CHAPTER 5

ACCOUNTING FOR MERCHANDISING OPERATIONS

Summary of Questions by STUDY Objectives
and Bloom’s Taxonomy

Note: K = Knowledge C = Comprehension AP = Application

* This topic is dealt with in an Appendix to the chapter.

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Note: TF = True-False MC = Multiple Choice Ma = Matching

* This topic is dealt with in an Appendix to the chapter.

Summary of Questions by lEVEL OF DIFFICULTY (LOD)

Note: E = Easy M = Medium H=Hard

* This topic is dealt with in an Appendix to the chapter.

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 sales revenue, cost of goods sold, gross profit, and operating expenses. 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 for all purchases of merchandise and freight, if freight is paid by the buyer. It is credited for purchase returns and allowances and purchase discounts. Purchase discounts are cash reductions to the net invoice price for early payment.

3. Prepare the entries for sales under a perpetual inventory system. 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. Two entries are also required to record sales returns when the returned merchandise can be sold again in the future. Freight costs on sales are recorded as an operating expense.

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 completed 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 by one step (i.e., subtracting total expenses from total revenues). 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 the entries for purchases and sales of inventory under a periodic inventory system and calculate cost of goods sold (Appendix 5A). In a periodic inventory system, separate temporary 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. 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: Beginning inventory + cost of goods purchased = cost of goods available for sale. Cost of goods available for sale – ending inventory = cost of goods sold.

TRUE-FALSE STATEMENTS

1. A retail company and a service company have different ways of measuring profit.

2. A service company will NOT have to measure gross profit.

3. Operating expenses will only occur in a merchandising company.

4. An operating cycle is the average time that it takes to go from cash to cash in producing revenues.

5. The normal operating cycle of a merchandising company is shorter than the cycle of a service company.

6. Goods available for sale can be defined as inventory.

7. Goods that have been sold in a merchandising company are called cost of goods sold.

8. Service revenue minus operating expenses equals gross profit.

9. The operating expenses of a merchandising company will be different than the operating expenses of a service company.

10. A periodic system of inventory will give the company much more control over their inventory.

11. A perpetual inventory system makes it easier for the company to answer questions about the availability of merchandise.

12. A physical count of the inventory system at year end is only required in the periodic system of inventory.

13. In a periodic inventory system, detailed records of the goods on hand are kept throughout the period.

14. A perpetual inventory system requires the company only determine the cost of goods sold at the end of the accounting period.

15. In the perpetual system of inventory, when merchandise is purchased for resale to customers, the account Merchandise Inventory is debited.

16. A quantity discount is a reduction in price according to the volume of the purchase.

17. A quantity discount is the same as a purchase discount.

18. Purchase discounts are offered to customers for the early payment of the balance due.

19. Every seller offers purchase discounts.

20. If sales terms are FOB destination, the buyer is responsible for getting the goods to their intended destination.

21. FOB Shipping point means that the seller is responsible for the freight costs.

22. If a company purchases goods FOB shipping point, the purchasing company will be responsible for the payment of the freight costs.

23. Freight costs are always a cost to the purchasing company.

24. When a company returns merchandise to its supplier under a perpetual inventory system, the inventory account will be debited.

25. Under a perpetual inventory system, any freight which is incurred when purchasing the inventory is debited to the inventory account.

26. In a perpetual system, there are 2 journal entries when making a sale of goods.

27. The perpetual system requires a second journal entry, increasing cost of goods sold and decreasing merchandise inventory when goods are sold.

28. A Sales Returns and Allowances account is only used in a perpetual inventory system.

29. A large balance in the Sales Returns and Allowances account may indicate that the merchandise which is being sold is of inferior quality.

30. The Sales Returns and Allowances account is a contra revenue account.

31. The Sales Discount account is a contra revenue account.

32. Sales discounts are only used in a perpetual inventory system.

33. There are additional steps required in the accounting cycle for a merchandising company than for a service company.

34. A single-step Income Statement is named because there is only one step in determining profit.

35. A single-step Income Statement is only done when using the periodic inventory system.

36. A single-step Income Statement is considered more useful because it provides a detailed breakdown of all the categories of expenses.

37. A multiple-step Income Statement is consistent with International Financial Reporting Standards.

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

39. In a multiple-step Income Statement, operating expenses are deducted from Gross Profit to give the Profit from Operations.

40. If Gross Profit is $80,000 and operating expenses are $55,000, then the Profit from Operations is $25,000.

41. Non operating expenses are any expenses which are NOT related to the company’s main operations.

42. Profit is the final outcome of a company’s operating and non operating activities.

43. If there are no “non- operating” activities, then Profit from Operations equals the company’s profit.

44. Gross profit margin is calculated by dividing cost of goods sold by net sales.

45. Gross profit margin is net sales divided by cost of goods sold.

46. To increase their gross profit margin, a company should increase their sales.

47. To increase their gross profit margin, a company should decrease their cost of goods sold.

48. To increase their gross profit margin, a company should decrease their operating expenses.

49. An increase in a company’s gross profit will mean an increase in gross profit margin.

50. Gross profit margin is an example of a liquidity ratio.

51. An increase in sales will always increase a company’s gross profit margin.

52. A decrease in cost of goods sold will always increase a company’s gross profit margin.

53. An increase in profit when accompanied with a decrease in net sales will increase profit margin.

54. A company can improve its profit margin by increasing its gross profit margin.

55. 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%.

*56. In a periodic inventory system, detailed records of each inventory purchase are maintained.

*57. Under a periodic inventory system, the inventory account is updated when the sale is recorded.

*58. When a company returns merchandise to its supplier under a periodic inventory system, the Purchases Account is credited.

*59. In the periodic system of accounting, the cost of goods sold is NOT recorded at the time of sale of goods.

*60. Purchases is a temporary account reported on the income statement as an expense.

*61. Cost of goods sold, in a periodic inventory system, is determined by adding the cost of goods purchased to the ending inventory.

*62. Net purchases is determined by adding purchase returns and allowances to total purchases.

*63. Cost of goods available for sale, in a periodic inventory system, is deducted from beginning inventory to determine cost of goods purchased.

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

64. A company which sells goods to customers is known as a

a. proprietorship.

b. corporation.

c. merchandising company.

d. service company.

65. Which of the following companies would NOT be considered a merchandising company?

a. Mountain Equipment Co-op

b. Walmart

c. Air Canada

d. Microsoft

66. 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.

67. 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.

68. Which of the following statements is correct?

a. Under a periodic system, the inventory account is only updated once per period.

b. Under a perpetual system, the 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.

69. Sales revenue less the cost of goods sold equals

a. operating expenses.

b. gross profit.

c. ending inventory

d. profit.

70. 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. at the end of each month.

71. 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.

72. The operating cycle of a merchandising company differs from that of a service company in 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.

73. 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.

74. Operating expenses are

a. expenses incurred to pay employees.

b. expenses avoided to make a sale.

c. expenses incurred in the process of earning revenue.

d. expenses incurred to calculate gross profit.

75. Which of the following statements is correct?

a. A service company does not have 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.

76. 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.

77. 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.

78. 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.

79. In a perpetual inventory system, 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.

80. Under a perpetual inventory system, the following entry would be made to record the 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

81. Under a perpetual inventory system, the following entry would be made to record the return of merchandise purchased on account:

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

82. In a perpetual inventory system, a merchandiser will record the purchase of individual inventory items in a (an) ____________ account.

a. control

b. subsidiary

c. expense

d. general ledger

83. 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.

84. 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.

85. 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.

86. Sackville Company purchased merchandise from Amherst Company with freight terms of FOB shipping point. The freight costs will be paid by the

a. seller.

b. buyer.

c. transportation company.

d. buyer and the seller.

87. Woodpoint Company purchased merchandise from Rockport Company with freight terms of FOB destination point. The freight costs will be paid by the

a. seller.

b. buyer.

c. transportation company.

d. buyer and the seller.

88. 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.

89. Wright Company recently made a $10,000 purchase from a major supplier. Shipping costs were $200, terms FOB shipping point. To record this purchase, Wright 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.

90. Westcock Company recently made a $20,000 purchase from a major supplier. Shipping costs were $400, terms FOB destination point. To record this purchase, Westcock 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.

91. 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.

92. 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.

93. 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.

94. 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.

95. Bendo 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.

96. FOB means

a. Free on board.

b. Freight on board.

c. Freight on back order.

d. Free on buyer.

97. A company buys merchandise costing $25,000 with terms of 2/10 n/30. The adjustment to the Merchandise Inventory account, assuming the discount is taken, will be

a. $250.

b. $300.

c. $500.

d. $0.

98. 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

99. Harvest Company has an offer to purchase 100 seeds for $100, 200 seeds for $150 or 300 seeds for $175. This offer is called a(n)

a. purchase discount.

b. quantity discount.

c. purchase return.

d. special merchandise terms.

100. 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.

101. 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.

102. 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.

103. 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.

104. A sales return in a perpetual inventory system requires a

a. debit to Merchandise Inventory and a credit to Accounts Payable.

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.

105. 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.

106. A sales invoice is a source document that

a. provides support for goods purchased for resale.

b. is required before a sale can be recorded.

c. provides evidence of a sale.

d. serves only as a customer receipt.

107. 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.

108. 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.

109. 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.

110. 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.

111. The HST collected on a sale of merchandise is recorded as

a. a selling expense.

b. sales tax payable.

c. sales revenue.

d. cost of goods sold.

112. When goods are returned 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.

113. 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.

114. A quantity 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.

115. Tidnish Company sells merchandise on account for $2,400 to Upper Cape Company. Upper Cape Company returns $800 (cost $500) of merchandise that was damaged, along with a cheque to settle the account. What entry does Tidnish Company make upon receipt of the cheque?

a. Cash 1600

Accounts Receivable 1600

b. Cash 1,568

Sales Returns and Allowances 832

Accounts Receivable 2,400

c. Cash 1,600

Sales Returns and Allowances 800

Inventory 500

Accounts Receivable 2,400

Cost of Goods Sold 500

d. Cash 2,400

Sales Returns and Allowances 800

Accounts Receivable 1600

116. Which of the following would be classified as a contra account?

a. Sales

b. Sales Returns and Allowances

c. Merchandise Inventory

d. Unearned Revenue

117. Which of the following accounts has a normal credit balance?

a. Sales Returns and Allowances

b. Delivery Expense

c. Sales

d. Selling Expense

118. Northend Electric returned to Southerby Inc. 5 damaged fuses. Southerby accepted the return and refunded the $200 Northend had paid for the order. To record this return, Southerby’s accountant must

a. debit Cash and credit Sales for $200.

b. debit Sales 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.

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

a. in the selling expense of the buyer.

b. in operating expenses for the seller.

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

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

120. 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.

121. 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.

122. When recording a return of a credit sale in a perpetual inventory system, all of the following accounts are affected EXCEPT

a. Sales Returns and Allowances.

b. Accounts Receivable.

c. Merchandise Inventory.

d. Cash.

123. 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.

124. On the income statement, a merchandiser would normally give a single sales figure (the sum of all its individual sales account) because

a. companies do not want competitors to know the details of operating results.

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.

125. If the seller delivers products FOB destination, what entry will it record?

a. Freight Out

Cash

b. Freight In

Cash

c. Cost of Goods Sold

Cash

d. Inventory

Cash

126. If returned merchandise is not damaged and can be sold again, the seller must record two journal entries. What will the seller record as the second journal entry?

a. Sales Returns and Allowances

Accounts Receivable

b. Accounts Receivable

Sales

c. Inventory

Cost of Goods Sold

d. Inventory

Accounts Receivable

127. Using a perpetual inventory system, if Shediac Video Store'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.

128. Using a perpetual inventory system, if Sackville 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 your inventory records to adjust to actual.

b. purchase additional inventory.

c. credit sales.

d. credit Purchase Returns and Allowances.

129. The journal entry to record a shortage of inventory at the end of the accounting period is

Debit Credit

a. Cost of Goods Sold Inventory

b. Inventory Sales Revenue.

c. Accounts Receivable Sales Revenue

d. Accounts Receivable Inventory

130. 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.

131. 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.

132. 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.

133. 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.

134. Taking a physical inventory count involves all of the following EXCEPT

a. counting the units on hand.

b. applying unit costs to the total inventory on hand for each item of inventory.

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.

135. Which of the following expressions is INCORRECT?

a. Gross profit – operating expenses = profit.

b. Sales – cost of goods sold – operating expenses = profit.

c. Profit + operating expenses = gross profit.

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

136. 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.

137. 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.

138. 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.

139. 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.

140. 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.

141. 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.

142. 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.

143. Profit margin is improved when

a. sales revenue increases.

b. gross profit decreases.

c. operating expenses increase.

d. the cost of goods sold increases.

144. 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.

145. 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%.

Use the following information for questions 146 and 147.

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

146. What is the gross profit margin?

a. 60%

b. 80%

c. 40%

d. 20%

147. What is the company’s profit margin?

a. 7.5%

b. 10%

c. 15%

d. 30%

148. 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

149. 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.

150. In a profitable company, the gross profit margin will always 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.

151. If sales have decreased in the past 5 years and the cost of goods sold value remains the same each year, 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.

*152. 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.

*153. 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.

*154. Which of the following accounts has a normal debit balance?

a. Purchase Returns and Allowances

b. Purchase Discounts

c. Sales

d. Sales Returns and Allowances

*155. 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.

*156. 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.

*157. The calculation of net purchases includes all of the following EXCEPT

a. freight in.

b. freight out.

c. purchases discounts.

d. purchases returns.

*158. 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 Inventory account.

d. a debit to the Sales account.

*159. 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.

Use the following information for questions *160 – *162.

Yatsu Limited has the following information in its accounting records as at December 31, 2014:

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.

*160. Net purchases are

a. $129,860.

b. $134,360.

c. $121,810.

d. $117,310.

*161. The cost of goods purchased is

a. $129,860.

b. $134,360.

c. $121,810.

d. $117,310.

*162. The cost of goods sold is

a. $129,860.

b. $134,360.

c. $116,310.

d. $110,810.

*163. 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

*164. 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.

*165. 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.

*166. 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.

ANSWERS TO MULTIPLE CHOICE QUESTIONS

MATCHING

167. Match the items below by entering the appropriate code letter in the space provided. (Some answers may be used more than once.)

A. Net sales G. Freight out

B. Subsidiary account H. Cost of goods purchased

C. Purchase discount I. Cost of goods sold

D. Periodic inventory system J. Perpetual inventory system

E. FOB destination K. Gross Profit Margin

F. FOB shipping point

1. Debits to Merchandise Inventory

2. A discount provided to encourage early payment

3. The merchandise inventory account balance should equal ending inventory, at all times

4. Separate account maintained for each different product

5. Freight terms which require the seller to pay the freight cost

6. Sales less sales returns and allowances and sales discounts

7. Freight cost to deliver goods to customers reported as an operating expense

8. Freight terms which required the buyer to pay the freight cost

9. Deducted from net sales to calculate gross profit

10. Requires a physical count of goods on hand to calculate cost of goods sold

11. A calculation of gross profit divided by net sales

ANSWERS TO MATCHING

1. H

2. C

3. J

4. B

5. E

6. A

7. G

8. F

9. I

10. D

11. K

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