Chapter 4
ACCOUNTING FOR MERCHANDISING OPERATIONS
True /False Questions
1. Merchandise inventory refers to products that a company owns and intends to sell to
customers.
2. A service company earns net income by buying and selling merchandise.
3. Gross profit is also called gross margin.
4. Cost of goods sold is also called cost of sales.
5. A wholesaler is an intermediary that buys products from manufacturers or other
wholesalers and sells them to consumers.
6. A retailer is an intermediary that buys products from manufacturers and sells them to
wholesalers.
7. Cost of goods sold represents the cost of buying and preparing merchandise for sale.
8. A company had sales of $350,000 and cost of goods sold of $200,000. Its gross profit
equals $150,000.
9. A company had net sales of $545,000 and cost of goods sold of $345,000. Its gross margin
equals $890,000.
10. A company had a gross profit of $300,000 based on sales of $400,000. Its cost of goods
sold equals $700,000.
11. A merchandising company’s operating cycle begins with the purchase of merchandise and
ends with the collection of cash from the sale.
12. Merchandise inventory is reported in the long-term assets section of the balance sheet.
13. Cash sales shorten the operating cycle for a merchandiser; credit sales lengthen operating
cycles.
14. Assets tied up in inventory are not considered productive assets.
15. A periodic inventory system requires updating of the inventory account only at the
beginning of an accounting period.
16. A perpetual inventory system continually updates accounting records for merchandising
transactions.
17. Beginning inventory plus net purchases equals merchandise available for sale.
18. The acid-test ratio is also called the quick ratio.
19. Quick assets include cash and cash equivalents, inventory, and current receivables.
20. The acid-test ratio is defined as current assets divided by current liabilities.
21. A common rule of thumb is that a company’s acid-test ratio should have a value near or
higher than 1 to conclude that a company is unlikely to face near-term liquidity problems.
22. Successful use of a just-in-time inventory system can narrow the gap between the acid-test
and the current ratio.
23. A company’s quick assets are $147,000 and its current liabilities are $143,000. This
company’s acid-test ratio is 1.03.
24. A company’s current ratio is 1.2 and its quick ratio is 0.25. This company is probably an
excellent credit risk because the ratios reveal no indication of liquidity problems.
25. The gross margin ratio is defined as gross margin divided by net sales.
26. The profit margin ratio is the same as the gross profit ratio.
27. A company had net sales of $340,500, its cost of goods sold was $257,000, and its net
income was $13,750. The company’s gross margin ratio equals 24.5%.
28. The Merchandise Inventory account balance at the beginning of the current period is equal
to the amount of ending Merchandise Inventory from the previous period.
29. Credit terms for a purchase include the amounts and timing of payments from a buyer to a
seller.
30. Purchase returns refer to merchandise a buyer acquires but then returns to the seller.
31. Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.
32. Under the perpetual inventory system, the cost of merchandise purchased is recorded in
the Merchandise Inventory account.
33. Credit terms of 2/10, n/30 imply that the seller offers the purchaser a 2% cash discount if
the amount is paid within 10 days of the invoice date. Otherwise, the full amount is due in 30
days.
34. Sellers always offer a discount to buyers for prompt payment toward purchases made on
credit.
35. Purchase discounts are the same as trade discounts.
36. If a company sells merchandise with credit terms 2/10 n/60, the credit period is 10 days
and the discount period is 60 days.
37. The seller is responsible for paying shipping charges and bears the risk of damage or loss
in transit if goods are shipped FOB destination.
38. If goods are shipped FOB destination, the seller does not record revenue from the sale
until the goods arrive at their destination because the transaction is not complete until that
point.
39. A buyer using a perpetual inventory system records the costs of shipping merchandise it
purchases in a Delivery Expense account.
40. If a buyer does not take advantage of a supplier’s credit terms of 2/10, n/30, and instead
pays the invoice in full at the end of 30 days, by not taking the discount the buyer loses the
equivalent of 18% annual interest on the amount of the purchase.
41. FOB shipping point means that the buyer accepts ownership when the goods arrive at the
buyer’s place of business.
42. Each sales transaction for a seller that uses a perpetual inventory system involves
recognizing both revenue and cost of merchandise sold.
43. Offering sales discounts on credit sales can benefit a seller by decreasing the delay in
receiving cash and reducing future collections efforts.
44. Sales Discounts is added to the Sales account when computing a company’s net sales.
45. A credit memorandum from a seller informs a buyer of the seller’s credit to its Accounts
Payable account arising from a sales return or allowance.
46. Under a perpetual inventory system, when a credit customer returns merchandise to the
seller, the seller debits Sales Returns and Allowances and credits Accounts Receivable and
also debits Merchandise Inventory and credits Cost of Goods Sold.
47. Because sellers assume that their customers will pay within the discount period, the seller
usually records the discount at the time of the sale.
48. A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20, and a credit
to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for
early payment.
49. Sales of $350,000 and net sales of $323,000 could reflect sales discounts of $27,000.
50. A perpetual inventory system is able to directly measure and monitor inventory shrinkage
and there is no need for a physical count of inventory.
51. Sales Discounts and Sales Returns and Allowances are contra revenue accounts that are
debited to close the accounts during the closing process.
52. Cost of Goods Sold is debited to close the account during the closing process.
53. In a perpetual inventory system, the Merchandise Inventory account must be closed at the
end of the accounting period.
54. The adjusting entry to reflect inventory shrinkage is a debit to Income Summary and a
credit to Inventory Shrinkage Expense.
55. A multiple-step income statement format shows detailed computations of net sales and
other costs and expenses, and reports subtotals for various classes of items.
56. Operating expenses are classified into two categories: selling expenses and cost of goods
sold.
57. A merchandiser’s classified balance sheet reports merchandise inventory as a current asset.
58. Expenses related to accounting, human resource management, and financial management
are known as selling expenses.
59. When a company has no reportable non-operating activities, its income from operations is
simply labeled net income.
60. A single-step income statement includes cost of goods sold as another expense and shows
only one subtotal for total expenses.
61. Under a periodic inventory system, purchases, purchases returns and allowances, purchase
discounts, and transportation in transactions are recorded in the Merchandise Inventory
account.
62. The periodic inventory system requires updating the inventory account only at the end of
the period to reflect the quantity and cost of goods available for sale and the cost of goods
sold.
63. In a periodic inventory system, cost of goods sold is recorded as each sale occurs.
64. Under both the periodic and perpetual inventory systems, the temporary account
Purchases Returns and Allowances is used to accumulate the cost of all returns and
allowances for a period.
65. Delivery expense is reported as part of general and administrative expense in the seller’s
income statement.
66. A merchandiser:
A. Earns net income by buying and selling merchandise.
B. Receives fees only in exchange for services.
C. Earns profit from commissions only.
D. Earns profit from fares only.
E. Buys products from consumers.
67. Cost of goods sold:
A. Is another term for merchandise sales.
B. Is the term used for the expense of buying and preparing merchandise for sale.
C. Is another term for revenue.
D. Is also called gross margin.
E. Is a term only used by service firms.
68. A company has sales of $695,000 and cost of goods sold of $278,000. Its gross profit
equals:
A. $(417,000).
B. $695,000.
C. $278,000.
D. $417,000.
E. $973,000.
69. A company has sales of $375,000 and its gross profit is $157,500. Its cost of goods sold
equals:
A. $(217,000).
B. $375,000.
C. $157,500.
D. $217,500.
E. $532,500.
70. The following statements regarding gross profit are true except:
A. Gross profit is also called gross margin.
B. Gross profit less other operating expenses equals income from operations.
C. Gross profit is not calculated on the multiple-step income statement.
D. Gross profit must cover all operating expenses to yield a return for the owner of the
business.
E. Gross profit equals net sales less cost of goods sold.
71. The following statements regarding merchandise inventory are true except:
A. Merchandise inventory is reported on the balance sheet as a current asset.
B. Merchandise inventory refers to products a company owns and intends to sell.
C. Merchandise inventory may include the costs of freight in and making them ready for sale.
D. Merchandise inventory appears on the balance sheet of a service company.
E. Purchasing merchandise inventory is part of the operating cycle for a business.
72. The following statements are true regarding the operating cycle of a merchandising
company except:
A. The operating cycle begins with the purchase of merchandise.
B. The operating cycle is shortened by credit sales.
C. The operating cycle ends with the collection of cash from the sale of merchandise.
D. The operating cycle can vary in length among different merchandising companies.
E. The operating cycle sometimes involves accounts receivable.
73. Merchandise inventory:
A. Is a long-term asset.
B. Is a current asset.
C. Includes supplies the company will use in future periods.
D. Is classified with investments on the balance sheet.
E. Must be sold within one month.
74. The operating cycle for a merchandiser that sells only for cash moves from:
A. Purchases of merchandise to inventory to cash sales.
B. Purchases of merchandise to inventory to accounts receivable to cash sales.
C. Inventory to purchases of merchandise to cash sales.
D. Accounts receivable to purchases of merchandise to inventory to cash sales.
E. Accounts receivable to inventory to cash sales.
75. The current period’s ending inventory is:
A. The next period’s beginning inventory.
B. The current period’s cost of goods sold.
C. The prior period’s beginning inventory.
D. The current period’s net purchases.
E. The current period’s beginning inventory.
76. Beginning inventory plus net purchases is:
A. Cost of goods sold.
B. Merchandise (goods) available for sale.
C. Ending inventory.
D. Sales.
E. Shown on the balance sheet.
77. The acid-test ratio:
A. Is also called the quick ratio.
B. Measures profitability.
C. Measures inventory turnover.
D. Is generally greater than the current ratio.
E. Measures return on assets.
78. Quick assets are defined as:
A. Cash, short-term investments, and inventory.
B. Cash, short-term investments, and current receivables.
C. Cash, inventory, and current receivables.
D. Cash, noncurrent receivables, and prepaid expenses.
E. Accounts receivable, inventory, and prepaid expenses.
79. KLM Corporation’s quick assets are $5,888,000, its current assets are $11,700,000 and its
current liabilities are $8,000,000. Its acid-test ratio equals:
A. 0.50.
B. 0.68.
C. 0.74.
D. 1.50.
E. 2.20.
80. A company’s current assets are $17,980, its quick assets are $11,420 and its current
liabilities are $12,190. Its quick ratio equals:
A. 0.94.
B. 1.07.
C. 1.48.
D. 1.57.
E. 2.40.
81. Liquidity problems are likely to exist when a company’s acid-test ratio:
A. Is less than the current ratio.
B. equals 1.
C. Is higher than 1.
D. Is substantially lower than 1.
E. Is higher than the current ratio.
82. The acid-test ratio differs from the current ratio in that:
A. Liabilities are divided by current assets.
B. Prepaid expenses and inventory are excluded from the calculation of the acid-test ratio.
C. The acid-test ratio measures profitability and the current ratio does not.
D. The acid-test ratio excludes short-term investments from the calculation.
E. The acid-test ratio is a measure of liquidity but the current ratio is not.
83. Using the following year-end information for Calvin’s Clothing, Inc., calculate the current
ratio and acid-test ratio for the business:
Cash…………………………………… $ 52,000
Short-term investments………………… 12,000
Accounts receivable…………………… 54,000
Inventory……………………………… 325,000
Prepaid expenses……………………… 17,500
Accounts payable……………………… 106,500
Other current payables………………… 25,000
A. 1.80 and 1
B. 1.97 and 1.52
C. 2.73 and 1.52
D. 3.50 and 0.90
E. 1.80 and 0.90
84. The gross margin ratio:
A. Is also called the net profit ratio.
B. Indicates the percent of sales revenue remaining after covering the cost of the goods sold.
C. Is also called the profit margin.
D. Is a measure of liquidity and should exceed 2.0 to be acceptable.
E. Should be greater than 1 for merchandising companies.
85. A company’s gross profit was $83,750 and its net sales were $347,800. Its gross margin
ratio equals:
A. 4.2%.
B. 24.1%.
C. 75.9%.
D. $83,750.
E. $264,050.
86. A company’s net sales were $676,600, its cost of goods sold was $236,810 and its net
income was $33,750. Its gross margin ratio equals:
A. 5%.
B. 9.6%.
C. 35%.
D. 65%.
E. 285.7%.
87. A company had net sales of $752,000 and cost of goods sold of $543,000. Its net income
was $17,530. The company’s gross margin ratio equals:
A. 18.9%
B. 24.5%
C. 27.8%
D. 34.7%
E. 35.2%
88. Mega Skateboard Supplier, Inc. had net sales of $2.8 million, its cost of goods sold was
$1.6 million, and its net income was $0.9 million. Its gross margin ratio equals:
A. 32%.
B. 175%.
C. 43%.
D. 57%.
E. 56%.
89. The credit terms 2/10, n/30 are interpreted as:
A. 2% cash discount if the amount is paid within 10 days, or the balance due in 30 days.
B. 10% cash discount if the amount is paid within 2 days, or the balance due in 30 days.
C. 30% discount if paid within 2 days.
D. 30% discount if paid within 10 days.
E. 2% discount if paid within 30 days.
90. A trade discount is:
A. A term used by a purchaser to describe a cash discount given to customers for prompt
payment.
B. A reduction in selling price below the list price.
C. A term used by a seller to describe a cash discount granted to customers for prompt
payment.
D. A reduction in price for prompt payment.
E. Also called a rebate.
91. Jasper Company, Inc. is a wholesaler that buys merchandise in large quantities. Its
supplier’s catalog indicates a list price of $500 on merchandise Jasper intends to purchase,
and offers a 30% trade discount for large quantity purchases. The cost of shipping for the
merchandise is $7 per unit. Jasper’s total purchase price per unit will be:
A. $507
B. $350
C. $357
D. $343
E. $493
92. Fragment Company, Inc. is a wholesaler that sells merchandise in large quantities. Its
catalog indicates a list price of $300 on a particular product and a 40% trade discount is
offered for quantity purchases of 50 units or more. The cost of shipping the merchandise is $7
per unit under terms FOB shipping point. If a customer purchases 100 units of this product,
what is the amount of sales revenue that Fragment will record from this sale?
A. $18,000
B. $30,000
C. $18,700
D. $29,300
E. $30,700
93. The amount recorded for merchandise inventory includes all of the following except:
A. Purchase discounts.
B. Returns and allowances.
C. Freight costs paid by the buyer.
D. Freight costs paid by the seller.
E. Trade discounts.
94. A company uses the perpetual inventory system and recorded the following entry:
Accounts Payable………………………… 2,500
Merchandise Inventory……………. 50
Cash………………………………… 2,450
This entry reflects a:
A. Purchase of merchandise on credit.
B. Return of merchandise.
C. Sale of merchandise on credit.
D. Payment of the account payable less a 2% cash discount taken.
E. Payment of the account payable less a 1% cash discount taken.
95. A debit memorandum is:
A. Required whenever a journal entry is recorded.
B. The source document for the purchase of merchandise inventory.
C. Required when a purchase discount is granted.
D. The document a buyer issues to inform the seller of a debit made to the seller’s account in
the buyer’s records.
E. Not necessary in a perpetual inventory system.
96. A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7,
it returned $200 worth of merchandise. On July 8, it paid the full amount due. The amount of
the cash paid on July 8 equals:
A. $200.
B. $1,564.
C. $1,568.
D. $1,600.
E. $1,800.
97. A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7,
it returned $200 worth of merchandise. On July 28, it paid the full amount due. The amount of
the cash paid on July 28 equals:
A. $200.
B. $1,564.
C. $1,568.
D. $1,600.
E. $1,800.
98. A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7,
it returned $200 worth of merchandise. On July 28, it paid the full amount due. The correct
journal entry to record the purchase on July 5 is:
A. Debit Merchandise Inventory $1,600; credit Cash $1,600.
B. Debit Merchandise Inventory $1,800; credit Accounts Payable $1,800.
C. Debit Merchandise Inventory $1,800; credit Sales Returns $200; credit Cash $1,600.
D. Debit Accounts Payable $1,800; credit Merchandise Inventory $1,800.
E. Debit Accounts Payable $1,800; credit Purchase Returns $200; credit Merchandise
Inventory $1,600.
99. A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7,
it returned $200 worth of merchandise. On July 28, it paid the full amount due. The correct
journal entry to record the merchandise return on July 7 is:
A. Debit Merchandise Inventory $1,600; credit Cash $1,600.
B. Debit Merchandise Inventory $200; credit Accounts Payable $200.
C. Debit Merchandise Inventory $200; credit Sales Returns $200.
D. Debit Accounts Payable $200; credit Merchandise Inventory $200.
E. Debit Accounts Payable $1,800; credit Purchase Returns $200; credit Merchandise
Inventory $1,600.
100. A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7,
it returned $200 worth of merchandise. On July 28, it paid the full amount due. The correct
journal entry to record the payment on July 28 is:
A. Debit Merchandise Inventory $1,600; credit Cash $1,600.
B. Debit Cash $1,600; credit Accounts Payable $1,600.
C. Debit Accounts Payable $1,600; credit Merchandise Inventory $32; credit Cash $1,568
D. Debit Accounts Payable $1,800; credit Cash $1,800.
E. Debit Accounts Payable $1,600; credit Cash $1,600.
101. A company purchased $4,000 worth of merchandise. Transportation costs were an
additional $350. The company later returned $275 worth of merchandise and paid the invoice
within the 2% cash discount period. The total amount paid for this merchandise is:
A. $3,725.00.
B. $3,925.00.
C. $3,995.00.
D. $4,000.50.
E. $4,075.00.
102. A buyer failed to take advantage of the vendor’s credit terms of 2/15, n/45, but instead
paid the invoice in full at the end of 60 days. By not taking advantage of the cash discount, the
equivalent annual interest lost on the amount of the purchase is:
A. 12.2%
B. 16.2%
C. 18.9%
D. 24.3%
E. 24.5%
103. Sales returns:
A. Refer to merchandise that customers return to the seller after the sale.
B. Refer to reductions in the selling price of merchandise sold to customers.
C. Represent cash discounts.
D. Represent trade discounts.
E. Are not recorded under the perpetual inventory system until the end of each accounting
period.
104. All of the following statements regarding sales returns and allowances are true except:
A. A reduction is the selling price because of damaged merchandise is included in sales
returns and allowances.
B. There is no relationship between sales returns and allowances and the possibility of lost
future sales.
C. Sales returns and allowances are recorded in a separate contra-revenue account.
D. Sales returns and allowances are rarely disclosed in published financial statements.
E. Sales returns and allowances are closed to the Income Summary account.
105. A debit to Sales Returns and Allowances and a credit to Accounts Receivable:
A. Reflects an increase in amount due from a customer.
B. Recognizes that a customer returned merchandise and/or received an allowance.
C. Requires a debit memorandum to recognize the customer’s return.
D. Is recorded when a customer takes a discount.
E. Reflects a decrease in amount due to a supplier.
106. Sales less sales discounts less sales returns and allowances equals:
A. Net purchases.
B. Cost of goods sold.
C. Net sales.
D. Gross profit.
E. Net income.
107. Garza Company had sales of $135,000, sales discounts of $2,000, and sales returns of
$3,200. Garza Company’s net sales equals:
A. $5,200.
B. $129,800.
C. $133,000.
D. $135,000.
E. $140,200.
108. On May 1, Shilling Company, Inc. sold merchandise in the amount of $5,800 to Anders,
with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Shilling uses the
perpetual inventory system. The journal entry or entries that Shilling will make on May 1 is:
A. Sales……………………………………………………..…. 5,800
Accounts receivable……….…..…....…..….... 5,800
B. Sales……………………………………………………..…. 5,800
Accounts receivable……….…..…....…..….... 5,800
Cost of goods sold…………………………………..…. 4,000
Merchandise Inventory…..……..……....….... 4,000
C. Accounts receivable…….……..……..……..…..…... 5,800
Sales……………………………………….….…….. 5,800
D. Accounts receivable…………..……..….…..…....…. 5,800
Sales……………………………………….….…….. 5,800
Cost of goods sold…………………………………..…. 4,000
Merchandise inventory…..……..……..…..…. 4,000
E. Accounts receivable…………..……..….…..…..…... 4,000
Sales……………………………………..….….…… 4,000
109. On May 1, Anders Company, Inc. purchased merchandise in the amount of $5,800 from
Shilling, with credit terms of 2/10, n/30. Anders uses the perpetual inventory system. The
journal entry or entries that Anders will make on May 1 is:
A. Sales……………………………………………………..…. 5,800
Accounts receivable……….…..…....…..….... 5,800
B. Merchandise Inventory……………………………….. 5,800
Accounts payable…….……....…....…..…..…. 5,800
C. Accounts payable……..……..……..……...…..…..… 5,800
Sales……………………………………….….…….. 5,800
D. Merchandise inventory…………………………….…. 5,800
Cash………………………………………………….. 5,800
E. Purchases……..……..……..……..….....…..…..…..… 5,800
Accounts Payable…….……..………..…..….... 5,800
110. On February 3, Smart Company, Inc. sold merchandise in the amount of $5,800 to
Truman Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Smart
uses the perpetual inventory system. Truman pays the invoice on February 8, and takes the
appropriate discount. The journal entry that Smart makes on February 8 is:
A. Cash…………………………………………..….…….….. 5,800
Accounts receivable……….…..…....…..….... 5,800
B. Cash……………………………………………….….……. 4,000
Accounts receivable……….…..…....…..….... 4,000
C. Cash…………………………………………….…….….… 3,920
Sales discounts………………………………….…….… 80
Accounts receivable……….…..…....…..….... 4,000
D. Cash…………………………………………….…….….… 5,684
Accounts receivable……….…..…....…..….... 5,684
E. Cash……………………………………………….….……. 5,684
Sales discounts………………………………….…….… 116
Accounts receivable……….…..…....…..….... 5,800
111. On July 1, Ferguson Company, Inc. sold merchandise in the amount of $5,800 to Tracey
Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ferguson uses
the perpetual inventory system. On July 5, Tracey returns some of the merchandise. The
selling price of the merchandise is $500 and the cost of the merchandise returned is $350. The
entry or entries that Ferguson must make on July 5 is:
A. Sales returns and allowances…..……..……....…... 500
Accounts receivable……….…..…....…..….... 500
Merchandise inventory…………………………….…. 350
Cost of goods sold……..……..……...…..….... 350
B. Sales returns and allowances…..……..……....…... 500
Accounts receivable……….…..…....…..….... 500
C. Accounts receivable…………..……..….…..…....…. 500
Sales returns and allowances…....…....….... 500
D. Accounts receivable…..……..……..…....…..…..…. 500
Sales returns and allowances…....…....….... 500
Cost of goods sold…………………………………..…. 350
Merchandise inventory…..……..……..…..…. 350
E. Sales returns and allowances…..……..……....…... 350
Accounts receivable……….…..…....…..….... 350
112. Juniper Company, Inc. uses a perpetual inventory system. The company purchased
$9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500
worth of merchandise. On August 16, it paid the full amount due. The amount of the cash paid
on August 16 equals:
A. $8,167.50.
B. $9,652.50.
C. $9,750.00.
D. $8,250.00.
E. $8,152.50.
113. Juniper Company, Inc. uses a perpetual inventory system. The company purchased
$9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500
worth of merchandise. On August 26, it paid the full amount due. The amount of the cash paid
on August 26 equals:
A. $8,167.50
B. $9,652.50.
C. $9,750.00.
D. $8,250.00.
E. $8,152.50.
114. Juniper Company, Inc. uses a perpetual inventory system. The company purchased
$9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500
worth of merchandise. On August 16, it paid the full amount due. The correct journal entry to
record the purchase on August 7 is:
A. Debit Merchandise Inventory $9,750; credit Cash $9,750.
B. Debit Accounts Payable $9,750; credit Merchandise Inventory $9,750.
C. Debit Merchandise Inventory $9,750; credit Sales Returns $1,500; credit Cash $8,250.
D. Debit Merchandise Inventory $9,750; credit Accounts Payable $9,750.
E. Debit Accounts Payable $8,250; debit Purchase Returns $1,500; credit Merchandise
Inventory $9,750.
115. Juniper Company, Inc. uses a perpetual inventory system. The company purchased
$9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500
worth of merchandise. On August 26, it paid the full amount due. The correct journal entry to
record the merchandise return on August 11 is:
A. Debit Accounts Payable $1,500; credit Cash $1,500.
B. Debit Accounts Payable $1,500; credit Merchandise Inventory $1,500.
C. Debit Merchandise Inventory $1,500; credit Sales Returns $1,500.
D. Debit Merchandise Inventory $1,500; credit Cash $1,500.
E. Debit Accounts Payable $1,500; credit Purchase Returns $1,500.
116. Juniper Company, Inc. uses a perpetual inventory system. The company purchased
$9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500
worth of merchandise. On August 16, it paid the full amount due. The correct journal entry to
record the payment on August 16 is:
A. Debit Merchandise Inventory $8,250; credit Cash $8,250.
B. Debit Cash $8,250; credit Accounts Payable $8,250.
C. Debit Accounts Payable $8,250; credit Merchandise Inventory $82.50; credit Cash
$8,167.50
D. Debit Accounts Payable $9,750; credit Merchandise Inventory $97.50; credit Cash
$9,652.50.
E. Debit Accounts Payable $8,167.50; credit Cash $8,167.50.
117. A company records the following journal entry: debit Cash $1,470, debit Sales Discounts
$30, and credit Accounts Receivable $1,500. This means that a customer has taken what
percentage cash discount for early payment?
A. 1%
B. 2%
C. 5%
D. 10%
E. 15%
118. All of the following statements regarding inventory shrinkage are true except:
A. Inventory shrinkage refers to the loss of inventory.
B. Inventory shrinkage is determined by comparing a physical count of inventory with
recorded inventory amounts.
C. Inventory shrinkage is recognized by debiting an operating expense.
D. Inventory shrinkage is recognized by debiting Cost of Goods Sold.
E. Inventory shrinkage can be caused by theft or deterioration.
119. Frisco Company Inc.’s Merchandise Inventory account at the end of year 2015 has a
balance of $62,115, but a physical count reveals that only $61,900 of inventory exists. The
adjusting entry to record this $215 of inventory shrinkage is:
A. Merchandise Inventory……………………………….. 215
Inventory shrinkage expense…..…..…..…... 215
B. Purchases discounts……………………………………. 215
Cost of goods sold……..……..……...…..….... 215
C. Cost of goods sold…………………………………..…. 215
Purchases discounts…….……..……..….…..… 215
D. Inventory shrinkage expense…..……..……..…..... 215
Cost of goods sold……..……..……...…..….... 215
E. Cost of Goods Sold……..……..……....…....…..….. 215
Merchandise Inventory…..……..……....….... 215
120. Which of the following accounts would be closed at the end of the accounting period
with a debit?
A. Sales Discounts.
B. Sales Returns and Allowances.
C. Cost of Goods Sold.
D. Operating Expenses.
E. Sales.
121. An income statement that includes cost of goods sold as another expense and shows only
one subtotal for total expenses is a:
A. Balanced income statement.
B. Single-step income statement.
C. Multiple-step income statement.
D. Combined income statement.
E. Simplified income statement.
122. Expenses that support the overall operations of a business and include the expenses
relating to accounting, human resource management, and financial management are called:
A. Cost of goods sold.
B. Selling expenses.
C. Purchasing expenses.
D. General and administrative expenses.
E. Non-operating activities.
123. Prentice Company, Inc. had cash sales of $94,275, credit sales of $83,450, sales returns
and allowances of $1,700, and sales discounts of $3,475. Prentice’s net sales for this period
equal:
A. $94,275.
B. $172,550.
C. $174,250.
D. $176,025.
E. $177,725.
124. Multiple-step income statements:
A. Are required by the FASB and IASB.
B. Contain more detail than a simple listing of revenues and expenses.
C. Are required for the periodic inventory system.
D. List cost of goods sold as an operating expense.
E. Are only used in perpetual inventory systems.
125. Expenses to promote sales by displaying and advertising merchandise, making sales, and
delivering goods to customers are known as:
A. General and administrative expenses.
B. Cost of goods sold.
C. Selling expenses.
D. Purchasing expenses.
E. Non-operating activities.
126. A company has net sales of $752,000 and cost of goods sold of $543,000. Its net income
is $17,530. The company’s gross margin and operating expenses, respectively, are:
A. $209,000 and $191,470
B. $191,470 and $209,000
C. $525,470 and $227,000
D. $227,000 and $525,470
E. $734,000 and $191,470
127. Which of the following accounts is used in the periodic inventory system but not used in
the perpetual inventory system?
A. Merchandise Inventory
B. Sales
C. Sales Returns and Allowances
D. Accounts Payable
E. Purchases
128. When preparing an unadjusted trial balance using a periodic inventory system, the
amount shown for Merchandise Inventory is:
A. The ending inventory amount.
B. The beginning inventory amount.
C. Equal to the cost of goods sold.
D. Equal to the cost of goods purchased.
E. Equal to the gross profit.
129. On September 12, Vander Company, Inc. sold merchandise in the amount of $5,800 to
Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander
uses the periodic inventory system. The journal entry or entries that Vander will make on
September 12 is:
A. Sales………………………………………………….… 5,800
Accounts receivable.………………………. 5,800
B. Sales………………………………………………….… 5,800
Accounts receivable.………………………. 5,800
Cost of goods sold………………..….….…..…... 4,000
Merchandise Inventory……………………. 4,000
C. Accounts receivable………………………………. 5,800
Sales……………………..…..….….….….…... 5,800
D. Accounts receivable………………………………. 5,800
Sales……………………..…..….….….….…... 5,800
Cost of goods sold………………..….….…..…... 4,000
Merchandise inventory…………..….….... 4,000
E. Accounts receivable………………………………. 4,000
Sales……………………..…..….….….….…... 4,000
130. On September 12, Vander Company, Inc. sold merchandise in the amount of $5,800 to
Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander
uses the periodic inventory system. Jepson pays the invoice on September 18, and takes the
appropriate discount. The journal entry that Vander makes on September 18 is:
A. Cash 5,800
Accounts receivable.………………………. 5,800
B. Cash……………………………………….…..….…... 4,000
Accounts receivable.………………………. 4,000
C. Cash……………………………………….…..….…... 3,920
Sales discounts……………………………………… 80
Accounts receivable.………………………. 4,000
D. Cash……………………………………….…..….…... 5,684
Accounts receivable.………………………. 5,684
E. Cash……………………………………….…..….…... 5,684
Sales discounts……………………………………… 116
Accounts receivable.………………………. 5,800
131. On September 12, Vander Company, Inc. sold merchandise in the amount of $5,800 to
Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander
uses the periodic inventory system. On September 14, Jepson returns some of the
merchandise. The selling price of the returned merchandise is $500 and the cost of the
merchandise returned is $350. The entry or entries that Vander must make on September 14
is:
A. Sales returns and allowances……….….….….. 500
Accounts receivable.………………………. 500
Merchandise inventory……………….…..….…. 350
Cost of goods sold……………….….….….. 350
B. Sales returns and allowances……….….….….. 500
Accounts receivable.………………………. 500
C. Accounts receivable………………………………. 500
Sales returns and allowances………….… 500
D. Accounts receivable………………………………. 500
Sales returns and allowances………….… 500
Cost of goods sold………………..….….…..…... 350
Merchandise inventory…………..….….... 350
E. Sales returns and allowances……….….….….. 350
Accounts receivable.………………………. 350
132. On September 12, Vander Company, Inc. sold merchandise in the amount of $5,800 to
Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander
uses the periodic inventory system. On September 14, Jepson returns some of the
merchandise. The selling price of the merchandise is $500 and the cost of the merchandise
returned is $350. Jepson pays the invoice on September 18, and takes the appropriate
discount. The journal entry that Vander makes on September 18 is:
A. Cash 5,800
Accounts receivable.………………………. 5,800
B. Cash……………………………………….…..….…... 4,000
Accounts receivable.………………………. 4,000
C. Cash……………………………………….…..….…... 5,194
Sales discounts……………………………………… 10
6
Accounts receivable.………………………. 5,300
D. Cash……………………………………….…..….…... 5,684
Accounts receivable.………………………. 5,684
E. Cash……………………………………….…..….…... 5,684
Sales discounts……………………………………… 116
Accounts receivable.………………………. 5,800
133. Cushman Company, Inc. had $800,000 in net sales, $350,000 in gross profit, and
$200,000 in operating expenses. Cost of goods sold equals:
A. $150,000.
B. $450,000.
C. $800,000.
D. $350,000.
E. $200,000.
134. Cushman Company, Inc. had $800,000 in sales, sales discounts of $12,000, sales returns
and allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating
expenses. Gross profit equals:
A. $770,000.
B. $115,000.
C. $390,000.
D. $402,000.
E. $408,000.
135. Cushman Company, Inc. had $800,000 in sales, sales discounts of $12,000, sales returns
and allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating
expenses. Net income equals:
A. $770,000.
B. $402,000.
C. $390,000.
D. $115,000.
E. $408,000.
136. A company purchased $10,000 of merchandise on June 15 with terms of 3/10, n/45. On
June 20, it returned $800 of that merchandise. On June 24, it paid the balance owed for the
merchandise taking any discount it was entitled to. The cash paid on June 24 equals:
A. $8,924.
B. $9,700.
C. $10,000.
D. $9,800.
E. $8,724.
137. A company purchased $10,000 of merchandise on June 15 with terms of 3/10, n/45, and
FOB shipping point. The freight charge was $500. On June 20, it returned $800 of that
merchandise. On June 24, it paid the balance owed for the merchandise taking any discount it
is entitled to. The cash paid on June 24 equals:
A. $9,224.
B. $10,200.
C. $10,500.
D. $10,300.
E. $9,424.
138. A company’s current assets are $23,420, its quick assets are $13,890 and its current
liabilities are $12,220. Its acid-test ratio equals:
A. 0.88.
B. 1.91.
C. 1.14.
D. .52.
E. 1.41.
139. Using the following year-end information for Bauman, LLC, calculate the current ratio
and acid-test ratio:
Cash……………………………………………….….……. $ 48,000
Short-term investments…..……..…...…....…..…... 12,000
Accounts receivable…………..……..….…..…....…. 45,000
Inventory……………………………………………….…. 225,000
Prepaid expenses………………………………….……. 12,500
Accounts payable…….……..……..……....…....…... 86,500
Other current payables…………..……..…..…..…... 22,000
A. 3.01 and 1.21
B. 3.16 and .97
C. 3.04 and 1.21
D. 1.09 and 4.77
E. 3.16 and 1.21.
140. A company’s net sales are $775,420, its costs of goods sold are $413,890, and its net
income is $117,220. Its gross margin ratio equals:
A. 46.6%.
B. 53.4%.
C. 28.3%.
D. 31.5%.
E. 40.5%.
141. All of the following statements related to U.S. GAAP and IFRS are true except:
A. Accounting for basic inventory transactions is the same under the two systems.
B. The closing process for merchandisers is the same under both systems.
C. U.S. GAAP offers little guidance about the presentation order of expenses.
D. Neither system requires separate disclosure of items when their size, nature, or frequency
are important.
E. Neither system defines operating income.
142. A company purchases merchandise with a catalog price of $20,000. The company
receives a 35% trade discount from the seller. The seller also offers credit terms of 2/10, n/30.
Assuming no returns were made and that payment was made within the discount period, what
is the net cost of the merchandise?
A. $13,720.
B. $19,600.
C. $6,860.
D. $13,000.
E. $12,740.
143. A company has net sales of $825,000 and cost of goods sold of $547,000. Its net income
is $98,500. The company’s gross margin and operating expenses, respectively, are:
A. $209,000 and $191,470
B. $278,000 and $179,500
C. $278,000 and $98,500
D. $179,500 and $98,500
E. $645,500 and $179,500
144. On March 12, Klein Company, Inc. sold merchandise in the amount of $7,800 to Babson
Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the
perpetual inventory system. The journal entry or entries that Klein will make on March 12 is:
A. Sales………………………………………………….… 7,800
Accounts receivable.………………………. 7,800
B. Sales………………………………………………….… 7,800
Accounts receivable.………………………. 7,800
Cost of goods sold………………..….….…..…... 4,500
Merchandise Inventory……………………. 4,500
C. Accounts receivable………………………………. 7,800
Sales……………………..…..….….….….…... 7,800
D. Accounts receivable………………………………. 7,800
Sales……………………..…..….….….….…... 7,800
Cost of goods sold………………..….….…..…... 4,500
Merchandise inventory…………..….….... 4,500
E. Accounts receivable………………………………. 4,500
Sales……………………..…..….….….….…... 4,500
145. On March 12, Klein Company, Inc. sold merchandise in the amount of $7,800 to Babson
Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the
perpetual inventory system. Babson pays the invoice on March 17, and takes the appropriate
discount. The journal entry that Klein makes on March 17 is:
A. Cash 7,800
Accounts receivable.………………………. 7,800
B. Cash……………………………………….…..….…... 4,500
Accounts receivable.………………………. 4,500
C. Cash……………………………………….…..….…... 7,644
Sales discounts……………………………………… 156
Accounts receivable.………………………. 7,800
D. Cash……………………………………….…..….…... 7,644
Accounts receivable.………………………. 7,644
E. Cash……………………………………….…..….…... 4,410
Sales discounts……………………………………… 90
Accounts receivable.………………………. 4,500
146. On March 12, Klein Company, Inc. sold merchandise in the amount of $7,800 to Babson
Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the
perpetual inventory system. On March 15, Babson returns some of the merchandise. The
selling price of the returned merchandise is $600 and the cost of the merchandise returned is
$350. The entry or entries that Klein must make on March 15 is:
A. Sales returns and allowances……….….….….. 600
Accounts receivable.………………………. 600
Merchandise inventory……………….…..….…. 350
Cost of goods sold……………….….….….. 350
B. Sales returns and allowances……….….….….. 600
Accounts receivable.………………………. 600
C. Accounts receivable………………………………. 600
Sales returns and allowances………….… 600
D. Accounts receivable………………………………. 600
Sales returns and allowances………….… 600
Cost of goods sold………………..….….…..…... 350
Merchandise inventory…………..….….... 350
E. Sales returns and allowances……….….….….. 350
Accounts receivable.………………………. 350
147. On March 12, Klein Company, Inc. sold merchandise in the amount of $7,800 to Babson
Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the
perpetual inventory system. On March 15, Babson returns some of the merchandise. The
selling price of the merchandise is $600 and the cost of the merchandise returned is $350.
Babson pays the invoice on March 20, and takes the appropriate discount. The amount that
Klein receives from Babson on March 20 is:
A. $7,800.
B. $7,644.
C. $7,044.
D. $7,056.
E. $7,200.
148. On March 12, Klein Company, Inc. sold merchandise in the amount of $7,800 to Babson
Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the
perpetual inventory system. On March 15, Babson returns some of the merchandise. The
selling price of the merchandise is $600 and the cost of the merchandise returned is $350.
Babson pays the invoice on March 20, and takes the appropriate discount. The journal entry
that Klein makes on March 20 is:
A. Cash 7,800
Accounts receivable.………………………. 7,800
B. Cash……………………………………….…..….…... 4,500
Accounts receivable.………………………. 4,500
C. Cash……………………………………….…..….…... 7,056
Sales discounts……………………………………… 144
Accounts receivable.………………………. 7,200
D. Cash……………………………………….…..….…... 7,056
Accounts receivable.………………………. 7,056
E. Cash……………………………………….…..….…... 7,644
Sales discounts……………………………………… 156
Accounts receivable.………………………. 7,800
149. Zenith Company Inc.’s Merchandise Inventory account at the end of year 2015 has a
balance of $91,820, but a physical count reveals that only $90,450 of inventory exists. The
adjusting entry to record this $1,370 of inventory shrinkage is:
A. Merchandise Inventory……………………………….. 1,370
Inventory shrinkage expense…..…..…..…... 1,370
B. Purchases discounts……………………………………. 1,370
Cost of goods sold……..……..……...…..….... 1,370
C. Cost of goods sold…………………………………..…. 1,370
Merchandise Inventory…..……..……....….... 1,370
D. Inventory shrinkage expense…..……..……..…..... 1,370
Cost of goods sold……..……..……...…..….... 1,370
E. Cost of Goods Sold……..……..……....…....…..….. 90,450
Merchandise Inventory…..……..……....….... 91,820
150. Match the following definitions and terms by placing the letter for the terms A through J
in the blank space next to the best definition.
A. Trade discount F. Acid-test ratio
B. General and administrative expenses G. Merchandise inventory
C. FOB shipping point H. Selling expenses
D. Single-step income statement I. Multiple-step income statement
E. FOB destination J. Inventory shrinkage
__
_
1. A measure of a company’s ability to pay its current liabilities that excludes less liquid
current assets such as inventory and prepaid expenses.
__
_
2. A widely used income statement format that lists cost of goods sold as another
expense and shows only one subtotal for total expenses.
__
_
3. The point of transfer from seller to buyer that takes place when the goods arrive at the
buyer’s place of business.
__
_
4. Products a company owns and intends to sell.
__
_
5. The expenses that support a company’s overall operations and include costs related to
accounting, human resource management and financial management.
__
_
6. The point of transfer from seller to buyer that takes place when goods depart the
seller’s place of business.
__
_
7. Inventory losses that can occur as a result of theft or deterioration and require an
adjusting entry to account for those losses.
__
_
8. An income statement format that shows detailed computations of net sales and other
costs and expenses, and reports subtotals for various classes of items.
__
_
9. A given percent deducted from a list price often granted to customers purchasing
large quantities of merchandise.
__
_
10. The expenses of promoting sales by displaying and advertising merchandise,
making sales, and delivering goods to customers.
1. F; 2. D; 3. E; 4. G; 5. B; 6. C; 7. J; 8. I; 9. A; 10. H
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
5-67
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: 04-A1
Learning Objective: 04-C2
Learning Objective: 04-P1
Learning Objective: 04-P3
Learning Objective: 04-P4
Topic: Acid-Test Ratios
Topic: Reporting Inventory for a Merchandiser
Topic: Accounting for Merchandise Purchases
Topic: Adjusting Entries for Merchandisers
Topic: Financial Statement Formats
151. Match the following terms with the appropriate definition.
A. Debit memorandum
B. Credit period
C. Credit terms
D. Credit memorandum
E. Discount period
F. Gross profit
G. Periodic inventory system
H. Perpetual inventory system
I. Sales discount
J. Purchase discount
__
1. An inventory accounting method that continually updates accounting records for
inventory available for sale and inventory sold.
__
2. An inventory accounting method that updates the accounting records for merchandise
transactions only at the end of a period.
__
3. The time period in which reduced payment can be made by the buyer because of a
cash discount offered by a seller of goods on credit.
__ 4. A notification that informs the seller of a debit made to the seller’s account payable in
the buyer’s records.
__
5. A cash discount granted, from the view of the purchaser intended to encourage buyers
to pay amounts owed earlier.
__ 6. A notification that informs a buyer of a seller’s credit to a buyer’s account.
__ 7. A cash discount granted from the view of the seller, indicated in the credit terms on
the invoice.
__ 8. The calculation of net sales less cost of goods sold.
__ 9. The description of the amounts and timing of payments from a buyer to a seller for a
purchase.
__ 10. The amount of time allowed before full payment is due.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
5-68
1. H; 2. G; 3. E; 4. A; 5. J; 6. D; 7. I; 8. F; 9. C; 10. B
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: 04-C1
Learning Objective: 04-P1
Learning Objective: 04-P2
Learning Objective: 04-P4
Learning Objective: 04-P5
Topic: Merchandising Activities
Topic: Accounting for Merchandise Purchases
Topic: Accounting for Merchandise Sales
Topic: Financial Statement Formats
Topic: Periodic Inventory System
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
5-69
Short Answer Questions
152. Identify and explain the key components of a merchandiser’s net income.
153. Describe the difference between wholesalers and retailers.
154. Describe the key attributes of inventory for a merchandising company.
155. What are the steps of the operating cycle for a merchandiser with credit sales?
156. Describe the difference between the periodic and perpetual inventory accounting
systems.
157. Explain the way in which costs flow through the merchandise inventory account to a
merchandiser’s income statement.
158. What is the acid-test ratio? How does it measure a company’s liquidity?
159. What is gross margin ratio? How is it used as an indicator of profitability?
160. What does the acronym FOB stand for? Describe the differences between FOB shipping
point (or FOB factory) and FOB destination.
FOB stands for free on board, and it determines who pays transportation and other incidental
costs of shipping goods. If goods are shipped FOB shipping point, also called FOB factory,
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.
Blooms: Understand
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 2 Medium
Learning Objective: 04-P1
Topic: Accounting for Merchandise Purchases
161. Describe the recording process (including costs) for the types of transactions involved in
purchasing merchandise inventory when a perpetual inventory system is used.
162. Describe the recording process (including costs) for the types of transactions associated
with sales of merchandise inventory using a perpetual inventory system.
163. What is inventory shrinkage? How do managers account for shrinkage?
164. How do closing entries for a merchandising company that uses the perpetual inventory
system differ from the closing entries for a service company?
165. Explain the difference between the single-step and multiple-step income statements.
166. Distinguish between selling expenses and general and administrative expenses.
167. Describe the difference(s) between the periodic and the perpetual inventory accounting
systems.
168. Describe why tracking inventory activities are necessary for a merchandising company.
169. Farmen Company, Inc. had net sales of $600,000 and cost of goods sold of $450,000.
Calculate Farmen’s gross profit.
170. National Storage Company, Inc. 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.
171. Harley’s Antique Shop, Inc. had net sales of $772,000. The gross profit was $415,000.
Calculate Harley’s cost of goods sold.
172. Fill in the blanks (a) through (g) for the Morrison Company, Inc. for each of the income
statements for 2014, 2015, and 2016.
Morrison Company, Inc.
Income Statements
For the years ended December 31
2014 2015 2016
Sales………………………………………………………………… $7,500 $10,000 (f)
Cost of goods sold………………………………………………
Merchandise inventory (beginning).…..…..…..…....(a) 375 750
Total cost of merchandise purchases…...…....…..…. 2,400 3,625 4,875
Merchandise inventory (ending)…...…..…..…..….... (b)
____
750 625
Cost of goods sold………………………………………….. 2,770 (d)____ 5,000
Gross profit……………………………………………….……...(c) 6,750 5,200
Operating expenses…………..……..……..……...…..…..… 3,750 3,750 (g)____
Net income $ 980 (e) . $ 2,500
173. Fill in the blanks (a) through (g) for the Corman Company, Inc. for each of the income
statements for 2014 and 2015.
Corman Company, Inc.
Income Statements
For the years ended December 31
2014 2015
Sales………………………………………………………………… $10,000 (e)
Cost of goods sold………………………………………………
Merchandise inventory (beginning).…..…..…..….... 375 750
Total cost of merchandise purchases…...…....…..…. 3,625 4,875
Merchandise inventory (ending)…...…..…..…..….... 750 (d)
Cost of goods sold………………………………………….. (a)____ 5,000
Gross profit……………………………………………….……... 6,750 5,200
Operating expenses…………..……..……..……...…..…..… 3,750 (c)____
Net income (b) . $ 2,500
174. The following information is available for Flanders and its two main competitors in the
industry, Sanders and Anders:
Flander
s
Sanders Anders
Cash……………………………………………….….……. $9,800 $10,500 $26,500
Short-term investments…..……..…...…....…..…... 6,400 8,200 12,500
Accounts receivable…………..……..….…..…....…. 12,500 8,500 14,350
Merchandise inventory…..……..……..……..……... 30,150 40,000 40,150
Prepaid expense…….……..……...…..…..…..…...... 900 6,750 2,450
Accounts payable…….……..……..……....…....…... 19,400 13,750 26,800
Salaries payable…………..……....…....…..…..….... 1,200 3,500 6,250
Other current payables…………..……..…..…..…... 600 1,200 2,150
The industry standard for the current ratio is 1.8 and the industry standard for the acid-test
ratio is 1.
Required:
1. Calculate the current ratio and acid-test ratio for each firm.
2. Rank the firms in decreasing order of liquidity.
3. Comment on Flanders’ relative liquidity position.
175. The following information refers to Percy’s Records and its competitors in the music
store business.
Current Ratio Quick ratio
Percy’s Records…………… 2.0 0.95
Jewel CDs……… 1.5 1.00
Rudy’s Raps….. 1.8 1.20
Marvin’s Jazz………… 1.9 0.80
Industry Average………… 2.0 1.00
Required:
Comment on the relative liquidity positions of these companies.
176. A company reported the following year-end information:
Cash…………………………………………….. $ 52,000
Short-term investments………………………… 12,000
Accounts receivable……………………………. 54,000
Inventory………………………………..……… 325,000
Prepaid expenses………………………………. 17,500
Accounts payable………………………..…….. 106,500
Other current payables………………………… 25,000
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?
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.
2.
Quick assets: Cash………………………… $ 52,000
Short-term investments……… 12,000
Accounts receivable………… 54,000
Total quick assets…………… $118,000
Current liabilities: Accounts payable…………… $106,500
Other current payables………… 25,000
$131,500
Quick assets $118,000 = 0.90
Current liabilities $131,500
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.
Blooms: Apply
AACSB: Analytical Thinking
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: 3 Hard
Learning Objective: 04-A1
Topic: Acid-Test Ratios
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McGraw-Hill Education.
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177. Calculate the gross margin ratio for each of the following separate cases A through C:
Net sales…………… $145,000 $623,500 $37,800
Cost of goods sold… 83,600 269,200 13,230
178. A company reported the following information for the month of July:
Sales…………………………………. $50,475
Sales discounts………………………. 1,235
Sales returns and allowances………… 2,840
Cost of goods sold…………………… 33,975
Required: Calculate this company’s gross profit.
179. A company reported the following information for the month of July:
Net Sales……………………………… $57,500
Cost of goods sold…………………… 33,200
Required: Calculate this company’s gross margin ratio.
180. The following information is for Barrel and its competitor Crate.
Barrel Crate
Year 1 Year 2 Year 1 Year 2
Net sales $347,850 $365,418 $579,750 $664,395
Cost of sales 121,747 146,167 318,862 312,265
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?
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1. Barrel Crate
Year 1 Year 2 Year 1 Year 2
Net sales $347,850 $365,418 $579,750 $664,395
Cost of sales 121,747 146,167 318,862 312,265
Gross Margin $226,103 $219,251 $260,888 $352,130
Barrel Crate
Year 1 Year 2 Year 1 Year 2
Gross profit $226,103 = 65% $219,251 = 60% $260,888 = 45% $352,130 = 53%
ratio $347,850 $365,418 $579,750 $664,395
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.
Blooms: Apply
AACSB: Analytical Thinking
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: 3 Hard
Learning Objective: 04-A2
Topic: Gross Margin Ratios
181. A company that uses the perpetual inventory system 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.
182. Sabor Company, Inc. uses a perpetual inventory system and 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.
183. Tahoe Ski Company uses the perpetual inventory system and had the following
transactions during January:
January 6: Purchased $4,000 of inventory. The seller’s credit terms are 2/10, n/30.
January 8: Returned $200 worth of defective units and received full credit.
January 15: Paid the amount due, less the returned items.
Prepare journal entries to record each of the preceding transactions.
184. Serene Spa Sales, Inc. uses the perpetual inventory system and had the following
transactions during August.
Aug 1 Sold merchandise on credit for $5,000, terms 3/10, n/30. The items sold had a cost
of $3,500.
3 Purchased merchandise for cash, $2,720.
4 Purchased merchandise on credit for $2,600, terms 1/20, n/30.
5 Issued a credit memorandum for $3,000 to a customer who returned merchandise
purchased July 20. The returned items had a cost of $2,010.
10 Received payment for merchandise sold August 1.
15 Received a credit memorandum from the seller for the return of faulty
merchandise purchased on August 4 for $600.
18 Paid freight charges of $200 for merchandise ordered last month. (FOB shipping
point)
23 Paid for the merchandise purchased August 4 less the portion that was returned.
24 Sold merchandise on credit for $7,000, terms 2/10, n/30. The items had a cost of
$4,900.
31 Received payment for merchandise sold on August 24.
Required:
Prepare the general journal entries to record these transactions.
185. Craig’s Snowboards, Inc. uses the perpetual inventory system and had the following
sales transactions during June:
June 2 Sold merchandise to General Sports Store on credit for $4,800, terms 1/15, n/60.
The items sold had a cost of $2,700.
June 4 General Sports Store returned merchandise that had a selling price of $200. The
cost of the merchandise returned was $110.
June 13 General Sports Store paid for the merchandise sold on June 2 less the return,
taking any appropriate discount earned.
Prepare the journal entries that Craig’s Snowboards, Inc. must make to record these
transactions.
186. Forrest’s Cycle Shop, Inc. uses a perpetual inventory accounting system and had the
following transactions during the month of July:
July 3 Sold merchandise to a customer on credit for $600, terms 2/10, n30. The cost of
the merchandise sold was $350.
July 4 Sold merchandise to a customer for cash of $425. The cost of the merchandise was
$250.
July 6 Sold merchandise to a customer on credit for $1,300, terms 2/10, n/30. The cost of
the merchandise sold was $750.
July 8 The customer from July 3 returned merchandise with a selling price of $100. The
cost of the merchandise returned was $55.
July 15 The customer from July 6 paid the full amount due, less any appropriate discounts
earned.
July 31 The customer from July 3 paid the full amount due, less any appropriate discounts
earned.
Prepare the required journal entries that Forrest’s Cycle Shop, Inc. must make to record these
transactions.
187. Following is the year-end adjusted trial balance for Fred’s Corner Grocery, Inc. for the
current year:
Fred’s Corner Grocery, Inc.
Adjusted Trial Balance
December 31
Dr. Cr.
Cash…………………………………………………….. $ 67,500
Accounts receivable…………………………………… 46,000
Merchandise inventory………………………………… 60,000
Store supplies…………………………………………. 800
Accounts payable……………………………………… 16,000
Salaries payable……………………………………….. 850
Common stock
Retained earnings……………………………………..
1,000
124,630
Dividends……………… 45,000
Sales…………………………………………………….. 550,000
Sales returns & allowances…………………………… 4,500
Sales discounts………………………………………… 4,250
Cost of goods sold..……………………………………. 382,450
Sales salaries expense………………………………… 44,000
Advertising expense……………………………………. 8,150
Store salaries expense………………………………… 24,325
Store supplies expense……………………………….. 450
Interest expense………………………………………… 5,055
Totals…………………………………………………….. $692,480 $692,480
Prepare the closing entries at December 31 for the current year.
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188. The year-end adjusted trial balance of Gordon Produce, Inc. for the current year, is
shown below:
GORDON PRODUCE
Adjusted Trial Balance
December 31
Debit
Credit
Cash…………………………………………..….….….…..….… $ 1,500
Store supplies…………………………………………………... 500
Merchandise inventory…………………………..…..….…. 11,000
Store equipment…………………………………………….…. 18,000
Accum. depr.—store equipment…………………………. $ 3,000
Accounts payable…………….………………………………. 6,000
Common stock
Retained earnings………………………….….…..….….…..
1,000
49,000
Dividends………………………………………………..….….. 22,000
Sales……………………………………………….….….….….... 60,500
Cost of goods sold………………………………..….….…... 48,000
Depreciation expense—Store equipment…………….. 1,000
Store supplies expense………………………………………. 1,500
Salaries expense…………………………………………..…... 14,000
Rent expense………………………………………………..…..
2,000
$119,500 $119,500
Prepare closing entries at December 31 for the current year.
189. From the adjusted trial balance for Brookstone Art Supplies, Inc. given below, prepare
a multiple-step income statement in good form.
Brookstone Art Supplies, Inc.
Adjusted Trial Balance
December 31
Debit Credit
Cash $ 9,400
Accounts receivable 25,000
Merchandise inventory 36,000
Office supplies 900
Store equipment 75,000
Accumulated depreciation—store equipment $ 22,000
Office equipment 60,000
Accumulated depreciation—office equipment 15,000
Accounts payable 42,000
Notes payable 10,000
Common stock
Retained earnings
1,000
109,700
Dividends 48,000
Sales 325,000
Sales discounts 6,000
Sales returns and allowances 16,500
Cost of goods sold 195,000
Selling expenses 32,500
General and administrative expenses 19,800
Interest expense 600
Totals $524,700 $524,700
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190. From the adjusted trial balance for Fabricated Products Company, Inc. given below,
prepare the necessary closing entries.
Fabricated Products Company, Inc.
Adjusted Trial Balance
December 31
Debit Credit
Cash $19,400
Accounts receivable 25,000
Merchandise inventory 26,000
Office supplies 1,900
Store equipment 84,000
Accumulated depreciation—store equipment $ 22,000
Office equipment 40,000
Accumulated depreciation—office equipment 15,000
Accounts payable 12,000
Notes payable 40,000
Common stock
Retained earnings
1,000
109,700
Dividends 28,000
Sales 245,000
Sales discounts 6,000
Sales returns and allowances 16,500
Cost of goods sold 145,000
Sales salaries expense 32,500
Depreciation expense—store equipment 11,000
Depreciation expense—office equipment 7,500
Office supplies expense 1,300
Interest expense 600
Totals
$444,700
$444,700
191. Johnnycake Restaurant uses a periodic inventory system. Prepare general journal entries
to record the following transactions for Johnnycake:
Aug. 10 Johnnycake purchased merchandise on credit from Foster Foods for $9,000, terms
2/10, n/30, FOB destination. Transportation costs of $350 were paid by Foster.
12 Johnnycake returned $600 of merchandise from the June 10 purchase.
19 Johnnycake paid Foster for the June 10 purchase.
192. Austin’s Pub Supply uses the periodic inventory system and had the following sales
transactions during August:
August 2 Sold merchandise to Jo’s Pub and Grub on credit for $3,750, terms 2/15, n/60.
The items sold had a cost of $1,200.
August 4 Jo’s Pub and Grub returned merchandise that had a selling price of $300. The
cost of the merchandise returned was $110.
August 13 Jo’s Pub and Grub paid for the merchandise sold on August 2, taking any
appropriate discount earned.
Prepare the journal entries that Austin’s Pub Supply must make to record these transactions.
193. Preston Office Furniture, Inc. uses the periodic inventory system and had the following
transactions during the month of May:
May 3 Sold merchandise to a customer on credit for $600, terms 2/10, n/30. The cost of
the merchandise sold was $350.
May 4 Sold merchandise to a customer for cash of $425. The cost of the merchandise
was $250.
May 6 Sold merchandise to a customer on credit for $1,300, terms 2/10, n/30. The cost
of the merchandise sold was $750.
May 8 The customer from May 3 returned merchandise with a selling price of $100. The
cost of the merchandise returned was $55.
May 15 The customer from May 6 paid the full amount due, less any appropriate
discounts earned.
May 31 The customer from May 3 paid the full amount due, less any appropriate
discounts earned.
Prepare the required journal entries that Preston Office Furniture, Inc. must make to record
these transactions.
194. 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.
Merchandise Inventory…………………….….... $60,000
Sales…………………………………………………….. 940,000
Sales discounts…………………………..…..….…. 16,000
Sales returns and allowances……….….…..…. 8,000
Cost of goods sold…..…………………………….
456,000
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.
195. Prepare journal entries to record the following merchandising transactions of Margin
Company, Inc., which applies the perpetual inventory system. Margin Company, Inc. offers
all of its credit customers credit terms of 2/10, n/30.
May 1 Purchased merchandise from Craft Company for $7,800 under credit terms of
1/10, n/30, FOB shipping point, invoice dated May 1.
May 2 Purchased merchandise from Bow Company for $10,600 under credit terms 2/05,
n/20, FOB destination.
May 3 Sold merchandise to Sting Company for $5,600, FOB shipping point, invoice
dated May 4. The merchandise had cost $3,000.
May 4 Paid $300 cash for the freight charges on the May 1 purchase of merchandise.
May 5 Received an $800 credit memorandum from Craft Company for the return of part
of the merchandise purchased on May 1.
May 6 Paid Bow Company the balance due within the discount period.
May 8 Sold merchandise to Skeet Company for $3,300, FOB shipping point, invoice
dated May 8. The merchandise had a cost of $1,500.
May 11 Paid Craft Company the balance due within the discount period.
May 13 Received the balance due from Sting Company within the discount period.
May 14 Issued a credit $300 credit memorandum to Skeet Company for an allowance on
defective merchandise.
May 17 Received the balance due from Skeet Company within the discount period.
196. Prepare journal entries to record the following merchandising transactions of Margin
Company, Inc., which applies the perpetual inventory system. Margin Company, Inc. offers
all of its credit customers credit terms of 2/10, n/30.
May 1 Purchased merchandise from Craft Company for $7,800 under credit terms of
1/10, n/30, FOB shipping point, invoice dated May 1.
May 2 Purchased merchandise from Bow Company for $10,600 under credit terms 2/05,
n/20, FOB destination.
May 4 Paid $300 cash for the freight charges on the May 1 purchase of merchandise.
May 5 Received an $800 credit memorandum from Craft Company for the return of part
of the merchandise purchased on May 1.
May 6 Paid Bow Company the balance due within the discount period.
May 11 Paid Craft Company the balance due within the discount period.
197. Prepare journal entries to record the following merchandising transactions of Margin
Company, Inc., which applies the perpetual inventory system. Margin Company, Inc. offers
all of its credit customers credit terms of 2/10, n/30.
May 3 Sold merchandise to Sting Company for $5,600, FOB shipping point, invoice
dated May 4. The merchandise had cost $3,000.
May 8 Sold merchandise to Skeet Company for $3,300, FOB shipping point, invoice
dated May 8. The merchandise had a cost of $1,500.
May 13 Received the balance due from Sting Company within the discount period.
May 14 Issued a credit $300 credit memorandum to Skeet Company for an allowance on
defective merchandise.
May 17 Received the balance due from Skeet Company within the discount period.
198. From the adjusted trial balance given below for the Grayson Company, Inc., prepare a
multiple-step income statement in good form. Salaries expense and building depreciation
expense should be equally divided between selling activities and the general and
administrative activities.
Grayson Company, Inc.
Adjusted Trial Balance
December 31
Debit Credit
Cash $19,500
Accounts receivable 27,000
Merchandise inventory 38,000
Office supplies 1,200
Store equipment 80,000
Accumulated depreciation—store equipment $ 25,000
Building 260,000
Accumulated depreciation—building 121,600
Accounts payable 28,500
Salaries payable 10,000
Common stock
Retained earnings
1,000
168,900
Dividends 45,000
Sales 450,000
Sales discounts 8,000
Sales returns and allowances 24,500
Cost of goods sold 210,000
Salaries expense 38,000
Depreciation expense—store equipment 16,000
Depreciation expense—building 24,000
Advertising expense 12,300
Office supplies expense 3,500
Gain on disposal of store equipment 3,000
Interest expense
1,000
Totals $808,000 $808,000
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199. Vincent Company, Inc. 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, Inc. paid within the discount period. Assume that both buyer and
seller use a perpetual inventory system.
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.)
1. a. Merchandise Inventory…………………………………………… 300,000
Accounts Payable…….……..……..……..…..…..…..…. 300,000
1. b. Accounts Payable………………………………………………….. 300,000
Merchandise inventory…………..…..…..…..…....…... 6,000
Cash…………………………………………………………….. 294,000
2. a. Accounts Receivable……..……..……..……...…..…..…..…... 300,000
Sales…………………………………………..….…….……... 300,000
Cost of goods sold…………………………………………….…... 200,000
Merchandise inventory…………..…..…..…..…....…... 200,000
2. b. Cash……………………………………………………………………. 294,000
Sales discounts……………………………………………………… 6,000
Accounts receivable…….……..……..……..…..…..…... 300,000
Discount = $300,000 * .02 = $6,000
3. By borrowing the money on the last day of the discount period and repaying it on the last day of the
credit period, the loan would be outstanding for 20 days (30-10). Interest on the loan is calculated at
9% for 20 days. The amount saved is the difference between the discount received for paying on time
and the amount of interest expense that would be paid to the bank.
Discount taken $6,000.00
Interest expense ($294,000 *.09 * 20/365) 1,449.86
Amount saved $4,550.14
Blooms: Apply
AACSB: Analytical Thinking
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 04-P1
Learning Objective: 04-P2
Topic: Accounting for Merchandise Purchases
Topic: Accounting for Merchandise Sales
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McGraw-Hill Education.
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200. Prepare journal entries to record the following merchandise transactions of Martinez
Excavation Equipment, Inc., which applies the perpetual inventory system.
May 1 Purchased merchandise from Kona Company for $12,700 under credit terms of
2/15, n/45, FOB destination, and invoice dated May 1.
3 Sold merchandise to Walton for $8,000 under credit terms of 1/10, n/30, FOB
destination, invoice date May 3. The merchandise had cost $5,000.
5 Paid $350 cash for shipping charges related to the May 3 sale.
6 Returned $2,000 of the merchandise purchased on May 1 to Kona Company.
7 Walton returned merchandise from the May 3 sale that had cost Martinez $625 and
had been sold for $1,000. The merchandise was restored to inventory.
13 Received the balance due from Walton less the return.
14 Paid the amount due Kona Company.
201. A ___________ is an intermediary that buys products from manufacturers and sells to
retailers.
202. A ________________company’s operating cycle begins with the purchase of
merchandise and ends with the collection of cash from merchandise sales.
203. Products that a company owns and intends to sell are called _____________________.
204. A ___________ inventory system updates the accounting record for inventory only at the
end of an accounting period.
205. The __________________ inventory system continually updates accounting records for
merchandise transactions for the amounts of inventory available for sale and inventory sold.
206. Beginning inventory plus the net cost of purchases is the _____________________.
207. A period’s beginning inventory is equal to the prior period’s ___________________.
208. The liquidity of a company can be measured using the current ratio and the
____________________, which only includes the most liquid current assets in its
calculation.
209. The gross margin ratio equals net sales less ___________ divided by net sales.
210. _________________ are the amounts and timing of payment from a buyer to a seller.
211. A buyer issues a _______________________ to inform the seller of a debit made to the
seller’s account payable in the buyer’s records.
212. 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.
213. 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.
214. Merchandise that customers return to the seller after a sale is referred to
as___________________.
215. 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_____________________________.
216. A seller usually prepares a ____________________ to confirm a buyer’s return or
allowance, and informs the buyer of the seller’s credit to the buyer’s Account Receivable on
the seller’s books.
217. ____________________ can benefit a seller by decreasing the delay in receiving cash
and reducing future collection efforts.
218. Inventory shrinkage can be computed by comparing the ___________ of inventory with
recorded quantities and amounts.
219. ________________________ expenses are those costs that support a company’s overall
operations and include expenses related to accounting, human resource management, and
financial management.
220. A _____________________ income statement format shows detailed computations of
net sales and other costs and expenses, and reports subtotals for various classes of items.
221. A ______________________ income statement includes cost of goods sold as another
expense and shows only one subtotal for total expenses.
222. Non-operating activities that include interest, dividend, and rent revenues, and gains
from asset disposals are called _____________________________.
223. Non-operating activities that include interest expense, losses from asset disposals, and
casualty losses are reported as ____________________________.
224. When a company has no reportable nonoperating activities, its income from operations is
reported as ___________________ .
225. Under the ______________ inventory accounting system, each purchase, purchase return
and allowance, purchase discount, and transportation-in transaction is recorded in a separate
temporary account.