5-13
Chapter 5 Review
1. What are the differences between a service enterprise and a merchandising
company?
2. Give a detailed explanation of the recording of purchases under a perpetual
inventory system. Use hypothetical figures to illustrate the perpetual inventory
system.
3. How are sales revenues recorded under a perpetual inventory system?
4. What are the differences between a single-step and a multiple-step income
statement?
5. Show how to calculate cost of goods sold under a periodic inventory system.
6. Explain how the gross profit rate and the profit margin ratio are computed. What
does each represent? How can each be improved?
7. How is the quality of earnings ratio calculated? What does this ratio mean if it is
significantly less than 1?
8. What is a key difference between a perpetual inventory system and a periodic
inventory system?
5-14
Vocabulary Quiz Name _______________
Chapter 5
1. A detailed inventory system in which the cost of each inventory item is
maintained and the records continuously show the inventory that
should be on hand.
2. A reduction given by a seller for prompt payment of a credit sale.
3. Measures the percentage of each dollar of sales that results in net
income, computed by dividing net income by net sales.
4. The total cost of merchandise sold during the period.
5. An inventory system in which detailed records are not maintained and
the cost of goods sold is determined only at the end of an accounting
period.
6. Sales less sales returns and allowances and sales discounts.
7. Primary source of revenue for a merchandising company.
8. The excess of net sales over the 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.
5-15
Solutions to Vocabulary Quiz
Chapter 5
1. Perpetual inventory system
5-16
Multiple Choice Quiz Name _______________
Chapter 5
1. Wal-Mart is a prime example of which type organization:
a. Merchandising concern.
b. Manufacturing concern.
c. Service organization.
d. Limited partnership.
2. Under the perpetual inventory system, purchases of merchandise for sale are
recorded in an account called:
a. Purchases.
b. Cost of goods sold.
c. Inventory.
d. Finished goods.
3. A purchaser, dissatisfied with merchandise received, may return the goods to the
seller for credit. This transaction is known, by the seller, as a:
a. Sales return.
b. Purchase return.
c. Sales allowance.
d. Purchase allowance.
4. All of the following are examples of business documents EXCEPT:
a. Memorandum describing merchandise.
b. Cash register tapes.
c. Sales invoice.
d. Canceled check.
5. In a periodic inventory system, the cost of goods sold is determined:
a. At the end of the accounting period.
b. Each time a sale occurs.
c. Each time a purchase occurs.
d. None of the above.
6. Freight costs incurred by the seller on outgoing merchandise are considered:
a. Operating expenses to the seller.
b. Part of merchandise inventory.
c. Part of purchases.
d. Part of cost of goods sold.
7. If a sales invoice shows credit terms of 2/10, n/30, the discount period is:
a. 10 days.
b. 2 days.
c. 30 days.
d. cannot be determined from the information given.
5-17
8. The revenue recognition principle requires that sales revenues be recognized:
a. When cash is received.
b. when the merchandise is ordered.
c. When the goods are transferred from the seller to the buyer.
d. None of these answer choices are correct.
9. Sales returns and allowances and sales discounts are:
a. Sales accounts.
b. Liability accounts.
c. Expense accounts.
d. Contra revenue accounts.
10. The income statement of a merchandising company contains the following unique
features:
a. Sales revenue, work in process, and operating expenses.
b. Sales revenue, work in process and gross profit.
c. Sales revenue, finished goods, and net income.
d. Sales revenue, cost of goods sold, and gross profit.
5-18
Solution Multiple Choice Quiz
Chapter 5
1. a
5-19
Exercise 1 – Creative Activity
Chapter 5
1. Make a list of businesses that you frequently patronize.
2. Determine which of these businesses would be would be classified as a
merchandising concerns.
3. Make a list of the types of items the retailers’ listed in part 1 hold in inventory.
4. Search the Internet. Find the industry average gross profit percentage for at least
three of these types of businesses.
5-20
Exercise 2 – Communication and Financial Statement Analysis Activity
Chapter 5
Assume Jayne Stoll, the Controller of Fast Bucks, a large retail company, has just gotten a
call from the Vice President of Marketing, Eddie Shifty. Eddie asked Jayne why the Sales
Returns and Allowances account is needed. Eddie suggests the account be done away
with and the returns simply be deducted from Sales Revenue.
1. Jayne has asked you to write a memo to Eddie Shifty explaining why the Sales
Return and Allowances account is needed.
2. What was Eddie Shifty’s motivation in wanting to decrease sales directly?
Solutions:
1. TO: Eddie Shifty
Vice President of Marketing
5-21
Exercise 3 – Mechanics of Accounting Activity
Chapter 5
Assume you are the owner of Vicious Cycle Bike Shop and just received an order of bikes
from Cannondale. You notice that the invoice dated October 22 has terms of 2/10, n/30.
1. What do the terms 2/10, n/30 mean?
2. Will you pay the invoice within the discount period?
3. What is your motivation to pay within the discount period, assuming the current
interest rate is 8%?
4. What is Cannondale’s motivation for offering the sales discount?
5. List three reasons why the invoice would not be paid within the discount period.
Comment on whether these reasons are acceptable.
5-22
Solutions:
1. The terms 2/10, n/30 means that if Vicious Cycle pays the invoice within 10
days, Cannondale will allow them to deduct 2 percent off of the selling price.
However, the invoice must be paid in full with 30 days.
2. Yes, Vicious Cycle will save money paying the invoice within the discount
period.
5-23
Exercise 4 – World Wide Web Accounting Careers Research Activity
Chapter 5
Your younger brother has just told you that he is interested in becoming a forensic
accountant. However, he does not understand exactly what a forensic accountant does and
has come to you for help. You have never heard of forensic accounting and decide to
search the Internet for help. Go to www.forensicaccounting.com and find answers to the
following questions.
1. What is forensic accounting?
2. What does a forensic accountant do?
3. What qualities should a forensic accountant possess?
4. How does one become a forensic accountant?
5-24
Exercise 5 – World Wide Web Financial Statement Analysis Activity
Chapter 5
Locate the financial statements of Gap for consecutive years in your school library or on the
World Wide Web. If researching the Web go to www.gap.com use the information found
there to answer the following questions:
1. Did the balance in the Merchandise Inventory account increase or decrease?
2. Did the accounts payable for the same period increase or decrease?
3. What is the correlation between merchandise inventory and accounts payable?