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Operating cycle of a merchandising company vs service company

25/11/2021 Client: muhammad11 Deadline: 2 Day

5 - 12

Test Bank for Accounting Principles, Eleventh Edition

5 - 13

Accounting for Merchandising Operations

CHAPTER 5
ACCOUNTING FOR MERCHANDISING OPERATIONS
Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy
Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
True-False Statements
1.

1

C

10.

3

C

19.

5

K

28.

5

K

sg37.

2

K

2.

1

C

11.

3

C

20.

5

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29.

5

K

sg38.

3

K

3.

1

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12.

3

K

21.

5

C

a30.

6

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sg39.

3

K

4.

1

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13.

4

C

22.

5

C

a31.

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sg40.

4

C

5.

1

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14.

4

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23.

5

C

a32.

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sg41.

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2

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15.

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24.

5

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a33.

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sg42.

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7.

2

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16.

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25.

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a34.

7

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8.

3

C

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26.

5

AP

sg35.

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9.

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C

18.

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27.

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sg36.

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Multiple Choice Questions
43.

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73.

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AP

103.

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133.

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a163.

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AP

44.

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74.

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104.

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C

134.

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a164.

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45.

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75.

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105.

3

C

135.

5

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sg165.

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AP

46.

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K

76.

3

AP

106.

3

K

136.

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AP

sg166.

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47.

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K

77.

3

C

107.

3

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137.

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AP

sg167.

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48.

1

C

78.

3

C

108.

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C

138.

5

AP

st168.

2

K

49.

1

K

79.

3

AP

109.

4

C

139.

5

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sg169.

3

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50.

1

K

80.

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110.

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140.

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st170.

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51.

1

C

81.

3

C

111.

1

C

141.

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sg171.

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AP

52.

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82.

3

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112.

4

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142.

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st172.

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53.

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83.

3

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113.

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143.

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sg173.

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54.

1

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84.

3

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114.

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144.

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a,st174.

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55.

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85.

3

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115.

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C

145.

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AP

175.

8

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56.

1

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86.

3

C

116.

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a146.

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176.

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57.

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87.

3

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117.

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a147.

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177.

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58.

2

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88.

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118.

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AP

a148.

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AP

178.

8

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59.

2

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89.

3

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119.

5

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149.

7

AP

179.

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60.

2

C

90.

3

C

120.

5

C

150.

7

AP

180.

8

K

61.

2

K

91.

3

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121.

5

K

151.

7

C

181

8

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62.

2

C

92.

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AP

122.

5

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a152.

7

K

182

8

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63.

2

C

93.

3

C

123.

5

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a153.

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183.

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64.

2

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94.

3

C

124.

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AP

a154.

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184.

8

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65.

2

AP

95.

3

C

125.

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a155.

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AP

185.

8

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66.

2

AP

96.

3

C

126.

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a156.

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186.

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67.

2

C

97.

3

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127.

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C

a157.

7

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187.

8

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68.

2

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98.

3

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128.

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a158.

7

C

188.

8

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69.

2

AP

99.

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AP

129.

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a159.

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C

189.

8

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70.

2

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100.

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130.

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a160.

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71.

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101.

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131.

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a161.

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72.

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102.

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132.

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a162.

7

C

sg This question also appears in the Study Guide.

st This question also appears in a self-test at the student companion website.

a This question covers a topic in an appendix to the chapter.

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy
Brief Exercises
190.

1

AP

193.

3

AP

196.

5

AP

199.

7

AP

191.

2

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194.

3

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197.

5

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200.

7

AP

192.

2,3

AP

195.

4

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198.

7

AP

a201.

7

AP

Exercises
202.

1

C

207.

2,3

AN

212.

4

AP

217.

5

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a222.

7

AP

203.

2,3

AP

208.

2

AP

213.

4

AP

218.

5

C

a223.

7

AP

204.

2,3

AP

209.

3

AP

214.

5

AN

219.

5

AP

a224.

7

AP

205.

2

E

210.

3

AP

215.

5

AP

220.

5

AP

a221.

7

AP

206.

2,3

AP

211.

4

AP

216.

5

AP

a221.

6

AP

a226.

7

AP

Completion Statements
227.

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229.

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231.

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233.

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228.

1

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230.

2

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232.

3

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234.

3

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236.

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Matching Statements

237.

1

K

Short-Answer Essay

238.

3

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240.

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242.

1

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244.

1

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239.

1

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241.

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243.

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245.

1

K

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Learning Objective 1
1.

TF

35.

TF

46.

MC

51.

MC

56.

MC

202.

Ex

239.

SA

2.

TF

36.

TF

47.

MC

52.

MC

57.

MC

227.

C

242.

SA

3.

TF

43.

MC

48.

MC

53.

MC

111.

MC

228.

C

244.

SA

4.

TF

44.

MC

49.

MC

54.

MC

165.

MC

229.

C

245.

SA

5.

F

45.

MC

50.

MC

55.

MC

190.

BE

237.

MA

Learning Objective 2
6.

TF

60.

MC

65.

MC

70.

MC

157.

MC

204.

Ex

230.

C

7.

TF

61.

MC

66.

MC

71.

MC

158.

MC

205.

Ex

231.

C

37.

TF

62.

MC

67.

MC

72.

MC

203.

Ex

206.

Ex

58.

MC

63.

MC

68.

MC

73.

MC

166.

BE

207.

Ex

59.

MC

64.

MC

69.

MC

156.

MC

167.

BE

208.

Ex

Learning Objective 3
8.

TF

75.

MC

83.

MC

91.

MC

99.

MC

107.

MC

209.

Ex

9.

TF

76.

MC

84.

MC

92.

MC

100.

MC

169.

MC

210.

Ex

10.

TF

77.

MC

85.

MC

93.

MC

101.

MC

192.

BE

232.

C

11.

TF

78.

MC

86.

MC

94.

MC

102.

MC

193.

BE

233.

C

12.

TF

79.

MC

87.

MC

95.

MC

103.

MC

194.

BE

234.

C

38.

TF

80.

MC

88.

MC

96.

MC

104.

MC

203.

Ex

240.

SA

39.

TF

81.

MC

89.

MC

97.

MC

105.

MC

204.

Ex

74.

MC

82.

MC

90.

MC

98.

MC

106.

MC

206.

Ex

SUMMARY OF Learning OBJECTIVES BY QUESTION TYPE
Learning Objective 4
13.

TF

15.

TF

108.

MC

110.

MC

170.

MC

211.

Ex

213.

Ex

14.

TF

40.

TF

109.

MC

112.

MC

195.

BE

212.

Ex

Learning Objective 5
16.

TF

26.

TF

117.

MC

127.

MC

137.

MC

172.

MC

235.

C

17.

TF

27.

TF

118.

MC

128.

MC

138.

MC

173.

MC

236.

C

18.

TF

28.

TF

119.

MC

129.

MC

139.

MC

196.

BE

241.

SA

19.

TF

29.

TF

120.

MC

130.

MC

140.

MC

197.

BE

243.

SA

20.

TF

41.

TF

121.

MC

131.

MC

141.

MC

215.

Ex

21.

TF

42.

TF

122.

MC

132.

MC

142.

MC

216.

Ex

22.

TF

113.

MC

123.

MC

133.

MC

143.

MC

217.

Ex

23.

TF

114.

MC

124.

MC

134.

MC

144.

MC

218.

Ex

24.

TF

115.

MC

125.

MC

135.

MC

145.

MC

219.

Ex

25.

TF

116.

MC

126.

MC

136.

MC

171.

MC

220.

Ex

Learning Objective a6
a34.

TF

175.

MC

178.

MC

181.

MC

184.

MC

187.

MC

a225.

Ex

a146.

MC

176.

MC

179.

MC

182.

MC

185.

MC

188.

MC

a147.

MC

177.

MC

180.

MC

183.

MC

186.

MC

189.

MC

Learning Objective a7
a30.

TF

a149.

MC

a154.

MC

a159.

MC

a164.

MC

a201.

BE

a225.

Ex

a31.

TF

a150.

MC

a155.

MC

a160.

MC

a174.

MC

a221.

Ex

a226.

Ex

a32.

TF

a151.

MC

a156.

MC

a161.

MC

a198.

BE

a222.

Ex

a33.

TF

a152.

MC

a157.

MC

a162.

MC

a199.

BE

a223.

Ex

a148.

MC

a153.

MC

a158.

MC

a163.

MC

a200.

BE

a224.

Ex

Learning Objective 8

175.

MC

177.

MC

179.

MC

181.

MC

183.

MC

185.

MC

176.

MC

178.

MC

180.

MC

182.

MC

184.

MC

Note: TF = True-False BE = Brief Exercise C = Completion

MC = Multiple Choice Ex = Exercise SA = Short-Answer

MA = Matching

CHAPTER LEARNING OBJECTIVES
1. Identify the differences between service and merchandising companies. Because of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual and a periodic inventory system.

2. Explain the recording of purchases under a perpetual inventory system. The company debits the Inventory account for all purchases of merchandise, and freight-in, and credits it for purchase discounts and purchase returns and allowances.

3. Explain the recording of sales revenues under a perpetual inventory system. When a merchandising company sells inventory, it debits Accounts Receivable (or Cash) and credits Sales Revenue for the selling price of the merchandise. At the same time, it debits Cost of Goods Sold and credits Inventory for the cost of the inventory items sold. Sales returns and allowances and sales discounts are debited and are contra revenue accounts.

4. Explain the steps in the accounting cycle for a merchandising company. Each of the required steps in the accounting cycle for a service company applies to a merchandising company. A worksheet is again an optional step. Under a perpetual inventory system, the company must adjust the Inventory account to agree with the physical count.

5. Distinguish between a multiple-step and a single-step income statement. A multiple-step income statement shows numerous steps in determining net income, including nonoperating activities sections. A single-step income statement classifies all data under two categories, revenues or expenses, and determines net income in one step.

a6. Prepare a worksheet for a merchandising company. The steps in preparing a worksheet for a merchandising company are the same as for a service company. The unique accounts for a merchandiser are Inventory, Sales Revenue, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold.

a7. Explain the recording of purchases and sales of inventory under a periodic inventory system. In recording purchases under a periodic system, companies must make entries for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. In recording sales, companies must make entries for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.

TRUE-FALSE STATEMENTS
1. Retailers and wholesalers are both considered merchandisers.

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

2. The steps in the accounting cycle are different for a merchandising company than for a service company.

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

3. Sales minus operating expenses equals gross profit.

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

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

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

5. A periodic inventory system requires a detailed inventory record of inventory items.

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

6. Freight terms of FOB Destination means that the seller pays the freight costs.

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

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

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

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

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

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

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

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

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

11. Sales Returns and Allowances and Sales Discounts are both designed to encourage customers to pay their accounts promptly.

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

12. To grant a customer a sales return, the seller credits Sales Returns and Allowances.

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

13. A company's unadjusted balance in Inventory will usually not agree with the actual amount of inventory on hand at year-end.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

14. For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.

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

15. A merchandising company has different types of adjusting entries than a service company.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

16. Nonoperating activities exclude revenues and expenses that result from secondary or auxiliary operations.

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

17. Operating expenses are different for merchandising and service enterprises.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

18. Net sales appears on both the multiple-step and single-step forms of an income statement.

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

19. A multiple-step income statement provides users with more information about a company’s income performance.

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

20. The multiple-step form of income statement is easier to read than the single-step form.

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

21. Inventory is classified as a current asset in a classified balance sheet.

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

22. Gain on sale of equipment and interest expense are reported under other revenues and gains in a multiple-step income statement.

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

23. The gross profit section for a merchandising company appears on both the multiple-step and single-step forms of an income statement.

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

24. In a multiple-step income statement, income from operations excludes other revenues and gains and other expenses and losses.

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

25. A single-step income statement reports all revenues, both operating and other revenues and gains, at the top of the statement.

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

26. If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.

Ans: T, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

27. Gross profit represents the merchandising profit of a company.

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

28. Gross profit is a measure of the overall profitability of a company.

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

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

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

a30. In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a31. Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.

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

a32. Under a periodic inventory system, the acquisition of inventory is charged to the Purchases account.

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

a33. Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.

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

a34. Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases to produce net purchases.

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

35. Inventory is reported as a long-term asset on the balance sheet.

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

36. Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.

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

37. The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.

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

38. Sales revenue should be recorded in accordance with the matching principle.

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

39. Sales returns and allowances and sales discounts are subtracted from sales in reporting net sales in the income statement.

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

40. A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

41. If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.

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

42. The major difference between the balance sheets of a service company and a merchandising company is inventory.

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

Answers to True-False Statements

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

1.

T

7.

T

13.

T

19.

T

25.

T

a31.

F

37.

F

2.

F

8.

F

14.

T

20.

F

26.

T

a32.

T

38.

F

3.

F

9.

F

15.

F

21.

T

27.

T

a33.

F

39.

T

4.

T

10.

T

16.

F

22.

F

28.

F

a34.

T

40.

T

5.

F

11.

F

17.

F

23.

F

29.

F

35.

F

41.

F

6.

T

12.

F

18.

T

24.

T

30.

T

36.

T

42.

T

MULTIPLE CHOICE QUESTIONS
43. Net income is gross profit less

a. financing expenses.

b. operating expenses.

c. other expenses and losses.

d. other expenses.

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

44. An enterprise which sells goods to customers is known as a

a. proprietorship.

b. corporation.

c. retailer.

d. service firm.

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

45. Which of the following would not be considered a merchandising company?

a. Retailer

b. Wholesaler

c. Service firm

d. Dot Com firm

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

46. A merchandising company that sells directly to consumers is a

a. retailer.

b. wholesaler.

c. broker.

d. service company.

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

47. Two categories of expenses for merchandising companies are

a. cost of goods sold and financing expenses.

b. operating expenses and financing expenses.

c. cost of goods sold and operating expenses.

d. sales and cost of goods sold.

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

48. The primary source of revenue for a wholesaler is

a. investment income.

b. service fees.

c. the sale of merchandise.

d. the sale of fixed assets the company owns.

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

49. Sales revenue less cost of goods sold is called

a. gross profit.

b. net profit.

c. net income.

d. marginal income.

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

50. After gross profit is calculated, operating expenses are deducted to determine

a. gross margin.

b. net income.

c. gross profit on sales.

d. net margin.

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

51. Cost of goods sold is determined only at the end of the accounting period in

a. a perpetual inventory system.

b. a periodic inventory system.

c. both a perpetual and a periodic inventory system.

d. neither a perpetual nor a periodic inventory system.

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

52. Which of the following expressions is incorrect?

a. Gross profit – operating expenses = net income

b. Sales revenue – cost of goods sold – operating expenses = net income

c. Net income + operating expenses = gross profit

d. Operating expenses – cost of goods sold = gross profit

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

53. Detailed records of goods held for resale are not maintained under a

a. perpetual inventory system.

b. periodic inventory system.

c. double entry accounting system.

d. single entry accounting system.

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

54. A perpetual inventory system would likely be used by a(n)

a. automobile dealership.

b. hardware store.

c. drugstore.

d. convenience store.

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

55. Which of the following is a true statement about inventory systems?

a. Periodic inventory systems require more detailed inventory records.

b. Perpetual inventory systems require more detailed inventory records.

c. A periodic system requires cost of goods sold be determined after each sale.

d. A perpetual system determines cost of goods sold only at the end of the accounting period.

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

56. In a perpetual inventory system, cost of goods sold is recorded

a. on a daily basis.

b. on a monthly basis.

c. on an annual basis.

d. with each sale.

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

57. If a company determines cost of goods sold each time a sale occurs, it

a. must have a computer accounting system.

b. uses a combination of the perpetual and periodic inventory systems.

c. uses a periodic inventory system.

d. uses a perpetual inventory system.

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

58. Under a perpetual inventory system, acquisition of merchandise for resale is debited to the

a. Inventory account.

b. Purchases account.

c. Supplies account.

d. Cost of Goods Sold account.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

59. The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit

a. Accounts Payable.

b. Purchase Returns and Allowances.

c. Sales Revenue.

d. Inventory.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

60. The Inventory account is used in each of the following except the entry to record

a. goods purchased on account.

b. the return of goods purchased.

c. payment of freight on goods sold.

d. payment within the discount period.

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

61. A buyer would record a payment within the discount period under a perpetual inventory system by crediting

a. Accounts Payable.

b. Inventory.

c. Purchase Discounts.

d. Sales Discounts.

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

62. If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the

a. Inventory account will be increased.

b. Inventory account will not be affected.

c. seller will bear the freight cost.

d. carrier will bear the freight cost.

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

63. Freight costs paid by a seller on merchandise sold to customers will cause an increase

a. in the selling expense of the buyer.

b. in operating expenses for the seller.

c. to the cost of goods sold of the seller.

d. to a contra-revenue account of the seller.

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

64. Paden Company purchased merchandise from Emmett Company with freight terms of FOB shipping point. The freight costs will be paid by the

a. seller.

b. buyer.

c. transportation company.

d. buyer and the seller.

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

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

a. $8,100

b. $8,280

c. $8,820

d. $9,000

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

Solution: $9,000 ( (1 - .02) ( $8,820

66. Scott Company purchased merchandise with an invoice price of $3,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

a. 20%

b. 24%

c. 18%

d. 36%

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

Solution: [360 ( (30 ( 10)] ( 1% ( 18%

67. If a company is given credit terms of 2/10, n/30, it should

a. hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.

b. pay within the discount period and recognize a savings.

c. pay within the credit period but don't take the trouble to invest the cash while waiting to pay the bill.

d. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.

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

68. In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited to

a. Inventory.

b. Purchase Discounts.

c. Purchase Allowance.

d. Sales Discounts.

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

69. Jake’s Market recorded the following events involving a recent purchase of merchandise:

Received goods for $60,000, terms 2/10, n/30.

Returned $1,200 of the shipment for credit.

Paid $300 freight on the shipment.

Paid the invoice within the discount period.

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

a. $57,624.

b. $57,918.

c. $57,924.

d. $59,100.

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

Solution: [($60,000 ( $1,200( .98)] ( 300 ( $57,924

70. Costner’s Market recorded the following events involving a recent purchase of merchandise:

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

Returned $800 of the shipment for credit.

Paid $200 freight on the shipment.

Paid the invoice within the discount period.

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

a. increased by $38,416.

b. increased by $38,612.

c. increased by $38,616.

d. increased by $39,400.

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

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

71. Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in

a. Freight Expense.

b. Freight - In.

c. Inventory.

d Freight - Out.

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

72. Glover Co. returned defective goods costing $5,000 to Mal Company on April 19, for credit. The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by Glover Co. on April 19, in receiving full credit is:

a. Accounts Payable 5,000

Inventory 5,000

b. Accounts Payable 5,000

Inventory 150

Cash 5,150

c. Accounts Payable 5,000

Purchase Discounts 120

Inventory 4,850

d. Accounts Payable 5,000

Inventory 120

Cash 4,850

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

73. McIntyre Company made a purchase of merchandise on credit from Marvin Company on August 8, for $9,000, terms 3/10, n/30. On August 17, McIntyre makes the appropriate payment to Marvin. The entry on August 17 for McIntyre Company is:

a. Accounts Payable 9,000

Cash 9,000

b. Accounts Payable 8,730

Cash 8,730

c. Accounts Payable 9,000

Purchase Returns and Allowances 270

MC. 73 (Cont.)

Cash 8,730

d. Accounts Payable 9,000

Inventory 270

Cash 8,730

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

Solution: $9,000 ( .97 ( $8,730

74. On July 9, Sheb Company sells goods on credit to Wooley Company for $5,000, terms 1/10, n/60. Sheb receives payment on July 18. The entry by Sheb on July 18 is:

a. Cash 5,000

Accounts Receivable 5,000

b. Cash 5,000

Sales Discounts 50

Accounts Receivable 4,950

c. Cash 4,950

Sales Discounts 50

Accounts Receivable 5,000

d. Cash 5,050

Sales Discounts 50

Accounts Receivable 5,000

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

Solution: $5,000 ( .99 ( $4,950

75. On November 2, 2014, Kasdan Company has cash sales of $6,000 from merchandise having a cost of $3,600. The entries to record the day's cash sales will include:

a. a $3,600 credit to Cost of Goods Sold.

b. a $6,000 credit to Cash.

c. a $3,600 credit to Inventory.

d a $6,000 debit to Accounts Receivable.

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

76. A credit sale of $4,000 is made on April 25, terms 2/10, n/30, on which a return of $250 is granted on April 28. What amount is received as payment in full on May 4?

a. $3,675

b. $3,750

c. $3,920

d $4,000

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

Solution: ($4,000 ( $250) ( .98 ( $3,675

77. The entry to record the receipt of payment within the discount period on a sale of $2,000 with terms of 2/10, n/30 will include a credit to

a. Sales Discounts for $40.

b. Cash for $1,960.

c. Accounts Receivable for $2,000.

d. Sales Revenue for $2,000.

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

78. The collection of a $6,000 account within the 2 percent discount period will result in a

a. debit to Sales Discounts for $120.

b. debit to Accounts Receivable for $5,880.

c. credit to Cash for $5,880.

d. credit to Accounts Receivable for $5,880.

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

Solution: $6,000 ( .02 ( $120

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