Merchandising Problem Set | Test Bank – 10th

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Student name:__________

FILL IN THE BLANK. Write the word or phrase that best completes each statement or answers the question.
1) A ___________ buys products from manufacturers and sells to retailers.

2) A ________________company's operating cycle begins with the purchase of merchandise and ends with the collection of cash from merchandise sales.

3) Products that a company owns and intends to sell are called _____________________.

4) A ___________ inventory system updates the accounting record for inventory only at the end of an accounting period.

5) A __________________ inventory system updates accounting records for each purchase and each sale of inventory.

6) Beginning inventory plus net purchases is the _____________________.

7) A period's beginning inventory is equal to the prior period's ___________________.

8) The liquidity of a company can be measured using the current ratio and the ____________________, which only includes cash, short-term investments, and current receivables.

9) The gross margin ratio equals net sales less ___________ divided by net sales.

10) _________________ are the amounts and timing of payment from a buyer to a seller.

11) A _______________________ is a price reduction granted by the seller to a buyer of defective or unacceptable merchandise.

12) FOB _________________ means the buyer accepts ownership when the goods depart the seller's place of business. The buyer is responsible for paying shipping costs and bears the risk of damage or loss when goods are in transit.

13) FOB _________________ means ownership of goods transfers to the buyer when the goods arrive at the buyer's place of business. The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit.

14) Merchandise that customers return to the seller after a sale is referred to as___________________.

15) Reductions in the selling price of merchandise sold to customers, often involving damaged or defective merchandise that a customer is willing to purchase with a decrease in the selling price is referred to as_____________________________.

16) The seller might offer a(n) _________________to a buyer that is not satisfied with the goods received.

17) ____________________ can benefit a seller by decreasing the delay in receiving cash and reducing future collection efforts.

18) Inventory shrinkage can be computed by comparing the ___________ of inventory with recorded quantities and amounts.

19) ________________________ expenses are those costs that support a company's overall operations and include expenses related to accounting, human resources, and finance.

20) A _____________________ income statement format shows net sales and reports subtotals for various types of items such as gross profit, income from operations, and net income.

21) A ______________________ income statement lists cost of goods sold as another expense and shows only one subtotal for total expenses.

22) Non-operating activities that include interest, dividends and rent revenues, and gains from asset disposals are called _____________________________.

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

24) When a company has no reportable non-operating activities, its income from operations is reported as ___________________ .

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

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
26) Identify and explain the key components of a merchandiser’s net income.

27) Describe the difference between wholesalers and retailers.

28) Define inventory for a merchandising company and describe how inventory is valued and reported.

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

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

31) Explain the way in which costs flow through the merchandise inventory account to a merchandiser’s income statement.

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

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

34) Describe the differences between FOB shipping point and FOB destination.

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

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

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

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

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

40) Distinguish between selling expenses and general and administrative expenses.

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

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

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

44) A company reported the following year-end information:

Required:
1. Explain the purpose of the acid-test ratio.
2. Calculate the acid-test ratio for this company.
3. What does the acid-test ratio reveal about this company?

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
45) Farmen Company had net sales of $600,000 and cost of goods sold of $450,000. Calculate Farmen’s gross profit.

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

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

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

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

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

The industry standard for the acid-test ratio is 1.

Required:
1. Calculate the acid-test ratio for each firm.
2. Rank the firms in decreasing order of liquidity.
3. Comment on Flanders’ relative liquidity position.

51) The following information refers to Percy’s Records and its competitors in the music store business.

Required:
Comment on the relative liquidity positions of these companies.

52) Calculate the gross margin ratio for each of the following separate cases A through C:

53) A company reported the following information for the month of July:

Required:
Calculate this company's gross profit.

54) A company reported the following information for the month of July:

Required:
Calculate this company's gross margin ratio.

55) The following information is for Barrel and its competitor Crate.

Required:
1. Calculate the dollar amount of gross margin and the gross margin ratio to the nearest percent, for each company for both years.
2. Which company had the more favorable ratio for each year?
3. Which company had the more favorable change in the gross margin ratio over this 2-year period?

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

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

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

Prepare journal entries to record each of the preceding transactions.

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

Required:
Prepare the general journal entries to record these transactions.

60) Craig’s Snowboards uses the perpetual inventory system and the gross method of accounting for sales, and had the following sales transactions during June:

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

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

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

62) Following is the year-end adjusted trial balance for Fred’s Corner Grocery for the current year:

Prepare the closing entries at December 31 for the current year.

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

Prepare closing entries at December 31 for the current year.

64) From the adjusted trial balance for Brookstone Art Supplies given below, prepare a multiple-step income statement.

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

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

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

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

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

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

69) At its fiscal year-end of June 30, Kendall Wholesale’s general ledger shows the following selected account balances. Kendall Wholesale uses the perpetual inventory system.

A physical count of its June 30 year-end inventory discloses that the cost of the merchandise inventory still available is $58,160. Prepare the entry to record any inventory shrinkage.

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

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

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

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

74) Vincent Company purchased merchandise from Liu Company with an invoice price of $300,000 and credit terms of 2/10, n/30. Liu Company’s cost for the merchandise was $200,000. Vincent Company paid within the discount period. Assume that both buyer and seller use a perpetual inventory system and the gross method of recording invoices.

1. Prepare entries that Vincent should record for (a) the purchase and (b) the cash payment.
2. Prepare entries that Liu should record for (a) the sale and (b) the cash collection.
3. Assume that the buyer borrowed enough cash to pay the balance on the last day of the discount period at an annual interest rate of 9% and paid it back on the last day of the credit period. Compute how much the buyer saved by following this strategy. (Assume a 365-day year and round dollar amounts to the nearest cent.)

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

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

77) Stevenson Corporation reports unadjusted first-year sales of $400,000 and cost of goods sold of $240,000. The company expects future returns and allowances equal to 3% of sales and 3% of cost of sales. Prepare the adjusting entries necessary to record the revenue side and cost side estimates for returns and allowances.

78) Martin Corporation allows customers to return merchandise within 60 days of purchase. At year-end, Martin estimates that sales of $20,000, with a cost of $14,000 will be returned in the upcoming year. The unadjusted balance in Inventory Returns Estimated is a debit of $4,000, and the unadjusted balance in Sales Refund Payable is a credit of $2,500. Prepare the adjusting entries necessary to record the revenue side and cost side estimates for returns and allowances.

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

Prepare journal entries to record each of the preceding transactions.

80) Barbara’s Boats uses the perpetual inventory system and the net method of accounting for purchases. The company had the following transactions during January:

Prepare journal entries to record each of the preceding transactions.

Answer Key

Test name: John Wild Ch04 Problem Material

1) wholesaler

2) merchandising

3) merchandise inventory

4) periodic

5) perpetual

6) merchandise available for sale

7) ending inventory

8) acid-test ratio

9) cost of goods sold

10) Credit terms

11) purchase allowance

12) shipping point

13) destination

14) sales returns

15) sales allowances

16) allowance or sales allowance

17) Sales discounts

18) physical count (or count)

19) General and administrative

20) multiple-step

21) single-step

22) other revenues and gains

23) other expenses and losses

24) net income

25) periodic

26) The basic components of income begin with net sales. Cost of goods sold is subtracted from net sales to determine gross profit (also called gross margin). Operating expenses are then subtracted from gross margin to determine net income.

27) A wholesaler buys products from manufacturers and sells to retailers or other wholesalers. A retailer buys products from manufacturers or wholesalers and sells them to consumers.

28) Merchandise inventory refers to products a company owns and intends to sell. Its costs include all necessary expenses to buy the goods, ship them to the store, and make them ready for sale. Merchandise inventory is a current asset on a merchandiser’s balance sheet.

29) The steps are: (1) cash purchases of merchandise; (2) inventory for sale; (3) credit sales (4) accounts receivable; (5) receipt of cash.

30) A periodic inventory system updates the accounting records for merchandise transactions only at the end of a period. A perpetual inventory system continually updates accounting records for merchandise transactions—specifically for those records of inventory available for sale and inventory sold. The perpetual inventory system is increasing in popularity due to technological advances and competitive pressures because it gives managers immediate access to detailed information on sales and inventory levels that a periodic system does not.

31) Beginning inventory plus the net cost of purchases is the merchandise available for sale. As inventory is sold, its cost is recorded in cost of goods sold on the income statement. What remains is the ending inventory on the balance sheet. A current period's ending inventory becomes the next period's beginning inventory.

32) The acid-test ratio is a measure of a company’s ability to pay its current liabilities. It is calculated by dividing quick assets (cash, short-term investments, and current receivables) by current liabilities. It excludes those current assets that are less liquid, such as inventory and prepaid expenses that take longer to be converted to cash. As a rule of thumb, an acid test ratio less than 1 means that current liabilities exceed quick assets and the company may face near-term liquidity problems.

33) The gross margin ratio computes the relationship between a company’s gross profit and sales. It is calculated by dividing gross margin (net sales less cost of goods sold) by net sales. The gross margin ratio measures a firm's profitability in selling its inventory. The gross margin must be large enough to cover operating expenses and provide sufficient net income to the owner(s). Maintaining sufficient gross margin is a key factor to a merchandiser’s success.

34) If goods are shipped FOB shipping point, ownership transfers to the buyer when the goods depart the seller's place of business, and the seller records revenue at that time. The buyer is then responsible for paying shipping costs and bearing the risk of damage or loss while goods are in transit. If goods are shipped FOB destination, ownership of the goods transfers to the buyer when the goods arrive at the buyer's place of business. The seller is responsible for paying shipping costs and bears the risk of damage or loss in transit. The seller does not record revenue until the goods arrive at the destination because the transaction is not complete before that point.

35) The cost of merchandise purchased for resale, net of discounts, is added (debited) to the Merchandise Inventory account. Purchases discounts for early payment on credit and purchases returns and allowances are subtracted (credited) from Merchandise Inventory. Transportation-in costs are also added (debited) to Merchandise Inventory because they are a necessary cost of acquiring the merchandise.

36) Sales of goods are recorded at list price less any discounts as a credit to the Sales account. At the same time, the cost of items sold is transferred from Merchandise Inventory to Cost of Goods Sold. Refunds or credits for returned merchandise are recorded with a debit to Sales Returns and Allowances. When cash discounts from the sales price are taken, the seller records (debits) the amount of the discounts to Sales Discounts. These accounting processes are recorded each time sales transactions occur. In this way, merchandise inventory, cost of sales, sales and receivables (or cash) reflect sales transactions on a timely basis.

37) Inventory shrinkage is the loss of merchandise inventory due to theft or deterioration or similar occurrences. It is computed by comparing a physical count of the inventory with recorded amounts. A physical count is usually performed at least once annually and an adjusting entry is prepared to account for any differences. Inventory shrinkage is typically added (debited) to the cost of goods sold and deducted (credited) from Merchandise Inventory.

38) Closing entries are similar for service and merchandising companies using a perpetual inventory system, but merchandising companies have some temporary accounts that must be closed that service companies do not. Generally, revenue for merchandising companies is called Sales rather than Fees Earned. It is closed with a debit, as are other revenues. Merchandising companies have Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold that all have debit balances and must be closed with credits.

39) A single-step income statement format includes cost of goods sold as another expense and shows only one subtotal for total expenses. The calculation of net income is simply total revenues minus total expenses. A multiple-step income statement format shows detailed computation of net sales and other costs and expenses, and reports subtotals for various classes of items. A multiple step income statement has three main parts: (1) gross profit, (2) income from operations, and (3) net income.

40) Selling expenses include the expenses of promoting sales by displaying and advertising merchandise, making sales, and delivering goods to customers. General and administrative expenses support a company's overall operations and include expenses related to accounting, human resource management, and financial management. Some expenses can relate to both areas and are allocated between them.

41) Under a perpetual system each purchase, purchase return and allowance, purchase discount, and cost for transportation-in is recorded in the merchandise inventory account. Under a periodic system, a separate temporary account is set up for each of these items. Because inventory is updated for each purchase and sale of merchandise, the perpetual inventory system yields more timely information for managers to better monitor and control inventory costs and levels.

42) Tracking merchandise activities are necessary to set prices and to manage discounts, allowances and returns for both sales and purchases. A perpetual inventory system enables a business to stock the right type and amounts of merchandise and to avoid the costs of being out-of-stock and carrying excess inventory. Most merchandisers and retailers understand the importance of managing inventory costs to get the most profit and in calculating working capital.

43) Sellers are required to estimate both expected sales discounts and expected sales returns and allowances in the period of sale by making two adjusting entries. The entry to adjust for expected sales discounts is to debit Sales Discounts and credit Allowance for Sales Discounts. Allowance for Sales Discounts is a contra-asset account that is reported on the balance sheet as a reduction to Accounts Receivable. The adjusting entry, for the revenue side of sales returns and allowances, is to debit Sales Returns and Allowances and credit Sales Refund Payable for the expected amount to be refunded to customers. The adjusting entry for the cost side is to debit Inventory Returns Estimated and credit Cost of Goods Sold for the cost of expected returns.

44) 1. The acid-test ratio measures the ability of a firm to pay its current liabilities. It is a more stringent test of liquidity as compared to the current ratio.<br> <br> 2.<br> Quick assets:<br>

<br> Current liabilities:<br>

Quick assets / Current liabilities = $117,900 / $131,000 = 0.90
3.
This company does not have enough quick assets to be considered in a strong liquidity position. The company may have too much money tied up in inventory or other less liquid current (or noncurrent) assets. Additional analyses should be undertaken to verify or refute this apparent liquidity concern.

45) Gross Profit = Net Sales − Cost of Goods Sold; $600,000 − $450,000 = $150,000

46) Gross Profit = Sales – Sales Discounts − Sales Returns and Allowances − Cost of Goods Sold
$1,000,000 − $2,500 − $15,000 − $525,000 = $457,500

47) Cost of Goods Sold = Net Sales – Gross Profit; $772,000 – $415,000 = $357,000

48)

(a) 2,770 + 375 − 2400 = 745
(b) 375, the beginning inventory for Year 2 is the ending inventory for Year 1
(c) 980 + 3,750 = 4,730
(d) 10,000 − 6,750 = 3,250
(e) 6,750 − 3,750 = 3,000
(f) 5,000 + 5,200 = 10,200
(g) 5,200 − 2,500 = 2,700

49)

(a) Merchandise inventory, beginning + purchases – Merchandise inventory, ending = Cost of goods sold; $375 + $3,625 − $750 = $3,250
(b) Gross profit − Operating expenses = Net Income; $6,750 − $3,750 = $3,000
(c) Gross profit − Net income = Operating expenses; $5,200 − $2,500 = $2,700
(d) Merchandise inventory, beginning + Purchases − Cost of goods sold= Merchandise inventory, ending; $750 + 4,875 − $5,000 = $625
(e) Cost of goods sold + Gross profit = Sales; $5,200 + $5,000 = $10,200

50) Part 1<br>

Flanders:
Acid-test ratio = $28,700/$21,200 = 1.35

Sanders:
Acid-test ratio = $27,200/$18,450 = 1.47

Anders:
Acid-test ratio = $53,350/$35,200 = 1.52
Part 2: Rank order:
;

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

51) Rudy’s Raps has a quick ratio significantly above the industry average, and Jewel’s CD's has a quick ratio equal to the industry average. These companies appear to have sufficient quick assets to pay current liabilities. Percy’s Records and Marvin’s Jazz, on the other hand, have quick ratios below the industry average of 1.00. This indicates that they may have problems in the near future paying current liabilities.

52) A = ($145,000 − $83,600)/$145,000 = 42.3%
B = ($623,500 − $269,200)/$623,500 = 56.8%
C = ($37,800 − $13,230)/$37,800 = 65%

53)

54)

55) 1.

Barrel:
Year 1: Gross profit ratio = $226,103 / $347,850 = 65%
Year 2: Gross profit ratio = $219,251 / $365,418 = 60%

Crate:
Year 1: Gross profit ratio = $260,888 / $579,750 = 45%
Year 2: Gross profit ratio = $352,130 / $664,395 = 53%

2. Barrel had the more favorable ratio for each year.
3. Crate’s gross margin ratio is increasing, while Barrel’s is decreasing. Moreover, these changes appear significant and warrant further analysis.

56)