1) The operating cycle for a merchandising firm is ________.
A) obtain cash from stockholders, invest cash in equipment, earn more cash
B) borrow cash from lenders, earn cash from customers, repay lenders
C) start with cash, buy inventory, sell inventory to customers, collect cash from customers
D) issue stock to owners, earn a profit, pay dividends to owners
2) Which statement below best describes how to account for the costs of purchasing inventory?
A) The costs are initially recorded as expenses and depreciated over the estimated useful life.
B) Inventory costs are initially reported as assets and then maintained in the asset accounts for
the life of the business.
C) The costs are initially recorded as assets and become expenses when the inventory has an
increase in market value.
D) The costs are initially recorded as assets and become expenses when the inventory is sold.
3) Inventory consists of items that ________.
A) are purchased for resale to customers as a normal operating activity
B) are purchased, and will be sold to customers only if they go up in market value
C) are intangible in nature
D) can be stored indefinitely and will be held in the business
4) A purchase requisition is a document that is ________.
A) sent to a supplier or vendor requesting that an item be shipped
B) used internally to request that something be purchased
C) used internally to approve a payment for inventory
D) sent to a supplier along with payment for inventory purchased
5) A purchase order is a document that is ________.
A) sent to a supplier or vendor requesting that an item be shipped
B) used internally to request that something be purchased
C) used internally to approve a payment for inventory
D) sent to a supplier along with payment for inventory purchased
6) Which statement below best explains the credit terms of 2/10, n/30?
A) The buyer will receive a 2 percent discount if it pays within ten days of the purchase.
B) The buyer will receive a 10 percent discount if it pays within two days.
C) The buyer will receive a 10 percent discount if it pays within thirty days.
D) The buyer will receive a 2 percent discount if it pays within thirty days.
7) Which of the following costs should be included in the inventory account when inventory is
purchased FOB shipping point?
A) insurance while the merchandise is in transit
B) the cost of the warehouse
C) the advertising costs
D) the cost of merchandise returned
8) The following information is provided for PO Company:
Purchased 100 units of merchandise for $20 each
Paid $50 of freight costs for the merchandise received
Paid $1,200 for an advertising campaign related to the merchandise
Returned 10 of the units purchased because they were broken
Paid the purchasing manager’s monthly salary of $3,000
Determine the cost of PO’s inventory at the end of the period.
A) $1,850
B) $3,050
C) $1,800
D) $4,800
9) Up-a-Creek Company had ending inventory of $60,000, purchases of $200,000, beginning
accounts payable of $100,000, ending accounts payable of $80,000 and cost of goods sold of
$150,000. What was the amount of beginning inventory?
A) $90,000
B) $10,000
C) $30,000
D) $150,000
10) Souper Bowls sold $500 of merchandise to a customer for cash. The sales tax was 5%. How
much cash did Souper Bowls receive?
A) $525
B) $371
C) $329
D) $210
11) Which of the following is inventory for an office supply store such as Office Max?
A) paper used to maintain Office Max’s accounting records
B) paper available to sell to Office Max’s customers
C) paper used in Office Max’s employee washroom
D) office supply storage costs
12) A company reports its unsold merchandise inventory on the ________.
A) balance sheet as a current asset
B) balance sheet as part of Property, plant & equipment
C) balance sheet as a current liability
D) income statement as an expense
13) If a company uses a periodic inventory system, it most likely updates its inventory records at
the time of every ________.
A) purchase
B) sale
C) return
D) physical inventory count
14) A company with a perpetual inventory system purchases inventory on account. What is the
effect of this transaction on the accounting equation?
A) increase one asset and decrease another asset
B) increase an asset and decrease retained earnings
C) increase an asset and decrease a liability
D) increase an asset and increase a liability
15) If the terms of purchase are FOB shipping point, title to the goods passes from the vendor to
the buyer ________.
A) when the merchandise leaves the vendor’s warehouse
B) halfway between the vendor’s warehouse and the buyer’s warehouse
C) when the merchandise reaches the buyer’s warehouse
D) when the merchandise is sold to the end user
16) If the terms of purchase are FOB destination, title to the goods passes from the vendor to the
buyer ________.
A) when the merchandise leaves the vendor’s warehouse
B) halfway between the vendor’s warehouse and the buyer’s warehouse
C) when the merchandise reaches the buyer’s warehouse
D) when the merchandise is sold to the end user
17) A purchase allowance ________.
A) is the amount of cash the purchasing manager is allowed to spend
B) increases the cost of inventory purchased
C) represents the cost of merchandise returned to the vendor
D) is a cost reduction for keeping merchandise that is damaged or defective
18) Which of the following DECREASES the cost of inventory purchased?
A) sales tax
B) purchasing merchandise FOB shipping point
C) purchase allowances
D) payment of accounts payable
19) A vendor offers terms of 3/10, n/30. What is the ANNUAL interest rate the vendor is
charging a buyer who does not pay within 10 days? (Assume there are 360 days in the year.
A) 3%
B) 36%
C) 54%
D) 108%
20) A vendor offers terms of 4/10, n/30. What is the ANNUAL interest rate the vendor is
charging a buyer who does not pay within 10 days? (Assume there are 360 days in the year.
A) 4%
B) 72%
C) 54%
D) 144%
21) A vendor offers terms of 2/10, n/30. What is the ANNUAL interest rate the vendor is
charging a buyer who does not pay within 10 days? (Assume there are 360 days in the year.
A) 2%
B) 36%
C) 54%
D) 72%
22) A vendor offers terms of 1/10, n/30. What is the ANNUAL interest rate the vendor is
charging a buyer who does not pay within 10 days? (Assume there are 360 days in the year.
A) 1%
B) 36%
C) 18%
D) 54%
23) On May 27, Ace Electronics ordered merchandise from Elmo Company. Elmo shipped the
merchandise to Ace on May 31, FOB shipping point. The merchandise arrived at Ace’s
warehouse on June 2. Ace paid for the merchandise on July 1. When should Elmo recognize
revenue?
A) May 27
B) May 31
C) June 2
D) July 1
24) On May 27, Ace Electronics ordered merchandise from Elmo Company. Elmo shipped the
merchandise to Ace on May 31, FOB destination. The merchandise arrived at Ace’s warehouse
on June 2. Ace paid for the merchandise on July 1. When should Ace record the purchase?
A) May 27
B) May 31
C) June 2
D) July 1
25) On November 27, Acme, Inc. ordered merchandise from Zenith Company. Zenith shipped
the merchandise to Acme on November 29, FOB shipping point. The merchandise arrived at
Acme’s warehouse on December 1. Acme paid for the merchandise on January 2. When should
Zenith recognize revenue?
A) November 27
B) November 29
C) December 1
D) January 2
26) On November 27, Acme, Inc. ordered merchandise from Zenith Company. Zenith shipped
the merchandise to Acme on November 29, FOB destination. The merchandise arrived at Acme’s
warehouse on December 1. Acme paid for the merchandise on January 2. When should Acme
record the purchase?
A) November 27
B) November 29
C) December 1
D) January 2
27) On December 12, Occident, Ltd., a company in Singapore, ordered merchandise from San
Francisco Exports. The merchandise was shipped to Occident on December 29, FOB shipping
point. The merchandise arrived at Occident’s warehouse on February 1. Occident paid for the
merchandise on March 2. When should San Francisco Exports recognize revenue?
A) December 12
B) December 29
C) February 1
D) March 2
28) On December 12, Occident, Ltd., a company in Singapore, ordered merchandise from San
Francisco Exports. The merchandise was shipped to Occident on December 29, FOB destination.
The merchandise arrived at Occident’s warehouse on February 1. Occident paid for the
merchandise on March 2. When should Occident record the purchase?
A) December 12
B) December 29
C) February 1
D) March 2
29) Sailors, Inc. sold $100,000 of merchandise to Breyer, Inc. with terms of 1/10, n/30. Five days
later, Breyer returned $10,000 of the merchandise. If Breyer pays within the discount period,
how much cash will Sailors receive?
A) $100,000
B) $99,000
C) $90,000
D) $89,100
30) Sailors, Inc. sold $100,000 of merchandise to Breyer, Inc. with terms of 1/10, n/30. If Breyer
pays the invoice 20 days after receipt of the invoice, how much cash will Sailors receive?
A) $100,000
B) $99,000
C) $90,000
D) $89,100
31) Zenith Company sold $10,000 of merchandise to Nadir Company, with terms of 2/10, n/30.
Five days later, Nadir returned $1,000 of the merchandise. If Nadir does NOT pay within the
discount period, how much cash will Zenith receive?
A) 10,000
B) $9,800
C) $9,000
D) $8,820
32) Nadir Company sold $2,000 of merchandise to Acme Company, with terms of 3/10, n/30.
Five days later, Acme returned $500 of the merchandise. If Acme pays within the discount
period, how much cash will Nadir receive?
A) $2,000
B) $1,940
C) $1,500
D) $1,455
33) Nadir Company sold $2,000 of merchandise to Acme Company, with terms of 3/10, n/30.
Five days later, Acme returned $500 of the merchandise. If Acme does NOT pay within the
discount period, how much cash will Nadir receive?
A) $2,000
B) $1,940
C) $1,500
D) $1,455
34) Ace Company sells goods FOB destination. The shipping costs ________.
A) will not be paid by Ace
B) appear on Ace’s income statement as a decrease in Net sales
C) appear on Ace’s income statement as an Operating expense
D) appear on Ace’s income statement as an increase in Cost of goods sold
35) Ace Electronics sold $350 of merchandise to a customer on account. The sales tax was 6%.
How much sales revenue did Ace earn?
A) $350
B) $371
C) $329
D) $0
36) Inside Outfitters sold $200 of merchandise to a customer for cash. The sales tax was 8%.
How much cash did Inside Outfitters receive?
A) $200
B) $16
C) $216
D) $184
37) Inside Outfitters sold $200 of merchandise to a customer for cash. The sales tax was 8%.
How much sales revenue did Inside Outfitters earn?
A) $200
B) $0
C) $216
D) $184
38) Acme Enterprise sold $150 of merchandise to a customer for cash. The sales tax was 7%.
How much cash did Inside Acme receive?
A) $10.50
B) $160.50
C) $150.00
D) $139.50
39) Acme Enterprise sold $150 of merchandise to a customer for cash. The sales tax was 7%.
How much sales revenue did Acme earn?
A) $10.50
B) $160.50
C) $150.00
D) $139.50
40) Which statement below best explains the credit terms of 2/15, n/30?
A) The buyer will receive a 15 percent discount if it pays within two days of the purchase.
B) The buyer will receive a 15 percent discount if it pays within thirty days.
C) The buyer will receive a 2 percent discount if it pays within fifteen days.
D) The buyer will receive a 2 percent discount if it pays within thirty days.
41) Boise Cascade Company purchases $5,000 of merchandise from a vender with credit terms
of 2/10, n/30. Assuming that Boise Cascade pays within the discount period, the total cost of the
inventory is ________.
A) $5,000
B) $4,900
C) $4,500
D) $3,500
42) On January 5, Boise Cascade Company purchases $5,000 of merchandise from a vendor with
credit terms of 2/10, n/30. If Boise Cascade pays the vendor on January 20, the amount of the
payment should be ________.
A) $5,000
B) $4,900
C) $4,500
D) $3,500
43) On January 5, Boise Cascade Company purchases $5,000 of merchandise from a vendor with
credit terms of 2/10, n/30. If Boise Cascade pays the vendor on January 13, the amount of the
payment should be ________.
A) $5,000
B) $4,900
C) $4,500
D) $3,500
44) Rigby Company purchased merchandise from a supplier in Hong Kong with an invoice cost
of $10,000 and shipping terms of FOB destination. The freight costs amount to $1,000. Rigby
should record inventory at a cost of ________.
A) $11,000
B) $10,000
C) $9,000
D) $1,000
45) Banner, Inc. purchases $45,000 of merchandise from a vendor with credit terms of 2/10,
n/30. Assuming that Banner pays within the discount period, the total cost of the inventory is
________.
A) $45,900
B) $45,000
C) $40,500
D) $44,100
46) Rigby Company buys merchandise from Shoshone Company with an invoice cost of
$100,000 and shipping terms of FOB shipping point. The freight costs amount to $1,000. Which
of the following statements is TRUE?
A) Rigby Company will record freight-in costs of $1,000.
B) Shoshone Company will record freight-out costs of $1,000.
C) Shoshone Company will record freight-in costs of $1,000.
D) Rigby Company will have inventory cost of $10,000.
47) Rigby Company buys merchandise from Shoshone Company with an invoice cost of $10,000
and shipping terms of FOB destination. The freight costs amount to $7,000. Which of the
following statements is TRUE?
A) Rigby Company will record freight-in costs of $7,000.
B) Shoshone Company will record freight-out costs of $7,000.
C) Shoshone Company will record freight-in costs of $7,000.
D) Rigby Company will have inventory cost of $107,000.
48) Horse Creek Company had beginning inventory of $34,000, purchases of $210,000, purchase
returns of $13,000, and ending inventory of $40,000. What was the cost of goods sold?
A) $204,000
B) $198,000
C) $157,000
D) $191,000
49) On May, 2, Breyer, Inc. purchases $25,000 of merchandise from a vendor with credit terms
of 2/10, n/30. If Breyer pays the vendor on May 10, the amount of the payment should be
________.
A) $25,000
B) $24,500
C) $22,500
D) $27,500
50) Rigby Company buys merchandise from Shoshone Company with an invoice cost of $10,000
and shipping terms of FOB shipping point. The freight costs amount to $1,000. Which of the
following statements is TRUE?
A) Rigby Company will record freight-in costs of $1,000.
B) Shoshone Company will record freight-out costs of $1,000.
C) Shoshone Company will record freight-in costs of $1,000.
D) Rigby Company will have inventory cost of $10,000.
51) On February 12, Horseshoe Bend Company purchases $25,000 of merchandise from a
vendor with credit terms of 2/10, n/30. On February 15, Horseshoe Bend Company returns
$5,000 of the goods because they are defective. If Horseshoe Bend pays the vendor the full
amount due on February 20, the amount of the payment is ________.
A) $25,000
B) $20,000
C) $19,600
D) $18,000
52) On February 12, Horseshoe Bend Company purchases $25,000 of merchandise from a
vendor with credit terms of 2/10, n/30. If Horseshoe Bend pays the vendor on February 21, the
amount of the payment should be ________.
A) $25,000
B) $24,500
C) $22,500
D) $27,500
53) Horse Creek Company had beginning inventory of $900,000, purchases of $2,000,000,
purchase returns of $50,000, ending inventory of $800,000, beginning accounts payable of
$200,000 and ending accounts payable of $100,000. What was the cost of goods sold?
A) $2,050,000
B) $1,950,000
C) $2,150,000
D) $1,900,000
54) Which of the following costs are included in the inventory account when inventory is
purchased FOB shipping point?
A) purchase returns
B) warranty costs
C) freight costs
D) allowance for uncollectible accounts
55) If the shipping terms are FOB shipping point than the shipping costs are paid by the
________.
A) seller and included as part of the cost of the seller’s inventory
B) buyer and included as part of selling expenses at the time of the purchase
C) seller and included as part of the selling expenses at the time of the sale
D) buyer and included as part of the cost of the buyer’s inventory at the time of the purchase
56) The Ribbon Company began operations on May 1. The following transactions took place in
May:
Purchased $400,000 of merchandise on account.
Purchased an additional $200,000 of merchandise for cash.
Paid $3,000 cash for freight to deliver the merchandise purchased.
Paid $25,000 for the store managers’ monthly salaries.
The cost of the inventory purchased for the month of May equals ________.
A) $400,000
B) $600,000
C) $603,000
D) $628,000
57) Perch X, Inc. purchased goods with an invoice price of $3,000. Purchase terms are 1/10, n/30
and the invoice is paid one week after it was received. The shipping terms are FOB shipping
point and the shipping costs are $300. The cost of the inventory purchased equals _______.
A) $3,000
B) $3,300
C) $2,700
D) $3,270
58) On December 29, Perch X, Inc. purchased $2,000 of merchandise from a supplier. The
shipping terms were FOB shipping point. The merchandise did not arrive until after yearend.
Perch X should ______.
A) exclude the merchandise from its inventory but should record the related accounts payable as
of yearend.
B) include the merchandise in its inventory and record the related accounts payable.
C) exclude the merchandise from its inventory and the related accounts payable as of yearend.
D) expense the merchandise as cost of goods sold at yearend.
59) On December 29, Perch X, Inc. purchased $2,000 of merchandise from a supplier. The
shipping terms were FOB destination. The merchandise did not arrive until after yearend. Perch
X should ______.
A) exclude the merchandise from its inventory but should record the related accounts payable as
of yearend.
B) include the merchandise in its inventory and record the related accounts payable.
C) exclude both the merchandise from its inventory and the related accounts payable as of
yearend.
D) expense the merchandise as cost of goods sold at yearend.
60) Net sales equals ________.
A) sales minus cost of goods sold
B) sales minus sales returns and allowances minus sales discounts
C) sales divided by net income
D) net income divided by sales
61) Net sales is net of ________.
A) goods in transit
B) cost of goods sold
C) sales returns and allowances
D) gross profit
62) Sales returns and allowances and Sales discounts are ________.
A) contra-asset accounts and are netted against Accounts receivable on the balance sheet
B) contra-expense accounts and netted against Cost of goods sold on the income statement
C) expense accounts and added to Sales on the income statement
D) contra-revenue accounts and netted against Sales on the income statement
63) A purchase requisition is completed after merchandise is received from a vendor.
64) A purchase allowance is a record of the company’s request to a vendor for goods or services.
65) The purchase of inventory is recorded as an expense called cost of goods sold.
66) Credit terms of 2/10, n/30 provide for a 10 percent discount if the buyer pays within 30 days.
67) If the shipping terms are FOB destination, the seller has to pay for freight costs.
68) If the shipping terms are FOB shipping point, the seller has to pay for freight costs.
69) If the shipping terms are FOB shipping point, the buyer has to pay for freight costs.
70) Freight out is an operating expense recorded on the seller’s books for the costs of shipping
merchandise to buyers.
71) Sales returns and allowances is a contra-asset account.
72) Describe the operating cycle for a merchandising firm.
73) Describe the function and use of a purchase requisition and a purchase order.
74) Shubart Apparel Company purchased 1,000 shirts from Blue Parrot, FOB shipping point.
Each shirt had an invoice cost of $18, which includes $1 of tariff paid to import the shirts from
Belize. Shubart also paid FedEx $2,000 to have the shirts shipped to its warehouse in Florida,
and another $500 to insure the shirts while they were in transit.
Required:
a. Determine the inventory cost that Shubart should record.
b. Explain when the costs described above will become expenses.
75) Good Health, LLP, completed the following inventory transactions during the month of
August:
a. used cash to purchase $620,000 of merchandise
b. purchased $190,000 of merchandise on account
c. paid freight costs of $33,000 on merchandise purchased FOB shipping point
d. returned $12,000 of defective merchandise to the supplier
e. used cash to purchase $210,000 of merchandise
f. paid the purchasing manager’s monthly salary of $11,000
g. purchased $45,000 of merchandise on account
h. paid the sales staff’s $22,000 salary for the month
i. paid freight costs of $9,000 on merchandise purchased FOB shipping point
j. paid the $17,000 utility bill for the month
Required: Determine the cost of merchandise purchased for the month.
76) Montana Company made the following purchases during the month of September:
Sept. 8
Purchased $5,600 of merchandise, terms 2/10, n/30,
FOB destination, freight cost $100
Sept. 16
Purchased $12,300 of merchandise, terms 2/15, n/60,
FOB shipping point, freight cost $100
Sept. 21
Purchased $15,000 of merchandise, terms 3/10, n/20,
FOB destination, freight cost $100
Sept. 28
Purchased $10,000 of merchandise, terms 1/15, n/45,
FOB shipping point, freight cost $100
Required:
1. Complete the chart below for each of the four purchases.
Sept. 8
Sept. 16
Sept.
21
Sept. 28
a. due date, assuming the discount is taken
b. last day to pay if the discount is NOT
taken
c. amount of discount
$
$
$
$
d. freight cost paid by Montana Company
$
$
$
$
2. Assuming that the selling company accepts all discounts, what is the total cost of purchases for
the month?
b.
d.