The Retailing Process – Ch6 | Test Bank – 10e

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Testbank

to accompany

Financial accounting

10^th edition

by

Hoggett et al.

© John Wiley & Sons Australia, Ltd 2018

Chapter 6: Accounting for retailing

Multiple-choice questions

1. The main difference between a service and a retail business is that service businesses:

a. sell services rather than goods.

b. sell directly to consumers.

c. buy and sell goods in bulk.

d. convert raw materials into finished goods.

Correct answer: a

Learning objective 6.1 ~ describe the nature of inventory and retailing operations.

2. The refers to the average length of time it takes for a retail business to acquire inventory, sell it to its customers and collect the cash owing.

a. accounting cycle.

b. product cycle.

c. inventory turnover.

d. operating cycle.

Correct answer: d

Learning objective 6.1 ~ describe the nature of inventory and retailing operations.

3. Which statement relating to inventory is not correct?

a. It is a very active asset, continually being acquired, sold and replaced.

b. It is classified as a non-current asset in the balance sheet.

c. Another name for inventory is stock-in-trade.

d. It makes up a significant portion of a retailer’s assets.

Correct answer: b

Learning objective 6.1 ~ describe the nature of inventory and retailing operations.

4. Goods held for sale by a retailer in the normal course of business are known as:

a. stock, inventory, stock-in-trade.

b. merchandise, inventory.

c. inventory, stock, raw materials.

d. stock, inventory work-in-process.

Correct answer: a

Feedback: Stock, inventory and stock-in-trade are all terms for goods held for sale by a retailer in the normal course of business. Work-in-process and raw materials are held by a manufacturer not a retailer.

Learning objective 6.1 ~ describe the nature of inventory and retailing operations.

5. Which of the following is usually a retailer’s largest expense?

a. Rent expenses

b. Selling expenses

c. Cost of sales

d. Administration expenses

Correct answer: c

Learning objective 6.1 ~ describe the nature of inventory and retailing operations.

6. Inventory is reported on the balance sheet as:

a. property, plant and equipment.

b. a non-current asset.

c. a current asset.

d. a liability.

Correct answer: c

Learning objective 6.1 ~ describe the nature of inventory and retailing operations.

7. A retailer buys and sells on 30 days CR and from the date of purchase it takes, on average, 14 days to sell inventory. What is the correct order for the steps in this retailer’s operating cycle?

I Sell goods to customer

II Collect cash payment from customer

III Pay supplier

IV Purchase goods for resale from supplier

a. IV, III, II, I

b. I, II, III, IV

c. I, IV, II, III

d. IV, I, III, II

Correct answer: d

Learning objective 6.1 ~ describe the nature of inventory and retailing operations.

8. A retailer’s income statement is set out in which of the following formats?

a. Sales revenue – cost of sales = gross profit

b. Sales revenue – cost of sales = gross profit – expenses = profit

c. Sales revenue – expenses = profit

d. Sales revenue – cost of sales – expenses = gross profit

Correct answer: b

Learning objective 6.2 ~ describe the basic format of an income statement for retail businesses.

9. In the income statement expenses are classified into four categories, cost of sales, selling and distribution, administrative, and financial. Expenses incurred for storage costs and advertising are classified as:

a. Cost of sales

b. Selling and distribution

c. Administrative

d. Financial

Correct answer: b

Learning objective 6.2 ~ describe the basic format of an income statement for retail businesses.

10. Which of the following should be classified as a selling and distribution expense in the income statement of a retailer?

a. Cash discounts

b. Bad Debts

c. Sales salaries and commissions

d. Depreciation on office furniture and equipment

Correct answer: c

Learning objective 6.2 ~ describe the basic format of an income statement for retail businesses.

11. If the invoice price for goods sold to a customer is $798, including GST, how much GST is to be collected from the customer?

a. Nil

b. $72.55

c. $79.80

d. $98.00

Correct answer: b

Feedback: $72.55 is to be collected from the customer = $798 / 11.

Learning objective 6.2 ~ describe the basic format of an income statement for retail businesses.

12. Which of the following is not required to appear on a tax invoice?

a. The words ‘tax invoice’

b. The GST amount payable

c. The ABN of the issuing entity

d. The signature of the person authorising the invoice

Correct answer: d

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

13. Australia’s GST (Goods and Services Tax) legislation requires a tax invoice to be issued for all sales greater than:

a. $50.

b. $75.

c. $100.

d. $200.

Correct answer: b

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

14. The account, Sales Returns and Allowances, is classified as what type of account?

a. Liability

b. Expense

c. Contra account to Inventory

d. Contra account to sales revenue

Correct answer: d

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

15. Cash (settlement) discounts are primarily issued to:

a. encourage customers to purchase goods on CR.

b. encourage customers to pay for purchases in cash.

c. encourage customers to pay their account early.

d. provide discounts to customers who purchase goods in bulk quantities.

Correct answer: c

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

16. Bailey Ltd sold goods to Andrews Ltd for $1000. Andrews Ltd paid the account 28 days later. Ignoring GST, the correct entry in Bailey Ltd’s books to record the payment by Andrews Ltd is:

a. DR Accounts receivable $1000; CR Sales $1000

b. DR Cash at bank $1000; CR Accounts receivable $1000

c. DR Accounts receivable $1000; CR Equity $1000

d. DR Cash at bank $1000; CR Sales $1000

Correct answer: b

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

17. A retailer will use which specific term for income?

a. sales.

b. revenue.

c. fees income.

d. service income.

Correct answer: a

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

18. Simon sold goods to Lawrence for $2200 including GST. Lawrence paid his account within the discount period and received a settlement discount of 2%. Using the gross method, the correct entry to be recorded in Simon’s books for the payment from Lawrence is:

a. DR Bank $2156; DR Discount allowed $44; CR Accounts receivable $2200

b. DR Bank $2160; DR Discount allowed $40; CR Accounts receivable $2200

c. DR Bank $2156, DR Discount allowed $44; DR GST payable $4; CR Accounts receivable $2204

d. DR Bank $2156; DR Discount allowed $40; DR GST payable $4; CR Accounts receivable $2200

Correct answer: d

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

19. GST is credited to the GST payable account when a sale occurs. If goods are returned or a discount allowed the _______________ account must be debited with an adjustment for GST.

a. GST receivable

b. GST payable

c. Purchases

d. Discount allowed

Correct answer: b

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

20. When goods are returned by a customer or the price is adjusted, Australia’s GST legislation requires the retailer to issue the customer with _________________for all amounts totalling more than $50.

a. an invoice

b. a negative tax invoice

c. an adjustment note

d. a refund note

Correct answer: c

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

21. GST collected on sales is accumulated in a liability account called GST payables and GST paid on purchases is accumulated in an account with a debit balance called GST receivables. What type of account is GST receivables?

a. Asset

b. Expense

c. Contra expense

d. Contra liability

Correct answer: d

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

22. James Ltd sold goods to Cameron Ltd on credit for $2 500. Ignoring GST and Cost of Sales, the correct accounting entry to record this transaction in James Ltd’s books is:

a. DR Accounts receivable $2500; CR Sales $2500

b. DR Sales $2500; CR Accounts receivable $2500

c. DR Bank $2500; CR Sales $2500

d. DR Sales $2500; CR Cost of sales $2500

Correct answer: a

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

23. In relation to discount terms, what does 5/7, n/30 mean?

a. Invoice due on 5^th July or 30^th November.

b. 50% discount if paid with 7 days, otherwise 30% discount.

c. 50% discount, November 30th

d. 5% discount to be deducted from the invoice price if payment is made within 7 days or the full amount is due within 30 days of the invoice date.

Correct answer: d

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

24. Brian sold goods to Mike on credit for $1100 including GST. The correct accounting entry to record this transaction in Brian’s books is:

a. DR Accounts receivable $1100, CR Sales $1100

b. DR Accounts receivable $1000, CR Sales $1000

c. DR Accounts receivable $1100; CR Sales $1000, CR GST payable $100

d. DR Accounts receivable $1000, DR GST payable $100; CR Sales $1100

Correct answer: c

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

25. Offering a credit customer a discount after the sale has occurred is a way to:

a. increase sales

b. put the customer in a good mood

c. avoid GST

d. encourage early payment of the amount owing

Correct answer: d

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

26. To obtain the maximum possible benefit from a cash discount of 2/10, n/30, the buyer should pay the invoice:

a. immediately.

b. when the seller threatens legal action.

c. at the end of the month to receive a 7% discount.

d. on the last day of the discount period, i.e. in 10 days, to receive a 2% discount.

Correct answer: d

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

27. When the seller pays freight outward the correct classification in the seller’s income statements is a/an ____________ expense.

a. cost of sales

b. administrative

c. selling

d. financial

Correct answer: c

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

28. Jane sold goods to Johnno for $4400 including GST. Johnno paid his account within the discount period and received a settlement discount of 5%. Using the gross method, which of the following is the correct entry in Jane’s books to record Johnno’s payment?

a. DR Cash $4180; DR Discount allowed $200; DRGST payable $20; CR Accounts receivable $4400

b. DR Cash $4200; DR Discount allowed $200; CR Accounts receivable $4400

c. DR Cash $4180; DR Discount allowed $220; DR GST payable $20; CR Accounts receivable $4420

d. DR Cash $4180; DR Discount allowed $220; CR Accounts receivable $4400

Correct answer: a

Learning objective 6.3 ~ account for sales transactions of retail businesses, including goods and services tax, the treatment of sales returns, cash discounts, trade discounts and freight costs.

29. Which of the following is not an advantage of the perpetual inventory system?

a. Continuous

b. Allows stock losses to be identified

c. Allows cost of sales to be calculated at any time

d. A stock-take is not required

Correct answer: d

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

30. Under the perpetual inventory system, three office desks were originally purchased on CR at $300 each plus 10% GST. If all three desks were sold to a customer at $550 each (including GST) what is the correct entry to record the cost of the sale?

a. DR Cost of sales $1650; CR Sales $1650

b. DR Cost of sales $900; CR Sales $900

c. DR Cost of sales $900; CR Inventory $900

d. DR Cost of sales $900; DR GST receivable $90; CR Inventory $990

Correct answer: c

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

31. In Australia, which of the following businesses is still most likely to use the periodic approach to accounting for inventory?

a. Supermarket

b. Pharmacy / Chemist

c. Service station

d. Bookshop

Correct answer: b

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

32. Under the periodic inventory system inventory purchased is debited to which account?

a. Prepaid expenses

b. Cost of sales

c. Purchases

d. Inventory

Correct answer: c

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

33. Under the perpetual inventory system inventory purchased is debited to which account?

a. Cost of sales

b. Purchases

c. Inventory

d. Selling expenses

Correct answer: c

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

34. Under the perpetual inventory system, what is the entry for the credit purchase of 10 violins at $600 each plus 10% GST?

a. DR Inventory $6600; CR Accounts payable $6000; CR GST payable $600

b. DR Inventory $6000; DR GST receivable $600; CR Accounts payable $6600

c. DR Inventory $6600; CR Accounts payable $6600

d. DR Inventory $6000; CR Accounts payable $5400; CR GST payable $600

Correct answer: b

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

35. Which of the following is not true of the periodic inventory system?

a. It uses a purchases account.

b. It identifies inventory variances.

c. It is the simplest system.

d. Cost of sales can be calculated only after a physical stocktake.

Correct answer: b

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

36. Under the periodic inventory system a/an ___________ is required before the cost of sales can be estimated.

a. error check

b. stocktake

c. virus scan

d. audit

Correct answer: b

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

37. Under the perpetual inventory system, and including GST, what is the entry to record the return of faulty goods to a supplier?

a. DR Accounts payable, CR Inventory, CR GST receivable

b. DR Inventory, CR Purchases returns, CR GST receivable

c. DR Accounts payable, CR Purchases, CR GST receivable

d. DR Inventory, DR GST receivable, CR Accounts payable

Correct answer: a

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

38. Under the perpetual inventory system, what is the entry to record the cost price of goods sold for cash?

a. DR Cost of sales, CR Inventory, CR GST receivable

b. DR Inventory, CR Cost of sales

c. DR Cost of sales, CR Inventory

d. DR Cost of sales, CR Purchases

Correct answer: c

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

39. Brisbane sold goods to Darwin on credit at a price of $880 including GST. What is the entry to record this transaction in Brisbane’s books under either the perpetual or periodic inventory system? (Ignore the transfer to Cost of Sales required under the perpetual system.)

a. DR Accounts receivable $880; CR Sales $880

b. DR Accounts receivable $800; CR Sales $800

c. DR Accounts receivable $800; DR GST payable $80; CR Sales $880

d. DR Accounts receivable $880; CR Sales $800, CR GST payable $80

Correct answer: d

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

40. Under the perpetual inventory system an inventory variance can be calculated as the difference between:

a. the total purchases for the period and the ending inventory balance.

b. beginning inventory less ending inventory.

c. the balance of the inventory account in the ledger and the total of the physical stocktake.

d. None of these options. An inventory loss cannot be calculated using the perpetual inventory system.

Correct answer: c

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

41. Under the periodic inventory system, the______________ of each sale is not recorded.

a. selling price

b. cost price

c. quantity

d. discount

Correct answer: b

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

42. The opening balance in the inventory account under a periodic inventory system represents:

a. inventory on hand at the end of the current period as determined by a physical stocktake.

b. opening inventory plus purchases less ending inventory.

c. inventory on hand at the end of the current period before allowing for any inventory variances.

d. inventory on hand at the end of the previous period as determined by a physical stocktake.

Correct answer: d

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

43. If beginning inventory was $20 000, total purchases for the period were $80 000, freight-in was $4 000 and ending inventory was $45 000, the cost of sales for the period would be:

a. $59 000

b. $84 000

c. $51 000

d. $76 000

Correct answer: a

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

44. Under the periodic inventory system, what is the entry for the cash purchase of 5 electric guitars at $500 each, plus 10% GST?

a. DR Purchases $2500; DR GST receivable $250; CR Bank $2750

b. DR Accounts payable $2750; CR Purchases $2500; CR GST payable $250

c. DR Purchases $2750; CR Bank $2750

d. DR Purchases $2750; CR Bank $2500; CR GST payable $250

Correct answer: a

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

45. The ____________ inventory system involves keeping a current and continuous record of the movement in each item of inventory.

a. current

b. perpetual

c. periodic

d. physical

Correct answer: b

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

46. Under the perpetual inventory system, what is the correct entry for the credit purchase of 10 electric keyboards at $100 per keyboard plus GST of 10%?

a. DR Inventory $1100; CR Accounts payable $1000; CR GST payable $100

b. DR Inventory $1000; DR GST receivable $100; CR Accounts payable $1100

c. DR Accounts payable $1100; CR Inventory $1000; CR GST payable $100

d. DR Inventory $1100; CR Accounts payable $1100

Correct answer: b

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

47. The account that measures the expense of the inventory sold during the period is called:

a. gross profit.

b. purchases.

c. cost of sales.

d. cost of completed goods.

Correct answer: c

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

48. Under the perpetual inventory system, the number of accounting entries required to record a credit sale is:

a. 1.

b. 2.

c. 3.

d. 4.

Correct answer: b

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

49. Using the periodic approach to accounting for inventory, beginning inventory plus purchases minus ending inventory as determined by a physical stocktake, is assumed to equal:

a. inventory turnover.

b. gross profit.

c. selling expenses.

d. cost of sales.

Correct answer: d

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

50. Under a periodic inventory system, if inventory at the start of the period is $15 000, purchases for the period are $73 000 and inventory at the end of the period, as per a physical stocktake is $20 000, what is the estimated cost of sales?

a. $68 000

b. $108 000

c. $88 000

d. $53 000

Correct answer: a

Feedback: With a periodic inventory system, estimated cost of sales is $68 000 = inventory at start + purchases – inventory at end ($15 000 + $73 000 – $20 000).

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

51. The use of computers has been a breakthrough for the perpetual inventory system. Many retail businesses use optical-scan cash registers to read barcodes. The scanners record the sale and, at the same time, update the inventory records with the of the sale.

a. fair value

b. cost

c. discount

d. date

Correct answer: b

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

52. The process of counting and pricing the entire inventory on hand on a particular date is known as:

a. the periodic inventory system.

b. merchandise pricing.

c. a stocktake.

d. invoicing.

Correct answer: c

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

53. Under the perpetual inventory method, which of the following entries would be a closing entry at the end of the accounting period?

a. DR Inventory; CR Profit or loss summary

b. DR Profit or loss summary; CR Inventory

c. DR Profit or loss summary; CR Cost of sales

d. DR Profit or loss summary; CR Purchases

Correct answer: c

Learning objective 6.5 ~ prepare worksheets and close the accounts for retail businesses for both the perpetual and periodic inventory systems.

54. The account used by the purchaser to record the amount of discount granted by its suppliers for prompt payment is called the:

a. discount allowed account.

b. discount received account.

c. discount taken account.

d. financial discount account.

Correct answer: b

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

55. Under the periodic inventory system, what is the correct entry to record the cost of the sale of a dining suite sold to a customer for $1650 including 10% GST? (The dining suite was originally purchased on credit for $990 including GST of $90).

a. DR Purchases $1650; CR Sales $1650

b. DR Purchases $900; CR Inventory $900

c. DR Cost of sales $900; CR Inventory $900

d. The cost of each sale is not recorded under the periodic inventory system

Correct answer: d

Learning objective 6.4 ~ account for purchases of inventory and cost of sales under both the perpetual and periodic inventory systems by retail businesses.

56. When interim accounting reports are prepared on a worksheet and the periodic method of accounting for inventory is used, closing inventory is:

a. not recorded.

b. recorded in the income statement debit column as a deduction from cost of sales and in the balance sheet debit column as a current asset.

c. recorded in the income statement credit column as a deduction from cost of sales and in the balance sheet debit column as a current asset.

d. is recorded as a debit to the inventory asset account and as CR to the gross profit account.

Correct answer: c

Learning objective 6.5 ~ prepare worksheets and close the accounts for retail businesses for both the perpetual and periodic inventory systems.

57. If closing inventory were overstated profit for the current period would be:

a. unaffected.

b. negative.

c. overstated.

d. understated.

Correct answer: c

Cost of sales would be overstated and profit would be understated.

Learning objective 6.5 ~ prepare worksheets and close the accounts for retail businesses for both the perpetual and periodic inventory systems.

58. Cost of goods available for sale is equal to:

a. Beginning inventory + net purchases

b. Beginning inventory + net purchases – ending inventory

c. Beginning inventory – ending inventory

d. Net purchases – ending inventory

Correct answer: a

Learning objective 6.6 ~ prepare a detailed income statement for a retail business.

59. With regards to the income statement for a retailer, which of the following statements is correct?

a. The cost of sales section is the same no matter whether the periodic or perpetual inventory system is used.

b. Under the periodic system freight inwards is added to the cost of purchases.

c. Interest revenue is added to sales revenue to calculate gross profit.

d. Expenses are classified into the groupings selling expenses, distribution expenses, and administrative and finance expenses.

Correct answer: b

Learning objective 6.6 ~ prepare a detailed income statement for a retail business.

60. When preparing an income statement for a retailer how will each of the following items be classified?

• 1. Discount allowed; and
  2. Depreciation of sales-person’s motor vehicles

a. Finance expenses; selling and distribution expenses

b. Administrative expenses; selling and distribution expenses

c. Finance expenses; administrative expenses

d. Selling and distribution expenses; selling and distribution expense

Correct answer: a

Learning objective 6.6 ~ prepare a detailed income statement for a retail business.

61. Assuming that the net price method of recording purchases is used and that the business uses the perpetual method of inventory recording, the correct entry to record the purchase of goods for $5000 on credit, with terms of 2/10, n/30 is: (ignore GST).

a. DR Inventory $5000; CR Accounts payable $5000

b. DR Inventory $4900; CR Accounts payable $4900

c. DR Inventory $4900; DR Discount allowed $100: CR Accounts payable $5000

d. DR Purchases $5000; CR Accounts payable $4900; CR Discount allowed $100

Correct answer: b

Learning objective 6.7 ~ describe the net method of recording purchases and sales whenever there are settlement discounts.

62. The formula for calculating the gross profit ratio is:

a. Gross profit /sales

b. Sales/gross profit

c. Cost of sales/sales

d. Gross profit after tax/sales

Correct answer: a

Learning objective 6.8 ~ perform a brief analysis of profitability in a retail business for decision-making purposes.

63. Which of the following statements is not true?

a. A decline in the gross profit ratio can be caused by decreases in the cost of sales.

b. A decline in the gross profit ratio represents an unfavourable trend.

c. The gross profit ratio can be compared with ratios for similar businesses.

d. The gross profit ratio is calculated as gross profit divided by net sales.

Correct answer: a

Learning objective 6.8 ~ perform a brief analysis of profitability in a retail business for decision-making purposes.

64. Which of the following statements is correct?

a. An expense to sales ratio of 10% in year 1 and 15% in year 2 indicates that management policies to control expenses have been successful.

b. In general, the faster the turnover of inventory the lower the profitability of the business.

c. A gross profit ratio that is increasing over time indicates an increase in the margin between the purchase price and the selling price of goods.

d. The formula for the inventory turnover ratio is sales divided by average inventory.

Correct answer: c

Learning objective 6.8 ~ perform a brief analysis of profitability in a retail business for decision-making purposes.

65. The formula, gross profit divided by sales, will calculate the:

a. sales ratio

b. gross profit ratio

c. inventory ratio

d. cost of sales ratio

Correct answer: b

Learning objective 6.8 ~ perform a brief analysis of profitability in a retail business for decision-making purposes.