Financial Accounting Tools for Business Decision Making, 7th Edition By Kimmel -Test Bank

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CHAPTER 5

MERCHANDISING OPERATIONS

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY

Item		LO		BT		Item		LO		BT		Item		LO		BT		Item		LO		BT		Item		LO		BT
	True-False Statements
	1.		1		K		12.		1		K		23.		3		K		34.		4		C		45.		5		K
	2.		1		K		13.		1		K		24.		3		K		35.		4		K		46.		6		AP
	3.		1		K		14.		1		K		25.		3		K		36.		4		K		47.		6		C
	4.		1		K		15.		1		K		26.		3		K		37.		4		K		48.		6		K
	5.		1		K		16.		2		K		27.		3		K		38.		4		K		49.		7		K
	6.		1		C		17.		2		K		28.		3		K		39.		4		K		50.		7		K
	7.		1		C		18.		2		K		29.		3		K		40.		4		K		51.		*8		K
	8.		1		K		19.		2		K		30.		3		C		41.		4		K		52.		*8		K
	9.		1		C		20.		2		K		31.		3		K		42.		4		K
	10.		1		K		21.		2		AP		32.		3		AP		43.		4		C
	11.		1		K		22.		2		C		33.		3		K		44.		5		K
	Multiple Choice Questions
	53.		1		K		82.		2		K		111.		3		AP		140.		3		AN		169.		6		AP
	54.		1		K		83.		2		AP		112.		3		AP		141.		3		C		170.		4		AP
	55.		1		K		84.		2		AP		113.		3		K		142.		4		K		171.		4		AP
	56.		1		K		85.		2		C		114.		3		K		143.		4		K		172.		6		AP
	57.		1		K		86.		2		AP		115.		3		AP		144.		4		K		173.		6		AP
	58.		1		K		87.		2		C		116.		3		AP		145.		4		K		174.		4		C
	59.		1		K		88.		2		C		117.		3		AP		146.		4		K		175.		4		K
	60.		1		K		89.		2		AP		118.		3		AP		147.		4		K		176.		5		C
	61.		1		K		90.		2		AP		119.		3		AP		148.		4		K		177.		5		C
	62.		1		K		91.		2		K		120.		3		K		149.		4		K		178.		5,6		AP
	63.		1		K		92.		2		AN		121.		3		AP		150.		4		K		179.		5,6		AP
	64.		1		K		93.		2		AP		122.		3		C		151.		4		K		180.		5		AP
	65.		1		C		94.		2		AP		123.		3		C		152.		4		K		181.		5		AP
	66.		1		K		95.		2		AN		124.		3		K		153.		4		K		182.		5		K
	67.		1		K		96.		2		AP		125.		3		K		154.		4		K		183.		5		K
	68.		1		K		97.		2		AN		126.		3		C		155.		4		K		184.		5		AN
	69.		1		K		98.		2		K		127.		3		AP		156.		4		K		185.		5		K
	70.		1		K		99.		2		AP		128.		3		AP		157.		4		K		186.		5		AP
	71.		1		K		100.		2		C		129.		3		AP		158.		4		K		187.		5		AP
	72.		1		K		101.		2		C		130.		3		K		159.		4		K		188.		6		K
	73.		1		K		102.		2		AP		131.		3		AP		160.		4		AP		189.		6		AP
	74.		1		K		103.		2		AP		132.		3		AP		161.		6		AP		190.		6		K
	75.		1		K		104.		2		K		133.		3		AP		162.		6		AP		191.		6		K
	76.		1		K		105.		2		K		134.		3		AP		163.		4		AP		192.		6		K
	77.		1		K		106.		3		K		135.		3		K		164.		6		AP		193.		6		C
	78.		1		C		107.		3		K		136.		3		K		165.		6		AP		194.		6		AP
	79.		1		K		108.		3		K		137.		3		K		166.		4		AP		195.		6		AP
	80.		1		K		109.		3		AP		138.		3		AP		167.		4		AP		196.		6		AP
	81.		1		C		110.		3		AP		139.		3		AP		168.		6		AP		197.		6		AP
	Multiple Choice Questions (Cont.)
	198.		6		C		200.		6		AP		202.		6		AP		*204.		8		AP		*206.		8		AP
	199.		6		AP		201.		6		AP		*203.		8		AP		*205.		8		AP
	Brief Exercises
	207.		1,4		AP		209.		2,3		AP		211.		4		AP		213.		5		AP
	208.		2,3		AP		210.		3		AP		212.		5		AP		214.		6		AP
	Exercises
	215.		2		AP		220.		2,3		AP		225.		4		K		230.		5		AP		*235.		8		AP
	216.		2		AP		221.		2,3		AP		226.		4,6		AP		231.		5		AP		*236.		8		AP
	217.		2,3		AP		222.		2,3		AP		227.		4,6		AP		232.		6		AP
	218.		2,3		AP		223.		3		AP		228.		4,6		AP		*233.		8		AP
	219.		2,3		AP		224.		3		AP		229.		4,6		AP		*234.		8		AP
	Completion Statements
	237.		1		K		239.		1		K		241.		2		K		243.		3		K		245.		4		K
	238.		1		K		240.		2		K		242.		3		K		244.		3		K		246.		6		K
	Matching
	247.		1-6		K
	Short-Answer Essay Questions
	248.		1		C		251.		3		C		254.		4		C		257.		2		C
	249.		3		C		252.		4		C		255.		6		C		258.		2		C
	250.		3		C		253.		4		C		256.		6		K

^*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Learning Objective 1
Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type
1.	TF	10.	TF	56.	MC	65.	MC	74.	MC	207.	BE
2.	TF	11.	TF	57.	MC	66.	MC	75.	MC	237.	C
3.	TF	12.	TF	58.	MC	67.	MC	76.	MC	238.	C
4.	TF	13.	TF	59.	MC	68.	MC	77.	MC	239.	C
5.	TF	14.	TF	60.	MC	69.	MC	78.	MC	247.	Ma
6.	TF	15.	TF	61.	MC	70.	MC	79.	MC	248.	SA
7.	TF	53.	MC	62.	MC	71.	MC	80.	MC
8.	TF	54.	MC	63.	MC	72.	MC	81.	MC
9.	TF	55.	MC	64.	MC	73.	MC	82.	MC
Learning Objective 2
16.	TF	84.	MC	92.	MC	100.	MC	215.	Ex	240.	C
17.	TF	85.	MC	93.	MC	101.	MC	216.	Ex	241.	C
18.	TF	86.	MC	94.	MC	102.	MC	217.	Ex	247.	Ma
19.	TF	87.	MC	95.	MC	103.	MC	218.	Ex	257.	SA
20.	TF	88.	MC	96.	MC	104.	MC	219.	Ex	258.	SA
21.	TF	89.	MC	97.	MC	105.	MC	220.	Ex
22.	TF	90.	MC	98.	MC	208.	BE	221.	Ex
83.	MC	91.	MC	99.	MC	209.	BE	222.	Ex

Learning Objective 3
Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type
23.	TF	106.	MC	117.	MC	128.	MC	139.	MC	222.	Ex
24.	TF	107.	MC	118.	MC	129.	MC	140.	MC	223.	Ex
25.	TF	108.	MC	119.	MC	130.	MC	141.	MC	224.	Ex
26.	TF	109.	MC	120.	MC	131.	MC	208.	BE	242.	C
27.	TF	110.	MC	121.	MC	132.	MC	209.	BE	243.	C
28.	TF	111.	MC	122.	MC	133.	MC	210.	BE	244.	C
29.	TF	112.	MC	123.	MC	134.	MC	217.	Ex	247.	Ma
30.	TF	113.	MC	124.	MC	135.	MC	218.	Ex	249.	SA
31.	TF	114.	MC	125.	MC	136.	MC	219.	Ex	250.	SA
32.	TF	115.	MC	126.	MC	137.	MC	220.	Ex	251.	SA
33.	TF	116.	MC	127.	MC	138.	MC	221.	Ex
Learning Objective 4
34.	TF	43.	TF	150.	MC	159.	MC	207.	BE	252.	SA
35.	TF	142.	MC	151.	MC	160.	MC	211.	BE	253.	SA
36.	TF	143.	MC	152.	MC	163.	MC	225.	Ex	254.	SA
37.	TF	144.	MC	153.	MC	166.	MC	226.	Ex
38.	TF	145.	MC	154.	MC	167.	MC	227.	Ex
39.	TF	146.	MC	155.	MC	170.	MC	228.	Ex
40.	TF	147.	MC	156.	MC	171.	MC	229.	Ex
41.	TF	148.	MC	157.	MC	174.	MC	245.	C
42.	TF	149.	MC	158.	MC	175.	MC	247.	Ma
Learning Objective 5
44.	TF	178.	MC	182.	MC	186.	MC	230.	Ex
45.	TF	179.	MC	183.	MC	187.	MC	231.	Ex
176.	MC	180.	MC	184.	MC	212.	BE	247.	Ma
177.	MC	181.	MC	185.	MC	213.	BE
Learning Objective 6
46.	TF	168.	MC	189.	MC	196.	MC	214.	BE	247.	Ma
47.	TF	169.	MC	190.	MC	197.	MC	226.	Ex	255.	SA
48.	TF	172.	MC	191.	MC	198.	MC	227.	Ex	256.	SA
161.	MC	173.	MC	192.	MC	199.	MC	228.	Ex
162.	MC	178.	MC	193.	MC	200.	MC	229.	Ex
164.	MC	179.	MC	194.	MC	201.	MC	232.	Ex
165.	MC	188.	MC	195.	MC	202.	MC	246.	C
Learning Objective 7
49.	TF	50.	TF	247.	Ma
Learning Objective 8
51.	TF	203.	MC	205.	MC	233.	Ex	235.	Ex
52.	TF	204.	MC	206.	MC	234.	Ex	236.	Ex

Note: TF = True-False C = Completion

MC = Multiple Choice Ex = Exercise

Ma = Matching SA = Short Answer Essay

CHAPTER LEARNING OBJECTIVES

Identify the differences between a service company and a merchandising company. Because of the presence of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual inventory system and a periodic inventory system.
Explain the recording of purchases under a perpetual inventory system. The Inventory account is debited for all purchases of merchandise and for freight costs, and it is credited for purchase discounts and purchase returns and allowances.
Explain the recording of sales revenues under a perpetual inventory system. When inventory is sold, Accounts Receivable (or Cash) is debited and Sales Revenue is credited for the selling price of the merchandise. At the same time, Cost of Goods Sold is debited and Inventory is credited for the cost of inventory items sold. Separate contra revenue accounts are maintained for Sales Returns and Allowances and Sales Discounts. These accounts are debited as needed to record returns, allowances, or discounts related to the sale.
Distinguish between a single-step and a multiple-step income statement. In a single-step income statement, companies classify all data under two categories, revenues or expenses, and net income is determined in one step. A multiple-step income statement shows numerous steps in determining net income, including results of nonoperating activities.
Determine cost of goods sold under a periodic system. The periodic system uses multiple accounts to keep track of transactions that affect inventory. To determine cost of goods sold, first calculate cost of goods purchased by adjusting purchases for returns, allowances, discounts, and freight-in. Then calculate cost of goods sold by adding cost of goods purchased to beginning inventory and subtracting ending inventory.
Explain the factors affecting profitability. Profitability is affected by gross profit, as measured by the gross profit rate, and by management’s ability to control costs, as measured by the profit margin ratio.
Identify a quality of earnings Indicator. Earnings have high quality if they provide a full and transparent depiction of how a company performed. An indicator of the quality of earnings is the quality of earnings ratio, which is net cash provided by operating activities divided by net income. Measures above 1 suggest the company is employing conservative accounting practices. Measures significantly below 1 might suggest the company is using aggressive accounting to accelerate the recognition of income.

*8. Explain the recording of purchases and sales of inventory under a periodic inventory system. To record purchases, entries are required for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. To record sales, entries are required for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.

TRUE-FALSE STATEMENTS

Retailers and wholesalers are both considered merchandising enterprises.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The operating cycle of a merchandising company ordinarily is shorter than that of a service company.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Sales revenue minus operating expenses equals gross profit.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A periodic inventory system does not require a detailed record of inventory items.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The operating cycle involves the purchase and sale of merchandise inventory as well as the subsequent collection of cash from credit sales.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The purchase of inventory and its eventual sale lengthen the operating cycle of a merchandising company.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Under the periodic inventory system, cost of goods sold is treated as an account.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

An advantage of using the periodic inventory system is that it requires less record keeping than the perpetual inventory system.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The periodic inventory system provides an up to date amount of inventory on hand.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A very small business most likely would have to use the perpetual inventory system.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The computer has increased greatly the use of the periodic inventory system.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Economics

Cost of Goods Sold is considered an expense of a merchandising firm.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Operating expenses are subtracted from revenue for a service enterprise and from gross profit for a merchandising enterprise.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Net sales minus cost of goods sold is called gross profit.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under the perpetual inventory system, purchases of merchandise for sale are recorded in the Inventory account.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The terms 2/10, net/30 mean that a 2 percent discount is allowed on payments made within the 10 days discount period.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A buyer who acquires merchandise under credit terms of 1/10, n/30 has 20 days after the invoice date to take advantage of the cash discount.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Discounts taken by the buyer for early payment of an invoice are called sales discounts by the buyer.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If merchandise costing $5,000, with terms 2/10, n/30, is paid within 10 days, the amount of the purchase discount is $100.

Ans: T, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

When an invoice is paid within the discount period, the amount of the discount decreases Inventory.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Sales revenues are only earned during the period cash is collected from the buyer.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Cash register tapes provide evidence of credit sales.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The revenue recognition principle applies to merchandising companies by recognizing sales revenues when the performance obligation is satisfied.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Sales allowances and Sales discounts are both designed to encourage customers to pay their accounts promptly.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Business Economics

Sales Discounts is a contra revenue account to Sales Revenue.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The normal balance of Sales Returns and Allowances is a credit.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Sales Discounts and Sales Returns and Allowances both have normal debit balances.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Merchandise is sold for $5,000 with terms 1/10, n/30. If $1,000 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $40.

Ans: T, LO: 3, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

The terms 2/10, n/30 mean that a 2 percent discount is allowed on payments made over 10 but before 30 days after the invoice date.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Quantitative Methods

The multiple-step income statement is considered more useful than the single-step income statement because it highlights the components of net income.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

In a single-step income only one step is required in determining net income.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Freight-out appears as an operating expense in the income statement.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Gross profit appears on both the single-step and multiple-step forms of an income statement.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Nonoperating activities include revenues and expenses that are related to the company’s main line of operations.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Operating expenses include interest expense and income tax expense.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Income from operations appears on both the single-step and multiple-step forms of an income statement.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A merchandising company’s net income is determined by subtracting operating expenses from gross profit.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Sales revenues, cost of goods sold, and gross profit are amounts on a merchandising company’s income statement not commonly found on the income statement of a service company.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The income statement for a merchandising company presents only two amounts not shown on a service company income statement.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under the periodic system, the purchases account is used to accumulate all purchases of merchandise for resale.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

With the periodic inventory system, goods available for sale must be calculated before cost of goods sold.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

If net sales are $750,000 and cost of goods sold is $600,000, the gross profit rate is 20%.

Ans: T, LO: 6, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

The gross profit amount is generally considered to be more informative than the gross profit rate.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Gross profit rate is computed by dividing cost of goods sold by net sales.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The quality of earnings ratio is calculated as net income divided by net cash provided by operating activities.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A quality of earnings ratio significantly less than 1 suggests that a company may be using more aggressive accounting techniques in order to accelerate income recognition.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*51. Under the periodic system, when a customer returns goods, Purchases Returns and Allowances is debited.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*52. Under the periodic inventory system, acquisitions of merchandise are not recorded in the Inventory account.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Answers to True-False Statements

T 9. T 17. T 25. F 33. F 41. T 49. F
F 10 F 18. T 26. T 34. T 42. T 50. T
F 11. F 19. F 27. F 35. T 43. F *51. F
T 12. F 20. F 28. T 36. T 44. T *52. T
F 13. T 21. T 29. F 37. F 45. T
T 14. T 22. T 30. T 38. F 46. T
T 15. T 23. F 31. T 39. F 47. F
F 16. T 24. F 32. T 40. F 48. F

MULTIPLE CHOICE QUESTIONS

Merchandising companies that sell to retailers are known as
brokers.
corporations.
wholesalers.
service firms.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Which of the following would not be considered a merchandising operation?
Retailer
Wholesaler
Service firm
Merchandising company

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Which of the following activities is not a component of the operating cycle?
Sale of merchandise
Payment of employees’ salaries
Collection of cash from merchandise sales
Purchase of merchandise

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Which of the following companies would be most likely to use a perpetual inventory system?
Grain company
Beauty salon
Clothing store
Fur dealer

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Gross profit equals the difference between
net income and operating expenses.
sales revenue and cost of goods sold.
sales revenue and operating expenses.
sales revenue and cost of goods sold plus operating expenses.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Each of the following companies is a merchandising company except a
wholesale parts company.
candy store.
moving company.
furniture store.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Net income will result if gross profit exceeds
cost of goods sold.
operating expenses.
purchases.
cost of goods sold plus operating expenses.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A merchandiser will earn an operating income of exactly $0 when
net sales equals cost of goods sold.
cost of goods sold equals gross margin.
operating expenses equal net sales.
gross profit equals operating expenses.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A merchandiser that sells directly to consumers is a
retailer.
wholesaler.
broker.
service enterprise.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Two categories of expenses in merchandising companies are
cost of goods sold and financing expenses.
operating expenses and financing expenses.
cost of goods sold and operating expenses.
other expenses and cost of goods sold.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The primary source of revenue for a wholesaler is
investment income.
service revenue.
the sale of merchandise.
the sale of plant assets the company owns.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Generally, the revenue account for a merchandising enterprise is called
Sales Revenue or Sales.
Investment Income.
Gross Profit.
Net Sales.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under a perpetual inventory system
accounting records continuously disclose the amount of inventory.
increases in inventory resulting from purchases are debited to purchases.
there is no need for a year-end physical count.
the account purchase returns and allowances is credited when goods are returned to vendors.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The operating cycle of a merchandising company is
always one year in length.
ordinarily longer than that of a service company.
about the same as that of a service company.
ordinarily shorter than that of a service company.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Sales revenue less cost of goods sold is called
gross profit.
net profit.
net income.
marginal income.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

After gross profit is calculated, operating expenses are deducted to determine
gross margin.
net income.
gross profit on sales.
net margin.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Which of the following expressions is incorrect?
Gross profit – Operating expenses = Net income
Sales revenue – cost of goods sold – Operating expenses = Net income
Net income + Operating expenses = Gross profit
Operating expenses – Cost of goods sold = Gross profit

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Detailed records of goods held for resale are not maintained under a
perpetual inventory system.
periodic inventory system.
double entry accounting system.
single entry accounting system.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A perpetual inventory system would most likely be used by a(n)
automobile dealership.
hardware store.
drugstore.
convenience store.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Which of the following is a true statement about inventory systems?
Periodic inventory systems require more detailed inventory records.
Perpetual inventory systems require more detailed inventory records.
A periodic system requires cost of goods sold be determined after each sale.
A perpetual system determines cost of goods sold only at the end of the accounting period.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The figure for which of the following items is determined at a different time under the perpetual inventory method than under the periodic method?
Sales Revenue
Cost of Goods Sold
Purchases
Accounts Receivable

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

In a perpetual inventory system, cost of goods sold is recorded
on a daily basis.
on a monthly basis.
on an annual basis.
each time a sale occurs.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The primary difference between a periodic and perpetual inventory system is that a periodic system
keeps a record showing the inventory on hand at all time.
provides better control over inventories.
records the cost of the sale on the date the sale is made.
determines the inventory on hand only at the end of the accounting period.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

When using the periodic system the physical inventory count is used to determine
only the sales value of goods in the ending inventory.
both the cost of the goods in ending inventory and the sales value of goods sold during the period.
both the cost of the goods sold and the cost of ending inventory.
only the cost of merchandise sold during the period.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Inventory becomes part of cost of goods sold when a company
pays for the inventory.
purchases the inventory.
sells the inventory.
receives payment from the customer.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Which statement is incorrect?
Periodic inventory systems provide better control over inventories than perpetual inventory systems.
Computers and electronic scanners allow more companies to use a perpetual inventory system.
Freight-in is debited to Inventory when a perpetual inventory system is used.
Regardless of the inventory system that is used, companies should take a physical inventory count.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

If a company determines cost of goods sold each time a sale occurs, it
must have a computer accounting system.
uses a combination of the perpetual and periodic inventory systems.
uses a periodic inventory system.
uses a perpetual inventory system.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The periodic inventory system is used most commonly by companies that sell
low-priced, high-volume merchandise.
high-priced, high-volume merchandise.
high-priced, low-volume merchandise.
high-priced, low and high-volume merchandise.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

What is a difference between merchandising companies and service enterprises?
Merchandising companies must prepare multiple-step income statements and service enterprises must prepare single-step income statements.
Merchandising companies generally have a longer operating cycle than service enterprises.
Cost of goods sold is an expense for service enterprises but not for merchandising companies.
All are differences.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under the perpetual inventory system, which of the following accounts would not be used?
Sales Revenue
Purchases
Cost of Goods Sold
Inventory

Ans: B, LO: 2 , Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Under a perpetual inventory system, acquisition of merchandise for resale is debited to
the Inventory account.
the Purchases account.
the Supplies account.
the Cost of Goods Sold account.

Ans: A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit
Accounts Payable.
Purchase Returns and Allowances.
Sales Revenue.
Inventory.

Ans: D, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Which of the following items does not result in an adjustment in the merchandise inventory account under a perpetual system?
A purchase of merchandise.
A return of merchandise inventory to the supplier
Payment of freight costs for goods shipped to a customer
Payment of freight costs for goods received from a supplier

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

A company using a perpetual inventory system that returns goods previously purchased on credit would
debit Accounts Payable and credit Inventory.
debit Sales and credit Accounts Payable.
debit Cash and credit Accounts Payable.
debit Accounts Payable and credit Purchases.

Ans: A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

If a purchaser using a perpetual inventory system pays the transportation costs, then the
Inventory account is increased.
Inventory account is not affected.
Freight-Out account is increased.
Delivery Expense account is increased.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Freight costs incurred by a seller on merchandise sold to customers will cause an increase
in the selling expenses of the buyer.
in operating expenses for the seller.
to the cost of goods sold of the seller.
to a contra-revenue account of the seller.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Conway Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Conway Company pays within the discount period?
$9,000
$8,820
$8,100
$8,280

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution: $9,000 ´ .98 = $8,820

A buyer borrows money at 6% interest to pay a $6,000 invoice with terms 1/10, n/30 on the 10th day of the discount period. The loan is repaid on the 30th day of the invoice. What is the buyer’s net savings for this total event?
$0
$40.00
$40.80
$80.00

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: ($6,000 ´ .01) – ($6,000 ´ .06 ´ 20/360) = $40

In the credit terms of 1/10, n/30, the “1” represents the
number of days in the discount period.
full amount of the invoice.
number of days when the entire amount is due.
percent of the cash discount.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Farwell Company purchased merchandise with an invoice price of $2,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?
2%
12%
18%
36%

Ans: C, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: [360 ¸ (30 – 10)] ´ 1% = 18%

Davies Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Davies Company pays within the discount period?
$9,000
$8,856
$8,820

d $7,200

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: $9,000 ´ .98 = $8,820

A credit sale of $1,900 is made on April 25, terms 2/10, net/30, on which a return of $100 is granted on April 28. What amount is received as payment in full on May 4?
$1,764
$1,862
$1,900

d $1,800

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: ($1,900 – $100) ´ .98 = $1,764

Grayson Company purchased merchandise with an invoice price of $2,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?
2%
12%
24%

d 36%

Ans: D, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: [360 ¸ (30 – 10)] ´ 2% = 36%

A credit sale of $700 is made on July 15, terms 2/10, net/30, on which a return of $50 is granted on July 18. What amount is received as payment in full on July 24?
$700
$637
$650

d $686

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: ($700 – $50) ´ .98 = $637

If a company is given credit terms of 2/10, n/30, it should
hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.
pay within the discount period and recognize a savings.
pay within the credit period but don’t take the trouble to invest the cash while waiting to pay the bill.
recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.

Ans: B, LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

A purchase invoice is a document that
provides support for goods purchased for cash.
provides evidence of incurred operating expenses.
provides evidence of credit purchases.
serves only as a customer receipt.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

Adams Company is a retailer and uses a perpetual inventory system. Which statement is correct?
Returns of merchandise by Adams Company to a manufacturer are credited to Inventory.
Freight paid to get merchandise to Adams Company’s store is debited to Freight Expense.
A return of merchandise by one of Adams Company’s customers is credited to Inventory.
Discounts taken by Adams Company’s customers are credited to Inventory.

Ans: A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

As the president of Harter Company, you notice that no discounts have been taken when settling accounts payables. What would be an acceptable explanation?
All invoices have credit terms of n/30.
There is not sufficient cash to pay within the discount period.
Discounts are missed because no one knows how to enter them in the new accounting software.
The full amount of the invoice is being paid within the discount period and the treasurer is pocketing the discount amount.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

When using a perpetual inventory system, why are discounts credited to Inventory?
The discounts are debited to discount expense and thus the credit has to be made to merchandise inventory.
The discounts reduce the cost of the inventory.
The discounts are a reduction of business expenses.
None of these answers choices are correct.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Tony’s Market recorded the following events involving a recent purchase of inventory:

Received goods for $40,000, terms 2/10, n/30.

Returned $800 of the shipment for credit.

Paid $200 freight on the shipment.

Paid the invoice within the discount period.

As a result of these events, the company’s inventory

increased by $38,416.
increased by $39,400.
increased by $38,612.
increased by $38,616.

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: [($40,000 – $800) ´ .98] + $200 = $38,616

Stan’s Market recorded the following events involving a recent purchase of inventory:

Received goods for $90,000, terms 2/10, n/30.

Returned $1,800 of the shipment for credit.

Paid $450 freight on the shipment.

Paid the invoice within the discount period.

As a result of these events, the company’s inventory

increased by $86,436.
increased by $88,650.
increased by $86,877.
increased by $86,886.

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: [($90,000 – $1,800) ´ .98] + $450 = $86,886

Assets purchased for resale are recorded in which of the following accounts?
Supplies
Inventory
Equipment
More than one of these answer choices is correct.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in which account?
Freight Expense
Freight-In
Inventory
Freight-Out

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Which of the following accounts is classified as a contra revenue account?
Sales Revenue
Cost of Goods Sold
Sales Returns and Allowances
Purchase Discounts

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Sales revenues are usually considered earned when
cash is received from credit sales.
an order is received.
goods have been transferred from the seller to the buyer.
adjusting entries are made.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Sales revenue
may be recorded before cash is collected.
will always equal cash collections in a month.
only results from credit sales.
is only recorded after cash is collected.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The journal entry to record a credit sale ignoring cost of goods sold is
Cash

Sales Revenue

Cash

Service Revenue

Accounts Receivable

Sales Returns and Allowances

Accounts Receivable

Sales Revenue

Ans: D, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Under the perpetual inventory system, in addition to making the entry to record a sale, a company would
debit Inventory and credit Cost of Goods Sold.
debit Cost of Goods Sold and credit Purchases.
debit Cost of Goods sold and credit Inventory.
make no additional entry until the end of the period.

Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

When sales of merchandise are made for cash, the transaction may be recorded by the following entry:
Debit Sales Revenue, credit Cash
Debit Cash, credit Sales Revenue
Debit Sales Revenue, credit Cash Discounts
Debit Sales Revenue, credit Sales Returns and Allowances

Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The entry to record a sale of $1,200 with terms of 2/10, n/30 will include a
debit to Sales Discounts for $24.
debit to Sales Revenue for $1,176.
credit to Accounts Receivable for $1,200.
credit to Sales Revenue for $1,200.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

A sales invoice is prepared when goods
are sold for cash.
are sold on credit.
sold on credit are returned.
are sold on credit or for cash.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The Sales Returns and Allowances account is classified as a(n)
asset account.
contra asset account.
expense account.
contra revenue account.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The entry to record the return of goods from a customer would include a
debit to Sales Revenue.
credit to Sales Revenue.
debit to Sales Returns and Allowances.
credit to Sales Returns and Allowances.

Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The entry to record the receipt of payment within the discount period on a sale of $700 with terms of 2/10, n/30 will include a
credit to Sales Discounts for $14.
debit to Sales Revenue for $686.
credit to Accounts Receivable for $700.
credit to Sales Revenue for $700.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The entry to record a sale of $700 with terms of 2/10, n/30 will include a
credit to Sales Discounts for $14.
debit to Cash for $686.
credit to Accounts Receivable for $700.
credit to Sales Revenue for $700.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The collection of an $900 account within the 2 percent discount period will result in a
debit to Sales Discounts for $18.
debit to Accounts Receivable for $882.
credit to Cash for $882.
credit to Accounts Receivable for $882.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $900 ´ .02 = $18

A sales invoice is used as documentation for a journal entry that requires a debit to
Cash and a credit to Sales Revenue.
Sales Returns and Allowances and a credit to Accounts Receivable.
Accounts Receivable and a credit to Sales Revenue.
Cash and a credit to Sales Returns and Allowances.

Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales
discount.
return.
contra asset.
allowance.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

When goods are returned that relate to a prior cash sale
the Sales Returns and Allowances account should not be used.
the Cash account will be credited.
Sales Returns and Allowances will be credited.
Accounts Receivable will be credited.

Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The Sales Returns and Allowances account does not provide information to management about
possible inferior merchandise.
the percentage of credit sales versus cash sales.
inefficiencies in filling orders.
errors in filling customers.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

A Sales Returns and Allowances account is not debited if a customer
returns defective merchandise.
receives a credit for merchandise of inferior quality.
utilizes a prompt payment incentive.
returns goods that are not in accordance with specifications.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

As an incentive for customers to pay their accounts promptly, a business may offer its customers
a sales discount.
free delivery.
a sales allowance.
a sales return.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

The credit terms offered to a customer by a business firm were 2/10, n/30, which means
the customer must pay the bill within 10 days.
the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date.
the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.
two sales returns can be made within 10 days of the invoice date and no returns thereafter.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Business Economics

A sales discount does not
provide the purchaser with a cash saving.
reduce the amount of cash received from a credit sale.
increase a contra revenue account.
increase an operating expense account.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Anderson Inc. sells $900 of merchandise on account to Baltic Company with credit terms of 2/10, n/30. If Baltic Company remits a check taking advantage of the discount offered, what is the amount of Baltic Company’s check?
$882
$900
$810
$840

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: $900 ´ .98 = $882

Aber Company sells merchandise on account for $1,800 to Borth Company with credit terms of 2/10, n/30. Borth Company returns $300 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
$1,464
$1,476
$1,470
$1,350

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: ($1,800 – $300) ´ .98 = $1,470

Casin Company sells $700 of merchandise on account to Delta Exploration with credit terms of 2/10, n/30. If Delta Exploration remits a check taking advantage of the discount offered, what is the amount of Delta Exploration’s check?
$490
$686
$630
$560

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: $700 ´ .98 = $686

Which sales accounts normally have a debit balance?
Sales Discounts
Sales Returns and Allowances.
Both Sales Discounts and Sales Returns and Allowances have debit balances.
Neither Sales Discounts or Sales Returns and Allowances have debit balances.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Fehr Company sells merchandise on account for $5,000 to Kelly Company with credit terms of 2/10, n/30. Kelly Company returns $1,000 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
$4,900
$4,920
$4,000
$3,920

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: ($5,000 – $1,000) ´ .98 = $3,920

Piper Company sells merchandise on account for $1,500 to Morton Company with credit terms of 2/10, n/30. Morton Company returns $500 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Piper Company make upon receipt of the check?
Cash 1,000

Accounts Receivable 1,000

Cash 980

Sales Returns and Allowances 520

Accounts Receivable . 1,500

Cash 980

Sales Returns and Allowances 500

Sales Discounts 20

Accounts Receivable 1,500

Cash 1,470

Sales Discounts 30

Sales Returns and Allowances 500

Accounts Receivable 1,000

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: ($1,500 – $500) ´ .02 = $20 Sales discount

The collection of a $600 account beyond the 2 percent discount period will result in a
debit to Cash for $588.
debit to Accounts Receivable for $600.
debit to Cash for $600.
debit to Sales Discounts for $12.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $600 – 0 = $600

The collection of a $700 account beyond the 2 percent discount period will result in a
debit to Cash for $686.
credit to Accounts Receivable for $700.
credit to Cash for $700.
debit to Sales Discounts for $14.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $700 – 0 = $700

Which of the following would not be classified as a contra account?
Sales Revenue
Sales Returns and Allowances
Accumulated Depreciation
Sales Discounts

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Which of the following accounts has a normal credit balance?
Sales Returns and Allowances
Sales Discounts
Sales Revenue
Cost of Goods Sold

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

With respect to the income statement
contra revenue accounts do not appear on the income statement.
sales discounts increase the amount of sales.
contra revenue accounts increase the amount of operating expenses.
sales discounts are included in the calculation of gross profit.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When a seller records a return of goods, the account that is credited is
Sales Revenue.
Sales Returns and Allowances.
Inventory.
Accounts Receivable.

Ans: D, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The respective normal account balances of Sales, Sales Returns and Allowances, and Sales Discounts are
credit, credit, credit.
debit, credit, debit.
credit, debit, debit.
credit, debit, credit.

Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Rains Company is a furniture retailer. On January 14, 2014, Rains purchased merchandise inventory at a cost of $48,000. Credit terms were 2/10, n/30. The inventory was sold on account for $80,000 on January 21, 2014. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2014 and the accounts receivables were settled on January 30, 2014. Which statement is correct?
Cash flows were affected on January 14 and January 21.
Gross profit percentage is 60%.
On January 30, 2014, customers should remit cash in the amount of $79,200.
There is not enough information available to answer this question.

Ans: C, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $80,000 ´ .99 = $79,200

Which statement is incorrect?
The sales revenue account is used to record the sales of goods held for resale to customers.
Sales discounts are recorded as debits to the sales revenue account.
The sales revenue account is a revenue account.
The sales revenue account has a normal credit balance and is closed at the end of the accounting period.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Indicate which one of the following would not appear on both a single-step income statement and a multiple-step income statement.
Gross profit
Operating expenses
Sales revenue
Cost of goods sold

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The form of income statement that derives its name from the fact that the total of all expenses is deducted from the total of all revenues is called a
multiple-step statement.
revenue statement.
report-form statement.
single-step statement.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Gross profit does not appear
on a multiple-step income statement.
on a single-step income statement.
to be relevant in analyzing the operation of a merchandising company.
on either a multiple-step or single-step income statement.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Gross profit equals the difference between net sales and
operating expenses.
cost of goods sold.
net income.
cost of goods sold plus operating expenses.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Positive operating income will result if gross profit exceeds
costs of goods sold.
salaries and wages expense.
cost of goods sold plus operating expenses.
operating expenses.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

What is the term applied to the excess of net sales over the cost of goods sold?
Income before income taxes
Income from operations
Net income
Gross profit

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Operating expenses would include
interest expense.
income tax expense.
freight-out.
freight-out and interest.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Which of the following is not a true statement about a multiple-step income statement?
Operating expenses do not include income tax expense.
There may be a section for non-operating activities.
There may be a section for operating assets.
There is a section for cost of goods sold.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

An advantage of the single-step income statement over the multiple-step form is
the amount of information it provides.
its comprehensiveness.
its simplicity.
its use in computing ratios.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Income from operations appears on
both a multiple-step and a single-step income statement.
neither a multiple-step nor a single-step income statement.
a single-step income statement.
a multiple-step income statement.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Income from operations is gross profit less
operating expenses and other expenses and losses.
operating expenses plus other revenues and gains.
operating expenses.
1
2
3
both 1 and 2

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Multiple-step income statements show
gross profit but not income from operations.
neither gross profit nor income from operations.
both income from operations and gross profit.
income from operations but not gross profit.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Interest expense would be classified on a multiple-step income statement under the heading
Other expenses and losses.
Other revenues and gains.
Operating expenses.
Cost of goods sold.

Ans: A , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Gross profit for a merchandising company is net sales minus
operating expenses.
cost of goods sold.
sales discounts.
cost of goods available for sale.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The sales section of an income statement for a retailer would not include
Sales discounts.
Sales revenue.
Net sales.
Cost of goods sold.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The operating expenses section of an income statement for a merchandising company would not include
Freight-out.
Utilities expense.
Cost of goods sold.
Insurance expense.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Indicate which one of the following would appear on the income statement of both a merchandising company and a service company.
Gross profit
Operating expenses
Sales revenue
Cost of goods sold

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Gross profit does not appear
on a merchandising company income statement.
on a service company income statement.
to be relevant in analyzing the operation of a merchandising company.
on the income statement if the periodic inventory system is used because it cannot be calculated.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Financial information is presented below:

Operating expenses $ 36,000

Sales revenue 150,000

Cost of goods sold 105,000

Gross profit would be

$114,000.
$ 36,000.
$ 45,000.
$ 24,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $150,000 – $105,000 = $45,000

Financial information is presented below:

Operating expenses $ 36,000

Sales revenue 150,000

Cost of goods sold 105,000

The gross profit rate would be

.70.
.24
.06.
.30.

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($150,000 – $105,000) ¸ $150,000 = .30

Financial information is presented below:

Operating expenses $ 36,000

Sales revenue 150,000

Cost of goods sold 105,000

The profit margin would be

.70.
.06.
.30.
.94.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($150,000 – $105,000 – $36,000) ¸ $150,000 = .06

Financial information is presented below:

Operating expenses $ 28,000

Sales returns and allowances 7,000

Sales discounts 3,000

Sales revenue 150,000

Cost of goods sold 91,000

Gross profit would be

$56,000.
$49,000.
$52,000.
$59,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($150,000 – $7,000 – $3,000) – $91,000 = $49,000

Financial information is presented below:

Operating expenses $ 28,000

Sales returns and allowances 7,000

Sales discounts 3,000

Sales revenue 150,000

Cost of goods sold 91,000

The gross profit rate would be

.33.
.35.
.65.
.27.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $150,000 – $7,000 – $3,000 = $140,000; ($140,000 – $91,000) ¸ $140,000 = .35

Financial information is presented below:

Operating expenses $ 28,000

Sales returns and allowances 7,000

Sales discounts 3,000

Sales revenue 150,000

Cost of goods sold 91,000

The profit margin would be

.21.
.14.
.35.
.15.

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $150,000 – $7,000 – $3,000 = $140,000; ($140,000 – $91,000 – $28,000) ¸ $140,000 = .15

Financial information is presented below:

Operating expenses $ 45,000

Sales returns and allowances 4,000

Sales discounts 6,000

Sales revenue 160,000

Cost of goods sold 90,000

The amount of net sales on the income statement would be

$154,000.
$150,000.
$160,000.
$156,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $160,000 – $4,000 – $6,000 = $150,000

Financial information is presented below:

Operating expenses $ 45,000

Sales returns and allowances 14,000

Sales discounts 6,000

Sales revenue 160,000

Cost of goods sold 90,000

Gross profit would be

$90,000.
$70,000.
$60,000.
$66,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($160,000 – $4,000 – $6,000) – $90,000 = $60,000

Financial information is presented below:

Operating expenses $ 45,000

Sales returns and allowances 4,000

Sales discounts 6,000

Sales revenue 160,000

Cost of goods sold 90,000

The gross profit rate would be

.40.
.60.
.44.
.45.

Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $160,000 – $4,000 – $6,000 = $150,000; ($150,000 – $90,000) ¸ $150,000 = .40

Financial information is presented below:

Operating expenses $ 45,000

Sales returns and allowances 4,000

Sales discounts 6,000

Sales revenue 160,000

Cost of goods sold 90,000

The profit margin would be

.40.
.09.
.16.
.10.

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $160,000 – $4,000 – $6,000 = $150,000; ($150,000 – $90,000 – $45,000) ¸ $150,000 = .10

Financial information is presented below:

Operating expenses $ 35,000

Sales returns and allowances 12,000

Sales discounts 3,000

Sales revenue 140,000

Cost of goods sold 85,000

The amount of net sales on the income statement would be

$128,000.
$125,000.
$140,000.
$137,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $140,000 – $12,000 – $3,000 = $125,000

Financial information is presented below:

Operating expenses $ 35,000

Sales returns and allowances 12,000

Sales discounts 3,000

Sales revenue 140,000

Cost of goods sold 85,000

Gross profit would be

$40,000.
$43,000.
$55,000.
$52,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($140,000 – $12,000 – $3,000) – $85,000 = 40,000

Financial information is presented below:

Operating expenses $ 35,000

Sales returns and allowances 12,000

Sales discounts 3,000

Sales revenue 140,000

Cost of goods sold 85,000

The gross profit rate would be

.68.
.39.
.32.
.34.

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $140,000 – $12,000 – $3,000 = $125,000; ($125,000 – $85,000) ¸ $125,000 = .32

Financial information is presented below:

Operating expenses $ 35,000

Sales returns and allowances 12,000

Sales discounts 3,000

Sales revenue 140,000

Cost of goods sold 85,000

The profit margin would be

.32.
.16.
.03.
.04.

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $140,000 – $12,000 – $3,000 = $125,000; ($125,000 – $85,000 – $35,000) ¸ $125,000 = .04

What is an advantage of using the multiple-step income statement?
It highlights the components of net income.
Gross profit is not a separate item.
It is easier to prepare than the single-step income statement.
Net income will be higher than net income computed using the single-step income statement.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For a jewelry retailer, which is an example of Other Revenues and Gains?
Repair revenue
Unearned revenue
Gain on sale of display cases
Discount received for paying for merchandise inventory within the discount period

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When using a periodic inventory system, which statement concerning the computation of cost of goods sold is correct?
The amount of ending inventory is determined on the last day of the accounting period.
Cost of goods available for sale includes net purchases plus the ending inventory.
Purchases represent cash paid for purchases during the accounting period.
Freight-in is ignored.

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When using the periodic inventory system, which of the following is not a step in determining cost of goods purchased?
Add freight-in
Subtract purchase returns and allowances
Subtract cost of ending inventory
All of these are necessary steps

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

At the beginning of the year, Uptown Athletic had an inventory of $400,000. During the year, the company purchased goods costing $1,500,000. If Uptown Athletic reported ending inventory of $500,000 and sales of $2,000,000, their cost of goods sold and gross profit rate would be
$1,000,000 and 70%.
$1,400,000 and 30%.
$1,000,000 and 30%.
$1,400,000 and 70%.

Ans: B, LO: 5,6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $400,000 + $1,500,000 – $500,000 = $1,400,000; ($2,000,000 – $1,400,000) ¸ $2,000,000 = 3090

At the beginning of the year, Wildcat Athletic had an inventory of $200,000. During the year, the company purchased goods costing $800,000. If Wildcat Athletic reported ending inventory of $300,000 and sales of $1,000,000, their cost of goods sold and gross profit rate would be
$500,000 and 70%
$700,000 and 30%.
$500,000 and 30%.
$700,000 and 70%.

Ans: B, LO: 5,6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $200,000 + $800,000 – $300,000 = $700,000; ($1,000,000 – $700,000) ¸ $1,000,000 = 30%

During the year, Megan’s Pet Shop’s merchandise inventory decreased by $60,000. If the company’s cost of goods sold for the year was $900,000, purchases would have been
$960,000.
$840,000.
$780,000.
Unable to determine.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $900,000 – $60,000 = $840,000

During the year, Sarah’s Pet Shop’s merchandise inventory decreased by $40,000. If the company’s cost of goods sold for the year was $600,000, purchases would have been
$640,000.
$560,000.
$520,000.
Unable to determine.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $600,000 – $40,000 = $560,000

The amount of cost of good available for sale during the year depends on the amounts of
beginning merchandise inventory and cost of goods sold.
beginning merchandise inventory, net cost of purchases, and ending merchandise inventory.
beginning merchandise inventory, cost of goods sold, and ending merchandise inventory.
beginning merchandise inventory and net costs of purchases.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Which of the following is not considered in computing net cost of purchases?
Purchases returns and allowances
Purchases
Freight paid on purchased goods
Freight paid on goods shipped to customers

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Assume Grammar Company uses the periodic inventory system and has a beginning inventory balance of $5,000, purchases of $75,000, and sales of $125,000. Grammar closes its records once a year on December 31. In the accounting records, the inventory account would be expected to have a balance on December 31 prior to adjusting and closing entries that was
equal to $5,000.
more than $5,000.
less than $5,000.
indeterminate.

Ans: A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

All of the following statements are true regarding the periodic inventory system except
Under the periodic inventory system, the balance of cost of goods sold is calculated at the end of the period.
Under the periodic inventory system, the balance in ending inventory is calculated at the end of the period.
Using the periodic inventory system affects the balance sheet contents differently than when the perpetual system is used.
Under the periodic system, a company uses separate accounts to record freight costs, returns, and discounts.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Sampson Company’s accounting records show the following for the year ending on December 31, 2014.

Purchase Discounts $ 5,600

Freight-In 7,800

Purchases 350,010

Beginning Inventory 23,500

Ending Inventory 28,800

Purchase Returns and Allowances 6,400

Using the periodic system, the cost of goods purchased is

$330,210.
$354,210.
$358,610.
$345,810.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $350,010 – $5,600 – $6,400 + $7,800 = $345,810

Sampson Company’s accounting records show the following at the year ending on December 31, 2014.

Purchase Discounts $ 5,600

Freight-In 7,800

Purchases 350,010

Beginning Inventory 23,500

Ending Inventory 28,800

Purchase Returns and Allowances 6,400

Using the periodic system, the cost of goods sold is

$351,110.
$348,910.
$340,510.
$359,510.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: [$23,500 + ($350,010 – $5,600 – $6,400 + $7,800)] – $28,800 = $340,510

Which of the following provides the best rationale regarding analysts’ views about the information value of the gross profit rate versus the gross profit amount?
The gross profit amount is more informative than the gross profit rate because it is a dollar amount rather than a ratio.
The gross profit amount is less informative than the gross profit rate because the latter presents a meaningful relationship between gross profit and net sales.
The gross profit amount is more informative than the gross profit rate because the gross profit rate is only used to describe a few industries while the gross profit amount is universally used.
The gross profit amount is more informative than the gross profit rate because high volume operations are able to calculate the gross profit rate but not the gross profit amount.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Bolton Company’s gross profit rate last year was 32.0% and this year it is 28.4%. Which of the following would not be a possible cause for this decline in the gross profit rate?
Bolton must pay higher prices to suppliers without passing these costs on to customers.
Bolton may have begun selling products with a higher markup.
Bolton’s average margin between selling price and inventory cost is decreasing.
Bolton may have seen a decline in total gross profit while maintaining net sales.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Haverty Industries increased its gross profit rate from 18.4% in 2013 to 23.7% in 2014. Which of the following would be a possible explanation for this change?
Haverty’s global sourcing efforts at the beginning of 2014 resulted in a lower cost of merchandise sold.
Haverty’s new profit lines with lower margins in 2014 became a larger component of their sales.
Haverty increased its product markdowns in 2014.
Haverty’s average margin between the selling price and the inventory cost decreased over this two-year period.

Ans: A, LO: 6, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Which of the following statements is true regarding profit margin?
Profit margin can be improved by decreasing the gross profit rate and/or controlling operating expenses and other costs
Profit margin does not vary across industries.
Discount stores with high merchandise turnover generally have higher profit margins.
If the profit margin has a higher value, this suggests favorable return on each dollar of sales.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The gross profit rate is computed by dividing gross profit by
sales revenue.
cost of goods sold.
net sales.
operating expenses.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A decline in a company’s gross profit could be caused by all of the following except
selling products with a lower markup.
clearance of discontinued inventory.
paying lower prices to its suppliers.
increasing competition resulting in a lower selling price.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

If Hostell Company has net sales of $500,000 and cost of goods sold of $325,000, Hostell’s gross profit rate is
50%.
35%.
54%.
100%.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($500,000 – $325,000) ¸ $500,000 = $35%

If Indiana Ink, Inc. has net sales of $400,000 and cost of goods sold of $300,000, Indiana Ink’s gross profit rate is
75%.
33%
25%.
100%.

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($400,000 – $300,000) ¸ $400,000 = $25%

A company shows the following balances:

Sales Revenue $1,000,000

Sales Returns and Allowances 175,000

Sales Discounts 25,000

Cost of Goods Sold 560,000

What is the gross profit rate?

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: [($1,000,000 – $175,000 – $25,000) – $560,000] ¸ $800,000 = $30%

A company shows the following balances:

Sales Revenue $ 800,000

Sales Returns and Allowances 75,000

Sales Discounts 25,000

Cost of Goods Sold 420,000

What is the gross profit rate?

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: [($800,000 – $75,000 – $25,000) – $420,000] ¸ $700,000 = $40%

What is a difference between the profit margin and the gross profit rate?
None, these are interchangeable terms.
The gross profit rate is computed by dividing net sales by gross profit and the profit margin is computed by dividing net sales by net income.
The gross profit rate will normally be higher than the profit margin ratio.
A profit margin of 7% means that 7 cents of each net sales dollar ends up in net income and a gross profit rate of 7% means that the cost of the goods were 7% of the selling price.

Ans: C, LO: 6, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Andrea’s Fashions sold merchandise for $95,000 cash during the month of July. Returns that month totaled $2,000. If the company’s gross profit rate is 40%, Andrea’s will report monthly net sales revenue and cost of goods sold of
$95,000 and $57,000.
$93,000 and $37,200.
$93,000 and $55,800.
$95,000 and $55,800.

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $95,000 – $2,000 – $93,000; $93,000 ´ .60 = $55,800

Betty’s Fabrics sold merchandise for $114,000 cash during the month of July. Returns that month totaled $2,400. If the company’s gross profit rate is 40%, Betty will report monthly net sales revenue and cost of goods sold of
$114,000 and $68,400.
$111,600 and $44,640.
$111,600 and $66,960.
$114,000 and $66,960.

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $114,000 – $2,400 = $111,600; $111,600 ´ .60 = $66,960

American Importers reports net income of $50,000 and cost of goods sold of $450,000. If the company’s gross profit rate was 40%, net sales were
$750,000.
$1,125,000.
$1,175,000.
$825,000.

Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $450,000 ¸ (1 – .40) = $750,000

United Services and Supplies reports net income of $60,000 and cost of goods sold of $360,000. US&S’s gross profit rate was 40%, net sales were
$600,000.
$900,000.
$960,000.
$660,000.

Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $360,000 ¸ (1 – .40) = $600,000

*203. Erin Corporation purchases $500 of merchandise on credit. Using the periodic inventory approach, Erin would record this transaction as:

Inventory 500

Accounts Payable 500

Accounts Payable 500

Purchases 500

Purchases 500

Accounts Payable 500

Accounts Payable 500

Inventory 500

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*204. Crowder Corporation recorded the return of $200 of goods originally sold on credit to Discount Industries. Using the periodic inventory approach, Crowder would record this transaction as:

Inventory 200

Accounts Receivable 200

Sales Returns and Allowances 200

Accounts Receivable 200

Accounts Payable 200

Sales Returns and Allowances 200

Accounts Receivable 200

Sales Returns and Allowances 200

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*205. Turner Corporation returned $150 of goods originally purchased on credit from Morgan Industries. Using the periodic Inventory approach, Turner would record this transaction as:

Inventory 150

Accounts Payable 150

Accounts Payable 150

Inventory 150

Purchase Returns and Allowances 150

Accounts Payable 150

Accounts Payable 150

Purchase Returns and Allowances 150

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*206. Ramos Company receives a payment on account from Martinez Industries. Based on the original sale of $8,000 using the periodic inventory approach, Ramos honors the 3% cash discount and records the payment. Which of the following is the correct entry for Ramos to record?

Cash 7,760

Sales Discounts 240

Inventory 8,000

Accounts Receivable 8,000

Cash 7,840

Purchase Discounts 160

Cash 7,760

Sales Discounts 240

Accounts Receivable 8,000

Cash 7,760

Purchase Discounts 240

Accounts Payable 8,000

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $8,000 ´ .03 = $240 sales discount

Answers to Multiple Choice Questions

c 73. b 93. c 113. b 133. c 153. c 173. d 193. c
c 74. d 94. a 114. d 134. b 154. a 174. a 194. b
b 75. d 95. d 115. c 135. a 155. b 175. c 195. c
d 76. c 96. b 116. c 136. c 156. d 176. a 196. d
b 77. c 97. b 117. d 137. d 157. c 177. c 197. c
c 78. a 98. c 118. a 138. d 158. b 178. b 198. c
b 79. d 99. a 119. c 139. c 159. b 179. b 199. c
d 80. a 100. a 120. d 140. c 160. c 180. b 200. c
a 81. b 101. b 121. b 141. b 161. d 181. b 201. a
c 82. b 102. d 122. b 142. a 162. b 182. d 202. a
c 83. a 103. d 123. c 143. d 163. b 183. d *203. c
a 84. d 104. b 124. a 144. b 164. b 184. a *204. b
a 85. c 105. c 125. c 145. b 165. d 185. c *205. d
b 86. a 106. c 126. d 146. d 166. b 186. d *206. c
a 87. a 107. c 127. a 147. d 167. c 187. c
b 88. b 108. a 128. c 148. c 168. a 188. b
d 89. b 109. d 129. b 149. c 169. d 189. b
b 90. b 110. c 130. c 150. c 170. b 190. a
a 91. d 111. b 131. d 151. d 171. a 191. d
b 92. c 112. d 132. c 152. c 172. c 192. c

BRIEF EXERCISES

Be. 207

Presented here are the components in Rowland Company’s income statement. Determine the missing amounts.

Sales Cost of Gross Operating Net

Revenue_ Goods Sold _Profit Expenses Income

$75,000 (a) $35,000 (b) $17,000

Ans: N/A, LO: 1,4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 207 (5 min.)

$ 40,000
$ 18,000
$115,000
$ 11,000

Be. 208

On September 4, Roberta’s Knickknacks buys merchandise on account from Dolan Company. The selling price of the goods is $900 and the cost of goods is $600. Both companies use the perpetual inventory systems Journalize the transactions on the books of both companies.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 208 (5 min.)

Roberta’s Knickknacks records

Sept. 4 Inventory ……………………………………………………………………. 900

Accounts Payable ……………………………………………….. 900

Dolan Company records

Sept. 4 Accounts Receivable …………………………………………………… 900

Sales Revenue……………………………………………………. 900

Cost of Goods Sold …………………………………………………….. 600

Inventory ……………………………………………………………. 600

Be. 209

Menke Company is a furniture retailer and uses the perpetual inventory system. On January 14, 2014, Menke purchased merchandise inventory at a cost of $45,000. Credit terms were 2/10, n/30. The inventory was sold on account for $60,000 on January 21, 2014. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2014, and the accounts receivables were settled on January 30, 2014. Prepare journal entries to record each of these transactions.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 209 (10 min.)

Jan. 14 Inventory…………………………………………………………………….. 45,000

Accounts Payable………………………………………………… 45,000

Jan. 21 Accounts Receivable……………………………………………………. 60,000

Sales Revenue……………………………………………………. 60,000

Cost of Goods Sold……………………………………………………… 45,000

Inventory…………………………………………………………….. 45,000

Jan. 23 Accounts Payable………………………………………………………… 45,000

Cash…………………………………………………………………… 44,100

Inventory…………………………………………………………….. 900

Jan. 30 Cash ………………………………………………………………………….. 59,400

Sales Discounts…………………………………………………………… 600

Accounts Receivable……………………………………………. 60,000

Be. 210

Prepare the journal entries to record the following transactions on Markowitz Company’s books using a perpetual inventory system. On February 6, Markowitz Company sold $105,000 of merchandise to the Lyman Company, terms 2/10, net /30. The cost of the merchandise sold was $70,000. On February 8, the Lyman Company returned $14,000 of the merchandise purchased on February 6. The cost of the merchandise returned was $7,000. On February 16 Markowitz Company received the balance due from the Lyman Company.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 210 (5 min.)

Feb 6 Accounts Receivable …………………………………………………… 105,000

Sales Revenue……………………………………………………. 105,000

Cost of Goods Sold …………………………………………………….. 70,000

Inventory ……………………………………………………………. 70,000

Feb 8 Sales Returns and Allowances …………………………………….. 14,000

Accounts Receivable …………………………………………… 14,000

Inventory ……………………………………………………………………. 7,000

Cost of Goods Sold …………………………………………….. 7,000

Feb 16 Cash ($91,000 x .98) …………………………………………………… 89,180

Sales Discounts ………………………………………………………….. 1,820

Accounts Receivable ($105,000 – $14,000) …………… 91,000

Be. 211

Lovett Company provides this information for the month of November, 2014: sales on credit $140,000; cash sales $50,000; sales discount $2,000; and sales returns and allowances $8,000. Prepare the sales revenues section of the income statement based on this information.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 211 (5 min.)

LOVETT COMPANY

Income Statement(Partial)

For the Month Ended November 30, 2014

Sales Revenue……………………………………………………………. $190,000

Less: Sales Returns and Allowances ………………………….. $ 8,000

Sales Discounts ……………………………………………….. 2,000 10,000

Net Sales . 180,000

Be. 212

Assume that Mitchell Company uses a periodic inventory system and has these account balances: Purchases $570,000; Purchase Returns and Allowances $14,000; Purchases Discounts $9,000; and Freight-In $15,000. Determine net purchases and cost of goods purchased.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 212 (5 min.)

Calculation of Net Purchases and Cost of goods purchased

Purchases…………………………………………………………………… $570,000

Less: Purchases returns and allowances …………………….. $14,000

Purchase discounts ………………………………………….. 9,000 23,000

Net Purchases……………………………………………………………. 547,000

Add: Freight-in…………………………………………………………….. 15,000

Cost of Goods Purchased………………………………………….. $562,000

Be. 213

Assume that Mitchell Company uses a periodic inventory system and has these account balances: Purchases $620,000; Purchase Returns and Allowances $25,000; Purchases Discounts $11,000; and Freight-In $19,000; beginning inventory of $45,000; ending inventory of $55,000; and net sales of $750,000. Determine the amounts to be reported for cost of goods sold and gross profit.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 213 (10 min.)

Calculation of cost of goods sold

Inventory, beginning……………………………………………………… $45,000

Cost of goods sold

Purchases…………………………………………………………………… $620,000

Less: Purchases returns and allowances …………………….. $25,000

Purchase discounts ………………………………………….. 11,000 36,000

Net purchases……………………………………………………………… 584,000

Add: Freight-In…………………………………………………………….. 19,000

Cost of goods purchased………………………………………………. 603,000

Cost of goods available for sale…………………………………….. 648,000

Inventory, ending…………………………………………………………. 55,000

Cost of goods sold……………………………………………………….. $593,000

Calculation of gross profit

Net sales…………………………………………………………………….. $750,000

Cost of goods sold……………………………………………………….. 593,000

Gross profit…………………………………………………………………. $157,000

Be. 214

Horner Corporation reported net sales of $150,000, cost of goods sold of $96,000, operating expenses of $35,000, other expenses of $10,000, net income of $9,000. Calculate the following values. 1. Profit margin. 2. Gross profit rate.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 214 (5 min.)

1. Profit margin =	Net income	=	$ 9,000	= 6 %
1. Profit margin =	Net sales	=	$150,000	= 6 %


2. Gross profit rate =	Gross profit	=	($150,000 – $96,000)	= 36%
2. Gross profit rate =	Net sales	=	$150,000	= 36%

EXERCISES

Ex. 215

Sue Cole is a new accountant with Simon Company. Simon purchased merchandise on account for $9,000. The credit terms are 1/10, n/30. Sue has talked with the company’s banker and knows that she could earn 6% on any money invested in the company’s savings account.

Instructions

(a) Should Sue pay the invoice within the discount period or should she keep the $9,000 in the savings account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best.

(b) If Sue forgoes the discount, it may be viewed as paying an interest rate of 1% for the use of $9,000 for 20 days. Calculate the annual rate of interest that this is equivalent to.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 215 (10 min.)

(a) Yes, Sue should take the discount.

Discount of 1% on $9,000 $90

Interest received on $9,000 (for 20 days at 6%) 30 ($9,000 ´ 6% ´ 20 ¸ 360)

Savings by taking the discount $60

(b) The equivalent annual interest rate is:

1% ´ 360 ¸ 20 = 18%.

Ex. 216

This information relates to Sherper Co.

On April 5 purchased merchandise from Newport Company for $22,000, terms 2/10, n/10.
On April 6 paid freight costs of $900 on merchandise purchased from Newport.
On April 7 purchased equipment on account for $26,000.

Ex. 216 (Cont.)

On April 8 returned some of April 5 merchandise to Newport Company which cost $2,000.
On April 15 paid the amount due to Newport Company in full.

Instructions

(a) Prepare the journal entries to record the transactions listed above on the books of Sherper Co. Sherper Co. uses a perpetual inventory system.

(b) Assume that Sherper Co. paid the balance due to Newport Company on May 4 instead of April 15. Prepare the journal entry to record this payment.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 216 (10 min.)

(a) (1) April 5 Inventory………………………………………………… 22,000

Accounts Payable…………………………….. 22,000

(2) April 6 Inventory………………………………………………… 900

Cash………………………………………………. 900

(3) April 7 Equipment……………………………………………… 26,000

Accounts Payable…………………………….. 26,000

(4) April 8 Accounts Payable……………………………………. 2,000

Inventory…………………………………………. 2,000

(5) April 15 Accounts Payable

($22,000 – $2,000)……………………………… 20,000

Inventory

[($22,000 – $2,000) ´ 2%]……………….. 400

Cash ($20,000 – $400)……………………….. 19,600

(b) May 4 Accounts Payable ($22,000 – $2,000)……………… 20,000

Cash…………………………………………………….. 20,000

Ex. 217

(a) Bazil Company purchased merchandise on account from Office Suppliers for $62,000, with terms of 1/10, n/30. During the discount period, Bazil returned some merchandise and paid $59,400 as payment in full. Bazil uses a perpetual inventory system. Prepare the journal entries that Bazil Company made to record the:

(1) purchase of merchandise.

(2) return of merchandise.

(3) payment on account.

(b) Weaver Company sold merchandise to Moore Company on account for $84,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $63,000. During the discount period, Moore Company returned $4,000 of merchandise and paid its account in full (minus the discount) by remitting $78,400 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Weaver Company made to record the:

(1) sale of merchandise.

(2) return of merchandise.

(3) collection on account.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 217 (15-20 min.)

(a) To compute the amount due after returns but before the discount divide $59,400 by .99 (100% – 1%).

$59,400 ¸ .99 = $60,000.

Subtract $60,000 from $62,000 to determine that $2,000 of merchandise was returned.

(1) Inventory ……………………………………………………………………. 62,000

Accounts Payable ……………………………………………….. 62,000

(2) Accounts Payable ……………………………………………………….. 2,000

Inventory ……………………………………………………………. 2,000

(3) Accounts Payable ($62,000 – $2,000) ……………………………. 60,000

Inventory ($60,000 x .01)…………………………………….. 600

Cash ($60,000 x .99)…………………………………………… 59,400

(b) Moore Company returns $4,000 of merchandise and owes $80,000 to Weaver Company.

$78,400 ¸ $80,000 = .98

100% – 98% = 2%

The missing discount percentage is 2%. $80,000 ´ 2% = $1,600 sales discount.

$80,000 – $1,600 = $78,400 cash received on account.

(1) Accounts Receivable …………………………………………………… 84,000

Sales Revenue……………………………………………………. 84,000

Cost of Goods Sold……………………………………………………… 63,000

Inventory…………………………………………………………….. 63,000

(2) Sales Returns and Allowances …………………………………….. 4,000

Accounts Receivable …………………………………………… 4,000

Inventory…………………………………………………………………….. 3,000*

Cost of Goods Sold……………………………………………… 3,000

* (cost = sales price x .75 as shown in sales entries)

(3) Cash ………………………………………………………………………….. 78,400

Sales Discounts ………………………………………………………….. 1,600

Accounts Receivable …………………………………………… 80,000

Ex. 218

June 4 Black Company purchased $9,000 worth of merchandise, terms n/30 from Hayes Company. The cost of the merchandise was $6,300.

Black returned $500 worth of goods to Hayes for full credit. The goods had a cost of $350 to Hayes.
Black paid the account in full.

Ex. 218 (Cont.)

Instructions

Prepare the journal entries to record these transactions in (a) Black’s records and (b) Hayes’ records. Assume use of the perpetual inventory system for both companies.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 218 (15-20 min.)

(a) Black’s books

June 4 Inventory 9,000

Accounts Payable………………………………. 9,000

12 Accounts Payable………………………………………… 500

Inventory 500

12 Accounts Payable………………………………………… 8,500

Cash………………………………………………. 8,500

(b) Hayes’ books

June 4 Accounts Receivable…………………………………….. 9,000

Sales Revenue…………………………………… 9,000

4 Cost of Goods Sold………………………………………. 6,300

Inventory 6,300

12 Sales Returns and Allowance…………………………… 500

Accounts Receivable……………………………. 500

12 Inventory 350

Cost of Goods Sold 350

12 Cash……………………………………………………….. 8,500

Accounts Receivable……………………………. 8,500

Ex. 219

On October 1, the Kile Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $150 each. During the month of October the following transactions occurred. Assume Kile uses a perpetual inventory system.

Oct. 4 Purchased 180 bicycles at a cost of $145 each from the Nixon Bicycle Company, terms 2/10, n/30.

5 Paid freight of $1,000 on the October 4 purchase.

6 Sold 10 bicycles from the October 1 inventory to Team America for $250 each, terms 2/10, n/30.

7 Received credit from the Nixon Bicycle Company for the return of 8 defective bicycles.

13 Issued a credit memo to Team America for the return of a defective bicycle.

14 Paid Nixon Bicycle Company in full, less discount.

Instructions

Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 219 (15-20 min.)

Oct. 4 Inventory ……………………………………………………………………. 26,100

Accounts Payable ……………………………………………….. 26,100

5 Inventory ……………………………………………………………………. 1,000

Cash ………………………………………………………………….. 1,000

6 Accounts Receivable …………………………………………………… 2,500

Sales Revenue……………………………………………………. 2,500

Cost of Goods Sold …………………………………………………….. 1,500

Inventory ……………………………………………………………. 1,500

7 Accounts Payable ……………………………………………………….. 1,160

Inventory ……………………………………………………………. 1,160

13 Sales Returns and Allowances …………………………………….. 250

Accounts Receivable …………………………………………… 250

Inventory ……………………………………………………………………. 150

Cost of Goods Sold …………………………………………….. 150

14 Accounts Payable ($26,100 – $1,160) ……………………………. 24,940

Cash ($24,940 ´ .98)……………………………………………. 24,441

Inventory ($24,940 ´ .02) …………………………………….. 499

Ex. 220

On September 1, Pennington Supply had an inventory of 20 backpacks at a cost of $25 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred.

Sept. 4 Purchased 50 backpacks at $25 each from Sievert, terms 2/10, n/30.

6 Received credit of $100 for the return of 4 backpacks purchased on September 4 that were defective.

9 Sold 25 backpacks for $40 each to Lilly Books, terms 2/10, n/30.

13 Sold 15 backpacks for $40 each to Stoner Office Supply, terms n/30.

14 Paid Sievert in full, less discount.

Instructions

Journalize the September transactions for Pennington Supply.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 220 (15-20 min.)

Sept. 4 Inventory …………………………………………………………………. 1,250

Accounts Payable …………………………………………….. 1,250

6 Accounts Payable …………………………………………………….. 100

Inventory …………………………………………………………. 100

9 Accounts Receivable ………………………………………………… 1,000

Sales Revenue…………………………………………………. 1,000

Cost of Goods Sold ………………………………………………….. 625

Inventory …………………………………………………………. 625

13 Accounts Receivable ………………………………………………… 600

Sales Revenue…………………………………………………. 600

Cost of Goods Sold ………………………………………………….. 375

Inventory …………………………………………………………. 375

14 Accounts Payable ($1,250 – $100) ……………………………… 1,150

Cash ($1,150 ´ .98)…………………………………………… 1,127

Inventory ($1,150 ´ .02) …………………………………………………………………….. 23

Ex. 221

Petersen Book Store entered into the transactions listed below. In the journal provided, prepare Petersen’s necessary entries, assuming use of the perpetual inventory system.

July 6 Purchased $1,600 of merchandise on credit, terms n/30.

Returned $100 of the items purchased on July 6.

Paid freight charges of $90 on the items purchased July 6.

19 Sold merchandise on credit for $4,400, terms 1/10, n/30. The merchandise had an inventory cost of $2,700.

22 Of the merchandise sold on July 19, $300 of it was returned. The items had cost the store $150.

Received payment in full from the customer of July 19.

31 Paid for the merchandise purchased on July 6.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 221 (15-20 min.)

July 6 Inventory 1,600

Accounts Payable……………………………………… 1,600

8 Accounts Payable……………………………………………… 100

Inventory 100

9 Inventory 90

Cash …………………………………………………… 90

19 Accounts Receivable …………………………………………. 4,400

Sales Revenue………………………………………… 4,400

Cost of Goods Sold……………………………………………. 2,700

Inventory 2,700

22 Sales Returns and Allowances……………………………….. 300

Accounts Receivable…………………………………. 300

Inventory 150

Cost of Goods Sold…………………………………… 150

28 Cash ($4,100 x .99) …………………………………………… 4,059

Sales Discounts………………………………………………… 41

Accounts Receivable 4,100

31 Accounts Payable ($1,600 – $100)…………………………… 1,500

Cash 1,500

Ex. 222

Presented here are selected transactions for the Leiss Company during April. Leiss uses the perpetual inventory system.

April 1 Sold merchandise to Mann Company for $4,000, terms 2/10, n/30. The merchandise sold had a cost of $2,500.

Purchased merchandise from Wild Corporation for $8,000, terms 1/10, n/30.

4 Purchased merchandise from Ryan Company for $1,000, n/30.

10 Received payment from Mann Company for purchase of April 1 less appropriate discount.

11 Paid Wild Corporation for April 2 purchase.

Instructions

Journalize the April transactions for Leiss Company.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 222 (12-16 min.)

April 1 Accounts Receivable 4,000

Sales Revenue………………………………………… 4,000

Cost of Goods Sold 2,500

Inventory 2,500

2 Inventory 8,000

Accounts Payable…………………………………….. 8,000

4 Inventory 1,000

Accounts Payable…………………………………….. 1,000

10 Cash ($4,000 x .98) 3,920

Sales Discounts ($4,000 x .02) 80

Accounts Receivable………………………………… 4,000

11 Accounts Payable……………………………………………… 8,000

Inventory ($8,000 x .01) 80

Cash ($8,000 x .99) 7,920

Ex. 223

Norman Company completed the following transactions in October: Norman uses a perpetual inventory system.

Credit Sales Sales Returns Date of

Date Amount Terms Date Amount Collection

Oct. 3 $ 800 2/10, n/30 Oct. 8

Oct. 11 1,500 3/10, n/30 Oct. 14 $ 300 Oct. 16

Oct. 17 5,000 1/10, n/30 Oct. 20 1,200 Oct. 29

Oct. 21 1,700 2/10, n/60 Oct. 23 400 Oct. 27

Oct. 23 6,000 2/10, n/30 Oct. 27 500 Oct. 28

Instructions

(a) Indicate the cash received for each collection. Show your calculations.

(b) Prepare the journal entry for the

(1) Oct. 17 sale. The merchandise sold had a cost of $3,000.

(2) Oct. 23 sales return. The merchandise returned had a cost of $200.

(3) Oct. 28 collection.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 223 (20 min.)

(a) Oct. 8 $784 [Sales $800 – Sales discount $16 ($800 ´ .02)]

16 $1,164 [Sales $1,500 – Sales return $300 = $1,200;

$1,200 – Sales discount $36 ($1,200 ´ .03)]

29 $3,800 [Sales $5,000 – Sales return $1,200 = $3,800;

(discount lapsed)]

27 $1,274 [Sales $1,700 – Sales return $400 = $1,300;

$1,300 – Sales discount $26 ($1,300 ´ .02)]

28 $5,390 [Sales $6,000 – Sales return $500 = $5,500;

$5,500 – Sales discount $110 ($5,500 ´ .02)]

(b) (1) Oct. 17 Accounts Receivable …………………………………… 5,000

Sales Revenue……………………………………. 5,000

Cost of Goods Sold……………………………………… 3,000

Inventory…………………………………………….. 3,000

(2) Oct. 23 Sales Returns and Allowances …………………….. 400

Accounts Receivable …………………………… 400

Inventory…………………………………………………….. 200

Cost of Goods Sold……………………………… 200

(3) Oct. 28 Cash ………………………………………………………….. 5,390

Sales Discounts ………………………………………….. 110

Accounts Receivable …………………………… 5,500

Ex. 224

The following transactions are for Kale Company.

(1) On December 3 Kale Company sold $500,000 of merchandise to Thomson Co., terms 1/10, n/10. The cost of the merchandise sold was $320,000.

(2) On December 8 Thomson Co. was granted an allowance of $20,000 for merchandise purchased on December 3.

(3) On December 13 Kale Company received the balance due from Thomson Co.

Instructions

(a) Prepare the journal entries to record these transactions on the books of Kale Company. Kale uses a perpetual inventory system.

(b) Assume that Kale Company received the balance due from Thomson Co. on January 2 of the following year instead of December 13. Prepare the journal entry to record the receipt of payment on January 2.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 224 (10 min.)

(a) (1) Dec 3 Accounts Receivable………………………………….. 500,000

Sales Revenue……………………………………. 500,000

Cost of Goods Sold…………………………………….. 320,000

Inventory…………………………………………….. 320,000

(2) Dec 8 Sales Returns and Allowances…………………….. 20,000

Accounts Receivable……………………………. 20,000

(3) Dec. 13 Cash ($480,000 – $4,800)…………………………… 475,200

Sales Discounts

[($500,000 – $20,000) ´ 1%]………………….. 4,800

Accounts Receivable

($500,000 – $20,000)………………. 480,000

(b) Jan 2 Cash…………………………………………………………. 480,000

Accounts Receivable

($500,000 – $20,000)………………………….. 480,000

Ex. 225

Instructions

State the missing items identified by ?.

Gross profit – Operating expenses = ?
Cost of goods sold + Gross profit = ?
Sales revenue – (? + ?) = Net sales
Income from operations + ? – ? = Net income
Net sales – Cost of goods sold = ?

Ans: N/A, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 225 (5 min.)

Income from operations (or Net income)
Net sales
Sales discounts, Sales returns and allowances
Other revenues and gains, Other expenses and losses
Gross profit

Ex. 226

Financial information is presented here for two companies.

King Company Queen Company

Sales revenue $56,000 ?

Sales returns and allowances ? 5,000

Net sales 50,000 80,000

Cost of goods sold 33,000 ?

Gross profit ? 32,000

Operating expenses 12,000 ?

Net income ? 14,000

Instructions

(a) Compute the missing amounts.

(b) Calculate the profit margin and the gross profit rate for each company.

Ans: N/A, LO: 4,6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 226 (10 min.)

(a) King Company

Sales returns = $6,000 ($56,000 – $50,000 = $6,000)

Gross profit = $17,000 ($50,000 – $33,000 = $17,000)

Net income = $5,000 ($17,000 – $12,000)

Queen Company

Sales revenue = $85,000 ($80,000 + $5,000)

Cost of goods sold = $48,000 ($80,000 – $32,000)

Operating expenses = $18,000 ($32,000 – $14,000)

(b)	King		Queen
Profit margin	$5,000	= .10	$14,000	= .175
	$50,000		$80,000

Gross profit rate	$17,000	= .34	$32,000	= .40
	$50,000		$80,000

Ex. 227

The following information is available for Quayle Company:

Sales revenue $618,000

Sales returns and allowances 20,000

Cost of goods sold 398,000

Operating expenses 114,000

Interest expense 19,000

Interest revenue 20,000

Instructions

Use the above information to prepare a multiple-step income statement for the year ended December 31, 2014.
Compute the profit margin.

Ans: N/A, LO: 4,6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 227 (20 min.)

QUAYLE COMPANY

Income Statement

For the Year Ended December 31, 2014

Sales

Sales revenue……………………………………………………………… $618,000

Less: Sales returns and allowances ……………………………. 20,000

Net sales ……………………………………………………………………. $598,000

Cost of goods sold……………………………………………………….. 398,000

Gross profit………………………………………………………. 200,000

Operating expenses . 114,000

Income from operations………………………………………………… 86,000

Other revenues and gains

Interest revenue………………………………………………… 20,000

Other expenses and losses

Interest expense……………………………………………….. 19,000

Net income…………………………………………………………………. $ 87,000

Profit margin: $87,000 ÷ $598,000 = 14.5%

Ex. 228

The adjusted trial balance of McCoy Company included the following selected accounts:

Debit Credit

Sales Revenue $645,000

Sales Returns and Allowances $ 50,000

Sales Discounts 9,500

Cost of Goods Sold 396,000

Freight-Out 2,000

Advertising Expense 15,000

Interest Expense 19,000

Salaries and Wages Expense 84,000

Utilities Expense 23,000

Depreciation Expense 3,500

Interest Revenue 25,000

Instructions

Use the above information to prepare a multiple-step income statement for the year ended December 31, 2014.
Calculate the profit margin and gross profit rate.

Ans: N/A, LO: 4,6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 228 (20 min.)

MCCOY COMPANY

Income Statement

For the Year Ended December 31, 2014

Sales revenue……………………………………………………………… $645,000

Less: Sales returns and allowances ……………………………. $ 50,000

Sales discounts ……………………………………………….. 9,500 59,500

Net sales ……………………………………………………………………. 585,500

Cost of goods sold……………………………………………………….. 396,000

Gross profit…………………………………………………………………. 189,500

Operating expenses

Salaries and Wages Expense………………………………….. $ 84,000

Utilities Expense…………………………………………………….. 23,000

Advertising Expense……………………………………………….. 15,000

Depreciation Expense ……………………………………………. 3,500

Freight-Out…………………………………………………………….. 2,000

Total operating expenses…………………………………… 127,500

Income from operations………………………………………………… 62,000

Other revenues and gains

Interest revenue……………………………………………………… 25,000

Other expenses and losses

Interest expense…………………………………………………….. 19,000

Net income…………………………………………………………………. $ 68,000

Profit margin = $68,000 ÷ $585,500 = 11.6%

Gross profit rate = $189,500 ÷ $585,500 = 32.4%

Ex. 229

Presented below is information for Zales Company for the month of January 2014.

Cost of goods sold $280,000 Rent expense $35,000

Freight-out 7,000 Sales discounts 8,000

Insurance expense 12,000 Sales returns and allowances 13,000

Salaries and wages expense 42,000 Sales revenue 421,000

Instructions

(a) Prepare a multiple-step income statement.

(b) Calculate the profit margin and the gross profit rate.

Ans: N/A, LO: 4,6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 229 (20 min.)

(a) ZALES COMPANY

Income Statement

For the Month Ended January 31, 2014

_____________________________________________________________________________

Sales

Sales revenue……………………………………………….. $421,000

Less: Sales returns and

allowances……………………………………… $13,000

Sales discounts……………………………………. 8,000 21,000

Net sales……………………………………………………….. 400,000

Cost of goods sold…………………………………………………… 280,000

Gross profit…………………………………………………………….. 120,000

Operating expenses

Salaries and wages expense……………………………. 42,000

Rent expense…………………………………………………. 35,000

Insurance expense………………………………………….. 12,000

Freight-out……………………………………………………… 7,000

Total operating expense…………………………… 96,000

Net income ……………………………………………………………. $ 24,000

(b) Profit margin =	$24,000	= .06
	$400,000

Gross profit rate =	$120,000	= .30
	$400,000

Ex. 230

The trial balance of Rachel Company at the end of its fiscal year, August 31, 2014, includes these accounts: Inventory $29,200; Purchases $144,000; Sales Revenue $190,000; Freight-In $8,000; Sales Returns and Allowances $3,000; Freight-Out $1,000; and Purchases Returns and Allowances $5,000. The ending inventory is $25,000.

Instructions

Prepare a cost of goods sold section for the year ending August 31.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 230 (10 min.)

Inventory, September 1, 2013……………………………………………. $ 29,200

Purchases……………………………………………………………………….. $144,000

Less: Purchase returns and allowances…………………………….. 5,000

Net purchases…………………………………………………………………. 139,000

Add: Freight-in………………………………………………………………… 8,000

Cost of goods purchased…………………………………………………… 147,000

Cost of goods available for sale…………………………………………. 176,200

Inventory, August 31, 2014………………………………………………… 25,000

Cost of goods sold……………………………………………………… $151,200

Ex. 231

Below is a series of cost of goods sold sections for Mikey Inc., Nancie Co., and Oscar Inc.

Mikey Nancie Oscar

Beginning inventory $ 250 $ 120 $ (g)

Purchases 1,700 1,080 43,590

Purchase returns and allowances 40 (d) (h)

Net purchases (a) 1,020 41,590

Freight-in 130 (e) 2,740

Cost of goods purchased (b) 1,230 (i)

Cost of goods available for sale 2,240 1,350 49,530

Ending inventory 310 (f) 6,230

Cost of goods sold (c) 1,130 43,300

Instructions

Fill in the lettered blanks to complete the cost of goods sold sections.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 231 (10 min.)

(a) $1,660 ($1,700 – $40)

(b) $1,790 ($1,660 + $130)

(d) $60 ($1,080 – $1,020)

(e) $210 ($1,230 – $1,020)

(f) $220 ($1,350 – $1,130)

(g) $5,200 ($49,530 – $44,330 from (i))

(h) $2,000 ($43,590 – $41,590)

(i) $44,330 ($41,590 + $2,740)

Ex. 232

The following information is available from the annual reports of Flynn Company and Tolan Inc.

(Amounts in millions)

Flynn Tolan

Sales revenue $32,622 $40,457

Cost of goods sold 20,739 24,431

Operating expenses 7,428 9,188

Income before taxes 4,455 6,838

Net income 2,594 4,072

Instructions

Calculate the profit margin and gross profit rate for each company.
What conclusion concerning the relative profitability of the two companies can be drawn from these data?

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 232 (15 min.)

Flynn Tolan

Profit margin: $2,594 $4,072

———— = 8.0% ———— = 10.1%

$32,622 $40,457

Gross profit rate: $32,622 – $20,739 $40,457 – $24,431

———————— ————————

$32,622 $40,457

$11,883 $16,026

———— = 36.4% ———— = 39.6%

$32,622 $40,457

Because all of Tolan’s profitability ratios are higher than Flynn’s, it can be concluded that Tolan is the more profitable of the two companies.

*Ex. 233

June 4 Deere Company purchased $3,500 worth of merchandise, terms n/30 from Gilbert Company. The cost of the merchandise was $2,500.

Deere returned $600 worth of goods to Gilbert for full credit. The goods had a cost of $400 to Johnson.
Deere paid the account in full.

Instructions

Prepare the journal entries to record these transactions in (a) Deere’s records and (b) Gilbert’s records. Assume use of the periodic inventory system for both companies.

Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 233 (15-20 min.)

(a) Deere’s books

June 4 Purchases ……………………………………………….. 3,500

Accounts Payable………………………………. 3,500

13 Accounts Payable………………………………………… 600

Purchase Returns and Allowances……………. 600

13 Accounts Payable………………………………………… 2,900

Cash………………………………………………. 2,900

(b) Gilbert’s books

June 4 Accounts Receivable…………………………………….. 3,500

Sales Revenue…………………………………… 3,500

13 Sales Returns and Allowance…………………………… 600

Accounts Receivable……………………………. 600

13 Cash……………………………………………………….. 2,900

Accounts Receivable……………………………. 2,900

*Ex. 234

On September 1, Hendricks Supply had an inventory of 18 backpacks at a cost of $20 each. The company uses a periodic inventory system. During September, the following transactions and events occurred.

Sept. 4 Purchased 50 backpacks at $20 each from Neufeld, terms 2/10, n/30.

6 Received credit of $100 for the return of 5 backpacks purchased on Sept. 4 that were defective.

9 Sold 30 backpacks for $30 each to Brewer Books, terms 2/10, n/30.

13 Sold 10 backpacks for $30 each to Stoner Office Supply, terms n/30.

14 Paid Neufeld in full, less discount.

Instructions

Journalize the September transactions for Hendricks Supply.

Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 234 (15-20 min.)

Sept. 4 Purchases ……………………………………………………………….. 1,000

Accounts Payable …………………………………………….. 1,000

6 Accounts Payable …………………………………………………….. 100

Purchase Returns and Allowances …………………….. 100

9 Accounts Receivable ………………………………………………… 900

Sales Revenue…………………………………………………. 900

13 Accounts Receivable ………………………………………………… 300

Sales Revenue…………………………………………………. 300

14 Accounts Payable ($1,000 – $100) ……………………………… 900

Cash ($900 ´ .98)……………………………………………… 882

Purchase Discounts ($900 ´ .02) ……………………….. 8

*Ex. 235

Presented here are selected transactions for the Foyle Company during April. Foyle uses the periodic inventory system.

April 1 Sold merchandise to Land Company for $4,000, terms 2/10, n/30. The merchandise sold had a cost of $2,000.

Purchased merchandise from Webb Corporation for $6,000, terms 1/10, n/30.

4 Purchased merchandise from Ryan Company for $2,000, n/30.

10 Received payment from Land Company for purchase of April 1 less appropriate discount.

11 Paid Webb Corporation for April 2 purchase.

Instructions

Journalize the April transactions for Foyle Company.

Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 235 (12-16 min.)

April 1 Accounts Receivable…………………………………………… 4,000

Sales Revenue………………………………………… 4,000

2 Purchases……………………………………………………… 6,000

Accounts Payable…………………………………….. 6,000

4 Purchases ……… ……………………………………………… 2,000

Accounts Payable…………………………………….. 2,000

*Solution 235 (Cont.)

10 Cash ($4,000 x .98) … ……………………………………….. 3,920

Sales Discounts ($4,000 x .02)……………………………….. 80

Accounts Receivable…………………………………… 4,000

11 Accounts Payable………………………………………………… 6,000

Purchase Discounts ($6,000 x .01)….. 60

Cash ($6,000 x .99)……………………………………. 5,940

*Ex. 236

This information relates to Tandi Co.

On April 5 purchased merchandise from Buehler Company for $33,000, terms 2/10, net/30.
On April 6 paid freight costs of $900 on merchandise purchased from Buehler Company.
On April 7 purchased equipment on account for $26,000.
On April 8 returned some of the April 5 merchandise to Buehler Company which cost $3,000.
On April 15 paid the amount due to Buehler Company in full.

Instructions

(a) Prepare the journal entries to record these transactions on the books of Tandi Co. using a periodic inventory system.

(b) Assume that Tandi Co. paid the balance due to Buehler Company on May 4 instead of April 15. Prepare the journal entry to record this payment.

Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*Solution 236 (10 min.)

(a) (1) April 5 Purchases……………………………………………. 33,000

Accounts Payable………………………….. 33,000

(2) April 6 Freight-In…………………………………………….. 900

Cash…………………………………………….. 900

(3) April 7 Equipment…………………………………………… 26,000

Accounts Payable…………………………………………. 26,000

(4) April 8 Accounts Payable…………………………………. 3,000

Purchase Returns and Allowances…… 3,000

($33,000 – $3,000)

(5) April 15 Accounts Payable…………………………………. 30,000

Purchase Discounts……………………………………………………….. 600

[($33,000 – $3,000) ´ 2%]

Cash ($30,000 – $600)………………………………………………. 29,400

(b) May 4 Accounts Payable…………………………………. 30,000

($33,000 – $3,000)

Cash…………………………………………………………… 30,000

COMPLETION STATEMENTS

A _________________ buys and sells inventory rather than performing services as their primary source of revenue.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Cost of goods sold is deducted from net sales revenue for the period in order to arrive at ________________.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Inventory on hand can be obtained from detailed inventory records when a ________________ inventory system is maintained.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The acquisition of inventory is debited to the ____________ account when a perpetual inventory system is used.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The freight costs incurred by a seller on outgoing inventory are an ________________ to the seller.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When a customer returns inventory previously purchased on credit, the entry to record the credit granted to the customer requires a debit to the ___________________ account and a credit to the ________________ account.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Every credit sales transaction should be supported by a _________________ that provides written evidence of the sale.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Sales Returns and Allowances and Sales Discounts are both ______________ accounts and have normal _______________ balances.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Gross profit is obtained by subtracting ________________ from ________________.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A useful measure of profitability is the ratio of net income to _____________.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements

merchandiser 243. Sales invoice
gross profit 244. contra revenue, debit
perpetual 245. cost of goods sold, net sales
Inventory 246. net sales
operating expense
Sales Returns and Allowances,

Accounts Receivable

MATCHING

Match the items below by entering the appropriate code letter in the space provided.

Net sales F. Contra revenue
Sales discount G. Freight-out
Credit terms H. Gross profit
Periodic inventory system I. Sales invoice
Gross profit rate J. Purchase discount

____ 1. A reduction given by the seller for prompt payment of a credit sale.

____ 2. Provides support for a credit sale.

____ 3. Gross profit divided by net sales.

____ 4. Sales less sales returns and allowances and sales discounts.

____ 5. Specifies the amount of cash discount and time period during which it is offered.

____ 6. Net sales less cost of goods sold.

____ 7. Freight cost to deliver goods to customers reported as an operating expense.

____ 8. Requires a physical count of goods on hand to compute cost of goods sold.

____ 9. A cash discount claimed by a buyer for prompt payment of a balance due.

____ 10. An account that is offset against a revenue account on the income statement.

Ans: N/A, LO: 1-6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Matching

B 6. H
I 7. G
E 8. D
A 9. J
C 10. F

SHORT-ANSWER ESSAY QUESTIONS

S-A-E 248

You are at a company picnic and the company president starts a conversation with you. The president says “Since we use the perpetual inventory system, there is no reason to take a physical count of our inventory.” What is your response to the president’s remarks?

Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: FSA

Solution 248

You have made a very good observation, but human and mechanical shortcomings need to be considered. The perpetual inventory system maintains detailed records of each inventory purchase, sale and return. This does not mean that everything has been correctly recorded. Some possible causes of discrepancies between the goods on hand and the amounts shown in the accounting system include (1) inventory items were coded incorrectly, (2) cashiers failed to properly scan inventory items, (3) inventory items were damaged or stolen, or (4) goods returned by customers were not properly entered in the accounting records. It is necessary to reconcile amounts in the ledger to actual quantities. Discrepancies should be properly accounted for and investigated.

S-A E 249

A merchandising company frequently has a need to use contra accounts related to the sale of goods. Identify the contra accounts that have normal debit balances and explain why they are not considered expenses.

Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics

Solution 249

The contra accounts related to the sale of goods that have normal debit balances are Sales Discounts and Sales Returns and Allowances. These accounts have debit balances but are not expenses because they are adjustments of sales, not operating, selling, or administrative expenses. They are an adjustment of the inflow from the sale of goods, rather than a cost used to help earn revenue.

S-A E 250

Alice Gray believes revenues from credit sales may be earned before they are collected in cash. Do you agree? Explain.

Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 250

Agree. In accordance with the revenue recognition principle, sales revenues are generally considered to be earned when the goods are transferred from the seller to the buyer; that is, when the exchange transaction occurs. The earning of revenue is not dependent on the collection of credit sales.

S-A E 251

To encourage bookstores to buy a broader range of book titles many publishers allow bookstores to return unsold books to the publisher. This results in very significant returns each year. To ensure proper recognition of revenues, how should publishing companies account for these returns?

Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 251

In most industries returns are not significant, and they are therefore accounted for as they occur. When returns are expected to be significant, the company should make an adjusting entry at the end of the period to estimate the amount of returns that will result from the period’s sales, so that revenues will not be overstated during the period.

S-A E 252

In a single-step income statement, all data are classified under two categories: (1) Revenues, or (2) Expenses. If the income statement is recast in a multiple-step format, what additional information or intermediate components of income would be presented?

Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 252

The items reported in a multiple-step income statement that are not reported in a single-step income statement are: gross revenues as well as net revenues, gross profit, detailed selling and administrative expenses, income from operations, other revenues and gains, and other expenses and losses. For companies using the periodic inventory method the computation of cost of goods sold using beginning and ending inventories, purchases (gross and net) are also broken out.

S-A-E 253

Distinguish between cost of goods sold and operating expenses, describe the nature of these two items and their placement on the income statement.

Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 253

Cost of goods sold includes the cost of obtaining the goods held for resale; it is deducted directly from net sales on the income statement. Operating expenses, on the other hand, include selling and general administrative expenses; they appear directly below the gross profit on the income statement.

S-A E 254

The income statement for a merchandising company presents five amounts not shown on a service company’s income statement. Identify and briefly explain the five unique amounts.

Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 254

The items reported for a merchandising company that are not reported for a service company are sales revenue, sales returns and allowances, sales discounts, cost of goods sold, and gross profit. Sales revenue, sales returns and allowances, and sales discounts comprise net sales. Cost of goods sold represents the total cost of merchandise sold during the period. Gross profit is the excess of net sales over the cost of goods sold.

S-A E 255

What factors affect a company’s gross profit rate—that is, what can cause the gross profit rate to increase and what can cause it to decrease?

Ans: N/A, LO: 6, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 255

Factors affecting a company’s gross profit rate include selling products with a higher (or lower) “markup,” increased competition that results in lower selling prices, and price increases or decrease from suppliers.

S-A E 256

The following are the gross profit percentages for Naylor Company:

Year Gross Profit

Percentage

2012 33%

2013 34%

2014 36%

2015 13%

List four possible explanations for the low gross profit percentage in 2015.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 256

Possible explanations for 2015’s low gross profit percentage:

Errors have occurred.
Cost of buying merchandise inventory increased, but the selling price was not increased.
Merchandise inventory has been stolen.
Some sales were not recorded.
The economy is weak and commissioned sales personnel lowered selling prices without authorization.
Inferior goods are being sold and customers are subsequently given sales allowances which reduce net sales.

S-A E 257 (Ethics)

Hiller Corporation manufactures electronic components for use in many consumer products. Their raw materials are purchased literally from all over the world. Depending on the country involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods.

Because of this situation, Hiller never closes its books until at least ten days after month end. In this way, it can sort out ownership of goods in transit, and document which goods were received by month end, and which were not.

Donna Gordon, a new accountant, was asked to record about $50,000 in inventory as having been received before month end. She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. Her boss, busy with month-end reports, curtly tells Donna to check the shipping terms. She did so, and found the notation “FOB (free on board) shipper’s dock” on the document. She hadn’t seen that particular notation before, but she reasoned that if the selling company considered it shipped when it reached their dock, Hiller should consider it received when it reached Hiller’s dock. She did not record the sale until after month end.

Required:

Why are accountants concerned with the timing in the recording of purchases?
Was there a violation of ethical standards here? Explain.

Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 257

Accountants are concerned with timing because they seek to make sure that sales are recorded in the proper period so that revenues and expenses are properly matched; to make sure that goods recorded as owned by the company actually are owned as of the last date of the period; and to make certain that sales recorded have been actually completed.

The only ethical principle that may be involved is one of competence. Donna does not appear to know enough about reading shipping documents to make a proper determination of ownership. The goods were owned by Hiller as soon as they left the shipper’s dock. Otherwise, the goods would have been owned by no one while in transit. It does not appear that Donna compromised her integrity or that she sought some sort of gain from her mistake. It does seem likely that she should have known how to interpret the shipping documents.

S-A E 258 (Communication)

Sandy Lang and Mandy Starr, two salespersons in adjoining territories, regularly compete for bonuses. During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal. On May 30, 2014, each made a large sale. Both orders were shipped on May 31, 2014, the last day of the month, and both were received by the customers on June 5, 2014. Sandy’s sale was FOB shipping point (ownership passes to buyer at time of shipping), and Mandy’s was FOB destination (ownership passes to buyer at time of receipt). The printed policy of the company states that sales “count” for purposes of calculating bonuses on the date that ownership passes to the purchaser. Sandy’s sale was therefore counted in her May monthly total of sales while Mandy’s sale was not. Mandy is quite upset. She has asked you to just include it, or to take Sandy’s off as well. She also has told you that you are being unethical for allowing Sandy to get a bonus just for choosing a particular shipping method.

S-A E 258 (Cont.)

As the accounting manager write a memo to Mandy on June 15, 2014, and explain your position.

Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: FSA

Solution 258

M E M O

TO: Mandy Starr

FROM: Accounting Manager

RE: Sales Bonuses

DATE: June 15, 2014

As you know, sales bonuses are based upon the revenue generated by each salesperson in accordance with the printed policy of the company. This policy states that you will receive bonus credit based on the date of title transfer for goods sold. Your disputed sale of May 30, 2014, was shipped on May 31, 2014, with terms “FOB Destination”. Our records indicate that this shipment was received by the customer on June 5, 2014. This puts title transfer into your June 2014 bonus payment. I can appreciate your being upset that this large sale was not counted in your May 2014 bonus but it will appear in your June 2014 bonus payment in accordance with the policy which is consistency applied. It would be unethical and unprofessional for me to change the written policy and it would violate the consistency of that policy’s application.

I do understand your disappointment, but this sale does count in June—and it just may make the difference in June’s bonus. Please call me if I can be of further help.

(signature)

IFRS QUESTIONS

The Income statement is
required under GAAP but not under IFRS.
required under IFRS in the same format as under GAAP.
required under IFRS but not under GAAP.
required under IFRS with some differences as compared to GAAP.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The basic accounting entries for merchandising are
the same under GAAP and under IFRS.
required under GAAP but not under IFRS.
required under IFRS but not under GAAP.
required under IFRS with some differences as compared to GAAP.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Under GAAP, companies can choose which inventory system?

Perpetual Periodic

Yes No
Yes Yes
No Yes
Yes No

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Under IFRS, companies can choose which inventory system?

Perpetual Periodic

Yes No
Yes Yes
No Yes
Yes No

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Companies cannot use the
periodic inventory system under GAAP.
periodic inventory system under IFRS.
perpetual system under IFRS.
None of these answer choices are correct.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Inventories are defined by IFRS as
held-for-sale in the ordinary course of business.
in the process of production for sale in the ordinary course of business.
in the form of materials or supplies to be consumed in the production process or in the providing of services.
All of these answer choices are correct.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Under GAAP, companies generally classify income statement items by
function.
nature.
nature or function
date incurred.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Under IFRS, companies must classify income statement items by
function.
nature.
nature or function
date incurred.

Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Under GAAP, income statement items are generally described as
administration, distribution, manufacturing, etc.
salaries, depreciation, utilities, etc.
administration, depreciation, manufacturing, etc.
salaries, distribution, utilities, etc.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Under IFRS, income statement items classified by nature are generally described as
administration, distribution, manufacturing, etc.
salaries, depreciation, utilities, etc.
administration, depreciation, manufacturing, etc.
salaries, distribution, utilities, etc.

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

For the income statement, IFRS requires
single-step approach.
multiple-step approach.
single-step approach or multiple-step approach.
no specific income statement approach.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Under IFRS, companies can apply revaluation to
land, buildings, and intangible assets.
land, buildings, but not intangible assets.
intangible assets, but not land.
no assets.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The use of IFRS results in more transactions affecting
net income but not other comprehensive income.
other comprehensive income, but not net income.
net income and other comprehensive income.
neither net income nor other comprehensive income.

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Comprehensive income under IFRS
includes unrealized gains and losses included in net income, in contrast to GAAP.
includes unrealized gains and losses included in net income, similar to GAAP.
excludes unrealized gains and losses included in net income, in contrast to GAAP.
excludes unrealized gains and losses included in net income, similar to GAAP.

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The number of years of income statement information to be presented is
2 years under both GAAP and IFRS.
3 years under both GAAP and IFRS.
2 years under GAAP and 3 years under IFRS.
3 years under GAAP and 2 years under IFRS.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Financial Accounting Tools for Business Decision Making, 7th Edition By Kimmel -Test Bank

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Financial Accounting Tools for Business Decision Making, 7th Edition By Kimmel -Test Bank

Description

Additional Information

Reviews

True-False Statements

Multiple Choice Questions

Multiple Choice Questions (Cont.)

Brief Exercises

Completion Statements

CHAPTER LEARNING OBJECTIVES

Answers to Multiple Choice Questions

Instructions

Instructions

Instructions

COMPLETION STATEMENTS

Solution 256

Additional information

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