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Name:
Class:
Date:
chapter 4
Indicate whether the statement is true or false.
1. Repayments of bonds would be shown as a cash outflow in the investing section of the statement of cash flows.
a. True
b. False
2. Cost of Merchandise Sold is used in accounting for transactions by sellers of merchandise.
a. True
b. False
3. When someone purchases merchandise and incurs the cost of transportation, these costs of purchasing inventory are
added to the cost of the inventory.
a. True
b. False
4. Purchases discounts are discounts given to the seller.
a. True
b. False
5. It is usual for the credit period to begin with the date the merchandise is received by the buyer.
a. True
b. False
6. The merchandise inventory account is found on the balance sheet.
a. True
b. False
7. When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to
pay within the discount period.
a. True
b. False
8. When the terms of sale are FOB shipping point, the buyer should pay the transportation charges.
a. True
b. False
9. If merchandise costing $2,500, terms FOB destination, 2/10, n/30, with prepaid transportation costs of $100, is paid
within 10 days, the amount of the purchases discount is $48.
a. True
b. False
10. Discounts taken by the buyer for early payment of an invoice are called purchases discounts by the buyer.
a. True
b. False
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Class:
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chapter 4
11. Available discounts taken by the buyer for early payment of an invoice are termed sales discounts by the seller.
a. True
b. False
12. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 10 days after the invoice date to take
advantage of the cash discount.
a. True
b. False
13. Revenue from sources other than the primary operating activity of a business is called other revenue.
a. True
b. False
14. Customer refunds and allowances is a contra-asset account.
a. True
b. False
15. In a multiple-step income statement, sales will be reduced by sales discounts and customer refunds and allowances to
arrive at net sales.
a. True
b. False
16. The indirect method of preparing the statement of cash flows reconciles net income with net cash flows from
operating activities.
a. True
b. False
17. A sale of $600 on account subject to a sales tax of 5% would increase account receivable by $570.
a. True
b. False
18. In a transaction where purchased merchandise has been returned, the buyer will increase the Customer Refunds
Payable account, and the seller will increase the Purchases Returns and Allowances account.
a. True
b. False
19. Interest expense is an example of an expense classified under "other expense."
a. True
b. False
20. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take
advantage of the cash discount.
a. True
b. False
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Class:
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chapter 4
21. A criticism of the single-step income statement is that gross profit and income from operations are not readily
available for analysis.
a. True
b. False
22. The sales discount account is a contra account to Sales.
a. True
b. False
23. Net sales is equal to sales plus cost of merchandise sold.
a. True
b. False
24. On the income statement, customer refunds and allowances and customer discounts are added to gross sales to yield
net sales.
a. True
b. False
25. On the income statement, the merchandise inventory at the beginning of the period is added to sales to yield the cost
of merchandise sold during the period.
a. True
b. False
26. The effects of a customer refund and allowance are a reduction in sales revenue and a decrease in cash or accounts
receivable.
a. True
b. False
27. Net income or loss may appear on the income statement of both a service business and a retail business.
a. True
b. False
28. On the income statement, sales discounts are normally deducted from sales to yield the cost of merchandise sold.
a. True
b. False
29. Sales discounts are used in accounting for transactions with customers.
a. True
b. False
30. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms
are stated as FOB destination.
a. True
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Class:
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chapter 4
b. False
31. If cash dividends of $145,000 were declared during the year and the decrease in dividends payable from the beginning
to the end of the year was $7,000, the statement of cash flows would report $152,000 in the financing activities section.
a. True
b. False
32. Freight in is the amount paid by the seller to deliver merchandise sold to a customer.
a. True
b. False
33. Under the perpetual inventory system, the cost of merchandise sold is recorded when sales are made.
a. True
b. False
34. Purchase discounts reduce sales.
a. True
b. False
35. If merchandise costing $2,500, terms FOB destination, 2/10, n/30, with transportation costs of $100, is paid within 10
days, the amount of the purchases discount is $52.
a. True
b. False
36. Sales discounts are granted by the seller to customers for payment at the end of the month.
a. True
b. False
37. Merchandise inventory shrinkage will decrease Retained Earnings.
a. True
b. False
38. There are two alternatives to reporting cash flows from operating activities in the statement of cash flows: (1) the
direct method and (2) the indirect method.
a. True
b. False
39. A criticism of a single-step income statement is that net income is not available for analysis.
a. True
b. False
40. In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account.
a. True
b. False
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chapter 4
41. The document issued by the seller that informs the buyer of the details of customer refund is called a debit
memorandum.
a. True
b. False
42. Purchases of merchandise increase the merchandise inventory account under the perpetual inventory system.
a. True
b. False
43. Gross profit percent is calculated by dividing gross profit by net sales.
a. True
b. False
44. Merchandise inventory shrinkage will increase Merchandise Inventory.
a. True
b. False
45. A credit memorandum is issued by the seller to customers for return of damaged or defective merchandise.
a. True
b. False
46. If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/eom.
a. True
b. False
47. To determine cash payments for operating expenses for the cash flow statement using the direct method, a decrease in
prepaid expenses is added to operating expenses other than depreciation.
a. True
b. False
48. When merchandise that was sold is returned, the seller decreases accounts payable.
a. True
b. False
49. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales.
a. True
b. False
50. On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues.
a. True
b. False
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Class:
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chapter 4
51. Merchandise is sold for $2,500, terms FOB destination, 2/10, n/30, with transportation 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 $40.
a. True
b. False
52. Operating expenses are subtracted from fees earned for a service business and from gross profit for a merchandising
business.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
53. A payment of dividends decreases which section on the statement of cash flows?
a. Operating activities
b. Investing activities
c. Financing activities
d. None of these
54. A sales invoice included the following information: merchandise price, $6,000; terms 2/10, n/30. Assuming that a
credit for merchandise returned of $600 is granted prior to payment and that the invoice is paid within the discount period,
what is the amount of cash received by the seller?
a. $5,880
b. $5,292
c. $5,586
d. $5,592
55. Expenses that cannot be traced directly to operations are identified as ____.
a. other revenue
b. operating expenses
c. cost of goods sold
d. other expenses
56. If the seller is to pay the delivery expense of delivering merchandise, the delivery terms are stated as _____.
a. FOB shipping point
b. FOB destination
c. FOB n/30
d. FOB seller
57. Which of the following businesses would be categorized as a retail business?
a. H&R Block
b. Becker Law Office
c. Little Tykes Day care
d. Kohl's
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chapter 4
58. In case of returned merchandise, the inventory account is increased by the amount of cost of the goods returned, and
_____.
a. the customer refunds payable account is increased by the same amount
b. the estimated returns inventory account is decreased by the same amount
c. the accounts receivable account is increased by the same amount
d. retained earnings are decreased by the same amount
59. Using a perpetual inventory system, the purchase of $30,000 of merchandise on account would include a(n) _____.
a. increase in Sales
b. increase in Merchandise Inventory
c. decrease in Merchandise Inventory
d. decrease in Sales
60. Which of the following is true of the perpetual inventory system?
a. The amount of merchandise available for sale is continuously updated in the inventory records.
b. Physical inventory is used to determine the cost of inventory on hand at the end of the period.
c. The inventory does not show the amount of merchandise sold.
d. The inventory account is updated for each purchase and sale, and related items in the subsidiary ledger are
updated on a monthly basis.
61. Which of the following is the formula to calculate gross profit percent?
a. (Sales – Operating Expense)/Gross Profit
b. Sales × Gross Profit
c. (Sales + Sales Discounts)/Cost of Goods Sold
d. (Sales – Cost of Goods Sold)/Sales
62. Which of the following refers to the arrangements between buyers and sellers regarding the payments for
merchandise?
a. Credit terms
b. Operating cycle
c. Accounting cycle
d. Markup terms
63. Using a perpetual inventory system, the return of merchandise purchased on account includes a(n) _____.
a. increase in Sales
b. increase in Merchandise Inventory
c. decrease in Merchandise Inventory
d. decrease in Sales
64. 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
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chapter 4
65. Which of the following would not affect the operating activities section of the statement of cash flows, using the
indirect method?
a. Decrease in merchandise inventory
b. Payment on a note payable
c. Decrease in unearned rent
d. Depreciation expense
66. During the previous year, Nightwork Co.' net sales was$135,000, cost of goods sold was $60,750, operating expenses
were $81,000, and other revenues were $13,550. What was Nightwork's gross profit?
a. $74,250
b. $60,700
c. $(6,750)
d. $6800
67. When merchandise that was sold on account is returned, which accounts are affected?
a. Cash, accounts receivable, cost of goods sold, and customer refunds payable
b. Customer refunds payable, accounts receivable, merchandise inventory, and estimated returns inventory
c. Customer refunds payable, accounts receivable, purchases, and estimated returns inventory
d. Customer refunds payable, accounts receivable, purchases, and merchandise inventory
68. Investing activities include ____.
a. collecting cash on loans made
b. obtaining cash from creditors
c. obtaining capital from owners
d. repaying money previously borrowed
69. Which of the following is a selling expense?
a. Advertising expense
b. Cost of goods sold
c. Rent expense
d. Depreciation of land and building
70. The form of income statement that emphasizes total revenues and total expenses in determining net income is called
the _____.
a. operating income statement
b. multiple-step statement
c. cash flow statement
d. single-step statement
71. Expenses that are incurred directly or entirely in connection with the sale of merchandise are classified as ____.
a. selling expenses
b. general expenses
c. other expenses
d. administrative expenses
72. Paying an invoice within the discount period _____.
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a. increases the profitability metric
b. has no effect on the profitability metric
c. decreases the liquidity metric
d. increases the liquidity metric
73. Under the indirect method for preparing the statement of cash flows, _____.
a. each transaction and its effect on cash flows are analyzed
b. net income is reconciled with net cash flows from operating activities
c. current liabilities are subtracted from the total cash flows from operating activities
d. depreciation expense is deducted from net income to calculate the cash flows from operating activities
74. Merchandise with an invoice price of $10,000 is purchased subject to terms of 2/10, n/30, FOB destination.
Transportation costs paid by the seller totaled $300. What is the net cost of the merchandise?
a. $10,300
b. $10,100
c. $9,800
d. $9,506
75. Under the indirect method for preparing the statement of cash flows, decreases in current assets are _____ net income
in the cash flows from operating activities section.
a. subtracted from
b. added to
c. not used in calculating
d. cannot tell from the information given
76. Which of the following occurs when a seller pays a customer a refund?
a. The seller decreases the balance of the cash account and the customer refunds payable account.
b. The seller decreases the balance of the sales account and the accounts receivable account.
c. The seller increases the balance of the cash account and the customer refunds payable account.
d. The seller increases the balance of the sales account and the accounts receivable account.
77. Office salaries, depreciation of office equipment, and office supplies are examples of what type of expense?
a. Selling expense
b. Miscellaneous expense
c. Administrative expense
d. Other expense
78. Data Inc. buys merchandise worth $275 on account, terms FOB shipping point, and pays the freight cost of $35. As a
result of this transaction, Data's _____.
a. liquidity increases
b. profitability remains unchanged
c. liquidity decreases
d. profitability increases
79. What is one criticism of the single-step income statement?
a. It is too complex.
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Class:
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chapter 4
b. It has too many subsections.
c. Gross profit and income from operations are not available for analysis.
d. Income taxes are given too much weight.
80. By dividing gross profit by cost of merchandise sold, we arrive at ____.
a. gross profit percent
b. average markup percent
c. ratio of sales to assets
d. sales percent
81. The difference between sales and cost of goods sold for a retail business is _____.
a. sales
b. net sales
c. gross sales
d. gross profit
82. If Johnson, Inc., sold $800,000 worth of merchandise, had $100,000 returned, and then the balance paid during the 1%
discount period, how much was Johnson's net sales?
a. $700,000
b. $800,000
c. $693,000
d. $692,000
83. Which of the following is the effect of purchasing merchandise on account with credit terms 2/10, n/30?
a. There is no effect on the liquidity and profitability metrics.
b. There is an increase in liquidity, while profitability remains unchanged.
c. There is an increase in profitability, while liquidity remains unchanged.
d. There is an increase in the liquidity and profitability metrics.
84. If merchandise sold on account is returned to the seller, the seller may inform the customer of the details by issuing a
_____.
a. sales invoice
b. purchase invoice
c. credit memorandum
d. debit memorandum
85. Scada Co's beginning inventory for the year was $52,500, purchases during the year were $135,750, and ending
inventory for the year was $175,000. What is Scada's cost of goods sold for the year?
a. $17,500
b. $52,500
c. $91,750
d. $13,250
86. Which of the following statements is true about a retail business?
a. The operating cycle for a service business differs from the operating cycle for a retail business in that a service
business must purchase merchandise for sale to customers.
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chapter 4
b. The revenue activities of a retail business involve the buying and selling of merchandise.
c. The operating cycles of retail businesses and service businesses are exactly the same.
d. The revenue activities of a retail business involve rendering services to customers.
87. The amount of the total cash paid to the seller for merchandise purchased 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
88. Sales to customers who use bank credit cards such as MasterCard and Visa are usually recorded by a(n) _____.
a. decrease in Bank Credit Card Sales, increase in Credit Card Expense, and increase in Sales
b. increase in Cash, increase in Credit Card Expense, and increase in Sales
c. increase in Cash, decrease in Credit Card Expense, and increase in Sales
d. decrease in Sales, increase in Credit Card Expense, and decrease in Cash
89. Cash paid to purchase long-term investments would be reported in the statement of cash flows in ____.
a. the cash flows from operating activities section
b. the cash flows from financing activities section
c. the cash flows from investing activities section
d. a separate schedule
90. Surist, Inc.
Surist, Inc., purchased merchandise for $300,000, received credit for purchase returns of $20,000, availed purchase
discounts of $5,000, and paid transportation in of $12,000.
Refer to Surist, Inc. If Surist, Inc., had $30,000 in beginning inventory and sold goods costing $180,000, what is the
ending inventory balance?
a. $150,000
b. $162,000
c. $90,000
d. $137,000
91. Which of the following is not considered when figuring net purchases?
a. Cost of goods sold
b. Purchase returns
c. Purchases discounts
d. Purchases
92. Which of the following should be shown on a statement of cash flows under the financing activity section?
a. The purchase of a long-term investment in the common stock of another company
b. The payment of cash to retire a long-term note
c. The proceeds from the sale of a building
d. The issuance of a long-term note to acquire land
93. Merchandise subject to terms 2/10, n/30, FOB shipping point, is sold on account to a customer for $35,000. The seller
issued a credit memorandum for $8,000 prior to payment. What is the amount of the cash discount allowable?
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chapter 4
a. $700
b. $540
c. $860
d. $350
94. Which of the following is not a subsection in a multiple-step income statement?
a. Purchase discounts
b. Gross profit
c. Operating income
d. Income before taxes
95. Cost of goods sold is subtracted from sales to arrive at _____.
a. net sales
b. fees earned
c. operating income
d. gross profit
96. Merchandise is ordered on November 12; the merchandise is shipped by the seller and the invoice is prepared, dated,
and mailed by the seller on November 15; the merchandise is received by the buyer on November 17; the transaction is
recorded in the seller's accounts on November 15. If the credit terms are 1/10, n/30, the discount period begins with what
date?
a. November 12
b. November 15
c. November 17
d. November 22
97. Galaxy, Inc., had the following merchandise transactions in October:
Purchases $80,000
Purchase returns 8,000
Purchase discounts 7,200
Transportation in 3,000
What is the total cost of merchandise purchased for Galaxy, Inc.?
a. $80,000
b. $67,800
c. $83,000
d. $77,000
98. Merchandise not sold at the end of the period is reported as _____.
a. cost of goods sold
b. old stock
c. merchandise inventory
d. net purchases
99. When purchases of merchandise are made for cash, under the perpetual inventory system, the transaction _____.
a. increases Cash; decreases Merchandise Inventory
b. increases Merchandise Inventory; decreases Cash
c. increases Merchandise Inventory; decreases Cash Discounts
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d. increases Merchandise Inventory; decreases Purchases
100. Which of the following best explains inventory shrinkage under the perpetual inventory system?
a. It is the discount taken by the buyer for early payment of an invoice.
b. It is the damaged merchandise returned by the buyer to the seller.
c. It is the amount that is entered on a cash register and recorded in the accounts by increasing inventory.
d. It is the difference between the physical count of inventory and the balance of the inventory account.
101. Selling and administrative expenses are found on the multi-step income statement ____.
a. before gross profit
b. after sales and before gross profit
c. after net income and before expenses
d. after gross profit
102. Based on the given information, calculate the net cash flow from operating activities using the indirect
method. During the previous year, Skyrim Co. reported a net income of $136,500. Its depreciation expense was $38,000
and its accounts payable balance decreased by $29,250.
a. $98,500
b. $174,500
c. $203,750
d. $145,250
103. If the buyer is to pay the delivery expense of delivering merchandise, delivery terms are stated as _____.
a. FOB shipping point
b. FOB destination
c. FOB n/30
d. FOB buyer
104. A sales invoice included the following information: merchandise price, $8,000; terms 2/10, n/eom. Assuming that a
credit for merchandise returned of $1,000 is granted prior to payment and that the invoice is paid within the discount
period, what is the amount of cash received by the seller?
a. $6,840
b. $7,000
c. $6,860
d. $7,840
105. The credit terms of a sale are normally indicated on a(n) _____.
a. purchase order
b. invoice
c. bill of lading
d. check
106. Surist, Inc.
Surist, Inc., purchased merchandise for $300,000, received credit for purchase returns of $20,000, availed purchase
discounts of $5,000, and paid transportation in of $12,000.
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Refer to Surist, Inc. What is the total cost of merchandise purchased?
a. $312,000
b. $287,000
c. $263,000
d. $288,000
107. Orange Co. sells merchandise on credit to Zea Co. in the amount of $9,000. The invoice is dated on September 15
with terms of 1/15, net 45. What is the amount of the discount, and up to what date must the invoice be paid in order for
the buyer to take advantage of the discount?
a. $180, September 30
b. $180, September 25
c. $90, September 30
d. $90, September 25
108. In credit terms of 1/10, n/30, the "10" 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
109. Subtracting operating expenses from gross profit results in ____.
a. net sales
b. total purchases
c. income from operations
d. cost of goods sold
110. Which of the following accounts will not be found in the Cost of Goods Sold section on the income statement?
a. Purchases
b. Transportation In
c. Customer Refunds and Allowances
d. Merchandise Inventory
111. X. Bonds Company
The following is a single-step income statement for the X. Bonds Company:
X. Bonds Company
Income Statement
For the Year Ended December 31, 20Y8
Revenues:
Net Sales $300,000
Interest Income 20,000
Total Revenues $320,000
Expenses:
Cost of Goods Sold $60,000
Selling Expenses 25,000
General and Administrative Expenses 30,000
Interest Expense 14,000
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Income Tax Expense 45,000
Total Expenses 174,000
Net Income $146,000
Refer to X. Bonds Company. If the income statement were prepared in a multiple-step format, income from operations
would be ____.
a. $126,000
b. $171,000
c. $146,000
d. $185,000
112. If title to merchandise purchases passes to the buyer when the goods are delivered to the buyer, the terms are _____.
a. consigned
b. n/30
c. FOB shipping point
d. FOB destination
113. Based on the following information, what would be recorded as purchases discount if the invoice is paid within the
discount period?
1. $5,000 of merchandise inventory was ordered on April 2, 20Y8.
2. $2,000 of this merchandise was received on April 5, 20Y8.
3. On April 6, 20Y8, an invoice dated April 4, 20Y8, with terms of 2/10, net 30 for $2,150, which included a $150
prepaid freight cost, was received.
4. On April 10, 20Y8, $500 of the merchandise was returned to the seller.
a. $100
b. $30
c. $43
d. $33
114. When a retailing business is making estimates for the expected customer refunds and allowances, it decreases the
customer refunds payable account _____.
a. and the sales account
b. and the purchases account
c. and the accounts receivable account
d. and the operating expenses
115. Which of the following items is subtracted from sales to arrive at net sales?
a. Desired sales
b. Sales commission
c. Customer refunds and allowances
d. Cost of after sales services
116. A sales invoice included the following information: merchandise price, $4,500; transportation, $300; terms 1/10,
n/eom, FOB shipping point. Assuming that a credit for merchandise returned of $600 is granted prior to payment, that the
transportation is prepaid by the seller, and that the invoice is paid within the discount period, what is the amount of cash
received by the seller?
a. $3,861
b. $4,158
