Chapter 05 – The Operating Cycle and Merchandising Operations
TRUE/FALSE
1. Service businesses can be classified as wholesalers and retailers.
2. The operating cycle involves the purchase and sale of merchandise inventory as well as the subsequent
collection of cash from credit sales.
3. Profitability management involves planning a business’s cash receipts and cash payments.
4. A sale takes place when title to the goods transfers to the buyer.
5. Cash flow cannot be managed, but it is a natural component of business operations.
6. When a U.S. company does business with a British company and payment is in British pounds, an
exchange gain or loss occurs if the exchange rate between dollars and pounds changes between the
date of sale and the date of payment.
7. An advantage of using the periodic inventory system is that it requires less recordkeeping than the
perpetual inventory system.
8. The periodic inventory system relies on a physical count of merchandise for its balance sheet amount.
9. Under the periodic inventory system, cost of goods sold is treated as an account.
10. The periodic inventory system provides an up–to-date amount of inventory on hand.
11. Adding together the ending merchandise inventory and cost of goods sold gives the amount of goods
available for sale.
12. A large discount chain, like Wal-Mart or Target, most likely would use the periodic inventory system
to maintain control of its inventory.
13. A retail operation would not have to take a physical inventory if it uses a perpetual inventory system.
14. Under the periodic inventory system, Cost of goods sold must be computed on the income statement
because it is not updated for purchases, sales, and other transactions during the accounting period.
15. A company would be more likely to know the amount of inventory on hand if it used the periodic
inventory system rather than the perpetual inventory system.
16. Computerization has led to a large increase in the use of the perpetual inventory system.
17. Taking a physical inventory refers to making a count of all merchandise on hand at a particular time.
18. When the periodic inventory system is used, a physical inventory should be taken at the end of the
fiscal year.
19. The computerization has helped taking physical inventory to a great extent under the periodic
inventory system.
20. When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the
discount period.
21. The terms “2/10, n/30” mean that a 2 percent discount is allowed on payments made over 10 but
before 30 days after the invoice date.
22. Terms of “2/10, n/30” are an example of a trade discount.
23. Sale and purchase of goods should be recorded at their list price, less any trade discount involved.
24. FOB shipping point means that the seller incurs the shipping costs.
25. If insured goods are shipped FOB destination, the seller should file a claim for goods damaged in
transit.
26. Freight-in is considered a cost of merchandise purchased.
27. Cost of goods sold is considered an expense of a merchandising business.
28. The difference between gross sales and net sales is equal to the sum of sales discounts and sales
returns and allowances.
29. Sales Discounts and Sales Returns and Allowances are contra-revenue accounts.
30. The net cost of purchases is found by deducting freight-in from net purchases.
31. With the periodic inventory system, goods available for sale must be calculated before cost of goods
sold.
32. Ending merchandise inventory is included in the calculation of goods available for sale.
33. The calculation of goods available for sale during the year is not affected by the previous year’s ending
merchandise inventory.
34. The change in merchandise inventory level from the beginning to the end of the year affects cost of
goods sold.
35. When the buyer bears the transportation charge, it is called freight-out.
36. Freight-In is treated as a deduction in the cost of goods sold section of the income statement.
37. Under the periodic inventory system, the Purchases account is used to accumulate all purchases of
merchandise for resale.
38. When a customer returns goods, the company decreases the Sales account.
39. Inventory losses are easier to identify under the perpetual inventory system than under the periodic
inventory system.
40. The fee paid by a retailer to a credit card company is considered a contra-revenue account by the
retailer.
41. Upon making a credit card sale, a business should record the sale as an accounts receivable until the
customer pays his or her credit card bill.
42. When a business is able to deposit its credit card sales invoices directly into a special bank account, it
debits Cash, not Accounts Receivable.
43. The use of major credit cards requires sellers to establish the customer’s credit.
44. Good internal control dictates that key employees be rotated among different jobs.
45. At the end of each day, the cashier should be the one responsible for comparing the amount on the
cash register tape with the day’s cash additions to the cash register.
46. Management’s authorization of transactions relates to a control activity in the accounting system.
47. Merchandising businesses do not need as good a system of internal control as service companies.
48. An effective system of internal control centralizes functions in a single, capable individual.
49. An effective system of internal control requires that individuals take periodic vacations.
50. Bonding means insuring a company against employee theft.
51. It is unlikely that a company would want to bond its employees who handle cash or inventory.
52. Management’s regular assessment of its internal controls is called risk assessment.
53. Under an effective system of internal control, errors occur only as a result of fraud or dishonesty.
54. The separation-of-duties feature of internal control can be negated when several employees are
involved in a scheme.
55. A system of internal control cannot be considered good until the possibility of human error has been
completely eliminated.
56. The purchasing department prepares a purchase requisition addressed to the vendor (seller) containing
instructions related to the items ordered.
57. Another term for an invoice is a bill.
58. One example of a periodic independent verification is the bank reconciliation.
59. In addition to keeping the records of a purchase transaction, the accounting department should prepare
and mail checks in payment of invoices.
60. Effective internal control requires a department to purchase supplies on its own.
61. The treasurer should prepare and sign a check only after a proper check authorization has been
provided.
62. Proper control procedures can guarantee the prevention of theft.
63. All systems of internal control are identical and, once established, do not need to be changed.
64. Management is responsible for establishing a satisfactory system of internal control.
65. A formal request for a purchase from the requesting department of a business is known as a purchase
requisition.
MULTIPLE CHOICE
1. Which of the following activities is not a component of the operating cycle?
a.
Payment of employees’ wages
b.
Sale of merchandise
c.
Purchase of merchandise
d.
Collection of cash from merchandise sales
2. Which of the following does not represent a sale?
a.
Merchandise placed aside for a customer who plans to come in next week and pay with
cash
b.
Purchase of merchandise by a customer who pays cash
c.
Sale of merchandise to a customer who uses a credit card
d.
Purchase of merchandise by a customer who uses a debit card
3. Each of the following companies is a merchandising business except a
a.
candy store.
b.
car wash.
c.
wholesale parts company.
d.
furniture store.
4. The periodic inventory system is used most commonly by companies that sell
a.
low-priced, high-volume merchandise.
b.
low-priced, low-volume merchandise.
c.
high-priced, low-volume merchandise.
d.
high-priced, high-volume merchandise.
5. Which of the following companies would be most likely to use a computerized perpetual inventory
system?
a.
Fur dealer
b.
Car dealership
c.
Auto parts store
d.
Boat dealership
6. Which of the following should not be included in the count of ending merchandise inventory?
a.
Damaged goods to be sold at a reduced price
b.
Goods in transit to which a company has title
c.
Goods in warehouses
d.
Goods sold but not yet delivered
7. A physical inventory is usually taken
a.
in the middle of the fiscal year.
b.
at the peak of the busy season.
c.
at the end of the fiscal year.
d.
when the perpetual inventory system, but not the periodic inventory system, is being used.
8. Which of the following goods would not be included in merchandise inventory for a purchasing
company?
a.
Goods in transit shipped FOB shipping point
b.
Goods on hand in the showroom
c.
Goods in transit shipped FOB destination
d.
Goods ordered and received from the supplier
9. A sale on March 21 with terms of n/10 eom is due to be collected by
a.
April 30.
b.
March 31.
c.
April 10.
d.
April 1.
10. A discount that buyers take for early payment of merchandise is called a
a.
customer discount.
b.
purchases discount.
c.
sales discount.
d.
trade discount.
11. A merchandising business will earn an income before income taxes of exactly $0 when
a.
net sales equals cost of goods sold.
b.
operating expenses equal net sales.
c.
gross margin equals operating expenses.
d.
cost of goods sold equals gross margin.
12. Merchandise inventory becomes part of cost of goods sold when a company
a.
receives payment from the customer.
b.
pays for the inventory.
c.
purchases the inventory.
d.
sells the inventory.
13. Under the perpetual inventory system, which of the following accounts would not be used?
a.
Cost of Goods Sold
b.
Merchandise Inventory
c.
Sales
d.
Purchases
14. Under the perpetual inventory system, in addition to making the entry to record a sale, a company
would
a.
record an increase in inventory corresponding to the amount of the sale.
b.
record a decrease in inventory and an increase in cost of goods sold for the cost of the
merchandise sold.
c.
record an increase in inventory corresponding to the cost of the inventory.
d.
make no additional entry until the end of the period.
15. The entry to record a sales return from a customer would require a(n)
a.
decrease to Sales.
b.
increase to Sales.
c.
decrease to Sales Returns and Allowances.
d.
increase to Sales Returns and Allowances.
16. Under the perpetual inventory system, the entry to record a purchase return would include a credit to
which account?
a.
Merchandise Inventory
b.
Purchases Returns and Allowances
c.
Accounts Payable
d.
Sales
17. Under the perpetual inventory system, in addition to making the entry to record a sales return, a
company would
a.
increase Merchandise Inventory and decrease Cost of Goods Sold.
b.
increase Cost of Goods Sold and decrease Purchases.
c.
increase Cost of Goods Sold and decrease Merchandise Inventory.
d.
make no additional entry until the end of the period.
18. Chancellor Company purchased merchandize worth $900 on credit, terms n/30. What is the required
journal entry to record the transaction under the perpetual inventory system?
a.
Accounts Receivable 900
Purchases 900
b.
Purchases 900
Merchandize Inventory 900
c.
Merchandize Inventory 900
Accounts Payable 900
d.
Accounts Payable 900
Merchandize Inventory 900
19. Chancellor Company purchased merchandize worth $900 on credit, terms n/30 and returned
merchandize worth $100 on next day. What is the required journal entry to record the merchandize
returns under the perpetual inventory system?
a.
Accounts Payable 100
Purchases Returns and Allowances 100
b.
Accounts Payable 100
Merchandize Inventory 100
c.
Merchandize Inventory 100
Purchases Returns and Allowances 100
d.
Purchases Returns and Allowances 100
Merchandize Inventory 100
20. Feathertouch Company sold merchandize worth $800 on credit, terms n/15. The merchandize sold had
cost $550. What is the required journal entry to record the transaction under the perpetual inventory
system?
a.
Accounts Receivables 800
Sales 800
Cost of Goods Sold 550
Merchandize Inventory 550
b.
Sales 800
Accounts Receivables 800
Merchandize Inventory 550
Cost of Goods Sold 550
c.
Accounts Receivables 800
Merchandize Inventory 800
Cost of Goods Sold 250
Merchandize Inventory 250
d.
Merchandize Inventory 800
Sales 800
Cost of Goods Sold 550
Merchandize Inventory 550
21. Feathertouch Company sold merchandize worth $800 on credit, terms n/15 and on the next day the
customer returned merchandize worth $50, which cost $30 for Feathertouch company. What is the
required journal entry to record the merchandize returns under the perpetual inventory system?
a.
Accounts Receivables 50
Sales Returns and Allowances 50
Cost of Goods Sold 30
Merchandize Inventory 30
b.
Sales Returns and Allowances 50
Accounts Receivables 50
Merchandize Inventory 30
Cost of Goods Sold 30
c.
Accounts Receivables 50
Merchandize Inventory 50
Cost of Goods Sold 30
Sales 30
d.
Merchandize Inventory 50
Sales 50
Sales 30
Cost of Goods Sold 30
22. The amount of goods available for sale during the year depends on the amounts of
a.
beginning merchandise inventory, net cost of purchases, and ending merchandise
inventory.
b.
beginning merchandise inventory and cost of goods sold.
c.
beginning merchandise inventory, cost of goods sold, and ending merchandise inventory.
d.
beginning merchandise inventory and net cost of purchases.
23. Assuming that net cost of purchases was $58,000 during the year and that ending merchandise
inventory was $1,000 less than the beginning merchandise inventory of $12,500, how much was cost
of goods sold?
a.
$69,500
b.
$71,500
c.
$59,000
d.
$46,500
24. Which of the following is not considered in computing net cost of purchases?
a.
Freight-out expenses
b.
Purchases
c.
Freight paid on purchased goods
d.
Purchases returns and allowances
25. Which of the following is necessary for computing cost of goods sold but not necessary for computing
goods available for sale?
a.
Freight-in
b.
Purchases
c.
Ending merchandise inventory
d.
Beginning merchandise inventory
26. Use this information to answer the following question.
Account Name
Debit
Credit
Sales
303,000
Sales Returns and Allowances
10,000
Purchases
68,000
Purchases Returns and Allowances
8,000
Freight-In
12,000
Selling Expenses
30,000
General and Administrative Expenses
110,000
In addition, beginning merchandise inventory was $22,000 and ending merchandise inventory was
$14,000.
Net sales for the period were
a.
$303,000.
b.
$273,000.
c.
$293,000.
d.
$213,000.
27. Use this information to answer the following question.
Account Name
Debit
Credit
Sales
300,000
Sales Returns and Allowances
10,000
Purchases
53,000
Purchases Returns and Allowances
8,000
Freight-In
12,000
Selling Expenses
30,000
General and Administrative Expenses
110,000
In addition, beginning merchandise inventory was $22,000 and ending merchandise inventory was
$14,000.
Net cost of purchases for the period were
a.
$77,000.
b.
$45,000.
c.
$57,000.
d.
$69,000.
28. Use this information to answer the following question.
Account Name
Debit
Credit
Sales
300,000
Sales Returns and Allowances
10,000
Purchases
62,000
Purchases Returns and Allowances
8,000
Freight-In
12,000
Selling Expenses
30,000
General and Administrative Expenses
110,000
In addition, beginning merchandise inventory was $22,000 and ending merchandise inventory was
$14,000.
Cost of goods sold for the period was
a.
$74,000.
b.
$62,000.
c.
$88,000.
d.
$58,000.
29. Use this information to answer the following question.
Account Name
Debit
Credit
Sales
319,000
Sales Returns and Allowances
10,000
Purchases
68,000
Purchases Returns and Allowances
8,000
Freight-In
12,000
Selling Expenses
30,000
General and Administrative Expenses
110,000
In addition, beginning merchandise inventory was $22,000 and ending merchandise inventory was
$14,000.
Income before income taxes for the period was
a.
$199,000.
b.
$119,000.
c.
$89,000.
d.
$229,000.
30. Use this information to answer the following question.
Debit
Credit
300,000
10,000
68,000
8,000
12,000
30,000
110,000
In addition, beginning merchandise inventory was $22,000 and ending merchandise inventory was
$14,000.
If beginning and ending merchandise inventories were ignored in computing net income, then net
income would be
a.
understated by $22,000.
b.
overstated by $8,000.
c.
understated by $14,000.
d.
understated by $8,000.
31. Use this information to answer the following question.
The selected accounts and balances for Keystone Market appear as follows:
Advertising Expense
$ 14,000
Common Stock
100,000
Dividends
21,000
Freight-In
7,000
Freight-Out Expense
10,000
Interest Income
24,000
Merchandise Inventory (Jan. 1)
70,000
Merchandise Inventory (Dec. 31)
56,000
Purchases
60,000
Purchases Returns and Allowances
4,000
Rent Expense
9,000
Retained Earnings
40,000
Sales
150,000
Sales Returns and Allowances
19,000
Wages Expense
32,000
The amount of net sales on the income statement would be
a.
$169,000.
b.
$144,000.
c.
$131,000.
d.
$137,000.
32. Use this information to answer the following question.
The selected accounts and balances for Keystone Market appear as follows:
Advertising Expense
$ 14,000
Common Stock
100,000
Dividends
21,000
Freight-In
7,000
Freight-Out Expense
10,000
Interest Income
24,000
Merchandise Inventory (Jan. 1)
58,000
Merchandise Inventory (Dec. 31)
56,000
Purchases
60,000
Purchases Returns and Allowances
4,000
Rent Expense
9,000
Retained Earnings
40,000
Sales
150,000
Sales Returns and Allowances
19,000
Wages Expense
32,000
Goods available for sale would appear on the income statement as
a.
$114,000.
b.
$61,000.
c.
$121,000.
d.
$51,000.
33. Use this information to answer the following question.
The selected accounts and balances for Keystone Market appear as follows:
Advertising Expense
$ 14,000
Common Stock
100,000
Dividends
21,000
Freight-In
7,000
Freight-Out Expense
10,000
Interest Income
24,000
Merchandise Inventory (Jan. 1)
70,000
Merchandise Inventory (Dec. 31)
56,000
Purchases
60,000
Purchases Returns and Allowances
4,000
Rent Expense
9,000
Retained Earnings
40,000
Sales
151,000
Sales Returns and Allowances
19,000
Wages Expense
32,000
Gross margin from sales would be
a.
$62,000.
b.
$55,000.
c.
$74,000.
d.
$68,000.
34. Assume a company uses the periodic inventory system and has a beginning merchandise inventory
balance of $5,000, purchases of $75,000, and sales of $125,000. The company closes its records once a
year on December 31. In the accounting records, the merchandise inventory account would be
expected to have a balance on December 31 prior to adjusting and closing entries that was
a.
indeterminate.
b.
less than $5,000.
c.
more than $5,000.
d.
equal to $5,000.
35. Chancellor Company purchased merchandize worth $900 on credit, terms n/30. What is the required
journal entry to record the transaction under the periodic inventory system?
a.
Accounts Receivable 900
Purchases 900
b.
Purchases 900
Accounts Payable 900
c.
Merchandize Inventory 900
Accounts Payable 900
d.
Accounts Payable 900
Merchandize Inventory 900
36. Chancellor Company purchased merchandize worth $900 on credit, terms n/30 and returned
merchandize worth $100 on next day. What is the required journal entry to record the merchandize
returns under the periodic inventory system?
a.
Accounts Payable 100
Purchases Returns and Allowances 100
b.
Accounts Payable 100
Merchandize Inventory 100
c.
Merchandize Inventory 100
Purchases Returns and Allowances 100
d.
Purchases Returns and Allowances 100
Merchandize Inventory 100
37. Feathertouch Company sold merchandize worth $800 on credit, terms n/15. The merchandize sold had
cost $550. What is the required journal entry to record the transaction and to transfer the cost of
merchandize inventory to cost of goods sold under the periodic inventory system?
a.
Accounts Receivables 800
Sales 800
No entry for transfer to cost of goods sold.
b.
Sales 800
Accounts Receivables 800
Merchandize Inventory 550
Cost of Goods Sold 550
c.
Accounts Receivables 800
Merchandize Inventory 800
Cost of Goods Sold 250
Merchandize Inventory 250
d.
Merchandize Inventory 800
Sales 800
Cost of Goods Sold 550
Merchandize Inventory 550
38. On June 3, Win-Tel Company sold merchandize worth $800 on credit, terms 2/10, n/30. The
merchandize sold had cost $550. The customer paid the amount on June 10.
What is the required journal entry to record the payment received under the periodic inventory system?
a.
Accounts Receivable 784
Sales Discounts 16
Cash 800
b.
Accounts Receivable 800
Sales Discounts 16
Cash 784
c.
Cash 784
Sales Discounts 16
Accounts Receivable 800
d.
Cash 800
Sales Discounts 16
Accounts Receivable 816
39. On June 3, Win-Tel Company sold merchandize worth $800 on credit, terms 2/10, n/30. The
merchandize sold had cost $550. The customer paid the amount on June 15.
What is the required journal entry to record the payment received under the periodic inventory system?
a.
Accounts Receivable 784
Sales Discounts 16
Cash 800
b.
Accounts Receivable 800
Cash 800
c.
Cash 784
Sales Discounts 16
Accounts Receivable 800
d.
Cash 800
Accounts Receivable 800
40. On June 3, Maryland Company purchased merchandize worth $800 on credit, terms 2/10, n/30. The
amount paid on June 10. What is the required journal entry to record the payment under the periodic
inventory system?
a.
Accounts Payable 784
Purchases Discounts 16
Cash 800
b.
Accounts Payable 800
Purchases Discounts 16
Cash 784
c.
Cash 784
Purchases Discounts 16
Accounts Payable 800
d.
Cash 800
Purchases Discounts 16
Accounts Payable 816