Horngren's Accounting 11th Edition by Tracie L. Miller - Test Bank

Horngren’s Accounting 11th Edition by Tracie L. Miller – Test Bank

Instant Download – Complete Test Bank With Answers

Sample Questions Are Posted Below

Horngren’s Accounting,11e (Miller-Nobles)

Chapter 5 Merchandising Operations

Learning Objective 5-1

1) A wholesaler is a merchandiser who buys merchandise from a manufacturer and sells the same to a retailer.

Answer: TRUE

Diff: 1

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : What Are Merchandising Operations? (H1)

2) A retailer purchases goods from a manufacturer and sells them to customers.

Answer: TRUE

Diff: 1

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : What Are Merchandising Operations? (H1)

3) The term “inventory,” for a merchandiser, refers to ________.

A) raw materials that are used for production
B) equipment that are used in production process
C) the cost of goods sold
D) goods held for sale to customers

Answer: D

Diff: 1

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : What Are Merchandising Operations? (H1)

4) An entity that buys goods and sells them to customers at a markup is a ________.

A) merchandiser
B) service provider
C) manufacturer
D) producer

Answer: A

Diff: 1

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : What Are Merchandising Operations? (H1)

5) On the income statement, a merchandising company reports the cost of merchandise inventory that has been sold to customers.

Answer: TRUE

Diff: 1

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : The Operating Cycle of a Merchandising Business

6) On the income statement, a service company reports the cost of merchandise inventory that has been sold to customers.

Answer: FALSE

Diff: 1

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : The Operating Cycle of a Merchandising Business

7) The operating cycle of a merchandiser begins when the company purchases inventory from a vendor and ends when the company then sells the inventory to a customer.

Answer: FALSE

Diff: 1

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : The Operating Cycle of a Merchandising Business

8) The operating cycle of a merchandiser begins when the company purchases inventory from a vendor and ends when the company collects cash from customers.

Answer: TRUE

Diff: 1

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : The Operating Cycle of a Merchandising Business

9) Gross profit is the extra amount the company receives from the customer for merchandise sold over what the company paid to the vendor.

Answer: TRUE

Diff: 1

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : The Operating Cycle of a Merchandising Business

10) Which of the following line items will appear on the income statement of a merchandiser but not of a service company?

A) Salaries Expense
B) Depreciation Expense
C) Cost of Goods Sold
D) Supplies Inventory

Answer: C

Diff: 1

LO: 5-1

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : The Operating Cycle of a Merchandising Business

11) Gross profit is calculated as the difference between net sales revenue and ________.

A) purchases
B) cost of goods sold
C) cost of merchandise inventory
D) selling and administrative expenses

Answer: B

Diff: 1

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : The Operating Cycle of a Merchandising Business

12) Best Value Company started its operations on January 1, 2017. It engages in buying and selling different types of electronic gadgets. The first step in its operating cycle would be to ________.

A) collect cash from customers
B) sell goods to customers
C) purchase inventory from vendors
D) record the sales in accounts

Answer: C

Diff: 2

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : The Operating Cycle of a Merchandising Business

13) The main expense of a merchandiser is usually ________.

A) cost of goods sold
B) current assets
C) selling and administrative expenses
D) production overhead

Answer: A

Diff: 1

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : The Operating Cycle of a Merchandising Business

14) ________ are the expenses that occur in an entity’s major line of business.

A) Interest expense
B) Interest revenue
C) Operating expenses
D) Loss on sale of plant asset

Answer: C

Diff: 1

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : The Operating Cycle of a Merchandising Business

15) List the three steps, in order of occurrence, of the operating cycle of a merchandising business.

Answer:

The operating cycle begins when the company purchases inventory from an individual or business, called a vendor.
The company then sells the inventory to a customer.
Finally, the company collects cash from the customers.

Diff: 2

LO: 5-1

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : The Operating Cycle of a Merchandising Business

16) G-mart, a small-scale grocer, wants to introduce an inventory system to track its inventory. G-mart does not currently use optical scanning registers and computer systems. The perpetual inventory system is most suitable for its operations.

Answer: FALSE

Diff: 1

LO: 5-1

AACSB: Information technology

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Merchandise Inventory Systems: Perpetual and Periodic Inventory Systems

17) When a company uses a perpetual inventory system, all merchandise transactions are updated as and when they occur. However, the inventory account may not show the current balance at all times.

Answer: TRUE

Diff: 2

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Merchandise Inventory Systems: Perpetual and Periodic Inventory Systems

18) Even in a perpetual inventory system that updates the inventory account as and when transactions occur, the business must count its inventory at least once in a year.

Answer: TRUE

Diff: 2

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Merchandise Inventory Systems: Perpetual and Periodic Inventory Systems

19) In a periodic inventory system, the Cost of Goods Sold account is continuously updated as and when sales occur.

Answer: FALSE

Diff: 2

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Merchandise Inventory Systems: Perpetual and Periodic Inventory Systems

20) The perpetual inventory system keeps a running record of inventory and cost of goods sold.

Answer: TRUE

Diff: 1

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Merchandise Inventory Systems: Perpetual and Periodic Inventory Systems

21) Merchandise inventory accounting systems can be broadly categorized into two types. They are ________.

A) FIFO and LIFO
B) perpetual and periodic
C) wholesale and retail
D) manufacturer and producer

Answer: B

Diff: 1

LO: 5-1

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Merchandise Inventory Systems: Perpetual and Periodic Inventory Systems

22) Which of the following is not recorded in a modern perpetual inventory system?

A) units purchased and cost amount
B) units sold and sales and cost amounts
C) customer account numbers and balances owed from the sale of merchandise inventory
D) the quantity of merchandise inventory on hand and its cost

Answer: C

Diff: 2

LO: 5-1

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Merchandise Inventory Systems: Perpetual and Periodic Inventory Systems

23) Which of the following statements is not correct?

A) In a perpetual inventory system, the “cash register” at the store is a computer terminal that records sales and updates inventory records.
B) Even in a perpetual inventory system, a business must count inventory at least one a year.
C) Restaurants and small retail stores often use the periodic inventory system.
D) In a periodic inventory system, merchandise inventory and purchasing systems are integrated with the records for Accounts Receivable and Sales Revenue.

Answer: D

Diff: 2

LO: 5-1

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Merchandise Inventory Systems: Perpetual and Periodic Inventory Systems

Learning Objective 5-2

1) An invoice is a request by the seller for payment from the purchaser.

Answer: TRUE

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : How Are Purchases of Merchandise Inventory Recorded in a Perpetual Inventory System? (H1)

2) An invoice is also known as a bill.

Answer: TRUE

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : How Are Purchases of Merchandise Inventory Recorded in a Perpetual Inventory System? (H1)

3) The Merchandise Inventory account is an expense account that is used only for goods purchased that the business owns and intends to resell to customers.

Answer: FALSE

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase of Merchandise Inventory

4) The Merchandise Inventory account is an asset account that is used only for goods purchased that the business owns and intends to resell to customers.

Answer: TRUE

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase of Merchandise Inventory

5) The Merchandise Inventory account is an expense account that is used for goods purchased that the business owns and intends to resell to customers, as well as for purchase of office supplies and equipment.

Answer: FALSE

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase of Merchandise Inventory

6) Which of the following entries would be made to record the purchase of inventory on account, if a company uses the perpetual inventory system?

A) a debit to Purchases and a credit to Accounts Payable
B) a debit to Accounts Payable and a credit to Purchases
C) a debit to Merchandise Inventory and a credit to Accounts Payable
D) a debit to Accounts Payable and a credit to Merchandise Inventory

Answer: C

Diff: 1

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchase of Merchandise Inventory

7) A company using the perpetual inventory system purchased merchandise on account for $5,000. Give the journal entry to record this transaction.

Answer:

Merchandise Inventory	5,000
Accounts Payable		5,000

Diff: 1

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchase of Merchandise Inventory

8) A purchase discount is the amount offered to the purchaser for delaying the payment to the seller.

Answer: FALSE

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Discounts

9) Credit terms of a merchandising company are 1/15, net 40. This means that the buyer can receive a discount of 1% if the invoice is paid within 40 days of the invoice date.

Answer: FALSE

Diff: 2

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Discounts

10) Nurix Company sold goods on credit terms n/20 to Jelly Harper Company. This means no discounts are offered, and the amount of the invoice is due 20 days after the invoice date.

Answer: TRUE

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Discounts

11) The purchase discount amount is calculated on the amount of the invoice minus the returns and allowances.

Answer: TRUE

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Discounts

12) Purchase discounts are calculated on the amount of the merchandise purchased including freight costs.

Answer: FALSE

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Discounts

13) Under the perpetual inventory system, when a purchaser makes payment within the discount period, the amount of discount will be credited to the Merchandise Inventory account.

Answer: TRUE

Diff: 2

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Discounts

14) Credit terms of 2/10, n/30 indicate that a discount of 2% will be given if payment is made within 10 days of the invoice date. Otherwise, the total invoice amount is due within 30 days of the invoice date.

Answer: TRUE

Diff: 1

LO: 5-2

AACSB: Analytical thinking

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Discounts

15) What does “2/10” mean, with respect to “credit terms of 2/10, n/30”?

A) A discount of 2 percent will be allowed if the invoice is paid within 10 days of the invoice date.
B) Interest of 2 percent will be charged if the invoice is paid after 10 days from the date on the invoice.
C) A discount of 10 percent will be allowed if the invoice is paid within two days of the invoice date.
D) Interest of 10 percent will be charged if invoice is paid after two days.

Answer: A

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Discounts

16) A company that uses the perpetual inventory system purchases inventory for $61,000 on account, with terms of 3/10, n/30. Which of the following is the journal entry to record the payment made within 10 days?

A) a debit to Accounts Payable for $61,000, a credit to Cash for $59,170, and a debit to Merchandise Inventory for $1,830
B) a debit to Accounts Payable for $61,000, a credit to Merchandise Inventory for $1,830, and a credit to Cash for $59,170
C) a debit to Merchandise Inventory for $1,830, a debit to Accounts Payable for $61,000, and a credit to Cash for $62,830
D) a debit to Accounts Payable for $59,170, a debit to Merchandise Inventory for $1,830, and a credit to Cash for $61,000

Answer: B

Diff: 2

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchase Discounts

17) A company that uses the perpetual inventory system purchased inventory for $910,000 on account with terms of 4/7, n/20. Which of the following correctly records the payment made 15 days after the date of invoice?

Cash	910,000
Accounts Payable		910,000

Accounts Payable	910,000
Merchandise Inventory		910,000

Accounts Payable	910,000
Cash		910,000

Accounts Payable	910,000
Merchandise Inventory		36,400
Cash		873,600

Answer: C

Diff: 2

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchase Discounts

18) A company using the perpetual inventory system purchased inventory worth $21,000 on account with terms of 3/10, n/30. Defective inventory of $1,000 was returned two days later, and the accounts were appropriately adjusted. If the invoice is paid within 10 days, the amount of the purchase discount that would be available to the company is ________.

A) $600
B) $660
C) $630
D) $620

Answer: A

Diff: 3

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchase Discounts

19) A company using the perpetual inventory system purchased inventory worth $540,000 on account with credit terms of 2/15, n/45. Defective inventory of $40,000 was returned 2 days later, and the accounts were appropriately adjusted. If the company paid the invoice 20 days later, the journal entry to record the payment would be ________.

A) $540,000 debit to Accounts Payable and $540,000 credit to Cash
B) $500,000 debit to Accounts Payable and $500,000 credit to Cash
C) $540,000 debit to Accounts Payable, $530,000 credit to Cash, and $10,000 credit to Merchandise Inventory
D) $530,000 debit to Accounts Payable, $10,000 credit to Merchandise Inventory, and $500,000 credit to Cash

Answer: B

Diff: 3

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchase Discounts

20) The terms of an invoice are 3/10, n/25. This means that a ________.

A) discount of 10 percent is allowed if the invoice is paid within three days
B) discount of 3 percent is allowed if the invoice is paid within 10 days
C) discount of 25 percent is allowed if the invoice is paid within 10 days
D) discount of 3 percent is allowed if the invoice is paid after 25 days

Answer: B

Diff: 1

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchase Discounts

21) An invoice of $800 for merchandise purchased is showing 2/15, n/30 as terms of credit. If the invoice is paid on or before the fifteenth day, the amount to be paid is ________.

A) $784
B) $800
C) $816
D) $819

Answer: A

Explanation: A)

Purchases $800

Discount (16)

Net amount due $784

Diff: 1

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchase Discounts

22) An invoice, with payment terms of 6/10, n/30, was issued on April 28 for $230.00. If the payment was made on May 12, the amount of payment will be ________. (Round your answer to the nearest cent.)

A) $230.00
B) $207.00
C) $216.20
D) $224.00

Answer: A

Diff: 1

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchase Discounts

23) Under the perpetual inventory system, discounts taken on an invoice by the buyer would be ________.

A) debited to Merchandise Inventory
B) credited to Merchandise Inventory
C) debited to Cost of Goods Sold
D) credited to Cost of Goods Sold

Answer: B

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Discounts

24) A company purchased inventory for $2,200 on account, and recorded the following journal entry:

Merchandise Inventory	2,200
Accounts payable		2,200

The vendor’s invoice showed terms of 3/10, n/30. Give the journal entry for the payment of the invoice 17 days after the invoice date.

Answer:

Accounts Payable	2,200
Cash		2,200

Diff: 1

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchase Discounts

25) A company purchased inventory for $100,000 on account and recorded it as follows:

Merchandise Inventory	100,000
Accounts Payable		100,000

The vendor’s invoice showed terms of 3/10, net 30. Give the journal entry for the payment of the invoice seven days after the invoice date, assuming that the vendor uses the perpetual inventory system.

Answer:

Accounts Payable	100,000
Merchandise Inventory		3,000
Cash		97,000

Diff: 2

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchase Discounts

26) Defective, damaged, or otherwise unsuitable merchandise that is returned to the seller is referred to as purchase allowances by the purchaser.

Answer: FALSE

Diff: 2

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Returns and Allowances

27) If purchase allowances are granted, the buyer need not return the goods to the seller.

Answer: TRUE

Diff: 2

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Returns and Allowances

28) Freight in is recorded in the Merchandise Inventory account if the purchaser uses the perpetual inventory system.

Answer: TRUE

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Returns and Allowances

29) Under the perpetual inventory system, purchase returns or allowances are debited to the Merchandise Inventory account by the purchaser.

Answer: FALSE

Diff: 2

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Returns and Allowances

30) On January 21, 2016, Bessant Company received merchandise from Mullies Company. On that date, it found a few of these goods to be damaged. On January 22, it returned the damaged goods to the seller. Such returns will be treated as ________ by Bessant.

A) purchase returns
B) sales returns
C) purchase allowances
D) sales allowances

Answer: A

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Returns and Allowances

31) Under the perpetual inventory system, when a wholesaler returns the goods purchased on account, the ________ account is credited.

A) Accounts Receivable
B) Merchandise Inventory
C) Cost of Goods Sold
D) Accounts Payable

Answer: B

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchase Returns and Allowances

32) A company that uses a perpetual inventory system purchased inventory on account and later returned goods worth $700 to the vendor. Which of the following would be the correct journal entry to record these returns?

Purchase Returns	700
Accounts Payable		700

Accounts Payable	700
Purchase Returns		700

Merchandise Inventory	700
Accounts Payable		700

Accounts Payable	700
Merchandise Inventory		700

Answer: D

Diff: 2

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchase Returns and Allowances

33) Oscar Packers received an allowance from the vendor for an amount of $400. Give the journal entry for this transaction. The company uses a perpetual inventory system.

Answer:

Accounts Payable	400
Merchandise Inventory		400

Diff: 2

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchase Returns and Allowances

34) If goods are sold on terms FOB shipping point, the ________.

A) seller normally pays the transportation costs
B) buyer normally pays the transportation costs
C) buyer and the seller split the transportation costs
D) shipping company bears the transportation cost

Answer: B

Diff: 1

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Transportation Costs

35) A company purchased inventory for $2,000 from a vendor on account, FOB shipping point, with terms of 2/10, n/30. The company paid $100 cash for freight in. Prepare the journal entry to record payment of the invoice within 10 days by the purchaser. (Assume a perpetual inventory system.)

Answer:

Accounts Payable	2,000
Merchandise Inventory		40
Cash		1,960

Diff: 1

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Transportation Costs

36) Complete the following table to show how FOB terms apply to merchandise inventory purchased by a merchandiser.

FOB Term	When does the title to the goods transfer to the buyer?	Who pays the freight?
Shipping Point
Destination

Answer:

FOB Term	When does the title to the goods transfer to the buyer?	Who pays the freight?
Shipping Point	When the goods leave the seller’s place of business (shipping point)	Buyer
Destination	At the delivery destination point	Seller

Diff: 2

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Transportation Costs

37) Under the terms FOB destination, title to the merchandise will pass to the purchaser when the goods are received by the purchaser.

Answer: TRUE

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Transportation Costs

38) Freight out is an addition to the Merchandise Inventory account if the seller uses the perpetual inventory system.

Answer: FALSE

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Transportation Costs

39) The term “freight out” refers to ________.

A) transportation costs on purchases
B) cost of inventory purchased
C) costs that are not actually paid in cash
D) transportation costs on sales

Answer: D

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Transportation Costs

40) VB Specialty Foods, a grocery merchandiser, purchased goods and paid transportation to bring them to the company warehouse. The transportation cost is known as ________.

A) freight out
B) selling expense
C) freight in
D) cost of goods sold

Answer: C

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Transportation Costs

41) Which of the following is true of freight in?

A) It is an administrative expense.
B) It is a selling expense.
C) It is the transportation cost on purchases.
D) It is the transportation cost on sales.

Answer: C

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Transportation Costs

42) Under which of the following terms will the buyer be required to pay transportation costs?

A) FOB destination
B) FOB shipping point
C) freight out
D) freight in

Answer: B

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Transportation Costs

43) FOB destination refers to a situation where title to goods while in transit belongs to the ________.

A) buyer
B) seller
C) transport agency
D) insurance agency

Answer: B

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Transportation Costs

44) A company purchased inventory for $3,000 from a vendor on account, FOB shipping point, with terms of 2/10, n/30. The company paid $100 cash for freight in. The entry to record payment of invoice within 2 days by the purchaser would include ________. (Assume a perpetual inventory system.)

A) a debit to Accounts Payable for $2,940 and a credit to Cash for $2,940
B) a debit to Accounts Payable for $3,000, a debit to Merchandise Inventory for $100, and a credit to Cash for $2,900
C) a debit to Accounts Payable for $3,000, a credit to Merchandise Inventory for $60, and a credit to Cash for $2,940
D) a debit to Accounts Payable for $2,940, a debit to Merchandise Inventory for $60, and a credit to Cash for $3,000

Answer: C

Diff: 3

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Transportation Costs

45) A company purchased inventory for $74,000 from a vendor on account, FOB shipping point, with terms of 3/10, n/30. The company paid the shipper $1,500 cash for freight in. The company paid the vendor nine days after the sale. If there was no beginning inventory, the cost of inventory would be ________. (Assume a perpetual inventory system.)

A) $73,280
B) $75,500
C) $70,280
D) $72,500

Answer: A

Explanation: A) Cost of Purchases $74,000

Less: Discount ($75,000 × 3%) 2,220

Net Purchases 71,780

Add: Freight-in 1,500

Cost of Inventory $73,280

Diff: 3

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Transportation Costs

46) A company purchased inventory for $3,000 from a vendor on account, FOB shipping point, with terms of 2/10, n/30. The company paid the shipper $100 cash for freight in. The company then returned damaged goods worth $200. The invoice was then paid eight days after the purchase. Assuming that there was no beginning inventory balance, the cost of inventory would be ________. (Assume a perpetual inventory system.)

A) $2,744
B) $2,844
C) $2,900
D) $2,940

Answer: B

Explanation: B)

Cost of Purchase $3,000

Less: Purchase Returns 200

Less: Purchase Discount 56

Plus: Freight In 100

Net Cost of Inventory Purchased $2,844

Diff: 3

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Transportation Costs

47) A company has purchased inventory and received an invoice that requires the buyer to pay the transportation costs for delivering the merchandise. The terms are ________.

A) FOB destination
B) FOB shipping point
C) FOB, 2/10, n/30
D) FOB in transit

Answer: B

Diff: 1

LO: 5-2

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Transportation Costs

48) A merchandiser, following the perpetual inventory system, has the following transactions during August, 2017:

Date Transaction Amount

Aug. 5 Purchased inventory on account $300,000

Aug. 9 Paid for transportation of goods purchased 25,000

Aug. 10 Returned defective merchandise to the seller 20,000

Aug. 15 Paid for goods purchased on August 5 ?

Credit terms of invoice are 2/15, n/45. Give journal entries for the above transactions.

Answer:

Date Accounts and Explanation Debit Credit

Aug. 5 Merchandise Inventory 300,000

Accounts Payable 300,000

Aug. 9 Merchandise Inventory 25,000

Cash 25,000

Aug. 10 Accounts Payable 20,000

Merchandise Inventory 20,000

Aug. 15 Accounts Payable 280,000

Cash 274,400

Merchandise Inventory 5,600

Diff: 2

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Transportation Costs

49) Reid Art Supply Company uses a perpetual inventory system. The company had the following transactions during August 2017:

Aug. 5: Purchased $2,900 of merchandise on account. Freight and credit terms were FOB shipping point, 3/15, n/60.

Aug. 9: Paid transportation costs of $440 for the Aug. 5 purchase.

Aug. 10: Returned $600 of defective merchandise that had been purchased on Aug. 5.

Aug. 15: Paid for the merchandise purchased on Aug. 5.

Give journal entries for August 10 and 15.

Answer: Journal entry on Aug. 10

Accounts Payable	600
Merchandise Inventory		600

Journal entry on Aug. 15

Accounts Payable	2,300
Merchandise Inventory		69
Cash		2,231

Diff: 2

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Transportation Costs

50) Portian Merchandisers has purchased merchandise on account and paid $450 for freight in. Give the journal entry for freight paid. (Assume a perpetual inventory system.)

Answer:

Merchandise Inventory	450
Cash		450

Diff: 1

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Transportation Costs

51) WAXS-D, merchandisers of musical instruments, has provided the following details:

Mar. 5	Inventory purchased on account	$725,000
Mar. 8	Freight in	35,000
Mar. 13	Purchase returns	55,000
Mar. 14	Allowances by vendor	12,000
Mar. 20	Payment made to vendor for purchases on March 5	?

Credit terms are: 4/20, n/45, FOB shipping point. Calculate the net cost of inventory purchased assuming that there are no other inventory-related transactions during the month.

A) $713,000
B) $665,280
C) $658,000
D) $666,680

Answer: D

Explanation: D)

Net Cost of Inventory Purchased

Purchases $725,000

Less: Purchase Returns and Allowances 67,000

Less: Purchase Discounts 26,320

Plus: Freight In 35,000

Net Cost of Inventory Purchased $666,680

Diff: 1

LO: 5-2

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Cost of Inventory Purchased

Learning Objective 5-3

1) An amount that a merchandiser earns by selling its inventory is known as sales revenue or sales.

Answer: TRUE

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Sale of Merchandise Inventory

2) Under the perpetual inventory system, two journal entries are used to record the sales of merchandise. One entry records the Sales Revenue and another entry records the Cost of Goods Sold.

Answer: TRUE

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Sale of Merchandise Inventory

3) A company sold merchandise with a cost of $238 for $440 on account. The seller uses the perpetual inventory system. The entry to record the cost of merchandise sold would include ________.

A) a debit to Sales Revenue and a credit to Cash for $440
B) a debit to Cash and a credit to Sales Revenue for $440
C) a debit to Cost of Goods Sold and a credit to Merchandise Inventory for $238
D) a debit to Merchandise Inventory for $238 and a credit to Cost of Goods Sold for $238

Answer: C

Diff: 1

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sale of Merchandise Inventory

4) Owens Jewelers uses the perpetual inventory system. On April 2, Owens sold merchandise with a cost of $5,500 for $7,000 to a customer on account with terms of 1/15, n/30. Which of the following journal entries correctly records the sales revenue?

Sales Revenue	7,000
Accounts Receivable		7,000

Sales Revenue	7,000
Cost of Goods Sold		7,000

Accounts Receivable	5,500
Sales Revenue		5,500

Accounts Receivable	7,000
Sales Revenue		7,000

Answer: D

Diff: 1

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sale of Merchandise Inventory

5) Landon Jewelers uses the perpetual inventory system. On April 2, Landon sold merchandise with a cost of $3,500 for $8,000 to a customer on account with terms of 1/15, n/30. The journal entry to record the cost of goods sold would be:

Cost of Goods Sold	3,500
Accounts Receivable		3,500

Sales Revenue	3,500
Cost of Goods Sold		3,500

Cost of Goods Sold	3,500
Merchandise Inventory		3,500

Merchandise Inventory	3,500
Cost of Goods Sold		3,500

Answer: C

Explanation: A)

Cost of Goods Sold	3,500
Accounts Receivable		3,500

Diff: 1

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sale of Merchandise Inventory

6) Under the perpetual inventory system, the journal entry to record cost of goods sold:

Cost of Goods Sold	XX
Sales		XX

Merchandise Inventory	XX
Sales		XX

Cost of Goods Sold	XX
Merchandise Inventory		XX

Sales	XX
Merchandise Inventory		XX

Answer: C

Diff: 1

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sale of Merchandise Inventory

7) On November 1, 2016, Everett Janitorial Supply sold merchandise with a cost of $3,200 for $5,000, FOB destination, and payment terms of 2/10, n/30. The company uses a perpetual inventory system. Give journal entries to record the sales revenue.

Answer:

Accounts Receivable	5,000
Sales Revenue		5,000

Cost of Goods Sold	3,200
Merchandise Inventory		3,200

Diff: 1

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sale of Merchandise Inventory

8) Journalize the following transactions for a merchandiser that uses the perpetual inventory system.

On January 8, inventory was sold for $6,000 on account. Credit terms were 3/15, n/30 (cost $4,500). On January 17, cash was received in full settlement of the January 8 sale.

Answer:

Jan. 8	Accounts Receivable	6,000
	Sales		6,000

	Cost of Goods Sold	4,500
	Merchandise Inventory		4,500

Jan. 17	Cash	5,820
	Sales Discounts ($6,000 × .03)	180
	Accounts Receivable		6,000

Diff: 2

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sale of Merchandise Inventory

9) Journalize the following transaction for a merchandiser that uses the perpetual inventory system.

Sold goods for cash, $1,200 (cost $750).

Answer:

Cash	1,200
Sales		1,200

Cost of Goods Sold	750
Merchandise Inventory		750

Diff: 1

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sale of Merchandise Inventory

10) Office Supplies Express uses a perpetual inventory system. Journalize the following sales transactions for this company. Explanations are not required.

July 3	Sold $15,400 of merchandise on account, credit terms are 2/10, n/30. Cost of goods is $9,300.
July 7	Received a $750 sales return from the customer. Cost of the goods is $435.
July 12	Office Supplies receives payment for the customer for the amount due from the July 3 sale.

Answer:

Date	Accounts and Explanation	Debit	Credit
Jul. 3	Accounts Receivable	15,400
	Sales Revenue		15,400

	Cost of Goods Sold	9,300
	Merchandise Inventory		9,300

Jul. 7	Sales Returns and Allowances	750
	Accounts Receivable		750

	Merchandise Inventory	435
	Cost of Goods Sold		435

Jul. 12	Cash ($14,650 – $293)	14,357
	Sales Discounts ($14,650 × 0.02)	293
	Accounts Receivable ($15,400 − $750)		14,650

Diff: 2

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sale of Merchandise Inventory

11) Rally Auto Supplies uses a perpetual inventory system. Journalize the following sales transactions for this company. Explanations are not required.

June 10	Sold $14,800 of merchandise on account, credit terms are 3/15, n/30. Cost of goods is $6,200.
June 14	Received a $900 sales return from the customer. Cost of the goods is $400.
June 23	Rally Auto Supplies receives payment for the customer for the amount due from the June 10 sale.

Answer:

Date	Accounts and Explanation	Debit	Credit
Jun. 10	Accounts Receivable	14,800
	Sales Revenue		14,800

	Cost of Goods Sold	6,200
	Merchandise Inventory		6,200

Jun. 14	Sales Returns and Allowances	900
	Accounts Receivable		900

	Merchandise Inventory	400
	Cost of Goods Sold		400

Jun. 23	Cash ($13,900 − $417)	13,483
	Sales Discounts ($13,900 × 0.03)	417
	Accounts Receivable ($15,400 − $750)		13,900

Diff: 2

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sale of Merchandise Inventory

12) A reduction in the amount of cash received from a customer for early payment is known as a sales discount.

Answer: TRUE

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Sales Discounts

13) A company sold merchandise for $24,000 on account with terms of 5/15, n/30. The company uses a perpetual inventory system. After two days, it received defective merchandise worth $4,000. The journal entry to record the cash receipt for the sale if the payment is received within 10 days of the invoice date would include ________.

A) a debit to Cash for $20,000, a credit to Merchandise Inventory for $1,000, and a credit to Sales Revenue for $19,000
B) a debit to Cash for $19,000, a debit to Sales Discount for $1,000, and a credit to Accounts Receivable for $20,000
C) a debit to Cash for $20,000, a debit to Merchandise Inventory for $4,000, and a credit to Accounts Receivable for $24,000
D) a debit to Sales Revenue for $24,000, a credit to Accounts Receivable for $20,000, and a credit to Sales Discounts for $4,000

Answer: B

Diff: 2

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sales Discounts

14) A company sold merchandise for $4,000 on account with terms of 4/15, n/30. The company uses a perpetual inventory system. Defective merchandise of $200 was returned two days later. If the payment was received after 30 days, the journal entry to record the cash receipt will include ________.

A) a debit to Cash for $3,840 and a credit to Accounts Receivable for $3,840
B) a debit to Cash for $3,800 and a credit to Accounts Receivable for $3,800
C) a credit to Sales Revenue for $3,800 and a debit to Cash for $3,800
D) a credit to Cost of Goods Sold for $4,000 and a debit to Sales Revenue for $4,000

Answer: B

Diff: 1

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sales Discounts

15) The Sales Discounts account is a contra account to the ________ account.

A) Purchases
B) Sales Revenue
C) Merchandise Inventory
D) Sales Returns and Allowances

Answer: B

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Sales Discounts

16) When a customer returns goods to the seller, the seller debits the Purchase Returns account.

Answer: FALSE

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Sales Returns and Allowances

17) When a merchandiser records sales returns, Accounts Receivable is credited. (Assume the seller uses the perpetual inventory system.)

Answer: TRUE

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Sales Returns and Allowances

18) A sales allowance is recorded with a credit to Accounts Payable.

Answer: FALSE

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Sales Returns and Allowances

19) When a seller grants a sales allowance, the customer does not return any goods to the seller.

Answer: TRUE

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Sales Returns and Allowances

20) Under the perpetual inventory system, what is the difference between a sales return and a sales allowance?

A) A sales return reduces the amount receivable from the customer, but a sales allowance does not.
B) A sales return involves an adjustment to Merchandise Inventory, but a sales allowance does not.
C) A sales return requires a debit to Sales Returns and Allowances, but a sales allowance does not.
D) A sales return is not deducted from sales revenue to calculate net sales, but a sales allowance is deducted from sales revenue.

Answer: B

Diff: 2

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sales Returns and Allowances

21) The normal balances of Sales, Sales Discounts, and Sales Returns and Allowances are ________.

A) debit, credit, and credit, respectively
B) debit, debit, and credit, respectively
C) credit, debit, and debit, respectively
D) credit, credit, and debit, respectively

Answer: C

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Sales Returns and Allowances

22) Under a perpetual inventory system, merchandise returned by a customer to the seller is recorded as a ________ in the books of seller.

A) sales return
B) sales allowance
C) sales discount
D) purchase return

Answer: A

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Sales Returns and Allowances

23) A merchandiser sold merchandise inventory on account. The journal entry to record sales allowances in the books of the merchandiser, using the perpetual inventory system would be:

Sales Returns and Allowances	XX
Accounts Receivable		XX

Merchandise Inventory	XX
Sales Revenue		XX

Cost of Goods Sold	XX
Sales Returns and Allowances		XX

Sales Returns and Allowances	XX
Cash		XX

Answer: A

Diff: 1

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sales Returns and Allowances

24) Under the perpetual inventory system, the journal entries to record sales returns (the original sale was on account) would be:

Accounts Payable	XX
Merchandise Inventory		XX

Merchandise Inventory	XX
Cost of Goods Sold		XX

Cost of Goods Sold	XX
Merchandise Inventory		XX

Merchandise Inventory	XX
Accounts Payable		XX

Accounts Receivable	XX
Sales		XX

Sales	XX
Cost of Goods Sold		XX

Sales Returns and Allowances	XX
Accounts Receivable		XX

Merchandise Inventory	XX
Cost of Goods Sold		XX

Answer: D

Diff: 1

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sales Returns and Allowances

25) Fashion Jewelers uses the perpetual inventory system. On April 2, Fashion sold goods with a cost of $5,500 for $14,000 with terms of 4/15, n/30. On April 4, the customer reported damaged goods and Fashion granted a $2,000 sales allowance. On April 10, Fashion received the payment for the sale. Give the journal entry that will be recorded on April 10 by Fashion.

Cash	11,520
Sales Discount	480
Accounts Receivable		12,000

Cash	12,000
Accounts Receivable		12,000

Accounts Receivable	12,000
Sales		12,000

Cash	12,000
Sales Discount		480
Accounts Receivable		11,520

Answer: A

Diff: 2

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sales Returns and Allowances

26) Journalize the following transaction for a merchandiser that uses the perpetual inventory system.

Received returned goods from a customer, $1,000 (cost, $740).

Answer:

Sales Returns and Allowances	1,000
Accounts Receivable		1,000

Merchandise Inventory	740
Cost of Goods Sold		740

Diff: 1

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sales Returns and Allowances

27) A company ships goods to a customer and pays transportation costs. To the seller, the transportation costs are ________.

A) freight out
B) freight in
C) sales commission
D) brokerage

Answer: A

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Transportation Costs – Freight Out

28) Under the perpetual inventory system, the journal entry to record the freight paid by the seller on goods sold is:

Cash	XX
Sales Discount		XX
Accounts Receivable		XX

Delivery Expenses	XX
Cash		XX

Cash	XX
Accounts Receivable		XX

Merchandise Inventory	XX
Cash		XX

Answer: B

Diff: 2

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Transportation Costs – Freight Out

29) Delivery expense is a(n) ________.

A) administrative expense
B) part of Cost of Goods Sold
C) operating expense
D) overhead expense

Answer: C

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Transportation Costs – Freight Out

30) Mason Lawn Equipment uses a perpetual inventory system. Journalize the following sales transactions for this company. Explanations are not required.

May 18	Sold $26,000 of merchandise on account, credit terms are 1/10, n/30, FOB destination. Cost of goods is $15,600.
May 22	Mason negotiated a $600 allowance on the goods sold on May 18.
May 24	Mason paid freight of $450.
May 26	Mason receives payment for the customer for the amount due from the May 18 sale.

Answer:

Date	Accounts and Explanation	Debit	Credit

May 18	Accounts Receivable	26,000
	Sales Revenue		26,000
	Cost of Goods Sold	15,600
	Merchandise Inventory		15,600
May 22	Sales Returns and Allowances	600
	Accounts Receivable		600
May 24	Delivery Expense	450
	Cash		450
May 26	Cash ($25,400 – $254) Sales Discounts ($25,400 × 0.01)	25,146 254
	Accounts Receivable ($26,000 – $600)		25,400

Diff: 3

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Transportation Costs – Freight Out

31) Net sales revenue is equal to sales revenue less cost of goods sold.

Answer: FALSE

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Net Sales Revenue and Gross Profit

32) Which of the following is true of net sales revenue?

A) It is calculated by subtracting cost of goods sold from sales.
B) It is calculated by adding sales discounts to sales.
C) It is calculated by adding sales discounts and sales returns and allowances to sales.
D) It is calculated by deducting sales discounts and sales returns and allowances from sales.

Answer: D

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Net Sales Revenue and Gross Profit

33) From the following details, calculate net sales revenue.

Sales Revenue	$400,000
Cost of Goods Sold	300,000
Operating Expenses	75,000
Sales Discounts	20,000
Sales Returns and Allowances	8,000
Interest Revenue	6,000

A) $351,000
B) $359,000
C) $372,000
D) $392,000

Answer: C

Explanation: C)

Net Sales Revenue:

Sales Revenue $400,000

Less: Sales Discounts 20,000

Less: Sales Returns and Allowances 8,000

Net Sales Revenue $372,000

Diff: 1

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Net Sales Revenue and Gross Profit

34) Up-to-date Merchandisers has the following transactions for the month of July.

Sales Revenue	$420,000
Cost of Goods Sold	300,000
Operating Expenses	85,000
Sales Discounts	20,000
Sales Returns and Allowances	18,000
Interest Revenue	5,000

Calculate Gross Profit.

A) $44,000
B) $82,000
C) $100,000
D) $120,000

Answer: B

Explanation: B)

Net Sales Revenue* $382,000

Less: Cost of Goods Sold 300,000

Gross Profit $82,000

*Calculation of Net Sales Revenue

Sales Revenue $420,000

Less: Sales Discounts 20,000

Less: Sales Returns and Allowances 18,000

Net Sales Revenue $382,000

Diff: 1

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Net Sales Revenue and Gross Profit

35) On November 1, 2017, Rodgers Enterprises sold merchandise with a cost of $7,000 for $25,000, FOB destination, with payment terms of 2/10, n/40. The company paid transportation costs of $100. Customer returns on this sale were $5,000 (with a cost of $2,500). The merchandise was returned on November 6. The company received the payment for the balance amount on November 10, 2017. Calculate the net sales revenue.

A) $19,600
B) $20,000
C) $4,500
D) $20,100

Answer: A

Explanation: A)

Net Sales Revenue:

Sales Revenue $25,000

Less: Sales Returns and Allowances 5,000

Less: Sales Discounts 400

Net Sales Revenue $19,600

Diff: 2

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Net Sales Revenue and Gross Profit

36) On November 1, 2017, Lotz Company sold merchandise for $16,000, FOB destination, with payment terms of 2/10, n/40. Customer returns on this sale amounted to $4,000. The company received payment for the balance on November 10, 2017. The cost of goods sold was $3,600. Calculate the amount of gross profit from these transactions.

A) $12,400
B) $8,160
C) $8,400
D) $11,760

Answer: B

Explanation: B)

Net Sales Revenue* $11,760

Less: Cost of Goods Sold 3,600

Gross Profit $8,160

* Calculation of Net Sales Revenue:

Sales Revenue $16,000

Less: Sales Returns and Allowances 4,000

Less: Sales Discounts ($12,000 × 2%) 240

Net Sales Revenue $11,760

Diff: 3

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Net Sales Revenue and Gross Profit

37) Weston Jewelers uses the perpetual inventory system. On April 2, Weston sold merchandise with a cost of $5,000 for $10,000 to a customer on account with terms of 2/15, n/30. On April 4, the customer reported damaged goods, and Michelin granted a $2,000 sales allowance. On April 10, Weston received payment from the customer. Calculate the amount of net sales revenue.

A) $9,840
B) $10,000
C) $8,000
D) $7,840

Answer: D

Explanation: D)

Net Sales Revenue:

Sales Revenue $10,000

Less: Sales Returns and Allowances 2,000

Less: Sales Discounts 160

Net Sales Revenue $7,840

Diff: 2

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Net Sales Revenue and Gross Profit

38) Quality Jewelers uses the perpetual inventory system. On April 2, Quality sold merchandise for $50,000 to a customer on account with terms of 3/15, n/30. The allowances and returns on this sale amounted to $3,000 and $9,000, respectively. The cost of goods sold was $20,000. On April 20, Quality received payment from the customer. Calculate the amount of gross profit.

A) $38,000
B) $20,000
C) $18,000
D) $16,500

Answer: C

Explanation: C)

Net Sales Revenue* $38,000

Less: Cost of Goods Sold 20,000

Gross Profit $18,000

* Calculation of Net Sales Revenue:

Sales Revenue $50,000

Less: Sales Returns and Allowances 12,000

Sales Discounts 0

Net Sales Revenue $38,000

Diff: 3

LO: 5-3

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Net Sales Revenue and Gross Profit

39) Gross profit is calculated as ________.

A) sales revenue less sales discounts and allowances
B) sales revenue less operating expenses
C) net sales revenue less sales discounts
D) net sales revenue less cost of goods sold

Answer: D

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Net Sales Revenue and Gross Profit

40) Gross profit represents the mark-up on ________.

A) sales revenue
B) merchandise inventory
C) operating expenses
D) transportation cost

Answer: B

Diff: 1

LO: 5-3

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Net Sales Revenue and Gross Profit

41) Briefly discuss what gross profit represents and how it affects the net earnings of a merchandiser.

Answer: Gross profit is the difference between net sales revenue and cost of goods sold. It represents the markup on the merchandise inventory and is a measure of a merchandiser’s success. A sufficiently high gross profit is vital to a merchandiser. The gross profit must cover the company’s operating expenses for the company to survive.

Diff: 3

LO: 5-3

AACSB: Analytical thinking

AICPA Functional: Measurement

PE Question Type: Critical thinking

H2 : Net Sales Revenue and Gross Profit

Learning Objective 5-4

1) The loss of inventory that occurs because of theft, damage, and errors is referred to as inventory shrinkage.

Answer: TRUE

Diff: 1

LO: 5-4

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Adjusting Merchandise Inventory Based on a Physical Count

2) When a company uses the perpetual inventory system, there is no need to conduct a physical count of inventory.

Answer: FALSE

Diff: 1

LO: 5-4

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Adjusting Merchandise Inventory Based on a Physical Count

3) The Merchandise Inventory account balance is $50,000. An physical count of inventory reveals that actual inventory balance is $42,000. Which of the following would be included in the adjusting entry? (Assume a perpetual inventory system.)

A) a $42,000 credit to Merchandise Inventory
B) a $50,000 debit to Cost of Goods Sold
C) a $8,000 credit to Cost of Goods Sold
D) a $8,000 credit to Merchandise Inventory

Answer: D

Diff: 1

LO: 5-4

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Adjusting Merchandise Inventory Based on a Physical Count

4) The Merchandise Inventory account of a company shows a balance of $50,000 but a physical count of inventory shows $43,000 Which of the following entries is required to record the shrinkage? (Assume a perpetual inventory system.)

Cost of Goods Sold	7,000
Shrinkage Expense		7,000

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

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

Cash	7,000
Merchandise Inventory		7,000

Answer: C

Diff: 1

LO: 5-4

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Adjusting Merchandise Inventory Based on a Physical Count

5) The general ledger shows a balance of $66,900 in the Merchandise Inventory account at the end of the period. The physical inventory count shows inventory of $63,600. The adjusting entry includes a ________.

A) debit to Cost of Goods Sold and a credit to Merchandise Inventory for $3,300
B) debit to Cost of Goods Sold and a credit to Cash for $3,300
C) debit to Merchandise Inventory and a credit to Cost of Goods Sold for $3,300
D) debit to Merchandise Inventory and a credit to Cash for $3,300

Answer: A

Diff: 1

LO: 5-4

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Adjusting Merchandise Inventory Based on a Physical Count

6) The trial balance for a merchandiser is as follows. A physical count of inventory at the end of the accounting year reveals $28,000 of inventory on hand. (Assume a perpetual inventory system.)

	Debit	Credit
Cash	$12,600
Accounts Receivable	2,400
Prepaid Rent	800
Merchandise Inventory	30,000
Accounts Payable		$4,200
Salaries Payable		1,000
Notes Payable		800
Owner, Capital		13,800

Owner, Withdrawals	1,000
Sales Revenue		96,000
Sales Returns and Allowances	1,600
Sales Discounts	400
Cost of Goods Sold	23,000
Salaries Expense	21,000
Rent Expense	14,000
Selling Expense	8,500
Supplies Expense	500	________
Total	$115,800	$115,800

Give journal entry to record the inventory shrinkage, and the entries to close the Sales Revenue account, the expense accounts and contra revenue accounts with a debit balance, and the the Income Summary account and the Owner, Withdrawals account.

Answer:

Cost of Goods Sold	2,000
Merchandise Inventory		2,000

Sales Revenue	96,000
Income Summary		96,000

Income Summary	69,000
Sales Returns and Allowances		1,600
Sales Discounts		400
Cost of Goods Sold		23,000
Salaries Expense		21,000
Rent Expense		14,000
Administrative Expense		8,500
Supplies Expense		500

Income Summary*	27,000
Owner, Capital		27,000

Owner, Capital	1,000
Owner, Withdrawals		1,000

Explanation:

*Calculation of net income:

Sales Revenue $96,000

Less:

Sales Returns and Allowances 1,600

Sales Discounts 400

Cost of Goods Sold 23,000

Salaries Expense 21,000

Rent Expense 14,000

Administrative Expense 8,500

Supplies Expense 500

Net Income $27,000

Diff: 1

LO: 5-4

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Adjusting Merchandise Inventory Based on a Physical Count

7) The entry to close Sales Discounts will include a debit to Income Summary.

Answer: TRUE

Diff: 1

LO: 5-4

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Closing the Accounts of a Merchandiser

8) If a physical count of inventory indicates that the Merchandise Inventory account is overstated, an adjusting entry is required to record the difference.

Answer: TRUE

Diff: 1

LO: 5-4

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Closing the Accounts of a Merchandiser

9) The entry to close Cost of Goods Sold includes a debit to Income Summary.

Answer: TRUE

Diff: 1

LO: 5-4

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Closing the Accounts of a Merchandiser

10) The revenue, expenses, Sales Returns and Allowances, and Sales Discounts will be closed via the ________ account.

A) Income Summary
B) Owner, Capital
C) Dividend
D) Stockholders’ Equity

Answer: A

Diff: 1

LO: 5-4

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Closing the Accounts of a Merchandiser

11) The Income Summary account has a credit balance of $29,000 after the revenue and expense accounts have been closed. Which of the following is to be credited to close the Income Summary account?

A) Dividends
B) Sales Revenue
C) Cost of Goods Sold
D) Owner, Capital

Answer: D

Diff: 1

LO: 5-4

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Closing the Accounts of a Merchandiser

12) An adjusted trial balance is given below.

	Debit	Credit
Cash	$16,000
Accounts Receivable	3,000
Prepaid Rent	900
Merchandise Inventory	25,000
Accounts Payable		$4,100
Salaries Payable		2,000
Notes Payable		700
Owner, Capital		11,800
Owner, Withdrawals	1,500
Sales Revenue		92,200
Sales Returns and Allowances	1,000
Sales Discounts	600
Cost of Goods Sold	21,000
Salaries Expense	18,000
Rent Expense	15,000
Selling Expense	8,100
Supplies Expense	700
Total	$110,800	$110,800

What will be the final balance in the company’s Owner,Capital account after recording the closing entries?

A) $38,100
B) $39,600
C) $26,300
D) $2,300

Answer: A

Explanation: A)

Calculation of Owner, Capital balance:

Beginning balance, Owner, Capital $11,800

Plus: Net Income* 27,800

Owner, Withdrawals (1,500)

Closing balance, Owner, Capital $38,100

Calculation of Net Income*

Sales Revenue $92,200

Less:

Sales Returns and Allowances 1,000

Sales Discounts 600

Cost of Goods Sold 21,000

Salaries Expense 18,000

Rent Expense 15,000

Selling Expense 8,100

Supplies Expense 700

Net Income $27,800

Diff: 2

LO: 5-4

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Closing the Accounts of a Merchandiser

13) The sales revenue of a merchandiser amounted to $22,000, sales returns and allowances amounted to $2,500, and sales discounts amounted to $800. The merchandiser uses a perpetual inventory system. The first entry in the closing process would include ________.

A) a credit to Income Summary for $22,000
B) a credit to Income Summary for $19,500
C) a debit to Income Summary for $2,500
D) a debit to Income Summary for $21,200

Answer: A

Explanation: A)

Sales Revenue	22,000
Income Summary		22,000

Diff: 1

LO: 5-4

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Closing the Accounts of a Merchandiser

14) A merchandiser had sales returns and allowances of $300, sales discounts of $700, cost of goods sold of $14,000, and all other expenses of $4,400. The merchandiser uses a perpetual inventory system. The second entry in the closing process would include ________.

A) a debit to Income Summary for $19,400
B) a credit to Income Summary for $18,400
C) a debit to Income Summary for $4,400
D) a debit to Income Summary for $18,400

Answer: A

Explanation: A) Second entry in closing process relates to closing of expense accounts and other temporary accounts with a debit balance.

Income Summary	19,400
Sales Returns and Allowances		300
Sales Discounts		700
Cost of Goods Sold		14,000
Other expenses		4,400

Diff: 2

LO: 5-4

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Closing the Accounts of a Merchandiser

15) A merchandiser uses a perpetual inventory system. The third step in the process of closing the accounts of a merchandiser is to ________.

A) make the revenue accounts equal to zero via the Income Summary account
B) make the Income Summary account equal to zero via the Owner, Withdrawals account
C) make the expense accounts equal to zero via the Income Summary account
D) make the Income Summary account equal to zero via the Owner, Capital account

Answer: D

Diff: 2

LO: 5-4

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Closing the Accounts of a Merchandiser

16) A merchandiser uses a perpetual inventory system. The beginning Owner, Capital balance of the merchandiser was $95,000. During the year, Sales Revenue amounted to $80,000, Sales Returns and Allowances were $1,300, Sales Discounts were $2,700, Cost of Goods Sold was $40,000, and all other expenses totaled $13,000. The company paid $24,000 in withdrawals to the owner. The last step in the closing process would include ________.

A) a debit to Income Summary for $57,000
B) a credit to Income Summary for $80,000
C) a debit to the Owner, Capital account for $20,000
D) a debit to the Owner, Capital account for $24,000

Answer: D

Diff: 1

LO: 5-4

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Closing the Accounts of a Merchandiser

17) A merchandiser uses a perpetual inventory system. The beginning Owner, Capital balance of the merchandiser was $130,000. During the year, Sales Revenue amounted to $80,000, Sales Returns and Allowances were $2,000, Sales Discounts were $4,000, Cost of Goods Sold was $40,000, and all other expenses totaled $12,000. The company paid $27,000 in withdrawals to the owner. The closing balance of Owner, Capital would be ________.

A) $129,000
B) $125,000
C) $118,000
D) $130,000

Answer: B

Explanation: B)

The closing journal entries would be:

Sales Revenue 80,000

Income Summary 80,000

Income Summary 58,000

Sale Returns and Allowances 2,000

Sales Discounts 4,000

Cost of Goods Sold 40,000

Other Expenses 12,000

Income Summary 22,000

Owner, Capital 22,000

Owner, Capital 27,000

Owner, Withdrawals 27,000

Closing balance of Owner, Capital:

Beginning balance $130,000

Net income 22,000

Owner, Withdrawals (27,000)

Closing balance of Owner, Capital $125,000

Diff: 2

LO: 5-4

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Closing the Accounts of a Merchandiser

18) An adjusted trial balance for a merchandiser is given below.

	Debit	Credit
Cash	$12,600
Accounts Receivable	2,400
Prepaid Rent	800
Merchandise Inventory	30,000
Accounts Payable		$4,200
Salaries Payable		1,000
Notes Payable		800
Owner, Capital		13,800

Owner, Withdrawals	1,000
Sales Revenue		96,000
Sales Returns and Allowances	1,600
Sales Discounts	400
Cost of Goods Sold	23,000
Salaries Expense	21,000
Rent Expense	14,000
Selling Expense	8,500
Supplies Expense	500	________
Total	$115,800	$115,800

Give the journal entry to close the Sales Revenue account.

Answer:

Sales Revenue	96,000
Income Summary		96,000

Diff: 2

LO: 5-4

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Closing the Accounts of a Merchandiser

19) An adjusted trial balance for a merchandiser is given below.

	Debit	Credit
Cash	$12,600
Accounts Receivable	2,400
Prepaid Rent	800
Merchandise Inventory	30,000
Accounts Payable		$4,200
Salaries Payable		1,000
Notes Payable		800
Owner, Capital		13,800

Owner, Withdrawals	1,000
Sales Revenue		96,000
Sales Returns and Allowances	1,600
Sales Discounts	400
Cost of Goods Sold	23,000
Salaries Expense	21,000
Rent Expense	14,000
Selling Expense	8,500
Supplies Expense	500	________
Total	$115,800	$115,800

Give journal entry to close the expense accounts and contra revenue accounts with a debit balance.

Answer:

Income Summary	69,000
Sales Returns and Allowances		1,600
Sales Discounts		400
Cost of Goods Sold		23,000
Salaries Expense		21,000
Rent Expense		14,000
Administrative Expense		8,500
Supplies Expense		500

Diff: 2

LO: 5-4

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Closing the Accounts of a Merchandiser

20) An adjusted trial balance a merchandiser is given below.

	Debit	Credit
Cash	$12,600
Accounts Receivable	2,400
Prepaid Rent	800
Merchandise Inventory	30,000
Accounts Payable		$4,200
Salaries Payable		1,000
Notes Payable		800
Owner, Capital		13,800

Owner, Withdrawals	1,000
Sales Revenue		96,000
Sales Returns and Allowances	1,600
Sales Discounts	400
Cost of Goods Sold	23,000
Salaries Expense	21,000
Rent Expense	14,000
Selling Expense	8,500
Supplies Expense	500	________
Total	$115,800	$115,800

Provide journal entries to close the Income Summary account and the Owner, Withdrawals account.

Answer:

Income Summary*	27,000
Owner, Capital		27,000

Owner, Capital	1,000
Owner, Withdrawals		1,000

Explanation:

*Calculation of net income:

Sales Revenue $96,000

Less:

Sales Returns and Allowances 1,600

Sales Discounts 400

Cost of Goods Sold 23,000

Salaries Expense 21,000

Rent Expense 14,000

Administrative Expense 8,500

Supplies Expense 500

Net Income $27,000

Diff: 3

LO: 5-4

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Closing the Accounts of a Merchandiser

21) When preparing the worksheet for a merchandising business using the perpetual inventory system, the Merchandise Inventory account must be adjusted based on a physical count due to inventory shrinkage.

Answer: TRUE

Diff: 1

LO: 5-4

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Worksheet for a Merchandising Business – Perpetual Inventory

22) Worksheet procedures for a merchandising business using the perpetual inventory system are different from the worksheet procedures for a service business.

Answer: FALSE

Diff: 1

LO: 5-4

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Worksheet for a Merchandising Business – Perpetual Inventory

23) When preparing the worksheet for a merchandising business using the perpetual inventory system, the main new account is the Merchandise Inventory account.

Answer: TRUE

Diff: 1

LO: 5-4

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Worksheet for a Merchandising Business – Perpetual Inventory

24) When preparing the worksheet for a merchandising business using the perpetual inventory system, which of the following statements is incorrect?

A) The merchandiser’s worksheet carries the account Cost of Goods Sold.
B) The main new account is the Merchandise Inventory account.
C) The worksheet procedures are not similar to the worksheet procedures for a service company.
D) The Merchandise Inventory account must be adjusted based on a physical count due to inventory shrinkage.

Answer: C

Diff: 1

LO: 5-4

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Worksheet for a Merchandising Business – Perpetual Inventory

25) When preparing the worksheet for a merchandising business using the perpetual inventory system, which of the following is not a new merchandising account that is shown on the worksheet?

A) Accumulated Depreciation — Building
B) Sales Returns and Allowances
C) Cost of Goods Sold
D) Merchandise Inventory

Answer: A

Diff: 1

LO: 5-4

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Worksheet for a Merchandising Business – Perpetual Inventory

Learning Objective 5-5

1) Cost of Goods Sold appears on a multi-step income statement but not on a single-step income statement.

Answer: FALSE

Diff: 1

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Income Statement

2) The net income calculated using either the single-step or multi-step income statement formats is always the same.

Answer: TRUE

Diff: 1

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Income Statement

3) Operating income is gross profit minus operating expenses.

Answer: TRUE

Diff: 1

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Income Statement

4) A single-step income statement shows subtotals for gross profit and operating income.

Answer: FALSE

Diff: 1

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Income Statement

5) In a multi-step income statement, interest revenue and interest expense are included in operating income.

Answer: FALSE

Diff: 1

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Income Statement

6) On a multi-step income statement, merchandisers report operating expenses in two categories—selling expenses and administrative expenses.

Answer: TRUE

Diff: 1

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Income Statement

7) The following information relates to Nebula Company.

Sales Revenue	$230,000
Cost of Goods Sold	150,000
Interest Revenue	10,000
Operating Expenses	42,500
Sales Discounts	20,000
Sales Returns and Allowances	6,000

Calculate the operating income.

A) $11,500
B) $67,500
C) $230,000
D) $21,500

Answer: A

Explanation: A)

Sales Revenue $230,000

Sales Discounts (20,000)

Sales Returns and Allowances (6,000)

Net Sales $204,000

Cost of Goods Sold (150,000)

Gross Profit $54,000

Operating Expenses (42,500)

Operating Income $11,500

Diff: 1

LO: 5-5

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Income Statement

8) The following information relates to Newman Company.

Sales Revenue	$240,000
Cost of Goods Sold	170,000
Interest Revenue	10,000
Operating Expenses	40,000
Sales Discounts	18,000
Sales Returns and Allowances	6,000

Calculate the net income of Newman Company.

A) $6,000
B) $16,000
C) $58,000
D) $240,000

Answer: B

Explanation: B)

Sales Revenue $240,000

Sales Discounts (18,000)

Sales Returns and Allowances (6,000)

Net Sales $216,000

Cost of Goods Sold (170,000)

Gross Profit $46,000

Operating Expenses (40,000)

Operating Income $6,000

Interest Revenue 10,000

Net Income $16,000

Diff: 1

LO: 5-5

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Income Statement

9) Which of the following is subtracted from net sales revenue to arrive at gross profit on a multi-step income statement?

A) cost of goods available for sale
B) cost of goods sold
C) sales discounts and sales returns and allowances
D) operating expenses

Answer: B

Diff: 1

LO: 5-5

AACSB: Analytical thinking

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Income Statement

10) On a multi-step income statement, the operating expenses are subtracted from ________ to arrive at operating income.

A) net sales
B) cost of goods sold
C) net profit
D) gross profit

Answer: D

Diff: 1

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Income Statement

11) Which of the following is added to operating income to arrive at net income?

A) sales revenue
B) cost of goods sold
C) interest revenue
D) operating expenses

Answer: C

Diff: 1

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Income Statement

12) Which of the following is the correct order of subtotals that appear on a multi-step income statement?

A) Operating income, Gross profit, Net income
B) Gross profit, Net sales revenue, Net income
C) Net income, Operating income, Net income
D) Gross profit, Operating income, Net income

Answer: D

Diff: 1

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Income Statement

13) Which of the following is shown on a multi-step income statement but not on a single-step income statement?

A) gross profit
B) net sales revenue
C) cost of goods sold
D) net income

Answer: A

Diff: 1

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Income Statement

14) Refer to the following trial balance.

	Debit	Credit
Cash	$19,000
Accounts Receivable	44,000
Merchandise Inventory	64,000
Supplies	16,000
Land	320,000
Accounts Payable		$5,000
Notes Payable		22,000
Owner, Capital		341,000
Owner, Withdrawals	3,000
Sales Revenue		460,000
Sales Returns and Allowances	9,000
Sales Discounts	9,000
Cost of Goods Sold	200,000
Salaries Expense	17,000
Utilities Expense	65,000
Rent Expense	56,000
Interest Expense	6,000	________
Totals	$828,000	$828,000

How much is the net sales revenue?

A) $461,000
B) $122,000
C) $442,000
D) $116,000

Answer: C

Explanation: C)

Sales Revenues $460,000

Sales Returns and Allowances (9,000)

Sales Discounts (9,000)

Net Sales Revenue $442,000

Diff: 2

LO: 5-5

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Income Statement

15) Refer to the following trial balance.

	Debit	Credit
Cash	$4,000
Accounts Receivable	14,000
Inventory	15,000
Supplies	4,000
Land	120,000
Accounts Payable		$6,000
Notes Payable		21,000
Owner, Capital		107,000
Owner, Withdrawals	2,000
Sales Revenue		160,000
Sales Returns and Allowances	2,000
Sales Discounts	6,000
Cost of Goods Sold	83,000
Salaries Expense	5,000
Utilities Expense	21,000
Rent Expense	16,000
Interest Expense	2,000	________
Totals	$294,000	$294,000

How much is the gross profit?

A) $152,000
B) $160,000
C) $294,000
D) $69,000

Answer: D

Explanation: D) Gross profit = Net sales* – Cost of goods sold = $152,000* – $83,000 = $10,000

* Net sales = Sales revenue – Sales returns and allowances – Sales discounts = $160,000 – $2,000 – $6,000 = $152,000

Diff: 2

LO: 5-5

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Income Statement

16) In a multi-step income statement, which of the following items is excluded from the calculation of operating income?

A) sales revenue
B) interest expense
C) selling expense
D) administrative expense

Answer: B

Diff: 1

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Income Statement

17) Expenses that fall outside the regular operations of a business are ________.

A) not shown in the income statement of a merchandiser
B) treated as current assets and are shown as merchandise inventory
C) included under the other revenues and expenses section of the income statement
D) not considered for the calculation of net income

Answer: C

Diff: 2

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Income Statement

18) An adjusted trial balance of Woods Company as of December 31, 2017 is given below. Prepare a multi-step income statement for the year for the company.

	Debit	Credit
Cash	$15,000
Accounts Receivable	42,000
Merchandise Inventory	60,000
Supplies	15,000
Land	300,000
Accounts Payable		$3,000
Notes Payable		25,000
H. Woods, Capital		326,000

H. Woods, Withdrawals	3,000
Sales Revenue		480,000
Sales Returns and Allowances	6,000
Sales Discounts	9,000
Cost of Goods Sold	240,000
Salaries Expense	15,000
Utilities Expense	69,000
Rent Expense	54,000
Interest Expense	6,000	_______
Totals	$834,000	$834,000

Answer:

Sales Revenue $480,000

Less: Sales Returns and Allowances (6,000)

Less: Sales Discounts (9,000)

Net Sales Revenue $465,000

Cost of Goods Sold (240,000)

Gross Profit 225,000

Operating Expenses:

Salaries Expense (15,000)

Utilities Expense (69,000)

Rent Expense (54,000)

Total Operating Expenses (138,000)

Operating Income 87,000

Other Revenues and (Expenses):

Interest Expense (6,000)

Net Income $81,000

Diff: 3

LO: 5-5

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Income Statement

19) An adjusted trial balance of Woods Company as of December 31, 2017 is given below. Prepare a single-step income statement for the year for the company.

	Debit	Credit
Cash	$15,000
Accounts Receivable	42,000
Merchandise Inventory	60,000
Supplies	15,000
Land	300,000
Accounts Payable		$3,000
Notes Payable		25,000
H. Woods, Capital		326,000

H. Woods, Withdrawals	3,000
Sales Revenue		480,000
Sales Returns and Allowances	6,000
Sales Discounts	9,000
Cost of Goods Sold	240,000
Salaries Expense	15,000
Utilities Expense	69,000
Rent Expense	54,000
Interest Expense	6,000	_______
Totals	$834,000	$834,000

Answer: Woods Company

Income Statement

Year Ended December 31, 2017

Revenues:

Net Sales Revenue $465,000

Expenses:

Cost of Goods Sold $240,000

Salaries Expense 15,000

Utilities Expense 69,000

Rent Expense 54,000

Interest Expense 6,000

Total Expenses $384,000

Net Income $81,000

Diff: 2

LO: 5-5

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Income Statement

20) A merchandiser’s statement of owner’s equity looks exactly like that of a service business.

Answer: TRUE

Diff: 1

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Statement of Retained Earnings and the Balance Sheet

21) Merchandise Inventory and Cost of Goods Sold appear ________.

A) on the balance sheet and statement of owner’s equity, respectively
B) on the statement of owner’s equity and income statement, respectively
C) on the balance sheet and income statement, respectively
D) on the income statement and statement of cash flows, respectively

Answer: C

Diff: 1

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Statement of Retained Earnings and the Balance Sheet

22) On a balance sheet for a merchandiser, Merchandise Inventory is listed as a(n) ________.

A) current asset
B) current liability
C) expense
D) revenue

Answer: A

Diff: 2

LO: 5-5

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Statement of Retained Earnings and the Balance Sheet

Learning Objective 5-6

1) The gross profit percentage measures the profitability of each sales dollar above the cost of goods sold.

Answer: TRUE

Diff: 1

LO: 5-6

AICPA Functional: Measurement

PE Question Type: Concept

H2 : How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

2) A small increase in the gross profit percentage may indicate an important rise in income.

Answer: TRUE

Diff: 1

LO: 5-6

AICPA Functional: Measurement

PE Question Type: Concept

H2 : How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

3) Which of the following is the correct formula for calculating gross profit percentage?

A) Net profit / Net sales revenue
B) Gross profit / Net sales revenue
C) Net sales revenue / Net profit
D) Net sales revenue / Gross profit

Answer: B

Diff: 1

LO: 5-6

AICPA Functional: Measurement

PE Question Type: Concept

H2 : How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

4) The gross profit percentage is one of the most carefully watched measures of ________.

A) profitability
B) liquidity
C) solvency
D) marketability

Answer: A

Diff: 1

LO: 5-6

AICPA Functional: Measurement

PE Question Type: Concept

H2 : How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

5) Which of the following is true of the gross profit percentage?

A) Gross profit percentage is the same for companies in all industries.
B) Gross profit percentage is used to measure the solvency of a company.
C) The gross profit percentage is one of the most carefully watched measures of profitability.
D) A service company must show its gross profit percentage in its Income Statement.

Answer: C

Diff: 2

LO: 5-6

AICPA Functional: Measurement

PE Question Type: Concept

H2 : How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

6) A company made net sales revenue of $540,000, and cost of goods sold totaled $324,000. Calculate its gross profit percentage.

A) 40%
B) 60%
C) 130%
D) 315%

Answer: A

Explanation: A) Gross profit = Sales revenue – Cost of goods sold = $540,000 – $324,000 = $216,000

Gross profit percentage = Gross profit / Sales revenue = $216,000 / $540,000 = 40%

Diff: 2

LO: 5-6

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

7) Gilbert Company generated sales revenues of $1,800,000 in 2017. Its cost of goods sold amounted to Calculate Gilbert’s gross profit percentage.

A) 55%
B) 45%
C) 222%
D) 182%

Answer: B

Explanation: B) Gross profit = Sales revenue – Cost of goods sold = $1,800,000 – $990,000 = $810,000

Gross profit percentage = Gross profit / Sales revenue = $810,000 / $1,800,000 = 55%

Diff: 2

LO: 5-6

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

8) What does the gross profit percentage measure? How is it computed?

Answer: The gross profit percentage measures the profitability of each sales dollar above the cost of goods sold. Gross profit percentage equals gross profit divided by net sales revenue.

Diff: 2

LO: 5-6

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

9) The gross profit percentage for Smith Clothing Retailer was 37.7% for the year ended December 31, 2016 and 42.5% for the year ended December 31, 2017. The industry average gross profit percentage, for both years, is 45.7%. Briefly discuss these findings.

Answer: The gross profit percentage for Smith has improved from 37.5 percent for 2016 to 42.5 percent for 2017. This shows that the gross profit earned from merchandise inventory has increased and is providing more to cover the remaining operating expenses and provide for net income. This increase is a good step in reaching the industry average. Smith should work to continue this increase and to keep operating expenses under control. These two actions will improve net income.

Diff: 3

LO: 5-6

AACSB: Analytical thinking

AICPA Functional: Measurement

PE Question Type: Critical thinking

H2 : How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)

Learning Objective 5-7

1) Under the periodic inventory system, purchases, purchase discounts, and purchase returns and allowances are recorded in the Merchandise Inventory account as and when they occur.

Answer: FALSE

Diff: 1

LO: 5-7

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchases of Merchandise Inventory

2) If a merchandiser uses the periodic inventory system, it is necessary to conduct a physical count of inventory to determine the quantity of inventory on hand.

Answer: TRUE

Diff: 1

LO: 5-7

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Purchases of Merchandise Inventory

3) A merchandiser purchased inventory on account for $18,000. Under the periodic inventory system, the journal entry to record the purchase would include ________.

A) a debit to Purchases for $18,000 and a credit to Accounts Payable for $18,000
B) a debit to Accounts Payable for $18,000 and a credit to Purchases for $18,000
C) a debit to Merchandise Inventory for $18,000 and a credit to Accounts Payable for $18,000
D) a debit to Accounts Payable for $18,000 and a credit to Merchandise Inventory for $18,000

Answer: A

Diff: 1

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchases of Merchandise Inventory

4) A merchandiser returned inventory worth $1,400 that was purchased on account. Under the periodic inventory system, the journal entry to record the return would include ________.

A) a debit to Purchase Returns and Allowances for $1,400 and a credit to Accounts Payable for $1,400
B) a debit to Accounts Payable for $1,400 and a $1,400 credit to Purchase Returns and Allowances
C) a debit to Purchases for $1,400 and a credit to Accounts Payable for $1,400
D) a debit to Accounts Payable for $1,400 and a credit to Purchases for $1,400

Answer: B

Diff: 2

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchases of Merchandise Inventory

5) Which of the following is the correct journal entry for freight paid on goods purchased by a merchandiser using the periodic inventory system?

Purchases	XX
Accounts Payable		XX

Merchandise Inventory	XX
Accounts Payable		XX

Freight In	XX
Cash		XX

Accounts Payable	XX
Cash		XX

Answer: C

Diff: 1

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchases of Merchandise Inventory

6) Which of the following is the correct journal entry for a return of goods that were purchased on account under the periodic inventory system?

Purchase Returns and Allowances	XX
Accounts Payable		XX

Accounts Payable	XX
Merchandise Inventory		XX

Accounts Payable

Purchase Returns and

Allowances

Merchandise Inventory	XX
Accounts Payable		XX

Answer: C

Diff: 2

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchases of Merchandise Inventory

7) Avery Company uses the periodic inventory system. On February 1, the corporation purchased inventory on account for $10,000. The terms of invoice were 5/10, n/30. The amount due was paid on February 9. Which of the following journal entries correctly records the payment in the books of Avery Company?

Accounts Payable	10,000
Purchase Discounts		500
Cash		9,500

Accounts Payable	10,000
Cash		10,000

Accounts Payable	10,000
Purchases		10,000

Accounts Payable	10,000
Merchandise Inventory		500
Cash		9,500

Answer: A

Diff: 1

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchases of Merchandise Inventory

8) Glasgow Company uses the periodic inventory system. On February 1, the corporation purchased inventory on account for $16,000. The terms were 3/10, n/30. On February 2, it returned damaged goods worth $500 to the supplier and was granted an allowance. Give the journal entry for the payment if the invoice is paid after the discount period. (Round your answers to the nearest dollar.)

Accounts Payable	15,520
Cash		15,054
Purchase Discounts		466

Cash	16,000
Accounts Payable		16,000

Accounts Payable	15,520
Cash		15,520

Cash	15,054
Purchase Discounts	466
Accounts Payable		15,520

Answer: C

Diff: 1

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchases of Merchandise Inventory

9) Using the periodic inventory system, state which accounts are used and whether the account is debited or credited. All transactions involve the purchase of inventory.

Transaction	Accounts Used / Is the account debited or credited?
Purchase of inventory on account
Prior to payment, returned inventory to the seller
Payment of freight bill

Answer:

Transaction	Accounts Used / Is the account debited or credited?
Purchase of inventory on account	Purchases – debited Accounts Payable – credited
Prior to payment, returned inventory to the seller	Accounts Payable – debited Purchase Returns and Allowances – credited
Cash payment of freight bill	Freight In – debited Cash – credited

Diff: 2

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchases of Merchandise Inventory

10) Journalize the following purchase transactions for Schaeffer Office Supplies using the periodic inventory system. Explanations are not required.

May 12	Schaeffer buys $167,500 worth of merchandise inventory on account with credit terms of 2/10, n/30.
May 16	Schaeffer returns $18,600 of the merchandise to the vendor due to damage during shipment.
May 21	Schaeffer pays the amount due.

Answer:

Date	Accounts and Explanation	Debit	Credit
May 12	Purchases	167,500
	Accounts Payable		167,500

May 16	Accounts Payable	18,600
	Purchases Returns and Allowance		18,600

May 21	Accounts Payable ($167,500 – $18,600)	148,900
	Cash ($148,900 − $2,978)		145,922
	Purchase Discount ($148,900 × 0.02)		2,978

Diff: 2

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchases of Merchandise Inventory

11) Journalize the following purchase transactions for ABC Swimming Pool Supply Company using the periodic inventory system. Explanations are not required.

May 2	Purchased $5,280 of merchandise inventory on account under terms 3/10, n/30 and FOB shipping point.
May 6	Returned $675 of defective merchandise purchased on May 2.
May 8	Paid freight bill of $120 on May 2 purchase.
May 12	Paid amount owed on credit purchase on May 2.

Answer:

Date	Accounts and Explanation	Debit	Credit
May 2	Purchases	5,280
	Accounts Payable		5,280

May 6	Accounts Payable	675
	Purchases Returns and Allowance		675

May 8	Freight-In	120
	Cash		120

May 12	Accounts Payable ($5,280 – $675)	4,605
	Cash ($4,605 – $138.15)		4,466.85
	Purchase Discount ($4,605 × .03)		138.15

Diff: 3

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Purchases of Merchandise Inventory

12) In a periodic inventory system, there is no need to record an entry to Merchandise Inventory and Cost of Goods Sold.

Answer: TRUE

Diff: 1

LO: 5-7

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Sale of Merchandise Inventory

13) In a periodic inventory system, a sale of inventory involves two entries, one to record Sales Revenue and one to record Cost of Goods Sold.

Answer: FALSE

Diff: 1

LO: 5-7

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Sale of Merchandise Inventory

14) When recording the sale of merchandise inventory, using a periodic inventory system, ________.

A) a running record of merchandise inventory is maintained during the accounting period
B) the Sales Revenue account is credited only as an adjusting entry because sales information is not needed during the accounting period
C) sales discounts and sales returns and allowances are not recorded
D) there is no need to record an entry to the Merchandise Inventory and the Cost of Goods Sold accounts

Answer: D

Diff: 2

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sale of Merchandise Inventory

15) Anderson Furniture sold 15 desks, with a cost of $7,500, for $13,250 on account. Anderson uses the periodic inventory system. Which of the following is the correct way to record this transaction?

Sales Revenue	13,250
Accounts Receivable	13,250

Accounts Receivable	13,250
Sales Revenue	13,250
Cost of Goods Sold	7,500
Merchandise Inventory	7,500

Accounts Receivable	13,250
Sales Revenue	13,250

Accounts Receivable	13,250
Sales Revenue	13,250
Purchases	7,500
Merchandise Inventory	7,500

Answer: C

Diff: 2

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sale of Merchandise Inventory

16) Journalize the following sales transactions for Smith Printing Equipment using the periodic inventory system. Explanations are not required.

March 2	Smith sold $45,800 of printing equipment on account, credit terms 2/10, n/EOM.
March 5	Smith received a $2,500 sales return on damaged goods from the customer.
March 11	Smith received payment from the customer on the amount due.

Answer:

Date	Accounts and Explanation	Debit	Credit
March 2	Accounts Receivable	45,800
	Sales Revenue		45,800

March 5	Sales Returns and Allowances	2,500
	Accounts Receivable		2,500

March 11	Cash ($43,300 − $866)	42,434
	Sales Discounts ($43,300 × 0.02)	866
	Accounts Receivable ($45,800 − $2,500)		43,300

Diff: 2

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sale of Merchandise Inventory

17) Journalize the following sales transactions for Outdoor Equipment using the periodic inventory system. Explanations are not required.

July 1	Sold $4,200 of equipment on account, credit terms are 3/10, n/30, FOB destination.
July 5	Paid $90 on freight out.
July 8	Negotiated a $240 allowance on the goods sold on July 1.
July 11	Received payment from the customer for the full amount due on the July 1 sale.

Answer:

Date	Accounts and Explanation	Debit	Credit
July 1	Accounts Receivable	4,200
	Sales Revenue		4,200

July 5	Delivery Expense	90
	Cash		90

July 8	Sales Returns and Allowances	240
	Accounts Receivable		240

July 11	Cash ($3,960 – $118.80)	3,841.20
	Sales Discounts ($3,960 × 0.03)	118.80
	Accounts Receivable ($4,200 – $240)		3,960

Diff: 2

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Sale of Merchandise Inventory

18) When using the periodic inventory system, there is no need to record an adjusting entry for inventory shrinkage.

Answer: TRUE

Diff: 1

LO: 5-7

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Adjusting and Closing Entries

19) When using the periodic inventory system, the process of recording the ending Merchandise Inventory is completed by making an adjusting entry.

Answer: FALSE

Diff: 1

LO: 5-7

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Adjusting and Closing Entries

20) The key difference in the closing process under the periodic inventory system is how merchandise inventory is handled.

Answer: TRUE

Diff: 1

LO: 5-7

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Adjusting and Closing Entries

21) Regarding the four-step closing process under the periodic inventory system, ________.

A) purchase Returns and Allowances and Purchase Discount accounts are closed with a credit via the Income Summary account
B) Sales Revenue is closed with a credit via the Income Summary account
C) the beginning Merchandise Inventory, Purchases, and Freight In are closed with a debit via the Income Summary account
D) the ending merchandise inventory balance must be recorded as a debit via the Income Summary account

Answer: D

Diff: 2

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Adjusting and Closing Entries

22) When a periodic inventory system is used, ________.

A) an adjusting entry is needed to record the ending Merchandise Inventory account balance
B) the process for closing the Income Summary and Owner’s Withdrawals accounts differs from the process used in the perpetual inventory system
C) beginning Inventory, Purchases, and Freight In accounts are closed via the Income Summary Account
D) there is no need to take a physical count of inventory

Answer: C

Diff: 1

LO: 5-7

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Adjusting and Closing Entries

23) When preparing financial statements under the periodic inventory system, a calculation of cost of goods sold must be made.

Answer: TRUE

Diff: 1

LO: 5-7

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Preparing Financial Statements

24) Cost of goods available for sale represents beginning merchandise inventory plus net purchases less freight in.

Answer: FALSE

Diff: 1

LO: 5-7

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Preparing Financial Statements

25) Which of the following line items would appear on the income statement of a company that uses the periodic inventory system, but not on that of a company that uses the perpetual inventory system?

A) Net Sales Revenue
B) Cost of Goods Sold
C) Cost of Goods Available for Sale
D) Operating expenses

Answer: C

Diff: 2

LO: 5-7

AICPA Functional: Measurement

PE Question Type: Concept

H2 : Preparing Financial Statements

26) Calculate the cost of goods sold for a merchandiser using the periodic inventory system from the following details.

Purchases	$540,000
Beginning Merchandise Inventory	180,000
Purchase Returns and Allowances	60,000
Purchase Discounts	16,000
Freight In	17,000
Ending Merchandise Inventory	160,000

A) $540,000
B) $501,000
C) $518,000
D) $821,000

Answer: B

Explanation: B)

Calculation of Cost of Goods Sold:

Beginning Merchandise Inventory $180,000

Purchases $540,000

Less: Purchase Returns and Allowances 60,000

Less: Purchase Discounts 16,000

Net Purchases $464,000

Plus: Freight In 17,000

Net Cost of Purchases 481,000

Cost of Goods Available for Sale $661,000

Less: Ending Inventory 160,000

Cost of Goods Sold $501,000

Diff: 1

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Preparing Financial Statements

27) The following details are provided by Blue Bell Merchandisers. The company uses the periodic inventory system.

Net Sales	$202,000
Purchases	91,000
Purchase Returns and Allowances	1,900
Purchase Discounts	1,400
Freight In	1,600
Beginning Merchandise Inventory	63,000
Ending Merchandise Inventory	37,000

Calculate the amount of net purchases.

A) $150,700
B) $86,100
C) $87,700
D) $111,000

Answer: C

Explanation: C)

Calculation of Net Purchases:

Purchases $91,000

Less: Purchase Returns and Allowances 1,900

Less: Purchase Discounts 1,400

Net Purchases $87,700

Diff: 1

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Preparing Financial Statements

28) From the following details of a merchandiser, calculate the Cost of Goods Sold. (Assume the merchandiser uses the periodic inventory system.)

Net Sales	$210,000
Purchases	93,000
Purchase Returns and Allowances	1,800
Purchase Discounts	1,300
Freight In	1,750
Beginning Merchandise Inventory	61,000
Ending Merchandise Inventory	37,000

A) $115,650
B) $65,900
C) $113,900
D) $54,650

Answer: A

Explanation: A)

Calculation of Cost of Goods Sold:

Beginning Merchandise Inventory $61,000

Purchases $93,000

Less: Purchase Returns and Allowances 1,800

Less: Purchase Discounts 1,300

Net Purchases $89,900

Plus: Freight In 1,750

Net Cost of Purchases 91,650

Cost of Goods Available for Sale $152,650

Less: Ending Inventory 37,000

Cost of Goods Sold $115,650

Diff: 2

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Preparing Financial Statements

29) Classic Car Parts uses a periodic inventory system. From the following details, calculate net purchases.

Beginning merchandise inventory	$2,000
Ending merchandise inventory	2,200
Purchases	21,000
Purchase Discounts	800
Purchase Returns and Allowances	1,300
Freight In	4,000

A) $23,100
B) $18,900
C) $20,900
D) $20,200

Answer: B

Explanation: B)

Calculation of net purchases:

Purchases $21,000

Less: Purchase Returns and Allowances 1,300

Less: Purchase Discounts 800

Net Purchases $18,900

Diff: 1

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Preparing Financial Statements

30) Swanson Company uses a periodic inventory system. From the following details, calculate the cost of goods sold.

Beginning merchandise inventory	$3,000
Ending merchandise inventory	2,300
Purchases	22,000
Purchase Discounts	700
Purchase Returns and Allowances	1,200
Freight In	4,300

A) $23,900
B) $20,100
C) $25,100
D) $27,400

Answer: C

Explanation: C)

Calculation of Cost of Goods Sold:

Beginning Merchandise Inventory $3,000

Purchases $22,000

Less: Purchase Returns and Allowances 1,200

Less: Purchase Discounts 700

Net Purchases $20,100

Plus: Freight In: 4,300

Net Cost of Purchases 24,400

Cost of Goods Available for Sale $27,400

Less: Ending Merchandise Inventory 2,300

Cost of Goods Sold $25,100

Diff: 1

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Preparing Financial Statements

31) Describe the calculation of cost of goods sold when using the periodic inventory system.

Answer: The Cost of Goods Sold account is calculated by adding Beginning Merchandise Inventory plus Net Cost of Purchases less Ending Inventory. Net Cost of Purchases is calculated by taking Purchases less Purchase Returns and Allowances less Purchase Discounts plus Freight In.

Diff: 2

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Preparing Financial Statements

32) Brookside Equipment Company uses the periodic inventory system. Brookside reported the following selected amounts at June 30, 2017:

Merchandise Inventory, July 1, 2016	$22,000
Merchandise Inventory, June 30, 2017	19,000
Purchases	96,000
Purchase Discounts	5,000
Purchase Returns and Allowances	8,500
Freight In	3,200
Sales Revenue	234,000
Sales Discounts	7,400
Sales Returns and Allowances	14,200
Common Stock	45,000
Retained Earnings	24.50

Requirement A: Compute net sales revenue.

Requirement B: Compute cost of goods sold.

Requirement C: Compute gross profit.

Answer:

Requirement A

Sales Revenue	$234,000
Less: Sales Discounts	7,400
Sales Returns & Allowances	14,200
Net Sales Revenue	$212,400

Requirement B

Beginning Merchandise Inventory		$22,000
Purchases	$96,000
Less: Purchase Returns and Allowances	8,500
Purchase Discounts	5,000
Net Purchases	82,500
Plus: Freight In	3,200
Net Cost of Purchases		85,700
Cost of Goods Available for Sale		107,700
Less: Ending Inventory		19,000
Cost of Goods Sold		$88,700

Requirement C

Net Sales Revenue	$212,400
Less: Cost of Goods Sold	88,700
Gross Profit	$123,700

Diff: 3

LO: 5-7

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2 : Preparing Financial Statements

Horngren's Accounting 11th Edition by Tracie L. Miller - Test Bank

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Horngren's Accounting 11th Edition by Tracie L. Miller - Test Bank

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Reviews

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Endocrine Nursing Notes Study Bundle

PsychiatricMental Health Study Guide |

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Pharmacology Nursing Bundle - 2025

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