Financial & Managerial Accounting 13e Carl Warren James M Reeve Jonathan Duchac - Test Bank

Financial & Managerial Accounting 13e Carl Warren James M Reeve Jonathan Duchac – Test Bank

Instant Download – Complete Test Bank With Answers

Sample Questions Are Posted Below

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

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 – Business Forms

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.BB.01 – Industry

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

In a merchandising business, sales minus operating expenses equals net income.
1. True
2. False

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends to sell.
1. True
2. False

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Service businesses provide services for income, while a merchandising business sells merchandise.
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 – Business Forms

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

In retail businesses, inventory is reported as a current asset.
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Under a periodic inventory system, the cost of merchandise on hand at the end of the year is determined by a physical count of the inventory.
1. True
2. False

ANSWER: True

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: True

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the beginning inventory.
1. True
2. False

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Freight-in is considered a cost of purchasing inventory.
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The cost of merchandise inventory is limited to the purchase price less any purchase discounts.
1. True
2. False

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are recorded.
1. True
2. False

ANSWER: True

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

In a perpetual inventory system, when merchandise is returned to the supplier, Cost of Merchandise Sold is debited as part of the transaction.
1. True
2. False

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Customer Refunds Payable is an account used to record merchandise returns from customers.
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Most retailers record all credit card sales as credit sales.
1. True
2. False

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The fees associated with credit card sales are periodically recorded as expenses.
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

A customer discount encourages customers to pay accounts more quickly than if a discount were not available.
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 – Current Assets Reporting

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Merchandise Inventory normally has a debit balance.
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 – Cash vs. Accrual

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account.
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system.
1. True
2. False

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period.
1. True
2. False

ANSWER: True

DIFFICULTY: Challenging

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Sellers and buyers are required to record trade discounts.
1. True
2. False

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms are stated as FOB destination.
1. True
2. False

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

RATIONALE: Accounts receivable = Sales + Sales tax payable = $750 + ($750 × 6%) =

$750 + $45 = $795

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 – Current Assets Reporting

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The abbreviation FOB stands for “free on board.”
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: True

RATIONALE: Amount of sales recorded = Sales – Sales discount = $3,600 – (2% × $3,600) =

$3,600 – $72 = $3,528

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

When the terms of sale are FOB shipping point, the buyer pays the freight charges.
1. True
2. False

ANSWER: True

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: True

RATIONALE: Credit terms of 2/10, n/30, provides a 2% discount if the invoice is paid within 10

days. If not paid within 10 days, the total invoice amount is due within 30 days.

Amount of purchase discount = 2% × Cost of merchandise = 2% × $3,500 = $70

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

There is no difference between the recording of cash sales and the recording of MasterCard or VISA sales.
1. True
2. False

ANSWER: True

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 – Cash vs. Accrual

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The seller may prepay the freight costs even though the terms are FOB shipping point.
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The seller records the sales tax as part of the sales amount.
1. True
2. False

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer’s place of business.
1. True
2. False

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: True

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Because many companies use computerized accounting systems, periodic inventory is widely used.
1. True
2. False

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in the general ledger.
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: True

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The form of the balance sheet in which assets, liabilities, and stockholders’ equity are presented in a downward sequence is called the report form.
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Sales is equal to the cost of merchandise sold less the gross profit.
1. True
2. False

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: True

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Gross profit minus selling expenses equals net income.
1. True
2. False

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The account form of the balance sheet is presented in a downward sequence in three sections.
1. True
2. False

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Cost of merchandise sold is often the largest expense on a merchandising company income statement.
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

When a merchandising business is compared to a service business, the financial statement that is not affected by that change is the retained earnings statement.
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Other income and expenses are items that are not related to the primary operating activity.
1. True
2. False

ANSWER: True

DIFFICULTY: Challenging

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Closing entries for a merchandising business are not similar to those for a service business.
1. True
2. False

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-04 – LO: 05-04

ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 – Closing Entries

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The ratio of sales to assets measures how effectively a business is using its assets to generate sales.
1. True
2. False

ANSWER: True

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-05 – LO: 05-05

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.23 – Financial Statement Analysis

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Under the periodic inventory system, the cost of merchandise sold is equal to the beginning merchandise inventory plus the cost of merchandise purchased plus the ending merchandise inventory.
1. True
2. False

ANSWER: False

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

In a periodic inventory system, the cost of merchandise purchased includes the cost of freight-in.
1. True
2. False

ANSWER: True

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: True

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Under the periodic inventory system, the cost of merchandise sold is recorded when sales are made.
1. True
2. False

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: False

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Merchandise inventory is classified on the balance sheet as a
1. current liability
2. current asset
3. long-term asset
4. long-term liability

ANSWER: b

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Which of the following is not a difference between a retail business and a service business?
1. in what is sold
2. the inclusion of gross profit on the income statement
3. accounting equation
4. merchandise inventory included on the balance sheet

ANSWER: c

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 – Business Forms

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.BB.01 – Industry

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Net income plus operating expenses is equal to
1. cost of merchandise sold
2. cost of merchandise
3. sales
4. gross profit

ANSWER: d

DIFFICULTY: Easy

Bloom’s: Understanding

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

What is the term applied to the excess of net revenue from sales over the cost of merchandise sold?
1. gross profit
2. income from operations
3. net income
4. gross sales

ANSWER: a

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Calculate the gross profit for Jefferson Company based on the following:

Sales $764,000

Selling expenses 42,500

Cost of merchandise sold 538,000

$495,500
$183,500
$721,500
$226,000

ANSWER: d

RATIONALE: Gross profit = Sales – Cost of merchandise sold = $764,000 – $538,000 =

$226,000

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The inventory system employing accounting records that continuously disclose the amount of inventory is called
1. retail
2. periodic
3. physical
4. perpetual

ANSWER: d

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Calculate income from operations for Jonas Company based on the following data:

Sales $764,000

Operating expenses 52,500

Cost of merchandise sold 538,000

$485,500
$711,500
$173,500
$226,000

ANSWER: c

RATIONALE: Income from operations = Sales – Cost of merchandise sold – Operating

expenses = $764,000 – $538,000 – $52,500 = $173,500

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Gross profit is equal to
1. sales plus cost of merchandise sold
2. sales plus selling expenses
3. sales less selling expenses
4. sales less cost of merchandise sold

ANSWER: d

DIFFICULTY: Moderate

Bloom’s: Understanding

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

When comparing a retail business to a service business, the financial statement that changes the most is the
1. balance sheet
2. income statement
3. retained earnings statement
4. statement of cash flows

ANSWER: b

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Dollar Co. sold merchandise to Pound Co. on account, $25,500, terms 2/15, net 45. Pound Co. paid the invoice within the discount period. What is the sales amount to be recorded in the above transactions?
1. $25,500
2. $26,010
3. $24,990
4. $16,000

ANSWER: c

RATIONALE: Amount of sales = Invoice amount – Sales discount = $25,500 – (2% × $25,500)

= $25,500 – $510 = $24,990

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The primary difference between the periodic and perpetual inventory systems is that a
1. periodic system determines the inventory on hand only at the end of the accounting period
2. periodic system keeps a record showing the inventory on hand at all times
3. periodic system provides an easy means to determine inventory shrinkage
4. periodic system records the cost of the sale on the date the sale is made

ANSWER: a

DIFFICULTY: Moderate

Bloom’s: Understanding

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Using a perpetual inventory system, the entry to record the sale of merchandise on account includes a
1. debit to Sales
2. debit to Merchandise Inventory
3. credit to Merchandise Inventory
4. credit to Accounts Receivable

ANSWER: c

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Which of the following accounts has a normal debit balance?
1. Accounts Payable
2. Merchandise Inventory
3. Sales
4. Interest Revenue

ANSWER: b

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Merchandise is ordered on November 10; the merchandise is shipped by the seller and the invoice is prepared, dated, and mailed by the seller on November 13; the merchandise is received by the buyer on November 18; the entry is made in the buyer’s accounts on November 20. The credit period begins with what date?
1. November 10
2. November 13
3. November 18
4. November 20

ANSWER: b

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Using a perpetual inventory system, the entry to record the return from a customer of merchandise sold on account includes a
1. credit to Customer Refunds Payable
2. debit to Merchandise Inventory
3. credit to Merchandise Inventory
4. debit to Cash

ANSWER: b

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

If merchandise sold on account is returned to the seller, the seller acknowledges the return by issuing a
1. sales invoice
2. purchase invoice
3. credit memo
4. debit memo

ANSWER: c

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The arrangements between buyer and seller as to when payments for merchandise are to be made are called
1. credit terms
2. net cash
3. cash on demand
4. gross cash

ANSWER: a

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 – Cash vs. Accrual

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

In credit terms of 3/15, n/45, the “3” represents the
1. number of days in the discount period
2. full amount of the invoice
3. number of days when the entire amount is due
4. percent of the cash discount

ANSWER: d

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 – Cash vs. Accrual

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Merchandise with a sales price of $5,000 is sold on account with terms 2/10, n/30. The journal entry to record the sale would include a
1. debit to Cash for $5,000
2. debit to Merchandise Inventory for $100
3. credit to Sales for $4,900
4. debit to Accounts Receivable for $4,880

ANSWER: c

RATIONALE: Amount of sales = Invoice amount – Sales discount = $5,000 – (2% × $5,000) =

$5,000 – $100 = $4,900

The journal entry to record the sale would include a credit to Sales for $4,900.

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Merchandise subject to terms 2/10, n/30, FOB shipping point, is sold on account to a customer for $25,000. What is the amount of sales discount allowable?
1. $260
2. $500
3. $460
4. $150

ANSWER: b

RATIONALE: Sales discount allowable = 2% × Sales = 2% × $25,000 = $500

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 – Cash vs. Accrual

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Which of the following accounts has a normal credit balance?
1. Accounts Receivable
2. Sales
3. Merchandise Inventory
4. Delivery Expense

ANSWER: b

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The entry to record the return of merchandise from a customer would include a
1. debit to Sales
2. credit to Sales
3. debit to Customer Refunds Payable
4. debit to Estimated Returns Inventory

ANSWER: c

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Sales to customers who use bank credit cards such as MasterCard and Visa are usually recorded by a
1. debit to Bank Credit Card Sales, debit to Credit Card Expense, and a credit to Sales
2. debit to Cash and a credit to Sales
3. debit to Cash, credit to Credit Card Expense, and a credit to Sales
4. debit to Sales, debit to Credit Card Expense, and a credit to Cash

ANSWER: b

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Sales to customers who use bank credit cards, such as MasterCard and Visa, are generally treated as
1. sales on account
2. sales returns
3. cash sales
4. sales when the credit card company remits the cash

ANSWER: c

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 – Cash vs. Accrual

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

When a buyer returns merchandise purchased for cash, the buyer will record the transaction as a
1. debit to Merchandise Inventory; a credit to Cash
2. debit to Cash; a credit to Merchandise Inventory
3. debit to Cash; a credit to Sales
4. debit to Sales; a credit to Accounts Payable

ANSWER: b

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

When merchandise purchased on account is returned under the perpetual inventory system, the buyer would debit
1. Merchandise Inventory
2. Purchases Returns and Allowances
3. Accounts Payable
4. Accounts Receivable

ANSWER: c

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

When purchases of merchandise are made on account with a perpetual inventory system, the transaction is recorded with which entry?
1. debit Accounts Payable; credit Merchandise Inventory
2. debit Merchandise Inventory; credit Accounts Payable
3. debit Merchandise Inventory; credit Cash Discounts
4. debit Merchandise Inventory; credit Purchases

ANSWER: b

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Using a perpetual inventory system, the entry to record the purchase of $30,000 of merchandise on account would include a
1. debit to Accounts Payable
2. debit to Merchandise Inventory
3. credit to Merchandise Inventory
4. credit to Sales

ANSWER: b

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Using a perpetual inventory system, the entry to record the return of merchandise purchased on account includes a
1. debit to Cost of Merchandise Sold
2. credit to Accounts Payable
3. credit to Merchandise Inventory
4. credit to Sales

ANSWER: c

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

In recording the cost of merchandise sold for cash, based on data available from perpetual inventory records, the journal entry is
1. debit Cost of Merchandise Sold; credit Sales
2. debit Cost of Merchandise Sold; credit Merchandise Inventory
3. debit Merchandise Inventory; credit Cost of Merchandise Sold
4. debit Accounts Receivable; credit Merchandise Inventory

ANSWER: b

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The amount of the total cash paid to the seller for merchandise purchased for consumption would normally include
1. only the list price
2. only the sales tax
3. the list price plus the sales tax
4. the list price less the sales tax

ANSWER: c

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Norfolk Sporting Goods purchases merchandise with a catalog list price of $30,000. The retailer receives a 30% trade discount and credit terms of 2/10, n/30. What amount should Norfolk debit to the Merchandise Inventory account?
1. $21,000
2. $20,580
3. $30,000
4. $29,400

ANSWER: b

RATIONALE: Price after trade discount = $30,000 – ($30,000 × 30%) = $30,000 – $9,000 =

$21,000

Debit to Merchandise Inventory account = Price after trade discount – Discount

as per credit term = [$21,000 – (2% × $21,000)] = $21,000 – $420 = $20,580

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 – Cash vs. Accrual

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

A sales invoice included the following information: merchandise price, $12,000; terms 1/10, n/eom; FOB shipping point with prepaid freight of $900 added to the invoice. Assuming that a credit for merchandise returned of $500 is granted prior to payment and that the invoice is paid within the discount period, what is the amount of cash that should be received by the seller?
1. $12,285
2. $11,500
3. $10,480
4. $11,385

ANSWER: a

RATIONALE: Cash received = Sales – Sales discount + Prepaid freight – Cost of merchandise

returned = $12,000 – (1% × $12,000) + $900 – [$500 – (1% × $500)] = $12,000

– $120 + $900 – ($500 – $5) = $12,780 – $495 = $12,285

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 – Cash vs. Accrual

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Which of the following accounts usually has a debit balance?
1. Accounts Payable
2. Sales Tax Payable
3. Sales
4. Merchandise Inventory

ANSWER: d

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Merchandise is sold for cash. The selling price of the merchandise is $6,000 and the sale is subject to a 7% state sales tax. The journal entry to record the sale would include a credit to
1. Cash for $6,000
2. Sales for $6,240
3. Sales Tax Payable for $420
4. Sales for $5,580

ANSWER: c

RATIONALE: Sales tax payable = Selling price × 7% state sales tax = $6,000 × 7% = $420

The journal entry to record the sale would include a credit to Sales Tax Payable

for $420.

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

If the buyer is to pay the freight costs of delivering merchandise, delivery terms are stated as
1. FOB shipping point
2. FOB destination
3. FOB n/30
4. FOB buyer

ANSWER: a

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

If the seller is to pay the freight costs of delivering merchandise, the delivery terms are stated as
1. FOB shipping point
2. FOB destination
3. FOB n/30
4. FOB seller

ANSWER: b

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are
1. n/30
2. FOB shipping point
3. FOB destination
4. consigned

ANSWER: b

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

When goods are shipped FOB destination and the seller pays the freight charges, the buyer
1. journalizes a reduction for the cost of the merchandise
2. journalizes a reimbursement to the seller
3. does not take a discount
4. makes no journal entry for the freight

ANSWER: d

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Pierce Company sold to Stanton Company merchandise on account FOB shipping point, 2/10, net 30, for $20,000. Pierce prepaid the $500 shipping charge. Which of the following entries does Pierce make to record this sale?
1. Accounts Receivable—Stanton, debit $20,000; Sales, credit $20,000
2. Accounts Receivable—Stanton, debit $19,600; Sales, credit $19,600, and Accounts Receivable—Stanton, debit $500; Cash, credit $500
3. Accounts Receivable—Stanton, debit $20,100; Sales, credit $20,100
4. Accounts Receivable—Stanton, debit $20,000; Sales, credit $20,000, and Delivery Expense, debit $500; Cash, credit $500

ANSWER: b

RATIONALE: Amount of sales = Invoice amount – Sales discount = $20,000 – (2% × $20,000)

= $20,000 – $400 = $19,600. Journal entry: Accounts Receivable—Stanton, debit

$19,600; Sales, credit $19,600, and Accounts Receivable—Stanton, debit $500;

Cash, credit $500

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Emma Co. sold to Isabella Co. merchandise on account FOB shipping point, 2/10, net 30, for $15,000. Emma Co. prepaid the $750 shipping charge. Using the perpetual inventory method, which of the following entries will Isabella Co. make to record the payment for the merchandise if Isabella Co. pays within the discount period?
1. Accounts Payable—Emma Co., debit $15,000; Cash, credit $15,000
2. Accounts Payable—Emma Co., debit $15,450; Cash, credit $15,450
3. Accounts Payable—Emma Co., debit $15,000; Freight In, debit $750; Cash, credit $15,750
4. Accounts Payable—Emma Co., debit $15,750; Merchandise Inventory, debit $300; Cash, credit $16,050

ANSWER: b

RATIONALE: Accounts Payable = Cost of merchandise – Purchase discount + Shipping charges

= $15,000 – (2% × $15,000) + $750 = $15,000 – $300 + $750 = $15,450

Journal entry: Accounts Payable—Emma Co., debit $15,450; Cash, credit

$15,450

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

A chart of accounts for a merchandising business
1. usually is the same as the chart of accounts for a service business
2. usually requires more accounts than does the chart of accounts for a service business
3. usually is standardized by the FASB for all merchandising businesses
4. always uses a three-digit numbering system

ANSWER: b

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Cumberland Co. sells $2,000 of inventory to Hancock Co. for cash. Cumberland paid $1,250 for the merchandise. Under a perpetual inventory system, which of the following journal entry(ies) would be recorded?
1. debit Cash, $2,000; credit Merchandise Inventory, $1,250
2. debit Cash, $2,000; credit Sales, $2,000; and debit Cost of Merchandise Sold, $1,250; credit Merchandise Inventory, $1,250
3. debit Cash, $1,250; credit Sales, $1,250
4. debit Accounts Receivable, $2,000; credit Sales, $2,000; and debit Cost of Merchandise Sold, $1,250; credit Merchandise Inventory, $1,250

ANSWER: b

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Jacob Co. sells merchandise on credit to Isaiah Co. for $9,700. The invoice is dated May 1 with terms of 1/15, net 45. What is the amount of the discount and up to what date must the invoice be paid in order for the buyer to take advantage of the discount?
1. $194, May 15
2. $194, May 16
3. $97, May 15
4. $97, May 16

ANSWER: d

RATIONALE: Amount of discount = Sale price × 1% = $9,700 × 1% = $97

The last day of the discount period = Invoice date of May 1 plus 15 days =

May 16

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Kaden Co. sells merchandise on credit to Jase Co. for $9,600. The invoice is dated July 15 with terms of 1/15, net 45. If Jase Co. chooses not to take the discount, by when should the payment be made?
1. July 30
2. August 29
3. August 15
4. July 25

ANSWER: b

RATIONALE: Credit terms of 1/15, n/45, provides a 1% sales discount if the invoice is paid

within 15 days. If not paid within 15 days, the total invoice amount is due within

45 days.

Credit period of 45 days = 16 days of July (31 – 15) + 29 days of August

(45 – 16)

Final due date is August 29.

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

To encourage a buyer to pay before the end of the credit period, the seller may offer a
1. purchases discount
2. sales discount
3. trade discount
4. payment discount

ANSWER: a

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Taking advantage of a 2/10, n/30 purchases discount is equal to a yearly savings rate of approximately
1. 2%
2. 24%
3. 20%
4. 36%

ANSWER: d

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Who is responsible for the freight costs when the terms are FOB shipping point?
1. the ultimate customer
2. the buyer
3. the seller
4. either the seller or the buyer

ANSWER: b

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Who is responsible for the freight cost when the terms are FOB destination?
1. the seller
2. the buyer
3. the customer
4. either the buyer or the seller

ANSWER: a

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

A retailer purchases merchandise with a catalog list price of $30,000. The retailer receives a 15% trade discount and has credit terms of 2/10, n/30. How much cash will be needed to pay this invoice within the discount period?
1. $30,000
2. $24,900
3. $29,400
4. $24,990

ANSWER: d

RATIONALE: Price after trade discount = Catalog price – Trade discount = $30,000 – (15% ×

$30,000) = $30,000 – $4,500 = $25,500

Cash required to pay the invoice = Price after trade discount – Purchase discount

= $25,500 – (2% × $25,500) = $25,500 – $510 = $24,990

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

What type of company would normally offer trade discounts to its customers?
1. service companies
2. retailers
3. wholesalers
4. online retailers

ANSWER: c

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 – Business Forms

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.BB.01 – Industry

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Which of the following accounts will only be found in the chart of accounts of a merchandising company?
1. Sales
2. Accounts Receivable
3. Merchandise Inventory
4. Accounts Payable

ANSWER: c

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Which of the following items would not affect the cost of merchandise inventory acquired during the period?
1. trade discounts
2. purchase discounts
3. freight-in
4. sales commissions

ANSWER: d

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

If title to merchandise purchases passes to the buyer when the goods are delivered to the buyer, the terms are
1. consigned
2. n/30
3. FOB shipping point
4. FOB destination

ANSWER: d

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are
1. n/30
2. FOB shipping point
3. FOB destination
4. consigned

ANSWER: b

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

If merchandise sells for $3,500, with terms of 3/15, n/45, and the cost of the inventory sold is $2,100, the amount charged to sales is
1. $3,395
2. $3,500
3. $2,037
4. $2,100

ANSWER: a

RATIONALE: Amount charged to sales = Sale price – Sales discount = $3,500 – (3% × $3,500)

= $3,500 – $105 = $3,395

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Under the perpetual inventory system, all purchases of merchandise are debited to the account
1. Merchandise Inventory
2. Cost of Merchandise Sold
3. Cost of Merchandise Available for Sale
4. Purchases

ANSWER: a

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

When the perpetual inventory system is used, the inventory sold is debited to
1. Supplies Expense
2. Cost of Merchandise Sold
3. Merchandise Inventory
4. Sales

ANSWER: b

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: a

DIFFICULTY: Easy

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The journal entry to record the receipt of inventory purchased for cash in a perpetual inventory system would be
1 Merchandise Inventory 1,500

Cash 1,500

1 Office Supplies 1,500

Cash 1,500

1 Purchases 1,500

Accounts Payable 1,500

1 Cash 1,500

Accounts Receivable 1,500

ANSWER: a

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Which of the following items should not be included in the cost of ending merchandise inventory?
1. purchased units in transit, shipped FOB shipping point
2. purchased units in transit, shipped FOB destination
3. units on hand in the warehouse
4. sold units in transit, not invoiced, and shipped FOB destination

ANSWER: b

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The Corbit Corp. sold merchandise for $10,000 cash. The cost of the merchandise sold was $7,590. The journal entries to record this transaction under the perpetual inventory system would be
Cash 10,000

Merchandise Inventory 10,000

Cost of Merchandise Sold 7,590

Sales 7,590

Cash 10,000

Sales 10,000

Cost of Merchandise Sold 7,590

Merchandise Inventory 7,590

Cash 10,000

Sales 10,000

Cost of Merchandise Sold 10,000

Merchandise Inventory 10,000

Cash 7,590

Sales 7,590

Cost of Merchandise Sold 7,590

Merchandise Inventory 7,590

ANSWER: b

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Abbey Co. sold merchandise to Gomez Co. on account, $35,000, terms 2/15, net 45. The cost of the merchandise sold was $24,500. Abbey Co. issued a credit memo for $3,600 for merchandise returned that originally cost $1,700. Gomez Co. paid the invoice within the discount period. What is the amount of gross profit earned by Abbey Co. on the above transactions?
1. $10,500
2. $30,772
3. $7,972
4. $31,400

ANSWER: c

RATIONALE: Gross profit earned by Abbey Co. = Sales after discount – Selling price of

returned merchandise after discount – (Cost of merchandise sold – Cost of

merchandise returned) = [$35,000 – ($35,000 × 2%)] – [$3,600 – ($3,600 × 2%)]

– ($24,500 – $1,700) = $7,972

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

What is the major difference between a periodic and perpetual inventory system?
1. Under the periodic inventory system, the purchase of inventory will be debited to the Purchases account.
2. Under the periodic inventory system, no journal entry is recorded at the time of the sale of inventory for the cost of the inventory.
3. Under the periodic inventory system, all adjustments such as purchases returns and allowances and discounts are reconciled at the end of the month.
4. All of the answers are correct.

ANSWER: d

DIFFICULTY: Moderate

Bloom’s: Understanding

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Generally, the revenue account for a merchandising business is entitled
1. Sales
2. Fees Earned
3. Gross Sales
4. Gross Profit

ANSWER: a

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Which account is not classified as a selling expense?
1. Sales Salaries
2. Delivery Expense
3. Cost of Goods Sold
4. Advertising Expense

ANSWER: c

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

President’s salaries, depreciation of office furniture, and office supplies are
1. selling expenses
2. miscellaneous expenses
3. administrative expenses
4. inventory expenses

ANSWER: c

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Expenses that are incurred directly or entirely in connection with the sale of merchandise are classified as
1. selling expenses
2. general expenses
3. other expenses
4. administrative expenses

ANSWER: a

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

When the perpetual inventory system is used, the inventory sold is shown on the income statement as
1. cost of merchandise sold
2. purchases
3. purchases returns and allowances
4. net purchases

ANSWER: a

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Merchandise is purchased for $6,000 on September 2 subject to terms of 2/10, n/30, FOB destination. Freight costs paid by the seller totaled $200. What is the required payment if paid on September 12?
1. $6,120
2. $5,940
3. $6,090
4. $5,880

ANSWER: d

RATIONALE: Cost of merchandise = Invoice amount – Purchase discount = $6,000 – (2% ×

$6,000) = $6,000 – $120 = $5,880

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Under the periodic inventory system, the journal entry to record the purchase of merchandise inventory will include a debit to
1. Merchandise Inventory
2. Purchases
3. Accounts Payable
4. Cost of Merchandise Purchased

ANSWER: b

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Using the following information, what is the amount of net income?

Purchases $32,000 Selling expense $ 960

Merchandise inventory, September 1 5,700 Merchandise inventory, September 30 6,370

Administrative expense 910 Sales 63,000

Rent revenue 1,200 Interest expense 1,040

$29,510
$29,960
$28,310
$29,350

ANSWER: b

RATIONALE: Cost of merchandise sold = Merchandise inventory on September 1 + Purchases

– Merchandise inventory on September 30 = $5,700 + $32,000 – $6,370

= $31,330

Income from operations = Sales – Cost of merchandise – Administrative

expenses – Selling expenses = $63,000 – $31,330 – $910 – $960 = $29,800

Net income = Income from operations + Rent revenue – Interest expense =

$29,800 + $1,200 – $1,040 = $29,960

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Using the following information, what is the amount of gross profit?

Purchases $32,000 Selling expense $ 960

Merchandise inventory, September 1 5,700 Merchandise inventory, September 30 6,370

Administrative expense 910 Sales 63,000

Rent revenue 1,200 Interest expense 1,040

$25,300
$31,670
$30,600
$62,840

ANSWER: b

RATIONALE: Cost of merchandise sold = Merchandise inventory on September 1 + Purchases

– Merchandise inventory on September 30 = $5,700 + $32,000 – $6,370

= $31,330

Gross profit = Sales – Cost of merchandise sold = $63,000 – $31,330 = $31,670

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Using the following information, what is the amount of income from operations?

Purchases $32,000 Selling expense $ 960

Merchandise inventory, September 1 5,700 Merchandise inventory, September 30 6,370

Administrative expense 910 Sales 63,000

Rent revenue 1,200 Interest expense 1,040

$31,670
$29,960
$28,760
$29,800

ANSWER: d

RATIONALE: Cost of merchandise sold = Merchandise inventory on September 1 + Purchases

– Merchandise inventory on September 30 = $5,700 + $32,000 – $6,370

= $31,330

Income from operations = Sales – Cost of merchandise – Administrative

expenses – Selling expenses = $63,000 – $31,330 – $910 – $960 = $29,800

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

When comparing a retail business to a service business, the financial statement that changes the least is the
1. balance sheet
2. income statement
3. retained earnings statement
4. statement of cash flows

ANSWER: c

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The retained earnings statement shows
1. only net income, beginning and ending balance of retained earnings
2. only total assets, beginning and ending balance of retained earnings
3. only net income, beginning balance of retained earnings, and dividends
4. beginning and ending balance of retained earnings and all the changes in retained earnings as a result of net income (loss) and dividends

ANSWER: d

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

When the three sections of a balance sheet are presented on a page in a downward sequence, it is called the
1. account form
2. comparative form
3. horizontal form
4. report form

ANSWER: d

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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

ANSWER: c

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

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
1. multiple-step statement
2. revenue statement
3. report-form statement
4. single-step statement

ANSWER: d

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Which of the following accounts should be closed to Income Summary at the end of the fiscal year?
1. Merchandise Inventory
2. Accumulated Depreciation
3. Dividends
4. Cost of Merchandise Sold

ANSWER: d

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-04 – LO: 05-04

ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 – Closing Entries

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Which account will be included in the closing entries for both service and merchandising companies?
1. Sales
2. Cost of Merchandise Sold
3. Purchase Discounts
4. Purchase Returns and Allowances

ANSWER: a

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-04 – LO: 05-04

ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 – Closing Entries

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

If the physical count of inventory revealed $158,000 of merchandise on hand and the inventory records reported $163,000, what would be the necessary adjusting entry to record inventory shrinkage?
1. debit Merchandise Inventory, $158,000; credit Cost of Merchandise Sold, $158,000
2. debit Merchandise Inventory, $5,000; credit Cost of Merchandise Sold, $5,000
3. debit Cost of Merchandise Sold, $163,000; credit Merchandise Inventory, $158,000
4. debit Cost of Merchandise Sold, $5,000; credit Merchandise Inventory, $5,000

ANSWER: d

RATIONALE: Inventory shrinkage = Account balance of Merchandise Inventory – Physical

merchandise inventory on hand = $163,000 – $158,000 = $5,000

Adjusting entry to record inventory shrinkage: debit Cost of Merchandise Sold,

$5,000; credit Merchandise Inventory, $5,000

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-04 – LO: 05-04

ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 – Adjusting Entries

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

ACCT.AICPA.FN.04 – Reporting

BUSPROG: Analytic

Inventory shrinkage is recorded when
1. merchandise is returned by a buyer
2. merchandise purchased from a seller is incomplete or short
3. merchandise is returned to a seller
4. there is a difference between a physical count of inventory and inventory records

ANSWER: d

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-04 – LO: 05-04

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Bradford Company had sales of $700,000 for a year. The total assets at the beginning of the year were $240,000, and the total assets at the end of the year were $280,000. The ratio of sales to total assets is (round answer to 2 decimal places)
1. 69
2. 40
3. 92
4. 34

ANSWER: a

RATIONALE: Average total assets = (Beginning total assets + Ending total assets) / 2 =

($240,000 + $280,000) / 2 = $260,000

Ratio of sales to total assets = Sales / Average total assets = $700,000 / $260,000

= 2.69

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-05 – LO: 05-05

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.23 – Financial Statement Analysis

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Bountiful Company had sales of $650,000 and cost of merchandise sold of $200,000 during a year. The total assets balance at the beginning of the year was $175,000 and at the end of the year was $167,000. Calculate the ratio of sales to total assets.
1. 00
2. 80
3. 29
4. 26

ANSWER: b

RATIONALE: Average total assets = (Beginning total assets + Ending total assets) / 2 =

($175,000 + $167,000) / 2 = $171,000

Ratio of sales to total assets = Sales / Average total assets = $650,000 / $171,000

= 3.80

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-05 – LO: 05-05

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.23 – Financial Statement Analysis

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

A company using the periodic inventory system has the following account balances: Merchandise Inventory at the beginning of the year, $3,600; Freight-In, $650; Purchases, $10,700; Purchases Returns and Allowances, $1,950; Purchases Discounts, $330. The cost of merchandise purchased is equal to
1. $12,670
2. $9,070
3. $8,420
4. $17,230

ANSWER: b

RATIONALE: Cost of merchandise purchased = Purchases + Freight In – Purchases Returns and

Allowances – Purchases Discounts = $10,700 + $650 – $1,950 – $330 = $9,070

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

A company using the periodic inventory system has merchandise inventory costing $210 on hand at the beginning of a period. During the period, merchandise costing $635 is purchased. At year-end, merchandise inventory costing $160 is on hand. The cost of merchandise sold for the year is
1. $795
2. $685
3. $265
4. $635

ANSWER: b

RATIONALE: Cost of merchandise sold = Beginning inventory + Inventory purchased – Ending

inventory = $210 + $635 – $160 = $685

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Which of the following accounts will not be found in the Cost of Merchandise Sold section of the income statement for a company using the periodic inventory method?
1. Purchases
2. Freight-In
3. Selling Expense
4. Merchandise Inventory

ANSWER: c

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Where are selling and administrative expenses found on the multiple-step income statement?
1. before gross profit
2. after sales and before gross profit
3. after net income and before expenses
4. after gross profit

ANSWER: d

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Under the periodic inventory system, the journal entry to record the cost of merchandise sold at the point of sale will include which of the following?
1. none of these
2. Cost of Merchandise Sold
3. Inventory
4. Purchases

ANSWER: a

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Under a periodic inventory system, closing entries will include
1. debits to Sales, Purchases Returns and Allowances, and Purchases Discounts
2. credits to the Allowance for Doubtful Accounts
3. adjustments to the merchandise inventory account to match physical inventory
4. all of these

ANSWER: a

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 – Closing Entries

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The proper journal entry to record the receipt of inventory purchased on account in a periodic inventory system would be
1 Merchandise Inventory 1,600

Accounts Payable 1,600

1 Office Supplies 1,600

Accounts Payable 1,600

1 Purchases 1,600

Accounts Payable 1,600

1 Purchases 1,600

Accounts Receivable 1,600

ANSWER: c

DIFFICULTY: Moderate

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Using the following information, what is the cost of merchandise sold?

Purchases $32,000 Selling expense $ 960

Merchandise inventory, September 1 5,700 Merchandise inventory, September 30 6,370

Administrative expense 910 Sales 63,000

Rent revenue 1,200 Interest expense 1,040

$32,400
$32,670
$31,330
$38,370

ANSWER: c

RATIONALE: Cost of merchandise sold = Merchandise inventory on September 1 + Purchases

– Merchandise inventory on September 30 = $5,700 + $32,000 – $6,370 =

$31,330

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Discuss the following statement:

“Operating cycles for all merchandising businesses are the same, with similar profit margins.”

Include an example(s) to illustrate your explanation.

ANSWER: This is not true. While the operations of merchandising businesses generally all

involve the purchase of merchandise (purchasing), the sale of products to

customers (sales), and the receipt of cash from customers (collection), operating

cycles may vary in length between merchandisers. This is due to the nature of

the product they sell. An example is a grocery store which depends on selling

more products in a very short time span.

DIFFICULTY: Moderate

Bloom’s: Understanding

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 – Accounting Cycle

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.BB.01 – Industry

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Describe the major differences in preparing the financial statements for a service business and a merchandising business.

Service Business

Income Statement:

Balance Sheet:

Merchandising Business

Income Statement:

Balance Sheet:

ANSWER: Service Business

Income Statement:

Revenues

Less operating expenses

Equals net income

Balance Sheet:

No merchandise inventory account

Merchandising Business

Income Statement:

Sales

Less cost of merchandise sold

Equals gross profit

Less operating expenses

Equals net income

Balance Sheet:

Includes merchandise inventory account in the current assets section

DIFFICULTY: Moderate

Bloom’s: Understanding

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.BB.01 – Industry

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Complete the following data taken from the condensed income statements for merchandising Companies A, B, and C.

Company A Company B Company C

Net income $315 $ ? $215

Sales ? 865 560

Gross profit 430 ? 325

Operating expenses ? 125 ?

Cost of merchandise sold 545 320 ?

ANSWER: Company A Company B Company C

Net income $315 $420 $215

Sales 975 865 560

Gross profit 430 545 325

Operating expenses 115 125 110

Cost of merchandise sold 545 320 235

OR Rearranged in the order of the income statement:

Company A Company B Company C

Sales $975 $865 $560

Less cost of merchandise sold 545 320 235

Gross profit 430 545 325

Less operating expenses 115 125 110

Net income 315 420 215

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Complete the following data taken from the condensed income statements for merchandising Companies X, Y, and Z.

Company X Company Y Company Z

Net income or net loss $220 $ ? $( 70)

Sales ? 1,315 890

Gross profit 435 ? 465

Operating expenses ? 565 ?

Cost of merchandise sold 330 775 ?

ANSWER: Company X Company Y Company Z

Net income or net loss $220 $ (25) $ (70)

Sales 765 1,315 890

Gross profit 435 540 465

Operating expenses 215 565 535

Cost of merchandise sold 330 775 425

OR Rearranged in the order of the income statement:

Company X Company Y Company Z

Sales $765 $1,315 $890

Less cost of merchandise sold 330 775 425

Gross profit 435 540 465

Less operating expenses 215 565 535

Net income or net loss 220 (25) (70)

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

During the current year, merchandise is sold for $137,500 cash and $425,600 on account. The cost of the merchandise sold is $322,325. What is the amount of the gross profit?

ANSWER: $137,500 + $425,600 – $322,325 = $240,775

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

During the current year, merchandise is sold for $117,500 cash and $241,750 on account. The cost of the merchandise sold is $157,400. What is the amount of the gross profit?

ANSWER: $117,500 + $241,750 – $157,400 = $201,850

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

During the current year, merchandise is sold for $86,000 cash and for $93,950 on account. The cost of the merchandise sold is $76,240. What is the amount of the gross profit?

ANSWER: Total sales, $179,950 – Cost of merchandise sold, $76,240 = Gross profit,

$103,710

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-01 – LO: 05-01

FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Travis Company purchased merchandise on account from a supplier for $5,700, terms 2/10, net 30. Travis Company paid for the merchandise within the discount period.

Under a perpetual inventory system, record the journal entries required for the above transactions.

ANSWER: Merchandise Inventory 5,586

Accounts Payable 5,586

Cash 5,586

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

On March 25, Osgood Company sold merchandise on account, $10,000, terms n/30. The applicable sales tax percentage is 7.5%. The cost of merchandise sold is $5,950. Record the transactions.

Journal
Date	Description	Post. Ref.	Debit	Credit

ANSWER:

Journal
Date	Description	Post. Ref.	Debit	Credit
Mar. 25	Accounts Receivable		10,750
	Sales			10,000
	Sales Tax Payable			750
Mar. 25	Cost of Merchandise Sold		5,950
	Merchandise Inventory			5,950

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

On March 29, customers who owe $10,500 on account to Sonic Sales Company submit payments of $4,250. Journalize this event.

ANSWER: Mar. 29 Cash 4,250

Accounts Receivable 4,250

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Journalize the following merchandise transactions:

(a) Sold merchandise on account, $17,300, with terms 2/10, net 30. The cost of the merchandise sold was $12,600.

(b) Received payment within the discount period.

ANSWER: (a) Accounts Receivable 16,954

Sales 16,954

Cost of Merchandise Sold 12,600

Merchandise Inventory 12,600

(b) Cash 16,954

Accounts Receivable 16,954

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Determine the amount to be paid in full settlement of each invoice, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period.

Merchandise Freight Paid by Seller Freight Terms Returns and Allowances

(a) $4,500 $140 FOB Shipping Point, 2/10, net 30 $1,200

(b) $7,650 $200 FOB Destination, 1/10, net 45 $450

ANSWER: (a) $3,374

(b) $7,128

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Sampson Co. sold merchandise to Batson Co. on account, $46,000, terms 2/15, net 45. The cost of the merchandise sold is $38,500. The Batson Co. paid the invoice within the discount period. Prepare the entries that both Sampson and Batson Companies would record for the above. Assume both Sampson and Batson use a perpetual inventory system.

ANSWER: Sampson Company Journal Entries:

Accounts Receivable—Batson Co. 45,080

Sales 45,080

Cost of Merchandise Sold 38,500

Merchandise Inventory 38,500

Cash 45,080

Accounts Receivable—Batson Co. 45,080

Batson Company Journal Entries:

Merchandise Inventory 45,080

Accounts Payable—Sampson Co. 45,080

Cash 45,080

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Which of the following costs would be included in merchandise inventory?

(a) Purchase price

(b) Insurance in transit FOB shipping point

(d) Repair due to negligence of receiving clerk

(e) Receiving department employee salary

(f) Cost of processing purchase orders

ANSWER: (a), (b), and (c)

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

On March 4, Micro Sales makes $4,850 in sales on bank credit cards which charge a 2.5% service charge and deposits the funds into Micro Sales’ bank accounts at the end of the business day. Journalize the sales and recognition of expense.

ANSWER: Mar. 4 Cash 4,728.75

Credit Card Expense 121.25

Sales 4,850.00

The sales are debited to cash. Also, since the credit card expense is easily determined (2.5% of sales), that expense can be immediately identified and should be recorded.

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Journalize the following transactions for Armour Inc. using both the periodic inventory system and the perpetual inventory system, presented in the side-by-side format of the form provided below.
7 Sold $1,200 of merchandise on credit to Rondo Distributors, terms n/30; the cost of the merchandise was $720.

Oct. 8 Purchased merchandise, $10,000; terms FOB shipping point and 2/15, n/30; with prepaid freight charges of $525 added to the invoice.

PERIODIC INVENTORY				PERPETUAL INVENTORY
Description	DR	CR	\|	Description	DR	CR
			\|
			\|
			\|
			\|
			\|
			\|
			\|

ANSWER:

PERIODIC INVENTORY SYSTEM				PERPETUAL INVENTORY SYSTEM
Oct. 7	Accounts Receivable	1,200		Accounts Receivable	1,200
	Sales		1,200	Sales		1,200

				Cost of Merchandise Sold	720
				Merchandise Inventory		720
8	Purchases	9,800		Merchandise Inventory	10,325
	Freight-In	525		Accounts Payable		10,325
	Accounts Payable		10,325

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

What is the normal balance of the following accounts?

Sales Tax Payable
Merchandise Inventory
Delivery Expense
Cost of Merchandise Sold
Customer Refunds Payable
Estimated Returns Inventory
Sales

ANSWER: a. credit

debit
debit
debit
credit
debit
credit

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 – GAAP

ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

For each of the following, calculate the cost of inventory reported on the balance sheet.

(a) The total merchandise on hand at the end of the year as determined by taking a physical inventory is

$62,000. Of the $62,000, $8,000 has been sold FOB destination and is awaiting pickup by the carrier.

(b) The total merchandise inventory counted at the end of the year was $63,000. Excluded from the count were

purchases of $6,000 in transit under FOB shipping point terms.

purchases of $5,000 in transit under FOB destination terms.

ANSWER: (a) $62,000

(b) $69,000

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

ACCT.AICPA.FN.04 – Reporting

BUSPROG: Analytic

Using the perpetual inventory system, journalize the entries for the following selected transactions:

(a) Sold merchandise on account for $12,000, terms n/30. The cost of the merchandise sold was $6,500.

(b) Sold merchandise to customers who used MasterCard and VISA, $9,500. The cost of the merchandise sold was

$5,300.

$1,700.

(d) Paid an invoice from First National Bank for $385, representing a service fee for processing MasterCard and

VISA sales.

(e) Received $2,825 from American Express Company after a $75 collection fee had been deducted.

ANSWER: (a) Accounts Receivable 12,000

Sales 12,000

Cost of Merchandise Sold 6,500

Merchandise Inventory 6,500

(b) Cash 9,500

Sales 9,500

Cost of Merchandise Sold 5,300

Merchandise Inventory 5,300

Sales 2,900

Cost of Merchandise Sold 1,700

Merchandise Inventory 1,700

(d) Credit Card Expense 385

Cash 385

(e) Cash 2,825

Credit Card Expense 75

Accounts Receivable 2,900

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Merchandise with a list price of $4,200 and costing $2,300 is sold on account, subject to the following terms: FOB destination, 2/10, n/30. The seller prepays the freight costs of $85 (debit Delivery Expense for the freight costs). Prior to payment for the goods, the seller issues a credit memo for $750 to the customer for merchandise costing $425 that is returned. Payment is received within the discount period. The company uses a perpetual inventory system.
Record the foregoing transactions of the seller in the sequence indicated below.

(a) Sold the merchandise, recognizing the sale and cost of merchandise sold.

(b) Paid the freight charges.

(d) Received payment from the customer.

ANSWER: (a) Accounts Receivable 4,116

Sales 4,116

Cost of Merchandise Sold 2,300

Merchandise Inventory 2,300

(b) Delivery Expense 85

Cash 85

Accounts Receivable 735

Merchandise Inventory 425

Estimated Returns Inventory 425

(d) Cash 3,381

Accounts Receivable 3,381

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Based on the information below, journalize the entries for the seller and the buyer. Both use a perpetual inventory system.

(a) Seller sold merchandise on account to the buyer, $4,750, terms 2/10, net 30, FOB shipping point. The cost of

the merchandise is $2,850. The seller prepays the freight of $75.

(b) Buyer returns $700 of merchandise as defective. The cost of the merchandise is $420.

Seller			Buyer
Description	DR	CR	Description	DR	CR

ANSWER: (a) Seller Buyer

Accounts Receivable 4,655 Merchandise Inventory 4,730

Sales 4,655 Accounts Payable 4,730

Cost of Merchandise Sold 2,850

Merchandise Inventory 2,850

Accounts Receivable 75

Cash 75

(b) Customer Refunds Payable 686 Accounts Payable 686

Accounts Receivable 686 Merchandise Inventory 686

Merchandise Inventory 420

Estimated Returns Inventory 420

Accounts Receivable 4,044 Cash 4,044

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Details of a purchase invoice and related credit memo are summarized as follows:

Invoice: Cost of merchandise listed on purchase invoice $6,500

Prepaid freight charge added to invoice 150

Terms, FOB shipping point, 1/10, n/eom

Credit memo: Cost of merchandise returned $1,500

Assume that the credit memo was received prior to payment and that the invoice is paid within the discount period. Determine the following:

(a) Amount of the cash discount allowed.

(b) Amount to be paid by the purchaser if the discount is taken.

ANSWER: (a) $50

(b) $5,100

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 – Cash vs. Accrual

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Conquest Company uses a perpetual inventory system. Conquest purchased $1,500 of merchandise on account and payment was made within the discount period. The credit terms were 2/10, n/30. Journalize Conquest’s purchase and payment.

ANSWER: (a) Merchandise Inventory 1,470

Accounts Payable 1,470

(b) Accounts Payable 1,470

Cash 1,470

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 – Cash vs. Accrual

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Merchandise with a list price of $4,700 is purchased on account, terms FOB shipping point, 1/10, n/30. The seller prepaid freight costs of $100. Prior to payment, $1,600 of the merchandise is returned. The invoice is paid within the discount period.
Record the foregoing transactions of the buyer in the sequence indicated below, assuming a perpetual inventory system is used.

(a) Purchased the merchandise.

(b) Recorded receipt of the credit memo for merchandise returned.

ANSWER: (a) Merchandise Inventory 4,753

Accounts Payable 4,753

(b) Accounts Payable 1,584

Merchandise Inventory 1,584

Cash 3,169

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Details of invoices for purchases of merchandise are as follows:

Merchandise Freight Terms Returns and Allowances

(a) $2,800 $45 FOB shipping point, 1/10, n/30 $200

(b) 7,600 60 FOB destination, n/30 800

(d) 500 50 FOB destination, 1/10, n/30 0

Determine the amount to be paid in full settlement of each of the invoices, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period.

ANSWER: (a) $2,800 – $200 – $26 + $45 = $2,619

(b) $7,600 – $800 = $6,800

(d) $500 – $5 = $495

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Journalize the entries to record the following selected transactions:

(a) Sold $900 of merchandise on account, subject to 7% sales tax. The cost of the merchandise sold was $510.

(b) Paid $436 to the state sales tax department for taxes collected.

ANSWER: (a) Accounts Receivable 963

Sales 900

Sales Tax Payable 63

Cost of Merchandise Sold 510

Merchandise Inventory 510

(b) Sales Tax Payable 436

Cash 436

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Gadget Palace is a retailer selling unique hardware. Gadget Palace uses a perpetual inventory system. Journalize the following transactions:

On July 5, Gadget Palace purchases inventory for sale from Turbo Tools for $11,400.00 with terms 2/10, n/30.

On July 6, Gadget Palace pays Fast Truck Transport $75.00 for freight-in on the July 5 order.

On July 8, Gadget Palace receives a credit memo from Turbo Tools for $215.00 for damaged merchandise.

On July 15, Gadget Palace pays Turbo Tools the balance due.

General Journal
Date	Description	Debit	Credit

ANSWER:

General Journal
Date	Description	Debit	Credit
July 5	Merchandise Inventory	11,172.00
	A/P—Turbo Tools		11,172.00

6	Merchandise Inventory	75.00
	Cash		75.00

8	A/P—Turbo Tools	210.70
	Merchandise Inventory		210.70

15	A/P—Turbo Tools	10,961.30
	Cash		10,961.30

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Marshall Supplies is a janitorial supply store that uses perpetual inventory. Journalize the following transactions:

On July 4, Marshall purchases inventory for sale from Tidy Wholesalers for $8,500.00 with terms 1/10, n/30.

On July 5, Marshall pays Express Transfer $45.00 for freight-in on the July 4 order.

On July 7, Marshall buys an additional $11,985.00 in inventory from Tidy Wholesalers with terms 1/10, n/30.

On July 13, Marshall pays Tidy Wholesalers the balance due on both invoices

Journal
Date	Description	Debit	Credit

ANSWER:

Journal
Date	Description	Debit	Credit
July 4	Merchandise Inventory	8,415.00
	A/P—Tidy Wholesalers		8,415.00

5	Merchandise Inventory	45.00
	Cash		45.00

7	Merchandise Inventory	11,865.15
	A/P—Tidy Wholesalers		11,865.15

13	A/P—Tidy Wholesalers	20,280.15
	Cash		20,280.15

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Bargain Wholesalers sells pet supplies to retailers including Pet World Supplies. Bargain Wholesalers uses a perpetual inventory. Journalize the following transactions:

May 4, Bargain Wholesalers sells inventory to Pet World Supplies for $8,250.00 with terms 1/10, n/30. The cost of the merchandise is $5,755.00.

May 7, Bargain Wholesalers sells an additional $10,985 in inventory to Pet World Supplies with terms 1/10, n/30. The cost of the merchandise is $6,925.00.

May 13, Bargain Wholesalers receives a check from Pet World Supplies paying the balance due on both invoices.

Journal
Date	Description	Debit	Credit

ANSWER:

Journal
Date	Description	Debit	Credit
May 4	A/R—Pet World Supplies	8,167.50
	Sales		8,167.50

	Cost of Merchandise Sold	5,755.00
	Merchandise Inventory		5,755.00

7	A/R—Pet World Supplies	10,875.15
	Sales		10,875.15

	Cost of Merchandise Sold	6,925.00
	Merchandise Inventory		6,925.00

13	Cash	19,042.65
	A/R—Pet World Supplies		19,042.65

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

On March 3, Bluebird Sales makes $4,350 in cash sales of general merchandise that has a cost of $1,512. Bluebird uses a perpetual inventory system.

(a) Journalize the sale.

(b) Journal the cost of merchandise sold.

ANSWER: (a) Mar. 3 Cash 4,350

Sales 4,350

(b) Mar. 3 Cost of Merchandise Sold 1,512

Merchandise Inventory 1,512

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

On March 5, Blowout Sales makes $22,500 in sales on the company’s own credit cards. The cost of merchandise sold is $16,825. Journalize the sales and recognition of the cost of merchandise sold.

ANSWER: Mar. 5 Accounts Receivable 22,500

Sales 22,500

Cost of Merchandise Sold 16,825

Merchandise Inventory 16,825

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

On March 15, Monroe Sales sells $9,525.00 on account to Garrison Brewer with terms of 2/10, n/30. The cost of merchandise sold was $6,905.00.

(a) Journalize the sale and the recognition of the cost of the sale.
(b) On March 20, a $125.00 credit memo is given to Garrison Brewer due to merchandise that was the wrong color.

Journalize this event. The cost of the returned merchandise was $65.00.
(c) On March 25, Garrison Brewer submits payment in full. Journalize this event.

ANSWER: (a) Accounts Receivable—Garrison Brewer 9,334.50

Sales 9,334.50

Cost of Merchandise Sold 6,905.00

Merchandise Inventory 6,905.00

(b) Customer Refunds Payable 122.50

Accounts Receivable—Garrison Brewer 122.50

Merchandise Inventory 65.00

Estimated Returns Inventory 65.00

Accounts Receivable—Garrison Brewer 9,212.00

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Journalize the following transactions assuming a perpetual inventory system:

May 5 Purchased merchandise from Archie Co., $6,000, terms FOB shipping point, 2/10, n/30.

Prepaid freight costs of $100 were added to the invoice.

12 Issued a debit memo to Archie Co. for $2,500 of merchandise returned from purchase on May 5.

14 Paid Archie Co. for invoice of May 5, less debit memo of May 12.

Date	Description	Debit	Credit

ANSWER:

Date	Description	Debit	Credit
May 5	Merchandise Inventory	5,980
	Accounts Payable		5,980

12	Accounts Payable	2,450
	Merchandise Inventory		2,450

14	Accounts Payable	3,530
	Cash		3,530

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Record the following transactions for Sparky’s Pet Shop using the general journal form provided below. Assume Sparky’s uses a perpetual inventory system. Omit transaction descriptions from entries:

August 1 Purchased $6,000 of merchandise on account, terms 2/10, n/30.

3 Returned $1,500 of merchandise purchased on August 1 due to defects.

7 Recorded cash sales for the first week of August, $9,750; cost of the merchandise was $4,000.

10 Made sale on account to a local breeder for $500, terms 1/10 net 30; cost of the merchandise was $200.

11 Paid for the merchandise purchased on August 1, less return.

20 Received payment from sale of August 10.

Date	Description	Debit	Credit

ANSWER:

Date	Description	Debit	Credit
Aug. 1	Merchandise Inventory	5,880
	Accounts Payable		5,880

3	Accounts Payable	1,470
	Merchandise Inventory		1,470

7	Cash	9,750
	Sales		9,750

7	Cost of Merchandise Sold	4,000
	Merchandise Inventory		4,000

10	Accounts Receivable	495
	Sales		495

10	Cost of Merchandise Sold	200
	Merchandise Inventory		200

11	Accounts Payable	4,410
	Cash		4,410

20	Cash	495
	Accounts Receivable		495

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Journalize the following transactions for both Abbott Co. (seller) and Dalton Co. (buyer). Assume both of the companies use the perpetual inventory system.

July 3 Abbott Co. sold merchandise on account to Dalton Co., $7,500, terms FOB shipping point,

net/eom. The cost of the merchandise sold was $4,400.

5 Dalton Co. paid $275 freight charges on purchase from Abbott Co.

9 Abbott Co. issued Dalton Co. a credit memo for merchandise returned, $2,250.

The cost of the merchandise returned was $1,325.

11 Abbott Co. received payment from Dalton Co. for purchase of July 3.

Abbott Co.				Dalton Co.
Date	Description	Debit	Credit	Description	Debit	Credit

ANSWER:

Abbott Co.				Dalton Co.
Date	Description	Debit	Credit	Description	Debit	Credit
July 3	Accounts Receivable	7,500		Merch. Inventory	7,500
	Sales		7,500	Accounts Payable		7,500

3	Cost of Merch. Sold	4,400
	Merch. Inventory		4,400

5				Merch. Inventory	275
				Cash		275

9	Customer Refunds Payable	2,250		Accounts Payable	2,250
	Accounts Rec.		2,250	Merch. Inventory		2,250

9	Merchandise Inventory	1,325
	Est. Returns Inventory		1,325

11	Cash	5,250		Accounts Payable	5,250
	Accounts Rec.		5,250	Cash		5,250

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 – Cash vs. Accrual

ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Using the list of accounts below, construct a chart of accounts for a merchandising business that rents out a portion of its building, and assign account numbers and arranging the accounts in balance sheet and income statement order (“1” for assets, and so on). Each account number should have three digits. Contra accounts should be designated with a decimal of the account (100.1 for contra of account 100). Assets and liabilities should be in order of liquidity, expenses should be in alphabetical order.

Accounts Payable	Equipment	Sales
Accounts Receivable	Interest Expense	Supplies Expense
Accumulated Depr.—Equipment	Land	Unearned Revenue
Advertising Expense	Merchandise Inventory	Utilities Expense
Common Stock	Notes Payable
Cash	Retained Earnings
Cost of Merchandise Sold	Rent Revenue
Depreciation Expense—Equipment	Salaries Expense
Dividends	Salaries Payable

ANSWER:

Acct No.	Description	Acct. No.	Description
100	Cash	302	Dividends
103	Accounts Receivable	400	Sales
105	Merchandise Inventory	500	Cost of Merchandise Sold
		502	Advertising Expense
110	Land	504	Depreciation Expense—Equipment
120	Equipment	506	Salaries Expense
120.1	Accumulated Depr.—Equipment	508	Supplies Expense
200	Accounts Payable	510	Utilities Expense
202	Salaries Payable	600	Rent Revenue
204	Unearned Revenue	700	Interest Expense
207	Notes Payable
300	Common Stock
301	Retained Earnings

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 – Accounting Cycle

ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Journalize the following transactions for the Evans Company. Assume the company uses a perpetual inventory system.

(a) Sold merchandise for $645. The cost of merchandise sold was $375.

(b) Sold merchandise for $432 and accepted VISA as the form of payment.

The cost of merchandise sold was $195.

(d) Paid credit card fees for the month of $85.

Journal
Date	Description	Debit	Credit

ANSWER:

Journal
Date	Description	Debit	Credit
(a)	Cash	645
	Sales		645

	Cost of Merchandise Sold	375
	Merchandise Inventory		375

(b)	Cash	432
	Sales		432

	Cost of Merchandise Sold	195
	Merchandise Inventory		195

(c)	Accounts Receivable	670
	Sales		670

	Cost of Merchandise Sold	438
	Merchandise Inventory		438

(d)	Credit Card Expense	85
	Cash		85

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Abbey Co. sold merchandise to Gomez Co. on account, $35,000, terms 2/15, net 45. The cost of the merchandise sold is $24,500. Abbey Co. issued a credit memo for $3,600 for merchandise returned that originally cost $1,700. Gomez Co. paid the invoice within the discount period. What is the amount of gross profit earned by Abbey Co. on the above transactions?

ANSWER: Sales [$35,000 – ($35,000 × 2%)] – [$3,600 – ($3,600 × 2%)] – Cost of

merchandise sold ($24,500 – $1,700) = Gross profit $7,972

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Calculate the gross profit for Jonas Company based on the following data:

Sales $764,000

Selling expenses 52,500

Cost of merchandise sold 538,000

ANSWER: Sales, $764,000 – Cost of merchandise sold, $538,000 = Gross profit, $226,000

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Which of the following accounts would be included in the chart of accounts of a merchandising company using the (a) periodic inventory system, (b) perpetual inventory system, or (c) both systems?

(1) Purchases

(2) Merchandise Inventory

(3) Sales

(4) Purchases Discounts

(5) Cost of Merchandise Sold

(6) Freight-In

(7) Delivery Expense

ANSWER: (1) a, (2) c, (3) c, (4) a, (5) b, (6) a, (7) c

DIFFICULTY: Easy

Bloom’s: Understanding

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Using the letter preceding each account, arrange the following selected accounts in the order they would normally appear in a chart of accounts of a company that uses a multiple-step income statement.

(a) Accounts Payable

(b) Accounts Receivable

(d) Miscellaneous Selling Expense

(e) Interest Expense

(f) Income Summary

(g) Misc. Admin. Expense

(h) Delivery Expense

ANSWER: (b) (c) (a) (f) (h) (d) (g) (e)

DIFFICULTY: Moderate

Bloom’s: Understanding

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

ACCT.AICPA.FN.04 – Reporting

BUSPROG: Analytic

Journalize the following transactions assuming the perpetual inventory system:

July 3 Sold merchandise on account for $3,750 including terms. The cost of the merchandise sold was $2,000.

5 Issued credit memo for $1,050 for merchandise returned from sale on July 3.

The cost of the merchandise returned was $610.

12 Received check for the amount due for sale on July 3 less return on July 5.

17 Sold merchandise for $7,000 plus 6% sales tax to cash customers. The cost of the merchandise sold

was $3,830.

Journal
Date	Description	Debit	Credit

ANSWER:

Journal
Date	Description	Debit	Credit
July 3	Accounts Receivable	3,750
	Sales		3,750

3	Cost of Merchandise Sold	2,000
	Merchandise Inventory		2,000

5	Customer Refunds Payable	1,050
	Accounts Receivable		1,050

5	Merchandise Inventory	610
	Estimated Returns Inventory		610

12	Cash	2,700
	Accounts Receivable		2,700

17	Cash	7,420
	Sales		7,000
	Sales Tax Payable		420

17	Cost of Merchandise Sold	3,830
	Merchandise Inventory		3,830

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 – Cash vs. Accrual

ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Using the following data taken from Hsu’s Imports Inc. which uses a periodic inventory system, determine the gross profit to be reported on the income statement for the year ended March 31.

Merchandise inventory, April 1 $ 193,250

Merchandise inventory, March 31 180,100

Purchases 1,079,600

Purchases returns and allowances 51,200

Purchases discounts 18,500

Sales 1,860,000

Freight-in 19,250

ANSWER: Gross Profit = Sales – COMS* = $1,860,000 – $1,042,300** = $817,700

*Cost of merchandise sold

**Cost of merchandise sold:

Merchandise inventory, April 1 $ 193,250

Purchases $1,079,600

Less: Purchases returns and allowances $51,200

Purchases discounts 18,500 69,700

Net purchases $1,009,900

Add freight-in 19,250

Cost of merchandise purchased 1,029,150

Merchandise available for sale $1,222,400

Less merchandise inventory, March 31 180,100

Cost of merchandise sold $1,042,300

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Using the following data taken from Hsu’s Imports Inc. which uses a periodic inventory system, prepare the cost of merchandise sold section of the income statement for the year ended March 31.

Merchandise inventory, April 1 $ 193,250

Merchandise inventory, March 31 180,100

Purchases 1,079,600

Purchases returns and allowances 51,200

Purchases discounts 18,500

Sales 1,860,000

Freight-in 19,250

ANSWER: Cost of merchandise sold:

Merchandise inventory, April 1 $193,250

Purchases $1,079,600

Less: Purchases returns and allowances $51,200

Purchases discounts 18,500 69,700

Net purchases $1,009,900

Add freight-in 19,250

Cost of merchandise purchased 1,029,150

Merchandise available for sale $1,222,400

Less merchandise inventory, March 31 180,100

Cost of merchandise sold $1,042,300

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Using the following data taken from Payton Inc. which uses a periodic inventory system, prepare the cost of merchandise sold section of the income statement for the year ended May 31.

Merchandise inventory, June 1 $ 393,250

Merchandise inventory, May 31 380,100

Purchases 1,579,600

Purchases returns and allowances 81,200

Purchases discounts 16,500

Sales 2,060,000

Freight-in 59,250

ANSWER: Cost of merchandise sold:

Merchandise inventory, June 1 $393,250

Purchases $1,579,600

Less: Purchases returns and allowances $81,200

Purchases discounts 16,500 97,700

Net purchases $1,481,900

Add freight-in 59,250

Cost of merchandise purchased 1,541,150

Merchandise available for sale $1,934,400

Less merchandise inventory, May 31 380,100

Cost of merchandise sold $1,554,300

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Using the following data taken from Payton Inc., which uses a periodic inventory system, determine the gross profit to be reported on the income statement for the year ended May 31.

Merchandise inventory, June 1 $ 393,250

Merchandise inventory, May 31 380,100

Purchases 1,579,600

Purchases returns and allowances 81,200

Purchases discounts 16,500

Sales 2,060,000

Freight-in 59,250

ANSWER: Gross profit = Sales – COMS* = $2,060,000 – $1,554,300** = $505,700

*Cost of merchandise sold

**Cost of merchandise sold:

Merchandise inventory, June 1 $393,250

Purchases $1,579,600

Less: Purchases returns and allowances $81,200

Purchases discounts 16,500 97,700

Net purchases $1,481,900

Add freight-in 59,250

Cost of merchandise purchased 1,541,150

Merchandise available for sale $1,934,400

Less merchandise inventory, May 31 380,100

Cost of merchandise sold $1,554,300

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Prepare a single-step income statement from the following data for Burt Co., taken from the ledger after adjustments on December 31, the end of the fiscal year.

Accounts Payable $ 97,200

Accounts Receivable 64,300

Accumulated Depreciation—Office Equipment 72,750

Accumulated Depreciation—Store Equipment 162,100

Administrative Expenses 56,500

Common Stock 81,750

Cash 53,000

Cost of Merchandise Sold 121,700

Dividends 52,000

Interest Expense 12,000

Merchandise Inventory 93,250

Note Payable, Due in two years 154,000

Office Equipment 149,750

Prepaid Insurance 6,500

Rent Revenue 17,500

Salaries Payable 28,700

Sales 365,500

Selling Expenses 41,500

Store Equipment 325,000

Supplies 4,000

ANSWER: Burt Co.

Income Statement

For the Year Ended December 31

Revenues:

Sales $365,500

Rent revenue 17,500

Total revenues $383,000

Expenses:

Cost of merchandise sold $121,700

Selling expenses 41,500

Administrative expenses 56,500

Interest expense 12,000

Total expenses 231,700

Net income $151,300

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The following data were extracted from the accounting records of Dana Designs for the year ended March 31.

Merchandise inventory, April 1 $530,000

Merchandise inventory, March 31 375,000

Purchases 270,000

Purchase returns and allowances 25,000

Purchase discounts 10,000

Sales 770,000

Freight-in 3,000

Prepare the gross profit and cost of merchandise sold section of the income statement for the year ended March 31, using the periodic method.

ANSWER: Dana Designs

Income Statement

For the Year Ended March 31

Sales $770,000

Cost of merchandise sold:

Merchandise inventory, April 1 $530,000

Purchases $270,000

Less: Purchases returns and allowances (25,000)

Purchase discounts (10,000)

Net purchases $235,000

Add Freight-in 3,000

Cost of merchandise purchased 238,000

Merchandise available for sale $768,000

Less merchandise inventory, March 31 375,000

Cost of merchandise sold 393,000

Gross profit $377,000

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Prepare a multiple-step income statement for Armstrong Co. from the following data for the year ended December 31.

Sales, $755,000; cost of merchandise sold, $330,000; administrative expenses, $35,000; interest expense, $30,000; rent revenue, $25,000; selling expenses, $50,000.

ANSWER: Armstrong Co.

Income Statement

For the Year Ended December 31

Sales $755,000

Cost of merchandise sold 330,000

Gross profit $425,000

Operating expenses:

Selling expenses $50,000

Administrative expenses 35,000

Total operating expenses 85,000

Income from operations $340,000

Other income and expense:

Rent revenue $25,000

Interest expense 30,000 (5,000)

Net income $335,000

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Selected data from the ledger of Beck Co., after adjustments, on September 30, the end of the fiscal year, are listed as follows:

Accounts Receivable $ 39,120 Prepaid Insurance $ 4,680

Accumulated Depreciation 60,540 Note Payable 77,750

Administrative Expenses 90,000 Retained Earnings 25,000

Common Stock 65,000 Salaries Payable 3,060

Cost of Merchandise Sold 550,000 Sales 950,000

Dividends 65,000 Selling Expenses 102,000

Interest Revenue 10,000 Supplies 3,125

Office Equipment 82,700

Prepare a single-step income statement and a retained earnings statement.

ANSWER: Beck Co.

Income Statement

For the Year Ended September 30

Revenues:

Sales $950,000

Interest revenue 10,000

Total revenues $960,000

Expenses:

Cost of merchandise sold $550,000

Selling expenses 102,000

Administrative expenses 90,000

Total expenses 742,000

Net income $218,000

Beck Co.

Retained Earnings Statement

For the Year Ended September 30

Retained earnings, October 1 $ 25,000

Net income for the year $218,000

Less dividends 65,000

Increase in retained earnings 153,000

Retained earnings, September 30 $178,000

DIFFICULTY: Challenging

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The following data for the current year ended June 30 are from the accounting records of Zanadu Co.:

Administrative expenses $ 28,750

Cost of merchandise sold 181,440

Interest expense 3,600

Rent revenue 1,500

Sales 534,440

Selling expenses 65,000

Prepare a multiple-step income statement for the year ended June 30.

ANSWER: Zanadu Co.

Income Statement

For the Year Ended June 30

Sales $534,440

Cost of merchandise sold 181,440

Gross profit $353,000

Operating expenses:

Selling expenses 65,000

Administrative expenses 28,750

Total operating expenses 93,750

Income from operations $259,250

Other income and expense:

Rent revenue 1,500

Interest expense (3,600)

Net income $257,150

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-03 – LO: 05-03

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Madison Company’s perpetual inventory records indicate that $875,300 of merchandise should be on hand on October 31. The physical inventory indicates that $781,900 is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Madison Company for the year ended October 31.

ANSWER: Oct. 31 Cost of Merchandise Sold 93,400

Merchandise Inventory 93,400

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-04 – LO: 05-04

ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 – Adjusting Entries

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Selected accounts and amounts appear below. Journalize the closing entry, assuming a perpetual inventory system.

Merchandise Inventory $ 45,500

Cost of Merchandise Sold 652,500

ANSWER: Income Summary 652,500

Cost of Merchandise Sold 652,500

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-04 – LO: 05-04

ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 – Closing Entries

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

The records of Penny Co. indicated that $415,000 of merchandise should be on hand on December 31. The physical inventory indicates that $370,000 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for the year ended December 31.

Journal
Date	Description	Post. Ref.	Debit	Credit

ANSWER:

Journal
Date	Description	Post. Ref.	Debit	Credit
Dec. 31	Cost of Merchandise Sold		45,000
	Merchandise Inventory			45,000

DIFFICULTY: Easy

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-04 – LO: 05-04

ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 – Adjusting Entries

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Based upon the following data for a business with a periodic inventory system, determine the cost of merchandise sold for August.

Merchandise inventory, August 1 $ 75,560

Merchandise inventory, August 31 96,330

Purchases 373,880

Purchases returns & allowances 14,760

Purchases discounts 10,900

Freight-in 4,135

ANSWER: Cost of merchandise sold:

Merchandise inventory, August 1 $ 75,560

Purchases $373,880

Less: Purchases returns and allowances $14,760

Purchases discounts 10,900 25,660

Net purchases $348,220

Add freight-in 4,135

Cost of merchandise purchased 352,355

Merchandise available for sale $427,915

Less merchandise inventory, August 31 96,330

Cost of merchandise sold $331,585

DIFFICULTY: Moderate

Bloom’s: Applying

LEARNING OBJECTIVES: FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 – Financial Statements

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Match each of the following terms (a–h) with the correct definition below.

Credit terms
FOB destination
FOB shipping point
Periodic inventory system
Perpetual inventory system
Inventory shrinkage
Single-step income statement
Multiple-step income statement

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

FNMN.WARD.16.05-03 – LO: 05-03

FNMN.WARD.16.05-04 – LO: 05-04

FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 – Cash vs. Accrual

ACCT.ACBSP.APC.09 – Financial Statements

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Shipping terms where the ownership of merchandise passes to the buyer when the buyer receives the merchandise.

ANSWER: b

Losses of inventory due to theft, damage, spoilage, etc. that cause the actual inventory on hand to be less than that on record.

ANSWER: f

Statement where net income is determined by deducting all expenses from all revenues.

ANSWER: g

Payment arrangements determined by the seller as to when invoices are due and whether early payment discount is offered.

ANSWER: a

Inventory system that updates the merchandise inventory account for every purchase and sale transaction.

ANSWER: e

Inventory system that updates the merchandise inventory account only at the end of the accounting period based on a physical count of merchandise on hand.

ANSWER: d

Statement that includes subtotals for net sales, gross profit, and net operating income in determining net income.

ANSWER: h

Shipping terms where the ownership of merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier.

ANSWER: c

Match each of the following items (a–h) with the appropriate definition below.

Freight
Delivery Expense
Merchandise Inventory
Sales discount
Purchases Returns and Allowances
Debit memo
Purchases discount
Trade discount

DIFFICULTY: Easy

Bloom’s: Remembering

LEARNING OBJECTIVES: FNMN.WARD.16.05-02 – LO: 05-02

FNMN.WARD.16.05-APP – LO: 05-APP

ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 – Cash vs. Accrual

ACCT.ACBSP.APC.06 – Recording Transactions

ACCT.ACBSP.APC.07 – Adjusting Entries

ACCT.ACBSP.APC.17 – Inventories Reporting

ACCT.AICPA.FN.03 – Measurement

BUSPROG: Analytic

Discount taken by the buyer for early payment of invoice.

ANSWER: g

Account used to record merchandise on hand under a perpetual inventory system.

ANSWER: c

Early payment discount offered to customers by the seller.

ANSWER: d

Expense account for recording shipping costs paid by the seller.

ANSWER: b

Discount to government agencies or customers who purchase large quantities of merchandise.

ANSWER: h

Account where returned merchandise or price adjustments are recorded by the buyer under the periodic inventory system.

ANSWER: e

The cost associated with delivery of merchandise to the customer.

ANSWER: a

Informs the seller of the reasons for the return of merchandise or the request for a price allowance.

ANSWER: f

Financial & Managerial Accounting 13e Carl Warren James M Reeve Jonathan Duchac - Test Bank

Description

Additional Information

Reviews

Additional information

Add Review Cancel reply

Winningham’s Critical Thinking Cases in Nursing 6th Edition

Basic And Clinical Pharmacology 14th Edition by Katzung Trevor

NEW Pediatric Primary Care 4th Edition by Richardson

Community & Public Health Nursing Promoting the Public's Health 9th Edition by Cherie Rector

Current Medical Diagnosis and Treatment 2019 58th Edition

Psychiatric Nursing 8th Edition by Keltner

Quick Links

Contact Information

Financial & Managerial Accounting 13e Carl Warren James M Reeve Jonathan Duchac - Test Bank

Description

Additional Information

Reviews

Additional information

Add Review Cancel reply

Related Products

Winningham’s Critical Thinking Cases in Nursing 6th Edition

Basic And Clinical Pharmacology 14th Edition by Katzung Trevor

NEW Pediatric Primary Care 4th Edition by Richardson

Community & Public Health Nursing Promoting the Public's Health 9th Edition by Cherie Rector

Current Medical Diagnosis and Treatment 2019 58th Edition

Psychiatric Nursing 8th Edition by Keltner

Quick Links

Contact Information