CHAPTER 6: 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 merchandise business, sales minus operating expenses equal net income.
a.
True
b.
False
3.
Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends to sell.
a.
True
b.
False
Chapter 6: Accounting for Merchandising Businesses
4.
Service businesses provide services for income, while a merchandising business sells merchandise.
a.
True
b.
False
5.
In retail businesses, inventory is reported as a current asset.
a.
True
b.
False
6.
Under a periodic inventory system, the cost of merchandise on hand at the end of the year is determined by a
physical count of the inventory.
a.
True
b.
False
Chapter 6: Accounting for Merchandising Businesses
7.
In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the beginning inventory.
a.
True
b.
False
8.
Freight in is the amount paid by the company to deliver merchandise sold to a customer.
a.
True
b.
False
9.
Freight in is considered a cost of purchasing inventory.
a.
True
b.
False
10.
The cost of merchandise inventory is limited to the purchase price less any purchase discounts.
a.
True
b.
False
Chapter 6: Accounting for Merchandising Businesses
11.
Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are
recorded.
a.
True
b.
False
12.
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
13.
When merchandise that was sold is returned, a credit to sales returns and allowances is made.
a.
True
b.
False
Chapter 6: Accounting for Merchandising Businesses
14.
In a perpetual inventory system, when merchandise is returned to the supplier, Cost of Merchandise Sold is
debited
as part of the transaction.
a.
True
b.
False
15.
Customer Refunds Payable is an account used to record merchandise returns from customers.
a.
True
b.
False
16.
Estimated Returns Inventory is an account used when adjusting for expected merchandise sales in the next period.
a.
True
b.
False
Chapter 6: Accounting for Merchandising Businesses
17.
Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales.
a.
True
b.
False
18.
Large businesses that make sales to customers who use nonbank credit cards, such as American Express,
generally treat these sales as credit sales.
a.
True
b.
False
19.
Most retailers record all credit card sales as credit sales.
a.
True
b.
False
Chapter 6: 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 customer discount encourages customers to pay accounts more quickly than if a discount were not available.
a.
True
b.
False
Chapter 6: Accounting for Merchandising Businesses
23.
Merchandise Inventory normally has a debit balance.
a.
True
b.
False
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 merchandise inventory account.
a.
True
b.
False
Chapter 6: Accounting for Merchandising Businesses
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 merchandise inventory account under the perpetual
inventory system.
a.
True
b.
False
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
Chapter 6: Accounting for Merchandising Businesses
29.
Buyers and sellers do not normally record the list prices of merchandise and the trade discounts in accounts.
a.
True
b.
False
30.
When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount.
a.
True
b.
False
31.
A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called
cash
discounts.
a.
True
b.
False
Chapter 6: Accounting for Merchandising Businesses
32.
Sellers and buyers are required to record trade discounts.
a.
True
b.
False
33.
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
34.
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
Chapter 6: Accounting for Merchandising Businesses
35.
When merchandise is sold for $600 plus 6% sales tax, the Sales account should be credited for $636.
a.
True
b.
False
36.
The abbreviation FOB stands for “free on board.”
a.
True
b.
False
37.
Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150. The amount
of the sales recorded is $3,528.
a.
True
b.
False
Chapter 6: Accounting for Merchandising Businesses
38.
If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination.
a.
True
b.
False
39.
When the terms of sale are FOB shipping point, the buyer should pay the freight charges.
a.
True
b.
False
40.
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
Chapter 6: Accounting for Merchandising Businesses
41.
The chart of accounts for a merchandising business would include an account called Delivery Expense.
a.
True
b.
False
42.
There is no difference between the recording of cash sales and the recording of MasterCard or VISA sales.
a.
True
b.
False
43.
When companies use a perpetual inventory system, the recording of the purchase of inventory will include a debit
to
Purchases.
a.
True
b.
False
Chapter 6: Accounting for Merchandising Businesses
44.
Most companies will not take a purchase discount, because 1% or 2% discounts are insignificant.
a.
True
b.
False
45.
The seller may prepay the freight costs even though the terms are FOB shipping point.
a.
True
b.
False
46.
The seller records the sales tax as part of the sales amount.
a.
True
b.
False
Chapter 6: Accounting for Merchandising Businesses
47.
A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take
a
physical inventory.
a.
True
b.
False
48.
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
49.
Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the buyer.
a.
True
b.
False
Chapter 6: Accounting for Merchandising Businesses
50.
Because many companies use computerized accounting systems, periodic inventory is widely used.
a.
True
b.
False
51.
If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in the
general
ledger.
a.
True
b.
False
52.
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
Chapter 6: Accounting for Merchandising Businesses
53.
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
54.
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.
a.
True
b.
False
55.
Sales are equal to the cost of merchandise sold less the gross profit.
a.
True
b.
False
Chapter 6: Accounting for Merchandising Businesses
56.
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.
a.
True
b.
False
57.
In a multiple-step income statement, the dollar amount for income from operations is always the same as
net
income.
a.
True
b.
False
58.
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 6: Accounting for Merchandising Businesses
59.
Gross profit minus selling expenses equals net income.
a.
True
b.
False
60.
The account form of the balance sheet is presented in a downward sequence in three sections.
a.
True
b.
False
61.
In the merchandising income statement, sales will be reduced by administrative expenses to arrive at
operating
income.
a.
True
b.
False