Ch5 – Accounting for Merchandising + Test Bank + Answers - Accounting Principles Vol 1 8e Canadian Complete Test Bank by Jerry J. Weygandt. DOCX document preview.
CHAPTER 5
ACCOUNTING FOR MERCHANDISING OPERATIONS
CHAPTER STUDY OBJECTIVES
1. Describe the differences between service and merchandising companies. A service company performs services. It has service or fee revenue and operating expenses. A merchandising company sells goods. It has merchandise inventory, sales revenue, cost of goods sold, gross profit, and operating expenses. A merchandising company has a longer operating cycle than a service company. Merchandising companies must decide if they want to spend the extra resources to use a perpetual inventory system in which inventory records are updated with each purchase and sale. The benefit of the perpetual system is that it provides better information and control over inventory than a periodic system in which inventory records are updated only at the end of the accounting period.
2. Prepare entries for purchases under a perpetual inventory system. The Merchandise Inventory account is debited (increased) for all purchases of merchandise and freight, if freight is paid by the buyer. It is credited (decreased) for purchase returns and allowances and purchase discounts. Purchase discounts are cash reductions to the net invoice price for early payment.
3. Prepare entries for sales under a perpetual inventory system using the earnings approach. When inventory is sold, two entries are required: (1) Accounts Receivable (or Cash) is debited and Sales is credited for the selling price of the merchandise. (2) Cost of Goods Sold (an expense) is debited (increased) and Merchandise Inventory (a current asset) is credited (decreased) for the cost of the inventory items sold. Contra revenue accounts are used to record sales returns and allowances and sales discounts. If the returned merchandise can be sold again in the future, an additional entry is made to increase Merchandise Inventory (a debit) and decrease Cost of Goods Sold (a credit). Freight costs paid by the seller are recorded as an operating expense. A contra revenue account is used to record sales discounts.
4. Perform the steps in the accounting cycle for a merchandising company. Each of the required steps in the accounting cycle for a service company is also done for a merchandising company. An additional adjusting journal entry may be required under a perpetual inventory system. The Merchandise Inventory account must be adjusted to agree with the physical inventory count if there is a difference in the amounts. Merchandising companies have additional temporary accounts that must also be closed at the end of the accounting year.
5. Prepare single-step and multiple-step income statements. In a single-step income statement, all data are classified under two categories (revenues or expenses), and profit is determined in one step. A multiple-step income statement shows several steps in determining profit. Net sales is calculated by deducting sales returns and allowances and sales discounts from sales. Next, gross profit is calculated by deducting the cost of goods sold from net sales. Profit (loss) from operations is then calculated by deducting operating expenses from gross profit. Total non-operating activities are added to (or deducted from) profit from operations to determine profit.
6. Calculate the gross profit margin and profit margin. The gross profit margin, calculated by dividing gross profit by net sales, measures the gross profit earned for each dollar of sales. The profit margin, calculated by dividing profit by net sales, measures the profit (total profit) earned for each dollar of sales. Both are measures of profitability that are closely watched by management and other interested parties.
7. Prepare entries for purchases and sales under a periodic inventory system and calculate cost of goods sold (Appendix 5A). In a periodic inventory system, separate temporary expense and contra expense accounts are used to record (a) purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs paid by the buyer. Purchases − purchase returns and allowances − purchase discounts = net purchases. Net purchases + freight in = cost of goods purchased.
In a periodic inventory system, only one journal entry is made to record a sale of merchandise. Accounts Receivable (or Cash) is debited and Sales is credited. Cost of goods sold is not recorded at the time of the sale. Instead, it is calculated as follows at the end of the period after the ending inventory has been counted: Beginning inventory + cost of goods purchased = cost of goods available for sale. Cost of goods available for sale − ending inventory = cost of goods sold.
8. Prepare entries for sales under a perpetual inventory system using the contract-based approach (Appendix 5B). The contract-based approach to revenue recognition is used by companies that follow IFRS. The core principle of this approach is that revenue is recognized when a performance obligation is complete and the amount of revenue recorded is the consideration (i.e., Cash) a company expects to receive. Merchandisers that offer their customers a right of return are obligated to provide a refund if requested by the buyer. The seller will estimate the potential return from a customer at the time of sale and will credit the liability account Refund Liability. At the same time, the seller estimates the cost of expected returned merchandise and debits an account called Estimated Inventory Returns. Refund Liability and Estimated Inventory Returns are balance sheets accounts. Merchandisers that offer their customers a cash discount for prompt payment will determine the probability that a customer will take advantage of the discount and the sales revenue recorded is reduced accordingly. If the customer does not take advantage of the discount, Sales revenue is credited to reflect the additional amount received.
TRUE-FALSE STATEMENTS
1) A retail company and a service company have different ways of measuring profit.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
2) A service company will NOT have to measure gross profit.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
3) Operating expenses will only occur in a merchandising company.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
4) An operating cycle is the average time that it takes to go from cash to cash in producing revenues.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
5) The normal operating cycle of a merchandising company is shorter than the cycle of a service company.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
6) The cost of goods available for sale can be defined as inventory.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
7) The cost of goods that have been sold in a merchandising company are called cost of goods sold.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
8) Service revenue minus operating expenses equals gross profit.
Difficulty: Medium
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
9) A periodic system of inventory will give the company more control over their inventory.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
10) A perpetual inventory system makes it easier for the company to answer questions about the availability of merchandise.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
11) A physical count of the inventory system at year end is only required in the periodic system of inventory.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
12) In a periodic inventory system, detailed records of the goods on hand are kept throughout the period.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
13) A perpetual inventory system requires that the company only determine the cost of goods sold at the end of the accounting period.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
14) In the perpetual system of inventory, the account Merchandise Inventory is debited when merchandise is purchased for resale to customers.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
15) A quantity discount is a reduction in price based on the number of items purchased.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
16) A quantity discount is the same as a purchase discount.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
17) Purchase discounts are offered to customers for the early payment of the balance due.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
18) Every seller offers purchase discounts.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
19) If sales terms are FOB destination, the buyer is responsible for getting the goods to their intended destination.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
20) FOB shipping point means that the seller is responsible for the freight costs.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
21) If a company purchases goods FOB shipping point, the purchasing company will be responsible for the payment of the freight costs.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
22) Freight costs are always a separate cost to the purchasing company.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
23) When a company returns merchandise to its supplier under a perpetual inventory system, the Merchandise Inventory account will be debited. Assume the company uses the earnings approach for revenue recognition.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
24) Under a perpetual inventory system, any freight that is incurred when purchasing the inventory is debited to the Merchandise Inventory account.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
25) In a perpetual inventory system, there are two journal entries when making a sale of goods.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach
Section Reference: Recording Sales of Merchandise
CPA: Financial Reporting
AACSB: Analytic
26) Using the perpetual inventory system and the earnings approach, an entry is required to increase cost of goods sold and decreasemerchandise inventory, when goods are sold.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach
Section Reference: Recording Sales of Merchandise
CPA: Financial Reporting
AACSB: Analytic
27) Assuming the company uses the earnings approach for revenue recognition, a Sales Returns and Allowances account is only used in a perpetual inventory system.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise
CPA: Financial Reporting
AACSB: Analytic
28) Assuming the company uses the earnings approach for revenue recognition, a large balance in the Sales Returns and Allowances account may indicate that the merchandise that is being sold is of inferior quality.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise
CPA: Financial Reporting
AACSB: Analytic
29) The Sales Returns and Allowances account is a contra revenue account.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise
CPA: Financial Reporting
AACSB: Analytic
30) The Sales Discounts account is a contra revenue account.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise
CPA: Financial Reporting
AACSB: Analytic
31) Sales discounts are only used in a perpetual inventory system.
Difficulty: Easy
Learning Objective: Prepare entries for sales using the earnings approach under a perpetual inventory system.
Section Reference: Recording Sales of Merchandise
CPA: Financial Reporting
AACSB: Analytic
32) There are additional steps required in the accounting cycle for a merchandising company than for a service company.
Difficulty: Easy
Learning Objective: Perform the steps in the accounting cycle for a merchandising company.
Section Reference: Completing the Accounting Cycle
CPA: Financial Reporting
AACSB: Analytic
33) A single-step income statement is named because there is only one step in determining profit.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
34) A single-step income statement is only done when using the periodic inventory system.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
35) A single-step income statement is considered more useful because it provides a detailed breakdown of all the categories of expenses.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
36) The gross profit section for a merchandising company appears on both the multiple-step and single-step forms of an income statement.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
37) In a multiple-step income statement, operating expenses are deducted from gross profit to give the profit from operations.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
38) If gross profit is $ 80,000 and operating expenses are $ 55,000, then the profit from operations is $ 25,000.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
39) Non-operating expenses are any expenses that are not related to the company’s main operations.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
40) Profit is the final outcome of a company’s operating and non-operating activities.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
41) If there are no “non-operating” activities, then profit from operations equals the company’s profit.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
42) Gross profit is NOT presented on the single-step income statement.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
43) Gross profit margin is calculated by dividing cost of goods sold by net sales.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
44) Gross profit margin is net sales divided by cost of goods sold.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
45) To increase their gross profit margin, a company could increase their sales with the same cost of goods sold.
Difficulty: Medium
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
46) To increase their gross profit margin, a company could decrease their cost of goods sold with the same sales.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
47) To increase their gross profit margin, a company could decrease their operating expenses.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
48) An increase in a company’s gross profit resulting from a decrease in cost of goods sold will mean an increase in gross profit margin.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
49) Gross profit margin is an example of a liquidity ratio.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
50) An increase in sales will always increase a company’s gross profit margin.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
51) A decrease in cost of goods sold will always decrease a company’s gross profit margin.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
52) An increase in profit when accompanied with a decrease in net sales will increase profit margin.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
53) A company can improve its profit margin by increasing its gross profit margin.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
54) Artist Company has net sales of $ 350,000 and cost of goods sold is $ 275,000. If all other expenses equal $ 40,000, the company’s profit margin is 10%.
Difficulty: Medium
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
55) In a periodic inventory system, detailed records of each inventory purchase are maintained.
Difficulty: Easy
Learning Objective: Prepare the entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
56) Under a periodic inventory system, the Merchandise Inventory account is updated when the sale is recorded.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
57) When a company returns merchandise to its supplier under a periodic inventory system, the Purchases account is credited.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
58) In the periodic system of accounting, the cost of goods sold is not recorded at the time of sale of goods.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
59) Purchases is a temporary account reported on the income statement as an expense.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
60) Cost of goods sold, in a periodic inventory system, is determined by adding the cost of goods purchased to the ending inventory.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
61) Net purchases is determined by adding purchase returns and allowances to total purchases.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
62) Cost of goods available for sale, in a periodic inventory system, less beginning inventory is equal to cost of goods purchased.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
63) The contract-based approach to revenue recognition is used by companies that follow IFRS.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the contract-based approach
Section Reference Recording Sales of Merchandise –Contract-Based Approach (Appendix 5B)
CPA: Financial Reporting
AACSB: Analytic
64) When using the contract-based approach to revenue recognition the amount of revenue recognized reflects the consideration the business expects to receive.
Difficulty: Easy
Learning Objective: Prepare the entries for sales under a perpetual inventory system using the contract-based approach
Section Recording Sales with Sales Returns
CPA: Financial Reporting
AACSB: Analytic
65) When using the contract-based approach to revenue recognition, when the customer returns goods for refund, the account Refund Liability is credited.
Difficulty: Easy
Learning Objective: Prepare the entries for sales under a perpetual inventory system using the contract-based approach
Section Recording Sales with Sales Returns
CPA: Financial Reporting
AACSB: Analytic
66) When using the contract-based approach to revenue recognition, if the customer returns goods for refund, but the goods are damaged or defective and can no longer be sold the account Cost of Goods sold is credited.
Difficulty: Easy
Learning Objective: Prepare the entries for sales under a perpetual inventory system using the contract-based approach
Section Recording Sales with Sales Returns
CPA: Financial Reporting
AACSB: Analytic
67) When using the contract-based approach to revenue recognition where a sales discount is offered to the customer, the potential reduction of revenue should be recognized at the time of the sale.
Difficulty: Easy
Learning Objective: Prepare the entries for sales under a perpetual inventory system using the contract-based approach
Section Recording Sales with Sales Discounts
CPA: Financial Reporting
AACSB: Analytic
68) When using the contract-based approach to revenue recognition where a sales discount is offered to the customer but the customer fails to pay within the discount period, the amount of the discount estimated at the time of the sale will be credited to Sales when the account is collected.
Difficulty: Easy
Learning Objective: Prepare the entries for sales under a perpetual inventory system using the contract-based approach
Section Recording Sales with Sales Discounts
CPA: Financial Reporting
AACSB: Analytic
MULTIPLE CHOICE QUESTIONS
69) A company that sells goods to customers is known as a
a) proprietorship.
b) corporation.
c) merchandising company.
d) service company.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
70) Which of the following companies would not be considered a merchandising company?
a) Mountain Equipment Co-op
b) Walmart
c) Air Canada
d) Microsoft
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
71) A merchandiser differs from a service-type business in that it
a) sells goods to customers.
b) has more employees.
c) only operates in one country.
d) requires more government regulation.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
72) Two categories of expenses in merchandising companies are
a) cost of goods sold and financing expenses.
b) operating expenses and financing expenses.
c) cost of goods sold and operating expenses.
d) sales and cost of goods sold.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
73) Which of the following represents the function of the wholesaler?
a) Buy products from manufacturers and sell to retailers.
b) Buy products from other wholesalers and sell to consumers.
c) Buy products from manufacturers and sell to consumers.
d) Buy products from retailers and sell to consumers.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
74) Which of the following represents the function of the retailer?
a) Buy products from manufacturers and sell to wholesalers.
b) Buy products from manufacturers and wholesalers and sell to consumers.
c) Buy products from other retailers and sell to manufacturers.
d) Buy products from other retailers and sell to wholesalers.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
75) Which of the following statements is correct?
a) Under a periodic system, the Merchandise Inventory account is only updated once per period.
b) Under a perpetual system, the Merchandise Inventory account is only updated once per period.
c) Cost of goods sold computed under a periodic system would be higher than under a perpetual system.
d) The value of inventory computed under a periodic system would be lower than under a perpetual system.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
76) Sales revenue less the cost of goods sold equals
a) operating expenses.
b) gross profit.
c) ending inventory.
d) profit.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
77) In a periodic inventory system, the inventory is adjusted
a) each time inventory is purchased.
b) each time inventory is sold.
c) when inventory is counted at the end of the accounting period.
d) always at the end of each month.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
78) If a company determines cost of goods sold each time a sale occurs, it
a) must have a computer accounting system.
b) must have a service business.
c) uses a periodic inventory system.
d) uses a perpetual inventory system.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
79) The operating cycle of a merchandising company differs from that of a service company in all of the following except that it:
a) is usually longer in days.
b) is usually shorter in days.
c) involves the purchase of inventory.
d) involves the sale of merchandise.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
80) When contrasting a perpetual inventory system to a periodic system, the
a) perpetual system requires less clerical work.
b) perpetual system provides better control over inventories.
c) periodic system requires more clerical work.
d) periodic system provides better control over inventories.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
81) All of the following are operating expenses except:
a) expenses incurred to pay employees.
b) expenses incurred to pay interest on bank loans.
c) expenses incurred for freight out.
d) expenses incurred to pay for advertising.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
82) Which of the following statements is correct?
a) A service company does not have a Cost of Goods Sold account because it does not sell goods.
b) A service company does have a Cost of Goods Sold account because it sells a service.
c) A merchandising company does not have a Cost of Goods Sold account because it does not sell goods.
d) A merchandising company does not have a Cost of Goods Sold account because it only sells a service.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
83) Which of the following is a true statement about inventory systems?
a) Periodic inventory systems require more detailed inventory records.
b) Perpetual inventory systems require more detailed inventory records.
c) A periodic system requires cost of goods sold be determined after each sale.
d) A perpetual system is specifically designed for companies that sell low unit-value items.
Difficulty: Easy
Learning Objective: Describe the differences between service and merchandising companies.
Section Reference: Merchandising Operations
CPA: Financial Reporting
AACSB: Analytic
84) The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit
a) Accounts Payable.
b) Purchase Returns and Allowances.
c) Purchase Discounts.
d) Merchandise Inventory.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
85) Under a perpetual inventory system, acquisition of merchandise for resale is debited to the
a) Merchandise Inventory account.
b) Cost of Goods Sold account.
c) Purchase Returns and Allowances account.
d) Purchases account.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
86) In a perpetual inventory system using the earnings approach, cost of goods sold is recorded
a) on a daily basis.
b) at the end of the accounting period.
c) on an annual basis.
d) with each sale.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
87) Under a perpetual inventory system, the following entry would be made to record a purchase of inventory on account:
a) Merchandise Inventory xxx
Accounts Payable xxx
b) Purchases xxx
Accounts Payable xxx
c) Cost of Goods Sold xxx
Accounts Payable xxx
d) Merchandise Inventory xxx
Accounts Receivable xxx
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
88) Under a perpetual inventory system, the following entry would be made to record the return of merchandise purchased on account that is not yet paid:
a) Accounts Payable xxx
Purchases xxx
b) Accounts Payable xxx
Merchandise Inventory xxx
c) Accounts Payable xxx
Purchase Returns and Allowances xxx
d) Accounts Payable xxx
Cost of Goods Sold xxx
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
89) In a perpetual inventory system, a merchandiser will record the purchase of individual inventory items in a (an) ______ account.
a) contra
b) subsidiary
c) expense
d) general ledger
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
90) The detailed individual data from the inventory subsidiary ledger are summarized in the
a) gross profit.
b) cost of goods sold.
c) merchandise inventory control account.
d) accounts payable control account.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
91) In a perpetual inventory system, the entry to record the purchase of merchandise inventory on account would require a
a) debit to the Merchandise Inventory account and a credit to the Accounts Payable account.
b) debit to the Accounts Payable account and a credit to the Merchandise Inventory account.
c) debit to the Merchandise Inventory account and a credit to the Cash account.
d) credit to the Merchandise Inventory account and a debit to the Accounts Receivable account.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
92) Sackville Company purchased merchandise from Amherst Company with freight terms of FOB shipping point. The freight costs will be paid by the
a) Amherst Company
b) Sackville Company
c) transportation company.
d) Both Amherst and Sackville will share the freight costs.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
93) Rivergold Company purchased merchandise from Saltmine Company with freight terms of FOB destination point. The freight costs will be paid by the
a) Saltmine Company
b) Rivergold Company.
c) transportation company.
d) Saltmine and Rivergold will share the freight costs.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
94) Using a perpetual inventory system, the cost of freight in
a) increases the cost of merchandise inventory.
b) is always paid by the seller.
c) is reflected in an expense account called Freight In.
d) reflects the cost of delivering goods to customers.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
95) Falcon Company recently made a $ 10,000 purchase from a major supplier. Shipping costs were $ 200, terms FOB shipping point. To record this purchase, Falcon Company will need to debit the
a) Merchandise Inventory account for $ 10,000.
b) Cost of Goods Sold account for $ 200.
c) Merchandise Inventory account for $ 10,200.
d) Cost of Goods Sold account for $ 10,200.
Difficulty: Medium
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
96) Eastdome Company recently made a $ 20,000 purchase from a major supplier. Shipping costs were $ 400, terms FOB destination point. To record this purchase, Eastdome Company will need to debit the
a) Merchandise Inventory account for $ 20,000.
b) Cost of Goods Sold account for $ 400.
c) Merchandise Inventory account for $ 20,400.
d) Cost of Goods Sold account for $ 20,400.
Difficulty: Medium
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
97) If a purchaser returns goods purchased on account to the supplier under a perpetual inventory system, the purchaser would debit
a) Cost of Goods Sold.
b) Accounts Payable.
c) Merchandise Inventory.
d) Purchase Returns.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
98) Which of the following best represents the journal entry to record the return of goods purchased on account under a perpetual inventory system?
a) a debit to Accounts Receivable and a credit to Purchase Returns and Allowances.
b) a debit to Accounts Receivable and a credit to Merchandise Inventory.
c) a debit to Accounts Payable and a credit to Purchase Returns and Allowances.
d) a debit to Accounts Payable and a credit to Merchandise Inventory.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
99) In a perpetual inventory system, a separate account is maintained for each separate inventory item. These separate accounts are referred to as
a) contra accounts.
b) subsidiary accounts.
c) control accounts.
d) purchase accounts.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
100) Selling terms 2/10, net 30 indicates which of the following?
a) The purchaser is required to pay the entire bill within 10 days.
b) The purchaser can take a 20% discount if they pay within 30 days.
c) The purchaser can take a 2% discount if they pay within 10 days.
d) The purchaser can take a 2% discount if they pay within 30 days.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
101) The term n/30 means
a) the entire bill must be paid within 30 days.
b) the purchaser must pay 3% interest if their payment is late.
c) the seller is offering a 30% discount for early payment.
d) the seller is expected to deliver the goods within 30 days.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
102) If a company purchases inventory for $ 160,000 with terms 2/10, n/30 and pays within the discount period, the amount of cash paid is
a) $ 165,000.
b) $ 163,200.
c) $ 156,800.
d) $ 160,000.
Difficulty: Medium
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
103) B&B Company receives a discount from its largest supplier for each order that exceeds 100 units. This discount is referred to as a
a) sales discount.
b) purchase discount.
c) quantity discount.
d) merchandise discount.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
104) FOB means
a) free on board.
b) freight on board.
c) freight on back order.
d) free on buyer.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
105) A company buys merchandise costing $ 25,000 with terms of 2/10, n/30. The entry to the Merchandise Inventory account, assuming the discount is taken, will be
a) $ 250.
b) $ 300.
c) $ 500.
d) $ 0.
Difficulty: Medium
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
106) A company makes a purchase for $ 250 on December 1, terms 2/10, n/30. How much will the discount be if the amount is paid on December 16?
a) $ 5
b) $ 0
c) $ 10
d) $ 25
Difficulty: Medium
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
107) Farm Company has an offer to purchase 100 seeds for $ 100, 200 seeds for $ 150, or 300 seeds for $ 175. This offer includes a(n)
a) purchase discount.
b) quantity discount.
c) purchase return.
d) special merchandise terms.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
108) GST/HST paid on the purchase of inventory is
a) an additional cost that must be absorbed by the merchandise company
b) not included in inventory because it is recoverable.
c) recorded as an operating expense on the income statement.
d) recorded as additional freight costs and included in the calculation of the cost of goods sold.
Difficulty: Easy
Learning Objective: Prepare entries for sales using the earnings approach under a perpetual inventory system.
Section Reference: Recording Sales of Merchandise
CPA: Financial Reporting
AACSB: Analytic
109) Assuming the company uses the earnings approach for revenue recognition, the Sales Returns and Allowances account is classified as
a) an asset account.
b) a contra asset account.
c) an expense account.
d) a contra revenue account.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise
CPA: Financial Reporting
AACSB: Analytic
110) Assuming the company uses the earnings approach for revenue recognition, which of the following best represents the journal entry to record the return of defective goods sold to customers on account and not yet collected? Assume the goods returned will be discarded.
a) a debit to Sales Returns and Allowances and a credit to Accounts Receivable
b) a debit to Merchandise Inventory and a credit to Accounts Receivable
c) a debit to Sales Returns and Allowances and a credit to Accounts Payable
d) a debit to Merchandise Inventory and a credit to Accounts Payable
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise
CPA: Financial Reporting
AACSB: Analytic
111) The Sales Discounts account is classified as
a) an asset account.
b) a contra asset account.
c) an expense account.
d) a contra revenue account.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise
CPA: Financial Reporting
AACSB: Analytic
112) As an incentive for customers to purchase a large number of items at one time, a business may offer its customers
a) a sales discount.
b) free delivery.
c) a sales allowance.
d) a quantity discount.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise
CPA: Financial Reporting
AACSB: Analytic
113) As an incentive for customers to pay their accounts promptly, a business, in certain industries, may offer its customers
a) a sales discount.
b) free delivery.
c) a sales allowance.
d) a quantity discount.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise
CPA: Financial Reporting
AACSB: Analytic
114) Assuming a purchase on account not yet paid, a purchase return in a perpetual inventory system requires a
a) debit to Accounts Payable and a credit to Merchandise Inventory.
b) debit to Cost of Goods Sold and a credit to Merchandise Inventory.
c) debit to Sales Revenue and a credit to Merchandise Inventory.
d) debit to Sales Returns and Allowances and a credit to Accounts Receivable.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under a perpetual inventory system.
Section Reference: Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
115) Assuming the company uses the earnings approach for revenue recognition, sales revenues are usually considered earned when
a) cash is received from credit sales.
b) an order is received.
c) goods have been transferred from the seller to the buyer.
d) adjusting entries are made.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
116) A sales invoice sent by a seller is used by a purchaser as a source document that
a) provides support for goods purchased for resale.
b) is required before a sale can be recorded.
c) provides irrevocable evidence of a sale.
d) serves only as a customer receipt.
Difficulty: Easy
Learning Objective: Prepare entries for purchases under perpetual inventory system.
Section Reference: Recording Recording Purchases of Merchandise
CPA: Financial Reporting
AACSB: Analytic
117) In a perpetual system, assuming the company uses the earnings approach for revenue recognition, the required entry(ies) to record the sale of merchandise for $ 1,000 on credit for goods costing the company $ 600 would include
a) a debit to Cost of Goods Sold and credit to Merchandise Inventory for $ 600.
b) a debit to Accounts Receivable and credit to Merchandise Inventory for $ 1,000.
c) a debit to Accounts Receivable and credit to Sales for $ 1,000.
d) both a) and c)
Difficulty: Medium
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
118) Freight costs incurred by the seller on outgoing merchandise are recorded as
a) freight out.
b) merchandise inventory.
c) freight in.
d) cost of goods sold.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
119) Freight costs incurred by the seller on outgoing merchandise is shown on the income statement as part of
a) Cost of Goods Sold.
b) Operating Expenses.
c) Sales Revenue.
d) Liabilities.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
120) Assuming the company uses the earnings approach for revenue recognition, a Sales Returns and Allowances account is not debited if a customer
a) returns defective merchandise.
b) receives a credit for merchandise of inferior quality.
c) utilizes a prompt payment incentive.
d) returns goods that are not in accordance with specifications.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
121) If a customer agrees to keep merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales
a) discount.
b) return.
c) contra asset.
d) allowance.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
122) The HST collected on a sale of merchandise is recorded as
a) a selling expense.
b) a liability.
c) sales revenue.
d) cost of goods sold.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
123) Assuming the company uses the earnings approach for revenue recognition, when goods are returned in a saleable condition, that relate to a prior cash sale,
a) the Sales Returns and Allowances account should not be used.
b) the Cash account will be credited.
c) Sales Returns and Allowances will be credited.
d) Accounts Receivable will be credited.
Difficulty: Medium
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
124) Assuming the company uses the earnings approach for revenue recognition, the Sales Returns and Allowances account does not provide information to management about
a) possible inferior merchandise.
b) the percentage of credit sales versus cash sales.
c) inefficiencies in filling orders.
d) errors in overbilling customers.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
125) A sales discount is
a) an incentive for customers to pay quickly.
b) recorded as a contra revenue account.
c) considered to be a sales allowance.
d) a cash savings to the purchaser.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
126) Assume that Trish Company uses the earnings approach for revenue recognition. Trish Company sells merchandise on account for $ 2,400 to Trash Company. Trash Company returns $ 800 (cost $ 500) of merchandise that was damaged, along with a cheque to settle the account. What entry does Trish Company make upon receipt of the cheque? The damaged inventory is sent to recycling.
a) Cash 1,600
Accounts Receivable 1,600
b) Cash 1,568
Sales Returns and Allowances 832
Accounts Receivable 2,400
c) Cash 1,600
Sales Returns and Allowances 800
Accounts Receivable 2,400
d) Cash 2,400
Sales Returns and Allowances 800
Accounts Receivable 1,600
Difficulty: Medium
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
127) Assuming the company uses the earnings approach for revenue recognition, which of the following would be classified as a contra account?
a) Sales
b) Sales Returns and Allowances
c) Merchandise Inventory
d) Unearned Revenue
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
128) Assuming the company uses the earnings approach for revenue recognition, which of the following accounts has a normal credit balance?
a) Sales Returns and Allowances
b) Delivery Expense
c) Sales
d) Selling Expense
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
129) Assume that Atom Electric and Neutron use the earnings approach for revenue recognition. Atom Electric returned to Neutron Inc. 5 damaged fuses. Neutron accepted the return and issued a credit note for $ 200 Atom for the merchandise had purchased on account. To record this return, Neutron’s accountant must
a) debit Cash and credit Sales for $ 200.
b) debit and credit Cash for $ 200.
c) debit Sales Returns and Allowances and credit Cash for $ 200.
d) debit Sales Returns and Allowances and credit Accounts Receivable for $ 200.
Difficulty: Medium
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
130) Freight costs paid by a seller on merchandise sold to customers will cause an increase
a) in the selling expenses of the buyer.
b) in operating expenses for the seller.
c) to the cost of goods sold of the seller.
d) to a contra revenue account of the seller.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
131) Assuming the company uses the earnings approach for revenue recognition, using a perpetual inventory system, the respective normal account balances of Merchandise Inventory, Sales Returns and Allowances, and Cost of Goods Sold are
a) credit, credit, credit.
b) debit, debit, debit.
c) debit, credit, credit.
d) debit, debit, credit.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
132) When recording a credit sale in a perpetual inventory system, all of the following accounts are affected except
a) Sales Revenue.
b) Accounts Receivable.
c) Merchandise Inventory.
d) Cash.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
133) Assuming the company uses the earnings approach for revenue recognition, when recording a return of a credit sale in a perpetual inventory system, and the merchandise returned is in saleable condition, all of the following accounts are affected except
a) Sales Returns and Allowances.
b) Accounts Receivable.
c) Merchandise Inventory.
d) Cash.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
134) Assuming the company uses the earnings approach for revenue recognition, a company uses the Sales Returns and Allowances account to record
a) a discount offered for a large quantity purchase.
b) a discount received from a supplier to encourage prompt payment.
c) returns of inventory to suppliers.
d) customer returns of prior sales.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
135) On the income statement, a merchandiser would normally give a single sales figure (the sum of all its individual sales accounts) because
a) the details are not relevant to most users of the income statement.
b) merchandisers only have one product available for sale.
c) perpetual inventory systems cannot separate various sales items.
d) it is too time consuming to separate all individual sales terms.
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
136) If the seller delivers products FOB destination, what entry will it record when it pays for the freight?
a) Freight Out Cash
b) Freight In Cash
c) Cost of Goods Sold Cash
d) Merchandise Inventory Cash
Difficulty: Easy
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
137) Assuming the company uses the earnings approach for revenue recognition, if returned merchandise is not damaged and can be sold again, the seller must record two journal entries. What will the seller record to update inventory for the cost of the goods returned?
a) Sales Returns and Allowances Accounts Receivable
b) Accounts Receivable Sales
c) Merchandise Inventory Cost of Goods Sold
d) Merchandise Inventory Accounts Receivable
Difficulty: Medium
Learning Objective: Prepare entries for sales under a perpetual inventory system using the earnings approach.
Section Reference: Recording Sales of Merchandise – Earnings Approach
CPA: Financial Reporting
AACSB: Analytic
138) Using a perpetual inventory system, if Shady Phone’s accounting records show an ending inventory balance of $ 25,000 and a physical count shows a balance of $ 23,000, it is necessary to
a) debit its inventory records.
b) purchase additional inventory.
c) remove the nonexistent inventory from its records.
d) credit Cost of Goods Sold.
Difficulty: Medium
Learning Objective: Perform the steps in the accounting cycle for a merchandising company.
Section Reference: Completing the Accounting Cycle
CPA: Financial Reporting
AACSB: Analytic
139) Using a perpetual inventory system, if Walford Harness Shop accounting records show an ending inventory balance of $ 43,000 and a physical count shows a balance of $ 45,000, it is necessary to
a) debit its inventory records to adjust to actual.
b) purchase additional inventory.
c) credit sales.
d) credit Purchase Returns and Allowances.
Difficulty: Medium
Learning Objective: Perform the steps in the accounting cycle for a merchandising company.
Section Reference: Completing the Accounting Cycle
CPA: Financial Reporting
AACSB: Analytic
140) The journal entry to record a shortage of inventory at the end of the accounting period is
Debit Credit
a) Cost of Goods Sold Merchandise Inventory
b) Merchandise Inventory Sales Revenue
c) Accounts Receivable Sales Revenue
d) Accounts Receivable Merchandise Inventory
Difficulty: Easy
Learning Objective: Perform the steps in the accounting cycle for a merchandising company.
Section Reference: Completing the Accounting Cycle
CPA: Financial Reporting
AACSB: Analytic
141) In a perpetual inventory system, the Merchandise Inventory account should equal the actual merchandise on hand
a) at all times.
b) only after the physical inventory account has occurred.
c) only at the beginning of the accounting period.
d) only at the end of the accounting period.
Difficulty: Easy
Learning Objective: Perform the steps in the accounting cycle for a merchandising company.
Section Reference: Completing the Accounting Cycle
CPA: Financial Reporting
AACSB: Analytic
142) All of the following accounts are closed at the end of the accounting period except
a) Sales Returns and Allowances.
b) Freight Out.
c) Cost of Goods Sold.
d) Merchandise Inventory.
Difficulty: Easy
Learning Objective: Perform the steps in the accounting cycle for a merchandising company.
Section Reference: Completing the Accounting Cycle
CPA: Financial Reporting
AACSB: Analytic
143) Assuming the company uses the earnings approach for revenue recognition, in a perpetual system, if the accounting records show an ending inventory balance of $ 22,000 and a physical count shows a balance of $ 20,000, it is necessary to
a) debit Merchandise Inventory and credit Cost of Goods Sold for $ 2,000.
b) debit Cost of Goods Sold and credit Sales Returns and Allowances for $ 2,000.
c) debit Cost of Goods Sold and credit Merchandise Inventory for $ 2,000.
d) debit Sales Returns and Allowances and credit Merchandise Inventory for $ 2,000.
Difficulty: Medium
Learning Objective: Perform the steps in the accounting cycle for a merchandising company.
Section Reference: Completing the Accounting Cycle
CPA: Financial Reporting
AACSB: Analytic
144) When using a perpetual inventory system, the adjusting entry required when merchandise inventory records do not agree with the physical count
a) has an effect on cost of goods sold.
b) has no effect on cost of goods sold.
c) requires reporting a loss when actual is higher than records.
d) requires reporting a gain when actual is lower than records.
Difficulty: Medium
Learning Objective: Perform the steps in the accounting cycle for a merchandising company.
Section Reference: Completing the Accounting Cycle
CPA: Financial Reporting
AACSB: Analytic
145) A physical inventory should be taken
a) after every purchase of merchandise.
b) after every sale.
c) at or near the balance sheet date.
d) only if a computer accounting system is used.
Difficulty: Easy
Learning Objective: Perform the steps in the accounting cycle for a merchandising company.
Section Reference: Completing the Accounting Cycle
CPA: Financial Reporting
AACSB: Analytic
146) Taking a physical inventory count involves all of the following except
a) counting the units on hand.
b) applying unit costs to each item of inventory on hand.
c) evaluating whether inventory needs to be written off as obsolete.
d) totalling the cost of each item of inventory to determine the total cost of goods on hand.
Difficulty: Easy
Learning Objective: Perform the steps in the accounting cycle for a merchandising company.
Section Reference: Completing the Accounting Cycle
CPA: Financial Reporting
AACSB: Analytic
147) Which of the following expressions is incorrect?
a) Gross profit – operating and non-operating expenses = profit.
b) Sales – cost of goods sold – operating and non-operating expenses = profit.
c) Profit + operating and non-operating expenses = gross profit.
d) Operating expenses – cost of goods sold = gross profit.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
148) Assuming the company uses the earnings approach for revenue recognition, the sales revenue section of an income statement for a retailer would not include
a) sales returns and allowances.
b) sales.
c) net sales.
d) cost of goods sold.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
149) The operating expense section of an income statement for a wholesaler would not include
a) office supplies expense.
b) telephone expense.
c) cost of goods sold.
d) insurance expense.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
150) Profit from operations will result if
a) the cost of goods sold exceeds operating expenses.
b) revenues exceed cost of goods sold.
c) revenues exceed operating expenses.
d) gross profit exceeds operating expenses.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
151) Gross profit for a merchandising concern is net sales minus
a) operating expenses.
b) cost of goods sold.
c) sales returns and allowances.
d) cost of goods available for sale.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
152) Which of the following does not belong on a single-step income statement?
a) net sales
b) salaries expense
c) gross profit
d) rent revenue
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
153) Gross profit does not appear
a) on a multiple-step income statement.
b) on a single-step income statement.
c) to be relevant in analyzing the operation of a merchandising company.
d) on the income statement if the periodic inventory system is used because it cannot be calculated.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
154) Which of the following is not a true statement about a multiple-step income statement?
a) Operating expenses may be classified as selling and administrative expenses.
b) There may be a section for non-operating activities.
c) There may be a section for operating assets.
d) There is a section for cost of goods sold.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
155) Under IFRS, expenses must be classified on an income statement on the basis of
a) size.
b) importance.
c) nature or function.
d) usual or unusual expenses.
Difficulty: Easy
Learning Objective: Prepare single-step and multiple-step income statements.
Section Reference: Merchandising Financial Statements
CPA: Financial Reporting
AACSB: Analytic
156) Assuming all other financial statement elements remain unchanged, the profit margin will improve when
a) sales revenue increases.
b) gross profit decreases.
c) operating expenses increase.
d) the cost of goods sold increases.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
157) Profit margin measures the extent by which selling price covers
a) operating expenses.
b) the cost of goods sold.
c) all expenses.
d) income taxes.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
158) If a company has net sales of $ 250,000 and cost of goods sold of $ 175,000, the gross profit margin is
a) 70%.
b) 30%.
c) 15%.
d) 100%.
Difficulty: Medium
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
159) ABC Manufacturing has net sales of $ 150,000, cost of goods sold of $ 95,000, and operating expenses of $ 30,000. The profit margin rounded to the nearest percentage is
a) 37%.
b) 40%.
c) 15%.
d) 17%.
Difficulty: Medium
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
160) ABC Manufacturing has net sales of $ 150,000, cost of goods sold of $ 95,000, and operating expenses of $ 30,000. The gross profit margin rounded to the nearest percentage is
a) 37%.
b) 40%.
c) 15%.
d) 17%.
Difficulty: Medium
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
161) A company shows the following balances:
Sales $ 1,000,000
Sales returns and allowances 250,000
Cost of goods sold 600,000
Operating expenses 75,000
What is the gross profit margin?
a) 60%
b) 80%
c) 40%
d) 20%
Difficulty: Medium
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
162) A company shows the following balances:
Sales $ 1,000,000
Sales returns and allowances 250,000
Cost of goods sold 600,000
Operating expenses 75,000
What is the company’s profit margin?
a) 7.5%
b) 10%
c) 15%
d) 30%
Difficulty: Medium
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
163) Assuming the company uses the earnings approach for revenue recognition, which of the following is not needed to calculate the gross profit margin?
a) sales
b) sales returns and allowances
c) cost of goods sold
d) operating expenses
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
164) Profit margin is calculated as
a) profit ÷ sales revenue.
b) profit ÷ net sales.
c) gross profit ÷ sales revenue.
d) gross profit ÷ cost of goods sold.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
165) In a profitable company, the gross profit margin will normally be ______ the profit margin.
a) higher than
b) lower than
c) equal to
d) The gross profit margin and the profit margin can never be the same.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
166) If sales have decreased in the past year and the cost of goods sold remains the same, this will create
a) an increase in gross profit margin.
b) an increase in profit margin.
c) a decrease in gross profit margin.
d) a decrease in cost of goods sold.
Difficulty: Easy
Learning Objective: Calculate the gross profit margin and profit margin.
Section Reference: Using the Information in the Financial Statements
CPA: Financial Reporting
AACSB: Analytic
167) The Purchase Returns and Allowances account is classified as
a) an asset account.
b) a contra asset account.
c) an expense account.
d) a contra expense account.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
168) The Purchase Discounts account is classified as
a) an asset account.
b) a contra asset account.
c) an expense account.
d) a contra expense account.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
169) Which of the following accounts has a normal debit balance?
a) Purchase Returns and Allowances
b) Purchase Discounts
c) Sales
d) Sales Discounts
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
170) Using a periodic inventory system, the cost of freight in
a) increases the cost of merchandise inventory.
b) is debited to the Purchases account.
c) is reflected in an expense account called Freight In.
d) reflects the cost of delivering goods to customers.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
171) Midgic Farm Store had a beginning merchandise inventory of $ 9,000. During the period, purchases were $ 35,000; purchase returns, $ 1,500; and freight in $ 3,000. A physical count of inventory at the end of the period revealed that $ 6,000 was still on hand. Using a periodic inventory system, the cost of goods sold was
a) $ 44,000.
b) $ 39,500.
c) $ 45,500.
d) $ 42,500.
Difficulty: Medium
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
172) The calculation of net purchases includes all of the following except
a) freight in.
b) freight out.
c) purchases discounts.
d) purchases returns.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
173) In a periodic inventory system, when the buyer pays for freight costs, this entails
a) a debit to the Freight In account.
b) a debit to the Purchases account.
c) a debit to the Merchandise Inventory account.
d) a debit to the Sales account.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
174) In a periodic inventory system, the cost of goods sold is calculated as
a) beginning inventory plus the cost of goods purchased less ending inventory.
b) ending inventory less cost of goods purchased.
c) beginning inventory less cost of goods purchased.
d) cost of goods purchased plus ending inventory less beginning inventory.
Difficulty: Medium
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
175) Yatsu Limited has the following information in its accounting records as at December 31, 2021:
Purchases $ 129,860
Freight in 4,500
Purchase returns and allowances 12,550
Beginning inventory 57,000
A physical inventory count revealed that there was $ 68,000 in ending inventory. Net purchases are
a) $ 129,860.
b) $ 134,360.
c) $ 121,810.
d) $ 117,310.
Difficulty: Medium
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
176) Yatsu Limited has the following information in its accounting records as at December 31, 2021:
Purchases $ 129,860
Freight in 4,500
Purchase returns and allowances 12,550
Beginning inventory 57,000
A physical inventory count revealed that there was $ 68,000 in ending inventory. The cost of goods purchased is
a) $ 129,860.
b) $ 134,360.
c) $ 121,810.
d) $ 117,310.
Difficulty: Medium
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
177) Yatsu Limited has the following information in its accounting records as at December 31, 2021:
Purchases $ 129,860
Freight in 4,500
Purchase returns and allowances 12,550
Beginning inventory 57,000
A physical inventory count revealed that there was $ 68,000 in ending inventory. The cost of goods sold is
a) $ 129,860.
b) $ 134,360.
c) $ 116,310.
d) $ 110,810.
Difficulty: Medium
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
178) The journal entry to record a return of merchandise purchased on account under a periodic inventory system would be
Debit Credit
a) Accounts Payable Purchase Returns and Allowances
b) Purchases Returns and Allowances Accounts Payable
c) Accounts Payable Merchandise Inventory
d) Merchandise Inventory Accounts Payable
Difficulty: Medium
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
179) Assuming the company uses the earnings approach for revenue recognition, under a periodic inventory system, the sale of merchandise on credit requires a debit to
a) Merchandise Inventory.
b) Sales.
c) Accounts Receivable.
d) Cash.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
180) Assuming the company uses the earnings approach for revenue recognition, under a periodic inventory system, the sale of merchandise on credit requires a credit to
a) Merchandise Inventory.
b) Sales Revenue.
c) Accounts Receivable.
d) Cash.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
181) Assuming the company uses the earnings approach for revenue recognition, under a periodic inventory system, the return of merchandise sold on credit requires a credit to
a) Merchandise Inventory.
b) Sales Revenue.
c) Accounts Receivable.
d) Cash.
Difficulty: Easy
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
182) Assuming the company uses the earnings approach for revenue recognition, in a periodic system, the required entry(ies) to record the sale of merchandise for $ 1,000 on credit for goods costing the company $ 600 would be
a) a debit to Cost of Goods Sold and credit to Merchandise Inventory for $ 600.
b) a debit to Accounts Receivable and credit to Merchandise Inventory for $ 1,000.
c) a debit to Accounts Receivable and credit to Sales for $ 1,000.
d) both a) and c)
Difficulty: Medium
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
AACSB: Analytic
183) In a periodic system, if the accounting records show an opening inventory balance of $ 15,000 and a physical count shows a balance of $ 20,000, it is necessary to
a) debit Income Summary and credit Merchandise Inventory for $ 15,000.
b) debit Merchandise Inventory and credit Cost of Goods Sold for $ 5,000.
c) debit Merchandise Inventory and credit Income Summary for $ 20,000.
d) both a) and c)
Difficulty: Medium
Learning Objective: Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold.
Section Reference: Periodic Inventory System (Appendix 5A)
CPA: Financial Reporting
184) Assume that Trish Company uses the contract-based approach for revenue recognition. Trish Company sells merchandise on account for $ 2,400 to Trash Company. Trash Company returns $ 800 (cost $ 500) of merchandise that was the wrong colour, along with a cheque to settle the account. What entry does Trish Company make upon receipt of the cheque and the returned merchandise?
a) Cash 1,600
Accounts Receivable 1,600
b) Cash 1,600
Refund Liability 800
Accounts Receivable 2,400
c) Cash 1,600
Refund Liability 800
Merchandise Inventory 500
Accounts Receivable 2,400
Estimated Inventory Returns 500
d) Cash 2,400
Refund Liability 800
Accounts Receivable 1,600
Difficulty: Medium
Learning Objective: Prepare entries for sales under a perpetual inventory system using the contract-based approach
Section Reference: Recording Sales of Merchandise –Contract-Based Approach (Appendix 5B)
CPA: Financial Reporting
AACSB: Analytic
185) Assume that Atom Electric and Neutron use the contract-based approach for revenue recognition. Atom Electric returned to Neutron Inc. 5 damaged fuses that were sent to recycling. Neutron accepted the return and refunded the $ 200 Atom had paid for the order. To record this return, Neutron’s accountant must
a) debit Cash and credit Sales for $ 200.
b) debit Sales Returns and Allowances and credit Cash for $ 200.
c) debit Refund Liability and credit Cash for $ 200.
d) debit Sales Returns and Allowances and credit Accounts Receivable for $ 200.
Difficulty: Medium
Learning Objective: Prepare entries for sales under a perpetual inventory system using the contract-based approach
Section Reference: Recording Sales of Merchandise –Contract-Based Approach (Appendix 5B)
CPA: Financial Reporting
AACSB: Analytic
186) Assuming the company uses the contract-based approach for revenue recognition, if returned merchandise is not damaged and can be sold again, the seller must record two journal entries. What will the seller record to update inventory for the cost of the goods returned?
a) Sales Returns and Allowances Accounts Receivable
b) Accounts Receivable Sales
c) Merchandise Inventory Estimated Inventory Returns
d) Merchandise Inventory Accounts Receivable
Difficulty: Medium
Learning Objective: Prepare entries for sales under a perpetual inventory system using the contract-based approach
Section Reference Recording Sales of Merchandise –Contract-Based Approach (Appendix 5B)
CPA: Financial Reporting
AACSB: Analytic
187) Stratton Inc. uses the contract-based approach to revenue recognition offers a 2% sales discount to Murphy Ltd. and reduced Sales by the full 2% at the point of sale. Murphy did not take advantage of the discount when it paid Stratton for the balance owing. When recording the collection on account, Stratton will
a) credit Sales for the amount of the discount.
b) debit Sales Discounts for the amount of the discount.
c) debit Sales for the amount of the discount.
d) debit Accounts Receivable the amount of the discount.
Difficulty: Medium
Learning Objective: Prepare the entries for sales under a perpetual inventory system using the contract-based approach
Section Recording Sales with Sales Discounts
CPA: Financial Reporting
AACSB: Analytic
MATCHING QUESTIONS
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Accounting Principles Vol 1 8e Canadian Complete Test Bank
By Jerry J. Weygandt
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