Chapter 03 – Accounting for Merchandising Businesses
3-1
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Quiz Questions for Chapter 3
1. Under the perpetual inventory method,
a. assets increase when inventory is purchased on account.
b. ignoring the effects of revenue recognition, assets decrease when inventory is sold.
c. ignoring the effects of revenue recognition, equity increases when inventory is sold.
d. both a and b.
2. ABC Co. purchased $5,000 of inventory on account with payment terms of 2/10, n/30. The goods were
delivered FOB shipping point. ABC paid freight costs of $200 in cash. ABC paid for the goods within the
discount period. Assuming a beginning inventory balance of zero, what would be the balance in the inventory
account after the purchase and payment for inventory were recorded? ABC Co. keeps perpetual inventory
records and uses the net method of accounting for inventory purchases.
a. $5,100.
b. $5,300.
c. $4,900.
d. $5,200.
3. X Co. purchased $2,000 of inventory on account. This inventory was sold for $3,000 cash. The amount of
gross margin reported on the income statement and the amount of net cash inflow from operating activities
reported on the statement of cash flows would be
a. $3,000 / $1,000.
b. $1,000 / $3,000.
c. $1,000 / $-0-.
d. $-0- / $1,000.
4. RST Co. sold for $6,000 inventory that had cost $4,000. Freight terms for the sale were FOB destination and
payment terms were 1/10, n/30. RST records sales transactions at the net amount. RST paid freight costs of
$200 in cash. The receivable was collected within the discount period. Based on this information alone, the
amount of gross margin would be
a. $1,940.
b. $1,740.
c. $1,800.
d. $2,000.
5. X Co. purchased $5,000 of inventory on account with credit terms of 2/10, n/30. Assuming that X Co. uses the
perpetual inventory method, what is the amount of the change in X’s total assets when the inventory was
purchased?
a. $5,000 increase.
b. $4,900 increase.
c. $5,100 increase.
d. $0 increase.
6. High Ridge Merchandising Co. sold for $12,000 cash inventory that had cost $10,000. Assuming High Ridge
uses the perpetual inventory method, recording this transaction would
a. increase assets by $2,000.
b. decrease equity by $10,000.
c. increase net income by $12,000.
d. increases expenses by $2,000.
Chapter 03 – Accounting for Merchandising Businesses
3-2
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
The following information pertains to the next two questions. ABC Co. purchased inventory that cost $5,000
under terms 2/10, n/30. The inventory was delivered under terms FOB destination. ABC paid for the inventory
within ten days. ABC sold the goods on account for $6,500, freight terms FOB destination. Freight costs of $160
were paid in cash.
7. ABC would report net income on its income statement of
a. $1,190.
b. $1,350.
c. $1,440.
d. $1,600.
8. Based on this information, ABC would report net cash inflow from operating activities on its statement of cash
flows of
a. $1,440.
b. $1,600.
c. $(4,900).
d. $(5,060).
9. Identify the true statement.
a. Transportation-out is a product cost.
b. Sales allowances increase net income.
c. A purchase discount decreases the book value of inventory under the perpetual inventory method.
d. FOB shipping point designates the seller as the party responsible for freight costs.
10. Which of the following is not a period cost?
a. Advertising cost.
b. Salary of the company president.
c. Goods purchased for resale.
d. Interest paid on a company note.
11. Which of the following statements is true?
a. The product costs associated with inventory are expensed when the inventory is purchased.
b. Administrative salaries are product costs.
c. All period costs are expensed in the period they are incurred.
d. Product costs are initially recorded as assets.
12. RST Company paid $500 cash for freight costs to have merchandise inventory delivered to its customers.
Which of the following illustrates how this event affects RST’s financial statements?
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
a.
−
NA
−
NA
+
−
− OA
b.
−
NA
−
NA
+
−
− FA
c.
+
NA
+
NA
NA
NA
− OA
d.
+
+
NA
NA
NA
NA
+ FA
13. STU Company experienced an accounting event that affected its financial statements as indicated below:
Chapter 03 – Accounting for Merchandising Businesses
3-3
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
+ −
NA
NA
NA
NA
NA
− OA
Assuming STU uses the perpetual inventory method, which of the following events could have caused these ef-
fects?
a. Purchased inventory on account.
b. Wrote down inventory to recognize a market value that was below cost.
c. Paid transportation-in costs.
d. Recognized a sale.
Chapter 03 – Accounting for Merchandising Businesses
3-4
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
Solutions to Quiz Questions
Question
Answer
1
D
2
A
3
B
4
A
5
B
6
A
7
C
8
D
9
C
10
C
11
D
12
A
13
C
Summary Outline of a Lesson Plan for Chapter 3
I. Define merchandise inventory. Distinguish product from period costs.
II. Introduce the multistep income statement, contrasting the income statement for a
merchandising company with a service company income statement.
III. Using Demonstration Problem 3-1 and the perpetual inventory method, illustrate
how product versus period costs affect financial statements differently.
IV. Use Demonstration Problem 3-2 as a platform for your classroom discussion of ac-
counting for returns and allowances, cash discounts (net method), and freight terms using
the perpetual inventory method.
V. Use Event 5 of Demonstration Problem 3-2 to show the interest cost of paying for
purchases after the discount period has expired.
VI. Use Demonstration Problem 3-3 if you plan to include the periodic inventory meth-
od covered in the appendix. Whether a company uses the perpetual or the periodic in-
ventory method the resulting financial statements will be the same. Students should un-
derstand the two methods represent alternative approaches to the same end.
VII. Use a financial statements model and the final balances in Demonstration Problem
3-2 to demonstrate how lost, damaged, or stolen merchandise affects financial
statements.
Chapter 03 – Accounting for Merchandising Businesses
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
VIII. Time considerations and homework assignments. Allot two to three hours of class
time for Chapter 3. Exercise 3-2 contrasts merchandising companies with service
companies; Exercises 3-3 through 3-5 require students to demonstrate the effect of
inventory transactions on the financial statements. Exercise 3-15 involves preparation of
single step and multistep income statements. Exercise 3-12 shows the interest costs of
failure to pay for purchases within the discount period. Problems 3-25 and 3-26 provide
a comprehensive follow-up of Demonstration Problem 3-2. Problem 3-28 focuses on
preparing financial statements using the periodic method.
IX. Enrichment. Select an enrichment exercise that reinforces your personal objectives.