Question 1

In a periodic inventory system ________.

Accepted Answer

In a periodic inventory system, businesses must perform a physical count of inventory to determine the quantities on hand. This is because updates to inventory quantities are not made after each sale and purchase, making it necessary to physically count and adjust inventory levels periodically. Choices A and C are incorrect because they are not true statements, and choice B is also incorrect because the cost to invest in a periodic inventory system is typically lower than that of a perpetual system, as there is less need for technology and ongoing maintenance.

Question 2

In a periodic inventory system,purchases,purchase discounts,and purchase returns and allowances are recorded in the Merchandise Inventory account as and when they occur.

Accepted Answer

In a periodic inventory system, purchases, purchase discounts, and purchase returns and allowances are recorded in separate accounts during the year.

Question 3

Carpenter Company generated sales revenues of $1,000,000 in 2019.Its cost of goods sold amounted to $\$ 600,000$ Calculate Carpenter's gross profit percentage.

Accepted Answer

Gross profit percentage is calculated as (Sales Revenue - Cost of Goods Sold) / Sales Revenue * 100. For Carpenter Company, this is ($1,000,000 - $600,000) / $1,000,000 * 100 = 40%.

Question 4

If a merchandiser uses the periodic inventory system,it is necessary to conduct a physical count of inventory to determine the quantity of inventory on hand.

Accepted Answer

Under the periodic inventory system, the inventory balance is not continuously updated, so a physical count is necessary to determine the actual amount of inventory on hand at the end of a period.

Question 5

A company made net sales revenue of $550,000,and cost of goods sold totaled $192,500.Calculate its gross profit percentage.

Accepted Answer

A) Gross profit = Sales revenue - Cost of goods sold = $550,000 - $192,500 = $357,500
Gross profit percentage = Gross profit / Sales revenue = $357,500 / $550,000 = 65%

Question 6

Smaller businesses invest in a periodic inventory system because of the ability to determine quantities of inventory on hand after each purchase and sale of merchandise inventory.

Accepted Answer

Smaller businesses invest in a periodic inventory system because it is too expensive to invest in a perpetual inventory system.

Question 7

Regarding the inventory system used by small retailers,which of the following statements is incorrect?

Accepted Answer

While a perpetual inventory system can provide some advantages in terms of accuracy and efficiency, small retailers are not necessarily required to use it to be competitive. Some may find it too expensive to implement, particularly if they have a lower volume of inventory or a limited budget for technology. Both periodic and perpetual inventory systems have their pros and cons, and the choice depends on the specific needs and resources of the business. However, statement B implies that a perpetual inventory system is a requirement for small retailers to be competitive, which is not necessarily true.

Question 8

In a perpetual inventory system,multiple performance obligations ________.

Accepted Answer

In a perpetual inventory system, multiple performance obligations require the company to allocate the transaction price to each performance obligation. This is because each obligation may have a unique value or price attached to it, and therefore revenue must be recognized separately for each obligation. Option A is incorrect because multiple performance obligations represent distinct obligations that must be separately identified and recognized. Option B is incorrect because the creation of an asset account, Unearned Revenue, is not necessary in a perpetual inventory system, as revenue can be recognized as the obligations are fulfilled. Option C is incorrect because revenue cannot be recognized simply because there is a binding contract; separate performance obligations must still be identified and recognized as they are fulfilled.

Question 9

Under the new revenue recognition standards,companies are required to identify the performance obligations associated with each contract.

Accepted Answer

This is true. Under the new revenue recognition standards, companies are required to identify the performance obligations associated with each contract. This means they must determine the distinct goods or services being provided to the customer and when they are being provided, in order to properly recognize revenue.

Question 10

Revenue from contracts with multiple performance obligations is recognized as each performance obligation is satisfied.

Accepted Answer

Revenue from contracts with multiple performance obligations should be recognized as each performance obligation is satisfied, in accordance with the principles of the new revenue recognition standard, ASC 606. This applies only if the performance obligations are distinct and accounted for separately under the standards.

Question 11

The Merchandise Inventory account is only used in a perpetual inventory system.

Accepted Answer

All inventory systems use the Merchandise Inventory account.

Question 12

A retailer sells,for cash,a television set with a two-year service contract.The retailer initially records the cash received for the service contract as Unearned Revenue.

Accepted Answer

This is because the service contract is not yet earned by the retailer and therefore cannot be recognized as revenue immediately. It will only be recognized as revenue over the two-year period, as services are rendered.

Question 13

In a periodic inventory system,businesses must obtain a physical count of inventory to determine quantities on hand.

Accepted Answer

In a periodic inventory system, inventory quantities are not updated continuously, and businesses must conduct physical counts to determine the quantity of inventory on hand. Therefore, the statement that in a periodic inventory system, businesses must obtain a physical count of inventory to determine quantities on hand is true.

Question 14

Complete Electronics Company sells a point-of-sale computer with a two-year service contract.Complete collects $2,000 cash for the selling price of the computer and $504 for the two-year service contract.How is revenue recognized?

Accepted Answer

Revenue for the computer sale ($2,000) can be recognized when the product is delivered. Revenue for the service contract ($504) should be recognized over the two-year contract period, which would be $21 per month for 24 months. Therefore, the company will record Sales Revenue of $2,000 when the computer is delivered and Service Revenue of $21 per month for 24 months.

Question 15

Home Theater Company has the following transaction related to the sale of merchandise inventory.
 June 1: Sold a home theater system (cost of $ \$ 6,200 $ ) for $ \$ 9,000 $ to a customer. The customer paid cash. The sales price included a two-year service contract valued at $ \$ 840 $. 
Dec 31. Recorded the amount of service contract earned. Journalize the transactions of Home Theater assuming that the company uses the perpetual inventory system.Do not record the cost of goods sold entry.Omit explanations.

Accepted Answer

The answer of Home Theater Company has the following transaction...

Question 16

Bridgeport Enterprises reported the following figures from its adjusted trial balance for its first year of business,which ended on June 30,2019.
 $$\begin{array} { | l | r | } 
\hline \text { Accounts Payable } & \$ 4,800 \
\hline \text { Accounts Receivable } & 3,600 \
\hline \text { Accrued Liabilities } & 1,400 \
\hline \text { Administrative Expenses } & 3,800 \
\hline \text { Bridgeport, Capital } & 7,550 \
\hline \text { Bridgeport, Withdrawals } & 2,000 \
\hline \text { Cash } & 4,500 \
\hline \text { Cost of Goods Sold } & 23,500 \
\hline \text { Equipment, net } & 8,500 \
\hline \text { Interest Expense } &150 \
\hline \text { Merchandise Inventory } & 2,500  \
\hline \text { Net Sales Revenue } &  35,000\
\hline \text { Notes Payable, Long-term } &  1,500\
\hline \text { Selling Expenses } &1,700\
\hline
\end{array}$$ Requirements:
a.Prepare a multi-step income statement.
b.Prepare the statement of owner's equity.The owner contributed $7,550 cash to the business during the first year of operations.
c.Prepare a classified balance sheet.
d.Compute the gross profit percentage.

Accepted Answer

The answer of Bridgeport Enterprises reported the following figures from...

Question 17

Under the new revenue recognition standards,companies recognize revenue when performance obligations associated with contracts are identified.

Accepted Answer

Under the new revenue recognition standards, companies recognize revenue when, or as, it satisfies each performance obligation.

Question 18

What does the gross profit percentage measure? How is it computed?

Accepted Answer

The answer of What does the gross profit percentage measure?...

Question 19

The gross profit percentage for Fran's Clothing Retailer was 37.7% for the year ended December 31,2018 and 42.5% for the year ended December 31,2019.The industry average gross profit percentage,for both years,is 45.7%.Briefly discuss these findings.

Accepted Answer

The answer of The gross profit percentage for Fran's Clothing...

Question 20

Purchase Discounts is a contra asset account.

Accepted Answer

Purchase Discounts is a contra expense account.

Quiz 5: Merchandising Operations