Chapter 5 – Accounting for Merchandising Businesses
1. The most important differences between a service business and a retail business are reflected in their operating cycles
and financial statements.
a.
True
b.
False
2. In a merchandising business, sales minus operating expenses equals net income.
a.
True
b.
False
3. Cost of goods sold is the amount that the merchandising company pays for the merchandise it intends to sell.
a.
True
b.
False
4. Service businesses provide services for income, while a merchandising business sells merchandise.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
5. In retail businesses, inventory is reported as a current asset.
a.
True
b.
False
6. Under a periodic inventory system, the cost of inventory on hand at the end of the accounting period is determined by a
physical count of the inventory.
a.
True
b.
False
7. Buyers and sellers do not normally record the list prices of merchandise and the trade discounts in accounts.
a.
True
b.
False
8. In a perpetual inventory system, the Inventory account is only used to reflect the beginning inventory.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
9. Freight-in is the amount paid by the company to deliver merchandise sold to a customer.
a.
True
b.
False
10. Freight-in is considered a cost of purchasing inventory.
a.
True
b.
False
11. The cost of inventory is limited to the purchase price less any purchase discounts.
a.
True
b.
False
12. Under the perpetual inventory system, when a sale is made, both the sale and cost of goods sold are recorded.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
13. If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30.
a.
True
b.
False
14. When merchandise that was sold is returned, a credit to Customer Refunds Payable is made.
a.
True
b.
False
15. In a perpetual inventory system, when merchandise is returned to the supplier, Cost of Goods Sold is debited as part of
the transaction.
a.
True
b.
False
16. Customer Refunds Payable is an account used to record merchandise returns from customers.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
17. Estimated Returns Inventory is an account used when adjusting for expected merchandise sales in the next period.
a.
True
b.
False
18. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales.
a.
True
b.
False
19. Most retailers record all credit card sales as credit sales.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
20. The fees associated with credit card sales are periodically recorded as expenses.
a.
True
b.
False
21. A seller may grant a buyer a reduction in selling price and this is called a customer discount.
a.
True
b.
False
22. A sales discount encourages customers to pay accounts more quickly than if a discount were not available.
a.
True
b.
False
23. Inventory normally has a debit balance.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
24. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take
advantage of the sales discount.
a.
True
b.
False
25. In a perpetual inventory system, merchandise returned to vendors reduces the inventory account.
a.
True
b.
False
26. Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. The entry to record the
purchase will include a debit to Cash and a credit to Sales.
a.
True
b.
False
27. Purchases of merchandise are typically credited to the inventory account under the perpetual inventory system.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
28. When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to
pay within the discount period.
a.
True
b.
False
29. When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount.
a.
True
b.
False
30. A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called cash
discounts.
a.
True
b.
False
31. Sellers and buyers are required to record trade discounts.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
32. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms
are stated as FOB destination.
a.
True
b.
False
33. A sale of $750 on account subject to a sales tax of 6% would be recorded as an account receivable of $750.
a.
True
b.
False
34. When merchandise is sold for $600 plus 6% sales tax, the Sales account should be credited for $636.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
35. The abbreviation FOB stands for “free on board.”
a.
True
b.
False
36. Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150. The sales
amount recorded is $3,528.
a.
True
b.
False
37. If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
38. When the terms of sale are FOB shipping point, the buyer pays the freight charges.
a.
True
b.
False
39. If merchandise costing $3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of $125, is paid within 10
days, the amount of the purchases discount is $70.
a.
True
b.
False
40. The chart of accounts for a merchandising business would include an account called Delivery Expense.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
41. When companies use a perpetual inventory system, the recording of the purchase of inventory will include a debit to
Purchases.
a.
True
b.
False
42. Most companies will not take a purchase discount, because 1% or 2% discounts are insignificant.
a.
True
b.
False
43. The seller may prepay the freight costs even though the terms are FOB shipping point.
a.
True
b.
False
44. The seller records the sales tax as part of the sales amount.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
45. A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take a physical
inventory.
a.
True
b.
False
46. Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer’s
place of business.
a.
True
b.
False
47. Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the buyer.
a.
True
b.
False
48. Because many companies use computerized accounting systems, periodic inventory is widely used.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
49. If the perpetual inventory system is used, an account entitled Cost of Goods Sold is included in the general ledger.
a.
True
b.
False
50. Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped FOB
shipping point.
a.
True
b.
False
51. On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues.
a.
True
b.
False
52. The form of the balance sheet in which assets, liabilities, and stockholders’ equity are presented in a downward
sequence is called the report form.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
53. Sales is equal to the cost of goods sold less the gross profit.
a.
True
b.
False
54. Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as
Other Revenue on the multiple-step income statement.
a.
True
b.
False
55. In a multiple-step income statement, the dollar amount for income from operations is always the same as net income.
a.
True
b.
False
56. The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income
from operations are not readily available.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
57. Gross profit minus selling expenses equals net income.
a.
True
b.
False
58. The account form of the balance sheet is presented in a downward sequence in three sections.
a.
True
b.
False
59. In the merchandising income statement, sales will be reduced by administrative expenses to arrive at operating
income.
a.
True
b.
False
60. As we compare a merchandising business to a service business, the financial statement that changes the most is the
balance sheet.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
61. Cost of goods sold is often the largest expense on a merchandising company income statement.
a.
True
b.
False
62. When a merchandising business is compared to a service business, the financial statement that is not affected by that
change is the retained earnings statement.
a.
True
b.
False
63. Other revenue and expenses are items that are not related to the primary operating activity.
a.
True
b.
False
64. Closing entries for a merchandising business are not similar to those for a service business.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
65. The asset turnover ratio measures how effectively a business is using its assets to generate sales.
a.
True
b.
False
66. Under the periodic inventory system, the cost of goods sold is equal to the beginning inventory plus the cost of
merchandise purchased plus the ending inventory.
a.
True
b.
False
67. In a periodic inventory system, the cost of merchandise purchased includes the cost of freight in.
a.
True
b.
False
68. In the periodic inventory system, purchases of merchandise for resale are debited to the Purchases account.
a.
True
b.
False
Chapter 5 – Accounting for Merchandising Businesses
69. Under the periodic inventory system, the cost of goods sold is recorded when sales are made.
a.
True
b.
False
70. Under a periodic inventory system, the accounts Purchases, Purchases Returns and Allowances, Purchases Discounts,
and Freight In are found on the balance sheet.
a.
True
b.
False
71. Inventory is classified on the balance sheet as a
a.
current liability
b.
current asset
c.
long-term asset
d.
long-term liability
Chapter 5 – Accounting for Merchandising Businesses
72. Which of the following is not a difference between a retail business and a service business?
a.
in what is sold
b.
the inclusion of gross profit on the income statement
c.
accounting equation
d.
inventory included on the balance sheet
73. Net income plus operating expenses is equal to
a.
cost of goods sold
b.
cost of merchandise
c.
sales
d.
gross profit
74. What is the term applied to the excess of sales over the cost of goods sold?
a.
gross profit
b.
operations
c.
net income
d.
gross sales