CHAPTER 4: ACCOUNTING FOR MERCHANDISING BUSINESSES
1. Operating expenses are subtracted from fees earned for a service business and from gross
profit for a merchandising business.
a. True
b. False
2. Net sales is equal to sales plus cost of merchandise sold.
a. True
b. False
3. The merchandise inventory account is found on the balance sheet.
a. True
b. False
4. Net income or loss may appear on the income statement of both a service business and a
merchandising business.
a. True
b. False
5. On the income statement, sales returns and allowances and sales discounts are added to gross
sales to yield net sales.
a. True
b. False
6. On the income statement, sales discounts are normally deducted from sales to yield the cost of
merchandise sold.
a. True
b. False
7. 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
Chapter 4: Accounting for Merchandising Businesses
8. 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
9. 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
10. Credit memorandum is issued by the seller to customers for return of damaged or defective
merchandise.
a. True
b. False
11. Sales Returns and Allowances is a contra-asset account.
a. True
b. False
12. Sales discounts are granted by the seller to customers for payment at the end of the month.
a. True
b. False
13. Revenue from sources other than the primary operating activity of a business is called other
income.
a. True
b. False
14. A criticism of a single-step income statement is that net income is not available for analysis.
a. True
b. False
Chapter 4: Accounting for Merchandising Businesses
15. When merchandise that was sold is returned, the seller decreases accounts payable.
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. The sales discount account is a contra account to Sales.
a. True
b. False
18. Freight in is the amount paid by the seller to deliver merchandise sold to a customer.
a. True
b. False
19. In a multiple-step income statement, sales will be reduced by sales discounts and sales returns
and allowances to arrive at net sales.
a. True
b. False
20. Interest expense is an example of an expense classified under “other expense.”
a. True
b. False
21. Purchase discounts reduce sales.
a. True
b. False
22. It is usual for the credit period to begin with the date the merchandise is received by the buyer.
a. True
b. False
Chapter 4: Accounting for Merchandising Businesses
23. 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
24. Under the perpetual inventory system, the cost of merchandise sold is recorded when sales are
made.
a. True
b. False
25. Sales discounts is used in accounting for transactions with customers.
a. True
b. False
26. A sale of $600 on account subject to a sales tax of 5% would increase account receivable by
$570.
a. True
b. False
27. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally
treated as credit sales.
a. True
b. False
28. The document issued by the seller that informs the buyer of the details of sales returns is called
a debit memorandum.
a. True
b. False
29. The effect of a sales return and allowance is a reduction in sales revenue and a decrease in
cash or accounts receivable.
a. True
b. False
Chapter 4: Accounting for Merchandising Businesses
30. 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
31. 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
32. 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
33. Available discounts taken by the buyer for early payment of an invoice are termed sales
discounts by the seller.
a. True
b. False
34. Purchases of merchandise increase the merchandise inventory account under the perpetual
inventory system.
a. True
b. False
35. 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
36. Discounts taken by the buyer for early payment of an invoice are called purchases discounts
by the buyer.
a. True
b. False
Chapter 4: Accounting for Merchandising Businesses
37. In a perpetual inventory system, merchandise returned to vendors reduces the merchandise
inventory account.
a. True
b. False
38. 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
b. False
39. Purchases discounts are discounts given to the seller.
a. True
b. False
40. 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
41. When the terms of sale are FOB shipping point, the buyer should pay the transportation
charges.
a. True
b. False
42. 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
43. 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
Chapter 4: Accounting for Merchandising Businesses
44. Cost of Merchandise Sold is used in accounting for transactions by sellers of merchandise.
a. True
b. False
45. In a transaction where purchased merchandise has been returned, the buyer will increase the
Sales Returns and Allowances account and the seller will increase the Purchases Returns and
Allowances account.
a. True
b. False
46. Merchandise inventory shrinkage will decrease Retained Earnings.
a. True
b. False
47. Merchandise inventory shrinkage will increase Merchandise Inventory.
a. True
b. False
48. Gross profit percent is calculated by dividing gross profit by net sales.
a. True
b. False
49. 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
50. 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
Chapter 4: Accounting for Merchandising Businesses
51. Repayments of bonds would be shown as a cash outflow in the investing section of the
statement of cash flows.
a. True
b. False
52. 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
53. Which of the following statements is true?
a. The revenue activities of a service business involve providing services to customers.
b. The revenue activities of a merchandising business involve the building of a product.
c. The revenue activities of a service business involve the building of a product.
d. The revenue activities of a merchandising business involve providing services to customers.
54. Which of the following businesses is a merchandising business?
a. H&R Block
b. Becker Law Office
c. Little Tykes Daycare
d. Kohl’s
55. Gross profit is determined by subtracting the cost of merchandise sold from what?
a. The cost of merchandise purchased
b. Fees earned
c. Accounts receivable
d. Net sales
56. Since merchandise inventory is normally sold within a year, how is it reported on the balance
sheet?
a. As a revenue
b. As the cost of merchandise sold
c. It does not appear on the Balance Sheet
d. As a current asset
Chapter 4: Accounting for Merchandising Businesses
57. Generally, the revenue account for a merchandising business is entitled:
a. Sales.
b. Net Sales.
c. Gross Sales.
d. Gross Profit.
58. Which of the following statements is true?
a. Only cash sales are included in the Sales account.
b. Sales is the total amount charged customers, including cash sales and sales on account.
c. Both sales discounts and sales returns and allowances are added to Sales to arrive at Net
Sales.
d. Sales is the revenue account typically used in service businesses.
59. The difference between sales and cost of merchandise sold for a merchandising business is:
a. sales.
b. net sales.
c. gross sales.
d. gross profit.
60. Which of the following items is subtracted from sales to arrive at net sales?
a. Desired sales
b. Sales commission
c. Sales returns and allowances
d. Cost of after sales services
61. West, Inc. had beginning inventory of $30,000, purchases of $65,000, and ending inventory of
$10,000. What is West’s cost of merchandise sold?
a. $30,000
b. $65,000
c. $10,000
d. $85,000
Chapter 4: Accounting for Merchandising Businesses
62. 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
63. Which expenses are subtracted from gross profit to arrive at income from operations?
a. All expenses
b. Cost of merchandise sold
c. Operating expenses
d. Sales discounts
64. Which of the following is not an example of selling expenses?
a. Salespersons’ salaries
b. Office staff salaries
c. Depreciation of store equipment
d. Advertising
65. Which of the following accounts is a contra account to Sales?
a. Accounts Payable
b. Sales Returns and Allowances
c. Accounts Receivable
d. Interest Revenue
66. Which of the following is not an administrative expense?
a. Salespersons’ salaries
b. Office staff salaries
c. Depreciation of office equipment
d. Office supplies used
Chapter 4: Accounting for Merchandising Businesses
67. ABC Company had $100,000 in net sales, $45,000 in cost of merchandise sold, $60,000 in
operating expenses, and $10,000 in other income. What is ABC Company’s gross profit?
a. $55,000
b. $40,000
c. $90,000
d. $145,000
68. For a merchandising firm, the inventory sold is shown on the income statement as:
a. cost of merchandise sold.
b. purchases.
c. purchases returns and allowances.
d. net purchases.
69. What is the term applied to the excess of net revenue from sales over the cost of merchandise
sold?
a. Gross profit
b. Income from operations
c. Net income
d. Gross sales
70. 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.
71. 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
Chapter 4: Accounting for Merchandising Businesses
72. The form of income statement that derives its name from the fact that the total of all expenses
is deducted from the total of all revenues is called a:
a. multiple-step statement.
b. revenue statement.
c. report-form statement.
d. single-step statement.
73. 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.
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, 2016
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
Income Tax Expense
45,000
Total Expenses
174,000
Net Income
$146,000
74. Refer to X. Bonds Company. If the income statement were prepared in a multiple-step format,
gross profit would be:
a. $240,000.
b. $126,000.
c. $260,000.
d. $185,000.
Chapter 4: Accounting for Merchandising Businesses
75. 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.
76. Which of the following would be subtracted from gross profit to determine operating income?
a. Operating expenses
b. Other expenses
c. Income taxes
d. All of these
77. 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.
78. 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
79. Which of the following are subtracted from sales to arrive at net sales?
a. Sales returns
b. Merchandise inventory
c. Accounts receivable
d. Cost of merchandise sold
80. Gross profit is equal to:
a. sales less (sales discounts and sales returns and allowances) plus cost of merchandise sold.
b. sales plus sales returns and allowances less sales discounts less cost of merchandise sold.
c. sales plus sales discounts less sales returns and allowances less cost of merchandise sold.
d. sales less (sales discounts and sales returns and allowances) less cost of merchandise sold.
Chapter 4: Accounting for Merchandising Businesses
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.
81. Refer to Surist, Inc. What is the total cost of merchandise purchased?
a. $312,000
b. $287,000
c. $263,000
d. $288,000
82. 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
83. Which of the following is not considered when figuring net purchases?
a. Cost of goods sold
b. Purchase returns
c. Purchases discounts
d. Purchases
84. Which of the following accounts will not be found in the Cost of Merchandise Sold section on
the income statement?
a. Purchases
b. Transportation In
c. Sales Returns and Allowances
d. Merchandise Inventory
85. Multiple-step income statements show:
a. gross profit but not net income.
b. neither gross profit nor net income.
c. gross profit but not cost of merchandise sold.
d. gross profit, cost of merchandise sold, income from operations and net income.
Chapter 4: Accounting for Merchandising Businesses
86. Under a perpetual inventory system,
a. accounting records continuously disclose the amount of inventory.
b. increases in inventory resulting from purchases are debited to Purchases.
c. there is no need for a year-end physical count.
d. the purchase returns and allowances account is credited when goods are returned to vendors.
87. Where are selling and administrative expenses 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
88. Silver Co. sold merchandise to Copper Co. on account, $75,000, terms 2/10, net 30. The cost
of the merchandise sold is $55,000. Silver Co. issued a credit memorandum for $10,000 for
merchandise returned that originally cost $9,000. Copper Co. paid the invoice within the
discount period. What is amount of net sales from the transactions?
a. $65,000
b. $63,500
c. $64,680
d. $63,700
89. Expenses that cannot be traced directly to operations are identified as:
a. other income.
b. operating expenses.
c. cost of goods sold.
d. other expenses.
90. What is one criticism of the single-step income statement?
a. It is too complex.
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.
Chapter 4: Accounting for Merchandising Businesses
91. Which financial statement reconciles net income with net cash flows from operating activities?
a. Balance sheet
b. Statement of retained earnings
c. Statement of cash flows
d. Income statement
92. 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
93. The credit terms of a sale are normally indicated on a(n):
a. purchase order.
b. invoice.
c. bill of lading.
d. check.
94. 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 buyer’s accounts on
November 18. The credit period begins with what date?
a. November 12
b. November 15
c. November 17
d. November 18
95. 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
Chapter 4: Accounting for Merchandising Businesses
96. 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
c. $4,161
d. $4,200
97. Sometimes a(n) is offered to buyers as a means of encouraging them to pay before
the end of the credit period.
a. accounts receivable
b. credit card
c. sales discount
d. cash sale
98. The arrangements between buyer and seller as to when payments for merchandise are to be
made are called:
a. credit terms.
b. net cash.
c. cash on demand.
d. gross cash.
99. If a $50,000 sale is made on January 1, with terms of 1/10, n/30, how much would the discount
be if payment is made on January 9?
a. $0
b. $5,000
c. $1,000
d. $500
100. In credit terms of 1/10, n/30, the “1” 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.