Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
5-58
Ex. 228
The adjusted trial balance of McCoy Company included the following selected accounts:
Debit Credit
Sales Revenue $645,000
Sales Returns and Allowances $ 50,000
Sales Discounts 9,500
Cost of Goods Sold 396,000
Freight-Out 2,000
Advertising Expense 15,000
Interest Expense 19,000
Salaries and Wages Expense 84,000
Utilities Expense 23,000
Depreciation Expense 3,500
Interest Revenue 25,000
Instructions
1. Use the above information to prepare a multiple-step income statement for the year ended
December 31, 2014.
2. Calculate the profit margin and gross profit rate.
Merchandising Operations
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Ex. 229
Presented below is information for Zales Company for the month of January 2014.
Cost of goods sold $280,000 Rent expense $35,000
Freight-out 7,000 Sales discounts 8,000
Insurance expense 12,000 Sales returns and allowances 13,000
Salaries and wages expense 42,000 Sales revenue 421,000
Instructions
(a) Prepare a multiple-step income statement.
(b) Calculate the profit margin and the gross profit rate.
Ex. 230
The trial balance of Rachel Company at the end of its fiscal year, August 31, 2014, includes these
accounts: Inventory $29,200; Purchases $144,000; Sales Revenue $190,000; Freight-In $8,000;
Sales Returns and Allowances $3,000; Freight-Out $1,000; and Purchases Returns and
Allowances $5,000. The ending inventory is $25,000.
Instructions
Prepare a cost of goods sold section for the year ending August 31.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
5-60
Solution 230 (10 min.)
Ex. 231
Below is a series of cost of goods sold sections for Mikey Inc., Nancie Co., and Oscar Inc.
Mikey Nancie Oscar
Beginning inventory $ 250 $ 120 $ (g)
Purchases 1,700 1,080 43,590
Purchase returns and allowances 40 (d) (h)
Net purchases (a) 1,020 41,590
Freight-in 130 (e) 2,740
Cost of goods purchased (b) 1,230 (i)
Cost of goods available for sale 2,240 1,350 49,530
Ending inventory 310 (f) 6,230
Cost of goods sold (c) 1,130 43,300
Instructions
Fill in the lettered blanks to complete the cost of goods sold sections.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 231 (10 min.)
Merchandising Operations
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Ex. 232
The following information is available from the annual reports of Flynn Company and Tolan Inc.
(Amounts in millions)
Flynn Tolan
Sales revenue $32,622 $40,457
Cost of goods sold 20,739 24,431
Operating expenses 7,428 9,188
Income before taxes 4,455 6,838
Net income 2,594 4,072
Instructions
1. Calculate the profit margin and gross profit rate for each company.
2. What conclusion concerning the relative profitability of the two companies can be drawn from
these data?
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 232 (15 min.)
*Ex. 233
June 4 Deere Company purchased $3,500 worth of merchandise, terms n/30 from Gilbert
Company. The cost of the merchandise was $2,500.
13 Deere returned $600 worth of goods to Gilbert for full credit. The goods had a cost of
$400 to Johnson.
13 Deere paid the account in full.
Instructions
Prepare the journal entries to record these transactions in (a) Deere’s records and (b) Gilbert’s
records. Assume use of the periodic inventory system for both companies.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
5-62
*Solution 233 (15-20 min.)
*Ex. 234
On September 1, Hendricks Supply had an inventory of 18 backpacks at a cost of $20 each. The
company uses a periodic inventory system. During September, the following transactions and
events occurred.
Sept. 4 Purchased 50 backpacks at $20 each from Neufeld, terms 2/10, n/30.
6 Received credit of $100 for the return of 5 backpacks purchased on Sept. 4 that were
defective.
9 Sold 30 backpacks for $30 each to Brewer Books, terms 2/10, n/30.
13 Sold 10 backpacks for $30 each to Stoner Office Supply, terms n/30.
14 Paid Neufeld in full, less discount.
Instructions
Journalize the September transactions for Hendricks Supply.
Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Merchandising Operations
FOR INSTRUCTOR USE ONLY
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*Solution 234 (15-20 min.)
*Ex. 235
Presented here are selected transactions for the Foyle Company during April. Foyle uses the
periodic inventory system.
April 1 Sold merchandise to Land Company for $4,000, terms 2/10, n/30. The
merchandise sold had a cost of $2,000.
2 Purchased merchandise from Webb Corporation for $6,000, terms 1/10, n/30.
4 Purchased merchandise from Ryan Company for $2,000, n/30.
10 Received payment from Land Company for purchase of April 1 less appropriate
discount.
11 Paid Webb Corporation for April 2 purchase.
Instructions
Journalize the April transactions for Foyle Company.
Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
*Solution 235 (12-16 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
5-64
*Ex. 236
This information relates to Tandi Co.
1. On April 5 purchased merchandise from Buehler Company for $33,000, terms 2/10, net/30.
2. On April 6 paid freight costs of $900 on merchandise purchased from Buehler Company.
3. On April 7 purchased equipment on account for $26,000.
4. On April 8 returned some of the April 5 merchandise to Buehler Company which cost $3,000.
5. On April 15 paid the amount due to Buehler Company in full.
Instructions
(a) Prepare the journal entries to record these transactions on the books of Tandi Co. using a
periodic inventory system.
(b) Assume that Tandi Co. paid the balance due to Buehler Company on May 4 instead of April
15. Prepare the journal entry to record this payment.
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COMPLETION STATEMENTS
237. A _________________ buys and sells inventory rather than performing services as their
primary source of revenue.
238. Cost of goods sold is deducted from net sales revenue for the period in order to arrive at
________________.
239. Inventory on hand can be obtained from detailed inventory records when a
________________ inventory system is maintained.
240. The acquisition of inventory is debited to the ____________ account when a perpetual
inventory system is used.
241. The freight costs incurred by a seller on outgoing inventory are an ________________ to
the seller.
242. When a customer returns inventory previously purchased on credit, the entry to record the
credit granted to the customer requires a debit to the ___________________ account and a
credit to the ________________ account.
243. Every credit sales transaction should be supported by a _________________ that provides
written evidence of the sale.
244. Sales Returns and Allowances and Sales Discounts are both ______________ accounts
and have normal _______________ balances.
245. Gross profit is obtained by subtracting ________________ from ________________.
246. A useful measure of profitability is the ratio of net income to _____________.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
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MATCHING
247. Match the items below by entering the appropriate code letter in the space provided.
A. Net sales F. Contra revenue
B. Sales discount G. Freight-out
C. Credit terms H. Gross profit
D. Periodic inventory system I. Sales invoice
E. Gross profit rate J. Purchase discount
____ 1. A reduction given by the seller for prompt payment of a credit sale.
____ 2. Provides support for a credit sale.
____ 3. Gross profit divided by net sales.
____ 4. Sales less sales returns and allowances and sales discounts.
____ 5. Specifies the amount of cash discount and time period during which it is offered.
____ 6. Net sales less cost of goods sold.
____ 7. Freight cost to deliver goods to customers reported as an operating expense.
____ 8. Requires a physical count of goods on hand to compute cost of goods sold.
____ 9. A cash discount claimed by a buyer for prompt payment of a balance due.
____ 10. An account that is offset against a revenue account on the income statement.
Merchandising Operations
FOR INSTRUCTOR USE ONLY
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SHORT-ANSWER ESSAY QUESTIONS
S-A-E 248
You are at a company picnic and the company president starts a conversation with you. The
president says “Since we use the perpetual inventory system, there is no reason to take a
physical count of our inventory.” What is your response to the president’s remarks?
S-A E 249
A merchandising company frequently has a need to use contra accounts related to the sale of
goods. Identify the contra accounts that have normal debit balances and explain why they are not
considered expenses.
S-A E 250
Alice Gray believes revenues from credit sales may be earned before they are collected in cash.
Do you agree? Explain.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
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S-A E 251
To encourage bookstores to buy a broader range of book titles many publishers allow bookstores
to return unsold books to the publisher. This results in very significant returns each year. To
ensure proper recognition of revenues, how should publishing companies account for these
returns?
S-A E 252
In a single-step income statement, all data are classified under two categories: (1) Revenues, or
(2) Expenses. If the income statement is recast in a multiple-step format, what additional
information or intermediate components of income would be presented?
S-A-E 253
Distinguish between cost of goods sold and operating expenses, describe the nature of these two
items and their placement on the income statement.
S-A E 254
The income statement for a merchandising company presents five amounts not shown on a
service company’s income statement. Identify and briefly explain the five unique amounts.
Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA
PC: Communications, IMA: Reporting
Merchandising Operations
FOR INSTRUCTOR USE ONLY
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Solution 254
S-A E 255
What factors affect a company’s gross profit rate—that is, what can cause the gross profit rate to
increase and what can cause it to decrease?
S-A E 256
The following are the gross profit percentages for Naylor Company:
Year Gross Profit
Percentage
2012 33%
2013 34%
2014 36%
2015 13%
List four possible explanations for the low gross profit percentage in 2015.
Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA
PC: Communications, IMA: Reporting
Solution 256
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
5-70
S-A E 257 (Ethics)
Hiller Corporation manufactures electronic components for use in many consumer products. Their
raw materials are purchased literally from all over the world. Depending on the country involved,
purchase terms vary widely. Some suppliers, for example, require full prepayment, while others
are content to receive payment within six months of receipt of the goods.
Because of this situation, Hiller never closes its books until at least ten days after month end. In
this way, it can sort out ownership of goods in transit, and document which goods were received
by month end, and which were not.
Donna Gordon, a new accountant, was asked to record about $50,000 in inventory as having
been received before month end. She argued that the shipping documents clearly showed that
the goods were actually received on the 8th of the current month. Her boss, busy with month-end
reports, curtly tells Donna to check the shipping terms. She did so, and found the notation “FOB
(free on board) shipper’s dock” on the document. She hadn’t seen that particular notation before,
but she reasoned that if the selling company considered it shipped when it reached their dock,
Hiller should consider it received when it reached Hiller’s dock. She did not record the sale until
after month end.
Required:
1. Why are accountants concerned with the timing in the recording of purchases?
2. Was there a violation of ethical standards here? Explain.
S-A E 258 (Communication)
Sandy Lang and Mandy Starr, two salespersons in adjoining territories, regularly compete for
bonuses. During the last month, their dollar volume of sales, on which the bonuses are based,
was nearly equal. On May 30, 2014, each made a large sale. Both orders were shipped on May
31, 2014, the last day of the month, and both were received by the customers on June 5, 2014.
Sandy’s sale was FOB shipping point (ownership passes to buyer at time of shipping), and
Mandy’s was FOB destination (ownership passes to buyer at time of receipt). The printed policy
of the company states that sales “count” for purposes of calculating bonuses on the date that
ownership passes to the purchaser. Sandy’s sale was therefore counted in her May monthly total
of sales while Mandy’s sale was not. Mandy is quite upset. She has asked you to just include it,
or to take Sandy’s off as well. She also has told you that you are being unethical for allowing
Sandy to get a bonus just for choosing a particular shipping method.
Merchandising Operations
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S-A E 258 (Cont.)
As the accounting manager write a memo to Mandy on June 15, 2014, and explain your position.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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IFRS QUESTIONS
1. The Income statement is
a. required under GAAP but not under IFRS.
b. required under IFRS in the same format as under GAAP.
c. required under IFRS but not under GAAP.
d. required under IFRS with some differences as compared to GAAP.
2. The basic accounting entries for merchandising are
a. the same under GAAP and under IFRS.
b. required under GAAP but not under IFRS.
c. required under IFRS but not under GAAP.
d. required under IFRS with some differences as compared to GAAP.
3. Under GAAP, companies can choose which inventory system?
Perpetual Periodic
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No
4. Under IFRS, companies can choose which inventory system?
Perpetual Periodic
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No
5. Companies cannot use the
a. periodic inventory system under GAAP.
b. periodic inventory system under IFRS.
c. perpetual system under IFRS.
d. None of these answer choices are correct.
6. Inventories are defined by IFRS as
a. held–for-sale in the ordinary course of business.
b. in the process of production for sale in the ordinary course of business.
c. in the form of materials or supplies to be consumed in the production process or in the
providing of services.
d. All of these answer choices are correct.
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7. Under GAAP, companies generally classify income statement items by
a. function.
b. nature.
c. nature or function
d. date incurred.
8. Under IFRS, companies must classify income statement items by
a. function.
b. nature.
c. nature or function
d. date incurred.
9. Under GAAP, income statement items are generally described as
a. administration, distribution, manufacturing, etc.
b. salaries, depreciation, utilities, etc.
c. administration, depreciation, manufacturing, etc.
d. salaries, distribution, utilities, etc.
10. Under IFRS, income statement items classified by nature are generally described as
a. administration, distribution, manufacturing, etc.
b. salaries, depreciation, utilities, etc.
c. administration, depreciation, manufacturing, etc.
d. salaries, distribution, utilities, etc.
11. For the income statement, IFRS requires
a. single-step approach.
b. multiple-step approach.
c. single-step approach or multiple-step approach.
d. no specific income statement approach.
12. Under IFRS, companies can apply revaluation to
a. land, buildings, and intangible assets.
b. land, buildings, but not intangible assets.
c. intangible assets, but not land.
d. no assets.
13. The use of IFRS results in more transactions affecting
a. net income but not other comprehensive income.
b. other comprehensive income, but not net income.
c. net income and other comprehensive income.
d. neither net income nor other comprehensive income.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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14. Comprehensive income under IFRS
a. includes unrealized gains and losses included in net income, in contrast to GAAP.
b. includes unrealized gains and losses included in net income, similar to GAAP.
c. excludes unrealized gains and losses included in net income, in contrast to GAAP.
d. excludes unrealized gains and losses included in net income, similar to GAAP.
15. The number of years of income statement information to be presented is
a. 2 years under both GAAP and IFRS.
b. 3 years under both GAAP and IFRS.
c. 2 years under GAAP and 3 years under IFRS.
d. 3 years under GAAP and 2 years under IFRS.