CHAPTER 5

MERCHANDISING OPERATIONS AND THE

MULTIPLE-STEP INCOME STATEMENT

CHAPTER LEARNING OBJECTIVES

1. Describe merchandising operations and inventory systems. Because of the presence of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual inventory system and a periodic inventory system.

2. Record purchases under a perpetual inventory system. The Inventory account is debited for all purchases of merchandise and for freight costs, and it is credited for purchase discounts and purchase returns and allowances.

3. Record sales under a perpetual inventory system. When inventory is sold, Accounts Receivable (or Cash) is debited and Sales Revenue is credited for the selling price of the merchandise. At the same time, Cost of Goods Sold is debited and Inventory is credited for the cost of inventory items sold. Separate contra revenue accounts are maintained for Sales Returns and Allowances and Sales Discounts. These accounts are debited as needed to record returns, allowances, or discounts related to the sale.

1. Prepare a multiple-step income statement. In a single-step income statement, companies classify all data under two categories, revenues or expenses, and net income is determined in one step. A multiple-step income statement shows numerous steps in determining net income, including results of nonoperating activities.
2. Determine the cost of goods sold under a periodic inventory system. The periodic system uses multiple accounts to keep track of transactions that affect inventory. To determine the cost of goods sold, first calculate the cost of goods purchased by adjusting purchases for returns, allowances, discounts, and freight-in. Then calculate the cost of goods sold by adding the cost of goods purchased to beginning inventory and subtracting ending inventory.
3. Compute and analyze gross profit rate and profit margin. Profitability is affected by gross profit, as measured by the gross profit rate, and by management’s ability to control costs, as measured by the profit margin.

*7. Record purchases and sales of inventory under a periodic inventory system. To record purchases, entries are required for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. To record sales, entries are required for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.

*8. Prepare adjusting entries for credit sales with returns and allowances. Adjusting credit sales for returns and allowances requires two entries at the end of the period. The first entry requires a debit to Sales Returns and Allowances and a credit to Refund Liability for the selling price of the estimated returns. The second entry requires a debit to Estimated Inventory Returns and a credit to Cost of Goods Sold for the cost of the estimated returns. Refund Liability is a liability account and reflects the estimated future amount owed to customers in response to future returned goods. Estimated Inventory Returns will generally be added to the Inventory account at the end of the period.

Difficulty:

Easy: 137

Medium: 145

Hard: 12

QUESTION LIST BY SECTION

Merchandising Operations and Inventory Systems (1): 1, 3, 13, 14, 15, 57, 58, 61, 62,63, 64, 65, 66, 67, 68, 69, 72, 73, 74, 81, 85, 245, 275, 276

Operating Cycles: 59

Flow of Costs: 76, 79, 82, 83

Perpetual System: 4, 8, 11, 16, 60, 70, 77, 78

Periodic System: 5, 9, 10, 12, 75, 80, 84

Advantages of the Perpetual System: 277

Recording Purchases Under a Perpetual System (2): 86, 87, 103 104, 107, 108, 109, 246, 278

Freight Costs: 116, 117, 118, 279, 294

Freight Costs Incurred by the Buyer: 89, 91, 110, 114

Freight Costs Incurred by the Seller: 17, 92, 111, 113, 115

Purchase Returns and Allowances: 88, 90, 98, 99, 280

Purchases Discounts: 18, 19, 20, 21, 22, 93, 94, 95, 96, 97, 100, 101, 102, 105, 106, 255

Summary of Purchasing Transactions: 256, 257, 258, 259, 260

Recording Sales Under a Perpetual System (3): 23, 24, 25, 26, 27, 31, 120, 121, 122, 123, 124, 125, 126, 133, 151, 152, 155, 157, 246, 248, 281, 287

Sales Returns and Allowances: 29, 119, 127, 128, 129, 134, 135, 136, 137, 154

Sales Discounts: 28, 30, 32, 33, 130, 131, 132, 138, 139, 140, 141, 142, 143, 144, 145, 146, 147, 148, 149, 150, 153, 156, 261

Data Analytics and Credit Sales: 34, 35

Multiple-Step Income Statement (4):

Single-Step Income Statement: 37, 159, 160, 161, 167, 178, 253, 254

Multiple-Step Income Statement: 36, 38, 42, 44, 45, 163, 166, 169, 170, 180, 263, 289, 291

Sales: 173, 177, 179, 249

Gross Profit: 39, 164, 172, 176, 211, 216, 283

Operating Expenses: 43, 165, 174, 175, 290

Nonoperating Activities and Income Tax Expense: 40

Cost of Goods Sold Under a Periodic System (5): 46, 47, 186, 187, 188, 189, 190, 191, 192, 193, 194, 195, 196, 197, 198, 268, 269

Gross Profit and Profit Margin (6): 52, 199, 221, 252, 270

Gross Profit Rate: 48, 49, 50, 51, 200, 201, 203, 204, 205, 206, 207, 208, 209, 210, 213, 214, 218, 219, 220, 222, 223, 225, 226, 292, 293

Profit Margin: 202, 212, 215, 217, 284

Periodic Inventory System (7): 232

Recording Merchandise Transactions: 250, 251, 271, 272, 273, 274

Recording Purchases of Merchandise: 54, 227, 233

Freight Costs: 239, 240

Purchase Returns and Allowances: 229

Recording Sales of Merchandise: 234

Sales Returns and Allowances: 53, 228

Sales Discounts: 230, 231, 236, 238

Comparison of Entries – Perpetual vs. Periodic:

Adjusting Entries for Credit Sales with Returns and Allowances (8): 55, 56, 243, 244, 288

TRUE-FALSE STATEMENTS

1. Retailers and wholesalers are both considered merchandising enterprises.

2. The operating cycle of a merchandising company is ordinarily shorter than that of a service company.

3. Sales revenue minus operating expenses equals gross profit.

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

5. A periodic inventory system does not require a detailed record of inventory items.

6. The operating cycle of a merchandiser involves the purchase and sale of inventory as well as the subsequent collection of cash from credit sales.

7. The purchase of inventory and its eventual sale lengthen the operating cycle of a merchandising company.

8. Under the periodic inventory system, the cost of goods sold account is updated each time a sale is made.

9. An advantage of using the periodic inventory system is that it requires fewer journal entries than the perpetual inventory system.

10. The periodic inventory system provides an up-to-date balance of inventory on hand.

11. A very small business most likely would use a perpetual inventory system.

12. Technology has greatly increased the use of periodic inventory systems.

13. Cost of Goods Sold is considered an expense of a merchandising firm.

14. Operating expenses are subtracted from revenue for a service enterprise and from gross profit for a merchandising enterprise.

15. Net sales minus cost of goods sold is called gross profit.

16. Under the perpetual inventory system, purchases of merchandise for sale are recorded in the Inventory account.

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

18. The terms 2/10, n/30 mean that a 2 percent discount is allowed on payments made within the 10 day discount period.

19. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 20 days after the invoice date to take advantage of the cash discount.

20. Discounts taken by the buyer for early payment of an invoice are called sales discounts by the buyer.

21. If merchandise costing $5,000, with terms 2/10, n/30, is paid within 10 days, the amount of the purchase discount is $100.

22. When an invoice is paid within the discount period, the amount of the discount decreases the cost of the inventory.

23. Sales revenue is only earned during the period in which the cash is collected from the buyer.

24. Cash register documents provide evidence of credit sales.

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

26. The revenue recognition principle is applied to merchandising companies by recognizing sales revenues when the performance obligation is satisfied.

27. Sales allowances and sales discounts are both designed to encourage customers to pay their accounts promptly.

28. Sales Discounts is a contra revenue account to Sales Revenue.

29. The normal balance of the Sales Returns and Allowances account is a credit.

30. When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period.

31. Sales Discounts and Sales Returns and Allowances both have normal debit balances.

32. Merchandise is sold for $5,000 with terms 1/10, n/30. If $1,000 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $40.

33. The terms 2/10, n/30 mean that a 2 percent discount is allowed on payments made over 10 but before 30 days after the invoice date.

34. Data analytics can be useful in refining sales discounts and sales returns and allowances policies.

35. Data analytics can be useful in refining purchase discounts and purchase returns and allowances policies.

36. The multiple-step income statement is considered by some to be more useful than the single-step income statement because it highlights the components of net income.

37. In a single-step income statement, only one step is required in determining net income.

38. Freight-out is reported as an operating expense in the income statement.

39. Gross profit appears on both the single-step and multiple-step forms of an income statement.

40. Nonoperating activities include revenues and expenses that are related to the company’s main line of operations.

41. Operating expenses include interest expense and income tax expense.

42. Income from operations appears on both the single-step and multiple-step forms of an income statement.

43. A merchandising company’s net income is determined by subtracting operating expenses from gross profit.

44. Sales revenues, cost of goods sold, and gross profit are amounts on a merchandising company's income statement not commonly found on the income statement of a service company.

45. The income statement for a merchandising company presents only two amounts not shown on a service company’s income statement.

46. Under the periodic system, the Purchases account is used to accumulate all purchases of merchandise for resale.

47. With the periodic inventory system, goods available for sale must be calculated before determining cost of goods sold.

48. If net sales are $750,000 and cost of goods sold is $600,000, the gross profit rate is 20%.

49. The gross profit dollar amount is generally considered to be more informative than the gross profit rate.

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

51. The quality of earnings ratio is calculated as net income divided by net cash provided by operating activities.

52. A quality of earnings ratio significantly less than 1 suggests that a company may be using more aggressive accounting techniques in order to accelerate income recognition.

*53. Under the periodic system, when a customer returns goods, Purchase Returns and Allowances is debited.

*54. Under the periodic inventory system, acquisitions of merchandise are not recorded in the Inventory account.

*55. The balance in the Refund Liability account is the estimated future amount expected to be collected from suppliers when goods purchased in the future are returned.

*56. The balance in Estimated Inventory Returns is generally deducted from Inventory on the Balance sheet.

MULTIPLE CHOICE QUESTIONS

57. Merchandising companies that sell to retailers are known as

a. brokers.

b. corporations.

c. wholesalers.

d. service firms.

58. Which of the following would not be considered a merchandising operation?

a. Retailer

b. Wholesaler

c. Service firm

d. Merchandising company

59. Which of the following activities is not a component of the operating cycle of a merchandiser?

a. Sale of merchandise

b. Issuing stock to owners

c. Collection of cash from merchandise sales

d. Purchase of merchandise

60. Which statement below is true concerning a perpetual inventory system?

1. It allows for the determination of cost of goods sold after each sale.
2. It does not require a physical inventory count to verify the cost of goods on hand.
3. Cost of goods sold is determined based on a physical count at the end of the period.
4. It is used infrequently due to the high cost of determining the cost of goods acquired.

61. Gross profit equals the difference between

a. net income and operating expenses.

b. net sales and cost of goods sold.

c. net sales and operating expenses.

d. net sales and cost of goods sold plus operating expenses.

62. Each of the following companies is a merchandising company except a

a. wholesale parts company.

b. candy store.

c. moving company.

d. furniture store.

63. Net income will result if gross profit exceeds

a. cost of goods sold.

b. operating expenses.

c. purchases.

d. cost of goods sold plus operating expenses.

64. A merchandiser will earn an operating income of exactly $0 when

a. net sales equals cost of goods sold.

b. cost of goods sold equals gross profit.

c. operating expenses equal net sales.

d. gross profit equals operating expenses.

65. With regard to accounting for a merchandising company versus a service company, which of the following is true?

1. Additional accounts and entries are typically required for a service company.
2. Retailers and wholesalers can be either service companies or merchandising companies.
3. The operating cycle of a merchandising company is longer than that of a service company.
4. Because inventory is an expense, it is recognized on the balance sheet by both service and merchandising companies.

66. A merchandiser that sells directly to consumers is a

a. retailer.

b. wholesaler

c. broker.

d. service enterprise.

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. purchases and cost of goods sold.

68. The primary source of revenue for a wholesaler is

a. investment income.

b. service revenue.

c. the sale of merchandise.

d. the sale of plant assets the company owns.

69. Generally, the revenue account for a merchandising enterprise is called

a. Sales Revenue or Sales.

b. Investment Income.

c. Gross Profit.

d. Net Sales.

70. Under a perpetual inventory system,

a. accounting records continuously disclose the amount of inventory.

b. increases in inventory resulting from purchases are debited to Purchases.

c. there is no need for a year-end physical count.

d. the account Purchase Returns and Allowances is credited when goods are returned to vendors.

71. The operating cycle of a merchandising company is

a. always one year in length.

b. ordinarily longer than that of a service company.

c. about the same as that of a service company.

d. ordinarily shorter than that of a service company.

72. Net sales less cost of goods sold is called

a. gross profit.

b. net profit.

c. net income.

d. marginal income.

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

a. gross profit.

b. net income.

c. gross profit on sales.

d. net sales.

74. Which of the following expressions is incorrect?

a. Gross profit - Operating expenses = Net income

b. Net sales - Cost of goods sold - Operating expenses = Net income

c. Net income + Operating expenses = Gross profit

d. Operating expenses - Cost of goods sold = Gross profit

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

a. perpetual inventory system.

b. periodic inventory system.

c. double-entry accounting system.

d. single entry accounting system.

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 to be determined after each sale.

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

77. Which of the following items is determined at a different time under the perpetual inventory system than under the periodic system?

a. Sales Revenue

b. Cost of Goods Sold

c. Purchases

d. Accounts Receivable

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

a. daily.

b. monthly.

c. annually.

d. each time a sale occurs.

79. The primary difference between a periodic and perpetual inventory system is that a periodic system

a. keeps a record showing the inventory on hand at all times.

b. provides better control over inventories.

c. records the cost of the sale on the date the sale is made.

d. determines the inventory on hand only at the end of the accounting period.

80. When using the periodic system the physical inventory count is used to determine

a. only the sales value of goods in the ending inventory.

b. both the cost of the goods in ending inventory and the sales value of goods sold during the period.

c. both the cost of the goods sold and the cost of ending inventory.

d. only the cost of merchandise sold during the period.

81. Under a perpetual inventory system, inventory is recognized as cost of goods sold when a company

a. pays for the inventory.

b. purchases the inventory.

c. sells the inventory.

d. receives payment from the customer.

82. Which statement is incorrect?

a. Periodic inventory systems provide better control over inventories than perpetual inventory systems.

b. Computers and electronic scanners allow more companies to use a perpetual inventory system.

c. Freight-in is debited to Inventory when a perpetual inventory system is used.

d. Regardless of the inventory system that is used, companies should take a physical inventory count.

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

a. must have a computerized accounting system.

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

c. uses a periodic inventory system.

d. uses a perpetual inventory system.

84. Which of the following statements about periodic inventory systems is not true?

a. Detailed inventory records of the goods on hand throughout the period are not maintained in the Inventory account.

b. A physical count is taken at the end of the period to determine the ending inventory balance.

c. Cost of goods sold is determined and recorded each time a sale is made.

d. The Inventory account is not updated for each purchase and sale.

85. What is a difference between merchandising companies and service enterprises?

a. Service companies report inventories and gross profit while merchandising enterprises only report inventory.

b. Merchandising companies generally have a longer operating cycle than service enterprises.

c. Cost of goods sold is an expense for service enterprises but not for merchandising companies.

d. All are these choices are differences.

86. Under the perpetual inventory system, which of the following accounts would not be used?

a. Sales Revenue

b. Purchases

c. Cost of Goods Sold

d. Inventory

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

a. the Inventory account.

b. the Purchases account.

c. the Supplies account.

d. the Cost of Goods Sold account.

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

a. Accounts Payable.

b. Purchase Returns and Allowances.

c. Sales Revenue.

d. Inventory.

89. Which of the following items will not result in a journal entry being recorded in the Inventory account under a perpetual system?

a. A purchase of merchandise

b. A return of merchandise inventory to the supplier

c. Payment of freight costs for goods shipped to a customer

d. Payment of freight costs for goods received from a supplier

90. A company using a perpetual inventory system that returns goods previously purchased on credit would

a. debit Accounts Payable and credit Inventory.

b. debit Sales and credit Accounts Payable.

c. debit Cash and credit Accounts Payable.

d. debit Accounts Payable and credit Purchases.

91. If a purchaser using a perpetual inventory system pays the transportation costs for goods purchased, then the

a. Inventory account is increased.

b. Inventory account is not affected.

c. Freight-Out account is increased.

d. Delivery Expense account is increased.

92. Freight costs incurred 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.

93. Acme Company purchased merchandise inventory with an invoice price of $12,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Acme Company pays within the discount period?

a. $12,000

b. $11,760

c. $10,800

d. $11,040

94. A buyer borrows money at 6% interest to pay a $9,000 invoice with terms 1/10, n/30 on the 10th day of the discount period. The loan is repaid on the 30th day of the invoice. What is the buyer’s net savings for these two transactions (assume a 360-day year)?

a. $0

b. $60.00

c. $61.20

d. $120.00

95. In the credit terms of 1/10, n/30, the “1” represents the

a. number of days in the discount period.

b. full amount of the invoice.

c. number of days when the entire amount is due.

d. percent of the cash discount.

96. A1 Supply Company purchased merchandise with an invoice price of $2,000 and credit terms of 2/10, n/30. Assuming a 360-day year, what is the implied annual interest rate inherent in the credit terms?

a. 4%

b. 24%

c. 36%

d. 72%

97. Company A purchased merchandise inventory with an invoice price of $15,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Company A pays within the discount period?

a. $15,000

b. $14,760

c. $14,700

d $12,000

98. A company returned goods for credit to the supplier. Which one of the following is part of the journal entry required if a perpetual inventory system is used?

1. Credit Accounts Payable
2. Credit Purchase Returns and Allowances
3. Debit Accounts Receivable
4. Credit Inventory

99. A credit sale of $3,800 is made on April 25, terms 2/10, n/30, on which a return of $200 is granted on April 28. What amount will be received as payment in full if collected on May 4?

a. $3,528

b. $3,724

c. $3,800

d $3,600

100. Ace Supply Company purchased merchandise with an invoice price of $2,000 and credit terms of 3/10, n/30. Assuming a 360-day year, what is the implied annual interest rate inherent in the credit terms?

a. 3%

b. 8%

c. 36%

d 54%

101. A credit sale of $1,400 is made on July 15, terms 2/10, n/30, on which a return of $100 is granted on July 18. What amount is received as payment in full on July 24?

a. $1,400

b. $1,274

c. $1,350

d $1,372

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

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

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

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

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

103. A purchase invoice is a document that

a. provides support for goods purchased for cash.

b. provides evidence of incurred operating expenses.

c. provides evidence of credit purchases.

d. serves only as a customer receipt.

104. Company A is a retailer and uses a perpetual inventory system. Which statement is correct?

a. Returns of merchandise by Company A to a manufacturer are credited to Inventory.

b. Freight paid to get merchandise to Company A’s store is debited to Freight Expense.

c. A return of merchandise by one of Company A’s customers is credited to Inventory.

d. Discounts taken by Company A’s customers are credited to Inventory.

105. As the president of Acme Company, you notice that no discounts have been taken when settling accounts payable. What would be an acceptable explanation?

a. All invoices have credit terms of n/30.

b. There is not sufficient cash to pay within the discount period.

c. Discounts are missed because no one knows how to enter them in the new accounting software.

d. The full amount of the invoice is being paid within the discount period and the treasurer is pocketing the discount amount.

106. When using a perpetual inventory system, why are purchase discounts credited to Inventory?

a. The discounts are debited to discount expense and thus the credit has to be made to merchandise inventory.

b. The discounts reduce the cost of the inventory.

c. The discounts are a reduction of business expenses.

d. None of these answers choices is correct.

107. Acme Market recorded the following events involving a recent purchase of inventory:

Received goods for $80,000, terms 2/10, n/30.

Returned $1,600 of the shipment for credit.

Paid $400 freight on the shipment.

Paid the invoice within the discount period.

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

a. increased by $76,832.

b. increased by $78,800.

c. increased by $77,224.

d. increased by $77,232.

108. Company A recorded the following events involving a recent purchase of inventory:

Received goods for $120,000, terms 2/10, n/30.

Returned $2,400 of the shipment for credit.

Paid $600 freight on the shipment.

Paid the invoice within the discount period.

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

a. increased by $115,248.

b. increased by $118,200.

c. increased by $115,836.

d. increased by $115,848.

109. Under a perpetual inventory system, assets purchased for resale are recorded in which of the following accounts?

a. Supplies

b. Inventory

c. Equipment

d. Patents

110. Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in which account?

a. Freight Expense

b. Freight-In

c. Inventory

d. Freight-Out

111. Under the perpetual system, cash freight costs incurred by the seller for the transporting of goods is recorded in which account?

a. Freight Expense

b. Freight-In

c. Inventory

d. Freight-Out

112. Company A and Company B both use perpetual systems. If Company A shipped goods to Company B with shipping terms FOB Shipping point, which of the following statements is true concerning the freight costs?

a. Company B will debit Inventory for the freight costs.

b. Company B will debit Freight-In for the freight costs.

c. Company A will debit Inventory for the freight costs.

d. Company A will debit Freight-Out for the freight costs

113. Acme Company and A1 Company both use perpetual systems. If Acme shipped goods to A1 Company with shipping terms FOB Destination, which of the following statements is true concerning the freight costs?

a. A1 will debit Inventory for the freight costs.

b. A1 will debit Freight-In for the freight costs.

c. Acme will debit Inventory for the freight costs.

d. Acme will debit Freight-Out for the freight costs

114. Under the perpetual system, when goods are shipped FOB Shipping Point, the freight costs are charged to

a. Freight Expense by the seller.

b. Freight-In by the buyer.

c. Inventory by the buyer.

d. Freight-Out by the seller.

115. Under the perpetual system, when goods are shipped FOB Destination, the freight costs are charged to

a. Freight Expense by the seller.

b. Freight-In by the buyer.

c. Inventory by the buyer.

d. Freight-Out by the seller.

116. When goods are shipped FOB Destination, title to the goods transfers from the seller to the buyer

a. when the purchase order is received by the seller.

b. when the goods are given to the freight carrier by the seller.

c. when the freight bill is paid by the buyer.

d. when the goods are received by the buyer.

117. When goods are shipped FOB Shipping Point, title to the goods transfers from the seller to the buyer

a. when the purchase order is received by the seller.

b. when the goods are given to the freight carrier by the seller.

c. when the freight bill is paid by the buyer.

d. when the goods are received by the buyer.

118. Which of the following statements is true regarding freight costs?

a. Freight-out is reported by the seller as an operating expense.

b. Freight-in is reported by the buyer as an operating expense.

c. The buyer dictates which party will pay the freight costs.

d. Freight costs incurred by the seller are considered part of the cost of the inventory.

119. Which of the following accounts is classified as a contra revenue account?

a. Sales Revenue

b. Cost of Goods Sold

c. Sales Returns and Allowances

d. Purchase Discounts

120. 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.

121. Sales revenue

a. may be recorded before cash is collected.

b. will always equal cash collections in a month.

c. only results from credit sales.

d. is only recorded after cash is collected.

122. The journal entry to record a credit sale ignoring cost of goods sold is

a. Cash

Sales Revenue

b. Cash

Service Revenue

c. Accounts Receivable

Sales Returns and Allowances

d. Accounts Receivable

Sales Revenue

123. Under the perpetual inventory system, in addition to making the entry to record a sale, a company would

a. debit Inventory and credit Cost of Goods Sold.

b. debit Cost of Goods Sold and credit Purchases.

c. debit Cost of Goods sold and credit Inventory.

d. make no additional entry until the end of the period.

124. When sales of merchandise are made for cash, the transaction may be recorded by the following entry:

a. Debit Sales Revenue, credit Cash

b. Debit Cash, credit Sales Revenue

c. Debit Sales Revenue, credit Cash Discounts

d. Debit Sales Revenue, credit Sales Returns and Allowances

125. The entry to record a sale of $1,800 with terms of 2/10, n/30 will include a

a. debit to Sales Discounts for $36.

b. debit to Sales Revenue for $1,764.

c. credit to Accounts Receivable for $1,800.

d. credit to Sales Revenue for $1,800.

126. A sales invoice is prepared when goods

a. are sold for cash.

b. are sold on credit.

c. sold on credit are returned.

d. are sold on credit or for cash.

127. Which of the following relationships is true concerning the Sales Returns and Allowances account?

1. It is a contra account that is reported on the balance sheet as a deduction from the related sales.
2. It can flag problems of inferior merchandise, inefficiencies in filling orders, and other mistakes.
3. It represents the cost of merchandise returned by customers.
4. It has a normal credit balance and is added to sales to determine net sales.

128. The Sales Returns and Allowances account is classified as a(n)

a. asset account.

b. contra asset account.

c. expense account.

d. contra revenue account.

129. The entry to record the return of goods from a customer would include a

a. debit to Sales Revenue.

b. credit to Sales Revenue.

c. debit to Sales Returns and Allowances.

d. credit to Sales Returns and Allowances.

130. The entry to record the receipt of payment within the discount period on a sale of $900 with terms of 2/10, n/30 will include a

a. credit to Sales Discounts for $18.

b. debit to Sales Revenue for $882.

c. credit to Accounts Receivable for $900.

d. credit to Sales Revenue for $900.

131. The entry to record a sale of $900 with terms of 2/10, n/30 will include a

a. credit to Sales Discounts for $18.

b. debit to Cash for $882.

c. credit to Accounts Receivable for $900.

d. credit to Sales Revenue for $900.

132. The collection of a $1,500 account within the 2 percent discount period will result in a

a. debit to Sales Discounts for $30.

b. debit to Accounts Receivable for $1,470.

c. credit to Cash for $1,470.

d. credit to Accounts Receivable for $1,470.

133. A sales invoice is used as documentation for a journal entry that requires a debit to

a. Cash and a credit to Sales Revenue.

b. Sales Returns and Allowances and a credit to Accounts Receivable.

c. Accounts Receivable and a credit to Sales Revenue.

d. Cash and a credit to Sales Returns and Allowances.

134. If a customer agrees to retain 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.

135. 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.

136. 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 billing customers.

137. 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.

138. As an incentive for customers to pay their accounts promptly, a business may offer its customers

a. a sales discount.

b. free delivery.

c. a sales allowance.

d. a sales return.

139. The credit terms offered to a customer by a business were 2/10, n/30, which means

a. the customer must pay the bill within 10 days.

b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date.

c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.

d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.

140. A company sells an item on account with credit terms of 2/10, n/20. What is the meaning of these terms?

1. An additional amount equal to 2 percent of the invoice price must be paid if payment is not received within 10 days; the account is overdue after 20 days.
2. A 10 percent cash discount may be taken if payment is made immediately; a 2 percent discount may be taken if paid within 20 days.
3. A 2 percent cash discount may be taken if payment is made within 10 days of the invoice date; otherwise, the full amount is due within 20 days.
4. A 10 percent cash discount may be taken if payment is made within 2 days of the invoice date; otherwise, the full amount is due in 20 days.

141. A sales discount does not

a. provide the purchaser with a cash savings.

b. reduce the amount of cash received from a credit sale.

c. increase a contra revenue account.

d. increase an operating expense account.

142. Acme Inc. sells $1,200 of merchandise on account to A1 Company with credit terms of 2/10, n/30. If A1 Company remits a check taking advantage of the discount offered, what is the amount of A1 Company's check?

a. $1,176

b. $1,200

c. $1,080

d. $1,120

143. A1 Supply Company sells merchandise on account for $3,000 to Ace Company with credit terms of 2/10, n/30. Ace Company returns $500 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?

a. $2,440

b. $2,460

c. $2,450

d. $2,250

144. Company A sells $900 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is the amount of Company B’s check?

a. $630

b. $882

c. $810

d. $720

145. Which of the following accounts normally have debit balances?

a. Sales Discounts

b. Sales Returns and Allowances.

c. Both Sales Discounts and Sales Returns and Allowances have debit balances.

d. Neither Sales Discounts nor Sales Returns and Allowances have debit balances.

146. Acme Supply Company sells merchandise on account for $7,500 to A1 Exploration Company with credit terms of 2/10, n/30. A1 Exploration returns $1,500 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?

a. $7,350

b. $7,380

c. $6,000

d. $5,880

147. A1 Retail Inc. sold merchandise for $800 subject to credit terms of 3/10, n/30. Which one of the following is part of the journal entry made by A1 Retail to record the collection in full within the discount period in a perpetual inventory system?

a. Debit to Sales Discounts for $24

b. Debit to Cash for $824

c. Credit to Accounts Receivable for $824

d. Credit to Inventory for $24

148. Acme Supply Company sells merchandise on account for $1,800 to Ace Retail Company with credit terms of 2/10, n/30. Ace Retail Company returns $600 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Acme Supply Company make upon receipt of the check?

a. Cash 1,200

Accounts Receivable 1,200

b. Cash 1,176

Sales Returns and Allowances 624

Accounts Receivable 1,800

c. Cash 1,176

Sales Returns and Allowances 600

Sales Discounts 24

Accounts Receivable 1,800

d. Cash 1,764

Sales Discounts 36

Sales Returns and Allowances 600

Accounts Receivable 1,200

149. The collection of a $500 account beyond the 2 percent discount period will result in a

a. debit to Cash for $490.

b. debit to Accounts Receivable for $500.

c. debit to Cash for $500.

d. debit to Sales Discounts for $10.

150. The collection of an $800 account beyond the 2 percent discount period will result in a

a. debit to Cash for $784.

b. credit to Accounts Receivable for $800.

c. credit to Cash for $800.

d. debit to Sales Discounts for $16.

151. Which of the following would not be classified as a contra account?

a. Sales Revenue

b. Sales Returns and Allowances

c. Accumulated Depreciation

d. Sales Discounts

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

a. Sales Returns and Allowances

b. Sales Discounts

c. Sales Revenue

d. Cost of Goods Sold

153. With respect to the income statement,

a. contra revenue accounts do not appear on the income statement.

b. sales discounts increase the amount of sales.

c. contra revenue accounts increase the amount of operating expenses.

d. sales discounts are included in the calculation of gross profit.

154. When a seller records a return of goods sold on account, the account credited is

a. Sales Revenue.

b. Sales Returns and Allowances.

c. Inventory.

d. Accounts Receivable.

155. The respective normal account balances of Sales, Sales Returns and Allowances, and Sales Discounts are

a. credit, credit, credit.

b. debit, credit, debit.

c. credit, debit, debit.

d. credit, debit, credit.

156. On January 14, 2025, Acme Furniture Company purchased merchandise inventory for $60,000. Credit terms were 2/10, n/30. The inventory was sold on account for $100,000 on January 21, 2025. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2025, and the accounts receivables were settled on January 30, 2025. Which statement is correct?

a. Cash flows were affected on January 14 and January 21.

b. The gross profit rate is 60%.

c. On January 30, 2025, customers should remit cash of $99,000.

157. Which statement is incorrect?

a. The Sales Revenue account is used to record the sales of goods held for resale to customers.

b. Sales discounts are recorded as debits to the Sales Revenue account.

c. The Sales Revenue account is a revenue account.

d. The Sales Revenue account has a normal credit balance and is closed at the end of the accounting period.

158. Opportunities for businesses to use data analytics in making decisions include all of the following except

a. what type of sales discount to offer.

b. policies regarding sales returns.

c. which customers should be granted credit.

d. All of these are opportunities to use data analytics.

159. Indicate which one of the following would not appear on both a single-step income statement and a multiple-step income statement.

a. Gross profit

b. Salaries and wages expense

c. Sales revenue

d. Cost of goods sold

160. The form of the income statement that derives its name from the fact that the total of all expenses is deducted from the total of all revenues is called a

a. multiple-step statement.

b. revenue statement.

c. report-form statement.

d. single-step statement.

161. 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 either a multiple-step or single-step income statement.

162. Gross profit equals the difference between net sales and

a. operating expenses.

b. cost of goods sold.

c. net income.

d. cost of goods sold plus operating expenses.

163. Positive operating income will result if gross profit exceeds

a. costs of goods sold.

b. salaries and wages expense.

c. cost of goods sold plus operating expenses.

d. operating expenses.

164. What is the term applied to the excess of net sales over the cost of goods sold?

a. Income before income taxes

b. Income from operations

c. Net income

d. Gross profit

165. Operating expenses would include

a. interest expense.

b. income tax expense.

c. freight-out.

d. freight-out and interest.

166. Which of the following is not a true statement about a multiple-step income statement?

a. Operating expenses do not include income tax expense.

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.

167. An advantage of the single-step income statement over the multiple-step form is

a. the amount of information it provides.

b. its comprehensiveness.

c. its simplicity.

d. its use in computing ratios.

168. Income from operations appears on

a. both a multiple-step and a single-step income statement.

b. neither a multiple-step nor a single-step income statement.

c. a single-step income statement.

d. a multiple-step income statement.

169. Income from operations is gross profit less

1. operating expenses and other expenses and losses.

2. operating expenses plus other revenues and gains.

3. operating expenses.

a. 1

b. 2

c. 3

d. both 1 and 2

170. Multiple-step income statements show

a. gross profit but not income from operations.

b. neither gross profit nor income from operations.

c. both income from operations and gross profit.

d. income from operations but not gross profit.

171. Interest expense would be classified on a multiple-step income statement under the heading

a. Other expenses and losses.

b. Other revenues and gains.

c. Operating expenses.

d. Cost of goods sold.

172. Gross profit for a merchandising company is net sales minus

a. operating expenses.

b. cost of goods sold.

c. sales discounts.

d. cost of goods available for sale.

173. The sales section of an income statement for a retailer would not include

a. Sales discounts.

b. Sales revenue.

c. Net sales.

d. Cost of goods sold.

174. The operating expenses section of an income statement for a merchandising company would not include

a. Freight-out.

b. Utilities expense.

c. Cost of goods sold.

d. Insurance expense.

175. Indicate which one of the following would appear on the income statement of both a merchandising company and a service company.

a. Gross profit

b. Operating expenses

c. Sales returns

d. Cost of goods sold

176. Gross profit does not appear

a. on a merchandising company income statement.

b. on a service company 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.

177. Financial information is presented below:

Operating expenses $ 45,000

Sales returns and allowances 3,000

Sales discounts 7,000

Sales revenue 160,000

Cost of goods sold 96,000

Net sales reported on the income statement would be

a. $153,000.

b. $150,000.

c. $160,000.

d. $157,000.

178. Which of the following items are reported on a multiple-step income statement and on a single-step income statement?

a. Cost of goods sold and sales

b. Gross profit and operating expenses

c. Operating expenses and total expenses

d. Sales and income from operations

179. Financial information is presented below:

Operating expenses $ 42,000

Sales returns and allowances 12,000

Sales discounts 3,000

Sales revenue 165,000

Cost of goods sold 96,000

Net sales reported on the income statement would be

a. $153,000.

b. $150,000.

c. $165,000.

d. $162,000.

180. What is an advantage of using the multiple-step income statement?

a. It highlights the components of net income.

b. Gross profit is not a separate item.

c. It is easier to prepare than the single-step income statement.

d. Net income will be higher than net income computed using the single-step income statement.

181. For a jewelry retailer, which of the following is an example of Other Revenues and Gains?

a. Repair revenue

b. Unearned revenue

c. Gain on sale of display cases

d. Discount received for paying for merchandise inventory within the discount period

182. For Target Corporation, which of the following is an example of Other Revenues and Gains?

a. Sales revenue

b. Unearned revenue

c. Gain on the sale of land

d. Purchases discounts

183. For Target Corporation, which of the following is an example of Other Expenses and Losses?

a. Interest Revenue

b. Interest Expense

c. Cost of Goods Sold

d. Utilities Expense

184. All of the following are examples of Other Expenses and Losses except

a. Rent Expense

b. Interest Expense

c. Loss on the Sale of Land

d. Casualty Losses

185. Which of the following would be reported in Other Expenses and Losses?

a. Interest Expense

b. Rent Expense

c. Dividends

d. Income Tax Expense

186. When using a periodic inventory system, which statement concerning the computation of cost of goods sold is correct?

a. The amount of ending inventory is determined on the last day of the accounting period.

b. Cost of goods available for sale includes net purchases plus the ending inventory.

c. Purchases represent cash paid for purchases during the accounting period.

d. Freight-in is ignored.

187. When using the periodic inventory system, which of the following is not a step in determining the cost of goods purchased?

a. Add freight-in

b. Subtract purchase returns and allowances

c. Subtract the cost of ending inventory

d. All of these are necessary steps.

188. At the beginning of the year, A1 Athletic Supply had an inventory of $600,000. During the year, the company purchased goods costing $2,250,000. If the company reported ending inventory of $750,000 and sales of $3,000,000, their cost of goods sold and gross profit rate would be

a. $1,500,000 and 70%.

b. $2,100,000 and 30%.

c. $1,500,000 and 30%.

d. $2,100,000 and 70%.

189. At the beginning of the year, Ace Athletic Supply had an inventory of $300,000. During the year, the company purchased goods costing $1,200,000. If the company reported ending inventory of $450,000 and sales of $1,500,000, their cost of goods sold and gross profit rate would be

a. $750,000 and 70%

b. $1,050,000 and 30%.

c. $750,000 and 30%.

d. $1,050,000 and 70%.

190. During the year, A1 Mini-Mart’s merchandise inventory decreased by $80,000. If the company’s cost of goods sold for the year was $1,200,000, purchases were

a. $1,280,000.

b. $1,120,000.

c. $1,040,000.

d. Unable to determine.

191. During the year, Company A’s merchandise inventory decreased by $50,000. If the company’s cost of goods sold for the year was $750,000, purchases were

a. $800,000.

b. $700,000.

c. $650,000.

d. Unable to determine.

192. The amount of cost of good available for sale during the year depends on the amounts of

a. beginning merchandise inventory and cost of goods sold.

b. beginning merchandise inventory, the net cost of purchases, and ending merchandise inventory.

c. beginning merchandise inventory, cost of goods sold and ending merchandise inventory.

d. beginning merchandise inventory and net cost of purchases.

193. The following information is available for A1 Produce Market:

Sales $225,000 Freight-in $11,000

Ending merchandise inventory 27,000 Purchase returns and allowances 4,000

Sales discounts 3,000 Depreciation expense 8,000

Purchases 143,000 Beginning merchandise inventory 23,000

How much is A1’s cost of goods sold?

a. $173,000

b. $146,000

c. $143,000

194. Which of the following is not considered in computing net cost of purchases?

a. Purchases returns and allowances

b. Purchases

c. Freight paid on purchased goods

d. Freight paid on goods shipped to customers

195. Assume Company A uses the periodic inventory system and has a beginning inventory balance of $5,000, purchases of $75,000, and sales of $125,000. Company A closes its books once a year on December 31. The Inventory account would be expected to have a balance on December 31 prior to adjusting and closing entries that was

a. equal to $5,000.

b. more than $5,000.

c. less than $5,000.

d. indeterminate.

196. All of the following statements are true regarding the periodic inventory system except

a. Under the periodic inventory system, cost of goods sold is calculated at the end of the period.

b. Under the periodic inventory system, the balance in ending inventory is determined at the end of the period.

c. Under the periodic inventory system, the assets reported on the balance sheet differ from those reported under the perpetual system.

d. Under the periodic system, a company uses separate accounts to record freight costs, purchase returns, and purchase discounts.

197. Acme Supply Company's accounting records show the following for the year ending December 31, 2025.

Purchase Discounts $ 11,200

Freight-In 15,600

Purchases 700,020

Beginning Inventory 47,000

Ending Inventory 57,600

Purchase Returns and Allowances 12,800

Using the periodic system, the cost of goods purchased is

a. $660,420.

b. $708,420.

c. $717,220.

d. $691,620.

198. Acme Supply Company's accounting records show the following at the year ending on December 31, 2025.

Purchase Discounts $ 11,200

Freight-In 15,600

Purchases 700,020

Beginning Inventory 47,000

Ending Inventory 57,600

Purchase Returns and Allowances 12,800

Using the periodic system, the cost of goods sold is

a. $702,220.

b. $697,820.

c. $681,020.

d. $719,020.

199. Which of the following provides the best rationale regarding analysts' views about the informative value of the gross profit rate versus the gross profit amount?

a. The gross profit amount is more informative than the gross profit rate because it is a dollar amount rather than a ratio.

b. The gross profit amount is less informative than the gross profit rate because the latter presents a meaningful relationship between gross profit and net sales.

c. The gross profit amount is more informative than the gross profit rate because the gross profit rate is only used to describe a few industries while the gross profit amount is universally used.

d. The gross profit amount is more informative than the gross profit rate because high-volume operations are able to calculate the gross profit rate but not the gross profit amount.

200. Company A's gross profit rate last year was 32.0% and this year it is 28.4%. Which of the following would not be a possible cause for this decline in the gross profit rate?

a. Company A must have paid higher prices to suppliers without passing these costs on to customers.

b. Company A may have begun selling products with a higher markup.

c. Company A's average margin between unit selling price and inventory unit cost is decreasing.

d. Company A may have seen a decline in total gross profit while maintaining net sales.

201. Acme Industries increased its gross profit rate from 18.4% in 2024 to 23.7% in 2025. Which of the following would be a possible explanation for this change?

a. Acme's global sourcing efforts at the beginning of 2025 resulted in a lower cost of merchandise sold percentage.

b. Acme's new product lines with lower margins became a larger component of total sales in 2025.

c. Acme increased its product markdown percentages in 2025.

d. Acme's average margin between the unit selling price and the inventory unit cost decreased over this two-year period.

202. Which of the following statements is true regarding profit margin?

a. Profit margin can be improved by decreasing the gross profit rate and/or controlling operating expenses and other costs.

b. Profit margin does not vary across industries.

c. Discount stores with high merchandise turnover generally have higher profit margins.

d. If the profit margin has a higher value, this suggests favorable return on each dollar of sales.

203. The gross profit rate is computed by dividing gross profit by

a. sales revenue.

b. cost of goods sold.

c. net sales.

d. operating expenses.

204. A decline in a company’s gross profit could be caused by all of the following except

a. selling products with a lower markup.

b. clearance of discontinued inventory at lower selling prices.

c. paying lower prices to its suppliers while maintaining a constant unit selling price.

d. increasing competition resulting in a lower selling price while maintaining constant unit costs from vendors.

205. Financial information is presented below:

Operating expenses $ 42,000

Sales returns and allowances 12,000

Sales discounts 3,000

Sales revenue 165,000

Cost of goods sold 96,000

Gross profit would be

a. $54,000.

b. $57,000.

c. $69,000.

d. $66,000.

206. Financial information is presented below:

Operating expenses $ 42,000

Sales returns and allowances 12,000

Sales discounts 3,000

Sales revenue 165,000

Cost of goods sold 96,000

The gross profit rate would be

a. .64.

b. .42.

c. .36.

d. .37.

207. Financial information is presented below:

Operating expenses $ 42,000

Sales returns and allowances 12,000

Sales discounts 3,000

Sales revenue 165,000

Cost of goods sold 96,000

The profit margin would be

a. .36.

b. .18.

c. .06.

d. .08.

208. If A1 Supply Company has net sales of $500,000 and cost of goods sold of $350,000, the company’s gross profit rate is

a. 70%.

b. 30%.

c. 43%.

d. 100%.

209. If Acme Ink, Inc. has net sales of $400,000 and cost of goods sold of $320,000, the company’s gross profit rate is

a. 80%.

b. 25%

c. 20%.

d. 100%.

210. Financial information is presented below:

Operating expenses $ 40,000

Net sales 200,000

Cost of goods sold 150,000

Gross profit would be

a. $160,000.

b. $ 40,000.

c. $ 50,000.

d. $ 10,000.

211. Financial information is presented below:

Operating expenses $ 40,000

Net sales 200,000

Cost of goods sold 150,000

The gross profit rate would be

a. .75.

b. .20

c. .05.

d. .25.

212. Financial information is presented below:

Operating expenses $ 40,000

Net sales 200,000

Cost of goods sold 150,000

The profit margin would be

a. .75.

b. .05.

c. .25.

d. .95.

213. Financial information is presented below:

Operating expenses $ 28,000

Sales returns and allowances 7,000

Sales discounts 3,000

Sales revenue 150,000

Cost of goods sold 98,000

Gross profit would be

a. $49,000.

b. $42,000.

c. $45,000.

d. $52,000.

214. Financial information is presented below:

Operating expenses $ 28,000

Sales returns and allowances 7,000

Sales discounts 3,000

Sales revenue 150,000

Cost of goods sold 98,000

The gross profit rate would be

a. .35.

b. .30.

c. .70.

d. .28.

215. Financial information is presented below:

Operating expenses $ 28,000

Sales returns and allowances 7,000

Sales discounts 3,000

Sales revenue 150,000

Cost of goods sold 98,000

The profit margin is

a. .28.

b. .09.

c. .30.

d. .10.

216. Financial information is presented below:

Operating expenses $ 45,000

Sales returns and allowances 3,000

Sales discounts 7,000

Sales revenue 160,000

Cost of goods sold 96,000

Gross profit would be

a. $61,000.

b. $64,000.

c. $54,000.

d. $67,000.

217. Financial information is presented below:

Operating expenses $ 45,000

Sales returns and allowances 3,000

Sales discounts 7,000

Sales revenue 160,000

Cost of goods sold 96,000

The profit margin would be

a. .36.

b. .05.

c. .12.

d. .06.

218. A company shows the following balances:

Sales Revenue $1,000,000

Sales Returns and Allowances 175,000

Sales Discounts 25,000

Cost of Goods Sold 600,000

What is the company’s gross profit rate?

a. 60%

b. 75%

c. 40%

d. 25%

219. Acme Industries reported net sales totaling $3,200,000 during the year. The company’s gross profit rate was determined to be 41%. Which statement is true?

1. The company generated $1,312,000 of net income during the year.
2. The company generated 41 cents of net income out of each dollar of assets owned by the company.
3. The company generated 41 cents out of every sales dollar that is available to cover its operating expenses and contribute to profit.
4. The inventory cost is 41% of the sales price of the inventory items.

220. A company shows the following balances:

Sales Revenue $ 800,000

Sales Returns and Allowances 75,000

Sales Discounts 25,000

Cost of Goods Sold 490,000

What is the company’s gross profit rate?

a. 61%

b. 70%

c. 30%

d. 39%

221. What is a difference between the profit margin and the gross profit rate?

a. None, these are interchangeable terms.

b. The gross profit rate is computed by dividing net sales by gross profit and the profit margin is computed by dividing net sales by net income.

c. The gross profit rate will normally be higher than the profit margin.

d. A profit margin of 7% means that 7 cents of each net sales dollar ends up in net income and a gross profit rate of 7% means that the cost of the goods was 7% of the selling price.

222. A1 Fashions sold merchandise for $190,000 cash during the month of July. Returns that month totaled $4,000. If the company’s gross profit rate is 40%, A1 will report monthly net sales revenue and cost of goods sold of

a. $190,000 and $114,000.

b. $186,000 and $74,400.

c. $186,000 and $111,600.

d. $190,000 and $111,600.

223. Financial information is presented below:

Operating expenses $ 45,000

Sales returns and allowances 3,000

Sales discounts 7,000

Sales revenue 160,000

Cost of goods sold 96,000

The gross profit rate would be

a. .36.

b. .64.

c. .40.

d. .34.

224. Company A sold merchandise for $171,000 cash during the month of July. Returns that month totaled $3,600. If the company’s gross profit rate is 40%, the company will report monthly net sales revenue and cost of goods sold of

a. $171,000 and $102,600.

b. $167,400 and $66,960.

c. $167,400 and $100,440.

d. $171,000 and $100,440.

225. Ace Importers reports net income of $60,000 and cost of goods sold of $540,000. If the company’s gross profit rate was 40%, net sales were

a. $900,000.

b. $1,350,000.

c. $1,410,000.

d. $990,000.

226. Ace Services and Supplies reports net income of $60,000 and cost of goods sold of $360,000. If Ace’s gross profit rate was 40%, net sales were

a. $600,000.

b. $900,000.

c. $960,000.

d. $660,000.

Be. 253

Use the following multiple-step income statement of Company A to prepare a single-step version.

Company A

Income Statement

For the Year Ended December 31, 2025

Sales

Sales revenue $98,000

Less: Sales returns and allowances 2,000

Net sales $96,000

Cost of goods sold 42,000

Gross profit 54,000

Operating expenses 14,000

Income from operations 40,000

Other revenues and gains

Interest revenue 1,000

Other expenses and losses

Loss on sale of equipment 500

Net income $40,500

Ex. 255

Kim Kardashian is a new accountant with Ace Discount Retail Company. Ace purchased merchandise on account for $9,000. The credit terms are 1/10, n/30. Kim has talked with the company's banker and knows that she could earn 6% on any money invested in the company's savings account.

Instructions

(a) Should Kim pay the invoice within the discount period or should she keep the $9,000 in the savings account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best.

(b) If Kim forgoes the discount, it may be viewed as paying an interest rate of 1% for the use of $9,000 for 20 days. Calculate the annual rate of interest that this is equivalent to.

Ex. 256

This information relates to A1 Supply Co.

1. On April 5 purchased merchandise from Acme Wholesale Company for $22,000, terms 2/10, n/10.

2. On April 6 paid freight costs of $900 on merchandise purchased from Acme Wholesale

3. On April 7 purchased equipment on account for $26,000.

4. On April 8 returned some of April 5 merchandise to Acme Wholesale which cost $2,000.

5. On April 15 paid the amount due to Acme Wholesale in full.

Instructions

(a) Prepare the journal entries to record the transactions listed above on the books of A1 Supply Co. The company uses a perpetual inventory system.

(b) Assume that A1 Supply Co. paid the balance due to Acme Wholesale Company on May 4 instead of April 15. Prepare the journal entry to record this payment.

Ex. 257

(a) Ace Company purchased merchandise on account from A1 Office Suppliers for $62,000 with terms of 1/10, n/30. During the discount period, Ace returned some merchandise and paid $59,400 as payment in full. Ace uses a perpetual inventory system. Prepare the journal entries that Ace Company made to record the:

(1) purchase of merchandise.

(2) return of merchandise.

(3) payment on account.

(b) Acme Supply Company sold merchandise to Ace Company on account for $84,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $63,000. During the discount period, Ace Company returned $4,000 of merchandise and paid its account in full (minus the discount) by remitting $78,400 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Acme Supply Company made to record the:

(1) sale of merchandise.

(2) return of merchandise.

(3) collection on account.

Ex. 258

June 4 Ace Discount Retail Company purchased $9,000 of merchandise; terms n/30 from A1 Supply Company. The cost of the merchandise was $6,300.

1. Ace Discount Retail returned $500 of goods to A1 Supply for full credit. The goods had a cost of $350 to A1 Supply.
2. Ace Discount Retail paid the account in full.

Instructions

Prepare the journal entries to record these transactions in (a) Ace Discount Retail’s records and (b) A1 Supply’s records. Assume the use of the perpetual inventory system for both companies.

Ex. 259

On October 1, the A1 Bicycle Store had an inventory of 20 electric bicycles for $150 each. During the month of October, the following transactions occurred. Assume A1 uses a perpetual inventory system.

Oct. 4 Purchased 180 bicycles for $145 each from the Ace Bicycle Company, terms 2/10, n/30.

5 Paid freight of $900 on the October 4 purchase.

6 Sold 10 bicycles from the October 1 inventory to Team America for $250 each, terms 2/10, n/30.

7 Received credit from the Ace Bicycle Company for the return of 8 defective bicycles.

13 Issued a credit memo to Team America for the return of a bicycle.

14 Paid Ace Bicycle Company in full, less discount.

Instructions

Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system.

Ex. 260

Presented here are selected transactions for the Ace Pet Supply Company during April. Ace Pet Supply uses the perpetual inventory system.

April 1 Sold merchandise to Pet Shop Company for $4,000, terms 2/10, n/30. The merchandise sold had a cost of $2,500.

2 Purchased merchandise from Wild Corporation for $8,000, terms 1/10, n/30.

4 Purchased merchandise from Ryan Company for $1,000, n/30.

10 Received payment from Pet Shop Company for purchase of April 1 less appropriate discount.

11 Paid Wild Corporation for April 2 purchase.

Instructions

Journalize the April transactions for Ace Pet Supply Company.

Ex. 261

A1 Restaurant Supply Company completed the following transactions in October: A1 uses a perpetual inventory system.

Credit Sales Sales Returns Date of

Date Amount Terms Date Amount Collection

Oct. 3 $ 800 2/10, n/30 Oct. 8

Oct. 11 1,500 3/10, n/30 Oct. 14 $ 300 Oct. 16

Oct. 17 5,000 1/10, n/30 Oct. 20 1,200 Oct. 29

Oct. 21 1,700 2/10, n/60 Oct. 23 400 Oct. 27

Oct. 23 6,000 2/10, n/30 Oct. 27 500 Oct. 28

Instructions

(a) Indicate the cash received for each collection. Show your calculations.

(b) Prepare the journal entry for the

(1) Oct. 17 sale. The merchandise sold had a cost of $3,000.

(2) Oct. 23 sales return. The merchandise returned had a cost of $200.

(3) Oct. 28 collection.

Ex. 262

The following transactions are for A1 Beauty Supply Company.

(1) On December 3, A1 Beauty Supply sold $500,000 of merchandise to Sally Co., terms 1/10, n/30. The cost of the merchandise sold was $320,000.

(2) On December 8, Sally Co. was granted an allowance of $20,000 for merchandise purchased on December 3.

(3) On December 13, A1 Beauty Supply received the balance due from Sally Co.

Instructions

(a) Prepare the journal entries to record these transactions on the books of A1 Beauty Supply. A1 uses a perpetual inventory system.

(b) Assume that A1 Beauty Supply received the balance due from Sally Co. on January 2 of the following year instead of December 13. Prepare the journal entry to record the receipt of payment on January 2.

Ex. 263

Instructions

State the missing items identified by ?.

1. Gross profit - Operating expenses = ?

2. Cost of goods sold + Gross profit = ?

3. Sales revenue - (? + ?) = Net sales

4. Income from operations + ? - ? = Net income

5. Net sales - Cost of goods sold = ?

Ex. 264

Financial information is presented here for two companies.

King Company Queen Company

Sales revenue $56,000 ?

Sales returns and allowances ? 5,000

Net sales 50,000 80,000

Cost of goods sold 33,000 ?

Gross profit ? 32,000

Operating expenses 12,000 ?

Net income ? 14,000

Instructions

(a) Compute the missing amounts.

(b) Calculate the profit margin and the gross profit rate for each company.

Ex. 265

The following information is available for A1 Marine Supply Company:

Sales revenue $618,000

Sales returns and allowances 20,000

Cost of goods sold 398,000

Operating expenses 114,000

Interest expense 19,000

Interest revenue 20,000

Instructions

1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2025.

2. Compute the profit margin.

Ex. 266

The adjusted trial balance of Ace Supply Company included the following selected accounts:

Debit Credit

Sales Revenue $645,000

Sales Returns and Allowances $ 50,000

Sales Discounts 9,500

Cost of Goods Sold 396,000

Freight-Out 2,000

Advertising Expense 15,000

Interest Expense 19,000

Salaries and Wages Expense 84,000

Utilities Expense 23,000

Depreciation Expense 3,500

Interest Revenue 25,000

Instructions

1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2025.

2. Calculate the profit margin and gross profit rate.

Ex. 267

Presented below is information for Acme Supply Co, for the month of January 2025.

Cost of goods sold $280,000 Rent expense $35,000

Freight-out 7,000 Sales discounts 8,000

Insurance expense 12,000 Sales returns and allowances 13,000

Salaries and wages expense 42,000 Sales revenue 421,000

Instructions

(a) Prepare a multiple-step income statement.

(b) Calculate the profit margin and the gross profit rate.

Ex. 268

The trial balance of Ace Home Store at the end of its fiscal year ending August 31, 2025, includes these accounts: Inventory $29,200; Purchases $144,000; Sales Revenue $190,000; Freight-In $8,000; Sales Returns and Allowances $3,000; Freight-Out $1,000; and Purchases Returns and Allowances $5,000. The ending inventory is $25,000.

Instructions

Prepare a cost of goods sold section for the year ending August 31.

Ex. 269

Below is a series of cost of goods sold sections for Elsa Inc., Idol Co., and R2D2 Inc.

Elsa Idol R2D2

Beginning inventory $ 450 $ 120 $ (g)

Purchases 1,700 1,080 43,590

Purchase returns and allowances 40 (d) (h)

Net purchases (a) 1,020 41,590

Freight-in 130 (e) 2,740

Cost of goods purchased (b) 1,230 (i)

Cost of goods available for sale 2,240 1,350 49,530

Ending inventory 310 (f) 6,230

Cost of goods sold (c) 1,130 43,300

Instructions

Fill in the lettered blanks to complete the cost of goods sold sections.

Ex. 270

The following information is available from the annual reports of Company A and Company B.

(amounts in millions)

Company A Company B

Net sales $32,622 $40,457

Cost of goods sold 20,739 24,431

Operating expenses 7,428 9,188

Income before taxes 4,455 6,838

Net income 2,594 4,072

Instructions

1. Calculate the profit margin and gross profit rate for each company.

2. What conclusion concerning the relative profitability of the two companies can be drawn from these data?

*Ex. 271

June 4 East Marine Company purchased $3,500 of merchandise, terms n/30 from Acme Marine Supply Company. The cost of the merchandise was $2,500.

1. East Marine returned $600 of goods to Acme Marine Supply for full credit. The goods had a cost of $400 to Gilbert.
2. East Marine paid the account in full.

Instructions

Prepare the journal entries to record these transactions in (a) East Marine’s records and (b) Acme Marine Supply’s records. Assume the use of the periodic inventory system for both companies.

*Ex. 272

On September 1, Ace Supply Co. had an inventory of 18 backpacks at a cost of $20 each. The company uses a periodic inventory system. During September, the following transactions and events occurred.

Sept. 4 Purchased 50 backpacks at $20 each from Acme Outfitters, terms 2/10, n/30.

6 Received credit of $100 for the return of 5 backpacks purchased on Sept. 4 that were defective.

9 Sold 30 backpacks for $30 each to A1 Books, terms 2/10, n/30.

13 Sold 10 backpacks for $30 each to Max Office Supply, terms n/30.

14 Paid Acme Outfitters in full, less discount.

Instructions

Journalize the September transactions for Ace Supply Co.

*Ex. 273

Presented here are selected transactions for Company A during April. Company A uses the periodic inventory system.

April 1 Sold merchandise to Company B for $4,000, terms 2/10, n/30. The merchandise sold had a cost of $2,000.

1. Purchased merchandise from Company C for $6,000, terms 1/10, n/30.

4 Purchased merchandise from Company D for $2,000, n/30.

10 Received payment from Company B for purchase of April 1 less appropriate discount.

11 Paid Company C for April 2 purchase.

Instructions

Journalize the April transactions for Company A.

*Ex. 274

This information relates to A1 Haircut Co.

1. On April 5 purchased merchandise from Acme Salon Supply Company for $33,000, terms 2/10, net/30.

2. On April 6 paid freight costs of $900 on merchandise purchased from Acme Salon Supply Company.

3. On April 7 purchased equipment on account for $26,000.

4. On April 8 returned some of the April 5 merchandise to Acme Salon Supply Company which cost $3,000.

5. On April 15 paid the amount due to Acme Salon Supply Company in full.

Instructions

(a) Prepare the journal entries to record these transactions on the books of A1 Haircut Co. using a periodic inventory system.

(b) Assume that A1 Haircut Co. paid the balance due to Acme Salon Supply Company on May 4 instead of April 15. Prepare the journal entry to record this payment.