1
College Accounting, 14e (Slater)
Chapter 12 Completion of the Accounting Cycle for a Merchandise Company
12.1 Learning Objective 12-1
1) The income statement is prepared from the:
A) Post-Closing Trial Balance.
B) worksheet.
C) general journal.
D) unadjusted Trial Balance.
2) To determine how much merchandise was returned from a company’s customers, the company should
review the:
A) Purchases Returns and Allowances Account.
B) Merchandise Inventory Account.
C) Sales Returns and Allowances Account.
D) Freight-in.
3) Net Sales are:
A) Gross Sales + Sales Discounts + Sales Returns and Allowances.
B) Gross Sales – Sales Discounts – Sales Returns and Allowances.
C) Revenue – Sales Discounts + Sales Returns and Allowances.
D) Gross Sales + Sales Discounts – Sales Returns and Allowances.
4) Net Sales + Sales Discounts + Sales Returns and Allowances equals:
A) Net Income.
B) Gross Sales.
C) Net Income from Operations.
D) None of the above
5) Johnson Supplies has $530,000 in net sales and $300,000 in gross profit. Cost of Goods Sold equals:
A) $830,000.
B) $300,000.
C) $230,000.
D) None of these is correct.
6) Net Sales – Cost of Goods Sold is equal to:
A) Net Income from Operations.
B) Operating Expenses.
C) Gross Profit.
D) Selling Expenses.
7) Net Purchases + Purchases Returns and Allowances + Purchase Discounts equals:
A) Net Loss.
B) Net Income.
C) Gross Profit.
D) Gross Purchases.
8) Cost of Goods Sold is calculated on the:
A) Post-Closing Trial Balance.
B) Trial Balance.
C) Income Statement.
D) Balance Sheet.
9) Gross Profit equals:
A) Net sales – Net Purchases.
B) Sales – Sales Returns and Allowances – Sales Discounts – Cost of Goods Sold.
C) Cost of Goods Sold – Other Expenses.
D) Cost of Goods Sold – Operating Expenses.
10) Cost of Goods Sold includes:
A) Freight-in.
B) Freight-out.
C) Supplies Expense.
D) Sales Discounts.
11) Freight-in is:
A) a Cost of Selling Goods.
B) a Cost of Purchasing Goods.
C) recorded as an Operating Expense.
D) a Selling Expense.
12) The calculation of Net Purchases does NOT include:
A) Purchases Returns and Allowances.
B) Purchases Discounts.
C) Purchases.
D) Merchandise Inventory.
13) Which of the following is NOT an operating expense?
A) Payroll Tax Expense
B) Inventory
C) Supplies Expense
D) Depreciation Expense – Office Equipment
14) What is the name of the revenue account used by merchandise companies?
A) Sales
B) Interest Income
C) Merchandise Inventory
D) Sales Discount
15) Which of the following is an operating expense?
A) Salaries Expense
B) Payroll Tax Expense
C) Freight-in
D) Both A and B are correct.
16) Which amount is directly found on the worksheet?
A) Cost of Goods Sold
B) Gross Profit
C) Net Sales
D) None of the above
17) In which section does Interest Revenue appear in the Income Statement?
A) Other Income
B) Other Expense
C) Revenue
D) Administrative Expenses
18) Which of the following is an operating expense?
A) Interest Expense
B) Purchases Returns and Allowances
C) Salaries Expense
D) Prepaid Insurance Expense
19) The amount found in the Income Statement debit column on the worksheet for Income Summary is
the:
A) total amount of expenses.
B) total amount of revenues.
C) beginning inventory.
D) ending inventory.
20) Selling expenses include:
A) Advertising Expense.
B) Freight-in.
C) Office Supplies Expense.
D) Sales Returns and Allowances.
21) Administrative Expenses include:
A) Sales – Salaries Expense.
B) Delivery Expense.
C) Advertising Expense.
D) Accounting – Staff Salaries Expenses.
22) Other Income is used to:
A) record payments from sales customers.
B) record any revenue from activities other than sales.
C) record all revenue.
D) record owner investments.
23) Other Expense is used to record:
A) selling expenses.
B) administrative expenses.
C) operating expenses.
D) interest expenses.
24) The information to prepare the Statement of Owner’s Equity comes from the:
A) income statement columns on the worksheet.
B) adjustments columns on the worksheet.
C) balance sheet columns on the worksheet.
D) general ledger.
25) A classified balance sheet provides more information about the company to:
A) owners.
B) creditors.
C) suppliers.
D) All of the above answers are correct.
26) An item that can be converted into cash or used up during the normal operating cycle is:
A) a current asset.
B) Revenue.
C) a current liability.
D) an expense.
27) Liquidity is:
A) the ability in which a current debt can be paid.
B) how easily an asset can be converted to cash.
C) how much cash a company has on its balance sheet.
D) how quickly customers pay.
28) Plant and Equipment includes which of the following?
A) Mortgage Payable
B) Supplies
C) Accumulated Depreciation on Equipment
D) All of these are correct.
29) In what category on a classified balance sheet is Accounts Receivable found?
A) Plant, Property and Equipment
B) Current Liabilities
C) Current Assets
D) Long Term Assets
30) A company paid next month’s rent in advance. This would be classified as a(n):
A) Current asset.
B) Expense.
C) Revenue.
D) Contra-Asset.
31) Plant, Property and Equipment is usually listed:
A) in alphabetical order.
B) in order of liquidity.
C) by how long they will last.
D) lowest to highest dollar values.
32) The ending merchandise inventory was overstated. This error would cause:
A) net income to be understated.
B) revenue to be understated.
C) net income to be overstated.
D) Cost of Goods Sold to be overstated.
33) The ending merchandise inventory was understated. This error would cause:
A) assets to be understated.
B) assets to be overstated.
C) net income to be overstated.
D) Cost of Goods Sold to be overstated.
34) Barnes’ Shoes allows a customer a discount from the original price for a defective product; Barnes
issues the customer a(n):
A) credit memorandum.
B) debit memorandum.
C) sales invoice.
D) inventory slip.
35) The excess of net revenue over the cost of goods sold is called:
A) operating profit.
B) net loss.
C) merchandising income.
D) gross profit.
36) If Net Sales is $10,500, Cost of Goods Sold is $5,400, Gross Profit is $5,100 and Operating Expenses are
$1,800, what is the Net Income from Operations?
A) $6,900
B) $3,300
C) $1,800
D) $5,100
37) To determine how much merchandise a company has returned to its vendors, it should review the:
A) Purchases Returns & Allowances account.
B) Change in the Inventory balance.
C) Sales Returns & Allowances account.
D) Sales Discounts account.
38) Merchandise purchased for resale under the perpetual inventory method is added to:
A) Merchandise Inventory.
B) Supplies.
C) Purchases.
D) Inventory Expense.
39) Merchandise purchased for resale under the perpetual inventory method is added to:
A) Merchandise Inventory.
B) Sales.
C) Purchases.
D) Supplies Expense.
40) In what category on a classified balance sheet is Store Equipment found?
A) Plant and Equipment
B) Current Liabilities
C) Current Assets
D) Long Term Liabilities
41) In what category in a classified balance sheet is Mortgage Payable found?
A) Plant and Equipment
B) Current Liabilities
C) Long-term Liabilities
D) Both B and C are correct.
42) The left and right columns on the financial statements are used for debits and credits.
43) The amount for Cost of Goods Sold is found on the worksheet after Revenue.
44) Land is listed first under Plant, Property and Equipment.
45) The formal income statement can be prepared from the balance sheet columns of the worksheet.
46) Gross profit equals Net Sales minus Inventory Available for Sale.
47) The Statement of Owner’s Equity ending capital is equal to the capital on the worksheet.
48) Administration expenses are found in the Operating Expense section of the income statement.
49) A balance sheet where assets and liabilities are broken down into more detail is called a
comprehensive balance sheet.
50) Cost of goods available for sale is equal to beginning inventory + Operating Expense.
51) The average time it takes to buy and sell merchandise and collect Accounts Receivable is the sales
cycle for a business.
52) The Statement of Owner’s Equity is the same for a service business as for a merchandise business.
53) When calculating Cost of Goods Sold on the Income Statement, the beginning inventory and not the
ending inventory value is required.
54) The following amounts are on the John’s Clothing worksheet for the month ended March 31
Required: Calculate the following:
a) Net sales
b) Net purchases
c) Net cost of purchases
d) Cost of goods available for sale
e) Cost of goods sold
f) Gross profit
Account Income Statement
Debit Credit
Income Summary 11 13
Sales 50
Sales Returns and Allowances 4
Sales Discounts 2
Purchases 12
Purchases Discount 2
Purchases Returns and Allowances 4
Freight-In 2
55) The following amounts are on the Bear Sporting Goods worksheet for the month ended October 31.
Required: Calculate the following:
a) Net sales
b) Net purchases
c) Net cost of purchases
d) Cost of goods available for sale
e) Cost of goods sold
f) Gross profit
Account Income Statement
Debit Credit
Income Summary 14 12
Sales 60
Sales Returns and Allowances 6
Sales Discounts 2
Purchases 30
Purchases Discount 4
Purchases Returns and Allowances 2
Freight-In 4
56) The following accounts are on the Balance Sheet section of Scents Galore worksheet for the date
November 30, 201X. Please prepare a Classified Balance Sheet using the information below.
Additional information: Withdrawals for the period are $4, and Net Income is $12.
Account Balance Sheet Debit Balance Sheet Credit
Cash 6
Accounts Receivable 15
Merchandise Inventory 14
Store Equipment 30
Accumulated Depreciation – Store Equipment 6
Accounts Payable 19
Mortgage Payable 24
Scents Galore, Capital 8
57) The following accounts are on the Balance Sheet section of Great Plains Camping worksheet for the
month ended January 31, 201x. Required: Prepare a classified balance sheet.
Account Balance Sheet Debit Balance Sheet Credit
Cash 2
Accounts Receivable 20
Merchandise Inventory 2
Store Equipment 6
Accumulated Depreciation – Store Equipment 2
Accounts Payable 9
Mortgage Payable 16
Great Plains, Capital 2
Additional information: Withdrawals for the period are $2, and Net Income is $3.
58) Identify the category(s) of each of the accounts below.
Current Asset
Plant and Equipment
Current Liabilities
Long-Term Liabilities
Item Category
0) Cash Current Asset
a) Supplies ________
b) Accts. Payable ________
c) Mortgage Payable ________
d) Building ________
e) Prepaid Insurance Exp. ________
59) Identify the category(s) of each of the accounts below.
Current Asset
Plant and Equipment
Current Liabilities
Long-Term Liabilities
Item Category
0. Cash Current Asset
a) Equipment ________
b) Accumulated Depr. ________
c) Mortgage Payable ________
d) Accounts Payable ________
e) Merchandise Inventory ________
60) Discuss the purpose of a detailed income statement. Briefly describe the major kinds of business
activities covered on a detailed income statement.
61) Discuss the purpose of a classified balance sheet. Include a description of the major balance sheet
classifications including: current assets, plant and equipment, current liabilities, and long-term liabilities.
62) Determine the ending Capital amount of a business having:
Beginning Capital amount of $25,000
Withdrawals of $ 2,500
Net sales of $250,000
Net purchases of $85,000
Freight-in of $2,000
Beginning inventory of $6,000
Ending inventory of $7,000
Operating expenses of $ 30,000
$ ________
63) Determine the ending Capital balance of a business having:
Beginning Capital of $75,000
No investments or withdrawals
Beginning inventory of $10,000
Net Purchases of $100,000
Ending inventory of $12,000
Operating expenses of $70,000
Net sales $107,000
$ ________
64) Determine the ending inventory of a business having:
Beginning Capital $6,000
Net sales of $60,000
Net purchases of $31,000
Freight-in of $2,000
Beginning inventory of $4,000
Ending Capital of $21,000
Operating expenses of $10,000
No additional investments or withdrawals.
$ ________
65) Determine the beginning inventory of a business having:
Beginning Capital balance of $11,000
No additional investments or withdrawals
Net sales of $43,500
Net purchases $26,000
Ending inventory of $4,250
Ending Capital balance of $10,000
Operating expenses of $16,500
$ ________