Chapter 05 Accounting for Merchandising Operations

MULTIPLE CHOICE QUESTIONS

Merchandise inventory refers to products that a company owns and intends to sell to customers.

• 1. True
  2. False

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

A service company earns net income by buying and selling merchandise.

• 1. True
  2. False

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Gross profit is also called gross margin.

• 1. True
  2. False

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Cost of goods sold is also called cost of sales.

• 1. True
  2. False

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

A wholesaler buys products from manufacturers or other wholesalers and sells them to consumers.

• 1. True
  2. False

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

A retailer buys products from manufacturers and sells them to wholesalers.

• 1. True
  2. False

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Cost of goods sold represents the cost of buying and preparing merchandise for sale.

• 1. True
  2. False

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. A company had sales of $350,000 and cost of goods sold of $200,000. Its gross profit equals

$150,000.

True

• 1. False

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company had net sales of $545,000 and cost of goods sold of $345,000. Its gross margin equals

$890,000.

True

• 1. False

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company had a gross profit of $300,000 based on sales of $400,000. Its cost of goods sold equals

$700,000.

True

• 1. False

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A merchandising company's operating cycle begins with the purchase of merchandise and ends with the collection of cash from the sale.

True

• 1. False

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Merchandise inventory is reported in the long-term assets section of the balance sheet.

• 1. True
  2. False

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

Cash sales shorten the operating cycle for a merchandiser; credit sales lengthen operating cycles.

• 1. True
  2. False

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Cost of goods sold is an expense, and is reported on the income statement.

• 1. True
  2. False

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. A periodic inventory system requires updating of the inventory account only at the beginning of an accounting period.

True

• 1. False

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. A perpetual inventory system continually updates accounting records for merchandising transactions.

True

• 1. False

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Beginning inventory plus net purchases equals merchandise available for sale.

• 1. True
  2. False

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

The acid-test ratio is also called the quick ratio.

• 1. True
  2. False

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

Quick assets include cash and cash equivalents, inventory, and current receivables.

• 1. True
  2. False

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

The acid-test ratio is defined as current assets divided by current liabilities.

• 1. True
  2. False

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

1. A common rule of thumb is that a company's acid-test ratio should have a value near or higher than 1 to conclude that a company is unlikely to face near-term liquidity problems.

True

• 1. False

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

1. Successful use of a just-in-time inventory system can narrow the gap between the acid-test and the current ratio.

True

• 1. False

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

1. 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

• 1. False

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. 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.

True

• 1. False

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

The gross margin ratio is defined as gross margin divided by net sales.

• 1. True
  2. False

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

The profit margin ratio is the same as the gross profit ratio.

• 1. True
  2. False

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

1. 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

• 1. False

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. The Merchandise Inventory account balance at the beginning of the current period is equal to the amount of ending Merchandise Inventory from the previous period.

True

• 1. False

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Credit terms for a purchase include the amounts and timing of payments from a buyer to a seller.

• 1. True
  2. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Purchase returns refer to merchandise a buyer acquires but then returns to the seller.

• 1. True
  2. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.

• 1. True
  2. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Purchase allowances refer to a price reduction (allowance) granted to a buyer of defective or unacceptable merchandise.

True

• 1. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Under the perpetual inventory system, the cost of merchandise purchased is recorded in the Merchandise Inventory account.

True

• 1. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. 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

• 1. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Sellers always offer a discount to buyers for prompt payment toward purchases made on credit.

• 1. True
  2. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Purchase discounts are the same as trade discounts.

• 1. True
  2. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. 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.

True

• 1. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. 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

• 1. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. If goods are shipped FOB destination, 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.

True

• 1. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. 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.

True

• 1. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. A buyer using a perpetual inventory system records the costs of shipping merchandise it purchases in a Delivery Expense account.

True

• 1. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. If a buyer does not take advantage of a supplier's credit terms of 2/10, n/30, and instead pays the invoice in full at the end of 30 days, by not taking the discount the buyer loses the equivalent of 18% annual interest on the amount of the purchase.

True

• 1. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

1. FOB shipping point means that the buyer accepts ownership when the goods arrive at the buyer's place of business.

True

• 1. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Each sales transaction for a seller that uses a perpetual inventory system involves recognizing both revenue and cost of merchandise sold.

True

• 1. False

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Offering sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collections efforts.

True

• 1. False

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Sales Discounts is added to the Sales account when computing a company's net sales.

• 1. True
  2. False

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Sales discounts has a normal debit balance because it decreases Sales, which has a normal credit balance.

True

• 1. False

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Under a perpetual inventory system, when a credit customer returns non-defective merchandise to the seller, the seller debits Sales Returns and Allowances and credits Accounts Receivable and also debits Merchandise Inventory and credits Cost of Goods Sold.

True

• 1. False

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

Each sale of merchandise has two parts: the revenue side and the cost side.

• 1. True
  2. False

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. 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.

True

• 1. False

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Sales of $350,000 and net sales of $323,000 could reflect sales discounts of $27,000.

• 1. True
  2. False

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A perpetual inventory system is able to directly measure and monitor inventory shrinkage and there is no need for a physical count of inventory.

True

• 1. False

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Sales Discounts and Sales Returns and Allowances are contra revenue accounts that are debited to close the accounts during the closing process.

True

• 1. False

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Cost of Goods Sold is debited to close the account during the closing process.

• 1. True
  2. False

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. In a perpetual inventory system, the Merchandise Inventory account must be closed at the end of the accounting period.

True

• 1. False

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. The adjusting entry to reflect inventory shrinkage is a debit to Income Summary and a credit to Inventory Shrinkage Expense.

True

• 1. False

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. 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

• 1. False

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

Operating expenses are classified into two categories: selling expenses and cost of goods sold.

• 1. True
  2. False

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

A merchandiser's classified balance sheet reports merchandise inventory as a current asset.

• 1. True
  2. False

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. Expenses related to accounting, human resource management, and financial management are known as selling expenses.

True

• 1. False

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. When a company has no reportable non-operating activities, its income from operations is simply labeled net income.

True

• 1. False

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. A single-step income statement includes cost of goods sold as another expense and shows only one subtotal for total expenses.

True

• 1. False

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. Under a periodic inventory system, purchases, purchases returns and allowances, purchase discounts, and transportation in transactions are recorded in the Merchandise Inventory account.

True

• 1. False

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. The periodic inventory system requires updating the inventory account only at the end of the period to reflect the quantity and cost of goods available for sale and the cost of goods sold.

True

• 1. False

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

In a periodic inventory system, cost of goods sold is recorded as each sale occurs.

• 1. True
  2. False

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. 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.

True

• 1. False

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.; 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Delivery expense is reported as part of general and administrative expense in the seller's income statement.

True

• 1. False

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

New revenue recognition rules require that sellers report sales net of expected sales discounts.

• 1. True
  2. False

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

The gross method requires a period-end adjusting entry to estimate future sales discounts.

• 1. True
  2. False

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Inventory Returns Estimated, which reflects an adjustment to inventory for expected future returns, is a liability account reported in the balance sheet, usually under Current Liabilities.

True

• 1. False

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. Inventory Returns Estimated is a current asset account used in a period-end adjusting entry to reflect the inventory estimated to be returned in the future.

True

• 1. False

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. Under the net method, when a company uses a perpetual inventory system, an invoice for $2,000 with terms of 2/10, n/30 should be recorded with a debit to Merchandise Inventory and a credit to Accounts Payable of $2,000.

True

• 1. False

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. When purchases are recorded at net amounts, any discounts lost as a result of late payments are reported as an operating expense.

True

• 1. False

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The net method initially records the invoice at its net amount (net of any cash discount).

• 1. True
  2. False

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Remember

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Either the gross method or net method may be used to record sales with cash discounts, but the net method requires a period-end adjusting entry to estimate expected future sales discounts taken.

True

• 1. False

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. Under the net method of recording purchases, the Discounts Lost account is used when the purchaser fails to take a discount offered by the seller.

True

• 1. False

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

A merchandiser:

• 1. Earns net income by buying and selling merchandise.
  2. Earns profit from fares only.
  3. Earns profit from commissions only.
  4. Receives fees only in exchange for services.
  5. Buys products from consumers.

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Cost of goods sold:

• 1. Is another term for revenue.
  2. Is another term for merchandise sales.
  3. Is also called gross margin.
  4. Is a term only used by service firms.
  5. Is the term used for the expense of buying and preparing merchandise for sale.

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

A company has sales of $695,000 and cost of goods sold of $278,000. Its gross profit equals: A) $(417,000).

B) $973,000. C) $695,000. D) $417,000. E) $278,000.

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A company has sales of $375,000 and its gross profit is $157,500. Its cost of goods sold equals: A) $532,500.

B) $157,500. C) $(217,000). D) $217,500. E) $375,000.

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The following statements regarding gross profit are true except:

• 1. Gross profit less other operating expenses equals income from operations.
  2. Gross profit is not calculated on the multiple-step income statement.
  3. Gross profit equals net sales less cost of goods sold.
  4. Gross profit is also called gross margin.
  5. Gross profit must cover all operating expenses to yield a return for the owner of the business.

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

The following statements regarding merchandise inventory are true except:

• 1. Merchandise inventory refers to products a company owns and intends to sell.
  2. Merchandise inventory appears on the balance sheet of a service company.
  3. Purchasing merchandise inventory is part of the operating cycle for a business.
  4. Merchandise inventory is reported on the balance sheet as a current asset.
  5. Merchandise inventory may include the costs of freight in and making them ready for sale.

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. The following statements are true regarding the operating cycle of a merchandising company

except:

The operating cycle is shortened by credit sales.

• 1. The operating cycle ends with the collection of cash from the sale of merchandise.
  2. The operating cycle begins with the purchase of merchandise.
  3. The operating cycle can vary in length among different merchandising companies.
  4. The operating cycle sometimes involves accounts receivable.

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Merchandise inventory:

• 1. Is a long-term asset.
  2. Is classified with investments on the balance sheet.
  3. Is a current asset.
  4. Must be sold within one month.
  5. Includes supplies the company will use in future periods.

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

The operating cycle for a merchandiser that sells only for cash moves from:

• 1. Accounts receivable to inventory to cash sales.
  2. Accounts receivable to purchases of merchandise to inventory to cash sales.
  3. Inventory to purchases of merchandise to cash sales.
  4. Purchases of merchandise to inventory to accounts receivable to cash sales.
  5. Purchases of merchandise to inventory to cash sales.

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

The current period's ending inventory is:

• 1. The current period's cost of goods sold.
  2. The current period's net purchases.
  3. The prior period's beginning inventory.
  4. The current period's beginning inventory.
  5. The next period's beginning inventory.

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Beginning inventory plus net purchases is:

• 1. Ending inventory.
  2. Cost of goods sold.
  3. Shown on the balance sheet.
  4. Merchandise (goods) available for sale.
  5. Sales.

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

The acid-test ratio:

• 1. Measures return on assets.
  2. Is also called the quick ratio.
  3. Is generally greater than the current ratio.
  4. Measures profitability.
  5. Measures inventory turnover.

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

Quick assets are defined as:

• 1. Cash, noncurrent receivables, and prepaid expenses.
  2. Accounts receivable, inventory, and prepaid expenses.
  3. Cash, inventory, and current receivables.
  4. Cash, short-term investments, and current receivables.
  5. Cash, short-term investments, and inventory.

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

1. KLM Corporation's quick assets are $5,888,000, its current assets are $11,700,000 and its current liabilities are $8,000,000. Its acid-test ratio equals:

A) 1.50. B) 0.74. C) 0.50. D) 0.68. E) 2.20.

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. A company's current assets are $17,980, its quick assets are $11,420 and its current liabilities are

$12,190. Its quick ratio equals:

A) 2.40. B) 0.94. C) 1.48. D) 1.57. E) 1.07.

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

Liquidity problems are likely to exist when a company's acid-test ratio:

• 1. Is substantially lower than 1.
  2. Is less than the current ratio.
  3. Equals 1.
  4. Is higher than the current ratio.
  5. Is higher than 1.

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

The acid-test ratio differs from the current ratio in that:

• 1. The acid-test ratio measures profitability and the current ratio does not.
  2. The acid-test ratio excludes short-term investments from the calculation.
  3. The acid-test ratio is a measure of liquidity but the current ratio is not.
  4. Prepaid expenses and inventory are excluded from the calculation of the acid-test ratio.
  5. Liabilities are divided by current assets.

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Understand

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. Using the following year-end information for Calvin's Clothing, calculate the current ratio and acid-test ratio for the business:

A) 1.97 and 1.52

B) 1.80 and 0.90

C) 3.50 and 0.90

1. 1.80 and 1

E) 2.73 and 1.52

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

The gross margin ratio:

• 1. Indicates the percent of sales revenue remaining after covering the cost of the goods sold.
  2. Should be greater than 1 for merchandising companies.
  3. Is a measure of liquidity and should exceed 2.0 to be acceptable.
  4. Is also called the net profit ratio.
  5. Is also called the profit margin.

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. A company's gross profit was $83,750 and its net sales were $347,800. Its gross margin ratio equals:

A) 24.1%. B) $264,050. C) 75.9%. D) 4.2%. E) $83,750.

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. A company's net sales were $676,600, its cost of goods sold was $236,810 and its net income was

$33,750. Its gross margin ratio equals:

A) 35%. B) 9.6%. C) 5%. D) 285.7%. E) 65%.

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. A company had net sales of $752,000 and cost of goods sold of $543,000. Its net income was

$17,530. The company's gross margin ratio equals:

A) 18.9% B) 34.7% C) 35.2% D) 27.8% E) 24.5%

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. Mega Skateboard Supplier had net sales of $2.8 million, its cost of goods sold was $1.6 million, and its net income was $0.9 million. Its gross margin ratio equals:

A) 175%. B) 32%. C) 43%. D) 57%. E) 56%.

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

The credit terms 2/10, n/30 are interpreted as:

• 1. 10% cash discount if the amount is paid within 2 days, or the balance due in 30 days.
  2. 2% cash discount if the amount is paid within 10 days, or the balance due in 30 days.
  3. 30% discount if paid within 10 days.
  4. 2% discount if paid within 30 days.
  5. 30% discount if paid within 2 days.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

A trade discount is:

• 1. A reduction in price for prompt payment.
  2. Also called a rebate.
  3. A reduction in selling price below the list price.
  4. A term used by a seller to describe a cash discount granted to customers for prompt payment.
  5. A term used by a purchaser to describe a cash discount given to customers for prompt payment.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Jasper Company is a wholesaler that buys merchandise in large quantities. Its supplier's catalog indicates a list price of $500 per unit on merchandise Jasper intends to purchase, and offers a 30% trade discount for large quantity purchases. The cost of shipping for the merchandise is $7 per unit. Jasper's total purchase price per unit will be:

A) $350 B) $507 C) $343 D) $357 E) $493

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

1. Fragment Company is a wholesaler that sells merchandise in large quantities. Its catalog indicates a list price of $300 per unit on a particular product and a 40% trade discount is offered for quantity purchases of 50 units or more. The cost of shipping the merchandise is $7 per unit under terms FOB shipping point. If a customer purchases 100 units of this product, what is the amount of sales revenue that Fragment will record from this sale?

A) $30,000 B) $29,300 C) $18,700 D) $30,700 E) $18,000

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Decision Making

The amount recorded for merchandise inventory includes all of the following except:

• 1. Purchase discounts.
  2. Returns and allowances.
  3. Freight costs paid by the buyer.
  4. Trade discounts.
  5. Freight costs paid by the seller.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. A company uses the perpetual inventory system and recorded the following entry:

This entry reflects a:

Return of merchandise.

• 1. Payment of the account payable less a 1% cash discount taken.
  2. Payment of the account payable less a 2% cash discount taken.
  3. Sale of merchandise on credit.
  4. Purchase of merchandise on credit.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

A debit memorandum is:

• 1. Required when a purchase discount is granted.
  2. Not necessary in a perpetual inventory system.
  3. Required whenever a journal entry is recorded.
  4. The source document for the purchase of merchandise inventory.
  5. The document a buyer issues to inform the seller of a debit made to the seller's account payable in the buyer's records.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 8, it paid the full amount due. The amount of the cash paid on July 8 equals:

A) $200. B) $1,800. C) $1,568. D) $1,564. E) $1,600.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. The amount of the cash paid on July 28 equals:

A) $1,600. B) $1,800. C) $1,568. D) $1,564. E) $200.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, The correct journal entry to record the purchase on July 5 is:

Debit Accounts Payable $1,800; credit Merchandise Inventory $1,800.

• 1. Debit Merchandise Inventory $1,600; credit Cash $1,600.
  2. Debit Accounts Payable $1,800; credit Purchase Returns $200; credit Merchandise Inventory

$1,600.

Debit Merchandise Inventory $1,800; credit Accounts Payable $1,800.

• 1. Debit Merchandise Inventory $1,800; credit Sales Returns $200; credit Cash $1,600.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the merchandise return on July 7 is:

Debit Merchandise Inventory $200; credit Accounts Payable $200.

• 1. Debit Accounts Payable $200; credit Merchandise Inventory $200.
  2. Debit Merchandise Inventory $200; credit Sales Returns $200.
  3. Debit Accounts Payable $1,800; credit Purchase Returns $200; credit Merchandise Inventory

$1,600.

Debit Merchandise Inventory $1,600; credit Cash $1,600.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the payment on July 28 is:

Debit Accounts Payable $1,800; credit Cash $1,800.

• 1. Debit Cash $1,600; credit Accounts Payable $1,600.
  2. Debit Merchandise Inventory $1,600; credit Cash $1,600.
  3. Debit Accounts Payable $1,600; credit Cash $1,600.
  4. Debit Accounts Payable $1,600; credit Merchandise Inventory $32; credit Cash $1,568.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 12, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the payment on July 12 is:

Debit Accounts Payable $1,800; credit Cash $1,800.

• 1. Debit Accounts Payable $1,600; credit Cash $1,600.
  2. Debit Accounts Payable $1,600; credit Merchandise Inventory $32; credit Cash $1,568.
  3. Debit Cash $1,600; credit Accounts Payable $1,600.
  4. Debit Merchandise Inventory $1,600; credit Cash $1,600.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company purchased $4,000 worth of merchandise. Transportation costs were an additional $350. The company returned $275 worth of merchandise and then paid the invoice within the 2% cash discount period. The total cost of this merchandise is:

A) $3,995.00. B) $4,075.00. C) $4,000.50. D) $3,725.00. E) $3,925.00.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. 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 45 days. By not taking advantage of the cash discount, the equivalent annual interest lost on the amount of the purchase is:

A) 24.5% B) 16.2% C) 24.3% D) 18.9% E) 12.2%

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Sales returns:

• 1. Refer to reductions in the selling price of merchandise sold to customers.
  2. Represent trade discounts.
  3. Are not recorded under the perpetual inventory system until the end of each accounting period.

Refer to merchandise that customers return to the seller after the sale.

• 1. Represent cash discounts.

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

All of the following statements regarding sales returns and allowances are true except:

• 1. Sales returns and allowances are rarely disclosed in published financial statements.
  2. Sales returns and allowances are recorded in a separate contra-revenue account.
  3. There is no relationship between sales returns and allowances and the possibility of lost future sales.

Sales returns and allowances are closed to the Income Summary account.

• 1. A reduction in the selling price because of damaged merchandise is included in sales returns and allowances.

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

A debit to Sales Returns and Allowances and a credit to Accounts Receivable:

• 1. Reflects an increase in amount due from a customer.
  2. Is recorded when a customer takes a discount.
  3. Records the cost side of a sales return.
  4. Reflects a decrease in amount due to a supplier.
  5. Recognizes that a customer returned merchandise and/or received an allowance.

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Sales less sales discounts less sales returns and allowances equals:

• 1. Net income.
  2. Cost of goods sold.
  3. Gross profit.
  4. Net sales.
  5. Net purchases.

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Garza Company had sales of $135,000, sales discounts of $2,000, and sales returns of $3,200. Garza Company's net sales equals:

A) $140,200. B) $5,200. C) $129,800. D) $135,000. E) $133,000.

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On May 1, Shilling Company sold merchandise in the amount of $5,800 to Anders, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Shilling uses the perpetual inventory system and the gross method table. The journal entry or entries that Shilling will make on May 1 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On May 1, Anders Company purchased merchandise in the amount of $5,800 from Shilling, with credit terms of 2/10, n/30. Anders uses the perpetual inventory system and the gross method table. The journal entry or entries that Anders will make on May 1 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On February 3, Smart Company sold merchandise in the amount of $5,800 to Truman Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Smart uses the perpetual inventory system and the gross method table. Truman pays the invoice on February 8, and takes the appropriate discount. The journal entry that Smart makes on February 8 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On July 1, Ferguson Company sold merchandise in the amount of $5,800 to Tracey Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ferguson uses the perpetual inventory system and the gross method table. On July 5, Tracey 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 Ferguson must make on July 5 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The amount of the cash paid on August 16 equals:

A) $8,152.50. B) $8,167.50. C) $9,750.00. D) $8,250.00. E) $9,652.50.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 26, it paid the full mount due. The amount of the cash paid on August 26 equals:

A) $9,652.50. B) $8,250.00. C) $9,750.00. D) $8,167.50. E) $8,152.50.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The correct journal entry to record the purchase on August 7 is:

Debit Merchandise Inventory $9,750; credit Sales Returns $1,500; credit Cash $8,250.

• 1. Debit Accounts Payable $8,250; debit Purchase Returns $1,500; credit Merchandise Inventory $9,750.

Debit Accounts Payable $9,750; credit Merchandise Inventory $9,750.

• 1. Debit Merchandise Inventory $9,750; credit Cash $9,750.
  2. Debit Merchandise Inventory $9,750; credit Accounts Payable $9,750.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 26, it paid the full amount due. The correct journal entry to record the merchandise return on August 11 is:

Debit Accounts Payable $1,500; credit Purchase Returns $1,500.

• 1. Debit Accounts Payable $1,500; credit Cash $1,500.
  2. Debit Accounts Payable $1,500; credit Merchandise Inventory $1,500.
  3. Debit Merchandise Inventory $1,500; credit Cash $1,500.
  4. Debit Merchandise Inventory $1,500; credit Sales Returns $1,500.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The correct journal entry to record the payment on August 16 is:

Debit Accounts Payable $8,250; credit Merchandise Inventory $82.50; credit Cash $8,167.50.

• 1. Debit Cash $8,250; credit Accounts Payable $8,250.
  2. Debit Accounts Payable $9,750; credit Merchandise Inventory $97.50; credit Cash $9,652.50.
  3. Debit Accounts Payable $8,167.50; credit Cash $8,167.50.
  4. Debit Merchandise Inventory $8,250; credit Cash $8,250.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. 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 what percentage cash discount for early payment?

A) 5% B) 10% C) 2% D) 15% E) 1%

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

All of the following statements regarding inventory shrinkage are true except:

• 1. Inventory shrinkage refers to the loss of inventory.
  2. Inventory shrinkage can be caused by theft or deterioration.
  3. Inventory shrinkage is recognized by debiting an operating expense.
  4. Inventory shrinkage is determined by comparing a physical count of inventory with recorded inventory amounts.

Inventory shrinkage is recognized by debiting Cost of Goods Sold.

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Frisco Company's Merchandise Inventory account at year-end has a balance of $62,115, but a physical count reveals that only $61,900 of inventory exists. The adjusting entry to record this $215 of inventory shrinkage is:

A)

B)

C)

D)

E)

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Which of the following accounts would be closed at the end of the accounting period with a debit?

• 1. Operating Expenses.
  2. Cost of Goods Sold.
  3. Sales Returns and Allowances.
  4. Sales.
  5. Sales Discounts.

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. An income statement that includes cost of goods sold as another expense and shows only one subtotal for total expenses is a:

Combined income statement.

• 1. Simplified income statement.
  2. Balanced income statement.
  3. Single-step income statement.
  4. Multiple-step income statement.

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. Expenses that support the overall operations of a business and include the expenses relating to accounting, human resource management, and financial management are called:

Cost of goods sold.

• 1. Non-operating activities.
  2. General and administrative expenses.
  3. Purchasing expenses.
  4. Selling expenses.

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. Prentice 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. Prentice's net sales for this period equal:

A) $176,025. B) $172,550. C) $94,275. D) $177,725. E) $174,250.

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

Multiple-step income statements:

• 1. Are only used in perpetual inventory systems.
  2. Are required by the FASB and IASB.
  3. Are required for the periodic inventory system.
  4. Contain more detail than a simple listing of revenues and expenses.
  5. List cost of goods sold as an operating expense.

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. Expenses to promote sales by displaying and advertising merchandise, make sales, and deliver goods to customers are known as:

Cost of goods sold.

• 1. Selling expenses.
  2. Non-operating activities.
  3. Purchasing expenses.
  4. General and administrative expenses.

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. A company has net sales of $752,000 and cost of goods sold of $543,000. Its net income is

$17,530. The company's gross margin and operating expenses, respectively, are:

A) $227,000 and $525,470 B) $209,000 and $191,470 C) $191,470 and $209,000 D) $525,470 and $227,000 E) $734,000 and $191,470

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Which of the following accounts is used in the periodic inventory system but not used in the perpetual inventory system?

Sales

• 1. Merchandise Inventory
  2. Purchases
  3. Accounts Payable
  4. Sales Returns and Allowances

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. When preparing an unadjusted trial balance using a periodic inventory system, the amount shown for Merchandise Inventory is:

The beginning inventory amount.

• 1. Equal to the cost of goods sold.
  2. Equal to the gross profit.
  3. Equal to the cost of goods purchased.
  4. The ending inventory amount.

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander uses the periodic inventory system and the gross method of accounting for sales. The journal entry or entries that Vander will make on September 12 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Jepson uses the periodic inventory system and the gross method of accounting for purchases. The journal entry that Jepson will make on September 12 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander uses the periodic inventory system and the gross method of accounting for sales. Jepson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Vander makes on September 18 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Jepson uses the periodic inventory system and the gross method of accounting for purchases. Jepson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Jepson makes on September 18 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander uses the periodic inventory system and the gross method of accounting for sales. On September 14, Jepson returns some of the non-defective merchandise, which is restored to inventory. The selling price of the returned merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Vander must make on September 14 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander uses the periodic inventory system and the gross method of accounting for sales. On September 14, Jepson returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. Jepson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Vander makes on September 18 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Cushman Company had $800,000 in net sales, $350,000 in gross profit, and $200,000 in operating expenses. Cost of goods sold equals:

A) $150,000. B) $450,000. C) $200,000. D) $350,000. E) $800,000.

Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Cushman Company had $800,000 in sales, sales discounts of $12,000, sales returns and allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating expenses. Gross profit equals:

A) $770,000. B) $408,000. C) $115,000. D) $402,000. E) $390,000.

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Cushman Company had $800,000 in sales, sales discounts of $12,000, sales returns and allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating expenses. Net income equals:

A) $402,000. B) $390,000. C) $408,000. D) $115,000. E) $770,000.

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. 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 was entitled to. The cash paid on June 24 equals:

A) $9,700. B) $9,800. C) $10,000. D) $8,724. E) $8,924.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company purchased $10,000 of merchandise on June 15 with terms of 3/10, n/45, and FOB shipping point. The freight charge, $500, was added to the invoice amount. 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:

A) $10,300. B) $9,224. C) $9,424. D) $10,200. E) $10,500.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company's current assets are $23,420, its quick assets are $13,890 and its current liabilities are

$12,220. Its acid-test ratio equals:

A) 1.14. B) 1.41. C) .52. D) 0.88. E) 1.91.

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. Using the following year-end information for Bauman, LLC, calculate the current ratio and acid-test ratio:

A) 3.01 and 1.21

B) 3.16 and 1.21

C) 3.04 and 1.21

D) 3.16 and .97

E) 1.09 and 4.77

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

1. A company's net sales are $775,420, its costs of goods sold are $413,890, and its net income is

$117,220. Its gross margin ratio equals:

A) 40.5%. B) 46.6%. C) 31.5%. D) 53.4%. E) 28.3%.

Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Risk Analysis

All of the following statements related to U.S. GAAP and IFRS are true except:

• 1. Neither system defines operating income.
  2. U.S. GAAP offers little guidance about the presentation order of expenses.
  3. Accounting for basic inventory transactions is the same under the two systems.
  4. Neither system requires separate disclosure of items when their size, nature, or frequency are important.

The closing process for merchandisers is the same under both systems.

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Understand

AACSB: Communication

AICPA: FN Reporting; BB Global

1. 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 within the discount period, what is the net cost of the merchandise?

A) $19,600. B) $13,000. C) $13,720. D) $6,860. E) $12,740.

Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. A company has net sales of $825,000 and cost of goods sold of $547,000. Its net income is

$98,500. The company's gross margin and operating expenses, respectively, are:

A) $179,500 and $98,500 B) $645,500 and $179,500 C) $209,000 and $191,470 D) $278,000 and $98,500 E) $278,000 and $179,500

Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for sales. The journal entry or entries that Klein will make on March 12 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for sales. Babson pays the invoice on March 17, and takes the appropriate discount. The journal entry that Klein makes on March 17 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for sales. On March 15, Babson returns some of the merchandise, which is not defective. The selling price of the returned merchandise is $600 and the cost of the merchandise returned is $350. The entry or entries that Klein must make on March 15 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for sales. On March 15, Babson returns some of the merchandise. The selling price of the merchandise is $600 and the cost of the merchandise returned is $350. Babson pays the invoice on March 20, and takes the appropriate discount. The amount that Klein receives from Babson on March 20 is:

A) $7,200. B) $7,800. C) $7,056. D) $7,644. E) $7,044.

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for sales. On March 15, Babson returns some of the merchandise. The selling price of the merchandise is $600 and the cost of the merchandise returned is $350. Babson pays the invoice on March 20, and takes the appropriate discount. The journal entry that Klein makes on March 20 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Zenith Company's Merchandise Inventory account at year-end has a balance of $91,820, but a physical count reveals that only $90,450 of inventory exists. The adjusting entry to record this

$1,370 of inventory shrinkage is:

A)

B)

C)

D)

E)

Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

All of the following statements regarding sales returns and allowances are true except:

• 1. Sales returns and allowances estimates are typically made as period-end adjustments.
  2. When sales returns and allowances adjustments are made to sales, an estimate must also be made for the cost side.

The Inventory Returns Estimated account is a current liability account.

• 1. New revenue recognition rules require sellers to report sales net of expected returns and allowances for annual periods.

Sales Refund Payable is a current liability account.

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. In its first year of business, Borden Corporation had sales of $2,000,000 and cost of goods sold of

$1,200,000. Borden expects returns in the following year to equal 8% of sales. The adjusting entry or entries to record the expected sales returns is (are):

A)

B)

C)

D)

E)

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. In the current year, Borden Corporation had sales of $2,000,000 and cost of goods sold of

$1,200,000. Borden expects returns in the following year to equal 8% of sales. The unadjusted balance in Inventory Returns Estimated is a debit of $6,000, and the unadjusted balance in Sales Refund Payable is a credit of $10,000. The adjusting entry or entries to record the expected sales returns is (are):

A)

B)

C)

D)

E)

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Netherland Corporation has the following unadjusted balances: Accounts Receivable, $80,000 (debit), and Allowance for Sales Discounts $300 (credit). Of the receivables, $50,000 of them are within the 2% discount period, and Netherland expects buyers to take $1,000 in future-period discounts ($50,000 × 2%) arising from this period's sales. The adjusting entry to estimate sales discounts is (are):

A)

B)

C)

D)

E)

Learning Objective: 05-P6 Appendix 5C—Prepare adjustments for discounts, returns, and allowances per revenue recognition rules. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. An expense resulting from failing to take advantage of cash discounts when using the net method of recording purchases is called:

Trade discounts.

• 1. Discounts earned.
  2. Purchases discounts.
  3. Discounts lost.
  4. Sales discounts.

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. A company that uses the net method of recording purchases and a perpetual inventory system purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. The correct journal entry to record the payment on July 28 is:

Debit Accounts Payable $1,600; credit Merchandise Inventory $32; credit Cash $1,568.

• 1. Debit Cash $1,600; credit Accounts Payable $1,600.
  2. Debit Merchandise Inventory $1,600; credit Cash $1,600.
  3. Debit Accounts Payable $1,568; debit Discounts Lost $32; credit Cash $1,600.
  4. Debit Accounts Payable $1,800; credit Cash $1,800.

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: FN Measurement; BB Critical Thinking

1. Morgan, Inc. uses a perpetual inventory system and the net method of recording purchases. On May 12, a merchandise purchase of $15,000 was made on credit, 2/10, n/30. The journal entry to record this purchase is:

A)

B)

C)

D)

E)

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

The net method of recording purchases refers to recording:

• 1. Specified amounts and timing of payments that a buyer agrees to in return for being granted credit.

Purchases at the invoice price less any cash discounts.

• 1. Inventory at the lower of cost or market.
  2. Purchases at the full invoice price, without deducting any cash discounts.
  3. Inventory at its selling price.

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Measurement

1. On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the net method of accounting for sales. On March 15, Babson returns some of the merchandise, which is not defective. The selling price of the returned merchandise is $600 and the cost of the merchandise returned is $350. The entry(ies) that Klein must make on March 15 is (are):

A)

B)

C)

D)

E)

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ryan uses the periodic inventory system and the net method of accounting for sales. The journal entry or entries that Ryan will make on September 12 is (are):

A)

B)

C)

D)

E)

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Johnson uses the periodic inventory system and the net method of accounting for purchases. The journal entry that Johnson will make on September 12 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ryan uses the periodic inventory system and the net method of accounting for sales. Johnson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Ryan makes on September 18 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Johnson uses the periodic inventory system and the net method of accounting for purchases. Johnson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Johnson makes on September 18 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ryan uses the periodic inventory system and the net method of accounting for sales. On September 14, Johnson returns some of the non-defective merchandise, which is restored to inventory. The selling price of the returned merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Ryan must make on September 14 is (are):

A)

B)

C)

D)

E)

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ryan uses the periodic inventory system and the net method of accounting for sales. On September 14, Johnson returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. Johnson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Ryan makes on September 18 is:

A)

B)

C)

D)

E)

Learning Objective: 05-P7 Appendix 5D—Record and compare merchandising transactions using the gross method and net method. Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

SHORT ANSWER QUESTIONS

1. 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.
2. Trade discount F. Acid-test ratio
3. General and administrative expenses G. Merchandise inventory
4. FOB shipping point H. Selling expenses
5. Single-step income statement I. Multiple-step income statement
6. FOB destination J. Inventory shrinkage

s

Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.; 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.; 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.; 05-P3 Prepare adjustments and close accounts for a merchandising company.; 05-P4 Define and prepare multiple-step and single-step income statements.

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Match the following terms with the appropriate definition.
2. Debit memorandum
3. Credit period
4. Credit terms
5. Credit memorandum
6. Discount period
7. Gross profit
8. Periodic inventory system
9. Perpetual inventory system
10. Sales discount
11. Purchase discount

Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.; 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.; 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.; 05-P4 Define and prepare multiple-step and

single-step income statements.; 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

ESSAY QUESTIONS

Identify and explain the key components of a merchandiser's net income.

Learning Objective: 05-C1 Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Describe the difference between wholesalers and retailers.

Learning Objective: 05-C1 Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Describe the key attributes of inventory for a merchandising company.

Learning Objective: 05-C2

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

SHORT ANSWER QUESTIONS

What are the steps of the operating cycle for a merchandiser with credit sales?

Learning Objective: 05-C2

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

ESSAY QUESTIONS

Describe the difference between the periodic and perpetual inventory accounting systems.

Learning Objective: 05-C2

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Explain the way in which costs flow through the merchandise inventory account to a merchandiser's income statement.

Learning Objective: 05-C2

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

What is the acid-test ratio? How does it measure a company's liquidity?

Learning Objective: 05-A1 Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Risk Analysis

What is gross margin ratio? How is it used as an indicator of profitability?

Learning Objective: 05-A2 Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. What does the acronym FOB stand for? Describe the differences between FOB shipping point (or FOB factory) and FOB destination.

Learning Objective: 05-P1

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Describe the recording process (including costs) for the types of transactions involved in purchasing merchandise inventory when a perpetual inventory system is used.

Learning Objective: 05-P1

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Describe the recording process (including costs) for the types of transactions associated with sales of merchandise inventory using a perpetual inventory system.

Learning Objective: 05-P2

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

What is inventory shrinkage? How do managers account for shrinkage?

Learning Objective: 05-P3

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. How do closing entries for a merchandising company that uses the perpetual inventory system differ from the closing entries for a service company?

Learning Objective: 05-P3

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

Explain the difference between the single-step and multiple-step income statements.

Learning Objective: 05-P4

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Reporting

Distinguish between selling expenses and general and administrative expenses.

Learning Objective: 05-P4

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Describe the difference(s) between the periodic and the perpetual inventory accounting systems.

Learning Objective: 05-P2; 05-P5

Bloom's: Understand AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Describe why tracking inventory activities are necessary for a merchandising company.

Learning Objective: 05-C1 Bloom's: Understand

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Discuss the period-end adjusting entries that are required in the new revenue recognition standards for estimating sales discounts and sales returns and allowances.

Learning Objective: 05-P6

Bloom's: Understand AACSB: Communication

AICPA: BB BB Industry; FN FN Measurement

105

1. Farmen Company had net sales of $600,000 and cost of goods sold of $450,000. Calculate Farmen's gross profit.

Learning Objective: 05-C1

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. National Storage Company had sales of $1,000,000, sales discounts of $2,500, sales returns and allowances of $15,000, and cost of goods sold of $525,000. Calculate National's gross profit.

Learning Objective: 05-C1

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Harley's Antique Shop had net sales of $772,000. The gross profit was $415,000. Calculate Harley's cost of goods sold.

Learning Objective: 05-C2

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Fill in the blanks (a) through (g) for the Morrison Company for each of the income statements for years 1, 2, and 3.

Learning Objective: 05-C1; 05-P4

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Fill in the blanks (a) through (g) for the Corman Company for each of the income statements for years 1 and 2

Learning Objective: 05-C1; 05-P4

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. The following information is available for Flanders and its two main competitors in the industry, Sanders and Anders:

Flanders Sanders Anders

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 Flanders' relative liquidity position.

Prepaid expense 900 6,750 2,450

Total current assets $59,750 $73,950 $95,950

Current ratio:

Flanders Sanders Anders

$59,750/21,200 = 2.82

$73,950/$18,450 = 4.01

$95,950/$35,200 = 2.73

Flanders Sanders Anders Cash………………………………… $ 9,800 $10,500 $26,500 Short-term investments…………… 6,400 8,200 12,500 Accounts receivable………………… 12,500 8,500 14,350 Total quick assets………………… $28,700 $27,200 $53,350

Flanders Sanders Anders

Part 2: Rank order:

Current ratio Acid-test ratio

Diff: 3

Part 3: Flanders' current ratio lags behind Sanders' but is ahead of both Anders and the industry average. Flanders' acid test ratio is behind both Anders and Sanders but is ahead of the industry average. Overall, Flanders appears reasonably strong on liquidity.

Topic: Acid-Test Ratio Learning Objective: 05-A1 Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Risk Analysis

1. The following information refers to Percy's Records and its competitors in the music store business.

Required:

Comment on the relative liquidity positions of these companies.

Learning Objective: 05-A1 Bloom's: Apply

AACSB: Analytic

AICPA: BB Critical Thinking; FN Risk Analysis

1. 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?

Learning Objective: 05-A1 Bloom's: Apply

AACSB: Analytic

AICPA: BB Critical Thinking; FN Risk Analysis

1. Calculate the gross margin ratio for each of the following separate cases A through C:

Learning Objective: 05-A2 Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Risk Analysis

1. A company reported the following information for the month of July:

Required: Calculate this company's gross profit.

Learning Objective: 05-P2

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Risk Analysis

1. A company reported the following information for the month of July:

Diff: 3

Topic: Gross Margin Ratio Learning Objective: 05-A2 Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Risk Analysis

1. The following information is for Barrel and its competitor Crate.

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?

Learning Objective: 05-A2 Bloom's: Apply

AACSB: Analytic

AICPA: BB Critical Thinking; FN Risk Analysis

1. A company that uses the perpetual inventory system and the gross method of accounting for purchases purchased $8,500 of merchandise on March 25 with credit terms of 2/10, n/30. The invoice was paid in full on April 4. Prepare the journal entries to record the transactions on March 25 and April 4.

Learning Objective: 05-P1

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Sabor Company uses a perpetual inventory system and the gross method of accounting for purchases. Sabor purchased $17,800 of merchandise on April 7 with credit terms of 1/10, n/30. Merchandise with a cost of $1,800 was damaged and returned to the seller on April 10. On April 16 the company paid the amount due. Prepare the journal entries to record the transactions on all three dates.

Learning Objective: 05-P1

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Tahoe Ski Company uses the perpetual inventory system and the gross method of accounting for purchases. The company had the following transactions during January:

January 6: Purchased $4,000 of inventory. The seller's credit terms are 2/10, n/30. January 8: Returned $200 worth of defective units and received full credit.

January 15: Paid the amount due, less the returned items.

Prepare journal entries to record each of the preceding transactions.

Learning Objective: 05-P1

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Serene Spa Sales uses the perpetual inventory system and the gross method of accounting for purchases and sales, and had the following transactions during August.

Required:

Prepare the general journal entries to record these transactions.

1. Merchandise Inventory 2,720

Cash 2,720

1. Merchandise Inventory 2,600

Accounts Payable 2,600

10 Cash 4,850

Sales Discounts 150

Accounts Receivable 5,000

15 Accounts Payable 600

Merchandise Inventory 600

116

Learning Objective: 05-P1; 05-P2

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Craig's Snowboards uses the perpetual inventory system and the gross method of accounting for sales, and had the following sales transactions during June:

e

Prepare the journal entries that Craig's Snowboards must make to record these transactions.

Learning Objective: 05-P2

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Forrest's Cycle Shop uses a perpetual inventory accounting system and the gross method of accounting for sales had the following transactions during the month of July:

e

Prepare the required journal entries that Forrest's Cycle Shop must make to record these transactions.

July 15 Cash 1,274

Sales discounts 26

Accounts receivable 1,300

Calculation: Discount = $1,300 * .02 = $26

July 31 Cash 500

Accounts receivable 500

Diff: 3

Topic: Accounting for Merchandise Sales Learning Objective: 05-P2

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Following is the year-end adjusted trial balance for Fred's Corner Grocery for the current year:

Fred’s Corner Grocery Adjusted Trial Balance December 31

Dr. Cr.

Cash…………………………………………………….. $ 67,500

Accounts receivable…………………………………… 46,000

Merchandise inventory………………………………… 60,000

Store supplies…………………………………………. 800

Accounts payable……………………………………… 16,000

Salaries payable……………………………………….. 850

F. Brewster, Capital…………………………………….. 125,630

F. Brewster, Withdrawals………………………………. 45,000 Sales…………………………………………………….. 550,000 Sales returns & allowances…………………………… 4,500

Sales discounts………………………………………… 4,250 Cost of goods sold..……………………………………. 382,450 Sales salaries expense………………………………… 44,000 Advertising expense……………………………………. 8,150 Store salaries expense………………………………... 24,325 Store supplies expense……………………………….. 450

Interest expense………………………………………... 5,055 Totals…………………………………………………….. $692,480 $692,480

119

Totals…………………………………………………….. $692,480 $692,480 Prepare the closing entries at December 31 for the current year.

Diff: 3

Topic: Adjusting and Closing Entries for Merchandisers Learning Objective: 05-P3

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. The year-end adjusted trial balance of Gordon Produce for the current year, is shown below:

GORDON PRODUCE

Adjusted Trial Balance December 31

Prepare closing entries at December 31 for the current year.

Learning Objective: 05-P3

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. From the adjusted trial balance for Brookstone Art Supplies given below, prepare a multiple-step income statement in good form.

Brookstone Art SuppliesAdjusted Trial BalanceDecember 31

Learning Objective: 05-P4

Bloom's: Apply

AACSB: Communication

AICPA: BB Industry; FN Reporting

1. From the adjusted trial balance for Fabricated Products Company given below, prepare the necessary closing entries.

Fabricated Products CompanyAdjusted Trial BalanceDecember 31

Learning Objective: 05-P3

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Johnnycake Restaurant uses a periodic inventory system and the gross method of accounting for purchases. Prepare general journal entries to record the following transactions for Johnnycake:

Learning Objective: 05-P5 Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Austin's Pub Supply uses the periodic inventory system and the gross method of accounting for sales. The company had the following sales transactions during August:

Prepare the journal entries that Austin's Pub Supply must make to record these transactions.

Learning Objective: 05-P5 Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Preston Office Furniture uses the periodic inventory system and the gross method of accounting for sales. It had the following transactions during the month of May:

e

Prepare the required journal entries that Preston Office Furniture must make to record these

transactions.

Learning Objective: 05-P5 Bloom's: Apply

AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. At its fiscal year-end of June 30, Kendall Wholesale's general ledger shows the following selected account balances. Kendall 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 $58,160. Prepare the entry to record any inventory shrinkage.

Learning Objective: 05-P3

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Prepare journal entries to record the following merchandising transactions of Margin Company, which applies the perpetual inventory system and the gross method of recording invoices. Margin Company offers all of its credit customers credit terms of 2/10, n/30.

Learning Objective: 05-P1; 05-P2

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Prepare journal entries to record the following merchandising transactions of Margin Company, which applies the perpetual inventory system and the gross method of recording invoices. Margin Company offers all of its credit customers credit terms of 2/10, n/30.

Learning Objective: 05-P1

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Prepare journal entries to record the following merchandising transactions of Margin Company, which applies the perpetual inventory system and the gross method of recording invoices. Margin Company offers all of its credit customers credit terms of 2/10, n/30.

Learning Objective: 05-P2

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. From the adjusted trial balance given below for the Grayson Company, prepare a multiple-step income statement in good form. Salaries expense and building depreciation expense should be equally divided between selling activities and the general and administrative activities.

Learning Objective: 05-P4

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Reporting

1. Vincent Company purchased merchandise from Liu Company with an invoice price of $300,000 and credit terms of 2/10, n/30. Liu Company's cost for the merchandise was $200,000. Vincent Company paid within the discount period. Assume that both buyer and seller use a perpetual inventory system and the gross method of recording invoices.
2. Prepare entries that Vincent should record for (a) the purchase and (b) the cash payment.
3. Prepare entries that Liu should record for (a) the sale and (b) the cash collection.
4. Assume that the buyer borrowed enough cash to pay the balance on the last day of the discount period at an annual interest rate of 9% and paid it back on the last day of the credit period. Compute how much the buyer saved by following this strategy. (Assume a 365-day year and round dollar amounts to the nearest cent.)

Learning Objective: 05-P1; 05-P2

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Reporting

1. Prepare journal entries to record the following merchandise transactions of Martinez Excavation Equipment, which applies the perpetual inventory system and the gross method of recording invoices.

Learning Objective: 05-P1; 05-P2

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. In its first month of business, Clausen Corporation reports sales of $1,750,000 and cost of goods sold of $950,000. Clausen estimates that current and future returns and allowances will equal 4% of those sales. Prepare the October 31 adjusting entries necessary to record the revenue side and cost side estimates for returns and allowances.

Learning Objective: 05-P6

Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Stevenson Corporation reports unadjusted first-year sales of $400,000 and cost of goods sold of

$240,000. The company expects future returns and allowances equal to 3% of sales and 3% of cost of sales. Prepare the adjusting entries necessary to record the revenue side and cost side estimates for returns and allowances.

Learning Objective: 05-P6

Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Martin Corporation allows customers to return merchandise within 60 days of purchase. At year-end, Martin estimates that sales of $20,000, with a cost of $14,000 will be returned in the

upcoming year. The unadjusted balance in Inventory Returns Estimated is a debit of $4,000, and the unadjusted balance in Sales Refund Payable is a credit of $2,500. Prepare the adjusting entries necessary to record the revenue side and cost side estimates for returns and allowances.

Learning Objective: 05-P6

Bloom's: Apply

AACSB: Analytical Thinking

AICPA: BB Industry; FN Measurement

1. Tahoe Ski Company uses the perpetual inventory system and the net method of accounting for purchases. The company had the following transactions during January:

January 6: Purchased $4,000 of inventory. The seller's credit terms are 2/10, n/30. January 8: Returned $200 worth of defective units and received full credit.

January 15: Paid the amount due, less the returned items.

Prepare journal entries to record each of the preceding transactions.

Learning Objective: 05-P7

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

1. Barbara's Boats uses the periodic inventory system and the net method of accounting for purchases. The company had the following transactions during January:

January 6: Purchased $10,000 of inventory. The seller's credit terms are 2/10, n/30. January 31: Due to an oversight, the invoice was not paid within the discount period. Full payment was made on January 31.

Prepare journal entries to record each of the preceding transactions.

Learning Objective: 05-P7

Bloom's: Apply AACSB: Analytic

AICPA: BB Industry; FN Measurement

SHORT ANSWER QUESTIONS

A ________ is an intermediary that buys products from manufacturers and sells to retailers.

Learning Objective: 05-C1 Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. A ________ company's operating cycle begins with the purchase of merchandise and ends with the collection of cash from merchandise sales.

Learning Objective: 05-C2

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

Products that a company owns and intends to sell are called ________.

Learning Objective: 05-C2 Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. ________ inventory system updates the accounting record for inventory only at the end of an accounting period.

Learning Objective: 05-C2 Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. The ________ inventory system continually updates accounting records for merchandise transactions for the amounts of inventory available for sale and inventory sold.

Learning Objective: 05-C2 Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making

Beginning inventory plus the net cost of purchases is the ________.

Learning Objective: 05-C2

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

A period's beginning inventory is equal to the prior period's ________.

Learning Objective: 05-C2

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. The liquidity of a company can be measured using the current ratio and the ________, which only includes the most liquid current assets in its calculation.

Learning Objective: 05-A1 Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

The gross margin ratio equals net sales less ________ divided by net sales.

Learning Objective: 05-A2 Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

________ are the amounts and timing of payment from a buyer to a seller.

Learning Objective: 05-P1

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. A buyer issues a ________ to inform the seller of a debit made to the seller's account payable in the buyer's records.

Learning Objective: 05-P1

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. 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.

Learning Objective: 05-P1

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. 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.

Learning Objective: 05-P1

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

Merchandise that customers return to the seller after a sale is referred to as _ .

Learning Objective: 05-P2

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. 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 is referred to as _ _.

Learning Objective: 05-P2

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. 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.

Learning Objective: 05-P2

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. ________ can benefit a seller by decreasing the delay in receiving cash and reducing future collection efforts.

Learning Objective: 05-P2

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. Inventory shrinkage can be computed by comparing the ________ of inventory with recorded quantities and amounts.

Learning Objective: 05-P3

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Decision Making

1. ________ expenses are those costs that support a company's overall operations and include expenses related to accounting, human resource management, and financial management.

Learning Objective: 05-P4

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Reporting

1. A ________ income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items.

Learning Objective: 05-P4

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Reporting

1. A ________ income statement includes cost of goods sold as another expense and shows only one subtotal for total expenses.

Learning Objective: 05-P4

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Reporting

1. Non-operating activities that include interest, dividend, and rent revenues, and gains from asset disposals are called ________.

Learning Objective: 05-P4

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Reporting

1. Non-operating activities that include interest expense, losses from asset disposals, and casualty losses are reported as .

Learning Objective: 05-P4

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Reporting

1. When a company has no reportable nonoperating activities, its income from operations is reported as ________.

Learning Objective: 05-P4

Bloom's: Remember AACSB: Communication

AICPA: BB Industry; FN Reporting

1. Under the ________ inventory accounting system, each purchase, purchase return and allowance, purchase discount, and transportation-in transaction is recorded in a separate temporary account.

Learning Objective: 05-P5 Bloom's: Remember

AACSB: Communication

AICPA: BB Industry; FN Decision Making