71. The following statements regarding merchandise inventory are true except:
A. Merchandise inventory is reported on the balance sheet as a current asset.
B. Merchandise inventory refers to products a company owns and intends to sell.
C. Merchandise inventory can include the cost of shipping the goods to the store and making
them ready for sale.
D. Merchandise inventory does not appear on the balance sheet of a service company.
E. Merchandise inventory purchases are not considered part of the operating cycle for a
business.
72. The following statements are true regarding the operating cycle of a merchandising
company except:
A. The operating cycle begins with the purchase of merchandise.
B. The operating cycle is shortened by credit sales.
C. The operating cycle ends with the collection of cash from the sale of merchandise.
C. The operating cycle can vary in length among different merchandising companies.
E. The operating cycle sometimes involves accounts receivable.
73. Merchandise inventory:
A. Is a long-term asset.
B. Is a current asset.
C. Includes supplies.
D. Is classified with investments on the balance sheet.
E. Must be sold within one month.
74. The operating cycle for a merchandiser that sells only for cash moves from:
A. Purchases of merchandise to inventory to cash sales.
B. Purchases of merchandise to inventory to accounts receivable to cash sales.
C. Inventory to purchases of merchandise to cash sales.
D. Accounts receivable to purchases of merchandise to inventory to cash sales.
E. Accounts receivable to inventory to cash sales.
75. The current period’s ending inventory is:
A. The next period’s beginning inventory.
B. The current period’s cost of goods sold.
C. The prior period’s beginning inventory.
D. The current period’s net purchases.
E. The current period’s beginning inventory.
76. Beginning inventory plus net purchases is:
A. Cost of goods sold.
B. Merchandise available for sale.
C. Ending inventory.
D. Sales.
E. Shown on the balance sheet.
77. The acid-test ratio:
A. Is also called the quick ratio.
B. Measures profitability.
C. Measures inventory turnover.
D. Is generally greater than the current ratio.
E. Measures return on assets.
78. The quick assets are defined as:
A. Cash, short-term investments, and inventory.
B. Cash, short-term investments, and current receivables.
C. Cash, inventory, and current receivables.
D. Cash, noncurrent receivables, and prepaid expenses.
E. Accounts receivable, inventory, and prepaid expenses.
79. ABC Corporation’s total quick assets were $5,888,000, its current assets were $11,700,000
and its current liabilities were $8,000,000. Its acid-test ratio equals:
A. 0.50.
B. 0.68.
C. 0.74.
D. 1.50.
E. 2.20.
80. A company’s current assets were $17,980, its quick assets were $11,420 and its current
liabilities were $12,190. Its quick ratio equals:
A. 0.94.
B. 1.07.
C. 1.48.
D. 1.57.
E. 2.40.
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81. Liquidity problems are likely to exist when a company’s acid-test ratio:
A. Is less than the current ratio.
B. Is 1 to 1.
C. Is higher than 1 to 1.
D. Is substantially lower than 1 to 1.
E. Is higher than the current ratio.
82. The acid-test ratio differs from the current ratio in that:
A. Liabilities are divided by current assets.
B. Prepaid expenses and inventory are excluded from the calculation of the acid-test ratio.
C. The acid-test ratio measures profitability and the current ratio does not.
D. The acid-test ratio excludes short-term investments from the calculation.
E. The acid-test ratio is a measure of liquidity but the current ratio is not.
83. Using the following year-end information for Breanna Boutique, calculate the current
ratio and acid-test ratio for the boutique:
Cash…………………………………… $ 52,000
Short-term investments………………… 12,000
Accounts receivable…………………… 54,000
Inventory……………………………… 325,000
Prepaid expenses……………………… 17,500
Accounts payable……………………… 106,500
Other current payables………………… 25,000
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A. 1.8 and 1
B. 1.97 and 1.52
C. 2.73 and 1.52
D. 3.50 and 0.90
E. None of the choices are correct
84. The gross margin ratio:
A. Is also called the net profit ratio.
B. Measures a merchandising firm’s ability to earn a profit from the sale of inventory.
C. Is also called the profit margin.
D. Is a measure of liquidity.
E. Should be greater than 1.
85. A company’s gross profit was $83,750 and its net sales were $347,800. Its gross margin
ratio equals:
A. 4.2%.
B. 24.1%.
C. 75.9%.
D. $83,750.
E. $264,050.
86. A company’s net sales were $676,600, its cost of goods sold was $236,810 and its net
income was $33,750. Its gross margin ratio equals:
A. 5%.
B. 9.6%.
C. 35%.
D. 65%.
E. 285.7%.
87. A company had net sales and cost of goods sold of $752,000 and $543,000, respectively.
Its net income was $17,530. The company’s gross margin ratio equals:
A. 18.9%
B. 24.5%
C. 27.8%
D. 34.7%
E. 35.2%
88. Peg had net sales of $28,496 million, its cost of goods sold was $19,092 million, and its
net income was $997 million. Its gross margin ratio equals:
A. 3.5%.
B. 5.2%.
C. 33%.
D. 67%.
E. 149.3%.
89. The credit terms 2/10, n/30 are interpreted as:
A. 2% cash discount if the amount is paid within 10 days, or the balance due in 30 days.
B. 10% cash discount if the amount is paid within 2 days, or the balance due in 30 days.
C. 30% discount if paid within 2 days.
D. 30% discount if paid within 10 days.
E. 2% discount if paid within 30 days.
90. A trade discount is:
A. A term used by a purchaser to describe a cash discount given to customers for prompt
payment.
B. A reduction in price below the list price.
C. A term used by a seller to describe a cash discount granted to customers for prompt
payment.
D. A reduction in price for prompt payment.
E. Also called a rebate.
91. The amount recorded for merchandise inventory includes all of the following except:
A. Purchase discounts.
B. Returns and allowances.
C. Freight costs paid by the buyer.
D. Freight costs paid by the seller.
E. Trade discounts.
92. A company uses the perpetual inventory system and recorded the following entry:
Accounts Payable………………………… 2,500
Merchandise Inventory……………. 50
Cash………………………………… 2,450
This entry reflects a:
A. Purchase of merchandise on credit.
B. Return of merchandise.
C. Sale of merchandise on credit.
D. Payment of the account payable and recognition of a 2% cash discount taken.
E. Payment of the account payable and recognition of a 1% cash discount taken.
93. A debit memorandum is:
A. Required whenever a journal entry is recorded.
B. The source document for the purchase of merchandise inventory.
C. Required when a purchase discount is granted.
D. The document a buyer issues to inform the seller of a debit made to the seller’s account in
the buyer’s records.
E. Not necessary in a perpetual inventory system.
94. A company purchased $1,800 of merchandise on December 5. On December 7, it returned
$200 worth of merchandise. On December 8, it paid the balance in full, taking a 2% discount.
The amount of the cash paid on December 8 equals:
A. $200.
B. $1,564.
C. $1,568.
D. $1,600.
E. $1,800.
95. A company purchased $4,000 worth of merchandise. Transportation costs were an
additional $350. The company later returned $275 worth of merchandise and paid the invoice
within the 2% cash discount period. The total amount paid for this merchandise is:
A. $3,725.00.
B. $3,925.00.
C. $3,995.00.
D. $4,000.50.
E. $4,075.00.
96. A buyer failed to take advantage of the vendor’s credit terms of 2/15, n/45, but instead
paid the invoice in full at the end of 60 days. By not taking advantage of the cash discount, the
buyer lost the equivalent of ____________ annual interest on the amount of the purchase.
A. 12.2%
B. 16.2%
C. 18.9%
D. 24.3%
E. 24.5%
97. Sales returns:
A. Refer to merchandise that customers return to the seller after the sale.
B. Refer to reductions in the selling price of merchandise sold to customers.
C. Represent cash discounts.
D. Represent trade discounts.
E. Are not recorded under the perpetual inventory system until the end of each accounting
period.
98. All of the following statements regarding sales returns and allowances are true except:
A. Sales returns and allowances can include a reduction is the selling price because of
damaged merchandise.
B. Sales returns and allowances do not reflect the possibility of lost future sales.
C. Sales returns and allowances are recorded in a separate contra-revenue account.
D. Sales returns and allowances are rarely disclosed in published financial statements.
E. Sales returns and allowances are closed to the Income Summary account.
99. A debit to Sales Returns and Allowances and a credit to Accounts Receivable:
A. Reflects an increase in amount due from a customer.
B. Recognizes that a customer returned merchandise and/or received an allowance.
C. Requires a debit memorandum to recognize the customer’s return.
D. Is recorded when a customer takes a discount.
E. Reflects a decrease in amount due a supplier.
100. Sales less sales discounts less sales returns and allowances equals:
A. Net purchases.
B. Cost of goods sold.
C. Net sales.
D. Gross profit.
E. Net income.
101. Herald Company had sales of $135,000, sales discounts of $2,000, and sales returns of
$3,200. Herald Company’s net sales equals:
A. $5,200.
B. $129,800.
C. $133,000.
D. $135,000.
E. $140,200.
102. On October 1, Robinson Company sold merchandise in the amount of $5,800 to Rosser,
with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robinson uses the
perpetual inventory system. The journal entry or entries that Robinson will make on October 1
is:
A. Sales 5,800
Accounts receivable
5,800
B. Sales 5,800
Accounts receivable
5,800
Cost of goods sold 4,000
Merchandise Inventory
4,000
C. Accounts receivable 5,800
Sales 5,800
D. Accounts receivable 5,800
Sales 5,800
Cost of goods sold 4,000
Merchandise inventory
4,000
E. Accounts receivable 4,000
Sales 4,000
103. On October 1, Whaley Company sold merchandise in the amount of $5,800 to Lee
Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Whaley uses
the perpetual inventory system. Lee pays the invoice on October 8, and takes the appropriate
discount. The journal entry that Whaley makes on October 8 is:
A. Cash 5,800
Accounts receivable
5,800
B. Cash 4,000
Accounts receivable
4,000
C. Cash 3,920
Sales discounts 80
Accounts receivable
4,000
D. Cash 5,684
Accounts receivable
5,684
E. Cash 5,684
Sales discounts 116
Accounts receivable
5,800
104. On October 1, Mutch Company sold merchandise in the amount of $5,800 to Carr
Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Mutch uses
the perpetual inventory system. On October 4, Carr returns some of the merchandise. The
selling price of the merchandise is $500 and the cost of the merchandise returned is $350. The
entry or entries that Mutch must make on October 4 is:
A. Sales returns and allowances 500
Accounts receivable
500
Merchandise inventory 350
Cost of goods sold
350
B. Sales returns and allowances 500
Accounts receivable
500
C. Accounts receivable 500
Sales returns and allowances
500
D. Accounts receivable 500
Sales returns and allowances
500
Cost of goods sold 350
Merchandise inventory
350
E. Sales returns and allowances 350
Accounts receivable
350
105. A company records the following journal entry: debit Cash $1,470, debit Sales Discounts
$30, and credit Accounts Receivable $1,500. This means that a customer has taken a ___ cash
discount for early payment.
A. 1%
B. 2%
C. 5%
D. 10%
E. 15%
106. All of the following statements regarding inventory shrinkage are true except:
A. Inventory shrinkage refers to the loss of inventory.
B. Inventory shrinkage is determined by comparing a physical count of inventory with
recorded inventory amounts.
C. Inventory shrinkage is recognized by debiting an operating expense.
D. Inventory shrinkage is recognized by debiting Cost of Goods Sold.
E. Inventory shrinkage can be caused by theft or deterioration.
107. Which of the following accounts would be closed with a debit?
A. Sales Discounts.
B. Sales Returns and Allowances.
C. Cost of Goods Sold.
D. Operating Expenses.
E. Sales.
108. An income statement that includes cost of goods sold as another expense and shows only
one subtotal for total expenses is a:
A. Balanced income statement.
B. Single-step income statement.
C. Multiple-step income statement.
D. Combined income statement.
E. Simplified income statement.
109. Expenses that support the overall operations of a business and include the expenses
relating to accounting, human resource management, and financial management are called:
A. Cost of goods sold.
B. Selling expenses.
C. Purchasing expenses.
D. General and administrative expenses.
E. Non-operating activities.
110. Benson Company had cash sales of $94,275, credit sales of $83,450, sales returns and
allowances of $1,700, and sales discounts of $3,475. Benson’s net sales for this period equal:
A. $94,275.
B. $172,550.
C. $174,250.
D. $176,025.
E. $177,725.
111. Multiple-step income statements:
A. Are required by the FASB.
B. Contain more detail than a simple listing of revenues and expenses.
C. Are required for the perpetual inventory system.
D. List cost of goods sold as an operating expense.
E. Can only be used in perpetual inventory systems.
112. Expenses of promoting sales by displaying and advertising merchandise, making sales,
and delivering goods to customers are:
A. General and administrative expenses.
B. Cost of goods sold.
C. Selling expenses.
D. Purchasing expenses.
E. Non-operating activities.
113. A company has net sales and cost of goods sold of $752,000 and $543,000, respectively.
Its net income is $17,530. The company’s gross margin and operating expenses are ________
and ____________, respectively.
A. $209,000; $191,470
B. $191,470; $209,000
C. $525,470; $227,000
D. $227,000; $525,470
E. $734,000; $191,470