Deck 6: The Operating Cycle and Merchandising Operations

Question 1

Under the periodic inventory system,Cost of goods sold must be computed on the income statement because it is not updated for purchases,sales,and other transactions during the accounting period.

Answer 1

True

Question 2

The perpetual inventory system relies on a physical count of merchandise for its balance sheet amount.

Answer 2

False

Question 3

Businesses can be classified as service companies,wholesalers,or retailers.

Answer 3

True

Question 4

An advantage of using the periodic inventory system is that it requires less recordkeeping than the perpetual inventory system.

Question 5

A company with a current ratio of 1.0 is considered more liquid than one with a current ratio of 2.0.

Question 6

Computerization has led to a large increase in the use of the periodic inventory system.

Question 7

The operating cycle involves the purchase and sale of merchandise inventory as well as the subsequent collection of cash from credit sales.

Question 8

When the terms of sale include a sales discount,it usually is advisable for the buyer to pay within the discount period.

Question 9

Cash flow cannot be managed,but it is a natural component of business operations.

Question 10

Taking a physical inventory refers to making a count of all merchandise on hand at a particular time.

Question 11

Computerization has helped to make taking physical inventory a much easier process in both the periodic and perpetual inventory systems.

Question 12

Liquidity management involves planning a business's cash receipts and cash payments.

Question 13

When a U.S.company does business with a British company and payment is in U.S.dollars,an exchange gain or loss occurs if the exchange rate between dollars and pounds changes between the date of sale and the date of payment.

Question 14

A company would be more likely to know the amount of inventory on hand if it used the perpetual inventory system rather than the periodic inventory system.

Question 15

When the periodic inventory system is used,a physical inventory does not need to be taken at the end of the fiscal year.

Question 16

Profitability means having enough cash on hand to pay bills when they become due.

Question 17

Under the periodic inventory system,cost of goods sold is treated as an account.

Question 18

A large discount chain,like Wal-Mart or Target,most likely would use the perpetual inventory system to maintain control of its inventory.

Question 19

The periodic inventory system provides an up-to-date amount of inventory on hand.

Question 20

A retail operation would still have to take a physical inventory even if it uses a perpetual inventory system.

Question 21

Upon making a credit card sale,a business should record the sale as an accounts receivable until the customer pays his or her credit card bill.

Question 22

The fee paid by a retailer to a credit card company is considered an expense account by the retailer.

Question 23

The net cost of purchases is found by adding freight-in to net purchases.

Question 24

Terms of "2/10,n/30" are an example of a trade discount.

Question 25

When a customer returns goods,the company increases the Sales Returns and Allowances account.

Question 26

If insured goods are shipped FOB destination,the seller should file a claim for goods damaged in transit.

Question 27

The use of major credit cards requires sellers to establish the customer's credit.

Question 28

With the periodic inventory system,goods available for sale must be calculated before cost of goods sold.

Question 29

A sale takes place when title to the goods transfers to the buyer.

Question 30

Sale and purchase of goods should be recorded at their list price,before any trade discount is recorded.

Question 31

When the buyer bears the transportation charge,it is called freight-out.

Question 32

FOB shipping point means that the seller incurs the shipping costs.

Question 33

The terms "2/10,n/30" mean that a 2 percent discount is allowed on payments made before 10 days after the invoice date.

Question 34

Cost of goods sold is not considered an expense of a merchandising business.

Question 35

Sales Discounts and Sales Returns and Allowances are revenue accounts.

Question 36

The difference between gross sales and net sales is equal to the sum of sales discounts and sales returns and allowances.

Question 37

Freight-in is not considered a cost of merchandise purchased.

Question 38

Inventory losses are easier to identify under the perpetual inventory system than under the periodic inventory system.

Question 39

When a business is able to deposit its credit card sales invoices directly into a special bank account,it debits Accounts Receivable.

Question 40

Adding together the beginning merchandise inventory and cost of goods sold gives the amount of goods available for sale.

Question 41

At the end of each day,the cashier should not be the one responsible for comparing the amount on the cash register tape with the day's cash additions to the cash register.

Question 42

Under the periodic inventory system,the Purchases account is used to accumulate all purchases of merchandise for resale.

Question 43

Freight-In is treated as an addition in the cost of goods sold section of the income statement.

Question 44

An effective system of internal control centralizes functions in a single,capable individual.

Question 45

The separation-of-duties feature of internal control can be negated when the owner of a small company has an active involvement in the company.

Question 46

The change in merchandise inventory level from the beginning to the end of the year does not affect cost of goods sold.

Question 47

Management's regular assessment of its internal controls is called monitoring.

Question 48

Proper control procedures do not guarantee the prevention of theft.

Question 49

Ending merchandise inventory is included in the calculation of goods available for sale.

Question 50

One example of a periodic independent verification is the bank reconciliation.

Question 51

Under an effective system of internal control,errors occur only as a result of fraud or dishonesty.

Question 52

All systems of internal control are identical and,once established,do not need to be changed.

Question 53

An effective system of internal control requires that individuals never take vacations.

Question 54

Management is responsible for establishing a satisfactory system of internal control.

Question 55

Management's authorization of transactions relates to a control activity in the accounting system.

Question 56

A system of internal control cannot be considered good until the possibility of human error has been completely eliminated.

Question 57

Merchandising businesses and servicing companies both need a good system of internal control.

Question 58

The calculation of goods available for sale during the year is affected by the previous year's ending merchandise inventory.

Question 59

Good internal control dictates that key employees be rotated among different jobs.

Question 60

Bonding means insuring a company against employee theft.

Question 61

Use this balance sheet and income statement for the first year of operations for Layton Novelties,Inc.to answer the following question. The current ratio for Layton Novelties is

A) 1.75.
B) .57.
C) 1.4.
D) 2.0.

Question 62

Which of the following companies would be most likely to use a computerized perpetual inventory system?

A) Antique dealer
B) Car dealership
C) Auto parts store
D) Large appliance retailer

Question 63

It is likely that a company would want to bond its employees who handle cash or inventory.

Question 64

The perpetual inventory system has traditionally been used most commonly by companies that sell

A) low-priced,high-volume merchandise.
B) low-priced,low-volume merchandise.
C) high-priced,low-volume merchandise.
D) high-priced,high-volume merchandise.

Question 65

Which of the following activities is not a component of the operating cycle?

A) Payment of rent
B) Payment for purchases made on credit
C) Purchase of merchandise
D) Collection of cash from credit sales

Question 66

Current assets divided by current liabilities is known as the

A) profit margin.
B) current ratio.
C) working capital.
D) capital structure.

Question 67

Each of the following companies is a merchandising business except a

A) candy store.
B) car wash.
C) wholesale parts company.
D) furniture store.

Question 68

Under the perpetual inventory system,

A) continuous records of the quantity and cost of inventory items are kept as they are bought and sold.
B) up-to-date information about product availability is more accessible to managers.
C) the cost of inventory items purchased for resale is recorded in the Merchandise Inventory account.
D) all of these are correct.

Question 69

The treasurer should prepare and sign a check only after a proper check authorization has been provided.

Question 70

Working capital measures

A) the excess of current assets over current liabilities-what is on hand to continue business operations.
B) the ability to earn a satisfactory income.
C) the amount of debt in the company.
D) the profitability of the business.

Question 71

Use this balance sheet and income statement for the first year of operations for Layton Novelties,Inc.to answer the following question. The total amount of working capital of Layton Novelties is

A) $8,000
B) $28,000
C) $12,000
D) $4,000

Question 72

Which of the following is a measure of liquidity?

A) Return on equity
B) Return on assets
C) Working capital
D) Profit margin

Question 73

A merchandising business will earn an income before income taxes of exactly $0 when

A) net sales equals cost of goods sold.
B) operating expenses equal net sales.
C) gross margin equals operating expenses.
D) cost of goods sold equals gross margin.

Question 74

A formal request for a purchase from the requesting department of a business is known as a purchase order.

Question 75

The purchasing department prepares a purchase requisition addressed to the vendor (seller)containing instructions related to the items ordered.

Question 76

Use this balance sheet and income statement to answer the following question. The total amount of working capital of Abner Systems is

A) $0.
B) $6,000.
C) $2,000.
D) $10,000.

Question 77

Effective internal control requires a department to purchase supplies through a formal purchasing process.

Question 78

Another term for an invoice is a check.

Question 79

A physical inventory is usually taken

A) at the beginning of the fiscal year.
B) at the end of the busy season.
C) at the end of the fiscal year.
D) when the perpetual inventory system,but not the periodic inventory system,is being used.

Question 80

In addition to keeping the records of a purchase transaction,the accounting department should prepare and mail checks for payment of invoices.