Deck 4: Reporting and Analyzing Merchandising Operations

Question 1

A company had sales of $350,000 and cost of goods sold of $200,000. Its gross profit equals $150,000.

Answer 1

True

Question 2

A periodic inventory system requires updating the inventory account only at the beginning of an accounting period.

Answer 2

False

Question 3

A company had net sales of $545,000 and cost of goods sold of $345,000. Its gross margin equals $890,000.

Answer 3

False

Question 4

Assets tied up in inventory are not considered productive assets.

Question 5

Beginning inventory plus net purchases equals merchandise available for sale.

Question 6

A perpetual inventory system continually updates accounting records for merchandising transactions.

Question 7

Cost of goods sold is also called cost of sales.

Question 8

Gross profit is also called gross margin.

Question 9

A retailer is an intermediary that buys products from manufacturers and sells them to wholesalers.

Question 10

Cost of goods sold represents the cost of buying and preparing merchandise for sale.

Question 11

A service company earns net income by buying and selling merchandise.

Question 12

The acid-test ratio is also called the quick ratio.

Question 13

Merchandise inventory is reported in the long-term assets section of the balance sheet.

Question 14

The acid-test ratio is defined as current assets divided by current liabilities.

Question 15

A merchandising company's operating cycle begins with the purchase of merchandise and ends with the collection of cash from the sale.

Question 16

Cash sales shorten the operating cycle for a merchandiser; credit sales lengthen operating cycles.

Question 17

A company had a gross profit of $300,000 based on sales of $400,000. Its cost of goods sold equals $700,000.

Question 18

A wholesaler is an intermediary that buys products from manufacturers or other wholesalers and sells them to consumers.

Question 19

Quick assets include cash and cash equivalents, inventory, and current receivables.

Question 20

Merchandise consists of products that a company acquires to resell to customers.

Question 21

The gross margin ratio is defined as gross margin divided by net sales.

Question 22

If a wholesaler offers a trade discount of 20% on a catalog item with a list price of $500, the buyer records the purchase at the net amount of list price minus trade discount.

Question 23

Purchase discounts are the same as trade discounts.

Question 24

If a company sells merchandise with credit terms 2/10 n/60, the credit period is 10 days and the discount period is 60 days.

Question 25

A common rule of thumb is that a company's acid-test ratio should have a value near or higher than 1 to conclude that a company is unlikely to face near-term liquidity problems.

Question 26

Sellers always offer a discount to buyers for prompt payment toward purchases made on credit.

Question 27

Successful use of a just-in-time inventory system can narrow the gap between the acid-test and the current ratio.

Question 28

A company's current ratio is 1.2 and its quick ratio is 0.25. This company is probably an excellent credit risk because the ratios reveal no indication of liquidity problems.

Question 29

Under the perpetual inventory system, the cost of merchandise purchased is recorded in the Merchandise Inventory account.

Question 30

A company's quick assets are $147,000 and its current liabilities are $143,000. This company's acid-test ratio is 1.03.
Acid-Test Ratio = Quick Assets/Current Liabilities
Acid-Test Ratio = $147,000/$143,000 = 1.03

Question 31

Credit terms for a purchase include the amounts and timing of payments from a buyer to a seller.

Question 32

The gross margin ratio is also called the gross profit ratio.

Question 33

Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.

Question 34

If goods are shipped FOB destination, the seller is responsible for paying shipping charges and bears the risk of damage or loss in transit.

Question 35

A company had net sales of $340,500, its cost of goods sold was $257,000, and its net income was $13,750. The company's gross margin ratio equals 24.5%.
Gross Margin Ratio = (Sales - Cost of Goods Sold)/Sales
Gross Margin Ratio = ($340,500 - $257,000)/$340,500 = 24.5%

Question 36

Credit terms of 2/10, n/30 imply that the seller offers the purchaser a 2% cash discount if the amount is paid within 10 days of the invoice date. Otherwise, the full amount is due in 30 days.

Question 37

If goods are shipped FOB destination, the seller does not record revenue from the sale until the goods arrive at their destination because the transaction is not complete before that point.

Question 38

A period's ending Merchandise Inventory account balance is the next period's beginning Merchandise Inventory balance.

Question 39

A buyer using a perpetual inventory system records the costs of shipping merchandise it purchases in a Delivery Expense account.

Question 40

Purchase returns refer to merchandise a buyer acquires but then returns to the seller.

Question 41

Sales Discounts and Sales Returns and Allowances are contra revenue accounts that are debited during the closing process.

Question 42

Sales of $350,000 and net sales of $323,000 may reflect sales discounts of $27,000.
$350,000 - $323,000 = $27,000; may be sales discounts, sales returns and allowances, or a combination of the two.

Question 43

A multiple-step income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items.

Question 44

Operating expenses in a multiple-step income statement are classified into two categories: selling expenses and cost of goods sold.

Question 45

Under a perpetual inventory system, when a credit customer returns merchandise to the seller prior to paying for the merchandise, the seller debits Sales Returns and Allowances and credits Accounts Receivable and also debits Merchandise Inventory and credits Cost of Goods Sold.

Question 46

FOB shipping point means that the buyer accepts ownership when the goods arrive at the buyer's place of business.

Question 47

Expenses related to accounting, human resource management, and financial management are classified as selling expenses in a multiple-step income statement.

Question 48

Either the gross method or net method may be used to record sales with cash discounts, but the net method requires a period-end adjusting entry to estimate expected future sales discounts taken.

Question 49

Offering sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collections efforts.

Question 50

A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20, and a credit to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for early payment.
$20/$1,000 = 2% discount

Question 51

Assuming a seller has not yet collected cash for goods sold, a credit memorandum is prepared to inform the buyer of the seller's credit to its Accounts Payable account arising from a sales return or allowance.

Question 52

The adjusting entry to reflect inventory shrinkage is a debit to Income Summary and a credit to Inventory Shrinkage Expense.

Question 53

Each sales transaction for a seller that uses a perpetual inventory system involves recognizing both revenue and cost of merchandise sold.

Question 54

Cost of Goods Sold is credited during the closing process.

Question 55

A single-step income statement includes cost of goods sold as another expense and shows only one subtotal for total expenses.

Question 56

When a company preparing a multiple-step income statement has no reportable non-operating activities, its income from operations is simply labeled net income.

Question 57

In a perpetual inventory system, the Merchandise Inventory account must be closed at the end of the accounting period.

Question 58

A perpetual inventory system is able to directly measure and monitor inventory shrinkage and there is no need for a physical count of inventory.

Question 59

A merchandiser's classified balance sheet reports Merchandise Inventory as a current asset.

Question 60

Sales Discounts is added to the Sales account when computing a company's net sales.

Question 61

A company has sales of $695,000 and cost of goods sold of $278,000. Its gross profit equals:

A)$(417,000).
B)$695,000.
C)$278,000.
D)$417,000.
E)$973,000.

Question 62

Inventory Returns Estimated is a current asset account used in a period-end adjusting entry to reflect the inventory estimated to be returned in the future.

Question 63

The following statements regarding merchandise inventory are true except:

A)Merchandise inventory is reported on the balance sheet as a current asset.
B)Merchandise inventory refers to products a company owns and intends to sell.
C)Merchandise inventory may include the costs of freight in and making them ready for sale.
D)Merchandise inventory appears on the balance sheet of a service company.
E)Purchasing merchandise inventory is part of the operating cycle for a business.

Question 64

Inventory Returns Estimated, which reflects an adjustment to cost of goods sold for expected future returns, is a liability account reported in the balance sheet, usually under Current Liabilities.

Question 65

The following statements are true regarding the operating cycle of a merchandising company except:

A)The operating cycle begins with the purchase of merchandise.
B)The operating cycle is shortened by credit sales.
C)The operating cycle ends with the collection of cash from the sale of merchandise.
D)The operating cycle can vary in length among different merchandising companies.
E)The operating cycle sometimes involves accounts receivable.

Question 66

Companies that use a perpetual inventory system under the gross method debit the total purchase invoice amount and credit cash discounts taken to the Merchandise Inventory account.

Question 67

Under a periodic inventory system, transactions for purchases, purchase returns and allowances, purchase discounts, and transportation-in transactions are recorded in the Merchandise Inventory account.

Question 68

Under the net method, when a company uses a perpetual inventory system, an invoice for $2,000 with terms of 2/10, n/30 should be recorded with a debit to Merchandise Inventory and a credit to Accounts Payable of $2,000.
$2,000 * 0.98 = $1,960

Question 69

In a periodic inventory system, cost of goods sold is recorded as each sale of merchandise occurs.

Question 70

Under the net method of recording purchases, the Discounts Lost account is used when the purchaser fails to take a discount offered by the seller.

Question 71

A company has sales of $375,000 and its gross profit is $157,500. Its cost of goods sold equals:

A)$(217,000).
B)$375,000.
C)$157,500.
D)$217,500.
E)$532,500.

Question 72

The periodic inventory system requires updating the inventory account at the end of the period to reflect the quantity and cost of goods available for sale and the cost of goods sold.

Question 73

Advertising expense is reported as part of general and administrative expenses in the seller's multiple-step income statement.

Question 74

When using the net method of recording sales, discounts not taken by the purchaser are recorded by the seller as Interest Revenue at the time of collection on account.

Question 75

Under the gross method, if companies using a perpetual inventory system do not take advantage of purchase discounts, a Discounts Lost account is debited at the time of payment.

Question 76

Under both the periodic and perpetual inventory systems, the temporary account Purchases Returns and Allowances is used to accumulate the cost of all returns and allowances for a period.

Question 77

A merchandiser:

A)Earns net income by buying and selling merchandise.
B)Receives fees only in exchange for services.
C)Earns profit from commissions only.
D)Earns profit from fares only.
E)Buys products from consumers.

Question 78

The following statements regarding gross profit are true except:

A)Gross profit is also called gross margin.
B)Gross profit less other operating expenses equals income from operations.
C)Gross profit is not calculated on the multiple-step income statement.
D)Gross profit must cover all operating expenses to yield a return for the owner of the business.
E)Gross profit equals net sales less cost of goods sold.

Question 79

Cost of goods sold is:

A)Another term for merchandise sales.
B)The term used for the expense of buying and preparing merchandise for sale.
C)Another term for revenue.
D)Also called gross margin.
E)A term only used by service firms.

Question 80

New revenue recognition rules that apply to public entities for annual periods beginning after December 15, 2017 require sellers to report sales net of expected sales discounts in the income statement.