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Merchandising Operations
5-21
118. The collection of an $1,500 account within the 2 percent discount period will result in a
a. debit to Sales Discounts for $30.
b. debit to Accounts Receivable for $1,470.
c. credit to Cash for $1,470.
d. credit to Accounts Receivable for $1,470.
119. A sales invoice is used as documentation for a journal entry that requires a debit to
a. Cash and a credit to Sales Revenue.
b. Sales Returns and Allowances and a credit to Accounts Receivable.
c. Accounts Receivable and a credit to Sales Revenue.
d. Cash and a credit to Sales Returns and Allowances.
120. If a customer agrees to retain merchandise that is defective because the seller is willing to
reduce the selling price, this transaction is known as a sales
a. discount.
b. return.
c. contra asset.
d. allowance.
121. When goods are returned that relate to a prior cash sale
a. the Sales Returns and Allowances account should not be used.
b. the Cash account will be credited.
c. Sales Returns and Allowances will be credited.
d. Accounts Receivable will be credited.
122. The Sales Returns and Allowances account does not provide information to management
about
a. possible inferior merchandise.
b. the percentage of credit sales versus cash sales.
c. inefficiencies in filling orders.
d. errors in billing customers.
123. A Sales Returns and Allowances account is not debited if a customer
a. returns defective merchandise.
b. receives a credit for merchandise of inferior quality.
c. utilizes a prompt payment incentive.
d. returns goods that are not in accordance with specifications.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-22
124. As an incentive for customers to pay their accounts promptly, a business may offer its
customers
a. a sales discount.
b. free delivery.
c. a sales allowance.
d. a sales return.
125. The credit terms offered to a customer by a business firm were 2/10, n/30, which means
a. the customer must pay the bill within 10 days.
b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th
day from the invoice date.
c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice
date.
d. two sales returns can be made within 10 days of the invoice date and no returns
thereafter.
126. A sales discount does not
a. provide the purchaser with a cash saving.
b. reduce the amount of cash received from a credit sale.
c. increase a contra revenue account.
d. increase an operating expense account.
127. Anderson Inc. sells $1,200 of merchandise on account to Baltic Company with credit
terms of 2/10, n/30. If Baltic Company remits a check taking advantage of the discount
offered, what is the amount of Baltic Company's check?
a. $1,176
b. $1,200
c. $1,080
d. $1,120
128. Aber Company sells merchandise on account for $3,000 to Borth Company with credit
terms of 2/10, n/30. Borth Company returns $500 of merchandise that was damaged,
along with a check to settle the account within the discount period. What is the amount of
the check?
a. $2,440
b. $2,460
c. $2,450
d. $2,250
Merchandising Operations
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129. Casin Company sells $900 of merchandise on account to Delta Exploration with credit
terms of 2/10, n/30. If Delta Exploration remits a check taking advantage of the discount
offered, what is the amount of Delta Exploration's check?
a. $630
b. $882
c. $810
d. $720
130. Which sales accounts normally have a debit balance?
a. Sales Discounts
b. Sales Returns and Allowances.
c. Both Sales Discounts and Sales Returns and Allowances have debit balances.
d. Neither Sales Discounts or Sales Returns and Allowances have debit balances.
131. Fehr Company sells merchandise on account for $7,500 to Kelly Company with credit
terms of 2/10, n/30. Kelly Company returns $1,500 of merchandise that was damaged,
along with a check to settle the account within the discount period. What is the amount of
the check?
a. $7,350
b. $7380
c. $6,000
d. $5,880
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-24
132. Piper Company sells merchandise on account for $1,800 to Morton Company with credit
terms of 2/10, n/30. Morton Company returns $600 of merchandise that was damaged,
along with a check to settle the account within the discount period. What entry does Piper
Company make upon receipt of the check?
a. Cash 1,200
Accounts Receivable 1,200
b. Cash 1,176
Sales Returns and Allowances 624
Accounts Receivable . 1,800
c. Cash 1,176
Sales Returns and Allowances 600
Sales Discounts 24
Accounts Receivable 1,800
d. Cash 1,764
Sales Discounts 36
Sales Returns and Allowances 600
Accounts Receivable 1,200
133. The collection of a $500 account beyond the 2 percent discount period will result in a
a. debit to Cash for $490.
b. debit to Accounts Receivable for $500.
c. debit to Cash for $500.
d. debit to Sales Discounts for $10.
134. The collection of an $800 account beyond the 2 percent discount period will result in a
a. debit to Cash for $784.
b. credit to Accounts Receivable for $800.
c. credit to Cash for $800.
d. debit to Sales Discounts for $16.
135. Which of the following would not be classified as a contra account?
a. Sales Revenue
b. Sales Returns and Allowances
c. Accumulated Depreciation
d. Sales Discounts
Merchandising Operations
FOR INSTRUCTOR USE ONLY
5-25
136. Which of the following accounts has a normal credit balance?
a. Sales Returns and Allowances
b. Sales Discounts
c. Sales Revenue
d. Cost of Goods Sold
137. With respect to the income statement
a. contra revenue accounts do not appear on the income statement.
b. sales discounts increase the amount of sales.
c. contra revenue accounts increase the amount of operating expenses.
d. sales discounts are included in the calculation of gross profit.
138. When a seller records a return of goods, the account that is credited is
a. Sales Revenue.
b. Sales Returns and Allowances.
c. Inventory.
d. Accounts Receivable.
139. The respective normal account balances of Sales, Sales Returns and Allowances, and
Sales Discounts are
a. credit, credit, credit.
b. debit, credit, debit.
c. credit, debit, debit.
d. credit, debit, credit.
140. Rains Company is a furniture retailer. On January 14, 2017, Rains purchased
merchandise inventory at a cost of $60,000. Credit terms were 2/10, n/30. The inventory
was sold on account for $100,000 on January 21, 2017. Credit terms were 1/10, n/30. The
accounts payable was settled on January 23, 2017 and the accounts receivables were
settled on January 30, 2017. Which statement is correct?
a. Cash flows were affected on January 14 and January 21.
b. Gross profit percentage is 60%.
c. On January 30, 2017, customers should remit cash in the amount of $99,000.
d. There is not enough information available to answer this question.
141. Which statement is incorrect?
a. The sales revenue account is used to record the sales of goods held for resale to
customers.
b. Sales discounts are recorded as debits to the sales revenue account.
c. The sales revenue account is a revenue account.
d. The sales revenue account has a normal credit balance and is closed at the end of the
accounting period.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
5-26
142. Indicate which one of the following would not appear on both a single-step income
statement and a multiple-step income statement.
a. Gross profit
b. Operating expenses
c. Sales revenue
d. Cost of goods sold
143. 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.
144. Gross profit does not appear
a. on a multiple-step income statement.
b. on a single-step income statement.
c. to be relevant in analyzing the operation of a merchandising company.
d. on either a multiple-step or single-step income statement.
145. Gross profit equals the difference between net sales and
a. operating expenses.
b. cost of goods sold.
c. net income.
d. cost of goods sold plus operating expenses.
146. Positive operating income will result if gross profit exceeds
a. costs of goods sold.
b. salaries and wages expense.
c. cost of goods sold plus operating expenses.
d. operating expenses.
147. What is the term applied to the excess of net sales over the cost of goods sold?
a. Income before income taxes
b. Income from operations
c. Net income
d. Gross profit
148. Operating expenses would include
a. interest expense.
b. income tax expense.
c. freight-out.
Merchandising Operations
5-27
d. freight-out and interest.
149. Which of the following is not a true statement about a multiple-step income statement?
a. Operating expenses do not include income tax expense.
b. There may be a section for non-operating activities.
c. There may be a section for operating assets.
d. There is a section for cost of goods sold.
150. An advantage of the single-step income statement over the multiple-step form is
a. the amount of information it provides.
b. its comprehensiveness.
c. its simplicity.
d. its use in computing ratios.
151. Income from operations appears on
a. both a multiple-step and a single-step income statement.
b. neither a multiple-step nor a single-step income statement.
c. a single-step income statement.
d. a multiple-step income statement.
152. Income from operations is gross profit less
1. operating expenses and other expenses and losses.
2. operating expenses plus other revenues and gains.
3. operating expenses.
a. 1
b. 2
c. 3
d. both 1 and 2
153. Multiple-step income statements show
a. gross profit but not income from operations.
b. neither gross profit nor income from operations.
c. both income from operations and gross profit.
d. income from operations but not gross profit.
154. Interest expense would be classified on a multiple-step income statement under the
heading
a. Other expenses and losses.
b. Other revenues and gains.
c. Operating expenses.
d. Cost of goods sold.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-28
155. Gross profit for a merchandising company is net sales minus
a. operating expenses.
b. cost of goods sold.
c. sales discounts.
d. cost of goods available for sale.
156. The sales section of an income statement for a retailer would not include
a. Sales discounts.
b. Sales revenue.
c. Net sales.
d. Cost of goods sold.
157. The operating expenses section of an income statement for a merchandising company
would not include
a. Freight-out.
b. Utilities expense.
c. Cost of goods sold.
d. Insurance expense.
158. Indicate which one of the following would appear on the income statement of both a
merchandising company and a service company.
a. Gross profit
b. Operating expenses
c. Sales revenue
d. Cost of goods sold
159. Gross profit does not appear
a. on a merchandising company income statement.
b. on a service company income statement.
c. to be relevant in analyzing the operation of a merchandising company.
d. on the income statement if the periodic inventory system is used because it cannot be
calculated.
160. Financial information is presented below:
Operating expenses $ 40,000
Sales revenue 200,000
Cost of goods sold 150,000
Gross profit would be
a. $160,000.
b. $ 40,000.
c. $ 50,000.
d. $ 10,000.
Merchandising Operations
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161. Financial information is presented below:
Operating expenses $ 40,000
Sales revenue 200,000
Cost of goods sold 150,000
The gross profit rate would be
a. .75.
b. .20
c. .05.
d. .25.
162. Financial information is presented below:
Operating expenses $ 40,000
Sales revenue 200,000
Cost of goods sold 150,000
The profit margin would be
a. .75.
b. .05.
c. .25.
d. .95.
163. Financial information is presented below:
Operating expenses $ 28,000
Sales returns and allowances 7,000
Sales discounts 3,000
Sales revenue 150,000
Cost of goods sold 98,000
Gross profit would be
a. $49,000.
b. $42,000.
c. $45,000.
d. $52,000.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-30
164. Financial information is presented below:
Operating expenses $ 28,000
Sales returns and allowances 7,000
Sales discounts 3,000
Sales revenue 150,000
Cost of goods sold 98,000
The gross profit rate would be
a. .35.
b. .30.
c. .70.
d. .28.
165. Financial information is presented below:
Operating expenses $ 28,000
Sales returns and allowances 7,000
Sales discounts 3,000
Sales revenue 150,000
Cost of goods sold 98,000
The profit margin would be
a. .28.
b. .09.
c. .30.
d. .10.
166. Financial information is presented below:
Operating expenses $ 45,000
Sales returns and allowances 3,000
Sales discounts 7,000
Sales revenue 160,000
Cost of goods sold 96,000
The amount of net sales on the income statement would be
a. $153,000.
b. $150,000.
c. $160,000.
d. $157,000.
Merchandising Operations
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167. Financial information is presented below:
Operating expenses $ 45,000
Sales returns and allowances 3,000
Sales discounts 7,000
Sales revenue 160,000
Cost of goods sold 96,000
Gross profit would be
a. $61,000.
b. $64,000.
c. $54,000.
d. $67,000.
168. Financial information is presented below:
Operating expenses $ 45,000
Sales returns and allowances 3,000
Sales discounts 7,000
Sales revenue 160,000
Cost of goods sold 96,000
The gross profit rate would be
a. .36.
b. .64.
c. .40.
d. .34.
169. Financial information is presented below:
Operating expenses $ 45,000
Sales returns and allowances 3,000
Sales discounts 7,000
Sales revenue 160,000
Cost of goods sold 96,000
The profit margin would be
a. .36.
b. .05.
c. .12.
d. .06.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-32
170. Financial information is presented below:
Operating expenses $ 42,000
Sales returns and allowances 12,000
Sales discounts 3,000
Sales revenue 165,000
Cost of goods sold 96,000
The amount of net sales on the income statement would be
a. $153,000.
b. $150,000.
c. $165,000.
d. $162,000.
171. Financial information is presented below:
Operating expenses $ 42,000
Sales returns and allowances 12,000
Sales discounts 3,000
Sales revenue 165,000
Cost of goods sold 96,000
Gross profit would be
a. $54,000.
b. $57,000.
c. $69,000.
d. $66,000.
172. Financial information is presented below:
Operating expenses $ 42,000
Sales returns and allowances 12,000
Sales discounts 3,000
Sales revenue 165,000
Cost of goods sold 96,000
The gross profit rate would be
a. .64.
b. .42.
c. .36.
d. .37.
Merchandising Operations
5-33
173. Financial information is presented below:
Operating expenses $ 42,000
Sales returns and allowances 12,000
Sales discounts 3,000
Sales revenue 165,000
Cost of goods sold 96,000
The profit margin would be
a. .36.
b. .18.
c. .06.
d. .08.
174. What is an advantage of using the multiple-step income statement?
a. It highlights the components of net income.
b. Gross profit is not a separate item.
c. It is easier to prepare than the single-step income statement.
d. Net income will be higher than net income computed using the single-step income
statement.
175. For a jewelry retailer, which is an example of Other Revenues and Gains?
a. Repair revenue
b. Unearned revenue
c. Gain on sale of display cases
d. Discount received for paying for merchandise inventory within the discount period
176. When using a periodic inventory system, which statement concerning the computation of
cost of goods sold is correct?
a. The amount of ending inventory is determined on the last day of the accounting
period.
b. Cost of goods available for sale includes net purchases plus the ending inventory.
c. Purchases represent cash paid for purchases during the accounting period.
d. Freight-in is ignored.
177. When using the periodic inventory system, which of the following is not a step in
determining cost of goods purchased?
a. Add freight-in
b. Subtract purchase returns and allowances
c. Subtract cost of ending inventory
d. All of these are necessary steps
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-34
178. At the beginning of the year, Uptown Athletic had an inventory of $600,000. During the
year, the company purchased goods costing $2,250,000. If Uptown Athletic reported
ending inventory of $750,000 and sales of $3,000,000, their cost of goods sold and gross
profit rate would be
a. $1,500,000 and 70%.
b. $2,100,000 and 30%.
c. $1,500,000 and 30%.
d. $2,100,000 and 70%.
179. At the beginning of the year, Wildcat Athletic had an inventory of $300,000. During the
year, the company purchased goods costing $1,200,000. If Wildcat Athletic reported
ending inventory of $450,000 and sales of $1,500,000, their cost of goods sold and gross
profit rate would be
a. $750,000 and 70%
b. $1,050,000 and 30%.
c. $750,000 and 30%.
d. $1,050,000 and 70%.
180. During the year, Megan’s Pet Shop’s merchandise inventory decreased by $80,000. If the
company’s cost of goods sold for the year was $1,200,000, purchases would have been
a. $1,280,000.
b. $1,120,000.
c. $1,040,000.
d. Unable to determine.
181. During the year, Sarah’s Pet Shop’s merchandise inventory decreased by $50,000. If the
company’s cost of goods sold for the year was $750,000, purchases would have been
a. $800,000.
b. $700,000.
c. $650,000.
d. Unable to determine.
Merchandising Operations
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182. The amount of cost of good available for sale during the year depends on the amounts of
a. beginning merchandise inventory and cost of goods sold.
b. beginning merchandise inventory, net cost of purchases, and ending merchandise
inventory.
c. beginning merchandise inventory, cost of goods sold, and ending merchandise
inventory.
d. beginning merchandise inventory and net costs of purchases.
183. Which of the following is not considered in computing net cost of purchases?
a. Purchases returns and allowances
b. Purchases
c. Freight paid on purchased goods
d. Freight paid on goods shipped to customers
184. Assume Grammar Company uses the periodic inventory system and has a beginning
inventory balance of $5,000, purchases of $75,000, and sales of $125,000. Grammar
closes its records once a year on December 31. In the accounting records, the inventory
account would be expected to have a balance on December 31 prior to adjusting and
closing entries that was
a. equal to $5,000.
b. more than $5,000.
c. less than $5,000.
d. indeterminate.
185. All of the following statements are true regarding the periodic inventory system except
a. Under the periodic inventory system, the balance of cost of goods sold is calculated at
the end of the period.
b. Under the periodic inventory system, the balance in ending inventory is calculated at
the end of the period.
c. Using the periodic inventory system affects the balance sheet contents differently than
when the perpetual system is used.
d. Under the periodic system, a company uses separate accounts to record freight costs,
returns, and discounts.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-36
186. Sampson Company's accounting records show the following for the year ending on
December 31, 2017.
Purchase Discounts $ 11,200
Freight-In 15,600
Purchases 700,020
Beginning Inventory 47,000
Ending Inventory 57,600
Purchase Returns and Allowances 12,800
Using the periodic system, the cost of goods purchased is
a. $660,420.
b. $708,420.
c. $717,220.
d. $691,620.
187. Sampson Company's accounting records show the following at the year ending on
December 31, 2017.
Purchase Discounts $ 11,200
Freight-In 15,600
Purchases 700,020
Beginning Inventory 47,000
Ending Inventory 57,600
Purchase Returns and Allowances 12,800
Using the periodic system, the cost of goods sold is
a. $702,220.
b. $697,820.
c. $681,020.
d. $719,020.
188. Which of the following provides the best rationale regarding analysts' views about the
information value of the gross profit rate versus the gross profit amount?
a. The gross profit amount is more informative than the gross profit rate because it is a
dollar amount rather than a ratio.
b. The gross profit amount is less informative than the gross profit rate because the latter
presents a meaningful relationship between gross profit and net sales.
c. The gross profit amount is more informative than the gross profit rate because the
gross profit rate is only used to describe a few industries while the gross profit amount
is universally used.
d. The gross profit amount is more informative than the gross profit rate because high
volume operations are able to calculate the gross profit rate but not the gross profit
amount.
Merchandising Operations
5-37
189. Bolton Company's gross profit rate last year was 32.0% and this year it is 28.4%. Which of
the following would not be a possible cause for this decline in the gross profit rate?
a. Bolton must pay higher prices to suppliers without passing these costs on to
customers.
b. Bolton may have begun selling products with a higher markup.
c. Bolton's average margin between selling price and inventory cost is decreasing.
d. Bolton may have seen a decline in total gross profit while maintaining net sales.
190. Haverty Industries increased its gross profit rate from 18.4% in 2016 to 23.7% in 2017.
Which of the following would be a possible explanation for this change?
a. Haverty's global sourcing efforts at the beginning of 2017 resulted in a lower cost of
merchandise sold.
b. Haverty's new profit lines with lower margins in 2017 became a larger component of
their sales.
c. Haverty increased its product markdowns in 2017.
d. Haverty's average margin between the selling price and the inventory cost decreased
over this two-year period.
191. Which of the following statements is true regarding profit margin?
a. Profit margin can be improved by decreasing the gross profit rate and/or controlling
operating expenses and other costs
b. Profit margin does not vary across industries.
c. Discount stores with high merchandise turnover generally have higher profit margins.
d. If the profit margin has a higher value, this suggests favorable return on each dollar of
sales.
192. The gross profit rate is computed by dividing gross profit by
a. sales revenue.
b. cost of goods sold.
c. net sales.
d. operating expenses.
193. A decline in a company’s gross profit could be caused by all of the following except
a. selling products with a lower markup.
b. clearance of discontinued inventory.
c. paying lower prices to its suppliers.
d. increasing competition resulting in a lower selling price.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-38
194. If Hostell Company has net sales of $500,000 and cost of goods sold of $350,000,
Hostell’s gross profit rate is
a. 70%.
b. 30%.
c. 43%.
d. 100%.
195. If Indiana Ink, Inc. has net sales of $400,000 and cost of goods sold of $320,000, Indiana
Ink’s gross profit rate is
a. 80%.
b. 25%
c. 20%.
d. 100%.
196. A company shows the following balances:
Sales Revenue $1,000,000
Sales Returns and Allowances 175,000
Sales Discounts 25,000
Cost of Goods Sold 600,000
What is the gross profit rate?
a. 60%
b. 75%
c. 40%
d. 25%
197. A company shows the following balances:
Sales Revenue $ 800,000
Sales Returns and Allowances 75,000
Sales Discounts 25,000
Cost of Goods Sold 490,000
What is the gross profit rate?
a. 61%
b. 70%
c. 30%
d. 39%
Merchandising Operations
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198. What is a difference between the profit margin and the gross profit rate?
a. None, these are interchangeable terms.
b. The gross profit rate is computed by dividing net sales by gross profit and the profit
margin is computed by dividing net sales by net income.
c. The gross profit rate will normally be higher than the profit margin ratio.
d. A profit margin of 7% means that 7 cents of each net sales dollar ends up in net
income and a gross profit rate of 7% means that the cost of the goods were 7% of the
selling price.
199. Andrea’s Fashions sold merchandise for $190,000 cash during the month of July. Returns
that month totaled $4,000. If the company’s gross profit rate is 40%, Andrea’s will report
monthly net sales revenue and cost of goods sold of
a. $190,000 and $114,000.
b. $186,000 and $74,400.
c. $186,000 and $111,600.
d. $190,000 and $111,600.
200. Betty’s Fabrics sold merchandise for $171,000 cash during the month of July. Returns that
month totaled $3,600. If the company’s gross profit rate is 40%, Betty will report monthly
net sales revenue and cost of goods sold of
a. $171,000 and $102,600.
b. $167,400 and $66,960.
c. $167,400 and $100,440.
d. $171,000 and $100,440.
201. American Importers reports net income of $60,000 and cost of goods sold of $540,000. If
the company’s gross profit rate was 40%, net sales were
a. $900,000.
b. $1,350,000.
c. $1,410,000.
d. $990,000.
202. United Services and Supplies reports net income of $60,000 and cost of goods sold of
$360,000. If US&S’s gross profit rate was 40%, net sales were
a. $600,000.
b. $900,000.
c. $960,000.
d. $660,000.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
5-40
Solution: $360,000 (1 − .40) = $600,000
*203. Erin Corporation purchases $500 of merchandise on credit. Using the periodic inventory
approach, Erin would record this transaction as:
a. Inventory 500
Accounts Payable 500
b. Accounts Payable 500
Purchases 500
c. Purchases 500
Accounts Payable 500
d. Accounts Payable 500
Inventory 500
*204. Crowder Corporation recorded the return of $200 of goods originally sold on credit to
Discount Industries. Using the periodic inventory approach, Crowder would record this
transaction as:
a. Inventory 200
Accounts Receivable 200
b. Sales Returns and Allowances 200
Accounts Receivable 200
c. Accounts Payable 200
Sales Returns and Allowances 200
d. Accounts Receivable 200
Sales Returns and Allowances 200
*205. Turner Corporation returned $150 of goods originally purchased on credit from Morgan
Industries. Using the periodic Inventory approach, Turner would record this transaction as:
a. Inventory 150
Accounts Payable 150
b. Accounts Payable 150
Inventory 150
c. Purchase Returns and Allowances 150
Accounts Payable 150
d. Accounts Payable 150
Purchase Returns and Allowances 150
