Financial and Managerial Accounting, 8e (Wild)
Chapter 4 Accounting for Merchandising Operations
1) Merchandise inventory refers to products that a company owns and plans 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 buys products from manufacturers or other wholesalers and sells them to
consumers.
6) A retailer buys products from manufacturers and sells them to wholesalers.
7) Cost of goods sold represents the expense 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) Cost of goods sold is an expense, and is reported on the income statement.
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 company with an acid-test ratio of 4.1 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 purchases but then returns to the seller.
31) Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.
32) Purchase allowances refer to a price reduction (allowance) granted to a buyer of defective or
unacceptable merchandise.
33) Under the perpetual inventory system, the cost of merchandise purchased is recorded in the
Merchandise Inventory account.
34) 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.
35) Sellers always offer a discount to buyers for prompt payment toward purchases made on
credit.
36) Purchase discounts are the same as trade discounts.
37) 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.
38) The seller is responsible for paying shipping charges and bears the risk of damage or loss in
transit if goods are shipped FOB destination.
39) 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.
40) If goods are shipped FOB shipping point, 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.
41) A buyer using a perpetual inventory system records the costs of shipping merchandise it
purchases in a Delivery Expense account.
42) A buyer of $5,000 in merchandise inventory 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. The buyer will pay
$4,900.
43) FOB shipping point means that the buyer accepts ownership when the goods arrive at the
buyer’s place of business.
44) Each sales transaction for a seller that uses a perpetual inventory system involves
recognizing both revenue and cost of merchandise sold.
45) Offering sales discounts on credit sales can benefit a seller by decreasing the delay in
receiving cash and reducing future collections efforts.
46) Sales Discounts is added to the Sales account when computing a company’s net sales.
47) Sales discounts has a normal debit balance because it decreases Sales, which has a normal
credit balance.
48) Under a perpetual inventory system, when a credit customer returns non-defective
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.
49) The perpetual system requires that each sale of merchandise has two entries: the revenue side
and the cost side.
50) 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.
51) Sales of $350,000 and net sales of $323,000 could reflect sales discounts of $27,000.
52) A perpetual inventory system is able to directly measure and monitor inventory shrinkage
and there is no need for a physical count of inventory.
53) Sales Discounts and Sales Returns and Allowances are contra revenue accounts that are
debited to close the accounts during the closing process.
54) Cost of Goods Sold is debited to close the account during the closing process.
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55) In a perpetual inventory system, the Merchandise Inventory account must be closed at the
end of the accounting period.
56) The adjusting entry to reflect inventory shrinkage is a debit to Income Summary and a credit
to Inventory Shrinkage Expense.
57) 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.
58) Operating expenses are classified into two categories: selling expenses and cost of goods
sold.
59) A merchandiser’s classified balance sheet reports merchandise inventory as a current asset.
60) Expenses related to accounting, human resource management, and financial management are
known as selling expenses.
61) When a company has no reportable non-operating activities, its income from operations is
simply labeled net income.
62) A single-step income statement includes cost of goods sold as another expense and shows
only one subtotal for total expenses.
63) Under a periodic inventory system, purchases, purchases returns and allowances, purchase
discounts, and transportation-in transactions are recorded in the Merchandise Inventory account.
64) The periodic inventory system requires updating the inventory account only at the end of the
period.
65) In a periodic inventory system, cost of goods sold is recorded as each sale occurs.
66) 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.
67) Delivery expense is reported as part of general and administrative expense in the seller’s
income statement.
68) New revenue recognition rules require that sellers report sales net of expected sales
discounts.
69) Under new revenue recognition rules, the gross method requires a period-end adjusting entry
to estimate future sales discounts.
70) Inventory Returns Estimated, which reflects an adjustment to inventory for expected future
returns, is a liability account reported in the balance sheet, usually under Current Liabilities.
71) Inventory Returns Estimated is a current asset account used in a period-end adjusting entry to
reflect the inventory estimated to be returned in the future.
72) Under the net method, when a company uses a perpetual inventory system, an invoice for
$2,000 with terms of 2/10, n/30 should be recorded with a debit to Merchandise Inventory and a
credit to Accounts Payable of $2,000.
73) When purchases are recorded at net amounts, any discounts lost as a result of late payments
are reported as an expense.
74) The net method records the invoice at its net amount (net of any cash discount).