Test bank accounting 25th editon warren chapter 6 accounting for merchandising businesses

Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are recorded... Account used to record merchandise purchased under a periodic invent

Chapter 6 Accounting for Merchandising Businesses

9 In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the beginning inventory

11 As we compare a merchandise business to a service business, the financial statement that changes the most

is the Balance Sheet

True False

12 When a merchandising business is compared to a service business, the financial statement that is not

affected by that change is the Statement of Owner's Equity

18 On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues

True False

19 The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and

income from operations are not readily available

True False

20 Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is

listed as Other Income on the multiple-step income statement

27 Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are recorded

36 Retailers record all credit card sales as credit sales

True False

37 The service fee that credit card companies charge retailers varies and is the primary reason why some

businesses do not accept all credit cards

45 Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system

54 Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150 If

$500 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $65

63 The seller records the sales tax as part of the sales amount

72 The ratio of net sales to assets measures how effectively a business is using its assets to generate sales True False

75 The accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and Freight In are found

on the balance sheet

True False

76 Match each of the following terms with the appropriate definition below

1 Account used to record merchandise purchased

under a periodic inventory system Purchases

2 Account used to record shipping cost of

merchandise by the buyer under a periodic

inventory system

Merchandise Inventory

3 Expense account for recording shipping costs

paid by the seller Sales Discounts

4 Account where returned merchandise or price

adjustments are recorded by the seller Delivery Expense

5 Early payment discount offered to customers by

6 Discounts off the list price offered by

wholesalers

Purchase Returns and Allowances

7 Account used to record merchandise purchased

77 Match each of the following terms with the correct definition below

1 Shipping terms where the ownership of

merchandise passes to the buyer when the buyer

receives the merchandise FOB Destination

2 Shipping terms where the ownership of

merchandise passes to the buyer when the seller

delivers the merchandise to the freight carrier

Inventory Shrinkage

3 Statement where net income is determined by

deducting all expenses from all revenues

Single-Step Income Statement

4 Statement that includes subtotals for net sales,

gross profit and net operating income in determining

5 Inventory system that updates the Merchandise

Inventory account only at the end of the accounting

period based on a physical count of merchandise on

hand

Perpetual Inventory system

6 Inventory system that updates the Merchandise

Inventory account for every purchase and sale

transaction

Periodic Inventory

system

7 Payment arrangements determined by the seller as

to when invoices are due and whether early payment

discount is offered

Multiple-Step Income Statement

8 Losses of inventory due to theft, damage, spoilage,

etc that cause the actual inventory on hand to be less

than that on record

79 Net income plus operating expenses is equal to

A cost of merchandise sold

B cost of merchandise available for sale

81 What is the term applied to the excess of net revenue from sales over the cost of merchandise sold?

82 The term "inventory" can indicate

A merchandise held for sale in the normal course of business

B equipment used to manufacture products

C supplies

D any asset

83 A company using the periodic inventory system has the following account balances: Merchandise Inventory

at the beginning of the year, $3,600; Freight-In, $650; Purchases, $10,700; Purchases Returns and Allowances,

$1,950; Purchases Discounts, $330 The cost of merchandise purchased is equal to

87 The form of 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

88 Multiple-step income statements show

A gross profit but not income from operations

B neither gross profit nor income from operations

C both gross profit and income from operations

D income from operations but not gross profit

90 The statement of owner's equity shows

A only net income, beginning and ending capital

B only total assets, beginning and ending capital

C only net income, beginning capital, and withdrawals

D all the changes in the owner's capital as a result of net income, net loss, additional investments, and

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

A periodic system determines the inventory on hand only at the end of the accounting period

B periodic system keeps a record showing the inventory on hand at all times

C periodic system provides an easy means to determine inventory shrinkage

D periodic system records the cost of the sale on the date the sale is made

95 When the perpetual inventory system is used, the inventory sold is shown on the income statement as

A cost of merchandise sold

C Statement of Owner's Equity

D Statement of Cash Flow

97 When comparing a retail business to a service business, the financial statement that changes the least is the

A Balance Sheet

B Income Statement

C Statement of Owner's Equity

D Statement of Cash Flow

99 Using the following information, what is the amount of cost of merchandise sold?

Merchandise inventory September 1 5,700 Merchandise inventory

September 30

6,370

100 Using the following information, what is the amount of gross profit?

101 Using the following information, what is the amount of net sales?

102 Using the following information, what is the amount of merchandise available for sale?

103 Where are selling and administrative expenses found on the multiple-step income statement?

A before gross profit

B after sales and before gross profit

C after net income before expenses

D after gross profit

104 Dorman Co sold merchandise to Smith Co on account, $23,500, terms 2/15, net 45 The cost of the merchandise sold is $16,000 Dorman Co issued a credit memo for $1,750 for merchandise returned that

originally cost $1,400 The Smith Co paid the invoice within the discount period What is amount of net sales

from the above transactions?

B debit to Merchandise Inventory

C credit to Merchandise Inventory

D credit to Accounts Receivable

107 Merchandise is ordered on December 1; the merchandise is shipped by the seller and the invoice is

prepared, dated, and mailed by the seller on December 3; the merchandise is received by the buyer on

December 8; the entry is made in the buyer's accounts on December 10 The credit period begins with what date?

A credit to Sales Returns and Allowances

B debit to Merchandise Inventory

C credit to Merchandise Inventory

D debit to Cost of Merchandise Sold

111 In credit terms of 3/15, n/45, the "3" 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

112 Merchandise with a sales price of $6,000 is sold on account with term 2/10, n/30 The journal entry to record the sale would include a

A debit to Cash for $6,000

B Debit to Sales Discounts for $120

C Credit to Sales for $6,000

D Debit to Accounts Receivable for $5,880

113 Merchandise subject to terms 1/10, n/30, FOB shipping point, is sold on account to a customer for

$25,000 The seller paid freight costs of $2,000 and issued a credit memo for $10,000 prior to payment What

is the amount of the cash discount allowable?

114 Which of the following accounts has a normal credit balance?

A Sales Returns and Allowances

C debit to Sales Returns and Allowances

D credit to Sales returns and Allowances

116 Sales to customers who use bank credit cards such as MasterCard and Visa are usually recorded by a

A debit to Bank Credit Card Sales, debit to Credit Card Expense, and a credit to Sales

B debit to Cash and a credit to Sales

C debit to Cash, credit to Credit Card Expense, and a credit to Sales

D debit to Sales, debit to Credit Card Expense, and a credit to Cash

118 When a buyer returns merchandise purchased for cash, the buyer may record the transaction using the following entry

A debit Merchandise Inventory; credit Cash

B debit Cash; credit Merchandise Inventory

C debit Cash; credit Sales Returns and Allowances

D debit Sales Returns and Allowances; credit Cash

A debit Cash; credit Merchandise Inventory

B debit Merchandise Inventory; credit Cash

C debit Merchandise Inventory; credit Cash Discounts

D debit Merchandise Inventory; credit Purchases

121 Using a perpetual inventory system, the entry to record the purchase of $30,000 of merchandise on account would include a

A debit to Accounts Payable

B debit to Merchandise Inventory

C credit to Merchandise Inventory

D credit to Sales

122 Using a perpetual inventory system, the entry to record the return of merchandise purchased on account includes a

A debit to Cost of Merchandise Sold

B credit to Accounts Payable

C credit to Merchandise Inventory

D credit to Sales

123 In recording the cost of merchandise sold for cash, based on data available from perpetual inventory records, the journal entry is

A debit Cost of Merchandise Sold; credit Sales

B debit Cost of Merchandise Sold; credit Merchandise Inventory

C debit Merchandise Inventory; credit Cost of Merchandise Sold

D debit Accounts Receivable; credit Merchandise Inventory

124 The amount of the total cash paid to the seller for merchandise purchased for consumption would normally include

A only the list price

B only the sales tax

C the list price plus the sales tax

D the list price less the sales tax

125 A retailer purchases merchandise with a catalog list price of $25,000 The retailer receives a 30% trade discount and credit terms of 2/10, n/30 What amount should the retailer debit to the Merchandise Inventory account?

128 Merchandise is sold for cash The selling price of the merchandise is $5,000 and the sale is subject to a 7% state sales tax The journal entry to record the sale would include

A A credit to Cash for $5,000

B A credit to Sales for $5,350

C A credit to Sales Tax Payable for $350

D None of these answers are correct

129 If the buyer is to pay the freight costs of delivering merchandise, delivery terms are stated as

A FOB shipping point

B FOB destination

C FOB n/30

D FOB buyer

130 If the seller is to pay the freight costs of delivering merchandise, the delivery terms are stated as

A FOB shipping point

133 When goods are shipped FOB destination and the seller pays the freight charges, the buyer

A journalizes a reduction for the cost of the merchandise

B journalizes a reimbursement to the seller

C does not take a discount

D makes no journal entry for the freight

134 Anthony Company sold Madison Company merchandise on account FOB shipping point, 2/10, net 30, for

$10,000 Anthony prepaid the $300 shipping charge Which of the following entries does Anthony make to record this sale?

A Accounts Receivable-Madison, debit $10,000; Sales, credit $10,000

B Accounts Receivable-Madison, debit $10,000; Sales, credit $10,000, and

Accounts Receivable-Madison, debit $300; Cash, credit $300

C Accounts Receivable-Madison, debit $10,300; Sales, credit $10,300

D Accounts Receivable-Madison, debit $10,000; Sales, credit $10,000, and

Freight Out, debit $300; Cash, credit $300

135 Emma Co sold Isabella Co merchandise on account FOB shipping point,, 2/10, net 30, for

$15,000 Emma Co prepaid the $750 shipping charge Using the perpetual inventory method, which of the following entries will Isabella Co make to record payment of the merchandise if Isabella Co pays within the discount period?

A Accounts Payable-Emma Co., debit $15,000; Freight In, credit $750; Cash, credit $14,250

B Accounts Payable-Emma Co., debit $15,750; Merchandise Inventory, credit $300; Cash, credit $15,450

C Accounts Payable-Emma Co., debit $15,000; Freight In, debit $750; Cash, credit $15,750

D Accounts Payable-Emma Co., debit $15,750; Merchandise Inventory, debit $300; Cash, credit $16,050

136 A chart of accounts for a merchandising business

A usually is the same as the chart of accounts for a service business

B usually requires more accounts than does the chart of accounts for a service business

C usually is standardized by the FASB for all merchandising businesses

D always uses a three-digit numbering system

137 Cumberland Co sells $2,000 of inventory to Hancock Co for cash Cumberland paid $1,250 for the merchandise Under a perpetual inventory system, which of the following journal entry(ies) would be

recorded?

A Cash $2,000 Dr, Merchandise Inventory $1,250 Cr

B Cash $2,000 Dr, Sales $2,000 Cr, and Cost of Merchandise Sold $1,250 Dr, Merchandise Inventory $1,250

139 Isaac Co sells merchandise on credit to Sonar Co in the amount of $9,600 The invoice is dated on April

15 with terms of 1/15, net 45 If Sonar Co chooses not to take the discount, by when should the payment be

142 Who pays the freight costs when the terms are FOB shipping point?

A the ultimate customer

145 What type of company would normally offer trade discounts to its customers?

151 Under the perpetual inventory system, all purchases of merchandise are debited to the account entitled

A Merchandise Inventory

B Cost of Merchandise Sold

C Cost of Merchandise Available for Sale

153 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 purchase returns and allowances account is credited when goods are returned to vendors

155 Which of the following items should not be included in the cost of ending merchandise inventory?

A purchased units in transit, shipped FOB shipping point

B purchased units in transit, shipped FOB destination

C units on hand in the warehouse

D sold units in transit, not invoiced and shipped FOB destination

156 The Corbit Corp sold merchandise $10,000 for cash The cost of the merchandise sold was $7,590 The journal entry(s) to record this transaction would be

157 Inventory shortage is recorded when

A merchandise is returned by a buyer

B merchandise purchased from a seller is incomplete or short

C merchandise is returned to a seller

D there is a difference between a physical count of inventory and inventory records

158 If the physical count of the inventory revealed $158,000 of merchandise on hand and the inventory records reported $163,000, what would be the necessary adjusting entry to record inventory shortage?

A Merchandise inventory debit $158,000; Cost of Merchandise Sold credit $158,000

B Merchandise inventory debit $5,000; Cost of Merchandise Sold credit $5,000

C Cost of Merchandise Sold debit $163,000; Merchandise Inventory credit $158,000

D Cost of Merchandise Sold debit $5,000; Merchandise Inventory credit $5,000

160 Ramone Company had $600,000 in Net Sales for the year 2010 The total assets at the beginning of the year were $240,000 and total assets at the end of the year were $280,000 The ratio of net sales to total assets is (round answer to 2 decimal places):

162 What is the major difference between a periodic and perpetual inventory system?

A Under the periodic inventory system, the purchase of inventory will be debited to the Purchases account

B Under the periodic inventory system, no journal entry is recorded at the time of the sale of inventory for the cost of the inventory

C Under the periodic inventory system, all adjustments such as purchases returns and allowances and discounts are reconciled at the end of the month

D All are correct

165 Under the periodic inventory system, the journal entry to record the cost of merchandise sold at the point

of sale will include the following account

166 Under a periodic inventory system, closing entries will include

A Dr Sales, Purchases Returns and Allowances, Purchases Discounts

B Cr Purchases, Sales Discounts, Sales Returns and Allowances

C Adjust Merchandise Inventory account to match physical inventory

D All are correct

Service Business Merchandising Business

175 Abbey Co sold merchandise to Gomez Co on account, $35,000, terms 2/15, net 45 The cost of the merchandise sold is $24,500 Abbey Co issued a credit memo for $3,600 for merchandise returned that originally cost $1,700 Gomez Co paid the invoice within the discount period What is the amount of gross profit earned by Abbey Co on the above transactions?

176 Based upon the following data, determine the cost of merchandise sold for August

177 Journalize the following merchandise transactions:

A Sold merchandise on account, $17,300 with terms 2/10, net 30 The cost of the merchandise sold was $12,600

B Received payment less the discount

178 Travis Company purchased merchandise on account from a supplier for $5,700, terms 2/10, net 30 Travis returned $1,100 of the merchandise and received full credit Travis Company paid for the merchandise within the discount period

Under a perpetual inventory system, record all of the journal entries required for the above transactions

181 Determine the amount to be paid in full settlement of each invoice, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period

Merchandise Freight Paid by Seller Freight Terms Returns and Allowances

perpetual inventory system

184 Maxi Company’s perpetual inventory records indicate that $820,300 of merchandise should be on hand on October 31, 2014 The physical inventory indicates that $781,900 is actually on hand Journalize the adjusting entry for the inventory shrinkage for Maxi Company for the year ended October 31, 2014

185 The records of Nevada Co indicated that $420,000 of merchandise should be on hand on December 31,

2010 The physical inventory indicates that $370,000 of merchandise is actually on hand Journalize the

adjusting entry for the inventory shrinkage for the year ended December 31, 2010

187 Discuss the following statement:

“Operating cycles for all merchandising businesses are the same, with similar profit margins.”

Include an example(s) to illustrate your explanation

192 What is the normal balance of the following accounts?

a Sales Tax Payable

b Merchandise Inventory

c Delivery Expense

d Cost of Merchandise Sold

e Sales Returns and Allowance

Merchandise inventory, April 1, 2010 $193,250

Merchandise inventory, March 31, 2011 180,100

Merchandise inventory, April 1, 2010 $193,250

Merchandise inventory, March 31, 2011 180,100

Merchandise inventory, June 1, 2010 $393,250

Merchandise inventory, May 31, 2011 380,100

Merchandise inventory, June 1, 2010 $393,250

Merchandise inventory, May 31, 2011 380,100

197 Which of the following accounts would be included in the chart of accounts of a merchandising company using the: (a) periodic inventory system, (b) perpetual inventory system, or (c) both systems?

199 Journalize the following transactions for Armour Inc using both the periodic inventory system and the perpetual inventory system, presented in a side-by-side format shown at the end of this exercise

Oct.7 Sold merchandise on credit to Rondo Distributors, terms n/30, FOB destination, $1,200; the cost of the merchandise was $720

Oct 8 Purchased merchandise, $10,000, terms FOB shipping point, 2/15, n/30, with prepaid freight charges of

$525 added to the invoice

PERIODIC INVENTORY PERPETUAL INVENTORY

Oct 9 Merchandise sold on October 7 accepted back from Rondo Co for full credit and returned to

merchandise inventory, $300; the cost of the merchandise was $180

Nov 5 Received payment in full of $900 from Pine Co for sale of merchandise on Oct 25

PERIODIC INVENTORY PERPETUAL INVENTORY

Oct 5 Purchased $18,000 of merchandise from Rex on account, terms 2/10, n/30

Oct 8 Returned merchandise purchased on account on Oct 5 amounting to $3,500

Oct 15 Paid for purchase of Oct 5, less Oct 8 return and purchase discount

PERIODIC INVENTORY PERPETUAL INVENTORY