SHORT ANSWER QUESTIONS
184)
What are the steps of the operating cycle for a merchandiser with credit sales?
ESSAY QUESTIONS
185)
Describe the difference between the periodic and perpetual inventory accounting systems.
186)
Explain the way in which costs flow through the merchandise inventory account to a
merchandiser’s income statement.
187)
What is the acid-test ratio? How does it measure a company’s liquidity?
188)
What is gross margin ratio? How is it used as an indicator of profitability?
189)
What does the acronym FOB stand for? Describe the differences between FOB shipping point (or
FOB factory) and FOB destination.
190)
Describe the recording process (including costs) for the types of transactions involved in
purchasing merchandise inventory when a perpetual inventory system is used.
191)
Describe the recording process (including costs) for the types of transactions associated with sales
of merchandise inventory using a perpetual inventory system.
192)
What is inventory shrinkage? How do managers account for shrinkage?
193)
How do closing entries for a merchandising company that uses the perpetual inventory system
differ from the closing entries for a service company?
194)
Explain the difference between the single-step and multiple-step income statements.
195)
Distinguish between selling expenses and general and administrative expenses.
196)
Describe the difference(s) between the periodic and the perpetual inventory accounting systems.
197)
Describe why tracking inventory activities are necessary for a merchandising company.
198)
Discuss the period-end adjusting entries that are required in the new revenue recognition standards
for estimating sales discounts and sales returns and allowances.
199)
Farmen Company had net sales of $600,000 and cost of goods sold of $450,000. Calculate
Farmen’s gross profit.
200)
National Storage Company had sales of $1,000,000, sales discounts of $2,500, sales returns and
allowances of $15,000, and cost of goods sold of $525,000. Calculate National’s gross profit.
201)
Harley’s Antique Shop had net sales of $772,000. The gross profit was $415,000. Calculate
Harley’s cost of goods sold.
202)
Fill in the blanks (a) through (g) for the Morrison Company for each of the income statements for
years 1, 2, and 3.
Morrison Company
Income Statements
For the years ended December 31
Year 2
Year 2
Year 3
Sales
$7,500
$10,000
(f)
Cost of goods sold
Merchandise inventory (beginning)
(a)
375
750
Total cost of merchandise purchases
2,400
3,625
4,875
Merchandise inventory (ending)
(b)
750
625
Cost of goods sold
2,770
(d)
5,000
Gross profit 106
(c)
6,750
5,200
Gross profit
(c)
6,750
5,200
Operating expenses
3,750
3,750
(g)
Net income
$ 980
(e)
$ 2,500
203)
Fill in the blanks (a) through (g) for the Corman Company for each of the income statements for
years 1 and 2
Year 1
Year 2
Sales
$10,000
(e)
Cost of goods sold 107
Cost of goods sold
(a) 745
2,400
3,625
(b) 375
750
625
2,770
(d) 3,250
Gross profit
(c) 4,730
6,750
5,200
Operating expenses
3,750
3,750
Sales
$10,000
(e) $10,200
Cost of goods sold
Total cost of merchandise purchases
3,625
4,875
(d) 625
Cost of goods sold
(a) 3,250
5,000
5,200
(c) 2,700
$ 2,500
Cost of goods sold
Merchandise inventory (beginning)
375
750
Total cost of merchandise purchases
3,625
4,875
Merchandise inventory (ending)
750
(d)
Cost of goods sold
(a)
5,000
Gross profit
6,750
5,200
Operating expenses
3,750
(c)
Net income
(b)
$ 2,500
204)
The following information is available for Flanders and its two main competitors in the industry,
Sanders and Anders:
Flanders Sanders Anders
Cash
$9,800
$10,500
$26,500
Short-term investments
6,400
8,200
12,500
Accounts receivable
12,500
8,500
14,350
Merchandise inventory
30,150
40,000
40,150
Prepaid expense
900
6,750
2,450
Accounts payable
19,400
13,750
26,800
Salaries payable
1,200
3,500
6,250
Other current payables
600
1,200
2,150
The industry standard for the current ratio is 1.8 and the industry standard for the acid-test ratio is 1.
Required:
1. Calculate the current ratio and acid-test ratio for each firm.
2. Rank the firms in decreasing order of liquidity.
3. Comment on Flanders’ relative liquidity position.
Total current liabilities
205)
The following information refers to Percy’s Records and its competitors in the music store business.
Current
Ratio
Quick
Ratio
Percy’s Records
2.0
0.95
Jewel CDs
1.5
1.00
Rudy’s Raps
1.8
1.20
Marvin’s Jazz
1.9
0.80
Industry Average
2.0
1.00
Required:
Comment on the relative liquidity positions of these companies.
206)
A company reported the following year-end information:
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
Required:
1. Explain the purpose of the acid-test ratio.
2. Calculate the acid-test ratio for this company.
3. What does the acid-test ratio reveal about this company?
207)
Calculate the gross margin ratio for each of the following separate cases A through C:
A
B
C
Net sales
$145,000
$623,500
$37,800
Cost of goods sold
83,600
269,200
13,230
208)
A company reported the following information for the month of July:
Sales
$50,475
Sales discounts
1,235
Sales returns and allowances
2,840
Cost of goods sold
33,975
Required: Calculate this company’s gross profit.
209)
A company reported the following information for the month of July:
Net Sales
$57,500
Cost of goods sold
33,200
Required: Calculate this company’s gross margin ratio.
210)
The following information is for Barrel and its competitor Crate.
Barrel
Crate
Year 1
Year 2
Year 1
Year 2
Net sales
$347,850
$365,418
$579,750
$664,395
Cost of sales
121,747
146,167
318,862
312,265
Required:
1. Calculate the dollar amount of gross margin and the gross margin ratio to the nearest percent, for
each company for both years.
2. Which company had the more favorable ratio for each year?
3. Which company had the more favorable change in the gross margin ratio over this 2-year period?
211)
A company that uses the perpetual inventory system and the gross method of accounting for
purchases purchased $8,500 of merchandise on March 25 with credit terms of 2/10, n/30. The
invoice was paid in full on April 4. Prepare the journal entries to record the transactions on March
25 and April 4.
212)
Sabor Company uses a perpetual inventory system and the gross method of accounting for
purchases. Sabor purchased $17,800 of merchandise on April 7 with credit terms of 1/10, n/30.
Merchandise with a cost of $1,800 was damaged and returned to the seller on April 10. On April
16 the company paid the amount due. Prepare the journal entries to record the transactions on all
three dates.
213)
Tahoe Ski Company uses the perpetual inventory system and the gross method of accounting for
purchases. The company had the following transactions during January:
January 6: Purchased $4,000 of inventory. The seller’s credit terms are 2/10, n/30.
January 8: Returned $200 worth of defective units and received full credit.
January 15: Paid the amount due, less the returned items.
Prepare journal entries to record each of the preceding transactions.
214)
Serene Spa Sales uses the perpetual inventory system and the gross method of accounting for
purchases and sales, and had the following transactions during August.
Aug 1
Sold merchandise on credit for $5,000, terms 3/10, n/30. The items sold had a
cost of $3,500.
3
Purchased merchandise for cash, $2,720.
4
Purchased merchandise on credit for $2,600, terms 1/20, n/30.
5
Issued a credit memorandum for $3,000 to a customer who returned
merchandise purchased July 20. The returned items had a cost of $2,010.
10
Received payment for merchandise sold August 1.
15
Received a credit memorandum from the seller for the return of defective
merchandise purchased on August 4 for $600.
18
Paid freight charges of $200 for merchandise ordered last month. (FOB
shipping point)
23
Paid for the merchandise purchased August 4 less the portion that was
returned.
24
Sold merchandise on credit for $7,000, terms 2/10, n/30. The items had a cost
of $4,900.
31
Received payment for merchandise sold on August 24.
Required:
Prepare the general journal entries to record these transactions.
June 2
Sold merchandise to General Sports Store on credit for $4,800, terms 1/15,
n/60. The items sold had a cost of $2,700.
June 4
General Sports Store returned merchandise that had a selling price of $200. Th
cost of the merchandise returned was $110.
June 13
General Sports Store paid for the merchandise sold on June 2 less the return,
taking any appropriate discount earned.
215)
Craig’s Snowboards uses the perpetual inventory system and the gross method of accounting for
sales, and had the following sales transactions during June:
e
Prepare the journal entries that Craig’s Snowboards must make to record these transactions.
June 13
Cash
July 3
Sold merchandise to a customer on credit for $600, terms 2/10, n30. The cost of
the merchandise sold was $350.
July 4
Sold merchandise to a customer for cash of $425. The cost of the merchandise
was $250.
July 6
Sold merchandise to a customer on credit for $1,300, terms 2/10, n/30. The cost
of the merchandise sold was $750.
July 8
The customer from July 3 returned merchandise with a selling price of $100. Th
cost of the merchandise returned was $55.
July 15
The customer from July 6 paid the full amount due, less any appropriate
discounts earned.
July 31
The customer from July 3 paid the full amount due, less any appropriate
discounts earned.
216)
Forrest’s Cycle Shop uses a perpetual inventory accounting system and the gross method of
accounting for sales had the following transactions during the month of July:
e
Prepare the required journal entries that Forrest’s Cycle Shop must make to record these
transactions.
217)
Following is the year-end adjusted trial balance for Fred’s Corner Grocery for the current year:
Fred’s Corner Grocery
Adjusted Trial Balance
December 31
Dr. Cr.
Cash…………………………………………………….. $ 67,500
Accounts receivable…………………………………… 46,000
Merchandise inventory………………………………… 60,000
Store supplies…………………………………………. 800
Accounts payable……………………………………… 16,000
Salaries payable……………………………………….. 850
F. Brewster, Capital…………………………………….. 125,630
F. Brewster, Withdrawals………………………………. 45,000
Sales…………………………………………………….. 550,000
Sales returns & allowances…………………………… 4,500
Sales discounts………………………………………… 4,250
Cost of goods sold..……………………………………. 382,450
Sales salaries expense………………………………… 44,000
Advertising expense……………………………………. 8,150
Store salaries expense………………………………… 24,325
Store supplies expense……………………………….. 450
Interest expense………………………………………... 5,055
Totals…………………………………………………….. $692,480 $692,480
119
Totals…………………………………………………….. $692,480 $692,480
Prepare the closing entries at December 31 for the current year.
218)
The year-end adjusted trial balance of Gordon Produce for the current year, is shown below:
GORDON PRODUCE
Adjusted Trial Balance
December 31
Debit
Credit
Cash
$ 1,500
Store supplies
500
Merchandise inventory
11,000
Store equipment
18,000
Accum. depr.–store equipment
$ 3,000
Accounts payable
6,000
J. Gordon, Capital
50,000
J. Gordon, Withdrawals
22,000
Sales
60,500
Cost of goods sold
48,000
Depreciation expense–Store equipment
1,000
Store supplies expense
1,500
Salar1
ie
2s
0 expense
14,000