Accounting I – Week 3

• Question 1

0 out of 1 points

	All of the following statements regarding inventory shrinkage are true except ______.
	Selected Answer: Inventory shrinkage is recognized by debiting an operating expense.   Response Feedback: Actually, inventory shrinkage refers to a loss of inventory which may be caused by theft or deterioration. The journal entry for shrinkage is a debit to cost of goods sold (also called cost of sales) and a credit (which is the reduction) to inventory. See Chapter 5’s completing the accounting cycle section to review.

• Question 2

1 out of 1 points

	Benson Company had cash sales of $94,275, credit sales of $83,450, sales returns and allowances of $1,700, and sales discounts of $3,475. Benson’s net sales for this period equal ______.
	Selected Answer: $172,550   Response Feedback: Correct! Net sales = $94,275 + $83,450 – $1,700 – $3,475 = $172,550.

• Question 3

1 out of 1 points

	A company has net sales and cost of goods sold of $752,000 and $543,000, respectively. Its net income is $17,530. The company’s gross margin and operating expenses are ________ and ____________, respectively.
	Selected Answer: $209,000; $191,470   Response Feedback: Correct! In this problem the calculation is formulated as $752,000- $543,000 = x – y = $17,530. Since x = $209,000, which is the gross margin, then y = $209,000 – 17,530 = $191,470.

• Question 4

1 out of 1 points

	An account used in the periodic inventory system that is not used in the perpetual inventory system is ______.
	Selected Answer: purchases   Response Feedback: Correct! “Purchases” is an account used in the periodic inventory system that is not used in the perpetual inventory system.

• Question 5

1 out of 1 points

	Merchandise inventory becomes part of cost of goods sold when a company ______.
	Selected Answer: sells the inventory   Response Feedback: Correct! Merchandise inventory becomes part of cost of goods sold when a company sells the inventory.

• Question 6

1 out of 1 points

	Using the following year-end information for Breanne Boutique, calculate the current ratio and acid-test ratio for the boutique: Cash                                                                                       $52,000 Short-term investments                                                  12,000 Accounts receivable                                                          54,000 Inventory                                                                             325,000 Prepaid expenses                                                               17,500 Accounts payable                                                             106,500 Other current payables                                                    25,000
	Selected Answer: 3.50 and 0.90   Response Feedback: Correct! The calculations of 0.50 and 0.90 are the current ratio and acid-test ratio for the boutique.

• Question 7

1 out of 1 points

	The entry to record a sales return from a customer would require a(n) ______.
	Selected Answer: increase to sales returns and allowances   Response Feedback: Correct! An entry to record a sales return from a customer would require an increase to sales returns and allowances.

• Question 8

0 out of 1 points

	Featherweight Company sold merchandise worth $800 on credit, terms n/15. The merchandise sold had cost $550. What is the required journal entry to record the transaction under the perpetual inventory system?
	Selected Answer: Merchandise Inventory           800 Sales                                                      800 Cost of Goods Sold                          550 Merchandise Inventory                                550   Response Feedback: [Answer is (A)] Actually, accounts receivable is debited for the amount of the sale and sales is credited for the amount of the sale. Cost of goods sold is debited for the cost of the inventory; merchandise inventory is credited for the cost of the inventory. See Chapter 5’s sections called purchase discounts and purchases returns and allowances to review these concepts.

• Question 9

1 out of 1 points

	Which of the following does not represent a sale?
	Selected Answer: Merchandise placed aside for a customer who plans to come in next week and pay with cash   Response Feedback: Correct! Merchandise placed aside for a customer who plans to come in next week and pay with cash does not represent a sale.

• Question 10

1 out of 1 points

	Which of the following goods would not be included in merchandise inventory for a purchasing company?
	Selected Answer: Goods in transit shipped FOB destination   Response Feedback: Correct! Goods in transit shipped FOB destination would not be included in merchandise inventory for a purchasing company.

• Question 1

1 out of 1 points

	Merchandise inventory becomes part of cost of goods sold when a company ______.
	Selected Answer: sells the inventory   Response Feedback: Correct! Merchandise inventory becomes part of cost of goods sold when a company sells the inventory.

• Question 2

1 out of 1 points

	The amount of cost of goods available for sale during the year depends on the amounts of ______.
	Selected Answer: beginning merchandise inventory and net cost of purchases   Response Feedback: Correct! The amount of cost of goods available for sale during the year depends on the amounts of beginning merchandise inventory and net cost of purchases.

• Question 3

0 out of 1 points

	Use this information to answer the following question. The selected accounts and balances for Keystone Market appear as follows: Advertising Expense                                       $14,000 Arthur Tatum, Capital                                     140,000 Arthur Tatum, Withdrawals                         21,000 Freight-In                                                            7,000 Freight-Out Expense                                      10,000 Interest Income                                                               24,000 Merchandise Inventory (Jan. 1)                 70,000 Merchandise Inventory (Dec. 31)             56,000 Purchases                                                           60,000 Purchases Returns & Allowances              4,000 Rent Expense                                                    9,000 Sales                                                                      169,000 Sales Returns and Allowances                    19,000 Wages Expense                                                                32,000 The gross margin would be _______.
	Selected Answer: $92,000   Response Feedback: Actually, the gross margin would be calculated by net sales minus the cost of goods sold to equal the gross margin. This is the periodic inventory system which requires the cost of goods sold to be calculated by adding beginning inventory to net purchases and subtracting ending inventory. See Chapter 5’s section on income reporting for a merchandiser.   Gross margin = net sales – cost of goods sold net sales =   (169,000-19,000) – ((70,000 + (60000-4000))- 56000)

• Question 4

0 out of 1 points

	All of the following statements regarding inventory shrinkage are true except ______.
	Selected Answer: Inventory shrinkage is recognized by debiting cost of goods sold.   Response Feedback: Actually, inventory shrinkage refers to a loss of inventory which may be caused by theft or deterioration. The journal entry for shrinkage is a debit to cost of goods sold (also called cost of sales) and a credit (which is the reduction) to inventory. See Chapter 5’s completing the accounting cycle section to review.

• Question 5

1 out of 1 points

	Using the following year-end information for Breanne Boutique, calculate the current ratio and acid-test ratio for the boutique: Cash                                                                                       $52,000 Short-term investments                                                  12,000 Accounts receivable                                                          54,000 Inventory                                                                             325,000 Prepaid expenses                                                               17,500 Accounts payable                                                             106,500 Other current payables                                                    25,000
	Selected Answer: 3.50 and 0.90   Response Feedback: Correct! The calculations of 0.50 and 0.90 are the current ratio and acid-test ratio for the boutique.

• Question 6

1 out of 1 points

	Which of the following accounts would be closed with a debit?
	Selected Answer: sales   Response Feedback: Correct! Sales discounts, sales returns, and allowances and cost of goods sold are all normal debit accounts whereas sales are a normal credit account. When closing the period’s temporary (income statement) accounts, you would credit the normally debit accounts and debit the normally credit accounts to make the balances zero for these accounts.

• Question 7

1 out of 1 points

	Under the perpetual inventory system, in addition to making the entry to record a sale, a company would ______.
	Selected Answer: record a decrease in inventory and an increase in cost of goods sold for the cost of the merchandise sold   Response Feedback: Correct! A company would record a decrease in inventory and an increase in cost of goods sold for the cost of the merchandise sold.

• Question 8

1 out of 1 points

	A company has net sales and cost of goods sold of $752,000 and $543,000, respectively. Its net income is $17,530. The company’s gross margin and operating expenses are ________ and ____________, respectively.
	Selected Answer: $209,000; $191,470   Response Feedback: Correct! In this problem the calculation is formulated as $752,000- $543,000 = x – y = $17,530. Since x = $209,000, which is the gross margin, then y = $209,000 – 17,530 = $191,470.

• Question 9

1 out of 1 points

	A company purchases merchandise with a catalog price of $20,000. The company receives a 35% trade discount from the seller. The seller also offers credit terms of 2/10, n/30. Assuming no returns were made and that payment was made on within the discount period, what is the net cost of the merchandise?
	Selected Answer: $12,740   Response Feedback: Correct! The net cost of merchandise is $12,740.

• Question 10

1 out of 1 points

	An account used in the periodic inventory system that is not used in the perpetual inventory system is ______.
	Selected Answer: purchases   Response Feedback: Correct! “Purchases” is an account used in the periodic inventory system that is not used in the perpetual inventory system.

 

Which of the following does not represent a sale?

Selected Answer: Merchandise placed aside for a customer who plans to come in next week and pay with cash   Response Feedback: Correct! Merchandise placed aside for a customer who plans to come in next week and pay with cash does not represent a sale.

• Question 2

0 out of 1 points

	A company records the following journal entry: debit Cash $1,470, debit Sales Discounts $30, and credit Accounts Receivable $1,500. This means that a customer has taken a(n) ______ cash discount for early payment.
	Selected Answer: 2%   Response Feedback: Actually, the discount = $30/$1,500 = 2%. Review Chapter 5’s sales discounts section.

• Question 3

1 out of 1 points

	A company purchased $10,000 of merchandise on June 15 with terms of 3/10, n/45. On June 20, it returned $800 of that merchandise. On June 24, it paid the balance owed for the merchandise taking any discount it is entitled to. The cash paid on June 24 equals:
	Selected Answer: $8,924   Response Feedback: Correct! The cash paid on June 24 equals $8,924.

• Question 4

1 out of 1 points

	An account used in the periodic inventory system that is not used in the perpetual inventory system is ______.
	Selected Answer: purchases   Response Feedback: Correct! “Purchases” is an account used in the periodic inventory system that is not used in the perpetual inventory system.

• Question 5

0 out of 1 points

	Which of the following goods would not be included in merchandise inventory for a purchasing company?
	Selected Answer: Goods in transit shipped FOB shipping point   Response Feedback: FOB shipping point means the buyer owns during transit. FOB destination means the seller owns during transit. Review this practice in Chapter 5’s section on transportation costs and ownership transfer.

• Question 6

0 out of 1 points

	Use this information to answer the following question. The selected accounts and balances for Keystone Market appear as follows: Advertising Expense                                       $14,000 Arthur Tatum, Capital                                     140,000 Arthur Tatum, Withdrawals                         21,000 Freight-In                                                            7,000 Freight-Out Expense                                      10,000 Interest Income                                                               24,000 Merchandise Inventory (Jan. 1)                 70,000 Merchandise Inventory (Dec. 31)             56,000 Purchases                                                           60,000 Purchases Returns & Allowances              4,000 Rent Expense                                                    9,000 Sales                                                                      169,000 Sales Returns and Allowances                    19,000 Wages Expense                                                                32,000 The gross margin would be _______.
	Selected Answer: $80,000   Response Feedback: Actually, the gross margin would be calculated by net sales minus the cost of goods sold to equal the gross margin. This is the periodic inventory system which requires the cost of goods sold to be calculated by adding beginning inventory to net purchases and subtracting ending inventory. See Chapter 5’s section on income reporting for a merchandiser.

• Question 7

1 out of 1 points

	Using the following year-end information for Breanne Boutique, calculate the current ratio and acid-test ratio for the boutique: Cash                                                                                       $52,000 Short-term investments                                                  12,000 Accounts receivable                                                          54,000 Inventory                                                                             325,000 Prepaid expenses                                                               17,500 Accounts payable                                                             106,500 Other current payables                                                    25,000
	Selected Answer: 3.50 and 0.90   Response Feedback: Correct! The calculations of 0.50 and 0.90 are the current ratio and acid-test ratio for the boutique.

• Question 8

1 out of 1 points

	Merchandise inventory becomes part of cost of goods sold when a company ______.
	Selected Answer: sells the inventory   Response Feedback: Correct! Merchandise inventory becomes part of cost of goods sold when a company sells the inventory.

• Question 9

1 out of 1 points

	Under the perpetual inventory system, which of the following accounts would not be used?
	Selected Answer: Purchases   Response Feedback: Correct! A purchases account is only used in a periodic inventory system.

• Question 10

1 out of 1 points

	A company purchases merchandise with a catalog price of $20,000. The company receives a 35% trade discount from the seller. The seller also offers credit terms of 2/10, n/30. Assuming no returns were made and that payment was made on within the discount period, what is the net cost of the merchandise?
	Selected Answer: $12,740   Response Feedback: Correct! The net cost of merchandise is $12,740.

 

• Question 1

1 out of 1 points

	The entry to record a sales return from a customer would require a(n) ______.
	Selected Answer: increase to sales returns and allowances   Response Feedback: Correct! An entry to record a sales return from a customer would require an increase to sales returns and allowances.

• Question 2

1 out of 1 points

	Featherweight Company sold merchandise worth $800 on credit, terms n/15. The merchandise sold had cost $550. What is the required journal entry to record the transaction under the perpetual inventory system?
	Selected Answer: Accounts Receivables             800 Sales                                                      800 Cost of Goods Sold                          550 Merchandise Inventory                                550   Response Feedback: Correct! The required journal entry to record the transaction would be as follows. Accounts Receivables                    800 Sales                                                      800 Cost of Goods Sold                          550 Merchandise Inventory                                550

• Question 3

1 out of 1 points

	Which of the following accounts would be closed with a debit?
	Selected Answer: sales   Response Feedback: Correct! Sales discounts, sales returns, and allowances and cost of goods sold are all normal debit accounts whereas sales are a normal credit account. When closing the period’s temporary (income statement) accounts, you would credit the normally debit accounts and debit the normally credit accounts to make the balances zero for these accounts.

• Question 4

1 out of 1 points

	A company purchases merchandise with a catalog price of $20,000. The company receives a 35% trade discount from the seller. The seller also offers credit terms of 2/10, n/30. Assuming no returns were made and that payment was made on within the discount period, what is the net cost of the merchandise?
	Selected Answer: $12,740   Response Feedback: Correct! The net cost of merchandise is $12,740.

• Question 5

1 out of 1 points

	Benson Company had cash sales of $94,275, credit sales of $83,450, sales returns and allowances of $1,700, and sales discounts of $3,475. Benson’s net sales for this period equal ______.
	Selected Answer: $172,550   Response Feedback: Correct! Net sales = $94,275 + $83,450 – $1,700 – $3,475 = $172,550.

• Question 6

1 out of 1 points

	The amount of cost of goods available for sale during the year depends on the amounts of ______.
	Selected Answer: beginning merchandise inventory and net cost of purchases   Response Feedback: Correct! The amount of cost of goods available for sale during the year depends on the amounts of beginning merchandise inventory and net cost of purchases.

• Question 7

1 out of 1 points

	Each of the following companies is a merchandising business except a _______.
	Selected Answer: car wash   Response Feedback: Correct! A car wash is not considered a merchandising business.

• Question 8

1 out of 1 points

	On October 1, Whaley Company sold merchandise in the amount of $5,800 to Lee Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Whaley uses the perpetual inventory system. Lee pays the invoice on October 8, and takes the appropriate discount. The journal entry that Whaley makes on October 8 is:
	Selected Answer: Cash                                                                                                      $5,684 Sales discount                                                                                   $  116 Accounts receivable                                                                                       $5,800   Response Feedback: Correct! The Sales discount = $5,800 * 0.02 = $116; Cash = $5,800 – $116 = $5,684.

• Question 9

1 out of 1 points

	Using the following year-end information for Breanne Boutique, calculate the current ratio and acid-test ratio for the boutique: Cash                                                                                       $52,000 Short-term investments                                                  12,000 Accounts receivable                                                          54,000 Inventory                                                                             325,000 Prepaid expenses                                                               17,500 Accounts payable                                                             106,500 Other current payables                                                    25,000
	Selected Answer: 3.50 and 0.90   Response Feedback: Correct! The calculations of 0.50 and 0.90 are the current ratio and acid-test ratio for the boutique.

• Question 10

1 out of 1 points

	Under the perpetual inventory system, which of the following accounts would not be used?
	Selected Answer: Purchases   Response Feedback: Correct! A purchases account is only used in a periodic inventory system.

 

 

REFERENCE: http://wenku.baidu.com/view/884b9f63caaedd3383c4d3cb

 

Chapter 005 Accounting for Merchandising Operations Summary of Questions by Difficulty Level (DL) and Learning Objective (LO) True/False Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. DL Easy Easy Easy Easy Med Med Med Med Med Med Easy Med Med Hard Easy Easy Easy Easy Easy Med Med Med Med Hard Easy LO C1 C1 C1 C1 C1 C1 C1 C1 C1 C1 C1 C2 C1 C2 C3 C3 C4 A1 A1 A1 A1 A1 A1 A1 A2 Item 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. DL Easy Med Hard Hard Easy Easy Easy Easy Easy Easy Med Med Med Med Med Med Med Med Med Med Hard Hard Easy Easy Easy LO A2 A2 A2 A2 P1 P3 P1 P1 P1 P1 P1 P1 P1 P1 P1 P1 P1 P1 P1 P1 P1 P1 P2 P2 P2 Item 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. DL Med Med Med Med Hard Easy Easy Med Med Med Hard Easy Easy Easy Med Med Med Med Easy Easy Easy Med Med Hard LO P2 P2 P2 P2 P2 P3 P3 P3 P3 P3 P3 P4 P4 P4 P4 P4 P4 P4 P5 P5 P5 P5 P5 P5 5-1 Chapter 005 Accounting for Merchandising Operations Multiple Choice Item 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. Matching Item 132. DL Med LO C2,P1,P3 P4,A1 Item 133. DL Med LO C1,C3,P1, P2,P4 Item DL LO DL Easy Easy Med Med Med Hard Easy Easy Med Hard Med Med Easy Easy Med Med Hard Hard Hard LO C1 C1 C1 C1 C1 C1 C2 C2 C2 C2 C4 C4 A1 A1 A1 A1 A1 A1 A1 Item 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. DL Hard Easy Easy Hard Hard Hard Easy Easy Med Med Med Med Hard Hard Easy Easy Med Med Med LO A1 A2 A2 A2 A2 A2 P1 P1 P1 P1 P1 P1 P1 P1 P2 P2 P2 P2 P2 Item 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. DL Med Med Med Med Hard Med Med Easy Easy Med Med Med Hard Easy Med Med Med Med Hard LO P2 P2 P2 P2 P2 P3 P3 P4 P4 P4 P4 P4 P4 P5 P5 P5 P5 P5 P5 Short Essay Item 134. 135. 136. 137. 138. 139. DL Easy Med Med Med Med Med LO C1 C1 C2 C2 C3 C4 Item 140. 141. 142. 143. 144. 145. DL Med Med Med Hard Hard Easy LO A1 A2 P1 P1 P2 P3 Item 146. 147. 148. 149. 150. DL Med Med Med Hard Med LO P3 P4 P4 P5 5-2 Chapter 005 Accounting for Merchandising Operations Problems Item 151. 152. 153. 154. 155. 156. 157. DL Easy Easy Hard Med Med Med Easy LO C1 C1 C1 A1 A1 A1 A2 Item 158. 159. 160. 161. 162. 163. 164. DL Med Hard Easy Med Hard Med Med LO A2 A2 P1 P1 P1,P2 P2 P2 Item 165. 166. 167. 168. 169. 170. 171. DL Med Hard Med Med Med Med Med LO P3 P3 P4 P4 P5 P5 P5 Completion Problems Item 172. 173. 174. 175. 176. 177. 178. 179. 180. DL Easy Med Easy Easy Easy Easy Easy Easy Easy LO C1 C1 C2 C2 C3 C3 C4 C4 A1 Item 181. 182. 183. 184. 185. 186. 187. 188. 189. DL Easy Med Med Med Med Med Easy Easy Easy LO A2 P1 P1 P1 P1 P1 P2 P2 P2 Item 190. 191. 192. 193. 194. 195. 196. 197. 198. DL Med Easy Easy Med Med Med Med Med Med LO P2 P3 P4 P4 P4 P4 P4 P4 P5 Problems Item 199. 200. DL Easy Easy LO C1 C1 Item 201. 202. DL Med Hard LO P3 P1,P2 Item 203. DL Hard LO P4 5-3 Chapter 005 Accounting for Merchandising Operations True / False Questions 1. Merchandise inventory consists of products that a company acquires to resell to customers. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C1 2. A service company earns net income by buying and selling merchandise. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C1 3. Gross profit is also called gross margin. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C1 4. Cost of goods sold is also called cost of sales. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C1 5-4 Chapter 005 Accounting for Merchandising Operations 5. A wholesaler is an intermediary that buys products from manufacturers or other wholesalers and sells them to consumers. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C1 6. A retailer is an intermediary that buys products from manufacturers and sells them to wholesalers. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C1 7. Cost of goods sold represents the cost of buying and preparing merchandise for sale. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C1 8. A company had sales and cost of goods sold of $350,000 and $200,000, respectively. Its gross profit equals $150,000. TRUE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: C1 5-5 Chapter 005 Accounting for Merchandising Operations 9. A company had net sales and cost of goods of $545,000 and $345,000, respectively. Its gross margin equals $890,000. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: C1 10. A company had a gross profit of $300,000 based on sales of $400,000. Its cost of goods sold equals $700,000. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: C1 11. A merchandising company’s operating cycle begins with the sale of merchandise and ends with the collection of cash from the sale. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C1 12. Merchandise inventory is reported in the long-term assets section of the balance sheet. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C2 5-6 Chapter 005 Accounting for Merchandising Operations 13. Cash sales shorten the operating cycle for a merchandiser; credit purchases lengthen operating cycles. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C1 14. Assets tied up in inventory are not productive assets. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: C2 15. A perpetual inventory system requires updating of the inventory account only at the beginning of an accounting period. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C3 16. A perpetual inventory system continually updates accounting records for inventory transactions. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C3 5-7 Chapter 005 Accounting for Merchandising Operations 17. Beginning merchandise inventory plus the net cost of purchases is the merchandise available for sale. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C4 18. The acid-test ratio is also called the quick ratio. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Easy Learning Objective: A1 19. Quick assets include cash, inventory, and current receivables. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Easy Learning Objective: A1 20. The acid-test ratio is defined as current assets divided by current liabilities. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1 5-8 Chapter 005 Accounting for Merchandising Operations 21. A common rule of thumb is that a company’s acid-test ratio should be at least 2 or a company may face near-term liquidity problems. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1 22. Successful use of a just-in-time inventory system can narrow the gap between the acid-test and the current ratio. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1 23. A company’s quick assets are $147,000 and its current liabilities are $143,000. This company’s acid-test ratio is 1.03. TRUE $147,000/$143,000 = 1.03 AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1 24. A company’s current ratio is 1.2 and its quick ratio is 0.25. This company is probably an excellent credit risk because the ratios reveal no indication of liquidity problems. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A1 5-9 Chapter 005 Accounting for Merchandising Operations 25. The gross margin ratio is defined as gross margin divided by net sales. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Easy Learning Objective: A2 26. The profit margin ratio is gross margin divided by total assets. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Easy Learning Objective: A2 27. The gross margin ratio reflects the relation between sales and cost of goods sold. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A2 28. A company had net sales of $340,500, its cost of goods sold was $257,000, and its net income was $13,750. The company’s gross margin ratio equals 24.5%. TRUE ($340,500 – $257,000)/$340,500 = 24.5% AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A2 5-10 Chapter 005 Accounting for Merchandising Operations 29. J.C. Penney had net sales of $24,750 million, cost of goods sold of $16,150 million, and net income of $837 million. Its gross margin ratio equals 3.4%. FALSE ($24,750 – $16,150)/$24,750 = 34.7% AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A2 30. The Merchandise Inventory account balance at the end of the current period is equal to the amount of beginning merchandise inventory for the next period. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P1 31. Cost of goods sold is reported on both the income statement and the balance sheet. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Easy Learning Objective: P3 32. Trade discounts are recorded in a Trade Discounts account in the accounting system. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P1 5-11 Chapter 005 Accounting for Merchandising Operations 33. Credit terms for a purchase include the amounts and timing of payments from a buyer to a seller. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P1 34. Purchase returns refer to merchandise a buyer acquires but then returns to the seller. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P1 35. Purchase allowances refer to merchandise a buyer acquires but then returns to the seller. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P1 36. Under the perpetual inventory system, the cost of merchandise purchased is recorded in the Purchases account. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 5-12 Chapter 005 Accounting for Merchandising Operations 37. Under the perpetual inventory system, the cost of merchandise purchased is recorded in the Merchandise Inventory account. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 38. Credit terms of 2/10, n/30 imply that the seller offers the purchaser a 2% cash discount if the amount is paid within 10 days of the invoice date. Otherwise, the full amount is due in 30 days. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 39. Sellers always offer a discount to buyers for prompt payment toward purchases made on credit. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 40. In a perpetual inventory system, the Merchandise Inventory account reflects the cost of goods available for sale. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 5-13 Chapter 005 Accounting for Merchandising Operations 41. Purchase discounts are the same as trade discounts. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 42. If a company sells merchandise with credit terms 2/10 n/60, the credit period is 10 days and the discount period is 60 days. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 43. The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit if goods are shipped FOB destination. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 44. If goods are shipped FOB shipping point, the seller does not record revenue from the sale until the goods arrive at their destination because the transaction is not complete until that point. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 5-14 Chapter 005 Accounting for Merchandising Operations 45. A buyer records the costs of shipping goods in a Delivery Expense, or transportation-out account when the buyer is responsible for these costs. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 46. A buyer did not take advantage of a supplier’s credit terms of 2/10, n/30, and instead paid the invoice in full at the end of 30 days. By not taking the discount the buyer lost the equivalent of 18% annual interest on the amount of the purchase. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: P1 47. FOB shipping point (or FOB factory) implies that ownership of goods transfers to the buyer at the buyer’s place of business. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: P1 48. Each sales transaction for a seller that uses a perpetual inventory system involves recognizing both revenue and cost of merchandise sold. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P2 5-15 Chapter 005 Accounting for Merchandising Operations 49. Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collections efforts. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P2 50. Sales discounts is a contra revenue account, meaning that the Sales Discounts account is added to the Sales account when computing a company’s net sales. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P2 51. A credit memorandum from a seller informs a buyer of the seller’s credit to its Accounts Payable account arising from a sales return or allowance. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P2 52. When a credit customer returns merchandise to the seller, under a perpetual inventory system, the seller would debit Sales Returns and Allowances and credit Accounts Receivable and also debit Merchandise Inventory and credit Cost of Goods Sold. TRUE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P2 5-16 Chapter 005 Accounting for Merchandising Operations 53. Because sellers assume that their customers will pay within the discount period, the seller usually records the discount at the time of the sale. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P2 54. A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20, and a credit to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for early payment. FALSE $20/$1,000 = 2% discount AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P2 55. Sales of $350,000 and net sales of $323,000 could reflect sales discounts of $27,000. TRUE $350,000 – $323,000 = $27,000 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Hard Learning Objective: P2 5-17 Chapter 005 Accounting for Merchandising Operations 56. A perpetual inventory system is able to directly measure and monitor inventory shrinkage and there is no need for a physical count of inventory. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P3 57. Sales Discounts are closed to the Income Summary account. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P3 58. Accounts unique to merchandising companies (versus service companies) include Merchandising Inventory, Sales, Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P3 59. Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold are all closed to the Income Summary account with debits. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P3 5-18 Chapter 005 Accounting for Merchandising Operations 60. In a perpetual inventory system, the merchandise inventory account must be closed at the end of the accounting period. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P3 61. The adjusting entry to reflect inventory shrinkage is a debit to Income Summary and a credit to Inventory Shrinkage Expense. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: P3 62. A multiple-step income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Easy Learning Objective: P4 63. Operating expenses are classified into two categories: selling expenses and cost of goods sold. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Easy Learning Objective: P4 5-19 Chapter 005 Accounting for Merchandising Operations 64. A merchandiser’s classified balance sheet reports merchandise inventory as a current asset. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Easy Learning Objective: P4 65. Generally accepted accounting principles require companies to use one specific format for the financial statements. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P4 66. Selling expenses support a company’s overall operations and include expenses related to accounting, human resource management, and financial management. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P4 67. When a company has no reportable nonoperating activities, its income from operations is simply labeled net income. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P4 5-20 Chapter 005 Accounting for Merchandising Operations 68. A single-step income statement includes cost of goods sold as another expense, and shows only one subtotal for total expenses. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P4 69. The periodic inventory system uses a temporary account called Purchases. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P5 70. The periodic inventory system is superior to the perpetual inventory system in preventing inventory shrinkage. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P5 71. The periodic inventory system requires updating the inventory account only at the end of the period to reflect the quantity and cost of both the goods available and the goods sold. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P5 5-21 Chapter 005 Accounting for Merchandising Operations 72. In a periodic inventory system, cost of goods sold is recorded as each sale occurs. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P5 73. Under both the periodic and perpetual inventory systems, the temporary account Purchases Returns and Allowances is used to accumulate the cost of all returns and allowances for a period. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P5 74. When preparing the unadjusted trial balance in a periodic inventory system, the amount that appears as Merchandise Inventory is the ending inventory amount. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: P5 5-22 Chapter 005 Accounting for Merchandising Operations Multiple Choice Questions 75. A merchandising company: A. Earns net income by buying and selling merchandise. B. Can buy products from manufacturers and sell to retailers. C. Can buy products from manufacturers and sell them to consumers. D. Can be a wholesaler or a retailer. E. All of these. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C1 76. A merchandising company: A. Earns net income by buying and selling merchandise. B. Receives fees only in exchange for services. C. Earns profit from commissions only. D. Earns profit from fares only. E. Buys products from consumers. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C1 77. Cost of goods sold: A. Is another term for merchandise sales. B. Is the term used for the cost of buying and preparing merchandise for sale. C. Is another term for revenue. D. Is also called gross margin. E. Is a term only used by service firms. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C1 5-23 Chapter 005 Accounting for Merchandising Operations 78. A company had sales of $695,000 and cost of goods sold of $278,000. Its gross margin equals: A. $(417,000). B. $695,000. C. $278,000. D. $417,000. E. $973,000. $695,000 – $278,000 = $417,000 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: C1 79. A company had sales of $375,000 and its gross profit was $157,500. Its cost of goods sold equals: A. $(217,000). B. $375,000. C. $157,500. D. $217,500. E. $532,500. $375,000 – $157,500 = $217,500 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: C1 5-24 Chapter 005 Accounting for Merchandising Operations 80. Gross profit: A. Is also called gross margin. B. Less other operating expenses equals income from operations. C. Equals net sales less cost of goods sold. D. Must cover all operating expenses to yield a return for the owner of the business. E. All of these. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: C1 81. Merchandise inventory: A. Is reported on the balance sheet as a current asset. B. Refers to products a company owns and intends to sell. C. Can include the cost of shipping the goods to the store and making them ready for sale. D. Does not appear on the balance sheet of a service company. E. All of these. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C2 82. The operating cycle of a merchandising company: A. Begins with the purchase of merchandise. B. Ends with the collection of cash from the sale of merchandise. C. Can vary in length among different merchandising companies. D. Sometimes involves accounts receivable. E. All of these. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C2 5-25 Chapter 005 Accounting for Merchandising Operations 83. Merchandise inventory: A. Is a long-term asset. B. Is a current asset. C. Includes supplies. D. Is classified with investments on the balance sheet. E. Must be sold within one month. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C2 84. The operating cycle for a merchandiser that sells only for cash moves from: A. Purchases of merchandise to inventory to cash sales. B. Purchases of merchandise to inventory to accounts receivable to cash sales. C. Inventory to purchases of merchandise to cash sales. D. Accounts receivable to purchases of merchandise to inventory to cash sales. E. Accounts receivable to inventory to cash sales. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: C2 85. The current period’s ending inventory is: A. The next period’s beginning inventory. B. The current period’s cost of goods sold. C. The prior period’s beginning inventory. D. The current period’s net purchases. E. The current period’s beginning inventory. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C4 5-26 Chapter 005 Accounting for Merchandising Operations 86. Beginning inventory plus net purchases is: A. Cost of goods sold. B. Merchandise available for sale. C. Ending inventory. D. Sales. E. Shown on the balance sheet. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C4 87. The acid-test ratio: A. Is also called the quick ratio. B. Measures profitability. C. Measures inventory turnover. D. Is generally greater than the current ratio. E. All of these. AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Easy Learning Objective: A1 88. The quick assets are defined as: A. Cash, short-term investments, and inventory. B. Cash, short-term investments, and current receivables. C. Cash, inventory, and current receivables. D. Cash, noncurrent receivables, and prepaid expenses. E. Accounts receivable, inventory, and prepaid expenses. AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Easy Learning Objective: A1 5-27 Chapter 005 Accounting for Merchandising Operations 89. ABC Corporation’s total quick assets were $5,888,000, its current assets were $11,700,000 and its current liabilities were $8,000,000. Its acid-test ratio equals: A. 0.50. B. 0.68. C. 0.74. D. 1.50. E. 2.20. $5,888,000/$8,000,000 = 0.74 AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1 90. A company’s current assets were $17,980, its quick assets were $11,420 and its current liabilities were $12,190. Its quick ratio equals: A. 0.94. B. 1.07. C. 1.48. D. 1.57. E. 2.40. $11,420/$12,190 = 0.94 AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1 5-28 Chapter 005 Accounting for Merchandising Operations 91. Liquidity problems are likely to exist when a company’s acid-test ratio: A. Is less than the current ratio. B. Is 1 to 1. C. Is higher than 1 to 1. D. Is substantially lower than 1 to 1. E. Is higher than the current ratio. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A1 92. The acid-test ratio differs from the current ratio in that: A. Liabilities are divided by current assets. B. Prepaid expenses and inventory are excluded from the calculation of the acid-test ratio. C. The acid-test ratio measures profitability and the current ratio does not. D. The acid-test ratio excludes short-term investments from the calculation. E. The acid-test ratio is a measure of liquidity but the current ratio is not. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A1 5-29 Chapter 005 Accounting for Merchandising Operations Breanna Boutique reported the following year-end information: 93. The current ratio and acid-test ratio for the boutique are _________ and ________, respectively: A. 1.8 and 1 B. 1.97 and 1.52 C. 2.73 and 1.52 D. 3.50 and 0.90 E. None of these Current ratio = $460,500/$131,500 = 3.50 Acid-test ratio = $118,000/$131,500 = 0.90 AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A1 94. Based on the ratios and analysis of the account balances for Breanna Boutique, the company is: A. likely to face near-term liquidity problems. B. unlikely to face near-term liquidity problems. C. likely raising liquidity concerns unless cash can be generated from inventory sales. D. unlikely raising liquidity concerns. E. Both A and C. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A1 5-30 Chapter 005 Accounting for Merchandising Operations 95. The gross margin ratio: A. Is also called the net profit ratio. B. Measures a merchandising firm’s ability to earn a profit from the sale of inventory. C. Is also called the profit margin. D. Is a measure of liquidity. E. Should be greater than 1. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: A2 96. A company’s gross profit was $83,750 and its net sales were $347,800. Its gross margin ratio equals: A. 4.2%. B. 24.1%. C. 75.9%. D. $83,750. E. $264,050. $83,750/$347,800 = 24.1% AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Easy Learning Objective: A2 5-31 Chapter 005 Accounting for Merchandising Operations 97. A company’s net sales were $676,600, its cost of good sold was $236,810 and its net income was $33,750. Its gross margin ratio equals: A. 5%. B. 9.6%. C. 35%. D. 65%. E. 285.7%. ($676,600 – $236,810)/$676,600 = 65% AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A2 98. A company had net sales and cost of goods sold of $752,000 and $543,000, respectively. Its net income was $17,530. The company’s gross margin ratio equals: A. 18.9% B. 24.5% C. 27.8% D. 34.7% E. 35.2% ($752,000 – $543,000)/$752,000 = 27.8% AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A2 5-32 Chapter 005 Accounting for Merchandising Operations 99. J.C. Penny had net sales of $28,496 million, its cost of goods sold was $19,092 million, and its net income was $997 million. Its gross margin ratio equals: A. 3.5%. B. 5.2%. C. 33%. D. 67%. E. 149.3%. ($28,496 – $19,092)/$28,496 = 33% AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A2 100. The credit terms 2/10, n/30 are interpreted as: A. 2% cash discount if the amount is paid within 10 days, or the balance due in 30 days. B. 10% cash discount if the amount is paid within 2 days, or the balance due in 30 days. C. 30% discount if paid within 2 days. D. 30% discount if paid within 10 days. E. 2% discount if paid within 30 days. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P1 5-33 Chapter 005 Accounting for Merchandising Operations 101. A trade discount is: A. A term used by a purchaser to describe a cash discount given to customers for prompt payment. B. A reduction in price below the list price. C. A term used by a seller to describe a cash discount granted to customers for prompt payment. D. A reduction in price for prompt payment. E. Also called a rebate. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P1 102. The amount recorded for merchandise inventory includes: A. Any purchase discounts. B. Any returns and allowances. C. Any necessary freight costs. D. Any trade discounts. E. All of these. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 5-34 Chapter 005 Accounting for Merchandising Operations 103. A company uses the perpetual inventory system and recorded the following entry: This entry reflects a: A. Purchase. B. Return. C. Sale. D. Payment of the account payable and recognition of a cash discount taken. E. Purchase and recognition of a cash discount taken. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P1 104. A debit memorandum is: A. Required whenever a journal entry is recorded. B. The source document for the purchase of merchandise inventory. C. Required when a purchase discount is granted. D. The document a buyer issues to inform the seller of a debit made to the seller’s account in the buyer’s records. E. Not necessary in a perpetual inventory system. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 5-35 Chapter 005 Accounting for Merchandising Operations 105. A company purchased $1,800 of merchandise on December 5. On December 7, it returned $200 worth of merchandise. On December 8, it paid the balance in full, taking a 2% discount. The amount of the cash paid on December 8 equals: A. $200. B. $1,564. C. $1,568. D. $1,600. E. $1,800. ($1,800 – $200) x .98 = $1,568 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P1 106. A company purchased $4,000 worth of merchandise. Transportation costs were an additional $350. The company later returned $275 worth of merchandise and paid the invoice within the 2% cash discount period. The total amount paid for this merchandise is: A. $3,725.00. B. $3,925.00. C. $3,995.00. D. $4,000.50. E. $4,075.00. [($4,000 – $275) x .98] + $350 = $4,000.50 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Hard Learning Objective: P1 5-36 Chapter 005 Accounting for Merchandising Operations 107. A buyer failed to take advantage of the vendor’s credit terms of 2/15, n/45, but instead paid the invoice in full at the end of 60 days. By not taking advantage of the cash discount, the buyer lost the equivalent of ____________ annual interest on the amount of the purchase. A. 12.2% B. 16.2% C. 18.9% D. 24.3% E. 24.5% (365 / [45-15]) x .02 = 24.3% AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Hard Learning Objective: P1 108. Merchandising companies must account for: A. Sales. B. Sales discounts. C. Sales returns and allowances. D. Cost of merchandise sold. E. All of these. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P2 5-37 Chapter 005 Accounting for Merchandising Operations 109. Sales returns: A. Refer to merchandise that customers return to the seller after the sale. B. Refer to reductions in the selling price of merchandise sold to customers. C. Represent cash discounts. D. Represent trade discounts. E. Are not recorded under the perpetual inventory system until the end of each accounting period. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P2 110. Sales returns and allowances: A. Can provide useful information about dissatisfied customers and the possibility of lost future sales. B. Are recorded in a separate contra-revenue account. C. Are rarely disclosed in published financial statements. D. Are closed to the Income Summary account. E. All of these. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P2 111. A debit to Sales Returns and Allowances and a credit to Accounts Receivable: A. Reflects an increase in amount due from a customer. B. Recognizes that a customer returned merchandise and/or received an allowance. C. Requires a debit memorandum to recognize the customer’s return. D. Is recorded when a customer takes a discount. E. All of these. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P2 5-38 Chapter 005 Accounting for Merchandising Operations 112. Sales less sales discounts less sales returns and allowances equals: A. Net purchases. B. Cost of goods sold. C. Net sales. D. Gross profit. E. Net income. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P2 113. Herald Company had sales of $135,000, sales discounts of $2,000, and sales returns of $3,200. Herald Company’s net sales equals: A. $5,200. B. $129,800. C. $133,000. D. $135,000. E. $140,200. $135,000 – $2,000 – $3,200 = $129,800 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P2 5-39 Chapter 005 Accounting for Merchandising Operations 114. On October 1, Robinson Company sold merchandise in the amount of $5,800 to Rosser, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robinson uses the perpetual inventory system. The journal entry or entries that Robinson will make on October 1 is: A. B. C. D. E. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P2 5-40 Chapter 005 Accounting for Merchandising Operations 115. On October 1, Whaley Company sold merchandise in the amount of $5,800 to Lee Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Whaley uses the perpetual inventory system. Lee pays the invoice on October 8, and takes the appropriate discount. The journal entry that Whaley makes on October 8 is: A. B. C. D. E. $5,800 x .02 = $116 $5,800 – $116 = $5,684 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P2 5-41 Chapter 005 Accounting for Merchandising Operations 116. On October 1, Mutch Company sold merchandise in the amount of $5,800 to Carr Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Mutch uses the perpetual inventory system. On October 4, Carr returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Mutch must make on October 4 is: A. B. C. D. E. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P2 5-42 Chapter 005 Accounting for Merchandising Operations 117. A company records the following journal entry: debit Cash $1,470, debit Sales Discounts $30, and credit Accounts Receivable $1,500. This means that a customer has taken a ___ cash discount for early payment. A. 1% B. 2% C. 5% D. 10% E. 15% $30/$1,500 = 2% discount AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Hard Learning Objective: P2 118. Inventory shrinkage: A. Refers to the loss of inventory. B. Is determined by comparing a physical count of inventory with recorded inventory amounts. C. Is recognized by debiting Cost of Goods Sold. D. Can be caused by theft or deterioration. E. All of these. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P3 5-43 Chapter 005 Accounting for Merchandising Operations 119. Which of the following accounts would be closed with a credit? A. Sales Discounts. B. Sales Returns and Allowances. C. Cost of Goods Sold. D. Operating Expenses. E. All of these. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P3 120. An income statement that includes cost of goods sold as another expense and shows only one subtotal for total expenses is a: A. Balanced income statement. B. Single-step income statement. C. Multiple-step income statement. D. Combined income statement. E. Simplified income statement. AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Easy Learning Objective: P4 121. Expenses that support the overall operations of a business and include the expenses relating to accounting, human resource management, and financial management are called: A. Cost of goods sold. B. Selling expenses. C. Purchasing expenses. D. General and administrative expenses. E. Nonoperating activities. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P4 5-44 Chapter 005 Accounting for Merchandising Operations 122. Benson Company had cash sales of $94,275, credit sales of $83,450, sales returns and allowances of $1,700, and sales discounts of $3,475. Benson’s net sales for this period equal: A. $94,275. B. $172,550. C. $174,250. D. $176,025. E. $177,725. $94,275 + $83,450 – $1,700 – $3,475 = $172,550 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P4 123. Multiple-step income statements: A. Are required by the FASB. B. Contain more detail than a simple listing of revenues and expenses. C. Are required for the perpetual inventory system. D. List cost of goods sold as an operating expense. E. Can only be used in perpetual inventory systems. AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P4 124. Expenses of promoting sales by displaying and advertising merchandise, making sales, and delivering goods to customers are: A. General and administrative expenses. B. Cost of goods sold. C. Selling expenses. D. Purchasing expenses. E. Nonoperating activities. AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P4 5-45 Chapter 005 Accounting for Merchandising Operations 125. A company has net sales and cost of goods sold of $752,000 and $543,000, respectively. Its net income is $17,530. The company’s gross margin and operating expenses are ________ and ____________, respectively. A. $209,000; $191,470 B. $191,470; $209,000 C. $525,470; $227,000 D. $227,000; $525,470 E. $734,000; $191,470 $752,000 – $543,000 = $209,000; $209,000 – $17,530 = $191,470 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Hard Learning Objective: P4 126. An account used in the periodic inventory system that is not used in the perpetual inventory system is A. Merchandise Inventory B. Sales C. Sales Returns and Allowances D. Accounts Payable E. Purchases AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P5 5-46 Chapter 005 Accounting for Merchandising Operations 127. When preparing an unadjusted trial balance using a periodic inventory system, the amount shown for Merchandise Inventory is: A. The ending inventory amount. B. The beginning inventory amount. C. Equal to the cost of goods sold. D. Equal to the cost of goods purchased. E. Equal to the gross profit. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P5 128. On October 1, Courtland Company sold merchandise in the amount of $5,800 to Carter Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Courtland uses the periodic inventory system. The journal entry or entries that Courtland will make on October 1 is: A. B. C. D. E. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P5 5-47 Chapter 005 Accounting for Merchandising Operations 129. On October 1, Courtland Company sold merchandise in the amount of $5,800 to Carter Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Courtland uses the periodic inventory system. Carter pays the invoice on October 8, and takes the appropriate discount. The journal entry that Courtland makes on October 8 is: A. B. C. D. E. $5,800 x .02 = $116 $5,800 – $116 = $5,684 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P5 5-48 Chapter 005 Accounting for Merchandising Operations 130. On October 1, Courtland Company sold merchandise in the amount of $5,800 to Carter Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Courtland uses the periodic inventory system. On October 4, Carter returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Courtland must make on October 4 is: A. B. C. D. E. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P5 5-49 Chapter 005 Accounting for Merchandising Operations 131. On October 1, Courtland Company sold merchandise in the amount of $5,800 to Carter Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Courtland uses the periodic inventory system. On October 4, Carter returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. Carter pays the invoice on October 8, and takes the appropriate discount. The journal entry that Courtland makes on October 8 is: A. B. C. D. E. $5,800 – $500 = $5,300 x .02 = $106 $5,300 – $106 = $5,194 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Hard Learning Objective: P5 5-50 Chapter 005 Accounting for Merchandising Operations Matching Questions 132. Match the following definitions and terms by placing the letter for the terms a through j in the blank space next to the best definition. a. List price b. Merchandise inventory c. EOM d. Single-step income statement e. FOB f. Acid-test ratio g. Inventory shrinkage h. Selling expenses i. Multiple-step income statement j. General and administrative expenses 1. Expenses that support overall operations and includes expenses related to accounting, human resource management and financial management. 2. The catalog price of an item before any trade discount is deducted. 3. Products a company owns and intends to sell. 4. Inventory losses that can occur as a result of theft or deterioration. 5. An income statement format that shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items. 6. The expenses of promoting sales by displaying and advertising merchandise, making sales, and delivering goods to customers. 7. The abbreviation for end-of-month; used to describe credit terms for some transactions. 8. The abbreviation for free on board; refers to the point when ownership of goods passes to the buyer. 9. An income statement format that shows only one subtotal for total expenses. 10. A ratio used to assess a company’s ability to pay its current liabilities; defined as quick assets divided by current liabilities. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: A1 Learning Objective: C2 Learning Objective: P1 Learning Objective: P3 Learning Objective: P4 f d e b 10 9 8 3 j 1 c 7 g 4 i 5 a 2 h 6 5-51 Chapter 005 Accounting for Merchandising Operations 133. Match the following terms with the appropriate definition. 1. Periodic inventory system 2. Debit memorandum 3. Perpetual inventory system 4. Credit period 5. Selling expenses 6. Credit memorandum A notification that the sender has credited the recipient’s account kept by the sender. The amount of time allowed before full payment is due. The description of the amounts and timing of payments from a buyer to a seller. A notification that the sender has debited the recipient’s account kept by the sender. The time period in which a cash discount is available and a reduced payment can be made by the buyer. 6 4 9 2 10 8 Net sales less cost of goods sold. An accounting method that updates the accounting records for merchandise transactions only at the end of a 7. Sales discount period. An accounting method that continually updates 8. Gross profit accounting records for merchandise transactions. A cash discount granted to customers for paying within 9. Credit terms the discount period. The expenses of promoting sales, by displaying and advertising merchandise, making sales, and delivering 10. Discount period goods to customers. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C1 Learning Objective: C3 Learning Objective: P1 Learning Objective: P2 Learning Objective: P4 1 3 7 5 5-52 Chapter 005 Accounting for Merchandising Operations Short Answer Questions 134. Identify and explain the key components of income for a merchandising company. The basic components of income begin with net sales. Cost of goods sold is subtracted from net sales to get gross profit (also called gross margin). Operating expenses are then subtracted from gross margin to determine net income. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C1 135. Describe the difference between wholesalers and retailers. A wholesaler is an intermediary that buys products from manufacturers and sells to retailers or other wholesalers. A retailer is an intermediary that buys products from manufacturers or wholesalers and sells them to consumers. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C1 136. Describe the key attributes of inventory for a merchandising company. Merchandise inventory is a current asset that represents products a company owns and intends to sell. Its costs include all necessary expenses to buy the inventory, ship it to the store, and make it ready for sale. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C2 5-53 Chapter 005 Accounting for Merchandising Operations 137. List the steps of the operating cycle for a merchandiser with credit sales. The steps are: (1) cash purchases of merchandise; (2) inventory for sale; (3) credit sales (4) accounts receivable; (5) cash collection. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C2 138. What is the difference between the periodic and perpetual inventory systems? A periodic inventory system updates the inventory account only at the end of a period. A perpetual inventory system continually updates accounting records for merchandise transactions. The perpetual inventory system is increasing in popularity due to technological advances and competitive pressures. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C3 139. Explain the cost flows and operating activities of a merchandising company. Beginning inventory plus the net cost of purchases is the merchandise available for sale. As inventory is sold, its cost is recorded in cost of goods sold on the income statement. What remains is the ending inventory on the balance sheet. A period’s ending inventory becomes the next period’s beginning inventory. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C4 5-54 Chapter 005 Accounting for Merchandising Operations 140. What is the acid-test ratio? How does it measure a company’s liquidity? The acid-test ratio is calculated by dividing quick assets (cash, current receivables, and short-term investments) by current liabilities. The acid-test measures the ability of a firm to pay its current liabilities. As a rule of thumb an acid test ratio less than 1 means that current liabilities exceed quick assets and the company is likely to face near-term liquidity problems. AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1 141. What is gross margin ratio? How is it used as an indicator of profitability? The gross margin ratio is calculated by dividing gross margin (or net sales less cost of goods sold) by net sales. The gross margin ratio measures a firm’s profitability in selling its inventory. The gross margin must be large enough to cover operating expenses and provide sufficient net income to the owner(s). AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: A2 5-55 Chapter 005 Accounting for Merchandising Operations 142. What does FOB stand for? Differentiate between FOB shipping point (or FOB factory) and FOB destination. FOB stands for free on board. If goods are shipped FOB shipping point, ownership transfers to the buyer when the goods depart the seller’s place of business, and the seller records revenue at that time. The buyer is then responsible for paying shipping costs and bearing the risk of damage or loss when goods are in transit. If goods are shipped FOB destination, ownership transfers to the buyer when the goods arrive at the buyer’s place of business. The seller is responsible for paying shipping costs and bears the risk of damage or loss in transit. The seller does not record revenue until the goods arrive at the destination because the transaction is not complete before that point. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 143. Describe the recording process (including costs) for purchasing merchandise inventory using a perpetual inventory system. Purchases, net of trade discounts, are added (debited) to the Merchandise Inventory account. Purchases discounts and purchases returns and allowances are subtracted (credited) from Merchandise Inventory. Transportation-in costs are added (debited) to Merchandise Inventory. The accounting procedures are recorded each time merchandise purchases occur. In this way, merchandise inventory reflects all net purchases on a timely basis. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: P1 5-56 Chapter 005 Accounting for Merchandising Operations 144. Describe the recording process (including costs) for sales of merchandise inventory using a perpetual inventory system. Sales are recorded at list price less any trade discounts. The cost of items sold is transferred from Merchandise Inventory to Cost of Goods Sold. Refunds or credits for returned merchandise are recorded (debited) to Sales Returns and Allowances. When cash discounts from the sales price are taken, the seller records (debits) the amount of the discounts to Sales Discounts. These accounting processes are recorded each time sales transactions occur. In this way, merchandise inventory, cost of sales, sales and receivables (or cash) reflect sales transactions on a timely basis. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: P2 145. What is inventory shrinkage? How do managers account for shrinkage? Inventory shrinkage is the loss of merchandise inventory due to theft or deterioration or similar phenomena. Inventory shrinkage is typically added (debited) to the cost of goods sold and Merchandise Inventory is reduced (credited) for the amount of the shrinkage. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P3 5-57 Chapter 005 Accounting for Merchandising Operations 146. How do closing entries for a merchandising company that uses the perpetual inventory system differ from the closing entries for a service company? Merchandising companies have some accounts that must be closed that service companies do not have. Generally, the revenue account for merchandising companies is called Sales rather than Fees Earned. It is closed with a debit, as are other revenues. Service companies do not have Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold that all appear in the accounts of merchandising companies. Each of these accounts must be closed with a credit. The remaining closing entries – closing Income Summary to Owner’s Capital, and closing Withdrawals to Owner’s Capital – are identical whether the firm is a merchandising firm or a service firm. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P3 147. Explain the difference between the single-step and multiple-step income statements. A single-step income statement format includes cost of goods sold as another expense, and shows only one subtotal for total expenses. A multiple-step income statement format shows detailed computation of net sales and other costs and expenses, and reports subtotals for various classes of items. AACSB: Communications AICPA BB: Industry AICPA FN: Reportng Difficulty: Medium Learning Objective: P4 5-58 Chapter 005 Accounting for Merchandising Operations 148. Distinguish between selling expenses and general and administrative expenses. Selling expenses include the expenses of promoting sales by displaying and advertising merchandise, making sales, and delivering goods to customers. General and administrative expenses support a company’s overall operations and include expenses related to accounting, human resource management, and financial management. Some expenses can relate to both areas and are allocated between them. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P4 149. What are the difference(s) between the periodic and the perpetual inventory systems? Under a perpetual system each purchase, purchase return and allowance, purchase discount, and transportation-in is recorded in the merchandise inventory account. Under a periodic system, a separate temporary account is set up for each of these items. The perpetual inventory system yields more timely information for managers to better monitor and control inventory costs and levels. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: P5 5-59 Chapter 005 Accounting for Merchandising Operations 150. In order to be successful, Joel Boblit of BigBadToyStore knew that he had to effectively track merchandising activities. Describe how using an inventory management system improved control over inventory and management of the business. Tracking merchandise activities was necessary to set prices and to mange discounts, allowances and returns of both sales and purchases. A perpetual inventory system enabled Joel to order the right type and amounts of inventory to meet customer demand and use space more efficiently. By ordering and stocking the correct amount of inventory, this reduces the costs of out-of-stock and excess inventory. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Problems 151. Nichole Company had net sales of $500,000 and cost of goods sold of $350,000. Calculate Nichole’s gross profit. $500,000 – $350,000 = $150,000 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Easy Learning Objective: C1 152. Harriet’s Toy Shop had net sales of $852,000. The gross profit was $230,000. Calculate Harriet’s cost of goods sold. $852,000 – $230,000 = $622,000 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Easy Learning Objective: C1 5-60 Chapter 005 Accounting for Merchandising Operations 153. Fill in the blanks (a) through (g) for the Hendricks Company for each of the income statements for 2008, 2009, and 2010. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Hard Learning Objective: C1 5-61 Chapter 005 Accounting for Merchandising Operations 154. The following information is available for Trico and its two main competitors in the industry (Duco and Unico): The industry standard for the current ratio is 1.8 and the industry standard for the acid-test ratio is 1. Required: 1. Calculate the current ratio and acid-test ratio for each firm. 2. Rank the firms in decreasing order of liquidity. 3. Comment on Trico’s relative liquidity position. 5-62 Chapter 005 Accounting for Merchandising Operations Part 1 Part 2: Rank order: Part 3: Trico’s current ratio lags behind Duco’s but is ahead of both Unico and the industry average. Trico’s acid test ratio is behind both Unico and Duco but is ahead of the industry average. Overall, Trico appears reasonably strong on liquidity. 5-63 Chapter 005 Accounting for Merchandising Operations AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A1 155. The following information refers to Annie’s Attic and its competitors in the antiques business. Required: Comment on the relative liquidity positions of these companies. Both Chisolm’s Collectibles and Bart’s Basement have acceptable levels of liquidity. However, even though Annie’s Attic and Martin’s Marbles have acceptable current ratios, their quick ratios indicate a potential liquidity problem. We should attempt to collect additional information to support or refute the evidence of a potential liquidity problem. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1 5-64 Chapter 005 Accounting for Merchandising Operations 156. A company reported the following year-end information: Required: 1. Explain the purpose of the acid-test ratio. 2. Calculate the acid-test ratio for this company. 3. What does the acid-test ratio reveal about this company? 1. The acid-test ratio measures the ability of a firm to pay its current liabilities. It is a more stringent test of liquidity as compared to the current ratio. 2. 3. This company does not have enough quick assets to be considered in a strong liquidity position. The company may have too much money tied up in inventory or other less liquid current (or noncurrent) assets. Additional analyses should be undertaken to verify or refute this apparent liquidity concern. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1 5-65 Chapter 005 Accounting for Merchandising Operations 157. Calculate the gross margin ratio for each of the following separate cases A through D: AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Easy Learning Objective: A2 5-66 Chapter 005 Accounting for Merchandising Operations 158. A company reported the following information for the month of November: Required: Calculate this company’s gross margin ratio. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A2 5-67 Chapter 005 Accounting for Merchandising Operations 159. The following information is for Trico and its competitor Unico. Required: 1. Calculate the dollar amount of gross margin and the gross margin ratio to the nearest percent, for each company for both years. 2. Which company had the more favorable ratio for each year? 3. Which company had the more favorable change in the gross margin ratio over this 2-year period? 1. 2. Trico had the more favorable ratio for each year. 3. Unico’s gross margin ratio is increasing, while Trico’s is decreasing. Moreover, these changes appear significant and warrant further analysis. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A2 5-68 Chapter 005 Accounting for Merchandising Operations 160. A company that uses the perpetual inventory system purchased $8,500 on September 25. Terms of the purchase were 2/10, n/30. The invoice was paid in full on October 4. Prepare the journal entries to record these merchandise transactions. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Easy Learning Objective: P1 161. Roller Blade Company uses the perpetual inventory system and had the following transactions during October: Prepare journal entries to record each of the preceding transactions. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P1 5-69 Chapter 005 Accounting for Merchandising Operations 162. Ceres Computer Sales uses the perpetual inventory system and had the following transactions during December. Required: Prepare the general journal entries to record these transactions. 5-70 Chapter 005 Accounting for Merchandising Operations 5-71 Chapter 005 Accounting for Merchandising Operations AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Hard Learning Objective: P1 Learning Objective: P2 163. Steve’s Skateboards uses the perpetual inventory system and had the following sales transactions during April: Prepare the journal entries that Steve’s Skateboards must make to record these transactions. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P2 5-72 Chapter 005 Accounting for Merchandising Operations 164. Maia’s Bike Shop uses the perpetual inventory system and had the following transactions during the month of May: Prepare the required journal entries that Maia’s Bike Shop must make to record these transactions. 5-73 Chapter 005 Accounting for Merchandising Operations AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P2 5-74 Chapter 005 Accounting for Merchandising Operations 165. Following is the year-end adjusted trial balance for Yakima’s Sporting Goods for the current year: Prepare the closing entries at December 31 for the current year. 5-75 Chapter 005 Accounting for Merchandising Operations AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P3 5-76 Chapter 005 Accounting for Merchandising Operations 166. The year-end adjusted trial balance of ABC Supply for the current year, is shown below: Prepare closing entries at December 31 for the current year. 5-77 Chapter 005 Accounting for Merchandising Operations Closing entries: AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Hard Learning Objective: P3 5-78 Chapter 005 Accounting for Merchandising Operations 5-79 Chapter 005 Accounting for Merchandising Operations 167. From the above adjusted trial balance for the Worker Products Company, prepare a multiple-step income statement in good form. AACSB: Analytic, Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P4 5-80 Chapter 005 Accounting for Merchandising Operations 168. From the above adjusted trial balance for Worker Products, prepare the necessary closing entries. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P4 5-81 Chapter 005 Accounting for Merchandising Operations 169. Neutron uses a periodic inventory system. Prepare general journal entries to record the following transactions for Neutron: AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P5 5-82 Chapter 005 Accounting for Merchandising Operations 170. Steve’s Skateboards uses the periodic inventory system and had the following sales transactions during April: Prepare the journal entries that Steve’s Skateboards must make to record these transactions. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P5 5-83 Chapter 005 Accounting for Merchandising Operations 171. Maia’s Bike Shop uses the periodic inventory system and had the following transactions during the month of May: Prepare the required journal entries that Maia’s Bike Shop must make to record these transactions. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P5 5-84 Chapter 005 Accounting for Merchandising Operations Fill in the Blank Questions 172. A company had net sales of $741,800. Its cost of goods sold must have been _________ to yield a gross profit of $282,884. $741,800 – $282,884 = $458,916 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Easy Learning Objective: C1 173. A ___________ is an intermediary that buys products from manufacturers and sells to retailers. Wholesaler AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: C1 174. A merchandising company’s ___________ begins with the purchase of merchandise and ends with the collection of cash from merchandise sales. Operating cycle AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C2 175. ________________________ refers to products that a company owns and intends to sell. Merchandise inventory AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C2 5-85 Chapter 005 Accounting for Merchandising Operations 176. A ___________ inventory system updates the accounting record for inventory only at the end of a period. Periodic AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C3 177. The __________________ inventory system continually updates accounting records for merchandise transactions for the amounts of inventory available for sale and inventory sold. Perpetual AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C3 178. Beginning inventory plus the net cost of purchases is the _____________________. Merchandise available for sale. AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C4 179. A period’s ___________________ becomes the next period’s beginning inventory. Ending inventory AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C4 5-86 Chapter 005 Accounting for Merchandising Operations 180. The acid-test ratio reflects the ___________ of a company. Liquidity AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: A1 181. The gross margin ratio equals net sales less ___________ divided by net sales. Cost of goods sold AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: A2 182. A company purchased $8,750 worth of merchandise, with terms of 2/10, n/30. The invoice was paid within the cash discount period. Accordingly, the company received a cash discount of _______________. $175 AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P1 183. The amounts and timing of payment from a buyer to a seller are the ____________________. Credit terms AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 5-87 Chapter 005 Accounting for Merchandising Operations 184. A _______________________ is a document the buyer issues to inform the seller of a debit made to the seller’s account in the buyer’s records. Debit memorandum AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 185. FOB _________________ means the buyer accepts ownership when the goods depart the seller’s place of business. The buyer is responsible for paying shipping costs and bears the risk of damage or loss when goods are in transit. Shipping point, or factory AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 186. FOB _________________ means ownership of goods transfers to the buyer when the goods arrive at the buyer’s place of business. The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit. Destination AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1 187. ____________________ refer to merchandise that customers return to the seller after a sale. Sales returns AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P2 5-88 Chapter 005 Accounting for Merchandising Operations 188. ___________________ refer to reductions in the selling price of merchandise sold to customers, often involving damaged or defective merchandise that a customer is willing to purchase with a decrease in the selling price. Sales allowances AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P2 189. A seller usually prepares a ____________________ to confirm a buyer’s return or allowance, and informs the buyer of the seller’s credit to the buyer’s Account Receivable on the seller’s books. Credit memorandum AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P2 190. Sales discounts can benefit a seller by decreasing the delay in receiving cash, and ___________. Reducing future collection efforts AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P2 191. Inventory shrinkage can be computed by comparing the ___________ of inventory with recorded quantities and amounts. Physical count (or count) AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P3 5-89 Chapter 005 Accounting for Merchandising Operations 192. ___________ expenses are those expenses that support a company’s overall operations and include expenses related to accounting, human resource management, and financial management. General and administrative AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Easy Learning Objective: P4 193. A _____________________ income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items. Multiple-step AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P4 194. A ______________________ income statement includes cost of goods sold as another expense and shows only one subtotal for total expenses. Single-step AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P4 195. _______________________ are nonoperating activities that include interest, dividend, and rent revenues, and gains from asset disposals. Other revenues and gains AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P4 5-90 Chapter 005 Accounting for Merchandising Operations 196. ______________________ are nonoperating activities that include interest expense, losses from asset disposals, and casualty losses. Other expenses and losses AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P4 197. When a company has no reportable nonoperating activities, its income from operations is reported as ___________________ Net income AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P4 198. Under the ___________ system, each purchase, purchase return and allowance, purchase discount, and transportation-in transaction is recorded in a separate temporary account. Periodic AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P5 True / False Questions 199. Delivery expense can also be called transportation-out or freight-out. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C1 5-91 Chapter 005 Accounting for Merchandising Operations 200. Delivery expense is reported as part of general and administrative expense in the seller’s income statement. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: C1 Problems 201. Sam’s Wholesale shows the following account balances in its ledger on June 30, its fiscal year-end. Sam’s Wholesale uses the perpetual inventory system. A physical count of its June 30 year-end inventory discloses that the cost of the merchandise inventory still available is $57,160. Prepare the entry to record any inventory shrinkage. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P3 5-92 Chapter 005 Accounting for Merchandising Operations 202. Prepare journal entries to record the following merchandising transactions of Dean Company, which applies the perpetual inventory system. Dean Company offers all of its credit customers credit terms of 2/10, n/30. 5-93 Chapter 005 Accounting for Merchandising Operations 5-94 Chapter 005 Accounting for Merchandising Operations AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Hard Learning Objective: P1 Learning Objective: P2 5-95 Chapter 005 Accounting for Merchandising Operations 203. From the adjusted trial balance given below for the Mirror Company, prepare a multiple-step income statement in good form. Salaries expense and depreciation expense on the building are equally divided between selling activities and the general and administrative activities. 5-96 Chapter 005 Accounting for Merchandising Operations AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Difficulty: Hard Learning Objective: P4 5-97