FOR INSTRUCTOR USE ONLY
CHAPTER 5
MERCHANDISING OPERATIONS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY
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Multiple Choice Questions
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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
5-2
Multiple Choice Questions (Cont.)
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Brief Exercises
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Completion Statements
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Short-Answer Essay Questions
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* This topic is dealt with in an Appendix to the chapter.
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 1
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1.
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207.
BE
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11.
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C
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Learning Objective 2
16.
TF
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MC
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MC
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MC
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Ex
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C
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BE
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Merchandising Operations
FOR INSTRUCTOR USE ONLY
5-3
Learning Objective 3
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23.
TF
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Learning Objective 4
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TF
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MC
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MC
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BE
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35.
TF
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MC
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C
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TF
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MC
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Ma
Learning Objective 5
44.
TF
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MC
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MC
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MC
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Ex
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TF
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MC
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MC
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MC
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Ex
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MC
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184.
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212.
BE
247.
Ma
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Learning Objective 6
46.
TF
168.
MC
189.
MC
196.
MC
214.
BE
247.
Ma
47.
TF
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MC
190.
MC
197.
MC
226.
Ex
255.
SA
48.
TF
172.
MC
191.
MC
198.
MC
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Ex
256.
SA
161.
MC
173.
MC
192.
MC
199.
MC
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Ex
162.
MC
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MC
193.
MC
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MC
229.
Ex
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MC
179.
MC
194.
MC
201.
MC
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Ex
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MC
188.
MC
195.
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MC
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C
Learning Objective 7
49.
TF
50.
TF
247.
Ma
Learning Objective 8
51.
TF
203.
MC
205.
MC
233.
Ex
235.
Ex
52.
TF
204.
MC
206.
MC
234.
Ex
236.
Ex
Note: TF = True-False C = Completion
MC = Multiple Choice Ex = Exercise
Ma = Matching SA = Short Answer Essay
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
5-4
CHAPTER LEARNING OBJECTIVES
1. Identify the differences between a service company and a merchandising company.
Because of the presence of inventory, a merchandising company has sales revenue, cost of
goods sold, and gross profit. To account for inventory, a merchandising company must
choose between a perpetual inventory system and a periodic inventory system.
2. Explain the recording of purchases under a perpetual inventory system. The Inventory
account is debited for all purchases of merchandise and for freight costs, and it is credited for
purchase discounts and purchase returns and allowances.
3. Explain the recording of sales revenues under a perpetual inventory system. When
inventory is sold, Accounts Receivable (or Cash) is debited and Sales Revenue is credited for
the selling price of the merchandise. At the same time, Cost of Goods Sold is debited and
Inventory is credited for the cost of inventory items sold. Separate contra revenue accounts
are maintained for Sales Returns and Allowances and Sales Discounts. These accounts are
debited as needed to record returns, allowances, or discounts related to the sale.
4. Distinguish between a single-step and a multiple-step income statement. In a single-
step income statement, companies classify all data under two categories, revenues or
expenses, and net income is determined in one step. A multiple-step income statement
shows numerous steps in determining net income, including results of nonoperating activities.
5. Determine cost of goods sold under a periodic system. The periodic system uses multiple
accounts to keep track of transactions that affect inventory. To determine cost of goods sold,
first calculate cost of goods purchased by adjusting purchases for returns, allowances,
discounts, and freight-in. Then calculate cost of goods sold by adding cost of goods
purchased to beginning inventory and subtracting ending inventory.
6. Explain the factors affecting profitability. Profitability is affected by gross profit, as
measured by the gross profit rate, and by management’s ability to control costs, as measured
by the profit margin ratio.
7. Identify a quality of earnings Indicator. Earnings have high quality if they provide a full and
transparent depiction of how a company performed. An indicator of the quality of earnings is
the quality of earnings ratio, which is net cash provided by operating activities divided by net
income. Measures above 1 suggest the company is employing conservative accounting
practices. Measures significantly below 1 might suggest the company is using aggressive
accounting to accelerate the recognition of income.
*8. Explain the recording of purchases and sales of inventory under a periodic inventory
system. To record purchases, entries are required for (a) cash and credit purchases, (b)
purchase returns and allowances, (c) purchase discounts, and (d) freight costs. To record
sales, entries are required for (a) cash and credit sales, (b) sales returns and allowances, and
(c) sales discounts.
Merchandising Operations
5-5
TRUE-FALSE STATEMENTS
1. Retailers and wholesalers are both considered merchandising enterprises.
2. The operating cycle of a merchandising company ordinarily is shorter than that of a
service company.
3. Sales revenue minus operating expenses equals gross profit.
4. Under a perpetual inventory system, the cost of goods sold is determined each time a sale
occurs.
5. A periodic inventory system does not require a detailed record of inventory items.
6. The operating cycle involves the purchase and sale of merchandise inventory as well as
the subsequent collection of cash from credit sales.
7. The purchase of inventory and its eventual sale lengthen the operating cycle of a
merchandising company.
8. Under the periodic inventory system, cost of goods sold is treated as an account.
9. An advantage of using the periodic inventory system is that it requires less record keeping
than the perpetual inventory system.
10. The periodic inventory system provides an up to date amount of inventory on hand.
11. A very small business most likely would have to use the perpetual inventory system.
12. The computer has increased greatly the use of the periodic inventory system.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
5-6
13. Cost of Goods Sold is considered an expense of a merchandising firm.
14. Operating expenses are subtracted from revenue for a service enterprise and from gross
profit for a merchandising enterprise.
15. Net sales minus cost of goods sold is called gross profit.
16. Under the perpetual inventory system, purchases of merchandise for sale are recorded in
the Inventory account.
17. Freight costs incurred by the seller on outgoing merchandise are an operating expense to
the seller.
18. The terms 2/10, net/30 mean that a 2 percent discount is allowed on payments made
within the 10 days discount period.
19. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 20 days after the
invoice date to take advantage of the cash discount.
20. Discounts taken by the buyer for early payment of an invoice are called sales discounts by
the buyer.
21. If merchandise costing $5,000, with terms 2/10, n/30, is paid within 10 days, the amount of
the purchase discount is $100.
22. When an invoice is paid within the discount period, the amount of the discount decreases
Inventory.
23. Sales revenues are only earned during the period cash is collected from the buyer.
24. Cash register tapes provide evidence of credit sales.
Merchandising Operations
5-7
25. The Sales Returns and Allowances account and the Sales Discount account are both
classified as expense accounts.
26. The revenue recognition principle applies to merchandising companies by recognizing
sales revenues when the performance obligation is satisfied.
27. Sales allowances and Sales discounts are both designed to encourage customers to pay
their accounts promptly.
28. Sales Discounts is a contra revenue account to Sales Revenue.
29. The normal balance of Sales Returns and Allowances is a credit.
30. When the terms of sale include a sales discount, it usually is advisable for the buyer to
pay within the discount period.
31. Sales Discounts and Sales Returns and Allowances both have normal debit balances.
32. Merchandise is sold for $5,000 with terms 1/10, n/30. If $1,000 of the merchandise is
returned prior to payment and the invoice is paid within the discount period, the amount of
the sales discount is $40.
33. The terms 2/10, n/30 mean that a 2 percent discount is allowed on payments made over
10 but before 30 days after the invoice date.
34. The multiple-step income statement is considered more useful than the single-step
income statement because it highlights the components of net income.
35. In a single-step income only one step is required in determining net income.
36. Freight-out appears as an operating expense in the income statement.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
5-8
37. Gross profit appears on both the single-step and multiple-step forms of an income
statement.
38. Nonoperating activities include revenues and expenses that are related to the company’s
main line of operations.
39. Operating expenses include interest expense and income tax expense.
40. Income from operations appears on both the single-step and multiple-step forms of an
income statement.
41. A merchandising company’s net income is determined by subtracting operating expenses
from gross profit.
42. Sales revenues, cost of goods sold, and gross profit are amounts on a merchandising
company’s income statement not commonly found on the income statement of a service
company.
43. The income statement for a merchandising company presents only two amounts not
shown on a service company income statement.
44. Under the periodic system, the purchases account is used to accumulate all purchases of
merchandise for resale.
45. With the periodic inventory system, goods available for sale must be calculated before
cost of goods sold.
46. If net sales are $750,000 and cost of goods sold is $600,000, the gross profit rate is 20%.
47. The gross profit amount is generally considered to be more informative than the gross
profit rate.
48. Gross profit rate is computed by dividing cost of goods sold by net sales.
Merchandising Operations
5-9
49. The quality of earnings ratio is calculated as net income divided by net cash provided by
operating activities.
50. A quality of earnings ratio significantly less than 1 suggests that a company may be using
more aggressive accounting techniques in order to accelerate income recognition.
*51. Under the periodic system, when a customer returns goods, Purchases Returns and
Allowances is debited.
*52. Under the periodic inventory system, acquisitions of merchandise are not recorded in the
Inventory account.
Answers to True-False Statements
MULTIPLE CHOICE QUESTIONS
53. Merchandising companies that sell to retailers are known as
a. brokers.
b. corporations.
c. wholesalers.
d. service firms.
Business Economics
54. Which of the following would not be considered a merchandising operation?
a. Retailer
b. Wholesaler
c. Service firm
d. Merchandising company
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
5-10
55. Which of the following activities is not a component of the operating cycle?
a. Sale of merchandise
b. Payment of employees’ salaries
c. Collection of cash from merchandise sales
d. Purchase of merchandise
56. Which of the following companies would be most likely to use a perpetual inventory
system?
a. Grain company
b. Beauty salon
c. Clothing store
d. Fur dealer
57. Gross profit equals the difference between
a. net income and operating expenses.
b. sales revenue and cost of goods sold.
c. sales revenue and operating expenses.
d. sales revenue and cost of goods sold plus operating expenses.
58. Each of the following companies is a merchandising company except a
a. wholesale parts company.
b. candy store.
c. moving company.
d. furniture store.
59. Net income will result if gross profit exceeds
a. cost of goods sold.
b. operating expenses.
c. purchases.
d. cost of goods sold plus operating expenses.
60. A merchandiser will earn an operating income of exactly $0 when
a. net sales equals cost of goods sold.
b. cost of goods sold equals gross margin.
c. operating expenses equal net sales.
d. gross profit equals operating expenses.
Merchandising Operations
5-11
61. A merchandiser that sells directly to consumers is a
a. retailer.
b. wholesaler.
c. broker.
d. service enterprise.
62. Two categories of expenses in merchandising companies are
a. cost of goods sold and financing expenses.
b. operating expenses and financing expenses.
c. cost of goods sold and operating expenses.
d. other expenses and cost of goods sold.
63. The primary source of revenue for a wholesaler is
a. investment income.
b. service revenue.
c. the sale of merchandise.
d. the sale of plant assets the company owns.
64. Generally, the revenue account for a merchandising enterprise is called
a. Sales Revenue or Sales.
b. Investment Income.
c. Gross Profit.
d. Net Sales.
65. Under a perpetual inventory system
a. accounting records continuously disclose the amount of inventory.
b. increases in inventory resulting from purchases are debited to purchases.
c. there is no need for a year-end physical count.
d. the account purchase returns and allowances is credited when goods are returned to
vendors.
66. The operating cycle of a merchandising company is
a. always one year in length.
b. ordinarily longer than that of a service company.
c. about the same as that of a service company.
d. ordinarily shorter than that of a service company.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
5-12
67. Sales revenue less cost of goods sold is called
a. gross profit.
b. net profit.
c. net income.
d. marginal income.
68. After gross profit is calculated, operating expenses are deducted to determine
a. gross margin.
b. net income.
c. gross profit on sales.
d. net margin.
69. Which of the following expressions is incorrect?
a. Gross profit – Operating expenses = Net income
b. Sales revenue – cost of goods sold – Operating expenses = Net income
c. Net income + Operating expenses = Gross profit
d. Operating expenses – Cost of goods sold = Gross profit
70. Detailed records of goods held for resale are not maintained under a
a. perpetual inventory system.
b. periodic inventory system.
c. double entry accounting system.
d. single entry accounting system.
71. A perpetual inventory system would most likely be used by a(n)
a. automobile dealership.
b. hardware store.
c. drugstore.
d. convenience store.
72. Which of the following is a true statement about inventory systems?
a. Periodic inventory systems require more detailed inventory records.
b. Perpetual inventory systems require more detailed inventory records.
c. A periodic system requires cost of goods sold be determined after each sale.
d. A perpetual system determines cost of goods sold only at the end of the accounting
period.
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73. The figure for which of the following items is determined at a different time under the
perpetual inventory method than under the periodic method?
a. Sales Revenue
b. Cost of Goods Sold
c. Purchases
d. Accounts Receivable
74. In a perpetual inventory system, cost of goods sold is recorded
a. on a daily basis.
b. on a monthly basis.
c. on an annual basis.
d. each time a sale occurs.
75. The primary difference between a periodic and perpetual inventory system is that a
periodic system
a. keeps a record showing the inventory on hand at all time.
b. provides better control over inventories.
c. records the cost of the sale on the date the sale is made.
d. determines the inventory on hand only at the end of the accounting period.
76. When using the periodic system the physical inventory count is used to determine
a. only the sales value of goods in the ending inventory.
b. both the cost of the goods in ending inventory and the sales value of goods sold
during the period.
c. both the cost of the goods sold and the cost of ending inventory.
d. only the cost of merchandise sold during the period.
77. Inventory becomes part of cost of goods sold when a company
a. pays for the inventory.
b. purchases the inventory.
c. sells the inventory.
d. receives payment from the customer.
78. Which statement is incorrect?
a. Periodic inventory systems provide better control over inventories than perpetual
inventory systems.
b. Computers and electronic scanners allow more companies to use a perpetual
inventory system.
c. Freight-in is debited to Inventory when a perpetual inventory system is used.
d. Regardless of the inventory system that is used, companies should take a physical
inventory count.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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79. If a company determines cost of goods sold each time a sale occurs, it
a. must have a computer accounting system.
b. uses a combination of the perpetual and periodic inventory systems.
c. uses a periodic inventory system.
d. uses a perpetual inventory system.
80. The periodic inventory system is used most commonly by companies that sell
a. low-priced, high-volume merchandise.
b. high-priced, high-volume merchandise.
c. high-priced, low-volume merchandise.
d. high-priced, low and high-volume merchandise.
81. What is a difference between merchandising companies and service enterprises?
a. Merchandising companies must prepare multiple-step income statements and service
enterprises must prepare single-step income statements.
b. Merchandising companies generally have a longer operating cycle than service
enterprises.
c. Cost of goods sold is an expense for service enterprises but not for merchandising
companies.
d. All are differences.
82. Under the perpetual inventory system, which of the following accounts would not be used?
a. Sales Revenue
b. Purchases
c. Cost of Goods Sold
d. Inventory
83. Under a perpetual inventory system, acquisition of merchandise for resale is debited to
a. the Inventory account.
b. the Purchases account.
c. the Supplies account.
d. the Cost of Goods Sold account.
84. The journal entry to record a return of merchandise purchased on account under a
perpetual inventory system would credit
a. Accounts Payable.
b. Purchase Returns and Allowances.
c. Sales Revenue.
d. Inventory.
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85. Which of the following items does not result in an adjustment in the merchandise inventory
account under a perpetual system?
a. A purchase of merchandise.
b. A return of merchandise inventory to the supplier
c. Payment of freight costs for goods shipped to a customer
d. Payment of freight costs for goods received from a supplier
86. A company using a perpetual inventory system that returns goods previously purchased
on credit would
a. debit Accounts Payable and credit Inventory.
b. debit Sales and credit Accounts Payable.
c. debit Cash and credit Accounts Payable.
d. debit Accounts Payable and credit Purchases.
87. If a purchaser using a perpetual inventory system pays the transportation costs, then the
a. Inventory account is increased.
b. Inventory account is not affected.
c. Freight-Out account is increased.
d. Delivery Expense account is increased.
88. Freight costs incurred by a seller on merchandise sold to customers will cause an
increase
a. in the selling expenses of the buyer.
b. in operating expenses for the seller.
c. to the cost of goods sold of the seller.
d. to a contra-revenue account of the seller.
89. Conway Company purchased merchandise inventory with an invoice price of $9,000 and
credit terms of 2/10, n/30. What is the net cost of the goods if Conway Company pays
within the discount period?
a. $9,000
b. $8,820
c. $8,100
d. $8,280
90. A buyer borrows money at 6% interest to pay a $6,000 invoice with terms 1/10, n/30 on
the 10th day of the discount period. The loan is repaid on the 30th day of the invoice.
What is the buyer’s net savings for this total event?
a. $0
b. $40.00
c. $40.80
d. $80.00
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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91. In the credit terms of 1/10, n/30, the “1” represents the
a. number of days in the discount period.
b. full amount of the invoice.
c. number of days when the entire amount is due.
d. percent of the cash discount.
92. Farwell Company purchased merchandise with an invoice price of $2,000 and credit terms
of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent
in the credit terms?
a. 2%
b. 12%
c. 18%
d. 36%
93. Davies Company purchased merchandise inventory with an invoice price of $9,000 and
credit terms of 2/10, n/30. What is the net cost of the goods if Davies Company pays
within the discount period?
a. $9,000
b. $8,856
c. $8,820
d $7,200
94. A credit sale of $1,900 is made on April 25, terms 2/10, net/30, on which a return of $100
is granted on April 28. What amount is received as payment in full on May 4?
a. $1,764
b. $1,862
c. $1,900
d $1,800
95. Grayson Company purchased merchandise with an invoice price of $2,000 and credit
terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate
inherent in the credit terms?
a. 2%
b. 12%
c. 24%
d 36%
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96. A credit sale of $700 is made on July 15, terms 2/10, net/30, on which a return of $50 is
granted on July 18. What amount is received as payment in full on July 24?
a. $700
b. $637
c. $650
d $686
97. If a company is given credit terms of 2/10, n/30, it should
a. hold off paying the bill until the end of the credit period, while investing the money at
10% annual interest during this time.
b. pay within the discount period and recognize a savings.
c. pay within the credit period but don’t take the trouble to invest the cash while waiting to
pay the bill.
d. recognize that the supplier is desperate for cash and withhold payment until the end of
the credit period while negotiating a lower sales price.
98. A purchase invoice is a document that
a. provides support for goods purchased for cash.
b. provides evidence of incurred operating expenses.
c. provides evidence of credit purchases.
d. serves only as a customer receipt.
99. Adams Company is a retailer and uses a perpetual inventory system. Which statement is
correct?
a. Returns of merchandise by Adams Company to a manufacturer are credited to
Inventory.
b. Freight paid to get merchandise to Adams Company’s store is debited to Freight
Expense.
c. A return of merchandise by one of Adams Company’s customers is credited to
Inventory.
d. Discounts taken by Adams Company’s customers are credited to Inventory.
100. As the president of Harter Company, you notice that no discounts have been taken when
settling accounts payables. What would be an acceptable explanation?
a. All invoices have credit terms of n/30.
b. There is not sufficient cash to pay within the discount period.
c. Discounts are missed because no one knows how to enter them in the new
accounting software.
d. The full amount of the invoice is being paid within the discount period and the
treasurer is pocketing the discount amount.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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101. When using a perpetual inventory system, why are discounts credited to Inventory?
a. The discounts are debited to discount expense and thus the credit has to be made to
merchandise inventory.
b. The discounts reduce the cost of the inventory.
c. The discounts are a reduction of business expenses.
d. None of these answers choices are correct.
102. Tony’s Market recorded the following events involving a recent purchase of inventory:
Received goods for $40,000, terms 2/10, n/30.
Returned $800 of the shipment for credit.
Paid $200 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory
a. increased by $38,416.
b. increased by $39,400.
c. increased by $38,612.
d. increased by $38,616.
103. Stan’s Market recorded the following events involving a recent purchase of inventory:
Received goods for $90,000, terms 2/10, n/30.
Returned $1,800 of the shipment for credit.
Paid $450 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory
a. increased by $86,436.
b. increased by $88,650.
c. increased by $86,877.
d. increased by $86,886.
104. Assets purchased for resale are recorded in which of the following accounts?
a. Supplies
b. Inventory
c. Equipment
d. More than one of these answer choices is correct.
105. Under the perpetual system, cash freight costs incurred by the buyer for the transporting
of goods is recorded in which account?
a. Freight Expense
b. Freight-In
c. Inventory
d. Freight-Out
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106. Which of the following accounts is classified as a contra revenue account?
a. Sales Revenue
b. Cost of Goods Sold
c. Sales Returns and Allowances
d. Purchase Discounts
107. Sales revenues are usually considered earned when
a. cash is received from credit sales.
b. an order is received.
c. goods have been transferred from the seller to the buyer.
d. adjusting entries are made.
108. Sales revenue
a. may be recorded before cash is collected.
b. will always equal cash collections in a month.
c. only results from credit sales.
d. is only recorded after cash is collected.
109. The journal entry to record a credit sale ignoring cost of goods sold is
a. Cash
Sales Revenue
b. Cash
Service Revenue
c. Accounts Receivable
Sales Returns and Allowances
d. Accounts Receivable
Sales Revenue
110. Under the perpetual inventory system, in addition to making the entry to record a sale, a
company would
a. debit Inventory and credit Cost of Goods Sold.
b. debit Cost of Goods Sold and credit Purchases.
c. debit Cost of Goods sold and credit Inventory.
d. make no additional entry until the end of the period.
111. When sales of merchandise are made for cash, the transaction may be recorded by the
following entry:
a. Debit Sales Revenue, credit Cash
b. Debit Cash, credit Sales Revenue
c. Debit Sales Revenue, credit Cash Discounts
d. Debit Sales Revenue, credit Sales Returns and Allowances
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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112. The entry to record a sale of $1,200 with terms of 2/10, n/30 will include a
a. debit to Sales Discounts for $24.
b. debit to Sales Revenue for $1,176.
c. credit to Accounts Receivable for $1,200.
d. credit to Sales Revenue for $1,200.
113. A sales invoice is prepared when goods
a. are sold for cash.
b. are sold on credit.
c. sold on credit are returned.
d. are sold on credit or for cash.
114. The Sales Returns and Allowances account is classified as a(n)
a. asset account.
b. contra asset account.
c. expense account.
d. contra revenue account.
115. The entry to record the return of goods from a customer would include a
a. debit to Sales Revenue.
b. credit to Sales Revenue.
c. debit to Sales Returns and Allowances.
d. credit to Sales Returns and Allowances.
116. The entry to record the receipt of payment within the discount period on a sale of $700
with terms of 2/10, n/30 will include a
a. credit to Sales Discounts for $14.
b. debit to Sales Revenue for $686.
c. credit to Accounts Receivable for $700.
d. credit to Sales Revenue for $700.
117. The entry to record a sale of $700 with terms of 2/10, n/30 will include a
a. credit to Sales Discounts for $14.
b. debit to Cash for $686.
c. credit to Accounts Receivable for $700.
d. credit to Sales Revenue for $700.