Chapter 5 – Accounting for Merchandising Businesses
133. Abbey Co. sold merchandise to Gomez Co. on account, $35,000, terms 2/15, net 45. The cost of the goods sold was
$24,500. Abbey Co. issued a credit memo for $3,600 for merchandise returned that originally cost $1,700. Gomez Co.
paid the invoice within the discount period. What is the amount of gross profit earned by Abbey Co. on the above
transactions?
a.
$10,500
b.
$30,772
c.
$7,972
d.
$31,400
134. What is the major difference between a periodic and perpetual inventory system?
a.
Under the periodic inventory system, the purchase of inventory will be debited to the Purchases account.
b.
Under the periodic inventory system, no journal entry is recorded at the time of the sale of inventory for the
cost of the inventory.
c.
Under the periodic inventory system, all adjustments such as purchases returns and allowances and discounts
are reconciled at the end of the accounting period.
d.
All of the answers are correct.
135. Generally, the revenue account for a merchandising business is entitled
a.
Sales
b.
Fees Earned
c.
Gross Sales
d.
Gross Profit
Chapter 5 – Accounting for Merchandising Businesses
136. Which account is not classified as a selling expense?
a.
Sales Salaries
b.
Delivery Expense
c.
Cost of Goods Sold
d.
Advertising Expense
137. President’s salaries, depreciation of office furniture, and office supplies are
a.
selling expenses
b.
miscellaneous expenses
c.
administrative expenses
d.
inventory expenses
138. Expenses that are incurred directly or entirely in connection with the selling of merchandise are classified as
a.
selling expenses
b.
general expenses
c.
other expenses
d.
administrative expenses
Chapter 5 – Accounting for Merchandising Businesses
139. When the perpetual inventory system is used, the inventory sold is shown on the income statement as
a.
cost of goods sold
b.
purchases
c.
purchases returns and allowances
d.
net purchases
140. Merchandise is purchased for $6,000 on September 2 subject to terms of 2/10, n/30, FOB destination. Freight costs
paid by the seller totaled $200. What is the required payment if paid on September 12?
a.
$6,120
b.
$5,940
c.
$6,090
d.
$5,880
141. Under the periodic inventory system, the journal entry to record the purchase of inventory will include a debit to
a.
Inventory
b.
Purchases
c.
Accounts Payable
d.
Cost of Merchandise Purchased
Chapter 5 – Accounting for Merchandising Businesses
142. Using the following information, what is the amount of net income?
Purchases
$32,000
Selling expense
$ 960
Inventory,
September 1
5,700
Inventory,
September 30
6,370
Administrative expense
910
Sales
63,000
Rent revenue
1,200
Interest expense
1,040
a.
$29,510
b.
$29,960
c.
$28,310
d.
$29,350
$1,200 – $1,040 = $29,960
143. Using the following information, what is the amount of gross profit?
Purchases
$32,000
Selling expense
$ 960
Inventory,
September 1
5,700
Inventory,
September 30
6,370
Administrative expense
910
Sales
63,000
Rent revenue
1,200
Interest expense
1,040
a.
$25,300
b.
$31,670
c.
$30,600
d.
$62,840
Gross profit = Sales – Cost of goods sold = $63,000 – $31,330 = $31,670
Chapter 5 – Accounting for Merchandising Businesses
144. Using the following information, what is the amount of income from operations?
Purchases
$32,000
Selling expense
$ 960
Inventory,
September 1
5,700
Inventory,
September 30
6,370
Administrative expense
910
Sales
63,000
Rent revenue
1,200
Interest expense
1,040
a.
$31,670
b.
$29,960
c.
$28,760
d.
$29,800
145. When comparing a retail business to a service business, the financial statement that changes the least is the
a.
balance sheet
b.
income statement
c.
retained earnings statement
d.
statement of cash flows
Chapter 5 – Accounting for Merchandising Businesses
146. The retained earnings statement shows
a.
only net income, beginning and ending balance of retained earnings
b.
only total assets, beginning and ending balance of retained earnings
c.
only net income, beginning balance of retained earnings, and dividends
d.
beginning and ending balance of retained earnings and all the changes in retained earnings as a result of net
income (loss) and dividends
147. When the three sections of a balance sheet are presented on a page in a downward sequence, it is called the
a.
account form
b.
comparative form
c.
horizontal form
d.
report form
148. 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
Chapter 5 – Accounting for Merchandising Businesses
149. 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.
operating-income statement
d.
single-step statement
150. Which of the following accounts should be closed to Income Summary at the end of the fiscal year?
a.
Inventory
b.
Accumulated Depreciation
c.
Dividends
d.
Cost of Goods Sold
151. If the physical count of inventory revealed $158,000 of inventory on hand and the inventory records reported
$163,000, what would be the necessary adjusting entry to record inventory shrinkage?
a.
debit Inventory, $158,000; credit Cost of Goods Sold, $158,000
b.
debit Inventory, $5,000; credit Cost of Goods Sold, $5,000
c.
debit Cost of Goods Sold, $163,000; credit Inventory, $158,000
d.
debit Cost of Goods Sold, $5,000; credit Inventory, $5,000
Chapter 5 – Accounting for Merchandising Businesses
152. Inventory shrinkage is recorded when
a.
merchandise is returned by a buyer
b.
merchandise purchased from a seller is incomplete or short
c.
merchandise is returned to a seller
d.
there is a difference between a physical count of inventory and inventory records
153. Bradford Company had sales of $700,000 for a year. The total assets at the beginning of the year were $240,000, and
the total assets at the end of the year were $280,000. The asset turnover ratio is (round answer to 2 decimal places)
a.
2.69
b.
0.40
c.
2.92
d.
0.34
154. Bountiful Company had sales of $650,000 and cost of goods sold of $200,000 during a year. The total assets balance
at the beginning of the year was $175,000 and at the end of the year was $167,000. Calculate the asset turnover ratio.
a.
3.00
b.
3.80
c.
0.29
d.
0.26
Chapter 5 – Accounting for Merchandising Businesses
155. A company using the periodic inventory system has the following account balances: Inventory at the beginning of the
year, $3,600; Freight In, $650; Purchases, $10,700; Purchases Returns and Allowances, $1,950; Purchases Discounts,
$330. The cost of merchandise purchased is equal to
a.
$12,670
b.
$9,070
c.
$8,420
d.
$17,230
156. A company using the periodic inventory system has inventory costing $210 on hand at the beginning of a
period. During the period, merchandise costing $635 is purchased. At year-end, inventory costing $160 is on hand. The
cost of goods sold for the year is
a.
$795
b.
$685
c.
$265
d.
$635
157. Which of the following accounts will not be found in the Cost of Goods Sold section of the income statement for a
company using the periodic inventory method?
a.
Purchases
b.
Freight In
c.
Selling Expense
d.
Inventory
Chapter 5 – Accounting for Merchandising Businesses
158. Where are selling and administrative expenses found on the multiple-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
159. Under the periodic inventory system, the journal entry to record the cost of goods sold at the point of sale will
include which of the following?
a.
none of these
b.
Cost of Goods Sold
c.
Inventory
d.
Purchases
160. Under a periodic inventory system, closing entries will include
a.
debits to Sales, Purchases Returns and Allowances, and Purchases Discounts
b.
credits to the Allowance for Doubtful Accounts
c.
adjustments to the inventory account to match physical inventory
d.
all of these
Chapter 5 – Accounting for Merchandising Businesses
161. The proper journal entry to record the receipt of inventory purchased on account in a periodic inventory system
would be
a.
Jan. 1 Inventory 1,600
Accounts Payable 1,600
b.
Jan. 1 Office Supplies 1,600
Accounts Payable 1,600
c.
Jan. 1 Purchases 1,600
Accounts Payable 1,600
d.
Jan. 1 Purchases 1,600
Accounts Receivable 1,600
162. Using the following information, what is the cost of goods sold?
Purchases
$32,000
Selling expense
$ 960
Inventory,
September 1
5,700
Inventory,
September 30
6,370
Administrative expense
910
Sales
63,000
Rent revenue
1,200
Interest expense
1,040
a.
$32,400
b.
$32,670
c.
$31,330
d.
$38,370
Cost of goods sold = Inventory on September 1 + Purchases – Inventory on September
Chapter 5 – Accounting for Merchandising Businesses
163. Discuss the following statement:
“Operating cycles for all merchandising businesses are the same, with similar profit margins.”
Include an example(s) to illustrate your explanation.
164. Describe the major differences in preparing the financial statements for a service business and a merchandising
business.
Service Business
Merchandising Business
Income Statement:
Income Statement:
Balance Sheet:
Balance Sheet:
Service Business
Merchandising Business
Income Statement:
Income Statement:
Equals operating income
Balance Sheet:
Balance Sheet:
Chapter 5 – Accounting for Merchandising Businesses
165. Complete the following data taken from the condensed income statements for merchandising Companies A, B, and
C.
Company A
Company B
Company C
Net income
$315
$ ?
$215
Sales
?
865
560
Gross profit
430
?
325
Operating expenses
?
125
?
Cost of goods sold
545
320
?
Net income
Sales
Gross profit
Operating expenses
Sales
Gross profit
Net income
166. Complete the following data taken from the condensed income statements for merchandising Companies X, Y, and
Z.
Company X
Company Y
Company Z
Net income/(net loss)
$220
$ ?
$( 70)
Sales
?
1,315
890
Gross profit
435
?
465
Operating expenses
?
565
?
Cost of goods sold
330
775
?
Net income/(net loss)
Sales
Gross profit
Operating expenses
Cost of goods sold
Chapter 5 – Accounting for Merchandising Businesses
167. During the current year, merchandise is sold for $137,500 cash and $425,600 on account. The cost of the goods sold
is $322,325. What is the amount of the gross profit?
168. During the current year, merchandise is sold for $117,500 cash and $241,750 on account. The cost of the goods sold
is $157,400. What is the amount of the gross profit?
169. During the current year, merchandise is sold for $86,000 cash and for $93,950 on account. The cost of the goods sold
is $76,240. What is the amount of the gross profit?
Chapter 5 – Accounting for Merchandising Businesses
170. Travis Company purchased merchandise on account from a supplier for $5,700, terms 2/10, net 30. Travis Company
paid for the merchandise within the discount period.
Under a perpetual inventory system, record the journal entries required for the above transactions.
171. On March 25, Osgood Company sold merchandise on account, $10,000, terms n/30. The applicable sales tax
percentage is 7.5%. Record the transaction.
Journal
Date
Description
Post.
Ref.
Debit
Credit
172. On March 29, customers who owe $10,500 on account to Sonic Sales Company submit payments of $4,250.
Journalize this event for Sonic Sales Company.
Chapter 5 – Accounting for Merchandising Businesses
173. Journalize the following merchandise transactions. The company uses the perpetual inventory system.
(a)
Sold merchandise on account, $17,300, with terms 2/10, net 30. The cost of the goods
sold was $12,600.
(b)
Received payment within the discount period.
(a)
Accounts Receivable
Sales
Cost of Goods Sold
Inventory
(b)
Cash
Accounts Receivable
174. Determine the amount to be paid in full settlement of each invoice, assuming that credit for returns and allowances
was received prior to payment and that all invoices were paid within the discount period.
Merchandise
Freight Paid by
Seller
Freight Terms
Returns and
Allowances
(a)
$4,500
$140
FOB Shipping
Point, 2/10, net 30
$1,200
(b)
$7,650
$200
FOB Destination,
1/10, net 45
$450
($7,650 – $450) – [($7,650 – $450) × 1%)] = $7,128
Chapter 5 – Accounting for Merchandising Businesses
175. Sampson Co. sold merchandise to Batson Co. on account, $46,000, terms 2/15, net 45. The cost of the goods sold is
$38,500. The Batson Co. paid the invoice within the discount period. Prepare the entries that both Sampson and Batson
Companies would record for the above. Assume both Sampson and Batson use a perpetual inventory system.
Accounts Receivable—Batson Co.
Cost of Goods Sold
Cash
Inventory
Accounts Payable—Sampson Co.
176. Which of the following costs would be included in inventory?
(a)
Purchase price
(b)
Insurance in transit FOB shipping point
(c)
Freight for delivery FOB shipping point
(d)
Repair due to negligence of receiving clerk
(e)
Receiving department employee salary
(f)
Cost of processing purchase orders
(a), (b), and (c)
177. On March 4, Micro Sales makes $4,850 in sales on bank credit cards which charge a 2.5% service charge and
deposits the funds into Micro Sales’ bank accounts at the end of the business day. Journalize the sales and recognition of
expense.
Mar. 4
Cash
Credit Card Expense
(2.5% of sales), that expense can be immediately identified and should be recorded.
Chapter 5 – Accounting for Merchandising Businesses
178. Journalize the following transactions for Armour Inc. using both the periodic inventory system and the perpetual
inventory system, presented in the side-by-side format of the form provided below.
Oct.7 Sold $1,200 of merchandise on credit to Rondo Distributors, terms n/30; the cost of the merchandise was $720.
Oct. 8 Purchased merchandise, $10,000; terms FOB shipping point and 2/15, n/30; with prepaid freight charges of $525
added to the invoice.
PERIODIC
INVENTORY
PERPETUAL
INVENTORY
Description
DR
CR
|
Description
DR
CR
|
|
|
|
|
|
|
Chapter 5 – Accounting for Merchandising Businesses
179. What is the normal balance of the following accounts?
a. Sales Tax Payable
b. Inventory
c. Delivery Expense
d. Cost of Goods Sold
e. Customer Refunds Payable
f. Estimated Returns Inventory
g. Sales
180. For each of the following, calculate the cost of inventory reported on the balance sheet.
(a)
The total inventory on hand at the end of the year as determined by taking a physical
inventory is $62,000. Of the $62,000, $8,000 has been sold FOB destination and is
awaiting pickup by the carrier.
(b)
The total inventory counted at the end of the year was $63,000. Excluded from the count
were purchases of $6,000 in transit under FOB shipping point terms.
(c)
The total inventory counted at the end of the year was $75,000. Excluded from the count
were purchases of $5,000 in transit under FOB destination terms.
Chapter 5 – Accounting for Merchandising Businesses
181. Using the perpetual inventory system, journalize the entries for the following selected transactions:
(a)
Sold merchandise on account for $12,000, terms n/30. The cost of the goods sold was
$6,500.
(b)
Sold merchandise to customers who used MasterCard and VISA, $9,500. The cost of the
goods sold was $5,300.
(c)
Sold merchandise to customers who used American Express, $2,900. The cost of the goods
sold was $1,700.
(d)
Paid an invoice from First National Bank for $385, representing a service fee for processing
MasterCard and VISA sales.
(e)
Paid an invoice from American Express for $75 fee.
(a)
Accounts Receivable
Sales
Cost of Goods Sold
Inventory
(b)
Cash
Sales
Cost of Goods Sold
Inventory
(c)
Cash
Sales
Cost of Goods Sold
Inventory
(d)
Credit Card Expense
Cash
(e)
Credit Card Expense
182. Merchandise with a list price of $4,200 and costing $2,300 is sold on account, subject to the following terms: FOB
destination, 2/10, n/30. The seller prepays the freight costs of $85 (debit Delivery Expense for the freight costs). Prior to
payment for the goods, the seller issues a credit memo for $750 to the customer for merchandise costing $425 that is
returned. Payment is received within the discount period. The company uses a perpetual inventory system.
Record the foregoing transactions of the seller in the sequence indicated below.
(a)
Sold the merchandise, recognizing the sale and cost of goods sold.
(b)
Paid the freight charges.
(c)
Issued the credit memo.
(d)
Received payment from the customer.