of goods sold	4,500
Merchandise Inventory		4,500

 

B)

Sales	7,800
Accounts  receivable		7,800
Cost of goods sold	4,500
Merchandise Inventory		4,500

 

C)

Accounts  receivable	4,500
Sales		4,500

 

D)

Accounts  receivable	7,800
Sales		7,800

 

E)

Sales	7,800
Accounts  receivable		7,800

 

 

Answer: A Explanation:                       A)

B)

C)

D)

E)

Diff: 2

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for Babson pays the invoice on March 17, and takes the appropriate discount. The journal entry that Klein makes on March 17 is:

A)

Cash	7,644
Sales discounts	156
Accounts  receivable		7,800

 

B)

Cash	4,410
Sales discounts	90
Accounts  receivable		4,500

 

C)

Cash	4,500
Accounts  receivable		4,500

 

D)

Cash	7,644
Accounts  receivable		7,644

 

E)

Cash	7,800
Accounts  receivable		7,800

 

 

Answer: A

Explanation:     A) Sales Discounts = $7,800 * .02 = $156

Cash = $7,800 – $156 = $7,644

1. Sales Discounts = $7,800 * .02 = $156 Cash = $7,800 – $156 = $7,644
2. Sales Discounts = $7,800 * .02 = $156 Cash = $7,800 – $156 = $7,644
3. Sales Discounts = $7,800 * .02 = $156 Cash = $7,800 – $156 = $7,644
4. Sales Discounts = $7,800 * .02 = $156 Cash = $7,800 – $156 = $7,644

Diff: 2

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for On March 15, Babson returns some of the merchandise, which is not defective. The selling price of the returned merchandise is $600 and the cost of the merchandise returned is $350. The entry or entries that Klein must make on March 15 is:

 

A)

Sales returns and allowances	350
Accounts  receivable		350

 

B)

Accounts  receivable	600
Sales returns and allowances		600
Cost of goods sold	350
Merchandise  inventory		350

 

C)

Sales returns and allowances	600
Accounts  receivable		600

 

D)

Accounts  receivable	600
Sales returns and allowances		600

 

E)

Sales returns and allowances	600
Accounts  receivable		600
Merchandise  inventory	350
Cost of goods sold		350

 

 

Answer: E Explanation:                       A)

B)

C)

D)

E)

Diff: 2

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for On March 15, Babson returns some of the merchandise. The selling price of the merchandise is $600 and the cost of the merchandise returned is $350. Babson pays the invoice on March 20, and takes the appropriate discount. The amount that Klein receives from Babson on March 20 is:

A) $7,200.                B) $7,800.                C) $7,056.                D) $7,644.                E) $7,044.

Answer: C

Explanation:     A) Accounts Receivable = $7,800 – $600 = $7,200 Sales Discounts = $7,200 * .02 = $144

Cash = $7,200 – $144 = $7,056

1. Accounts Receivable = $7,800 – $600 = $7,200 Sales Discounts = $7,200 * .02 = $144

Cash = $7,200 – $144 = $7,056

1. Accounts Receivable = $7,800 – $600 = $7,200 Sales Discounts = $7,200 * .02 = $144

Cash = $7,200 – $144 = $7,056

1. Accounts Receivable = $7,800 – $600 = $7,200 Sales Discounts = $7,200 * .02 = $144

Cash = $7,200 – $144 = $7,056

1. Accounts Receivable = $7,800 – $600 = $7,200 Sales Discounts = $7,200 * .02 = $144

Cash = $7,200 – $144 = $7,056

Diff: 2

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for On March 15, Babson returns some of the merchandise. The selling price of the merchandise is $600 and the cost of the merchandise returned is $350. Babson pays the invoice on March 20, and takes the appropriate discount. The journal entry that Klein makes on March 20 is:

A)

Cash	7,056
Accounts  receivable		7,056

 

B)

Cash	7,800
Accounts  receivable		7,800

 

C)

Cash	7,644
Sales discounts	156
Accounts  receivable		7,800

 

D)

Cash	4,500
Accounts  receivable		4,500

 

E)

Cash	7,056
Sales discounts	144
Accounts  receivable		7,200

 

 

Answer: E

Explanation:     A) Accounts Receivable = $7,800 – $600 = $7,200 Sales Discounts = $7,200 * .02 = $144

Cash = $7,200 – $144 = $7,056

1. Accounts Receivable = $7,800 – $600 = $7,200 Sales Discounts = $7,200 * .02 = $144

Cash = $7,200 – $144 = $7,056

1. Accounts Receivable = $7,800 – $600 = $7,200 Sales Discounts = $7,200 * .02 = $144

Cash = $7,200 – $144 = $7,056

1. Accounts Receivable = $7,800 – $600 = $7,200 Sales Discounts = $7,200 * .02 = $144

Cash = $7,200 – $144 = $7,056

1. Accounts Receivable = $7,800 – $600 = $7,200 Sales Discounts = $7,200 * .02 = $144

Cash = $7,200 – $144 = $7,056

Diff: 3

Topic: Accounting for Merchandise Sales

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• Zenith Company’s Merchandise Inventory account at year-end has a balance of $91,820, but a physical count reveals that only $90,450 of inventory The adjusting entry to record this

$1,370 of inventory shrinkage is:

A)

Purchases discounts	1,370
Cost of goods sold		1,370

 

B)

Inventory shrinkage expense	1,370
Cost of goods sold		1,370

 

C)

Merchandise  inventory	1,370
Inventory shrinkage expense		1,370

 

D)

Cost of goods sold	90,450
Merchandise  inventory		90,450

 

E)

Cost of goods sold	1,370
Merchandise  inventory		1,370

 

 

Answer: E Explanation:                       A)

B)

C)

D)

E)

Diff: 2

Topic: Adjusting and Closing Entries for Merchandisers

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

164)   All of the following statements regarding sales returns and allowances are true except:

1. Sales returns and allowances estimates are typically made as period-end
2. When sales returns and allowances adjustments are made to sales, an estimate must also be made for the cost

C)  The Inventory Returns Estimated account is a current liability account.

1. New revenue recognition rules require sellers to report sales net of expected returns and allowances for annual

E)  Sales Refund Payable is a current liability account. Answer: C

Explanation:     A)

B)

C)

D)

E)

Diff: 2

Topic: Adjustments for sales discounts, returns and allowances

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

 

 

• In its first year of business, Borden Corporation had sales of $2,000,000 and cost of goods sold of

$1,200,000. Borden expects returns in the following year to equal 8% of sales. The adjusting entry or entries to record the expected sales returns is (are):

A)

Sales returns and allowances	160,000
Sales		160,000
Cost of Goods Sold	96,000
Inventory Returns Estimated		96,000

 

B)

Sales Refund Payable	160,000
Accounts  receivable		160,000

 

C)

Sales	2,000,000
Sales Refund Payable		160,000
Accounts  receivable		1,840,000

 

D)

Sales Returns and Allowances	160,000
Sales Refund Payable		160,000
Inventory Returns Estimated	96,000
Cost of goods sold		96,000

 

E)

Accounts  Receivable	2,000,000
Sales		2,000,000

 

 

Answer: D

Explanation:     A) Sales Refund Payable = $2,000,000 × .08 = $160,000 Inventory Returns Estimated = $1,200,000 × .08 = $96,000

1. B) Sales Refund Payable = $2,000,000 × .08 = $160,000 Inventory Returns Estimated = $1,200,000 × .08 = $96,000
2. C) Sales Refund Payable = $2,000,000 × .08 = $160,000 Inventory Returns Estimated = $1,200,000 × .08 = $96,000
3. D) Sales Refund Payable = $2,000,000 × .08 = $160,000 Inventory Returns Estimated = $1,200,000 × .08 = $96,000
4. E) Sales Refund Payable = $2,000,000 × .08 = $160,000 Inventory Returns Estimated = $1,200,000 × .08 = $96,000

Diff: 2

Topic: Adjustments for sales discounts, returns and allowances

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• In the current year, Borden Corporation had sales of $2,000,000 and cost of goods sold of

$1,200,000. Borden expects returns in the following year to equal 8% of sales. The unadjusted balance in Inventory Returns Estimated is a debit of $6,000, and the unadjusted balance in Sales Refund Payable is a credit of $10,000. The adjusting entry or entries to record the expected sales returns is (are):

A)

Sales Returns and Allowances	150,000
Sales Refund Payable		150,000
Inventory Returns Estimated	90,000
Cost of goods sold		90,000

 

B)

Sales	2,000,000
Sales Refund Payable		160,000
Accounts  receivable		1,840,000

 

C)

Accounts  Receivable	2,000,000
Sales		2,000,000

 

D)

Sales Refund Payable	150,0000
Accounts  receivable		150,000

 

E)

Sales returns and allowances	150,000
Sales		150,000
Cost of Goods Sold	90,000
Inventory Returns Estimated		90,000

 

 

Answer: A

Explanation:     A) Sales Refund Payable = $2,000,000 × .08 = $160,000 – $10,000 = $150,000 Inventory Returns Estimated = $1,200,000 × .08 = $96,000 – $6,000 = $90,000

1. B) Sales Refund Payable = $2,000,000 × .08 = $160,000 – $10,000 = $150,000 Inventory Returns Estimated = $1,200,000 × .08 = $96,000 – $6,000 = $90,000
2. C) Sales Refund Payable = $2,000,000 × .08 = $160,000 – $10,000 = $150,000 Inventory Returns Estimated = $1,200,000 × .08 = $96,000 – $6,000 = $90,000
3. D) Sales Refund Payable = $2,000,000 × .08 = $160,000 – $10,000 = $150,000 Inventory Returns Estimated = $1,200,000 × .08 = $96,000 – $6,000 = $90,000
4. E) Sales Refund Payable = $2,000,000 × .08 = $160,000 – $10,000 = $150,000 Inventory Returns Estimated = $1,200,000 × .08 = $96,000 – $6,000 = $90,000

Diff: 3

Topic: Adjustments for sales discounts, returns and allowances

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• Netherland Corporation has the following unadjusted balances: Accounts Receivable, $80,000 (debit), and Allowance for Sales Discounts $300 (credit). Of the receivables, $50,000 of them are within the 2% discount period, and Netherland expects buyers to take $1,000 in future-period discounts ($50,000 × 2%) arising from this period’s The adjusting entry to estimate sales discounts is (are):

 

A)

Accounts  Receivable	80,000
Sales		80,000

 

B)

Sales Discounts	700
Allowance for Sales Discounts		700

 

C)

Sales Discounts	50,000
Sales		50,000
Cost of Goods Sold	1,000
Inventory Returns Estimated		1,000

 

D)

Sales Discounts	1,000
Allowance for Sales Discounts		1,000

 

E)

Sales Discounts	1,000
Accounts  receivable		1,000

 

 

Answer: B

Explanation:     A) Allowance for Sales Discounts = $50,000 × .02 = $1,000 – $300 = $700 B) Allowance for Sales Discounts = $50,000 × .02 = $1,000 – $300 = $700 C) Allowance for Sales Discounts = $50,000 × .02 = $1,000 – $300 = $700 D) Allowance for Sales Discounts = $50,000 × .02 = $1,000 – $300 = $700 E) Allowance for Sales Discounts = $50,000 × .02 = $1,000 – $300 = $700

Diff: 3

Topic: Adjustments for sales discounts, returns and allowances

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• An expense resulting from failing to take advantage of cash discounts when using the net method of recording purchases is called:

A)  Trade discounts.

1. Discounts
2. Purchases
3. Discounts
4. Sales

Answer: D Explanation:                       A)

B)

C)

D)

E)

Diff: 1

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

 

 

• A company that uses the net method of recording purchases and a perpetual inventory system purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of On July 28, it paid the full amount due. The correct journal entry to record the payment on July 28 is:

A)  Debit Accounts Payable $1,600; credit Merchandise Inventory $32; credit Cash $1,568.

600. Debit Cash $1,600; credit Accounts Payable $1,600.
601. Debit Merchandise Inventory $1,600; credit Cash $1,600.
602. Debit Accounts Payable $1,568; debit Discounts Lost $32; credit Cash $1,600.
603. Debit Accounts Payable $1,800; credit Cash $1,800. Answer: D

Explanation:     A) Purchase, net of discount = $1,800 × .98 = $1,764

Purchase return, net of discount = $200 × .98 = $196 Debit to Accounts Payable = $1,764 – 196 =$1,568

No discount may be taken because the payment is made after the discount period.

1. Purchase, net of discount = $1,800 × .98 = $1,764 Purchase return, net of discount = $200 × .98 = $196 Debit to Accounts Payable = $1,764 – 196 =$1,568

No discount may be taken because the payment is made after the discount period.

1. Purchase, net of discount = $1,800 × .98 = $1,764 Purchase return, net of discount = $200 × .98 = $196 Debit to Accounts Payable = $1,764 – 196 =$1,568

No discount may be taken because the payment is made after the discount period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diff: 3

1. Purchase, net of discount = $1,800 × .98 = $1,764 Purchase return, net of discount = $200 × .98 = $196 Debit to Accounts Payable = $1,764 – 196 =$1,568

No discount may be taken because the payment is made after the discount period.

1. Purchase, net of discount = $1,800 × .98 = $1,764 Purchase return, net of discount = $200 × .98 = $196 Debit to Accounts Payable = $1,764 – 196 =$1,568

No discount may be taken because the payment is made after the discount period.

 

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: FN Measurement; BB Critical Thinking

 

 

• Morgan, uses a perpetual inventory system and the net method of recording purchases. On May 12, a merchandise purchase of $15,000 was made on credit, 2/10, n/30. The journal entry to record this purchase is:

A)

Merchandise Inventory	15,000
Accounts Payable		15,000

 

B)

Accounts Payable	15,000
Merchandise Inventory		15,000

 

C)

Merchandise Inventory	14,700
Accounts Payable		14,700

 

D)

Purchases	14,700
Accounts Payable		14,700

 

E)

Purchases	15,000
Accounts Payable		15,000

 

 

Answer: C

Explanation:     A) $15,000 × .98 = $14,700

1. B) $15,000 × .98 = $14,700 C) $15,000 × .98 = $14,700

 

 

 

 

 

Diff: 2

D) $15,000 × .98 = $14,700 E) $15,000 × .98 = $14,700

 

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

171)   The net method of recording purchases refers to recording:

1. Specified amounts and timing of payments that a buyer agrees to in return for being granted

B)  Purchases at the invoice price less any cash discounts.

1. Inventory at the lower of cost or
2. Purchases at the full invoice price, without deducting any cash
3. Inventory at its selling Answer: B

Explanation:     A)

B)

C)

D)

E)

Diff: 1

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

 

 

• On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the net method of accounting for On March 15, Babson returns some of the merchandise, which is not defective. The selling price of the returned merchandise is $600 and the cost of the merchandise returned is $350. The entry(ies) that Klein must make on March 15 is (are):

A)

Accounts  receivable	600
Sales returns and allowances		600

 

B)

Sales returns and allowances	350
Accounts  receivable		350

 

C)

Sales returns and allowances	588
Accounts  receivable		588
Merchandise  inventory	350
Cost of goods sold		350

 

D)

Accounts  receivable	600
Sales returns and allowances		600
Cost of Goods Sold	350
Merchandise  inventory		350

 

E)

Sales returns and allowances	588
Accounts  receivable		588
Merchandise  inventory	343
Cost of goods sold		343

 

 

Answer: C Explanation:                       A)

B)

C)

D)

E)

Diff: 2

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ryan uses the periodic inventory system and the net method of accounting for The journal entry or entries that Ryan will make on September 12 is (are):

A)

Accounts  receivable	5,684
Sales		5,684
Cost of goods sold	4,000
Merchandise Inventory		4,000

 

B)

Accounts  receivable	5,800
Sales		5,800

 

C)

Accounts  receivable	5,800
Sales		5,800
Cost of Goods Sold	4,000
Merchandise  inventory		4,000

 

D)

Sales	5,800
Accounts  receivable		5,800

 

E)

Accounts  receivable	5,684
Sales		5,684

 

 

Answer: E Explanation:                       A)

B)

C)

D)

E)

Diff: 3

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Johnson uses the periodic inventory system and the net method of accounting for The journal entry that Johnson will make on September 12 is:

A)

Merchandise  inventory	5,800
Accounts payable		5,800

 

B)

Purchases	5,800
Accounts payable		5,800

 

C)

Merchandise  inventory	5,684
Accounts payable		5,684

 

D)

Purchases	5,684
Accounts payable		5,684

 

E)

Accounts payable	4,000
Merchandise  inventory		4,000

 

 

Answer: D Explanation:                       A)

B)

C)

D)

E)

Diff: 3

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ryan uses the periodic inventory system and the net method of accounting for Johnson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Ryan makes on September 18 is:

A)

Cash	5,684
Sales discounts	116
Accounts  receivable		5,800

 

B)

Cash	5,684
Accounts  receivable		5,684

 

C)

Cash	5,800
Accounts  receivable		5,800

 

D)

Cash	4,000
Accounts  receivable		4,000

 

E)

Cash	3,920
Sales discounts	80
Accounts  receivable		4,000

 

 

Answer: B

Explanation:     A) Sales Discounts = $5,800 × .02 = $116

Cash = $5,800 – $116 = $5,684

1. Sales Discounts = $5,800 × .02 = $116 Cash = $5,800 – $116 = $5,684
2. Sales Discounts = $5,800 × .02 = $116 Cash = $5,800 – $116 = $5,684
3. Sales Discounts = $5,800 × .02 = $116 Cash = $5,800 – $116 = $5,684
4. Sales Discounts = $5,800 × .02 = $116 Cash = $5,800 – $116 = $5,684

Diff: 2

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Johnson uses the periodic inventory system and the net method of accounting for Johnson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Johnson makes on September 18 is:

 

A)

Sales	4,000
Sales Refund Payable		80
Accounts  receivable		3,920

 

B)

Purchases	5,684
Cash		5,684

 

C)

Accounts payable	5,684
Cash		5,684

 

D)

Sales	5,800
Sales Refund Payable		116
Accounts  receivable		5,684

 

E)

Cash	5,684
Purchases discounts	116
Accounts payable		5,800

 

 

Answer: C

Explanation:     A) Purchases Discounts = $5,800 × .02 = $116

Cash = $5,800 – $116 = $5,684

1. Purchases Discounts = $5,800 × .02 = $116 Cash = $5,800 – $116 = $5,684
2. Purchases Discounts = $5,800 × .02 = $116 Cash = $5,800 – $116 = $5,684
3. Purchases Discounts = $5,800 × .02 = $116 Cash = $5,800 – $116 = $5,684
4. Purchases Discounts = $5,800 × .02 = $116 Cash = $5,800 – $116 = $5,684

Diff: 2

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ryan uses the periodic inventory system and the net method of accounting for On September 14, Johnson returns some of the non-defective merchandise, which is restored to inventory. The selling price of the returned merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Ryan must make on September 14 is (are):

A)

Sales returns and allowances	500
Accounts  receivable		500

 

B)

Sales returns and allowances	490
Accounts  receivable		490
Merchandise  inventory	350
Cost of goods sold		350

 

C)

Sales returns and allowances	350
Accounts  receivable		350

 

D)

Sales returns and allowances	490
Accounts  receivable		490

 

E)

Sales returns and allowances	490
Accounts  receivable		490
Merchandise  inventory	343
Cost of goods sold		343

 

 

Answer: D Explanation:                       A)

B)

C)

D)

E)

Diff: 3

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ryan uses the periodic inventory system and the net method of accounting for On September 14, Johnson returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. Johnson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Ryan makes on September 18 is:

A)

Cash	5,684
Sales discounts	116
Accounts  receivable		5,800

 

B)

Cash	5,194
Sales discounts	106
Accounts  receivable		5,300

 

C)

Cash	5,800
Accounts  receivable		5,800

 

D)

Cash	5,684
Accounts  receivable		5,684

 

E)

Cash	5,194
Accounts  receivable		5,194

 

 

Answer: E

Explanation:     A) Accounts Receivable = ($5,800 × .98) – ($500 × .98) = $5,194 B) Accounts Receivable = ($5,800 × .98) – ($500 × .98) = $5,194 C) Accounts Receivable = ($5,800 × .98) – ($500 × .98) = $5,194 D) Accounts Receivable = ($5,800 × .98) – ($500 × .98) = $5,194 E) Accounts Receivable = ($5,800 × .98) – ($500 × .98) = $5,194

Diff: 3

Topic: Recording Transactions under the Net Method

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

SHORT ANSWER QUESTIONS

• Match the following definitions and terms by placing the letter for the terms A through J in the blank space next to the best

 

1. Trade discount Acid-test ratio
2. General and administrative expenses Merchandise inventory
3. FOB shipping point Selling expenses
4. Single-step income statement Multiple-step income statement
5. FOB destination Inventory shrinkage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

_____ 1. A measure of a company’s ability to pay its current liabilities that excludes less liquid current assets such as inventory and prepaid expenses.   _____ 2. A widely used income statement format that lists cost of goods sold as another expense and shows only one subtotal for total expenses.   _____ 3. The point of transfer from seller to buyer that takes place when the goods arrive at the buyer’s place of business. _____ 4. Products a company owns and intends to sell.   _____ 5. The expenses that support a company’s overall operations and include costs related to accounting, human resource management and financial management.   _____ 6. The point of transfer from seller to buyer that takes place when goods depart the seller’s place of business.   _____ 7. Inventory losses that can occur as a result of theft or deterioration and require an adjusting entry to account for those losses.   _____ 8. An income statement format that shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classe of items.   _____ 9.  A given percent deducted from a list price often granted to customers purchasing large quantities of merchandise.   _____ 10. The expenses of promoting sales by displaying and advertising merchandise, making sales, and delivering goods to customers.

s

 

 

 

 

 

 

 

 

 

Answer: 1. F; 2. D; 3. E; 4. G; 5. B; 6. C; 7. J; 8. I; 9. A; 10. H

Explanation:

Diff: 1

Topic: Acid-Test Ratio; Reporting Inventory for a Merchandiser; Accounting for Merchandise Purchases; Adjusting and Closing Entries for Merchandisers; Financial Statements for Merchandisers

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.; 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.; 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.; 05-P3 Prepare adjustments and close accounts for a merchandising    company.; 05-P4 Define and prepare multiple-step and single-step income statements.

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• Match the following terms with the appropriate

1. Debit memorandum
2. Credit period
3. Credit terms
4. Credit memorandum
5. Discount period
6. Gross profit
7. Periodic inventory system
8. Perpetual inventory system
9. Sales discount
10. Purchase discount

 

 

_____	1. An inventory accounting method that continually updates accounting records for inventory available for sale and inventory sold.
_____	2. An inventory accounting method that updates the accounting records for merchandise transactions only at the end of a period.
_____	3. The time period in which reduced payment can be made by the buyer because of a cash discount offered by a seller of goods on credit.
_____	4. A notification that informs the seller of a debit made to the seller’s account payable in the buyer’s records.
_____	5. A cash discount granted, from the view of the purchaser intended to encourage buyers to pay amounts owed earlier.
_____	6. A notification that informs a buyer of a seller’s credit to a buyer’s account.
_____	7. A cash discount granted from the view of the seller, indicated in the credit terms on the invoice.
_____	8. The calculation of net sales less cost of goods sold.
_____	9. The description of the amounts and timing of payments from a buyer to a seller for a purchase.
_____	10. The amount of time allowed before full payment is due.

 

Answer: 1. H; 2. G; 3. E; 4. A; 5. J; 6. D; 7. I; 8. F; 9. C; 10. B

Explanation:

 

Diff: 1

Topic: Merchandising Activities; Accounting for Merchandise Purchases; Accounting for Merchandise Sales; Financial Statements for Merchandisers; Periodic Inventory System

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.; 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.; 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.; 05-P4 Define and prepare multiple-step and

single-step income statements.; 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

ESSAY  QUESTIONS

181)   Identify and explain the key components of a merchandiser’s net income.

Answer: The basic components of income begin with net sales. Cost of goods sold is subtracted from net sales to determine gross profit (also called gross margin). Operating expenses are then subtracted from gross margin to determine net income.

Diff: 2

Topic: Merchandising Activities Learning Objective: 05-C1 Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

182)   Describe the difference between wholesalers and retailers.

Answer: A wholesaler is an intermediary that buys products from manufacturers or other wholesalers and sells to retailers or other wholesalers. A retailer is an intermediary that buys products from manufacturers or wholesalers and sells them to consumers.

Diff: 1

Topic: Merchandising Activities Learning Objective: 05-C1 Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

183)   Describe the key attributes of inventory for a merchandising company.

Answer: Merchandise inventory refers to products a company owns and intends to sell. Its costs include all necessary expenses to buy the goods, ship them to the store, and make them ready for sale. Merchandise inventory is a current asset on a merchandiser’s balance sheet.

Diff: 1

Topic: Cost flows of a Merchandiser Learning Objective: 05-C2

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

SHORT ANSWER QUESTIONS

184)   What are the steps of the operating cycle for a merchandiser with credit sales?

Answer: The steps are: (1) cash purchases of merchandise; (2) inventory for sale; (3) credit sales (4) accounts receivable; (5) cash collection.

Explanation:

Diff: 2

Topic: Cost flows of a Merchandiser Learning Objective: 05-C2

Bloom’s: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

ESSAY  QUESTIONS

185)   Describe the difference between the periodic and perpetual inventory accounting systems.

Answer: A periodic inventory system updates the accounting records for merchandise transactions only at the end of a period. A perpetual inventory system continually updates accounting records for merchandise transactions–specifically for those records of inventory available   for sale and inventory sold. The perpetual inventory system is increasing in popularity due to technological advances and competitive pressures because it gives managers immediate access to detailed information on sales and inventory levels that a periodic system does not.

Diff: 2

Topic: Perpetual Inventory System; Periodic Inventory System Learning Objective: 05-C2

Bloom’s: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Explain the way in which costs flow through the merchandise inventory account to a merchandiser’s income

Answer: Beginning inventory plus the net cost of purchases is the merchandise available for sale. As inventory is sold, its cost is recorded in cost of goods sold on the income statement. What remains is the ending inventory on the balance sheet. A period’s ending inventory becomes the next period’s beginning inventory.

Diff: 2

Topic: Cost Flows of a Merchandiser Learning Objective: 05-C2

Bloom’s: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

187)   What is the acid-test ratio? How does it measure a company’s liquidity?

Answer: The acid-test ratio is a measure of a merchandiser’s ability to pay its current liabilities. It is calculated by dividing quick assets (cash, current receivables, and short-term investments) by current liabilities. It excludes those current assets that are less liquid, such as inventory and prepaid expenses that take longer to be converted to cash. As a rule of thumb, an acid test ratio less than 1 means that current liabilities exceed quick assets and the company may face near-term liquidity problems.

Diff: 2

Topic: Acid-Test Ratio Learning Objective: 05-A1 Bloom’s: Understand AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

 

 

188)   What is gross margin ratio? How is it used as an indicator of profitability?

Answer: The gross margin ratio computes the relationship between a company’s gross profit and sales. It is calculated by dividing gross margin (net sales less cost of goods sold) by net sales. The gross margin ratio measures a firm’s profitability in selling its inventory. The gross margin must be large enough to cover operating expenses and provide sufficient net income to the owner(s).  Without sufficient gross margin, a merchandiser will likely fail.

Diff: 2

Topic: Gross Margin Ratio Learning Objective: 05-A2 Bloom’s: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• What does the acronym FOB stand for? Describe the differences between FOB shipping point (or FOB factory) and FOB

Answer: FOB stands for free on board, and it determines who pays transportation and other incidental costs of shipping goods. If goods are shipped FOB shipping point, also called FOB factory, ownership transfers to the buyer when the goods depart the seller’s place of business, and the seller records revenue at that time. The buyer is then responsible for paying shipping costs and bearing the risk of damage or loss while goods are in transit.  If goods are shipped FOB destination, ownership of the goods transfers to the buyer when the goods arrive at the buyer’s place of business. The seller is responsible for paying shipping costs and bears the risk of damage or loss in transit. The seller does not record revenue until the goods arrive at the destination because the transaction is not complete before that point.

Diff: 2

Topic: Accounting for Merchandise Purchases Learning Objective: 05-P1

Bloom’s: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• Describe the recording process (including costs) for the types of transactions involved in purchasing merchandise inventory when a perpetual inventory system is

Answer: The cost of merchandise purchased for resale, net of trade discounts, is added (debited) to the Merchandise Inventory account. Purchases discounts for early payment on credit and purchases returns and allowances are subtracted (credited) from Merchandise Inventory. Transportation-in costs are also added (debited) to Merchandise Inventory because they are a necessary cost of acquiring the merchandise.

Diff: 2

Topic: Accounting for Merchandise Purchases Learning Objective: 05-P1

Bloom’s: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Describe the recording process (including costs) for the types of transactions associated with sales of merchandise inventory using a perpetual inventory

Answer: Sales of goods are recorded at list price less any trade discounts as a credit to the Sales account. At the same time, the cost of items sold is transferred from Merchandise Inventory to Cost of Goods Sold. Refunds or credits for returned merchandise are recorded (debited) to Sales Returns and Allowances. When cash discounts from the sales price are taken, the seller records (debits) the amount of the discounts to Sales Discounts. These accounting processes are recorded each time sales transactions occur. In this way, merchandise inventory, cost of sales, sales and receivables (or cash) reflect sales transactions on a timely basis.

Diff: 2

Topic: Accounting for Merchandise Sales Learning Objective: 05-P2

Bloom’s: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

192)   What is inventory shrinkage? How do managers account for shrinkage?

Answer: Inventory shrinkage is the loss of merchandise inventory due to theft or deterioration or similar occurrences. It is computed by comparing a physical count of the inventory with recorded amounts. A physical count is usually performed at least once annually and an adjusting entry is prepared to account for any differences. Inventory shrinkage is typically added (debited) to the cost of goods sold and deducted (credited) from Merchandise Inventory.

Diff: 1

Topic: Adjusting and Closing Entries for Merchandisers Learning Objective: 05-P3

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• How do closing entries for a merchandising company that uses the perpetual inventory system differ from the closing entries for a service company?

Answer: Closing entries are similar for service and merchandising companies using a perpetual inventory system, but merchandising companies have some temporary accounts that must be closed that service companies do not. Generally, revenue for merchandising companies is called Sales rather than Fees Earned. It is closed with a debit, as are other revenues.

Merchandising companies have Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold that all have debit balances and must be closed with credits.

Diff: 2

Topic: Adjusting and Closing Entries for Merchandisers Learning Objective: 05-P3

Bloom’s: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

194)   Explain the difference between the single-step and multiple-step income statements.

Answer: A single-step income statement format includes cost of goods sold as another expense, and shows only one subtotal for total expenses. The calculation of net income is simply total revenues minus total expenses. A multiple-step income statement format shows detailed computation of net sales and other costs and expenses, and reports subtotals for various classes of items.

Diff: 2

Topic: Financial Statements for Merchandisers Learning Objective: 05-P4

Bloom’s: Understand AACSB: Communication

AICPA: BB Industry; FN Reporting

 

 

195)   Distinguish between selling expenses and general and administrative expenses.

Answer: Selling expenses include the expenses of promoting sales by displaying and advertising merchandise, making sales, and delivering goods to customers. General and administrative expenses support a company’s overall operations and include expenses related to accounting, human resource management, and financial management. Some expenses can relate to both areas and are allocated between them.

Diff: 2

Topic: Financial Statements for Merchandisers Learning Objective: 05-P4

Bloom’s: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• Describe the difference(s) between the periodic and the perpetual inventory accounting Answer: Under a perpetual system each purchase, purchase return and allowance, purchase discount,

and cost for transportation-in is recorded in the merchandise inventory account. Under a

periodic system, a separate temporary account is set up for each of these items. Because inventory is updated for each purchase and sale of merchandise, the perpetual inventory system yields more timely information for managers to better monitor and control inventory costs and levels.

Diff: 2

Topic: Accounting for Merchandise Sales; Periodic Inventory System Learning Objective: 05-P2; 05-P5

Bloom’s: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Describe why tracking inventory activities are necessary for a merchandising Answer: Tracking merchandise activities are necessary to set prices and to manage discounts,

allowances and returns for both sales and purchases. A perpetual inventory system enables a

business to stock the right type and amounts of merchandise and to avoid the costs of being out-of-stock and carrying excess inventory.  Most merchandisers and retailers understand the importance of managing inventory costs to get the most profit and in calculating working capital.

Diff: 2

Topic: Merchandising Activities Learning Objective: 05-C1 Bloom’s: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Discuss the period-end adjusting entries that are required in the new revenue recognition standards for estimating sales discounts and sales returns and

Answer: Sellers are required to estimate both expected sales discounts and expected sales returns and allowances in the period of sale by making two adjusting entries.  The entry to adjust for expected sales discounts is to debit Sales Discounts and credit Allowance for Sales Discounts. Allowance for Sales Discounts is a contra-asset account that is reported on the balance sheet as a reduction to Accounts Receivable. The adjusting entry, for the revenue side of sales returns and allowances, is to debit Sales Returns and Allowances and credit Sales Refund Payable for the expected amount to be refunded to customers.  The adjusting entry for the cost side is to debit Inventory Returns Estimated and credit Cost of Goods Sold for the cost of expected returns.

Diff: 3

Topic: Adjustments for sales discounts, returns and allowances Learning Objective: 05-P6

Bloom’s: Understand AACSB: Communication

AICPA: BB BB Industry; FN FN Measurement

 

 

105

 

• Farmen Company had net sales of $600,000 and cost of goods sold of $450,000. Calculate Farmen’s gross

Answer: Gross Profit = Sales — Cost of Goods Sold; $600,000 — $450,000 = $150,000

Diff: 1

Topic: Cost Flows of a Merchandiser Learning Objective: 05-C1

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• National Storage Company had sales of $1,000,000, sales discounts of $2,500, sales returns and allowances of $15,000, and cost of goods sold of $525,000. Calculate National’s gross

Answer: Gross Profit = Sales — Sales Discounts — Sales Returns and Allowances — Cost of Goods Sold

$1,000,000 — $2,500 — $15,000 — $525,000= $457,500

Diff: 2

Topic: Cost Flows of a Merchandiser Learning Objective: 05-C1

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• Harley’s Antique Shop had net sales of $772,000. The gross profit was $415,000. Calculate Harley’s cost of goods

Answer: Cost of Goods Sold = Net Sales — Gross Profit; $772,000 — $415,000 = $357,000

Diff: 2

Topic: Cost Flows of a Merchandiser Learning Objective: 05-C2

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• Fill in the blanks (a) through (g) for the Morrison Company for each of the income statements for years 1, 2, and

 

 

Morrison  Company Income  Statements For the years ended December 31
	Year 2	Year 2	Year 3
Sales	$7,500	$10,000	(f)
Cost of goods sold
Merchandise  inventory  (beginning)	(a)	375	750
Total cost of merchandise purchases	2,400	3,625	4,875
Merchandise inventory (ending)	(b)	750	625
Cost of goods sold	2,770	(d)	5,000
Gross profit 106	(c)	6,750	5,200

 

 

Gross profit	(c)	6,750	5,200
Operating  expenses	3,750	3,750	(g)
Net income	$   980	(e)	$ 2,500

 

Answer:

Morrison  Company Income  Statements For the years ended December 31
	Year 1	Year 2	Year 3
Sales	$7,500	$10,000	(f) $10,200
Cost of goods sold
Merchandise  inventory  (beginning)	(a)   745	375	750
Total cost of merchandise purchases	2,400	3,625	4,875
Merchandise inventory (ending)	(b)   375	750	625
Cost of goods sold	2,770	(d) 3,250	5,000
Gross profit	(c) 4,730	6,750	5,200
Operating  expenses	3,750	3,750	(g) 2,700
Net income	$    980	(e) $3,000	$   2,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diff: 3

(a) 2,770 + 375 — 2400 = 745

(b) 375, the beginning inventory for Year 2 is the ending inventory for Year 1 (c) 980 + 3,750 = 4,730

(d) 10,000 — 6,750 = 3,250

(e) 6,750 — 3,750 = 3,000

(f) 5,000 + 5,200 = 10,200

(g) 5,200 — 2,500 = 2,700

 

Topic: Cost Flows of a Merchandiser; Financial Statements for Merchandisers Learning Objective: 05-C1; 05-P4

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• Fill in the blanks (a) through (g) for the Corman Company for each of the income statements for years 1 and 2

 

 

Corman  Company Income  Statements For the years ended December 31
	Year 1	Year 2
Sales	$10,000	(e)
Cost of goods sold                                                           107

 

 

Cost of goods sold
Merchandise  inventory  (beginning)	375	750
Total cost of merchandise purchases	3,625	4,875
Merchandise inventory (ending)	750	(d)
Cost of goods sold	(a)	5,000
Gross profit	6,750	5,200
Operating  expenses	3,750	(c)
Net income	(b)	$ 2,500

 

 

 

Corman  Company Income  Statements For the years ended December 31   Year 1 Year 2 Sales $10,000 (e) $10,200 Cost of goods sold     Merchandise  inventory  (beginning) 375 750 Total cost of merchandise purchases 3,625 4,875 Merchandise inventory (ending)        750 (d)    625 Cost of goods sold (a) 3,250     5,000 Gross profit 6,750 5,200 Operating  expenses       3,750 (c) 2,700 Net income (b) $3,000 $   2,500

Answer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diff: 3

• Merchandise inventory, beginning + purchases — Merchandise inventory, ending = Cost of goods sold; $375 + $3,625 — $750 = $3,250
• Gross profit — Operating expenses = Net Income; $6,750 — $3,750 = $3,000
• Gross profit — Net income = Operating expenses; $5,200 — $2,500 = $2,700
• Merchandise inventory, beginning + Purchases — Cost of goods sold= Merchandise inventory, ending; $750 + 4,875 — $5,000 = $625
• Cost of goods sold + Gross profit = Sales; $5,200 + $5,000 = $10,200

 

Topic: Cost Flows of a Merchandiser; Financial Statements for Merchandisers Learning Objective: 05-C1; 05-P4

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

• The following information is available for Flanders and its two main competitors in the industry, Sanders and Anders:

 

Flanders      Sanders       Anders       

Cash	$9,800	$10,500	$26,500
Short-term  investments	6,400	8,200	12,500
Accounts  receivable	12,500	8,500	14,350
Merchandise  inventory	30,150	40,000	40,150
Prepaid  expense	900	6,750	2,450
Accounts  payable	19,400	13,750	26,800
Salaries payable	1,200	3,500	6,250
Other current payables	600	1,200	2,150

 

The industry standard for the current ratio is 1.8 and the industry standard for the acid-test ratio is 1.

 

Required:

1. Calculate the current ratio and acid-test ratio for each
2. Rank the firms in decreasing order of
3. Comment on Flanders’ relative liquidity

Answer:	Part 1	Flanders	Sanders	Anders
	Cash	$ 9,800	$10,500	$26,500
	Short-term  investments	6,400	8,200	12,500
	Accounts  receivable	12,500	8,500	14,350
	Merchandise  inventory	30,150	40,000	40,150

Prepaid expense                                           900            6,750                2,450

Total current assets                                $59,750             $73,950             $95,950

Accounts  payable	$19,400             $13,750             $26,800
Salary payable	1,200                3,500                6,250
Other current payables	600            1,200                2,150
Total current liabilities	$21,200             $18,450             $35,200

 

 

 

 

Current ratio:

Flanders             Sanders              Anders

 

$59,750/21,200 =                                        2.82

$73,950/$18,450 =                                                              4.01

$95,950/$35,200 =                                                                                     2.73

 

 

Flanders Sanders Anders Cash…………………………………    $ 9,800      $10,500      $26,500 Short-term investments……………          6,400            8,200            12,500 Accounts receivable…………………                             12,500                     8,500                                                                         14,350 Total quick assets…………………                            $28,700             $27,200                                                            $53,350

 

 

Flanders             Sanders              Anders

 

 

Answer:	Acid-test ratio:
	$28,700/$21,200  = $27,200/$18,450  = $53,350/$35,200  =	1.35	1.47	1.52

 

Part 2: Rank order:

Current ratio                                          Acid-test ratio

Sanders	4.01	Anders	1.52
Flanders	2.82	Sanders	1.47
Anders	2.73	Flanders	1.35
Industry  average	1.80	Industry  average	1.00

 

 

 

 

 

 

 

Diff: 3

Part 3: Flanders’ current ratio lags behind Sanders’ but is ahead of both Anders and the industry average. Flanders’ acid test ratio is behind both Anders and Sanders but is ahead of the industry average. Overall, Flanders appears reasonably strong on liquidity.

 

Topic: Acid-Test Ratio Learning Objective: 05-A1 Bloom’s: Apply

AACSB: Analytic

AICPA: BB Industry; FN Risk Analysis

 

 

• The following information refers to Percy’s Records and its competitors in the music store

 

 

	Current Ratio	Quick Ratio
Percy’s Records	2.0	0.95
Jewel CDs	1.5	1.00
Rudy’s Raps	1.8	1.20
Marvin’s Jazz	1.9	0.80
Industry Average	2.0	1.00

 

Required:

Comment on the relative liquidity positions of these companies.

Answer: Both Jewel CDs and Rudy’s Raps have acceptable levels of liquidity. However, even though Percy’s Records and Marvin’s Jazz have acceptable current ratios, their quick ratios indicate a potential liquidity problem. We should attempt to collect additional information to support or refute the evidence of a potential liquidity problem.

Diff: 3

Topic: Acid-Test Ratio Learning Objective: 05-A1 Bloom’s: Apply

AACSB: Analytic

AICPA: BB Critical Thinking; FN Risk Analysis

 

• A company reported the following year-end information:

 

 

Cash	$52,000
Short-term  investments	12,000
Accounts  receivable	54,000
Inventory	325,000
Prepaid expenses	17,500
Accounts payable	106,500
Other current payables	25,000

 

Required:

1. Explain the purpose of the acid-test
2. Calculate the acid-test ratio for this
3. What does the acid-test ratio reveal about this company?

Answer: 1. The acid-test ratio measures the ability of a firm to pay its current liabilities. It is a more stringent test of liquidity as compared to the current ratio.

 

2. Quick assets:		Cash	$ 52,000
		Short-term  investments	12,000
		Accounts receivable	54,000
		Total quick assets	$118,000
Current liabilities:		Accounts payable	$106,500
		Other current payables	25,000
			$131,500
Quick assets		$118,000 = 0.90
Current liabilities		$131,500

 

 

 

 

 

 

 

 

 

Diff: 3

3. This company does not have enough quick assets to be considered in a strong liquidity position. The company may have too much money tied up in inventory or other less liquid current (or noncurrent) assets. Additional analyses should be undertaken to verify or refute this apparent liquidity concern.

 

Topic: Acid-Test Ratio Learning Objective: 05-A1 Bloom’s: Apply

AACSB: Analytic

AICPA: BB Critical Thinking; FN Risk Analysis

 

• Calculate the gross margin ratio for each of the following separate cases A through C:

 

 

	A	B	C
Net sales	$145,000	$623,500	$37,800
Cost of goods sold	83,600	269,200	13,230

 

Answer: A = ($145,000 — $83,600)/$145,000 = 42.3% B = ($623,500 — $269,200)/$623,500 = 56.8%

 

 

 

Diff: 2

C = ($37,800 — $13,230)/$37,800 = 65%

 

Topic: Gross Margin Ratio Learning Objective: 05-A2 Bloom’s: Apply

AACSB: Analytic

AICPA: BB Industry; FN Risk Analysis

 

 

• A company reported the following information for the month of July:

 

 

Sales	$50,475
Sales discounts	1,235
Sales returns and allowances	2,840
Cost of goods sold	33,975

 

Required: Calculate this company’s gross profit.

Answer:

Sales	$50,475
Less: Sales discounts		(1,235)
Less: Sales returns and allowances		(2,840)
Net sales		$46,400
Less: Cost of goods sold		(33,975)
Gross profit		$12,425

 

Diff: 2

Topic: Accounting for Merchandise Sales Learning Objective: 05-P2

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Risk Analysis

 

• A company reported the following information for the month of July:

 

 

Net Sales	$57,500
Cost of goods sold	33,200

 

Required: Calculate this company’s gross margin ratio.
Answer: Net sales		$57,500
Less: Cost of goods sold		(33,200)
Gross profit		$24,300
Gross margin ratio (24,300/57,500)	42.3%

Diff: 3

Topic: Gross Margin Ratio Learning Objective: 05-A2 Bloom’s: Apply

AACSB: Analytic

AICPA: BB Industry; FN Risk Analysis

 

 

• The following information is for Barrel and its competitor

 

 

	Barrel		Crate
	Year 1	Year 2	Year 1	Year 2
Net sales	$347,850	$365,418	$579,750	$664,395
Cost of sales	121,747	146,167	318,862	312,265

 

Required:

1. Calculate the dollar amount of gross margin and the gross margin ratio to the nearest percent, for each company for both
2. Which company had the more favorable ratio for each year?
3. Which company had the more favorable change in the gross margin ratio over this 2-year period?

Answer: 1.

Barrel                                        Crate

Year 1              Year 2              Year 1              Year 2

Net sales	$347,850	$365,418		$579,750	$664,395
Cost of sales	121,747	146,167		318,862	312,265
Gross Margin	$226,103	$219,251		$260,888	$352,130
Year 1	Barrel Year 2		Crate Year 1		Year 2
Gross profit $226,103 = 65%	$219,251 = 60%		$260,888 = 45%		$352,130 = 53%
ratio             $347,850	$365,418		$579,750		$664,395

 

2. Barrel had the more favorable ratio for each year.

 

Answer: 3. Crate’s gross margin ratio is increasing, while Barrel’s is decreasing. Moreover, these changes appear significant and warrant further analysis.

Diff: 3

Topic: Gross Margin Ratio Learning Objective: 05-A2 Bloom’s: Apply

AACSB: Analytic

AICPA: BB Critical Thinking; FN Risk Analysis

 

 

• A company that uses the perpetual inventory system and the gross method of accounting for purchases purchased $8,500 of merchandise on March 25 with credit terms of 2/10, n/30. The invoice was paid in full on April Prepare the journal entries to record the transactions on March 25 and April 4.

Answer: March 25         Merchandise Inventory                        8,500

Accounts Payable                                             8,500

 

 

 

 

 

 

 

Diff: 2

April 4             Accounts Payable                                 8,500

Merchandise Inventory                                                             170

Cash                                                                 8,330

 

Topic: Accounting for Merchandise Purchases Learning Objective: 05-P1

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

• Sabor Company uses a perpetual inventory system and the gross method of accounting for Sabor purchased $17,800 of merchandise on April 7 with credit terms of 1/10, n/30. Merchandise with a cost of $1,800 was damaged and returned to the seller on April 10. On April 16 the company paid the amount due. Prepare the journal entries to record the transactions on all three dates.

Answer: April 7             Merchandise Inventory                        17,800

Accounts Payable                                             17,800

 

April 10           Accounts Payable                                1,800

Merchandise Inventory                                     1,800

 

 

 

 

 

 

 

Diff: 2

April 16           Accounts Payable                                 16,000

Merchandise Inventory                                                          160

Cash                                                                 15,840

 

Topic: Accounting for Merchandise Purchases Learning Objective: 05-P1

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• Tahoe Ski Company uses the perpetual inventory system and the gross method of accounting for The company had the following transactions during January:

January 6:        Purchased $4,000 of inventory. The seller’s credit terms are 2/10, n/30. January 8:      Returned $200 worth of defective units and received full credit.

January 15:      Paid the amount due, less the returned items.

 

Prepare journal entries to record each of the preceding transactions.

Answer: January 6:        Merchandise Inventory                              4,000

Accounts Payable                                                   4,000

January 8:        Accounts Payable                                      200

Merchandise Inventory                                          200

 

 

 

 

 

 

 

 

Diff: 2

January 15:      Accounts Payable                                      3,800

Merchandise Inventory                                                       76

Cash                                                                       3,724

 

Topic: Accounting for Merchandise Purchases Learning Objective: 05-P1

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

• Serene Spa Sales uses the perpetual inventory system and the gross method of accounting for purchases and sales, and had the following transactions during

 

 

Aug 1	Sold merchandise on credit for $5,000, terms 3/10, n/30. The items sold had a cost of $3,500.
3	Purchased merchandise for cash, $2,720.
4	Purchased merchandise on credit for $2,600, terms 1/20, n/30.
5	Issued a credit memorandum for $3,000 to a customer who returned merchandise purchased July 20. The returned items had a cost of $2,010.
10	Received payment for merchandise sold August 1.
15	Received a credit memorandum from the seller for the return of defective merchandise purchased on August 4 for $600.
18	Paid freight charges of $200 for merchandise ordered last month. (FOB shipping point)
23	Paid for the merchandise purchased August 4 less the portion that was returned.
24	Sold merchandise on credit for $7,000, terms 2/10, n/30. The items had a cost of $4,900.
31	Received payment for merchandise sold on August 24.

 

Required:

Prepare the general journal entries to record these transactions.

Answer: Aug	1	Accounts  Receivable	5,000
		Sales		5,000
		Cost of goods sold	3,500
		Merchandise  Inventory		3,500

 

• Merchandise Inventory                                                     2,720

Cash                                                                                       2,720

 

 

• Merchandise Inventory                                                     2,600

Accounts Payable                                                                    2,600

 

5	Sales Returns and Allowances	3,000
	Accounts  Receivable		3,000
	Merchandise  Inventory	2,010
	Cost of goods sold		2,010

 

10        Cash                                                                                 4,850

Sales Discounts                                                                 150

Accounts Receivable                                                                5,000

15        Accounts Payable                                                              600

Merchandise Inventory                                                            600

116

 

Answer:              18        Merchandise Inventory                                                      200

Cash                                                                                       200

 

 

23        Accounts Payable ($2,600 — $600)                                   2,000 Merchandise Inventory ($2,000 x .01)                                                                                                   20

Cash                                                                                       1,980

 

24	Accounts  Receivable	7,000
	Sales		7,000
	Cost of goods sold	4,900
	Merchandise  Inventory		4,900

 

31        Cash                                                                                 6,860

Sales Discounts                                                                 140

Accounts Receivable                                                                7,000

 

 

Diff: 3

Topic: Accounting for Merchandise Purchases; Accounting for Merchandise Sales Learning Objective: 05-P1; 05-P2

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• Craig’s Snowboards uses the perpetual inventory system and the gross method of accounting for sales, and had the following sales transactions during June:

 

 

 

 

June 2 Sold merchandise to General Sports Store on credit for $4,800, terms 1/15, n/60. The items sold had a cost of $2,700. June 4 General Sports Store returned merchandise that had a selling price of $200. Th cost of the merchandise returned was $110. June 13 General Sports Store paid for the merchandise sold on June 2 less the return, taking any appropriate discount earned.

e

 

 

 

 

 

 

Prepare the journal entries that Craig’s Snowboards must make to record these transactions.

Answer:

June 2	Accounts receivable	4,800
	Sales		4,800
	Cost of goods sold	2,700
	Merchandise  inventory		2,700
June 4	Sales returns and allowances	200
	Accounts receivable		200
	Merchandise  inventory	110
	Cost of goods sold		110
June 13	Cash                                         117	4,554

 

June 13 Cash 4,554     Sales discounts 46     Accounts receivable   4,600

Answer:

 

 

 

 

 

 

Diff: 2

Topic: Accounting for Merchandise Sales Learning Objective: 05-P2

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• Forrest’s Cycle Shop uses a perpetual inventory accounting system and the gross method of accounting for sales had the following transactions during the month of July:

 

 

 

 

 

 

 

 

 

 

July 3 Sold merchandise to a customer on credit for $600, terms 2/10, n30. The cost of the merchandise sold was $350. July 4 Sold merchandise to a customer for cash of $425. The cost of the merchandise was $250. July 6 Sold merchandise to a customer on credit for $1,300, terms 2/10, n/30. The cost of the merchandise sold was $750. July 8 The customer from July 3 returned merchandise with a selling price of $100. Th cost of the merchandise returned was $55. July 15 The customer from July 6 paid the full amount due, less any appropriate discounts earned. July 31 The customer from July 3 paid the full amount due, less any appropriate discounts earned.

e

 

 

 

 

 

 

 

 

 

Prepare the required journal entries that Forrest’s Cycle Shop must make to record these transactions.

Answer:	July 3	Accounts  receivable	600
		Sales		600
		Cost of goods sold	350
		Merchandise  inventory		350

 

July 4	Cash	425
	Sale		425
	Cost of goods sold	250
	Merchandise  inventory		250

 

July 6	Accounts  receivable	1,300
	Sale		1,300
	Cost of goods sold	750
	Merchandise  inventory		750

 

 

Answer:	July 8	Sales returns and allowances	100
		Accounts  receivable Merchandise  inventory Cost of goods sold	55	100     55

 

July 15           Cash                                                                    1,274

Sales discounts                                                    26

Accounts receivable                                                         1,300

Calculation: Discount = $1,300 * .02 = $26

July 31            Cash                                                                   500

Accounts receivable                                                        500

 

 

Diff: 3

Topic: Accounting for Merchandise Sales Learning Objective: 05-P2

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• Following is the year-end adjusted trial balance for Fred’s Corner Grocery for the current year:

 

 

Fred’s Corner Grocery Adjusted Trial Balance December 31

 

 

 

Dr. Cr.

 

Cash……………………………………………………..          $  67,500

 

Accounts receivable……………………………………                  46,000

Merchandise inventory…………………………………           60,000

Store supplies………………………………………….            800

Accounts payable………………………………………                              16,000

Salaries payable………………………………………..                               850

1. Brewster, Capital…………………………………….. 125,630
2. Brewster, Withdrawals………………………………. 45,000 Sales……………………………………………………..                                                                                                 550,000 Sales returns & allowances……………………………                     4,500

Sales discounts…………………………………………           4,250  Cost of goods sold..…………………………………….          382,450 Sales salaries expense…………………………………            44,000 Advertising expense…………………………………….          8,150 Store salaries expense…………………………………             24,325 Store  supplies  expense………………………………..                                                                                                           450

Interest   expense…………………………………………                 5,055 Totals……………………………………………………..        $692,480                                                                                                $692,480

119

 

Answer: Dec 31 Sales 550,000       Income Summary   550,000   31 Income Summary 473,180       Sales Returns and Allowances   4,500     Sales Discounts   4,250     Cost of goods sold   382,450     Sales Salaries Expense   44,000     Advertising  Expense   8,150     Store Salaries Expense   24,325     Store Supplies Expense   450     Interest Expense   5,055   31 Income Summary 76,820       F. Brewster, Capital   76,820   31 F. Brewster, Capital 45,000       F. Brewster, Withdrawals   45,000

Totals……………………………………………………..        $692,480                                                                                                $692,480 Prepare the closing entries at December 31 for the current year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diff: 3

Topic: Adjusting and Closing Entries for Merchandisers Learning Objective: 05-P3

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• The year-end adjusted trial balance of Gordon Produce for the current year, is shown below:

 

 

GORDON  PRODUCE

Adjusted Trial Balance December 31

 

 

	Debit	Credit
Cash	$ 1,500
Store supplies	500
Merchandise  inventory	11,000
Store equipment	18,000
Accum. depr.–store equipment		$ 3,000
Accounts payable		6,000
J. Gordon, Capital		50,000
J. Gordon, Withdrawals	22,000
Sales		60,500
Cost of goods sold	48,000
Depreciation expense–Store equipment	1,000
Store supplies expense	1,500
Salar1ie2s0 expense	14,000

 

 

Salaries expense	14,000
Rent expense	2,000
		$119,500	$119,500

 

Prepare closing entries at December 31 for the current year.

Answer:

Dec. 31	Sales	60,500
	Income Summary		60,500
31	Income Summary	66,500
	Cost of goods sold		48,000
	Salaries  Expense		14,000
	Rent Expense		2,000
	Store Supplies Expense		1,500
	Depreciation  Expense–Store Equip.		1,000

 

31	J. Gordon, Capital	6,000
	Income Summary		6,000
	J. Gordon, Capital	22,000
	J. Gordon, Withdrawals		22,000

 

Diff: 3

Topic: Adjusting and Closing Entries for Merchandisers Learning Objective: 05-P3

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• From the adjusted trial balance for Brookstone Art Supplies given below, prepare a multiple-step income statement in good

 

Brookstone Art SuppliesAdjusted Trial BalanceDecember 31

	Debit	Credit
Cash	$9,400
Accounts  receivable	25,000
Merchandise  inventory	36,000
Office supplies	900
Store equipment	75,000
Accumulated  depreciation–store  equipment		$22,000
Office equipment	60,000
Accumulated  depreciation–office  equipment		15,000
Accounts payable		42,000
Notes payable		10,000
A. Brookstone, Capital		110,700
A. Brookstone, Withdrawals	48,000
Sales		325,000
Sales discounts                                                               121	6,000

 

 

Sales discounts	6,000
Sales returns and allowances	16,500
Cost of goods sold	195,000
Selling expenses	32,500
General and administrative expenses	19,800
Interest expense	600
Totals	$524,700		$524,700

 

 

 

Answer:                                             Brookstone Art Supplies Income  Statement

For the year ended December 31

Sales		$325,000
Less: Sales discounts	$ 6,000
Sales returns and allowances	16,500	22,500 $302,500
Net sales
Cost of goods sold		195,000 107,500
Gross profit
Operating  expenses
Selling  expenses	32,500
General and administrative expenses	19,800
Total operating expenses		52,300 55,200
Income from operations
Other  expenses
Interest  expense		600 $ 54,600
Net income

 

Diff: 3

Topic: Financial Statements for Merchandisers Learning Objective: 05-P4

Bloom’s: Apply

AACSB: Communication

AICPA: BB Industry; FN Reporting

 

• From the adjusted trial balance for Fabricated Products Company given below, prepare the necessary closing

 

Fabricated Products CompanyAdjusted Trial BalanceDecember 31

	Debit		Credit
Cash	$19,400
Accounts  receivable	25,000
Merchandise  inventory	26,000
Office supplies	1,900
Store equipment	84,000
Accumulated  depreciation–store  equipment			$22,000
Office equipment	40,000
Accumulated  depreciation–office  equipment			15,000
Accounts payable			12,000
Notes payable			40,000
P. Card, Capital			110,700
P. Card, Withdrawals	28,000
Sales			245,000
Sales discounts	6,000
Sales returns and allowances	16,500
Cost of goods sold	145,000
Sales salaries expense	32,500
Depreciation expense–store equipment	11,000
Depreciation  expense–office equipment	7,500
Office supplies expense	1,300
Interest expense	600
Totals	$444,700		$444,700

 

Answer:

Dec. 31	Sales	245,000
	Income Summary		245,000
Dec. 31	Income Summary	220,400
	Sales discounts		6,000
	Sales returns and allowances		16,500
	Cost of goods sold		145,000
	Sales salaries expense		32,500
	Depreciation  expense–store  equipment		11,000
	Depreciation  expense–office  equipment		7,500
	Office supplies expense		1,300
	Interest  expense		600
Dec. 31	Income Summary	24,600
	P. Card, Capital		24,600

 

Answer: Dec. 31        P. Card, Capital                                                       28,000

1. Card, Withdrawals 28,000

 

 

Diff: 3

Topic: Adjusting and Closing Entries for Merchandisers Learning Objective: 05-P3

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• Johnnycake Restaurant uses a periodic inventory system and the gross method of accounting for Prepare general journal entries to record the following transactions for Johnnycake:

 

 

Aug. 10	Johnnycake purchased merchandise on credit from Foster Foods for $9,000, terms 2/10, n/30, FOB destination. Transportation costs of $350 were paid by Foster.
12	Johnnycake returned $600 of merchandise from the August 10 purchase.
19	Johnnycake paid Foster for the August 10 purchase.

 

Answer:

Aug. 10	Purchases	9,000
	Accounts Payable		9,000
12	Accounts Payable	600
	Purchases Returns and Allowances		600
19	Accounts Payable	8,400
	Cash		8,232
	Purchases Discounts ($8,400 x .02)		168

 

Diff: 2

Topic: Periodic Inventory System Learning Objective: 05-P5 Bloom’s: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

• Austin’s Pub Supply uses the periodic inventory system and the gross method of accounting for The company had the following sales transactions during August:

 

 

August 2	Sold merchandise to Jo’s Pub and Grub on credit for $3,750, terms 2/15, n/60. The items sold had a cost of $1,200.
August 4	Jo’s Pub and Grub returned merchandise that had a selling price of $300. The cost of the merchandise returned was $110.
August 13	Jo’s Pub and Grub paid for the merchandise sold on August 2, taking any appropriate discount earned.

 

Prepare the journal entries that Austin’s Pub Supply must make to record these transactions.

Answer:

Aug. 2	Accounts  receivable	3,750
	Sales		3,750
Aug. 4	Sales returns and allowances	300
	Accounts  receivable		300
Aug. 13	Cash	3,381
	Sales discounts	69
	Accounts  receivable		3,450

 

Diff: 3

Topic: Periodic Inventory System Learning Objective: 05-P5 Bloom’s: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• Preston Office Furniture uses the periodic inventory system and the gross method of accounting for It had the following transactions during the month of May:

 

 

 

 

 

 

 

May   3 Sold merchandise to a customer on credit for $600, terms 2/10, n/30. The cost of the merchandise sold was $350. May   4 Sold merchandise to a customer for cash of $425. The cost of the merchandise was $250. May   6 Sold merchandise to a customer on credit for $1,300, terms 2/10, n/30. Th cost of the merchandise sold was $750. May   8 The customer from May 3 returned merchandise with a selling price of $100. The cost of the merchandise returned was $55. May 15 The customer from May 6 paid the full amount due, less any appropriate discounts earned. May 31 The customer from May 3 paid the full amount due, less any appropriate discounts earned.

e

 

 

 

 

 

 

 

 

 

 

 

 

Prepare the required journal entries that Preston Office Furniture must make to record these

 

transactions.

Answer:

May 3	Accounts  receivable	600
	Sales		600
May 4	Cash	425
	Sales		425
May 6	Accounts  Receivable	1,300
	Sales		1,300
May 8	Sales returns and allowances	100
	Accounts  receivable		100
May 15	Cash		1,274
	Sales Discounts	26
	Accounts  receivable		1,300
	Calculation: Discount = $1,300 * .02 = $26
May 31	Cash		500
	Accounts  receivable		500

 

Diff: 3

Topic: Periodic Inventory System Learning Objective: 05-P5 Bloom’s: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• At its fiscal year-end of June 30, Kendall Wholesale’s general ledger shows the following selected account Kendall Wholesale uses the perpetual inventory system.

 

Merchandise Inventory	$60,000
Sales	940,000
Sales discounts	16,000
Sales returns and allowances	8,000
Cost of goods sold	456,000

 

A physical count of its June 30 year-end inventory discloses that the cost of the merchandise inventory still available is $58,160. Prepare the entry to record any inventory shrinkage.

Answer: June 30      Cost of goods sold                                             1,840

Merchandise Inventor                                               1,840

Diff: 2

Topic: Adjusting and Closing Entries Learning Objective: 05-P3

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

• Prepare journal entries to record the following merchandising transactions of Margin Company, which applies the perpetual inventory system and the gross method of recording Margin Company offers all of its credit customers credit terms of 2/10, n/30.

 

 

May 1	Purchased merchandise from Craft Company for $7,800 under credit terms of 1/10, n/30, FOB shipping point, invoice dated May 1.
May 2	Purchased merchandise from Bow Company for $10,600 under credit terms 2/05, n/20, FOB destination.
May 3	Sold merchandise to Sting Company for $5,600, FOB shipping point, invoice dated May 4. The merchandise had cost $3,000.
May 4	Paid $300 cash for the freight charges on the May 1 purchase of merchandise.
May 5	Received an $800 credit memorandum from Craft Company for the return of part of the merchandise purchased on May 1.
May 6	Paid Bow Company the balance due within the discount period.
May 8	Sold merchandise to Skeet Company for $3,300, FOB shipping point, invoice dated May 8. The merchandise had a cost of $1,500.
May 11	Paid Craft Company the balance due within the discount period.
May 13	Received the balance due from Sting Company within the discount period.
May 14	Issued a credit $300 credit memorandum to Skeet Company for an allowance on defective merchandise.
May 17	Received the balance due from Skeet Company within the discount period.

 

Answer:

May 1	Merchandise  Inventory Accounts Payable–Craft Co.	7,800	7,800
May 2	Merchandise  Inventory Accounts Payable–Bow Co.	10,600	10,600
May 3	Accounts receivable–Sting Co. Sales Cost of goods sold Merchandise  inventory	5,600     3,000	5,600     3,000
May 4	Merchandise  Inventory Cash	300	300
May 5	Accounts payable–Craft Co. Merchandise  inventory	800	800
May 6	Accounts payable–Bow Co. Merchandise inventory ($10,600 * .02)	10,600	212
	Cash ($10,600 — $212)		10,388

 

Answer:

 

May 8          Accounts receivable–Skeet Co.                               3,300

Sales                                                                             3,300

Cost of goods sold                                                  1,500

Merchandise inventory                                                   1,500

May 11        Accounts payable–Craft Co. ($7,800 — $800)         7,000 Merchandise inventory ($7,000 * .01)                                                               70

Cash ($7,000 — $70)                                                     6,930

May 13        Cash ($5,600 * .98)                                                5,488

Sales Discounts ($5,600 * .02)                                112

Accounts receivable–Sting Co.                                       5,600

May 14        Sales returns and allowances                                    300

Accounts receivable–Skeet Co.                                      300

May 17        Cash (($3,300 — $300)* .98)                                  2,940

Sales discounts ($3,000 * .02)                                 60

Accounts receivable–Skeet ($3,300 — 300)                    3,000

 

 

 

Diff: 3

Topic: Accounting for Merchandising Purchases; Accounting for Merchandising Sales Learning Objective: 05-P1; 05-P2

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• Prepare journal entries to record the following merchandising transactions of Margin Company, which applies the perpetual inventory system and the gross method of recording Margin Company offers all of its credit customers credit terms of 2/10, n/30.

 

 

May 1	Purchased merchandise from Craft Company for $7,800 under credit terms of 1/10, n/30, FOB shipping point, invoice dated May 1.
May 2	Purchased merchandise from Bow Company for $10,600 under credit terms 2/05, n/20, FOB destination.
May 4	Paid $300 cash for the freight charges on the May 1 purchase of merchandise.
May 5	Received an $800 credit memorandum from Craft Company for the return of part of the merchandise purchased on May 1.
May 6	Paid Bow Company the balance due within the discount period.
May 11	Paid Craft Company the balance due within the discount period.

 

Answer:

May 1	Merchandise  Inventory Accounts Payable–Craft Co.	7,800	7,800
May 2	Merchandise  Inventory Accounts Payable–Bow Co.	10,600	10,600
May 4	Merchandise  Inventory Cash	300	300
May 5	Accounts payable–Craft Co. Merchandise  inventory	800	800
May 6	Accounts payable–Bow Co. Merchandise inventory ($10,600 * .02)	10,600	212
	Cash ($10,600 — $212)		10,388
May 11	Accounts payable–Craft Co. ($7,800 — $800) Merchandise inventory ($7,000 * .01)	7,000	70
	Cash ($7,000 — $70)		6,930

 

Diff: 2

Topic: Accounting for Merchandising Purchases Learning Objective: 05-P1

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

• Prepare journal entries to record the following merchandising transactions of Margin Company, which applies the perpetual inventory system and the gross method of recording Margin Company offers all of its credit customers credit terms of 2/10, n/30.

 

 

May 3	Sold merchandise to Sting Company for $5,600, FOB shipping point, invoice dated May 4. The merchandise had cost $3,000.
May 8	Sold merchandise to Skeet Company for $3,300, FOB shipping point, invoice dated May 8. The merchandise had a cost of $1,500.
May 13	Received the balance due from Sting Company within the discount period.
May 14	Issued a credit $300 credit memorandum to Skeet Company for an allowance on defective merchandise.
May 17	Received the balance due from Skeet Company within the discount period.

 

 

Answer:

 

May 3          Accounts receivable–Sting Co.                                      5,600

Sales                                                                                          5,600

Cost of goods sold                                                        3,000

Merchandise inventory                                                                3,000

 

Answer:

 

May 8          Accounts receivable–Skeet Co.                                     3,300

Sales                                                                                          3,300

Cost of goods sold                                                        1,500

Merchandise inventory                                                                1,500

 

 

May 13        Cash ($5,600 * .98)                                                      5,488

Sales Discounts ($5,600 * .02)                                      112

Accounts receivable–Sting Co.                                                    5,600

May 14        Sales returns and allowances                                         300

Accounts receivable–Skeet Co.                                                   300

May 17        Cash (($3,300 — $300)* .98)                                        2,940

Sales discounts ($3,000 * .02)                                       60

Accounts receivable–Skeet ($3,300 — 300)                                 3,000

 

 

 

Diff: 2

Topic: Accounting for Merchandising Sales Learning Objective: 05-P2

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

• From the adjusted trial balance given below for the Grayson Company, prepare a multiple-step income statement in good Salaries expense and building depreciation expense should be equally divided between selling activities and the general and administrative activities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Answer:                                                  Grayson Company

Income Statement

For the year ended December 31

 

 

 

 

 

 

 

 

 

Sales   $450,000 Less: Sales discounts $ 8,000   Sales returns and allowances 24,500 32,500 Net sales   $417,500 Cost of goods sold   210,000 Gross profit   207,500

131

 

Gross profit   207,500 Operating expenses     Selling expenses     Sales salaries expense $ 19,000   Depreciation expense–store equipment 16,000   Depreciation  expense–building 12,000   Advertising  expense 12,300   Total selling expenses 59,300   General and administrative expenses     Salaries expense $ 19,000   Depreciation  expense–building 12,000   Office supplies expense 3,500   Total general and administrative expense s        34,500   Total operating expenses   93,800 Income from operations   113,700 Other revenues and gains (expenses and losses)     Gain on disposal of store equipment 3,000   Interest expense (1,000) 2,000 Net income   $ 115,700

Answer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diff: 3

Topic: Financial Statements for Merchandisers Learning Objective: 05-P4

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Reporting

 

 

• Vincent Company purchased merchandise from Liu Company with an invoice price of $300,000 and credit terms of 2/10, n/30. Liu Company’s cost for the merchandise was $200,000. Vincent Company paid within the discount Assume that both buyer and seller use a perpetual inventory system and the gross method of recording invoices.

1. Prepare entries that Vincent should record for (a) the purchase and (b) the cash
2. Prepare entries that Liu should record for (a) the sale and (b) the cash
3. Assume that the buyer borrowed enough cash to pay the balance on the last day of the discount period at an annual interest rate of 9% and paid it back on the last day of the credit Compute how much the buyer saved by following this strategy. (Assume a 365-day year and round dollar amounts to the nearest cent.)

Answer: 1. a.      Merchandise Inventory                                                300,000

Accounts Payable                                                                    300,000

 

 

1. Accounts Payable                                                           300,000

Merchandise inventory                                                            6,000

 

Answer:                       Cash                                                                                       294,000

 

2. a.	Accounts  Receivable	300,000
	Sales		300,000
	Cost of goods sold	200,000
	Merchandise  inventory		200,000

 

2. b. Cash 294,000

Sales discounts                                                               6,000

Accounts receivable                                                                300,000

Discount = $300,000 * .02 = $6,000

 

 

3. By borrowing the money on the last day of the discount period and repaying it on the last day of the credit period, the loan would be outstanding for 20 days (30-10). Interest on the loan is calculated at 9% for 20 days. The amount saved is the difference between the discount received for paying on time and the amount of interest expense that would be paid to the bank.

Discount taken                         $6,000.00

Interest expense ($294,000 *.09 * 20/365)  1,449.86 Amount saved           $4,550.14

 

Diff: 3

Topic: Accounting for Merchandise Purchases; Accounting for Merchandise Sales Learning Objective: 05-P1; 05-P2

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Reporting

 

 

• Prepare journal entries to record the following merchandise transactions of Martinez Excavation Equipment, which applies the perpetual inventory system and the gross method of recording

 

 

May 1	Purchased merchandise from Kona Company for $12,700 under credit terms of 2/15, n/45, FOB destination, and invoice dated May 1.
3	Sold merchandise to Walton for $8,000 under credit terms of 1/10, n/30, FOB destination, invoice date May 3. The merchandise had cost $5,000.
5	Paid $350 cash for shipping charges related to the May 3 sale.
6	Returned $2,000 of the merchandise purchased on May 1 to Kona Company.
7	Walton returned merchandise from the May 3 sale that had cost Martinez $625 and had been sold for $1,000. The merchandise was restored to inventory.
13	Received the balance due from Walton less the return.
14	Paid the amount due Kona Company.

 

Answer:

May  1       Merchandise Inventory                                          12,700

Accounts Payable                                                                 12,700

 

 

3	Accounts receivable	8,000
	Sales		8,000
	Cost of goods sold	5,000
	Merchandise  inventory		5,000

 

• Delivery expense 350

Cash                                                                                    350

• Accounts payable                                                    2,000

Merchandise inventory                                                         2,000

 

7	Sales returns and allowances	1,000
	Accounts  Receivable		1,000
	Merchandise Inventory	625
	Cost of goods sold		625

13      Cash ($8,000 — $1,000) * .99                               6,930

Sales discounts ($8,000 — $1,000) * .01               70

Accounts receivable                                                              7,000

 

14      Accounts payable ($12,700 — $2,000).                     10,700 Merchandise inventory ($10,700 * .02)                                                                                       214

Cash ($10,700 — $214)                                                       10,486

 

 

Diff: 3

Topic: Accounting for Merchandise Purchases; Accounting for Merchandise Sales Learning Objective: 05-P1; 05-P2

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

• In its first month of business, Clausen Corporation reports sales of $1,750,000 and cost of goods sold of $950,000. Clausen estimates that current and future returns and allowances will equal 4% of those Prepare the October 31 adjusting entries necessary to record the revenue side and cost side estimates for returns and allowances.

Answer:

Oct 31	Sales Returns and Allowances Sales Refund Payable ($1,750,000 x .04)	70,000	70,000
Oct 31	Inventory Returns Estimated ($950,000 x .04) Cost of Goods Sold	38,000	38,000

 

Diff: 2

Topic: Adjustments for sales discounts, returns and allowances Learning Objective: 05-P6

Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• Stevenson Corporation reports unadjusted first-year sales of $400,000 and cost of goods sold of

$240,000.  The company expects future returns and allowances equal to 3% of sales and 3% of cost of sales.  Prepare the adjusting entries necessary to record the revenue side and cost side estimates for returns and allowances.

Answer:

Dec. 31	Sales Returns and Allowances Sales Refund Payable ($400,000 x .03)	12,000	12,000
Dec. 31	Inventory Returns Estimated ($240,000 x .03) Cost of Goods Sold	7,200	7,200

 

Diff: 2

Topic: Adjustments for sales discounts, returns and allowances Learning Objective: 05-P6

Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

• Martin Corporation allows customers to return merchandise within 60 days of At year-end, Martin estimates that sales of $20,000, with a cost of $14,000 will be returned in the

upcoming year.  The unadjusted balance in Inventory Returns Estimated is a debit of $4,000, and the unadjusted balance in Sales Refund Payable is a credit of $2,500.   Prepare the adjusting entries necessary to record the revenue side and cost side estimates for returns and allowances.

Answer:

Dec 31	Sales Returns and Allowances Sales Refund Payable ($20,000 – $2,500)	17,500	17,500
Dec 31	Inventory Returns Estimated ($14,000 – $4,000) Cost of Goods Sold	10,000	10,000

 

Diff: 3

Topic: Adjustments for sales discounts, returns and allowances Learning Objective: 05-P6

Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

 

 

• Tahoe Ski Company uses the perpetual inventory system and the net method of accounting for The company had the following transactions during January:

January 6:        Purchased $4,000 of inventory. The seller’s credit terms are 2/10, n/30. January 8:      Returned $200 worth of defective units and received full credit.

January 15:      Paid the amount due, less the returned items.

 

Prepare journal entries to record each of the preceding transactions.

Answer:

January 6:        Merchandise Inventory                               3,920

Accounts Payable                                                  3,920

January 8:        Accounts Payable                                       196

Merchandise Inventory                                          196

 

January 15:      Accounts Payable                                       3,724

Cash                                                                      3,724

 

Diff: 2

Topic: Recording Transactions under the Net Method Learning Objective: 05-P7

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

• Barbara’s Boats uses the periodic inventory system and the net method of accounting for The company had the following transactions during January:

January 6:        Purchased $10,000 of inventory. The seller’s credit terms are 2/10, n/30. January 31:      Due to an oversight, the invoice was not paid within the discount period.  Full payment was made on January 31.

 

Prepare journal entries to record each of the preceding transactions.

Answer:

January 6:        Purchases……………..                               3,920

Accounts Payable                                                   3,920

January 31:      Accounts Payable                                                              3,920 Purchases Discounts Lost                           80

Cash                                                                       4,000

 

Diff: 2

Topic: Recording Transactions under the Net Method Learning Objective: 05-P7

Bloom’s: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

 

 

SHORT ANSWER QUESTIONS

236)   A ________ is an intermediary that buys products from manufacturers and sells to retailers. Answer: wholesaler

Explanation:

Diff: 1

Topic: Merchandising Activities Learning Objective: 05-C1 Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• A ________ company’s operating cycle begins with the purchase of merchandise and ends with the collection of cash from merchandise

Answer: merchandising Explanation:

Diff: 1

Topic: Cost flows of a Merchandiser Learning Objective: 05-C2

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

238)   Products that a company owns and intends to sell are called ________. Answer: Merchandise inventory

Explanation:

Diff: 1

Topic: Merchandising Activities Learning Objective: 05-C2 Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• ________ inventory system updates the accounting record for inventory only at the end of an accounting

Answer: periodic Explanation:

Diff: 1

Topic: Periodic Inventory System Learning Objective: 05-C2 Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• The ________ inventory system continually updates accounting records for merchandise transactions for the amounts of inventory available for sale and inventory

Answer: perpetual Explanation:

Diff: 1

Topic: Perpetual Inventory System Learning Objective: 05-C2 Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

241)   Beginning inventory plus the net cost of purchases is the ________. Answer: merchandise available for sale

Explanation:

Diff: 1

Topic: Cost Flows of a Merchandiser Learning Objective: 05-C2

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

242)   A period’s beginning inventory is equal to the prior period’s ________. Answer: ending inventory

Explanation:

Diff: 1

Topic: Cost Flows of a Merchandiser Learning Objective: 05-C2

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• The liquidity of a company can be measured using the current ratio and the ________, which only includes the most liquid current assets in its

Answer: acid-test ratio Explanation:

Diff: 2

Topic: Acid-Test Ratio Learning Objective: 05-A1 Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

244)   The gross margin ratio equals net sales less ________ divided by net sales. Answer: cost of goods sold

Explanation:

Diff: 2

Topic: Gross Margin Ratio Learning Objective: 05-A2 Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

245)   ________ are the amounts and timing of payment from a buyer to a seller. Answer: Credit terms

Explanation:

Diff: 1

Topic: Accounting for Merchandise Purchases Learning Objective: 05-P1

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• A buyer issues a ________ to inform the seller of a debit made to the seller’s account payable in the buyer’s

Answer: debit memorandum Explanation:

Diff: 1

Topic: Accounting for Merchandise Purchases Learning Objective: 05-P1

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• FOB ________ means the buyer accepts ownership when the goods depart the seller’s place of The buyer is responsible for paying shipping costs and bears the risk of damage or loss when goods are in transit.

Answer: shipping point (or factory) Explanation:

Diff: 1

Topic: Accounting for Merchandise Purchases Learning Objective: 05-P1

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• FOB ________ means ownership of goods transfers to the buyer when the goods arrive at the buyer’s place of The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit.

Answer: destination Explanation:

Diff: 1

Topic: Accounting for Merchandise Purchases Learning Objective: 05-P1

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

249)   Merchandise that customers return to the seller after a sale is referred to as _               . Answer: sales returns

Explanation:

Diff: 1

Topic: Accounting for Merchandise Sales Learning Objective: 05-P2

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• Reductions in the selling price of merchandise sold to customers, often involving damaged or defective merchandise that a customer is willing to purchase with a decrease in the selling price is referred to as _

Answer: sales allowances Explanation:

Diff: 1

Topic: Accounting for Merchandise Sales Learning Objective: 05-P2

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• A seller usually prepares a to confirm a buyer’s return or allowance, and informs the buyer of the seller’s credit to the buyer’s Account Receivable on the seller’s

Answer: credit memorandum Explanation:

Diff: 1

Topic: Accounting for Merchandise Sales Learning Objective: 05-P2

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• ________ can benefit a seller by decreasing the delay in receiving cash and reducing future collection

Answer: Sales discounts Explanation:

Diff: 1

Topic: Accounting for Merchandise Sales Learning Objective: 05-P2

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

 

• Inventory shrinkage can be computed by comparing the ________ of inventory with recorded quantities and

Answer: physical count (or count) Explanation:

Diff: 1

Topic: Adjusting and Closing Entries for Merchandisers Learning Objective: 05-P3

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

 

• ________ expenses are those costs that support a company’s overall operations and include expenses related to accounting, human resource management, and financial

Answer: General and administrative Explanation:

Diff: 1

Topic: Financial Statements for Merchandisers Learning Objective: 05-P4

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Reporting

 

 

• A ________ income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of

Answer: multiple-step Explanation:

Diff: 1

Topic: Financial Statements for Merchandisers Learning Objective: 05-P4

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Reporting

 

 

• A ________ income statement includes cost of goods sold as another expense and shows only one subtotal for total

Answer: single-step Explanation:

Diff: 1

Topic: Financial Statements for Merchandisers Learning Objective: 05-P4

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Reporting

 

 

• Non-operating activities that include interest, dividend, and rent revenues, and gains from asset disposals are called

Answer: other revenues and gains Explanation:

Diff: 2

Topic: Financial Statements for Merchandisers Learning Objective: 05-P4

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Reporting

 

• Non-operating activities that include interest expense, losses from asset disposals, and casualty losses are reported as .

Answer: other expenses and losses Explanation:

Diff: 1

Topic: Financial Statements for Merchandisers Learning Objective: 05-P4

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Reporting

 

 

• When a company has no reportable nonoperating activities, its income from operations is reported as

Answer: net income Explanation:

Diff: 1

Topic: Financial Statements for Merchandisers Learning Objective: 05-P4

Bloom’s: Remember AACSB: Communication

AICPA: BB Industry; FN Reporting

 

 

• Under the ________ inventory accounting system, each purchase, purchase return and allowance, purchase discount, and transportation-in transaction is recorded in a separate temporary

Answer: periodic Explanation:

Diff: 1

Topic: Periodic Inventory System Learning Objective: 05-P5 Bloom’s: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making