Chapter 5—Accounting for Merchandising Businesses Key
1. One of the most important differences between a service business and a retail business is in what is sold.
2. In a merchandise business, sales minus operating expenses equals net income.
3. Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends
to sell.
4. Service businesses provide services for income, while a merchandising business sells merchandise.
5. In many retail businesses, inventory is the largest current asset.
6. Under a periodic inventory system, the merchandise on hand at the end of the year is determined by a
physical count of the inventory.
7. In the periodic inventory system, purchases of merchandise for resale are debited to the Purchases account.
8. Under the periodic inventory system, the cost of merchandise sold is equal to the beginning merchandise
inventory plus the cost of merchandise purchased plus the ending merchandise inventory.
9. In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the beginning
inventory.
10. In a periodic inventory system, the cost of merchandise purchased includes the cost of freight-in.
11. As we compare a merchandise business to a service business, the financial statement that changes the most
is the Balance Sheet.
12. When a merchandising business is compared to a service business, the financial statement that is not
affected by that change is the Statement of Owner’s Equity.
13. The ending merchandise inventory for 2010 is the same as the beginning merchandise inventory for 2011.
14. In a multiple-step income statement the dollar amount for income from operations is always the same as net
income.
15. Net sales is equal to sales minus cost of merchandise sold.
16. Gross profit minus selling expenses equals net income.
17. The form of the balance sheet in which assets, liabilities, and owner’s equity are presented in a downward
sequence is called the report form.
18. On the income statement in the single-step form, the total of all expenses is deducted from the total of all
revenues.
19. 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.
20. Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is
listed as Other Income on the multiple-step income statement.
21. Freight in is the amount paid by the company to deliver merchandise sold to a customer.
22. In the merchandising income statement, sales will be reduced by sales discounts and sales returns and
allowances to arrive at net sales.
23. Other income and expenses are items that are not related to the primary operating activity.
24. Freight-in is considered a cost of purchasing inventory.
25. The cost of merchandise inventory is limited to the purchase price less any purchase discounts.
26. Cost of Merchandise Sold is often the largest expense on a merchandising company income statement.
27. Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are
recorded.
28. Under the periodic inventory system, the cost of merchandise sold is recorded when sales are made.
29. If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as
n/30.
30. When merchandise that was sold is returned, a credit to sales returns and allowances is made.
31. In a perpetual inventory system, when merchandise is returned to the seller, Cost of Merchandise Sold is
debited as part of the transaction.
32. Sales Returns and Allowances is a contra-revenue account.
33. Sales Discounts is a revenue account with a credit balance.
34. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit
sales.
35. Sales to customers who use nonbank credit cards, such as American Express, are generally treated as credit
sales.
36. Retailers record all credit card sales as credit sales.
37. The service fee that credit card companies charge retailers varies and is the primary reason why some
businesses do not accept all credit cards.
38. A seller may grant a buyer a reduction in selling price and this is called a sales allowance.
39. The effect of a sales return and allowance is a reduction in sales revenue and a decrease in cash or accounts
receivable.
40. Merchandise Inventory normally has a debit balance.
41. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30days after the invoice date to take
advantage of the cash discount.
42. Discounts taken by the buyer for early payment of an invoice are credited to Sales Discounts by the buyer.
43. In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory
account.
44. Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. If payment
is made within 10 days of the purchase, the entry to record the payment will include a credit to Cash and a
credit to Purchase Discounts.
45. Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual
inventory system.
46. 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.
47. When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade
discount.
48. A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called
cash discounts.
49. Sellers and buyers are required to record trade discounts.
50. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment,
52. When merchandise is sold for $600 plus 6% sales tax, the Sales account should be credited for $636.
53. The abbreviation FOB stands for Free On Board.
54. Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150. If
$500 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the
amount of the sales discount is $65.
55. If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination.
56. When the terms of sale are FOB shipping point, the buyer should pay the freight charges.
57. 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.
58. The chart of accounts for a merchandise business would include an account called Delivery Expense.
59. There is no difference between the recording of cash sales and the recording of MasterCard or VISA sales.
60. When companies use a perpetual inventory system, the recording of the purchase of inventory will include a
debit to purchases.
61. Most companies will not take a purchases discount, because 1% or 2% discounts are insignificant.
62. The seller may prepay the freight costs even though the terms are FOB shipping point.
63. The seller records the sales tax as part of the sales amount.
64. The buyer will include the sales tax as part of the cost of items purchased for use.
65. A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take
a physical inventory.
66. Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to
the buyer’s place of business.
67. Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped
FOB shipping point.
68. Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the
buyer.
69. If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in the
general ledger.
70. The adjusting entry to record inventory shrinkage would generally include a debit to Cost of Merchandise
Sold.
71. Closing entries for a merchandising business are not similar to those for a service business.
72. The ratio of net sales to assets measures how effectively a business is using its assets to generate sales.
73. Because many companies use computerized accounting systems, periodic inventory is widely used.
74. Computerized systems can be used to capture accounting information such as accounts receivable, inventory
items, accounts payable, and sales.
75. The accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and Freight In are found
on the balance sheet.
76. Match each of the following terms with the appropriate definition below.
1. Early payment discount offered to customers by the
2. Account where returned merchandise or price
Merchandise
3. Expense account for recording shipping costs paid
5. Account used to record merchandise purchased
6. Account where returned merchandise or price
adjustments are recorded by the buyer under the
Purchase Returns
7. Account used to record merchandise purchased
8. Account used to record shipping cost of
merchandise by the buyer under a periodic inventory
Sales Returns and
77. Match each of the following terms with the correct definition below.
1. Shipping terms where the ownership of merchandise
passes to the buyer when the buyer receives the
2. Statement that includes subtotals for net sales, gross
profit and net operating income in determining net
Inventory
3. Payment arrangements determined by the seller as to
when invoices are due and whether early payment
Single-Step Income
4. Statement where net income is determined by
5. Losses of inventory due to theft, damage, spoilage,
etc. that cause the actual inventory on hand to be less
Perpetual Inventory
6. Inventory system that updates the Merchandise
Inventory account for every purchase and sale
Periodic Inventory
7. Shipping terms where the ownership of merchandise
passes to the buyer when the seller delivers the
Multiple-Step
8. Inventory system that updates the Merchandise
Inventory account only at the end of the accounting
period based on a physical count of merchandise on
FOB Shipping
78. Which one of the following is not a difference between a retail business and a service business?
79. Net income plus operating expenses is equal to
80. Generally, the revenue account for a merchandising business is entitled
81. What is the term applied to the excess of net revenue from sales over the cost of merchandise sold?
82. The term “inventory” can indicate
83. A company using the periodic inventory system has the following account balances: Merchandise Inventory
at the beginning of the year, $3,600; Freight-In, $650; Purchases, $10,700; Purchases Returns and Allowances,
$1,950; Purchases Discounts, $330. The cost of merchandise purchased is equal to
84. A company, using the periodic inventory system, has merchandise inventory costing $175 on hand at the
beginning of the period. During the period, merchandise costing $635 is purchased. At year-end, merchandise
inventory costing $160 is on hand. The cost of merchandise sold for the year is
85. Expenses that are incurred directly or entirely in connection with the sale of merchandise are classified as
86. Office salaries, depreciation of office equipment, and office supplies are examples of what type of expense?
87. The form of income statement that derives its name from the fact that the total of all expenses is deducted
from the total of all revenues is called a
88. Multiple-step income statements show
89. When the three sections of a balance sheet are presented on a page in a downward sequence, it is called the
90. The statement of owner’s equity shows
91. Merchandise inventory is classified on the balance sheet as a
92. Which account is not classified as a selling expense?
93. The primary difference between a periodic and perpetual inventory system is that a
94. The inventory system employing accounting records that continuously disclose the amount of inventory is
called
95. When the perpetual inventory system is used, the inventory sold is shown on the income statement as
96. When comparing a retail business to a service business, the financial statement that changes the most is the
97. When comparing a retail business to a service business, the financial statement that changes the least is the
98. Gross profit is equal to:
99. Using the following information, what is the amount of cost of merchandise sold?
Purchases
$32,000
Purchases discounts
$960
Merchandise inventory September 1
5,700
Merchandise inventory
September 30
6,370
Sales returns and allowances
910
Sales
63,000
Purchases returns and allowances
1,200
Freight In
1,040
100. Using the following information, what is the amount of gross profit?
Purchases
$32,000
Purchases discounts
$960
Merchandise inventory
September 1
5,700
Merchandise inventory
September 30
6,370
Sales returns and
allowances
910
Sales
63,000
Purchases returns and
allowances
1,200
Freight In
1,040
101. Using the following information, what is the amount of net sales?
Purchases
$32,000
Purchases discounts
$960
Merchandise inventory
September 1
5,700
Merchandise inventory
September 30
6,370
Sales returns and
allowances
910
Sales
63,000
Purchases returns and
allowances
1,200
Freight In
1,040
102. Using the following information, what is the amount of merchandise available for sale?
Purchases
$32,000
Purchases discounts
$960
Merchandise inventory
September 1
5,700
Merchandise inventory
September 30
6,370
Sales returns and
allowances
910
Sales
63,000
Purchases returns and
allowances
1,200
Freight In
1,040
103. Where are selling and administrative expenses found on the multiple-step income statement?
104. Dorman Co. sold merchandise to Smith Co. on account, $23,500, terms 2/15, net 45. The cost of the
merchandise sold is $16,000. Dorman Co. issued a credit memo for $1,750 for merchandise returned that
originally cost $1,400. The Smith Co. paid the invoice within the discount period. What is amount of net sales
from the above transactions?
105. Using a perpetual inventory system, the entry to record the sale of merchandise on account includes a
106. Which of the following accounts has a normal debit balance?
107. Merchandise is ordered on December 1; the merchandise is shipped by the seller and the invoice is
prepared, dated, and mailed by the seller on December 3; the merchandise is received by the buyer on
December 8; the entry is made in the buyer’s accounts on December 10. The credit period begins with what
date?
108. Using a perpetual inventory system, the entry to record the return from a customer of merchandise sold on
account includes a
109. If merchandise sold on account is returned to the seller, the seller may inform the customer of the details
by issuing a
110. The arrangements between buyer and seller as to when payments for merchandise are to be made are
called
111. In credit terms of 3/15, n/45, the “3” represents the
112. Merchandise with a sales price of $6,000 is sold on account with term 2/10, n/30. The journal entry to
record the sale would include a
113. Merchandise subject to terms 1/10, n/30, FOB shipping point, is sold on account to a customer for
$25,000. The seller paid freight costs of $2,000 and issued a credit memo for $10,000 prior to payment. What
is the amount of the cash discount allowable?
114. Which of the following accounts has a normal credit balance?
115. The entry to record the return of merchandise from a customer would include a
116. Sales to customers who use bank credit cards such as MasterCard and Visa are usually recorded by a
117. Sales to customers who use bank credit cards, such as MasterCard and Visa, are generally treated as
118. When a buyer returns merchandise purchased for cash, the buyer may record the transaction using the
following entry
119. When merchandise is returned under the perpetual inventory system, the buyer would credit
120. When purchases of merchandise are made for cash, the transaction may be recorded with the following
entry
121. Using a perpetual inventory system, the entry to record the purchase of $30,000 of merchandise on account
would include a
122. Using a perpetual inventory system, the entry to record the return of merchandise purchased on account
includes a
123. In recording the cost of merchandise sold for cash, based on data available from perpetual inventory
records, the journal entry is
124. The amount of the total cash paid to the seller for merchandise purchased for consumption would normally
include
125. A retailer purchases merchandise with a catalog list price of $25,000. The retailer receives a 30% trade
discount and credit terms of 2/10, n/30. What amount should the retailer debit to the Merchandise Inventory
account?
126. A sales invoice included the following information: merchandise price, $10,000; freight, $900; terms 1/10,
n/eom, FOB shipping point. Assuming that a credit for merchandise returned of $500 is granted prior to
payment and that the invoice is paid within the discount period, what is the amount of cash that should be
received by the seller?
127. Which of the following accounts usually has a debit balance?
128. Merchandise is sold for cash. The selling price of the merchandise is $5,000 and the sale is subject to a
7% state sales tax. The journal entry to record the sale would include
129. If the buyer is to pay the freight costs of delivering merchandise, delivery terms are stated as
130. If the seller is to pay the freight costs of delivering merchandise, the delivery terms are stated as
131. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms
are
132. Merchandise with an invoice price of $3,000 is purchased on September 2 subject to terms of 2/10, n/30,
FOB destination. Freight costs paid by the seller totaled $200. What is the cost of the merchandise if paid on
September 12, assuming the discount is taken?
133. When goods are shipped FOB destination and the seller pays the freight charges, the buyer