CHAPTER 5
ACCOUNTING FOR MERCHANDISING OPERATIONS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
a This question covers a topic in an appendix to the chapter.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
5 – 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Brief Exercises
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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
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Learning Objective 1
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Learning Objective 2
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Learning Objective 3
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Accounting for Merchandising Operations
FOR INSTRUCTOR USE ONLY
5 – 3
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 4
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Learning Objective 5
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Learning Objective a6
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Learning Objective a7
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Learning Objective 8
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Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise SA = Short-Answer
MA = Matching
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
5 – 4
CHAPTER LEARNING OBJECTIVES
1. Identify the differences between service and merchandising companies. Because of
inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit.
To account for inventory, a merchandising company must choose between a perpetual and a
periodic inventory system.
2. Explain the recording of purchases under a perpetual inventory system. The company
debits the Inventory account for all purchases of merchandise, and freight-in, and credits it for
purchase discounts and purchase returns and allowances.
3. Explain the recording of sales revenues under a perpetual inventory system. When a
merchandising company sells inventory, it debits Accounts Receivable (or Cash) and credits
Sales Revenue for the selling price of the merchandise. At the same time, it debits Cost of
Goods Sold and credits Inventory for the cost of the inventory items sold. Sales returns and
allowances and sales discounts are debited and are contra revenue accounts.
4. Explain the steps in the accounting cycle for a merchandising company. Each of the
required steps in the accounting cycle for a service company applies to a merchandising
company. A worksheet is again an optional step. Under a perpetual inventory system, the
company must adjust the Inventory account to agree with the physical count.
5. Distinguish between a multiple-step and a single-step income statement. A multiple-step
income statement shows numerous steps in determining net income, including nonoperating
activities sections. A single-step income statement classifies all data under two categories,
revenues or expenses, and determines net income in one step.
a6. Prepare a worksheet for a merchandising company. The steps in preparing a worksheet
for a merchandising company are the same as for a service company. The unique accounts
for a merchandiser are Inventory, Sales Revenue, Sales Returns and Allowances, Sales
Discounts, and Cost of Goods Sold.
a7. Explain the recording of purchases and sales of inventory under a periodic inventory
system. In recording purchases under a periodic system, companies must make entries for
(a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts,
and (d) freight costs. In recording sales, companies must make entries for (a) cash and credit
sales, (b) sales returns and allowances, and (c) sales discounts.
Accounting for Merchandising Operations
5 – 5
TRUE-FALSE STATEMENTS
1. Retailers and wholesalers are both considered merchandisers.
2. The steps in the accounting cycle are different for a merchandising company than for a
service company.
3. Sales minus operating expenses equals gross profit.
4. Under a perpetual inventory system, the cost of goods sold is determined each time a sale
occurs.
5. A periodic inventory system requires a detailed inventory record of inventory items.
6. Freight terms of FOB Destination means that the seller pays the freight costs.
7. Freight costs incurred by the seller on outgoing merchandise are an operating expense to
the seller.
8. Sales revenues are recognized during the period cash is collected from the buyer.
9. The Sales Returns and Allowances account and the Sales Discount account are both
classified as expense accounts.
10. Merchandisers apply the revenue recognition principle by recognizing sales revenues
when the performance obligation is satisfied.
11. Sales Returns and Allowances and Sales Discounts are both designed to encourage
customers to pay their accounts promptly.
12. To grant a customer a sales return, the seller credits Sales Returns and Allowances.
13. A company’s unadjusted balance in Inventory will usually not agree with the actual
amount of inventory on hand at year-end.
Test Bank for Financial Accounting, Ninth Edition
5 – 6
14. For a merchandising company, all accounts that affect the determination of income are
closed to the Income Summary account.
15. A merchandising company has different types of adjusting entries than a service
company.
16. Nonoperating activities exclude revenues and expenses that result from secondary or
auxiliary operations.
17. Operating expenses are different for merchandising and service enterprises.
18. Net sales appears on both the multiple-step and single-step forms of an income statement.
19. A multiple-step income statement provides users with more information about a
company’s income performance.
20. The multiple-step form of income statement is easier to read than the single-step form.
21. Inventory is classified as a current asset in a classified balance sheet.
22. Gain on sale of equipment and interest expense are reported under other revenues and
gains in a multiple-step income statement.
23. The gross profit section for a merchandising company appears on both the multiple-step
and single-step forms of an income statement.
24. In a multiple-step income statement, income from operations excludes other revenues and
gains and other expenses and losses.
25. A single-step income statement reports all revenues, both operating and other revenues
and gains, at the top of the statement.
26. If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.
27. Gross profit represents the merchandising profit of a company.
Accounting for Merchandising Operations
5 – 7
28. Gross profit is a measure of the overall profitability of a company.
29. Gross profit rate is computed by dividing cost of goods sold by net sales.
a30. In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial
balance (Dr.) and income statement (Dr.) columns.
a31. Freight-in is an account that is subtracted from the Purchases account to arrive at cost of
goods purchased.
a32. Under a periodic inventory system, the acquisition of inventory is charged to the
Purchases account.
a33. Under a periodic inventory system, freight-in on merchandise purchases should be
charged to the Inventory account.
a34. Purchase Returns and Allowances and Purchase Discounts are subtracted from
Purchases to produce net purchases.
35. Inventory is reported as a long-term asset on the balance sheet.
36. Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are
more readily determined.
37. The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the
first 10 days of the next month.
38. Sales revenue should be recorded in accordance with the matching principle.
39. Sales returns and allowances and sales discounts are subtracted from sales in reporting
net sales in the income statement.
40. A merchandising company using a perpetual inventory system will usually need to make
an adjusting entry to ensure that the recorded inventory agrees with physical inventory
count.
Test Bank for Financial Accounting, Ninth Edition
5 – 8
41. If a merchandising company sells land at more than its cost, the gain should be reported
in the sales revenue section of the income statement.
42. The major difference between the balance sheets of a service company and a
merchandising company is inventory.
Answers to True-False Statements
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MULTIPLE CHOICE QUESTIONS
43. Net income is gross profit less
a. financing expenses.
b. operating expenses.
c. other expenses and losses.
d. other expenses.
44. An enterprise which sells goods to customers is known as a
a. proprietorship.
b. corporation.
c. retailer.
d. service firm.
45. Which of the following would not be considered a merchandising company?
a. Retailer
b. Wholesaler
c. Service firm
d. All of these are considered a merchandising company.
46. A merchandising company that sells directly to consumers is a
a. retailer.
b. wholesaler.
c. broker.
d. service company.
Accounting for Merchandising Operations
5 – 9
47. Two categories of expenses for merchandising companies are
a. cost of goods sold and financing expenses.
b. operating expenses and financing expenses.
c. cost of goods sold and operating expenses.
d. sales and cost of goods sold.
48. The primary source of revenue for a wholesaler is
a. investment income.
b. service fees.
c. the sale of merchandise.
d. the sale of fixed assets the company owns.
49. Sales revenue less cost of goods sold is called
a. gross profit.
b. net profit.
c. net income.
d. marginal income.
50. After gross profit is calculated, operating expenses are deducted to determine
a. gross margin.
b. net income.
c. gross profit on sales.
d. net margin.
51. Cost of goods sold is determined only at the end of the accounting period in
a. a perpetual inventory system.
b. a periodic inventory system.
c. both a perpetual and a periodic inventory system.
d. neither a perpetual nor a periodic inventory system.
52. Which of the following expressions is incorrect?
a. Gross profit – operating expenses = net income
b. Sales revenue – cost of goods sold – operating expenses = net income
c. Net income + operating expenses = gross profit
d. Operating expenses – cost of goods sold = gross profit
53. Detailed records of goods held for resale are not maintained under a
a. perpetual inventory system.
b. periodic inventory system.
c. double entry accounting system.
d. single entry accounting system.
Test Bank for Financial Accounting, Ninth Edition
5 – 10
54. A perpetual inventory system would likely be used by a(n)
a. automobile dealership.
b. hardware store.
c. drugstore.
d. convenience store.
55. Which of the following is a true statement about inventory systems?
a. Periodic inventory systems require more detailed inventory records.
b. Perpetual inventory systems require more detailed inventory records.
c. A periodic system requires cost of goods sold be determined after each sale.
d. A perpetual system determines cost of goods sold only at the end of the accounting
period.
56. In a perpetual inventory system, cost of goods sold is recorded
a. on a daily basis.
b. on a monthly basis.
c. on an annual basis.
d. with each sale.
57. If a company determines cost of goods sold each time a sale occurs, it
a. must have a computer accounting system.
b. uses a combination of the perpetual and periodic inventory systems.
c. uses a periodic inventory system.
d. uses a perpetual inventory system.
58. Under a perpetual inventory system, acquisition of merchandise for resale is debited to the
a. Inventory account.
b. Purchases account.
c. Supplies account.
d. Cost of Goods Sold account.
59. The journal entry to record a return of merchandise purchased on account under a
perpetual inventory system would credit
a. Accounts Payable.
b. Purchase Returns and Allowances.
c. Sales Revenue.
d. Inventory.
Accounting for Merchandising Operations
5 – 11
60. The Inventory account is used in each of the following except the entry to record
a. goods purchased on account.
b. the return of goods purchased.
c. payment of freight on goods sold.
d. payment within the discount period.
61. A buyer would record a payment within the discount period under a perpetual inventory
system by crediting
a. Accounts Payable.
b. Inventory.
c. Purchase Discounts.
d. Sales Discounts.
62. If a purchaser using a perpetual system agrees to freight terms of FOB shipping point,
then the
a. Inventory account will be increased.
b. Inventory account will not be affected.
c. seller will bear the freight cost.
d. carrier will bear the freight cost.
63. Freight costs paid by a seller on merchandise sold to customers will cause an increase
a. in the selling expense of the buyer.
b. in operating expenses for the seller.
c. to the cost of goods sold of the seller.
d. to a contra-revenue account of the seller.
64. Paden Company purchased merchandise from Emmett Company with freight terms of
FOB shipping point. The freight costs will be paid by the
a. seller.
b. buyer.
c. transportation company.
d. buyer and the seller.
65. Glenn Company purchased merchandise inventory with an invoice price of $9,000 and
credit terms of 2/10, n/30. What is the net cost of the goods if Glenn Company pays within
the discount period?
a. $8,100
b. $8,280
c. $8,820
d. $9,000
Test Bank for Financial Accounting, Ninth Edition
5 – 12
66. Scott Company purchased merchandise with an invoice price of $3,000 and credit terms
of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent
in the credit terms?
a. 20%
b. 24%
c. 18%
d. 36%
67. If a company is given credit terms of 2/10, n/30, it should
a. hold off paying the bill until the end of the credit period, while investing the money at
10% annual interest during this time.
b. pay within the discount period and recognize a savings.
c. pay within the credit period but don’t take the trouble to invest the cash while waiting to
pay the bill.
d. recognize that the supplier is desperate for cash and withhold payment until the end of
the credit period while negotiating a lower sales price.
68. In a perpetual inventory system, the amount of the discount allowed for paying for
merchandise purchased within the discount period is credited to
a. Inventory.
b. Purchase Discounts.
c. Purchase Allowance.
d. Sales Discounts.
69. Jake’s Market recorded the following events involving a recent purchase of merchandise:
Received goods for $60,000, terms 2/10, n/30.
Returned $1,200 of the shipment for credit.
Paid $300 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory increased by
a. $57,624.
b. $57,918.
c. $57,924.
d. $59,100.
Accounting for Merchandising Operations
FOR INSTRUCTOR USE ONLY
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70. Costner’s Market recorded the following events involving a recent purchase of
merchandise:
Received goods for $40,000, terms 2/10, n/30.
Returned $800 of the shipment for credit.
Paid $200 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory
a. increased by $38,416.
b. increased by $38,612.
c. increased by $38,616.
d. increased by $39,400.
71. Under the perpetual system, freight costs incurred by the buyer for the transporting of
goods is recorded in
a. Freight Expense.
b. Freight – In.
c. Inventory.
d Freight – Out.
72. Glover Co. returned defective goods costing $5,000 to Mal Company on April 19, for credit.
The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by Glover Co.
on April 19, in receiving full credit is:
a. Accounts Payable ……………………………………………………… 5,000
Inventory ………………………………………………………….. 5,000
b. Accounts Payable ……………………………………………………… 5,000
Inventory ………………………………………………………………….. 150
Cash ……………………………………………………………….. 5,150
c. Accounts Payable ……………………………………………………… 5,000
Purchase Discounts …………………………………………… 120
Inventory ………………………………………………………….. 4,850
d. Accounts Payable ……………………………………………………… 5,000
Inventory ………………………………………………………….. 120
Cash ……………………………………………………………….. 4,850
73. McIntyre Company made a purchase of merchandise on credit from Marvin Company on
August 8, for $9,000, terms 3/10, n/30. On August 17, McIntyre makes the appropriate
payment to Marvin. The entry on August 17 for McIntyre Company is:
a. Accounts Payable ……………………………………………………… 9,000
Cash ……………………………………………………………….. 9,000
b. Accounts Payable ……………………………………………………… 8,730
Cash ……………………………………………………………….. 8,730
c. Accounts Payable ……………………………………………………… 9,000
Purchase Returns and Allowances ……………………….. 270
Test Bank for Financial Accounting, Ninth Edition
5 – 14
MC. 73 (Cont.)
Cash ………………………………………………………………… 8,730
d. Accounts Payable ……………………………………………………… 9,000
Inventory ………………………………………………………….. 270
Cash ………………………………………………………………… 8,730
74. On July 9, Sheb Company sells goods on credit to Wooley Company for $5,000, terms
1/10, n/60. Sheb receives payment on July 18. The entry by Sheb on July 18 is:
a. Cash ……………………………………………………………………….. 5,000
Accounts Receivable ………………………………………….. 5,000
b. Cash ……………………………………………………….………………. 5,000
Sales Discounts…………………………………………………. 50
Accounts Receivable ………………………………………….. 4,950
c. Cash ……………………………………………………………………….. 4,950
Sales Discounts ………………………………………………………… 50
Accounts Receivable ………………………………………….. 5,000
d. Cash ……………………………………………………………………….. 5,050
Sales Discounts…………………………………………………. 50
Accounts Receivable ………………………………………….. 5,000
75. On November 2, 2014, Kasdan Company has cash sales of $6,000 from merchandise
having a cost of $3,600. The entries to record the day’s cash sales will include:
a. a $3,600 credit to Cost of Goods Sold.
b. a $6,000 credit to Cash.
c. a $3,600 credit to Inventory.
d a $6,000 debit to Accounts Receivable.
76. A credit sale of $4,000 is made on April 25, terms 2/10, n/30, on which a return of $250 is
granted on April 28. What amount is received as payment in full on May 4?
a. $3,675
b. $3,750
c. $3,920
d $4,000
Accounting for Merchandising Operations
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77. The entry to record the receipt of payment within the discount period on a sale of $2,000
with terms of 2/10, n/30 will include a credit to
a. Sales Discounts for $40.
b. Cash for $1,960.
c. Accounts Receivable for $2,000.
d. Sales Revenue for $2,000.
78. The collection of a $6,000 account within the 2 percent discount period will result in a
a. debit to Sales Discounts for $120.
b. debit to Accounts Receivable for $5,880.
c. credit to Cash for $5,880.
d. credit to Accounts Receivable for $5,880.
79. Company X sells $900 of merchandise on account to Company Y with credit terms of
2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is
the amount of Company Y’s check?
a. $630
b. $720
c. $810
d. $882
80. Cleese Company sells merchandise on account for $5,000 to Langston Company with
credit terms of 2/10, n/30. Langston Company returns $1,000 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. $3,920
b. $4,000
c. $4,900
d. $4,920
81. The collection of a $1,500 account after the 2 percent discount period will result in a
a. debit to Cash for $1,470.
b. debit to Accounts Receivable for $1,500.
c. debit to Cash for $1,500.
d. debit to Sales Discounts for $30.
Test Bank for Financial Accounting, Ninth Edition
5 – 16
82. The collection of a $1,000 account after the 2 percent discount period will result in a
a. debit to Cash for $980.
b. credit to Accounts Receivable for $1,000.
c. credit to Cash for $1,000.
d. debit to Sales Discounts for $20.
83. In a perpetual inventory system, the Cost of Goods Sold account is used
a. only when a cash sale of merchandise occurs.
b. only when a credit sale of merchandise occurs.
c. only when a sale of merchandise occurs.
d. whenever there is a sale of merchandise or a return of merchandise sold.
84. Sales revenues are usually considered recognized when
a. cash is received from credit sales.
b. an order is received.
c. goods have been transferred from the seller to the buyer.
d. adjusting entries are made.
85. A sales invoice is a source document that
a. provides support for goods purchased for resale.
b. provides evidence of incurred operating expenses.
c. provides evidence of credit sales.
d. serves only as a customer receipt.
86. Sales revenue
a. may be recorded before cash is collected.
b. will always equal cash collections in a month.
c. only results from credit sales.
d. is only recorded after cash is collected.
87. The journal entry to record a credit sale of merchandise is
a. Cash
Sales Revenue
b. Cash
Service Revenue
c. Accounts Receivable
Service Revenue
d. Accounts Receivable
Sales Revenue
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88. Sales Returns and Allowances is increased when
a. an employee does a good job.
b. goods are sold on credit.
c. goods that were sold on credit are returned.
d. customers refuse to pay their accounts.
89. The Sales Returns and Allowances account is classified as a(n)
a. asset account.
b. contra asset account.
c. expense account.
d. contra revenue account.
90. A credit granted to a customer for returned goods requires a debit to
a. Sales Revenue and a credit to Cash.
b. Sales Returns and Allowances and a credit to Accounts Receivable.
c. Accounts Receivable and a credit to a contra-revenue account.
d. Cash and a credit to Sales Returns and Allowances.
91. 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.
92. A credit sale of $3,600 is made on July 15, terms 2/10, n/30, on which a return of $200 is
granted on July 18. What amount is received as payment in full on July 24?
a. $3,332
b. $3,440
c. $3,528
d $3,600
93. 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.
Test Bank for Financial Accounting, Ninth Edition
5 – 18
94. 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 overbilling customers.
95. 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.
96. 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.
97. The credit terms offered to a customer by a business firm are 2/10, n/30, which means that
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.
98. 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.
99. Company A sells $2,500 of merchandise on account to Company B with credit terms of
2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is
the amount of Company B’s check?
a. $1,750
b. $2,000
c. $2,250
d. $2,450
Accounting for Merchandising Operations
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100. Kern Company sells merchandise on account for $8,000 to Block Company with credit terms
of 2/10, n/30. Block Company returns $1,600 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. $6,272
b. $6,400
c. $7,840
d. $7,872
101. Carter Company sells merchandise on account for $4,000 to Hannah Company with credit
terms of 2/10, n/30. Hannah Company returns $600 of merchandise that was damaged,
along with a check to settle the account within the discount period. What entry does Carter
Company make upon receipt of the check?
a. Cash ……………………………………………………….………………. 3,400
Accounts Receivable ………………………………………….. 3,400
b. Cash ……………………………………………………….………………. 3,332
Sales Returns and Allowances ……………………………………. 668
Accounts Receivable ………………………………………….. 4,000
c. Cash ……………………………………………………………………….. 3,332
Sales Returns and Allowances ……………………………………. 600
Sales Discounts ………………………………………………………… 68
Accounts Receivable ………………………………………….. 4,000
d. Cash ……………………………………………………….………………. 3,920
Sales Discounts ………………………………………………………… 80
Sales Returns and Allowances …………………………….. 600
Accounts Receivable ………………………………………….. 3,400
102. 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
103. Which of the following accounts has a normal credit balance?
a. Sales Returns and Allowances
b. Sales Discounts
c. Sales Revenue
d. Selling Expense
104. 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.
Test Bank for Financial Accounting, Ninth Edition
5 – 20
105. When a seller grants credit for returned goods, the account that is credited is
a. Sales Revenue.
b. Sales Returns and Allowances.
c. Inventory.
d. Accounts Receivable.
106. The respective normal account balances of Sales Revenue, Sales Returns and
Allowances, and Sales Discounts are
a. credit, credit, credit.
b. debit, credit, debit.
c. credit, debit, debit.
d. credit, debit, credit.
107. All of the following are contra revenue accounts except
a. sales revenue.
b. sales allowances.
c. sales discounts.
d. sales returns.
108. A merchandising company using a perpetual system will make
a. the same number of adjusting entries as a service company does.
b. one more adjusting entry than a service company does.
c. one less adjusting entry than a service company does.
d. different types of adjusting entries compared to a service company.
109. In preparing closing entries for a merchandising company, the Income Summary account
will be credited for the balance of
a. sales revenue.
b. inventory.
c. sales discounts.
d. freight-out.
110. A merchandising company using a perpetual system may record an adjusting entry by
a. debiting Income Summary.
b. crediting Income Summary.
c. debiting Cost of Goods Sold.
d. debiting Sales Revenue.
111. The operating cycle of a merchandiser is
a. always one year in length.
b. generally longer than it is for a service company.
c. about the same as for a service company.
d. generally shorter than it is for a service company.
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112. When the physical count of Rosanna Company inventory had a cost of $4,350 at year end
and the unadjusted balance in Inventory was $4,500, Rosanna will have to make the
following entry:
a. Cost of Goods Sold ……………………………………………………. 150
Inventory ………………………………………………………….. 150
b. Inventory ………………………………………………………………….. 150
Cost of Goods Sold ……………………………………………. 150
c. Income Summary………………………………………………………. 150
Inventory ………………………………………………………….. 150
d. Cost of Goods Sold ……………………………………………………. 4,500
Inventory ………………………………………………………….. 4,500
113. Arquette Company’s financial information is presented below.
Sales Revenue $ ???? Cost of Goods Sold 540,000
Sales Returns and Allowances 40,000 Gross Profit ????
Net Sales 900,000
The missing amounts above are:
Sales Revenue Gross Profit
a. $940,000 $360,000
b. $860,000 $360,000
c. $940,000 $420,000
d. $860,000 $420,000
114. The sales revenue 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.
115. The operating expense section of an income statement for a wholesaler would not include
a. freight-out.
b. utilities expense.
c. cost of goods sold.
d. insurance expense.
116. Income from operations will always result if
a. the cost of goods sold exceeds operating expenses.
b. revenues exceed cost of goods sold.
c. revenues exceed operating expenses.
d. gross profit exceeds operating expenses.
Test Bank for Financial Accounting, Ninth Edition
5 – 22
117. 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 revenues
d. Cost of goods sold
118. Conrad Company reported the following balances at June 30, 2015:
Sales Revenue $16,200
Sales Returns and Allowances 600
Sales Discounts 300
Cost of Goods Sold 7,500
Net sales for the month is
a. $7,800
b. $15,300.
c. $15,600.
d. $16,200.
119. 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.
120. 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 merchandiser.
d. on the income statement if the periodic inventory system is used because it cannot be
calculated.
121. Which of the following is not a true statement about a multiple-step income statement?
a. Operating expenses are similar for merchandising and service enterprises.
b. There may be a section for nonoperating activities.
c. There may be a section for operating assets.
d. There is a section for cost of goods sold.
122. Which one of the following is shown on a multiple-step but not on a single-step income
statement?
a. Net sales
b. Net income
c. Gross profit
d. Cost of goods sold
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123. All of the following items would be reported as other expenses and losses except
a. freight-out.
b. casualty losses.
c. interest expense.
d. loss from employees‘ strikes.
124. If a company has net sales of $700,000 and cost of goods sold of $455,000, the gross
profit percentage is
a. 25%.
b. 35%.
c. 65%.
d. 100%.
125. A company shows the following balances:
Sales Revenue $2,500,000
Sales Returns and Allowances 450,000
Sales Discounts 50,000
Cost of Goods Sold 1,400,000
What is the gross profit percentage?
a. 30%
b. 44%
c. 56%
d. 70%
126. The gross profit rate is computed by dividing gross profit by
a. cost of goods sold.
b. net income.
c. net sales.
d. sales revenue.
127. In terms of liquidity, inventory is
a. more liquid than cash.
b. more liquid than accounts receivable.
c. more liquid than prepaid expenses.
d. less liquid than store equipment.
128. On a classified balance sheet, inventory is classified as
a. an intangible asset.
b. property, plant, and equipment.
c. a current asset.
d. a long-term investment.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
5 – 24
129. Gross profit for a merchandiser is net sales minus
a. operating expenses.
b. cost of goods sold.
c. sales discounts.
d. cost of goods available for sale.
130. During 2015, Parker Enterprises generated revenues of $90,000. The company’s
expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000
and a loss on the sale of equipment of $3,000.
Parker’s gross profit is
a. $24,000.
b. $27,000.
c. $45,000.
d. $90,000.
131. During 2015, Parker Enterprises generated revenues of $90,000. The company’s
expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000
and a loss on the sale of equipment of $3,000.
Parker’s income from operations is
a. $18,000.
b. $27,000.
c. $45,000.
d. $90,000.
132. During 2015, Parker Enterprises generated revenues of $90,000. The company’s
expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000
and a loss on the sale of equipment of $3,000.
Parker’s net income is
a. $24,000.
b. $27,000.
c. $45,000.
d. $90,000.
133. Financial information is presented below:
Operating Expenses $ 60,000
Sales Revenue 225,000
Cost of Goods Sold 135,000
Gross profit would be
a. $30,000.
b. $90,000.
Accounting for Merchandising Operations
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MC. 133 (Cont.)
c. $165,000.
d. $225,000.
134. Financial information is presented below:
Operating Expenses $ 60,000
Sales Revenue 225,000
Cost of Goods Sold 135,000
The gross profit rate would be
a. .133.
b. .400.
c. .600.
d. .733.
135. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 26,000
Sales Discounts 12,000
Sales 300,000
Cost of Goods Sold 158,000
Gross profit would be
a. $104,000.
b. $116,000.
c. $130,000.
d. $142,000.
136. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 26,000
Sales Discounts 12,000
Sales Revenue 300,000
Cost of Goods Sold 158,000
The gross profit rate would be
a. .347.
b. .397.
c. .473.
d. .542.
Test Bank for Financial Accounting, Ninth Edition
5 – 26
137. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 18,000
Sales Discounts 12,000
Sales Revenue 320,000
Cost of Goods Sold 174,000
The amount of net sales on the income statement would be
a. $290,000.
b. $302,000.
c. $308,000.
d. $320,000.
138. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 18,000
Sales Discounts 12,000
Sales Revenue 320,000
Cost of Goods Sold 174,000
Gross profit would be
a. $26,000.
b. $116,000.
c. $128,000.
d. $134,000.
139. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 18,000
Sales Discounts 12,000
Sales Revenue 320,000
Cost of Goods Sold 174,000
The gross profit rate would be
a. .363.
b. .400.
c. .456.
d. .503.
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140. If a company has sales revenue of $630,000, net sales of $600,000, and cost of goods
sold of $390,000, the gross profit rate is
a. 35%.
b. 38%
c. 62%.
d. 65%.
141. Dawson’s Fashions sold merchandise for $40,000 cash during the month of July. Returns
that month totaled $1,000. If the company’s gross profit rate is 40%, Dawson’s will report
monthly net sales revenue and cost of goods sold of
a. $39,000 and $23,400.
b. $39,000 and $24,000.
c. $40,000 and $23,400.
d. $40,000 and $24,000.
142. During August, 2015, Baxter’s Supply Store generated revenues of $60,000. The
company’s expenses were as follows: cost of goods sold of $36,000 and operating
expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale
of a delivery truck of $2,000.
Baxter’s gross profit for August, 2015 is
a. $20,000.
b. $21,000.
c. $23,000.
d. $24,000.
143. During August, 2015, Baxter’s Supply Store generated revenues of $60,000. The
company’s expenses were as follows: cost of goods sold of $36,000 and operating
expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale
of a delivery truck of $2,000.
Baxter’s nonoperating income (loss) for the month of August, 2015 is
a. $0.
b. $1,000.
c. $2,000.
d. $3,000.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
5 – 28
144. During August, 2015, Baxter’s Supply Store generated revenues of $60,000. The
company’s expenses were as follows: cost of goods sold of $36,000 and operating
expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale
of a delivery truck of $2,000.
Baxter’s operating income for the month of August, 2015 is
a. $20,000.
b. $21,000.
c. $23,000.
d. $24,000.
145. During August, 2015, Baxter’s Supply Store generated revenues of $60,000. The
company’s expenses were as follows: cost of goods sold of $36,000 and operating
expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale
of a delivery truck of $2,000.
Baxter’s net income for August, 2015 is
a. $20,000.
b. $21,000.
c. $23,000.
d. $24,000.
a146. In a worksheet for a merchandising company, Inventory would appear in the
a. trial balance and adjusted trial balance columns only.
b. trial balance and balance sheet columns only.
c. trial balance, adjusted trial balance, and balance sheet columns.
d. trial balance, adjusted trial balance, and income statement columns.
a147. The Inventory account balance appearing in a perpetual inventory worksheet represents the
a. ending inventory.
b. beginning inventory.
c. cost of merchandise purchased.
d. cost of merchandise sold.
a148. The following information is available for Dennehy Company:
Sales Revenue $390,000 Freight-In $30,000
Ending Inventory 37,500 Purchase Returns and Allowances 15,000
Purchases 270,000 Beginning Inventory 45,000
Dennehy’s cost of goods sold is
a. $262,500.
b. $285,000.
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FOR INSTRUCTOR USE ONLY
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MC. 148 (Cont.)
c. $292,500.
d. $345,000.
,
a149. At the beginning of September 2015, Stella Company reported Inventory of $8,000.
During the month, the company made purchases of $35,600. At September 30, 2015, a
physical count of inventory reported $8,400 on hand. Cost of goods sold for the month is
a. $35,200.
b. $35,600.
c. $36,000.
d. $43,600.
,
a150. At the beginning of the year, Hunt Company had an inventory of $750,000. During the
year, the company purchased goods costing $2,400,000. If Hunt Company reported
ending inventory of $900,000 and sales of $3,750,000, the company’s cost of goods sold
and gross profit rate must be
a. $1,500,000 and 66.7%.
b. $2,250,000 and 40%.
c. $1,500,000 and 40%.
d. $2,250,000 and 60%.
a151. During the year, Slick’s Pet Shop’s inventory decreased by $25,000. If the company’s cost
of goods sold for the year was $500,000, purchases must have been
a. $475,000.
b. $500,000.
c. $525,000.
d. Unable to determine.
a152. Cost of goods available for sale is computed by adding
a. beginning inventory to net purchases.
b. beginning inventory to the cost of goods purchased.
c. net purchases and freight-in.
d. purchases to beginning inventory.
a153. The Freight-In account
a. increases the cost of merchandise purchased.
b. is contra to the Purchases account.
c. is a permanent account.
d. has a normal credit balance.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
5 – 30
a154. Net purchases plus freight-in determines
a. cost of goods sold.
b. cost of goods available for sale.
c. cost of goods purchased.
d. total goods available for sale.
a155. Goldblum Company has the following account balances:
Purchases $96,000
Sales Returns and Allowances 12,800
Purchase Discounts 8,000
Freight-In 6,000
Delivery Expense 10,000
The cost of goods purchased for the period is
a. $80,800.
b. $88,000.
c. $94,000.
d. $104,000.
,
a156. McKendrick Shoe Store has a beginning inventory of $45,000. During the period,
purchases were $195,000; purchase returns, $6,000; and freight-in $15,000. A physical
count of inventory at the end of the period revealed that $30,000 was still on hand. The
cost of goods available for sale was
a. $189,000.
b. $204,000.
c. $219,000.
d. $249,000.
a157. In a periodic inventory system, a return of defective merchandise to a supplier is recorded
by crediting
a. Accounts Payable.
b. Inventory.
c. Purchases.
d. Purchase Returns and Allowances.
a158. Which one of the following transactions is recorded with the same entry in a perpetual and
a periodic inventory system?
a. Cash received on account with a discount
b. Payment of freight costs on a purchase
c. Return of merchandise sold
d. Sale of merchandise on credit
Accounting for Merchandising Operations
FOR INSTRUCTOR USE ONLY
5 – 31
a159. The journal entry to record a return of merchandise purchased on account under a
periodic inventory system would be
a. Accounts Payable
Purchase Returns and Allowances
b. Purchase Returns and Allowances
Accounts Payable
c. Accounts Payable
Inventory
d. Inventory
Accounts Payable
a160. Under a periodic inventory system, acquisition of merchandise is debited to the
a. Inventory account.
b. Cost of Goods Sold account.
c. Purchases account.
d. Accounts Payable account.
a161. Which of the following accounts has a normal credit balance?
a. Purchases
b. Sales Returns and Allowances
c. Freight-In
d. Purchase Discounts
a162. The respective normal account balances of Purchases, Purchase Discounts, and Freight–
in are
a. credit, credit, debit.
b. debit, credit, credit.
c. debit, credit, debit.
d. debit, debit, debit.
a163. Cobb Company’s accounting records show the following at the year ending on December
31, 2015:
Purchase Discounts $ 11,200
Freight – In 15,600
Purchases 402,000
Beginning Inventory 47,000
Ending Inventory 57,600
Purchase Returns 12,800
Using the periodic system, the cost of goods purchased is
a. $378,000.
b. $383,000.
c. $393,600.
d. $404,200.
Test Bank for Financial Accounting, Ninth Edition
5 – 32
a164. Cobb Company’s accounting records show the following at the year ending on December
31, 2015:
Purchase Discounts $ 11,200
Freight – In 15,600
Purchases 402,000
Beginning Inventory 47,000
Ending Inventory 57,600
Purchase Returns 12,800
Using the periodic system, the cost of goods sold is
a. $378,000.
b. $383,000.
c. $393,600.
d. $404,200.
165. Ezra Company has sales revenue of $60,000, cost of goods sold of $36,000 and
operating expenses of $14,000 for the year ended December 31. Ezra’s gross profit is
a. $0.
b. $10,000.
c. $24,000.
d. $46,000.
166. Rae Company uses a perpetual inventory system and made a purchase of merchandise
on credit from Tyree Corporation on August 3, for $9,000, terms 2/10, n/45. On August 10,
Rae makes the appropriate payment to Tyree. The entry on August 10 for Rae Company
is
a. Accounts Payable ……………………………………………………… 9,000
Cash …………………………………………………………………. 9,000
b. Accounts Payable ……………………………………………………… 8,820
Cash …………………………………………………………………. 8,820
c. Accounts Payable ……………………………………………………… 9,000
Purchase Returns and Allowances ………………………… 180
Cash …………………………………………………………………. 8,820
d. Accounts Payable ……………………………………………………… 9,000
Inventory …………………………..……………………………….. 180
Cash …………………………………………………………………. 8,820
Accounting for Merchandising Operations
5 – 33
167. Kate Company uses a perpetual inventory system and purchased inventory from Phoebe
Company. The shipping costs were $500 and the terms of the shipment were FOB
shipping point. Kate would have the following entry regarding the shipping charges:
a. There is no entry on Kate’s books for this transaction.
b. Freight Expense ……………………………………………………….. 500
Cash ……………………………………………………………….. 500
c. Freight-Out …………………………..………………………………….. 500
Cash ……………………………………………………………….. 500
d. Inventory ………………………………………………………………….. 500
Cash ……………………………………………………………….. 500
168. In a perpetual inventory system, a return of defective merchandise by a purchaser is
recorded by crediting
a. Purchases.
b. Purchase Returns.
c. Purchase Allowance.
d. Inventory.
169. On October 4, 2015, JT Corporation had credit sales transactions of $4,000 from
merchandise having cost $2,400. The entries to record the day’s credit transactions
include a
a. debit of $4,000 to Inventory.
b. credit of $4,000 to Sales Revenue.
c. debit of $2,400 to Inventory.
d. credit of $2,400 to Cost of Goods Sold.
170. Which of the following accounts is not closed to Income Summary?
a. Cost of Goods Sold
b. Inventory
c. Sales Revenue
d. Sales Discounts
171. In the Augie Company, sales were $750,000, sales returns and allowances were $30,000,
and cost of goods sold was $450,000. The gross profit rate was
a. 36%.
b. 37.5%.
c. 40%.
d. 41.7%.
172. Net sales is sales revenue less
a. sales discounts.
b. sales returns.
c. sales returns and allowances.
d. sales discounts and sales returns and allowances.
Test Bank for Financial Accounting, Ninth Edition
5 – 34
173. In the balance sheet, ending inventory is reported
a. in current assets immediately following accounts receivable.
b. in current assets immediately following prepaid expenses.
c. in current assets immediately following cash.
d. under property, plant, and equipment.
a174. Cost of goods available for sale is computed by adding
a. freight-in to net purchases.
b. beginning inventory to net purchases.
c. beginning inventory to purchases and freight-in.
d. beginning inventory to cost of goods purchased.
175. The Income statement is
a. required under GAAP but not under IFRS.
b. required under IFRS in the same format as under GAAP.
c. required under IFRS but not under GAAP.
d. required under IFRS with some differences as compared to GAAP.
176. The basic accounting entries for merchandising are
a. the same under GAAP and under IFRS.
b. required under GAAP but not under IFRS.
c. required under IFRS but not under GAAP.
d. required under IFRS with some differences as compared to GAAP.
177. Under GAAP, companies can choose which inventory system?
Perpetual Periodic
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No
178. Under IFRS, companies can choose which inventory system?
Perpetual Periodic
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No
Accounting for Merchandising Operations
5 – 35
179. Companies cannot use the
a. periodic inventory system under GAAP.
b. periodic inventory system under IFRS.
c. perpetual system under IFRS.
d. both periodic and perpetual can be used under GAAP and IFRS.
180. Inventories are defined by IFRS as
a. held-for-sale in the ordinary course of business.
b. in the process of production for sale in the ordinary course of business.
c. in the form of materials or supplies to be consumed in the production process or in the
providing of services.
d. All of these answer choices are correct.
181. Under GAAP, companies generally classify income statement items by
a. function.
b. nature.
c. nature or function
d. date incurred.
182. Under IFRS, companies must classify income statement items by
a. function.
b. nature.
c. nature or function
d. date incurred.
183. Under GAAP, income statement items are generally described as
a. administration, distribution, manufacturing, etc.
b. salaries, depreciation, utilities, etc.
c. administration, depreciation, manufacturing, etc.
d. salaries, distribution, utilities, etc.
184. Under IFRS, income statement items are generally described as
a. administration, distribution, manufacturing, etc.
b. salaries, depreciation, utilities, etc.
c. administration, depreciation, manufacturing, etc.
d. salaries, distribution, utilities, etc.
Test Bank for Financial Accounting, Ninth Edition
5 – 36
185. For the income statement, IFRS requires
a. single-step approach.
b. multiple-step approach.
c. single-step approach or multiple-step approach.
d. no specific income statement approach.
186. Under IFRS, companies can apply revaluation to
a. land, buildings, and intangible assets.
b. land, buildings, but not intangible assets.
c. intangible assets, but not land or buildings.
d. no assets.
187. The use of IFRS results in more transactions affecting
a. net income but not other comprehensive income.
b. other comprehensive income, but not net income.
c. but net income and other comprehensive income.
d. neither net income nor other comprehensive income.
188. Comprehensive income under IFRS
a. includes unrealized gains and losses included in net income, in contrast to GAAP.
b. includes unrealized gains and losses included in net income, similar to GAAP.
c. excludes unrealized gains and losses included in net income, in contrast to GAAP.
d. excludes unrealized gains and losses included in net income, similar to GAAP.
189. The number of years of income statement information to be presented is
a. 2 years under both GAAP and IFRS.
b. 3 years under both GAAP and IFRS.
c. 2 years under GAAP and 3 years under IFRS.
d. 3 years under GAAP and 2 years under IFRS.
Accounting for Merchandising Operations
5 – 37
Answers to Multiple Choice Questions
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
43.
b
64.
b
85.
c
106.
c
127.
c
a148.
c
169.
b
44.
c
65.
c
86.
a
107.
a
128.
c
a149.
a
170.
b
45.
c
66.
c
87.
d
108.
b
129.
b
a150.
b
171.
b
46.
a
67.
b
88.
c
109.
a
130.
c
a151.
a
172.
d
47.
c
68.
a
89.
d
110.
c
131.
b
a152.
b
173.
a
48.
c
69.
c
90.
b
111.
b
132.
a
a153.
a
a174.
d
49.
a
70.
c
91.
d
112.
a
133.
b
a154.
c
175.
d
50.
b
71.
c
92.
a
113.
a
134.
b
a155.
c
176.
a
51.
b
72.
a
93.
b
114.
d
135.
a
a156.
d
177.
b
52.
d
73.
d
94.
b
115.
c
136.
b
a157.
d
178.
b
53.
b
74.
c
95.
c
116.
d
137.
a
a158.
a
179.
d
54.
a
75.
c
96.
a
117.
b
138.
b
a159.
a
180.
d
55.
b
76.
a
97.
c
118.
b
139.
b
a160.
c
181.
a
56.
d
77.
c
98.
d
119.
d
140.
a
a161.
d
182.
c
57.
d
78.
a
99.
d
120.
b
141.
a
a162.
c
183.
a
58.
a
79.
d
100.
a
121.
c
142.
d
a163.
c
184.
b
59.
d
80.
a
101.
c
122.
c
143.
d
a164.
b
185.
d
60.
c
81.
c
102.
a
123.
a
144.
a
165.
c
186.
a
61.
b
82.
b
103.
c
124.
b
145.
c
166.
d
187.
b
62.
a
83.
d
104.
d
125.
a
a146
.
c
167.
d
188.
b
63.
b
84.
c
105.
d
126.
c
a147
.
a
168.
d
189.
d
BRIEF EXERCISES
BE 190
Presented here are the components in Bradley Company’s income statement. Determine the
missing amounts.
Sales Cost of Gross Operating Net
Revenue Goods Sold _Profit Expenses Income
$75,000 (a) $35,000 (b) $17,000
(c) $86,000 $59,000 $48,000 (d)
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
5 – 38
BE 191
Prepare the necessary journal entries on the books of Kelly Carpet Company to record the
following transactions, assuming a perpetual inventory system (you may omit explanations):
(a) Kelly purchased $45,000 of merchandise on account, terms 2/10, n/30.
(b) Returned $3,000 of damaged merchandise for credit.
(c) Paid for the merchandise purchased within 10 days.
BE 192
Garth Company sold goods on account to Kyle Enterprises with terms of 2/10, n/30. The goods
had a cost of $600 and a selling price of $1,100. Both Garth and Kyle use a perpetual inventory
system. Record the sale on the books of Garth and the purchase on the books of Kyle.
BE 193
Richter Company sells merchandise on account for $2,500 to Lynch Company with credit terms
of 3/10, n/60. Lynch Company returns $200 of merchandise that was damaged, along with a
check to settle the account within the discount period. What entry does Richter Company make
upon receipt of the check and the damaged merchandise?
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA
Accounting for Merchandising Operations
FOR INSTRUCTOR USE ONLY
5 – 39
BE 194
Charlie Company uses a perpetual inventory system. During May, the following transactions and
events occurred.
May 13 Sold 8 motors at a cost of $45 each to Scruffy Brothers Supply Company, terms
4/10, n/30. The motors cost Charlie $26 each.
May 16 One defective motor was returned to Charlie.
May 23 Received payment in full from Scruffy Brothers. Round to nearest dollar.
Instructions
Journalize the May transactions for Charlie Company (seller) assuming that Charlie uses a
perpetual inventory system. You may omit explanations. Round amounts to nearest dollar.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
5 – 40
BE 195
The income statement for Pepe Serna Company for the year ended December 31, 2015 is as
follows:
PEPE SERNA COMPANY
Income Statement
For the Year Ended December 31, 2015
Revenues
Sales revenue ………………………………………………………………… $58,000
Interest revenue ……………………………………………………………… 3,000
Total revenues ………………………………………………………….. 61,000
Expenses
Cost of goods sold ………………………………………………………….. $33,000
Salaries and wages expense ……………………………………………. 13,000
Interest expense …………………………………………………………….. 1,000
Total expenses………………………………………………………….. 47,000
Net income ………………………………………………………………………………. $ 14,000
Prepare the entries to close the revenue and expense accounts at December 31, 2015. You may
omit explanations for the transactions.
BE 196
Hoyt Company provides this information for the month of November, 2015: sales on credit
$170,000; cash sales $70,000; sales discounts $2,000; and sales returns and allowances $9,000.
Prepare the sales revenues section of the income statement based on this information.
Accounting for Merchandising Operations
5 – 41
BE 197
During October, 2015, Red’s Catering Company generated revenues of $14,000. Sales
discounts totaled $200 for the month. Expenses were as follows: Cost of goods sold of $7,700
and operating expenses of $2,000.
Calculate (1) gross profit and (2) income from operations for the month.
aBE 198
For each of the following, determine the missing amounts.
Beginning Goods Available Cost of Ending
Inventory Purchases for Sale Goods Sold Inventory
1. $10,000 ________ $ 45,000 $25,000 _______
2. ______ $220,000 $265,000 _______ $40,000
aBE 199
Assume that Swann Company uses a periodic inventory system and has these account balances:
Purchases $525,000; Purchase Returns and Allowances $14,000; Purchase Discounts $9,000;
and Freight-In $15,000. Determine net purchases and cost of goods purchased.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
5 – 42
aBE 200
Assume that Swann Company uses a periodic inventory system and has these account balances:
Purchases $630,000; Purchase Returns and Allowances $25,000; Purchase Discounts $11,000;
and Freight-In $19,000; beginning inventory of $45,000; ending inventory of $55,000; and net
sales of $750,000. Determine the cost of goods sold.
aBE 201
Scruffy Brothers Supply uses a periodic inventory system. During May, the following transactions
and events occurred.
May 13 Purchased 8 motors at a cost of $45 each from Charlie Company, terms 4/10, n/30.
The motors cost Charlie Company $26 each.
May 16 Returned 1 defective motor to Charlie.
May 23 Paid Charlie Company in full. Round to nearest dollar.
Instructions
Journalize the May transactions for Scruffy Brothers. You may omit explanations.
Accounting for Merchandising Operations
FOR INSTRUCTOR USE ONLY
5 – 43
EXERCISES
Ex. 202
For each of the following, determine the missing amounts.
Sales Cost of Gross Operating Net
Revenue Goods Sold _Profit Expenses Income
1. $100,000 ________ _______ $30,000 $12,000
2. ________ $135,000 $125,000 _______ $80,000
Ex. 203
On October 1, Benji’s Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $200
each. During the month of October, the following transactions occurred.
Oct. 4 Purchased 40 bicycles at a cost of $200 each from Monrue Bicycle Company, terms
1/10, n/30.
6 Sold 25 bicycles to Team Wisconsin for $330 each, terms 2/10, n/30.
7 Received credit from Monrue Bicycle Company for the return of 2 defective bicycles.
13 Issued a credit memo to Team Wisconsin for the return of a defective bicycle.
14 Paid Monroe Bicycle Company in full, less discount.
Instructions
Prepare the journal entries to record the transactions assuming the company uses a perpetual
inventory system.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
5 – 44
Ex. 204
On September 1, Reid Supply had an inventory of 15 backpacks at a cost of $20 each. The
company uses a perpetual inventory system. During September, the following transactions and
events occurred.
Sept. 4 Purchased 70 backpacks at $20 each from Hunter, terms 2/10, n/30.
Sept. 6 Received credit of $100 for the return of 5 backpacks purchased on Sept. 4 that were
defective.
Sept. 9 Sold 40 backpacks for $35 each to Oliver Books, terms 2/10, n/30.
Sept. 13 Sold 15 backpacks for $35 each to Heller Office Supply, terms n/30.
Sept. 14 Paid Hunter in full, less discount.
Instructions
Journalize the September transactions for Reid Supply.
Accounting for Merchandising Operations
FOR INSTRUCTOR USE ONLY
5 – 45
Ex. 205
Sam Wainwright is a new accountant with Ground Floor Company. Ground Floor purchased
merchandise on account for $18,000. The credit terms are 1/10, n/30. Sam has talked with the
company’s banker and knows that he could earn 4% on any money invested in the company’s
savings account.
Instructions
(a) Should Sam pay the invoice within the discount period or should he keep the $18,000 in the
money market account and pay at the end of the credit period? Support your
recommendation with a calculation showing which action would be best.
(b) If Sam forgoes the discount, it may be viewed as paying an interest rate of 1% for the use of
$18,000 for 20 days. Calculate the annual rate of interest that this is equivalent to.
Ex. 206
(a) Karns Company purchased merchandise on account from Bailey Office Suppliers for
$174,000, with terms of 2/10, n/30. During the discount period, Karns returned some
merchandise and paid $156,800 as payment in full. Karns uses a perpetual inventory
system. Prepare the journal entries that Karns Company made to record:
(1) the purchase of merchandise.
(2) the return of merchandise.
(3) the payment on account.
(b) Hinds Company sold merchandise to Peter Company on account for $146,000 with credit
terms of ?/10, n/30. The cost of the merchandise sold was $86,140. During the discount
period, Peter Company returned $6,000 of merchandise and paid its account in full (minus
the discount) by remitting $137,200 in cash. Both companies use a perpetual inventory
system. Prepare the journal entries that Hinds Company made to record:
(1) the sale of merchandise.
(2) the return of merchandise.
(3) the collection on account.
Test Bank for Financial Accounting, Ninth Edition
5 – 46
Ex. 207
An inexperienced accountant for Tilly Company made the following errors in recording
merchandising transactions.
1. A $270 refund to a customer for faulty merchandise was debited to Sales Revenue $270 and
credited to Cash $270.
2. A $310 credit purchase of supplies was debited to Inventory $310 and credited to Cash $310.
3. A $190 sales return was debited to Sales Revenue.
4. A cash payment of $40 for freight on merchandise purchases was debited to Freight-Out
$400 and credited to Cash $400.
Instructions
Prepare separate correcting entries for each error, assuming that the incorrect entry is not
reversed. (Omit explanations.)
Accounting for Merchandising Operations
FOR INSTRUCTOR USE ONLY
5 – 47
Solution 207 (6-8 min.)
Ex. 208
Prepare the necessary journal entries to record the following transactions, assuming Dakin
Company uses a perpetual inventory system.
(a) Purchased $35,000 of merchandise on account, terms 2/10, n/30.
(b) Returned $700 of damaged merchandise for credit.
(c) Paid for the merchandise purchased within 10 days.
Ex. 209
Prepare the necessary journal entries to record the following transactions, assuming Eustace
Company uses a perpetual inventory system.
(a) Eustace sells $45,000 of merchandise, terms 1/10, n/30. The merchandise cost $30,000.
(b) The customer in (a) returned $4,000 of merchandise to Eustace. The merchandise returned
cost $2,400.
(c) Eustace received the balance due within the discount period.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
5 – 48
Ex. 210
Newell Company completed the following transactions in October:
Credit Sales Sales Returns Date of
Date Amount Terms Date Amount Collection
Oct. 3 $ 600 2/10, n/30 Oct. 8
Oct. 11 1,700 3/10, n/30 Oct. 14 $ 400 Oct. 16
Oct. 17 5,000 1/10, n/30 Oct. 20 1,000 Oct. 29
Oct. 21 1,400 2/10, n/60 Oct. 23 200 Oct. 27
Oct. 23 2,300 2/10, n/30 Oct. 27 400 Oct. 28
Instructions
(a) Indicate the cash received for each collection. Show your calculations.
(b) Prepare the journal entry for the
(1) Oct. 17 sale. The merchandise sold had a cost of $3,500.
(2) Oct. 23 sales return. The merchandise returned had a cost of $140.
(3) Oct. 28 collection.
Newell uses a perpetual inventory system.
Accounting for Merchandising Operations
FOR INSTRUCTOR USE ONLY
5 – 49
Ex. 211
The following information is available for Moiz Company:
Debit Credit
Common Stock $ 30,000
Retained Earnings 20,000
Dividends $ 30,000
Sales Revenue 510,000
Sales Returns and Allowances 20,000
Sales Discounts 7,000
Cost of Goods Sold 310,000
Freight-Out 2,000
Advertising Expense 15,000
Interest Expense 19,000
Salaries and Wages Expense 55,000
Utilities Expense 18,000
Depreciation Expense 7,000
Interest Revenue 23,000
Instructions
Using the above information, prepare the closing entries for Moiz Company.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
5 – 50
Ex. 212
The adjusted trial balance of J. W. Hatch Company appears below.
J. W. HATCH
Adjusted Trial Balance
December 31, 2015
Debit Credit
Cash 12,000
Accounts Receivable 25,000
Inventory 35,000
Buildings 140,000
Accumulated Depreciation—
Buildings 20,000
Accounts Payable 12,000
Common Stock 100,000
Retained Earnings 44,000
Dividends 30,000
Sales Revenue 310,000
Sales Discounts 6,000
Sales Returns & Allowances 8,000
Cost of Goods Sold 188,000
Operating Expenses 42,000
486,000 486,000
Instructions
Using the information given, prepare the year-end closing entries.
Accounting for Merchandising Operations
FOR INSTRUCTOR USE ONLY
5 – 51
(To close dividends to retained earnings)
Ex. 213
Kennedy Company had the following account balances at year-end: cost of goods sold $85,000;
inventory $15,000; operating expenses $39,000; sales revenue $144,000; sales discounts
$1,600; and sales returns and allowances $2,300. A physical count of inventory determines that
inventory on hand is $14,400.
Instructions
(a) Prepare the adjusting entry necessary as a result of the physical count.
(b) Prepare closing entries.
Ex. 214
Financial information is presented below for two different companies.
Gower Martini Food
Drugs and Liquor
Sales revenue
$90,000
$ (e)
Sales returns and allowances
(a)
3,000
Net sales
86,000
95,000
Cost of goods sold
56,000
(f)
Gross profit
(b)
36,000
Operating expenses
22,000
(g)
Income from operations
(c)
(h)
Other expenses and losses
4,000
7,000
Net income
(d)
11,000
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
5 – 52
Ex. 214 (Cont)
Instructions
Determine the missing amounts.
Ex. 215
Presented below is information for Annie Company for the month of March 2015.
Cost of goods sold $245,000 Rent expense $ 36,000
Freight-out 7,000 Sales discounts 8,000
Insurance expense 5,000 Sales returns and allowances 11,000
Salaries and wages expense 63,000 Sales revenue 410,000
Instructions
(a) Prepare a multiple -step income statement.
(b) Compute the gross profit rate.
Accounting for Merchandising Operations
FOR INSTRUCTOR USE ONLY
5 – 53
Ex. 216
In 2015, Rondelli Company had net sales of $650,000 and cost of goods sold of $455,000.
Operating expenses were $150,000, and interest expense was $10,000. Rondelli prepares a
multiple-step income statement.
Instructions
(a) Compute Rondelli gross profit.
(b) Compute the gross profit rate.
(c) What is Rondelli income from operations and net income?
(d) If Rondelli prepared a single-step income statement, what amount would it report for net
income?
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
5 – 54
Ex. 217
Argentina Company gathered the following condensed data for the year ended December 31,
2015:
Cost of goods sold $ 750,000
Net sales 1,200,000
Operating expenses 275,000
Interest expense 48,000
Dividend revenue 38,000
Casualty loss from vandalism 125,000
Instructions
1. Prepare a single-step income statement for the year ended December 31, 2015.
2. Prepare a multiple-step income statement for the year ended December 31, 2015.
Accounting for Merchandising Operations
5 – 55
Ex. 218
Instructions
State the missing items identified by ?.
1. Gross profit – Operating expenses = ?
2. Cost of goods sold + Gross profit on sales = ?
3. Sales Revenue – (? + ?) = Net sales
4. Income from operations + ? – ? = Net income
5. Net sales – Cost of goods sold = ?
Ex. 219
The adjusted trial balance of Nick Company contained the following information:
Debit Credit
Sales Revenue $570,000
Sales Returns and Allowances $ 15,000
Sales Discounts 7,000
Cost of Goods Sold 323,000
Freight-Out 2,000
Advertising Expense 15,000
Interest Expense 18,000
Salaries and Wages Expense 85,000
Utilities Expense 28,000
Depreciation Expense 7,000
Interest Revenue 27,000
Instructions
1. Use the above information to prepare a multiple-step income statement for the year ended
December 31, 2015.
2. Prepare a single-step income statement for the year ended December 31, 2015.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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Accounting for Merchandising Operations
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Ex. 220
The following information is available for Sheldon Leonard Company:
Operating expenses $ 85,000
Cost of goods sold 200,000
Sales 325,000
Sales returns and allowances 16,000
Instructions
Compute each of the following:
(a) Net sales
(b) Gross profit
(c) Income from operations
(c) Income from operations = $24,000 ($109,000 – $85,000)
aEx. 221
The adjusted trial balance of Dailey Music Company appears below. Dailey Music Company
prepares monthly financial statements and uses the perpetual inventory method.
Instructions
Complete the worksheet below.
DAILEY MUSIC COMPANY
Worksheet
For the Month Ended April 30, 2015
Adjusted
Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit
Cash 11,000
Inventory 19,000
Supplies 3,500
Equipment 80,000
Accum. Depreciation—
Equipment 15,000
Accounts Payable 20,000
Common Stock 50,000
Retained Earnings 42,000
Dividends 8,000
Sales Revenue 39,000
Sales Discounts 2,000
Cost of Goods Sold 25,000
Advertising Expense 7,000
Supplies Expense 6,000
Depreciation Expense 1,000
Test Bank for Financial Accounting, Ninth Edition
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Ex. 221 (Cont.)
Rent Expense 2,500
Utilities Expense 1,000
166,000 166,000
aEx. 222
Three items are missing in each of the following columns and are identified by letter.
Sales revenue $ (a) $840,000
Sales returns and allowances 15,000 22,000
Sales discounts 10,000 15,000
Net sales 440,000 (d)
Beginning inventory (b) 300,000
Cost of goods purchased 220,000 (e)
Ending inventory 170,000 303,000
Cost of goods sold 252,000 575,000
Gross profit (c) (f)
Accounting for Merchandising Operations
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Ex. 222 (Cont.)
Instructions
Calculate the missing amounts and identify them by letter.
aEx. 223
Reineman Supply Company uses a periodic inventory system. During September, the following
transactions and events occurred.
Sept. 3 Purchased 90 backpacks at $25 each from Zuzu Company, terms 2/10, n/30.
Sept. 6 Received credit of $150 for the return of 6 backpacks purchased on Sept. 3 that
were defective.
Sept. 9 Sold 15 backpacks for $42 each to Bailey Books, terms 2/10, n/30.
Sept. 13 Paid Zuzu Company in full.
Instructions
Journalize the September transactions for Reineman Supply Company.
aEx. 224
The following information is available for Hopkins Company:
Beginning inventory $ 45,000
Ending inventory 70,000
Freight-in 10,000
Purchases 290,000
Purchase returns and allowances 8,000
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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Ex. 224 (Cont.)
Instructions
Compute each of the following:
(a) Net purchases
(b) Cost of goods purchased
(c) Cost of goods sold
Ex. 225
The income statement of Jue’s Luggage. includes the items listed below:
Net sales $900,000
Gross profit 315,000
Beginning inventory 80,000
Purchase discounts 15,000
Purchase returns and allowances 8,000
Freight-in 10,000
Operating expenses 300,000
Purchases 560,000
Instructions
Use the appropriate items listed above as a basis for determining:
(a) Cost of goods sold.
(b) Cost of goods available for sale.
(c) Ending inventory.
Accounting for Merchandising Operations
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aEx. 226
Prepare the necessary journal entries to record the following transactions, assuming a periodic
inventory system:
(a) Purchased $450,000 of merchandise on account, terms 2/10, n/30.
(b) Returned $30,000 of damaged merchandise for credit.
(c) Paid for the merchandise purchased within 10 days.
COMPLETION STATEMENTS
227. A ________________ buys and sells goods rather than performing services to earn a
profit.
228. Cost of goods sold is deducted from net sales revenue for the period in order to arrive at
________________.
229. Inventory on hand can be obtained from detailed inventory records when a
________________ inventory system is maintained.
230. The acquisition of inventory is debited to the ____________ account when a perpetual
inventory system is used.
231. The freight cost incurred by a seller to deliver goods sold to a customer is called
________________.
Test Bank for Financial Accounting, Ninth Edition
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232. When a customer returns merchandise previously purchased on credit, the entry for the
seller to record the return requires a debit to the ________________ account and a credit
to the ________________ account.
233. Sales Returns and Allowances and Sales Discounts are both ______________ accounts
and have _______________ normal balances.
234. Every sales transaction should be supported by a ________________ that provides
written evidence of the sale.
235. Gross profit is obtained by subtracting ________________ from ________________.
236. Income from operations is determined by subtracting total operating expenses from
________________.
Answers to Completion Statements
Accounting for Merchandising Operations
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MATCHING
237. Match the items below by entering the appropriate code letter in the space provided.
A. Net sales F. FOB shipping point
B. Sales discounts G. Freight-out
C. Purchase invoice H. Gross profit
D. Periodic inventory system I. Operating expenses
E. FOB destination J. Income from operations
____ 1. An incentive to encourage customers to pay their accounts early.
____ 2. Expenses incurred in the process of earning sales revenue.
____ 3. Freight terms that require the seller to pay the freight cost.
____ 4. Sales revenue less sales returns and allowances and sales discounts.
____ 5. A document that supports each credit purchase.
____ 6. Net sales less cost of goods sold.
____ 7. Freight cost to deliver goods to customers reported as a selling expense.
____ 8. Requires a physical count of goods on hand to compute cost of goods sold.
____ 9. Gross profit less total operating expenses.
____ 10. Freight terms that require the buyer to pay the freight cost.
Answers to Matching
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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SHORT-ANSWER ESSAY QUESTIONS
S-A E 238
A merchandiser frequently has a need to use contra accounts related to the sale of goods.
Identify the contra accounts that have normal debit balances and explain why they are not
considered expenses.
S-A E 239
Distinguish between FOB shipping point and FOB destination. Identify the freight terms that will
result in a debit to Inventory by the purchaser and a debit to Freight-out by the seller.
S-A E 240
Adrland Caselotti believes revenues from credit sales may be recognized before they are
collected in cash. Do you agree? Explain.
S-A E 241
In a single-step income statement, all data are classified under two categories: (1) Revenues, or
(2) Expenses. If the income statement is recast in a multiple-step format, what additional
information or intermediate components of income would be presented?
Accounting for Merchandising Operations
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S-A E 242
You are at a company picnic and the company president starts a conversation with you. The
president says “Since we use the perpetual inventory system, there is no reason to take a
physical count of our inventory.” What is your response to the president’s remarks?
S-A E 243
The income statement for a merchandising company presents five amounts not shown on a
service company’s income statement. Identify and briefly explain the five unique amounts.
S-A E 244 (Ethics)
Holmes Corporation manufactures electronic components for use in many consumer products.
Their raw materials are purchased literally from all over the world. Depending on the country
involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while
others are content to receive payment within six months of receipt of the goods.
Because of this situation, Holmes never closes its books until at least ten days after month end.
In this way, it can sort out ownership of goods in transit, and document which goods were
received by month end, and which were not.
Manya Andre, a new accountant, was asked to record about $70,000 in inventory as having been
received before month end. She argued that the shipping documents clearly showed that the
goods were actually received on the 8th of the current month. Her boss, busy with month-end
reports, curtly tells Ann to check the shipping terms. She did so, and found the notation “FOB
shipper’s dock” on the document. She hadn’t seen that particular notation before, but she
reasoned that if the selling company considered it shipped when it reached their dock, Holmes
should consider it received when it reached Holmes’s dock. She did not record the purchase until
after month end.
Test Bank for Financial Accounting, Ninth Edition
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Required:
1. Why are accountants concerned with the timing in the recording of purchases?
2. Was there a violation of ethical standards here? Explain.
S-A E 245 (Communication)
Ellen Corhy and Bryn Davis, two salespersons in adjoining territories, regularly compete for
bonuses. During the last month, their dollar volume of sales, on which the bonuses are based,
was nearly equal. On the last day of the month, both made a large sale. Both orders were
shipped on the last day of the month and both were received by the customer on the fifth of the
following month. Ellen’s sale was FOB shipping point, and Bryn’s was FOB destination. The
company “counts” sales for purposes of calculating bonuses on the date that ownership passes
to the purchaser. Ellen’s sale was therefore counted in her monthly total of sales, Bryn’s was not.
Bryn is quite upset. She has asked you to just include it, or to take Ellen’s off as well. She also
has told you that you are being unethical for allowing Ellen to get a bonus just for choosing a
particular shipping method.
Write a memo to Bryn. Explain your position.
Accounting for Merchandising Operations
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Solution 245
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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CHALLENGE EXERCISES
CE 1
Craig Ferguson Company had the following account balances at year-end: cost of goods sold
$70,000; inventory $17,300: operating expenses $33,000; sales revenue $121,000; sales
discounts $1,400; and sales returns and allowances $1,950. A physical count of inventory
determines that merchandise inventory on hand is $16,450.
Instructions
(a) Prepare the adjusting entry necessary as a result of the physical count.
(b) Prepare closing entries
(c) Assume that the physical count of inventory indicated that inventory on hand is $17,800 (the
account still shows a balance of $17,300 due to errors made during the year. Prepare the
adjusting entry necessary as a result of the physical count.
(d) What is Craig Ferguson Company‘s net income for the year?
CE 2
In its income statement for the year ended 12/31/15, Hickman Company reported the following
condensed data:
Operating expenses $1,042,000 Interest revenue 35,000
Cost of goods sold 1,600,000 Loss on disposal of plant assets 10,000
Interest Expenses 68,000 Net sales 2,850,000
Instructions
(a) Prepare a multiple-step income statement.
(b) Prepare a single-step income statement.
(c) How did Hickman compute the amount it is reporting as net sales?
Accounting for Merchandising Operations
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CE 3
Presented below is financial information for two different companies.
Winn Company Maris Company
Sales revenue $190,000 $ (e)
Sales discounts 2,000 2,500
Sales returns (a) 5,000
Net sales 183,000 210,000
Cost of goods sold 103,000 (f)
Gross profit (b) 80,000
Operating expenses 45,000 (g)
Income from operations (c) 55,000
Other revenues (expenses) 4,000 (h)
Net income (d) 49,000
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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Instructions
(a) Determine the missing amounts above.
(b) Determine the gross profit rates. (Round to one decimal place.)