College Accounting, 12e (Slater)
Chapter 12 Completion of the Accounting Cycle for a Merchandise Company
12.1 Learning Objective 12-1
1) The income statement is prepared from the:
A) Post-Closing Trial Balance.
B) worksheet.
C) general journal.
D) statement of owner‘s equity.
2) To determine how much merchandise was returned from a company’s customers, the company should
review the:
A) Purchases Returns and Allowances Account.
B) Purchases Discount Account.
C) Sales Returns and Allowances Account.
D) Freight-In.
3) Net Sales are:
A) Gross Sales + Sales Discounts + Sales Returns and Allowances.
B) Gross Sales – Sales Discounts – Sales Returns and Allowances.
C) Revenue – Sales Discounts + Sales Returns and Allowances.
D) Gross Sales + Sales Discounts – Sales Returns and Allowances.
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4) Net Sales + Sales Discounts + Sales Returns and Allowances equals:
A) Net Loss.
B) Gross Sales.
C) Net Income from Operations.
D) Gross Profit.
5) Net Purchases are:
A) Total Purchases + Purchases Discounts + Purchases Returns and Allowances.
B) Total Purchases + Purchases Discounts – Purchases Returns and Allowances.
C) Total Purchases – Purchases Discounts – Purchases Returns and Allowances.
D) None of these are correct.
6) Net Sales – Cost of Goods Sold is equal to:
A) Net Income from Operations.
B) Operating Expenses.
C) Gross Profit.
D) Gross Expenses.
7) Net Purchases + Purchases Returns and Allowances + Purchase Discount equals:
A) Net Loss.
B) Net Income.
C) Gross Profit.
D) Gross Purchases.
8) Cost of Goods Sold is calculated on the:
A) Balance Sheet.
B) Trial Balance.
C) Income Statement.
D) Statement of Owner‘s Equity.
9) Gross Profit equals:
A) Net sales – Other Expenses.
B) Sales – Sales Returns and Allowances – Sales Discounts – Cost of Goods Sold.
C) Cost of Goods Sold – Other Expenses.
D) Cost of Goods Sold – Operating Expenses.
10) Cost of Goods Sold includes:
A) Freight-in.
B) Freight-out.
C) Interest Income.
D) Net Sales.
11) Freight-in is:
A) a Cost of Selling Goods.
B) a Cost of Purchasing Goods.
C) recorded as an Operating Expense.
D) recorded as an asset.
12) The calculation of Net Purchases does not include:
A) Purchases Returns and Allowances.
B) Purchases Discounts.
C) Purchases.
D) Freight-in.
13) Which of the following is not an operating expense?
A) Payroll Tax Expense
B) Freight-in
C) Supplies Expense
D) Salaries Expense
14) What is the name of the revenue account used by merchandise companies?
A) Sales
B) Interest Income
C) Merchandise Inventory
D) Capital
15) Which of the following is an operating expense?
A) Salaries Expense
B) Payroll Tax Expense
C) Purchases
D) Both A and B are correct.
16) Which amount is directly found on the worksheet?
A) Cost of Goods Sold
B) Purchases
C) Gross Profit
D) Net Sales
17) In which section does Interest Revenue appear in the Income Statement?
A) Other Income
B) Other Expense
C) Selling Expenses
D) Administrative Expenses
18) Which of the following is an operating expense?
A) Interest expense
B) Interest revenue
C) Salaries expense
D) Freight-In
19) The amount found in the Income Statement debit column on the worksheet for Income Summary is
the:
A) total amount of expenses.
B) total amount of revenues.
C) beginning inventory.
D) ending inventory.
20) Selling expenses include:
A) Advertising Expense.
B) Cost of Goods Sold.
C) Office Supplies Expense.
D) All of the above are correct.
21) Administrative Expenses include:
A) Insurance Expense.
B) Delivery Expense.
C) Advertising Expense.
D) None of the above are correct.
22) Other Income is used to:
A) record payments from sales customers.
B) record any revenue from activities other than sales.
C) record all revenue.
D) record owner investments.
23) Other Expense is used to record:
A) selling expenses.
B) administrative expenses.
C) operating expenses.
D) non-operating expenses.
24) The information to prepare the Statement of Owner’s Equity comes from the:
A) income statement columns on the worksheet.
B) adjustments columns on the worksheet.
C) balance sheet columns on the worksheet.
D) general ledger.
25) A classified balance sheet provides more information about the company to:
A) owners.
B) creditors.
C) suppliers.
D) All of the above answers are correct.
26) An item that can be converted into cash or used up during the normal operating cycle is:
A) a current asset.
B) Plant and Equipment.
C) a current liability.
D) a long-term liability.
27) Liquidity is:
A) how quickly loans can be paid.
B) how easily an asset can be converted to cash.
C) how much cash a company has on its balance sheet.
D) None of the above are correct.
28) Plant and Equipment includes which of the following?
A) Cash
B) Accounts Receivable
C) Accumulated Depreciation on Equipment
D) All of these are correct.
29) In what category in a classified balance sheet is Accounts Receivable found?
A) Plant and Equipment
B) Current Liabilities
C) Current Assets
D) Owner’s Equity
30) A company paid next month’s rent in advance. This would be classified as a(n):
A) current asset.
B) Expense.
C) Revenue.
D) current liability.
31) Plant and Equipment is usually listed:
A) in alphabetical order.
B) in order of liquidity.
C) by how long they will last.
D) dollar value.
32) The ending merchandise inventory was overstated. This error would cause:
A) net income to be understated.
B) assets to be understated.
C) net income to be overstated.
D) expense to be overstated.
33) The ending merchandise inventory was understated. This error would cause:
A) assets to be understated.
B) assets to be overstated.
C) net income to be overstated.
D) None of these are correct.
34) If beginning inventory is $5,000, ending inventory is $3,000, net purchases is $12,000 and Freight-in is
$400, what is the Cost of Goods Available for Sale?
A) $17,400
B) $17,000
C) $14,400
D) $14,000
35) If beginning inventory is $5,000, ending inventory is $3,000, net purchases is $12,000 and Freight-in is
$400, what is the Cost of Goods Sold?
A) $17,400
B) $17,000
C) $14,400
D) $14,000
36) If Net Sales is $8,000, Cost of Goods Sold is $3,000, Gross Profit is $5,000 and Operating Expenses are
$1,000, what is the Net Income from Operations?
A) $2,000
B) $4,000
C) $1,000
D) $3,000
37) To determine how much merchandise a company has returned to its vendors, it should review the:
A) Purchases Returns & Allowances account.
B) Purchases Discount account.
C) Sales Returns & Allowances account.
D) Sales Discounts account.
38) Merchandise purchased for resale under the periodic inventory method is added to:
A) Merchandise Inventory.
B) Sales.
C) Purchases.
D) Inventory Expense.
39) Merchandise purchased for resale under the perpetual inventory method is added to:
A) Merchandise Inventory.
B) Sales.
C) Purchases.
D) Inventory Expense.
40) In what category in a classified balance sheet is Store Equipment found?
A) Plant and Equipment
B) Current Liabilities
C) Current Assets
D) Owner’s Equity
41) In what category in a classified balance sheet is Mortgage Payable found?
A) Plant and Equipment
B) Current Liabilities
C) Long-term Liabilities
D) Both B and C are correct.
42) The left and right columns on the financial statements are used for debits and credits.
43) The amount for Cost of Goods Sold is found on the worksheet.
44) Land is listed first under Plant, Property and Equipment.
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45) The formal income statement can be prepared from the income statement columns of the worksheet.
46) Gross profit minus Operating Expenses equals Net Income.
47) The statement of owner’s equity ending capital is equal to the capital on the worksheet.
48) Non-operating expenses are found in the Cost of Goods Sold section of the income statement.
49) A balance sheet where assets and liabilities are broken down into more detail is called a
comprehensive balance sheet.
50) Cost of goods available for sale is equal to beginning inventory + Cost of Goods Sold.
51) The average time it takes to buy and sell merchandise and collect Accounts Receivable is the normal
operating cycle for a business.
52) The Statement of Owner’s Equity is the same for a service business as for a merchandise business.
53) When calculating Cost of Goods Sold on the Income Statement, the beginning and ending inventory
values are both required.
54) The following amounts are on the Riley’s Clothing worksheet for the month ended March 30.
Required: Calculate the following:
a) Net sales
b) Net purchases
c) Net cost of purchases
d) Cost of goods available for sale
e) Cost of goods sold
f) Gross profit
Account Income Statement
Debit Credit
Sales 40
Sales Returns and Allowances 4
Sales Discounts 2
Income Summary 11 13
Purchases 15
Purchases Discount 2
Purchases Returns and Allowances 4
Freight-In 2
55) The following amounts are on the Bear Sporting Goods worksheet for the month ended October 31.
Required: Calculate the following:
a) Net sales
b) Net purchases
c) Net cost of purchases
d) Cost of goods available for sale
e) Cost of goods sold
f) Gross profit
Account Income Statement
Debit Credit
Sales 50
Sales Returns and Allowances 6
Sales Discounts 2
Income Summary 14 12
Purchases 30
Purchases Discount 4
Purchases Returns and Allowances 2
Freight-In 4
56) The following accounts are on the Balance Sheet section of Scents Galore worksheet for the date
November 30, 200X.
Additional information: Withdrawals for the period are $4, and Net Income is $12.
Account
Balance Sheet Debit
Balance Sheet Credit
Cash
6
Accounts Receivable
15
Merchandise Inventory
14
Store Equipment
30
Accumulated Depreciation – Store
Equipment
6
Accounts Payable
19
Mortgage Payable
24
Scents Galore, Capital
8
57) The following accounts are on the Balance Sheet section of Great Lakes Camping worksheet for the
month ended January 31, 200x. Required: Prepare a classified balance sheet.
Account
Balance Sheet Debit
Balance Sheet Credit
Cash
2
Accounts Receivable
14
Merchandise Inventory
12
Store Equipment
6
Accumulated Depreciation – Store
Equipment
2
Accounts Payable
3
Mortgage Payable
16
Great Lakes, Capital
2
Additional information: Withdrawals for the period are $2, and Net Income is $3.
58) Identify the category(s) of each of the accounts below.
Current Asset
Plant and Equipment
Current Liabilities
Long-Term Liabilities
Item Category
0) Cash Current Asset ________
a) Accts. Receivable ________ ________
b) Accts. Payable ________ ________
c) Mortgage Payable ________ ________
d) Building ________ ________
e) Prepaid Insurance ________ ________
59) Identify the category(s) of each of the accounts below.
Current Asset
Plant and Equipment
Current Liabilities
Long-Term Liabilities
Item Category
0. Cash Current Asset ________
a) Accts. Payable ________ ________
b) Accumulated Depr. ________ ________
c) Mortgage Payable ________ ________
d) Unearned Revenue ________ ________
e) Accounts Receivable. ________ ________
60) Discuss the purpose of a detailed income statement. Briefly describe the major kinds of business
activities covered on a detailed income statement.