Question 1

Income from operations appears on both the single-step and multiple-step forms of an income statement.

Accepted Answer

Income from operations appears only on the multiple-step income statement, which separates operating revenues and expenses from non-operating items. The single-step income statement does not make this distinction.

Question 2

Merchandise is sold for $5,000 with terms 1/10, n/30.If $1,000 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $40.

Accepted Answer

The sales discount is calculated on the net amount after returns. The net amount is $4,000 ($5,000 - $1,000). The discount is 1% of $4,000, which is $40.

Question 3

The normal balance of the Sales Returns and Allowances account is a credit.

Accepted Answer

The normal balance of the Sales Returns and Allowances account is a debit because it is a contra-revenue account that offsets sales revenue.

Question 4

Gross profit appears on both the single-step and multiple-step forms of an income statement.

Accepted Answer

Gross profit appears only on the multiple-step income statement, where it is calculated by subtracting the cost of goods sold from net sales. The single-step income statement does not separately show gross profit, as it combines all revenues and expenses in a single calculation.

Question 5

Operating expenses include interest expense and income tax expense.

Accepted Answer

Operating expenses typically include costs related to the day-to-day functioning of a business, such as rent, utilities, and salaries, but do not include interest expense and income tax expense, which are categorized separately.

Question 6

Sales revenue is only earned during the period in which the cash is collected from the buyer.

Accepted Answer

Sales revenue is recognized when it is earned and realizable, not necessarily when cash is collected, according to the accrual accounting principle.

Question 7

Freight-out is reported as an operating expense in the income statement.

Accepted Answer

Freight-out, or delivery expense, is considered a selling expense and is included in operating expenses on the income statement.

Question 8

Cash register tapes provide evidence of credit sales.

Accepted Answer

Cash register tapes typically provide evidence of cash sales, not credit sales. Credit sales are usually documented through invoices or sales receipts.

Question 9

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

Accepted Answer

This is true because paying within the discount period can result in significant savings for the buyer. Failing to pay within the discount period means missing out on the discount and ultimately paying more for the product or service.

Question 10

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

Accepted Answer

The terms "2/10, n/30" mean that a 2 percent discount is allowed if the payment is made within 10 days after the invoice date; otherwise, the net (full) amount is due within 30 days.

Question 11

Sales Discounts and Sales Returns and Allowances both have normal debit balances.

Accepted Answer

Sales Discounts and Sales Returns and Allowances are contra-revenue accounts, which means they reduce total sales revenue and therefore have normal debit balances.

Question 12

The multiple-step income statement is considered by some to be more useful than the single-step income statement because it highlights the components of net income.

Accepted Answer

The multiple-step income statement separates operating and non-operating activities, providing detailed insights into the components of net income, which some users find more informative.

Question 13

Sales Discounts is a contra revenue account to Sales Revenue.

Accepted Answer

Sales Discounts is a contra revenue account because it reduces the total sales revenue by the amount of discounts given to customers for early payment or other reasons.

Question 14

When an invoice is paid within the discount period, the amount of the discount decreases the cost of the inventory.

Accepted Answer

When an invoice is paid within the discount period, the buyer takes advantage of the discount offered by the seller, which reduces the amount owed. This reduction in the amount paid decreases the cost of the inventory for the buyer.

Question 15

If merchandise costing $5,000, with terms 2/10, n/30, is paid within 10 days, the amount of the purchase discount is $100.

Accepted Answer

The purchase discount is calculated as 2% of $5,000, which is $100.

Question 16

The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.

Accepted Answer

Both the Sales Returns and Allowances account and the Sales Discount account are classified as contra revenue accounts, not expense accounts. They are used to reduce the amount of revenue in the income statement.

Question 17

Sales allowances and sales discounts are both designed to encourage customers to pay their accounts promptly.

Accepted Answer

Sales discounts are designed to encourage prompt payment, while sales allowances are reductions in price due to issues with the product or service.

Question 18

Nonoperating activities include revenues and expenses that are related to the company's main line of operations.

Accepted Answer

Nonoperating activities include revenues and expenses that are not related to the company's main line of operations, such as interest income, gains or losses from investments, and other incidental activities.

Question 19

The revenue recognition principle is applied to merchandising companies by recognizing sales revenues when the performance obligation is satisfied.

Accepted Answer

The revenue recognition principle states that revenue should be recognized when it is earned, which for merchandising companies is when the goods are delivered to the customer, satisfying the performance obligation.

Question 20

In a single-step income statement, only one step is required in determining net income.

Accepted Answer

A single-step income statement calculates net income by subtracting total expenses from total revenues in one step.

Quiz 5: Merchandising Operations and the Multiple-Step Income Statement