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Chapter 4
b.
False
44. Revenue from sources other than the primary operating activity of a business is called other revenue.
a.
True
b.
False
45. A criticism of a single-step income statement is that net income is not available for analysis.
a.
True
b.
False
Chapter 4
46. The indirect method of preparing the statement of cash flows reconciles net income with net cash flows from
operating activities.
a.
True
b.
False
47. 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
Chapter 4
48. Interest expense is an example of an expense classified under “other expense.”
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
Chapter 4
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
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
Chapter 4
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 retail 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 retail business involve providing services to customers.
Chapter 4
54. Which of the following businesses is a retail business?
a.
H&R Block
b.
Becker Law Office
c.
Little Tykes Day care
d.
Kohl's
55. The cost of goods sold is subtracted from sales to arrive at _____.
a.
net sales
b.
Fees earned
c.
operating income
d.
gross profit
Chapter 4
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
57. Merchandise which is not sold at the end of the year is reported on the balance sheet as _____.
a.
accounts receivable
b.
capital stock
c.
inventory
d.
operating income
Chapter 4
58. 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.
59. _____ is reported as a current asset on balance sheet.
a.
Operating income
b.
Cost of goods sold.
c.
Merchandise inventory
d.
Accounts payable
Chapter 4
60. 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.
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.
61. 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.
Chapter 4
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. Which of the following is not considered when figuring net purchases?
a.
Cost of goods sold
b.
Purchase returns
c.
Purchases discounts
d.
Purchases
Chapter 4
64. 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. What is the total cost of merchandise purchased?
a.
$312,000
b.
$287,000
c.
$263,000
d.
$288,000
65. Surist, Inc.
Chapter 4
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
66. 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.
Chapter 4
67. 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.
68. 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
Chapter 4
69. The credit terms of a sale are normally indicated on a(n):
a.
purchase order.
b.
invoice.
c.
bill of lading.
d.
check.
70. 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.
Chapter 4
71. 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
72. 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.
Chapter 4
73. 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, 2016.
2.
$2,000 of this merchandise was received on April 5, 2016.
3.
On April 6, 2016, an invoice dated April 4, 2016, with terms of 2/10, net 30 for $2,150
which included a $150 prepaid freight cost, was received.
4.
On April 10, 2016, $500 of the merchandise was returned to the seller.
a.
$100
b.
$30
c.
$43
d.
$33
74. Merchandise purchased on account by a company has no effect on its working capital because:
a.
inventory and accounts payable are increased by the same amount.
b.
inventory and accounts receivable are increased by the same amount.
c.
cash and inventory are increased by the same amount.
Chapter 4
d.
cash and inventory are decreased by the same amount.
75. Which of the following is the effect of purchasing merchandise for cash on a company's liquidity and profitability
metrics?
a.
There is no effect on liquidity and profitability.
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 both liquidity and profitability.
76. When purchases of merchandise are made for cash, under the perpetual inventory system, the transaction:
a.
increases Cash; decreases Merchandise Inventory.
Chapter 4
b.
increases Merchandise Inventory; decreases Cash.
c.
increases Merchandise Inventory; decreases Cash Discounts.
d.
increases Merchandise Inventory; decreases Purchases.
77. 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.
78. In credit terms of 1/10, n/30, the “10” represents the:
Chapter 4
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.
79. Paying an invoice within the discount period _____.
a.
increases the profitability metric
b.
has no effect on the profitability metric
c.
decreases the liquidity metric
d.
increases the liquidity metric
Chapter 4
80. 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
81. 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
