Chapter 04 Reporting and Analyzing Merchandising Operations
Answer Key
True / False Questions
1.
Merchandise consists of products that a company acquires to resell 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.
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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.
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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.
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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 the inventory account only at the beginning
of an accounting period.
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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.
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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.
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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.
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26.
The gross margin ratio is also called 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.
A period’s ending Merchandise Inventory account balance is the next period’s beginning
Merchandise Inventory balance.
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.
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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.
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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.
If goods are shipped FOB destination, the seller is responsible for paying shipping charges
and bears the risk of damage or loss in transit.
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 before
that point.
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39.
A buyer using a perpetual inventory system records the costs of shipping merchandise it
purchases in a Delivery Expense account.
40.
If a wholesaler offers a trade discount of 20% on a catalog item with a list price of $500,
the buyer records the purchase at the net amount of list price minus trade discount.
41.
FOB shipping point means that the buyer accepts ownership when the goods arrive at the
buyer’s place of business.
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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.
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45.
Assuming a seller has not yet collected cash for goods sold, a credit memorandum is
prepared to inform the 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 prior to paying for the merchandise, the seller debits Sales Returns and Allowances
and credits Accounts Receivable and also debits Merchandise Inventory and credits Cost
of Goods Sold.
47.
Either the gross method or net method may be used to record sales with cash discounts,
but the net method requires a period-end adjusting entry to estimate expected future
sales discounts taken.
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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 may 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.
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51.
Sales Discounts and Sales Returns and Allowances are contra revenue accounts that are
debited during the closing process.
52.
Cost of Goods Sold is credited during the closing process.
53.
In a perpetual inventory system, the Merchandise Inventory account must be closed at the
end of the accounting period.
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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 in a multiple-step income statement are classified into two
categories: selling expenses and cost of goods sold.
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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 classified as selling expenses in a multiple-step income statement.
59.
When a company preparing a multiple-step income statement has no reportable non–
operating activities, its income from operations is simply labeled net income.
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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, transactions for purchases, purchase 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 at the end of the
period to reflect the quantity and cost of goods available for sale and the cost of goods
sold.