Chapter 6 - I hope these notes can help you. Study smart! PDF

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Chapter 6—Accounting for Merchandising Businesses TRUE/FALSE 1. Operating expenses are subtracted from fees earned for a service business and from gross profit for a merchandising business. ANS: T

DIF: 1

OBJ: 01

2. Net income or loss may appear on the income statement of both a service business and a merchandising business. ANS: T

DIF: 1

OBJ: 01

3. Cost of merchandise sold is the same as operating expenses. ANS: F

DIF: 1

OBJ: 01

4. It is usual for the credit period to begin with the date the merchandise is received by the buyer. ANS: F

DIF: 1

OBJ: 02a

5. Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system. ANS: F

DIF: 1

OBJ: 02a

6. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take advantage of the cash discount. ANS: F

DIF: 1

OBJ: 02a

7. Discounts taken by the buyer for early payment of an invoice are called purchases discounts by the buyer. ANS: T

DIF: 1

OBJ: 02a

8. If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30. ANS: F

DIF: 1

OBJ: 02a

9. Merchandise Inventory normally has a debit balance. ANS: T

DIF: 1

OBJ: 02a

10. In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account. ANS: T

DIF: 1

OBJ: 02a

11. Using a perpetual inventory system, the cost of merchandise sold is accumulated directly in a cost of merchandise sold account. ANS: T

DIF: 1

OBJ: 02a

12. Under a periodic inventory system, the merchandise on hand at the end of the year is determined by a physical count of the inventory. ANS: T

DIF: 1

OBJ: 02a

13. Under a periodic inventory system, both the sales amount and the cost of merchandise sold amount are recorded when each item of merchandise is sold. ANS: F

DIF: 1

OBJ: 02a

14. Under a periodic inventory system, the inventory listing is used to determine the cost of merchandise sold for the period as well as the cost of inventory on hand at the end of the period. ANS: T

DIF: 1

OBJ: 02a

15. Purchases discounts are discounts given to the seller. ANS: F

DIF: 1

OBJ: 02a

16. Under the perpetual inventory system, the cost of merchandise sold is recorded when sales are made. ANS: T

DIF: 1

OBJ: 02b

17. Sales Discounts normally has a debit balance. ANS: T

DIF: 1

OBJ: 02b

18. Sales Discounts is used in accounting for transactions with customers. ANS: T

DIF: 3

OBJ: 02b

19. A sale of $600 on account, subject to a sales tax of 5%, would be recorded as an account receivable of $600. ANS: F

DIF: 5

OBJ: 02b

20. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales. ANS: F

DIF: 1

OBJ: 02b

21. Sales to customers who use nonbank credit cards, such as American Express, are generally treated as credit sales. ANS: T

DIF: 1

OBJ: 02b

22. The document issued by the seller that informs the buyer of the details of sales returns is called a credit memorandum. ANS: T

DIF: 1

OBJ: 02b

23. The effect of a sales return and allowance is a reduction in sales revenue and a decrease in cash or accounts receivable. ANS: T

DIF: 1

OBJ: 02b

24. Available discounts taken by the customer for early payment of an invoice are termed purchases discounts by the buyer. ANS: T

DIF: 1

OBJ: 02b

25. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms are stated as FOB destination. ANS: F

DIF: 1

OBJ: 02c

26. Merchandise is sold for $2,500, terms FOB destination, 2/10, n/30, with prepaid transportation costs of $150. If $500 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. ANS: T

DIF: 5

OBJ: 02c

27. If the buyer is to absorb the transportation costs related to a purchase, the terms are said to be FOB destination. ANS: F

DIF: 1

OBJ: 02c

28. If merchandise costing $2,500, terms FOB destination, 2/10, n/30, with prepaid transportation costs of $100, is paid within 10 days, the amount of the purchases discount is $52. ANS: F

DIF: 5

OBJ: 02c

29. The transportation out account is used by sellers in accounting for transactions with buyers. ANS: T

DIF: 1

OBJ: 02d

30. Cost of Merchandise Sold is used in accounting for transactions by sellers of merchandise. ANS: T

DIF: 1

OBJ: 02d

31. Sales Returns and Allowances is used in accounting for transactions with customers. ANS: T

DIF: 1

OBJ: 02d

32. The chart of accounts for a merchandising business would include an account called Merchandise Inventory. ANS: T

DIF: 1

OBJ: 03

33. Operating expenses of a business are usually grouped into two categories: selling expenses and administrative expenses. ANS: T

DIF: 1

OBJ: 04

34. Operating expenses of relatively small amounts that cannot be identified with principal accounts are usually accumulated in accounts entitled Miscellaneous Selling Expense and Miscellaneous Administrative Expense. ANS: T

DIF: 1

OBJ: 04

35. Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as Other Income on the multiple-step income statement. ANS: T

DIF: 1

OBJ: 04

36. On the multiple-step income statement, the total of all expenses is deducted from the total of all revenues. ANS: F

DIF: 1

OBJ: 04

37. On a multiple-step income statement, losses on sales of fixed assets would be listed as a liability item. ANS: F

DIF: 1

OBJ: 04

38. Expenses that cannot be associated definitely with operations, such as interest expense, are listed as administrative expenses on the multiple-step income statement. ANS: F

DIF: 1

OBJ: 04

39. On the income statement, sales returns and allowances and sales discounts are added to gross sales to yield net sales. ANS: F

DIF: 1

OBJ: 04

40. On the income statement, sales discounts are normally deducted from merchandise inventory to yield the cost of merchandise sold. ANS: F

DIF: 1

OBJ: 04

41. Selling expenses are divided into general and operating expenses. ANS: F

DIF: 1

OBJ: 04

42. Other income is added to and other expense is subtracted from income from operations on the multiple-step income statement. ANS: T

DIF: 1

OBJ: 04

43. On the income statement, the merchandise inventory at the beginning of the period is added to sales to yield the cost of merchandise sold during the period.

ANS: F

DIF: 1

OBJ: 04

44. On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues. ANS: T

DIF: 1

OBJ: 04

45. A criticism of the single-step income statement is that gross profit and income from operations are not readily available for analysis. ANS: T

DIF: 1

OBJ: 04

46. Merchandise Inventory is classified as a plant asset. ANS: F

DIF: 1

OBJ: 05

47. The amount of the net income for a period appears on both the income statement and the statement of owner's equity for that period. ANS: T

DIF: 1

OBJ: 05

48. The adjusting entry to record inventory shrinkage would include a debit to Cost of Merchandise Sold. ANS: T

DIF: 1

OBJ: 05

49. The adjusting entry to record inventory shrinkage would include a debit to Merchandise Inventory. ANS: F

DIF: 1

OBJ: 05

50. The form of the balance sheet in which assets, liabilities, and owner's equity are presented in a downward sequence is called the report form. ANS: T

DIF: 1

OBJ: 05

51. The ratio of net sales to assets measures how effectively a business is using its assets to generate sales. ANS: T

DIF: 1

OBJ: 06

52. A low ratio of net sales to assets indicates an effective use of assets. ANS: F

DIF: 1

OBJ: 06

53. In a manual accounting system, a sales journal for a merchandise business is similar to a revenue journal for a service business. ANS: T

DIF: 1

OBJ: Ap1

54. In a computerized accounting system, special journals may be replaced by electronic forms that capture the necessary information.

ANS: T

DIF: 1

OBJ: Ap1

55. The balance sheet accounts of a work sheet provide the information to prepare the closing entries. ANS: F

DIF: 1

OBJ: Ap2

MULTIPLE CHOICE 1. Generally, the revenue account for a merchandising business is entitled: a. Sales b. Net Sales c. Gross Sales d. Gross Profit ANS: A

DIF: 1

OBJ: 01

2. The difference between sales and cost of merchandise sold for a merchandising business is: a. Sales b. Net Sales c. Gross Sales d. Gross Profit ANS: D

DIF: 1

OBJ: 01

3. Merchandise inventory is classified on the balance sheet as a: a. Current Liability b. Current Asset c. Long-Term Asset d. Long-Term Liability ANS: B

DIF: 1

OBJ: 01

4. When purchases of merchandise are made for cash, the transaction may be recorded with the following entry: a. debit Cash; credit Merchandise Inventory b. debit Merchandise Inventory; credit Cash c. debit Merchandise Inventory; credit Cash Discounts d. debit Merchandise Inventory; credit Purchases ANS: B

DIF: 5

OBJ: 02a

5. Merchandise is ordered on November 12; the merchandise is shipped by the seller and the invoice is prepared, dated, and mailed by the seller on November 15; the merchandise is received by the buyer on November 17; the entry is made in the buyer's accounts on November 18. The credit period begins with what date? a. November 12 b. November 15 c. November 17 d. November 18 ANS: B

DIF: 5

OBJ: 02a

6. The primary difference between a periodic and perpetual inventory system is that a: a. periodic system determines the inventory on hand only at the end of the accounting period b. periodic system keeps a record showing the inventory on hand at all times

c. periodic system provides an easy means to determine inventory shrinkage d. periodic system records the cost of the sale on the date the sale is made ANS: A

DIF: 1

OBJ: 02a

7. When a buyer returns merchandise purchased for cash, the buyer may record the transaction using the following entry: a. debit Merchandise Inventory; credit Cash b. debit Cash; credit Merchandise Inventory c. debit Cash; credit Sales Returns and Allowances d. debit Sales Returns and Allowances; credit Cash ANS: B

DIF: 5

OBJ: 02a

8. When merchandise is purchased to resell to customers, it is recorded in the account entitled: a. Supplies b. Capital c. Merchandise Inventory d. Sales ANS: C

DIF: 1

OBJ: 02a

9. Using a perpetual inventory system, the entry to record the purchase of $30,000 of merchandise on account would include a: a. debit to Sales b. debit to Merchandise Inventory c. credit to Merchandise Inventory d. credit to Sales ANS: B

DIF: 1

OBJ: 02a

10. Using a perpetual inventory system, the entry to record the return of merchandise purchased on account includes a: a. debit to Sales b. debit to Merchandise Inventory c. credit to Merchandise Inventory d. credit to Sales ANS: C

DIF: 1

OBJ: 02a

11. Merchandise is ordered on November 12; the merchandise is shipped by the seller and the invoice is prepared, dated, and mailed by the seller on November 15; the merchandise is received by the buyer on November 17; the entry is made in the seller's accounts on November 15. If the credit terms are 1/10, n/30, the credit period begins with what date? a. November 12 b. November 15 c. November 17 d. November 22 ANS: B

DIF: 5

OBJ: 02a

12. The inventory system employing accounting records that continuously disclose the amount of inventory is called: a. retail b. periodic c. physical

d. perpetual ANS: D

DIF: 1

OBJ: 02a

13. Under the perpetual inventory system, all purchases of merchandise are debited to the account entitled: a. Merchandise Inventory b. Cost of Merchandise Sold c. Sales d. Purchases ANS: A

DIF: 1

OBJ: 02a

14. The arrangements between buyer and seller as to when payments for merchandise are to be made are called: a. credit terms b. net cash c. cash on demand d. gross cash ANS: A

DIF: 1

OBJ: 02b

15. In credit terms of 1/10, n/30, the "1" represents the: a. number of days in the discount period b. full amount of the invoice c. number of days when the entire amount is due d. percent of the cash discount ANS: D

DIF: 1

OBJ: 02a

16. Sales to customers who use bank credit cards such as MasterCard and Visa are usually recorded by a: a. debit to Bank Credit Card Sales, debit to Credit Card Expense, and a credit to Sales b. debit to Cash and a credit to Sales c. debit to Cash, credit to Credit Card Expense, and a credit to Sales d. debit to Sales, debit to Credit Card Expense, and a credit to Cash ANS: B

DIF: 1

OBJ: 02b

17. The amount of the total cash paid to the seller for merchandise purchased would normally include: a. only the list price b. only the sales tax c. the list price plus the sales tax d. the list price less the sales tax ANS: C

DIF: 1

OBJ: 02b

18. In recording the cost of merchandise sold for cash, based on data available from perpetual inventory records, the journal entry is: a. debit Cost of Merchandise Sold; credit Sales b. debit Cost of Merchandise Sold; credit Merchandise Inventory c. debit Merchandise Inventory; credit Cost of Merchandise Sold d. debit Accounts Receivable; credit Merchandise Inventory ANS: B

DIF: 5

OBJ: 02b

19. Under a perpetual inventory system, the costs of all sales of merchandise are credited to the account entitled: a. Sales Discounts b. Cost of Merchandise Sold c. Sales Returns and Allowances d. Merchandise Inventory ANS: D

DIF: 1

OBJ: 02b

20. When the perpetual inventory system is used, the inventory sold is shown on the income statement as: a. cost of merchandise sold b. purchases c. purchases returns and allowances d. net purchases ANS: A

DIF: 1

OBJ: 02b

21. Using a perpetual inventory system, the entry to record the sale of merchandise on account includes a: a. debit to Sales b. debit to Merchandise Inventory c. credit to Merchandise Inventory d. credit to Accounts Receivable ANS: C

DIF: 1

OBJ: 02b

22. Which of the following accounts has a normal debit balance? a. Accounts Payable b. Sales Returns and Allowances c. Sales d. Interest Revenue ANS: B

DIF: 1

OBJ: 02b

23. A sales invoice included the following information: merchandise price, $5,000; transportation, $300; terms 1/10, n/eom, FOB shipping point. Assuming that a credit for merchandise returned of $600 is granted prior to payment, that the transportation is prepaid by the seller, and that the invoice is paid within the discount period, what is the amount of cash received by the seller? a. $4,356 b. $4,400 c. $4,656 d. $4,950 ANS: C

DIF: 3

OBJ: 02b

24. Using a perpetual inventory system, the entry to record the return from a customer of merchandise sold on account includes a: a. credit to Sales Returns and Allowances b. debit to Merchandise Inventory c. credit to Merchandise Inventory d. debit to Cost of Merchandise Sold ANS: B

DIF: 1

OBJ: 02b

25. Using a perpetual inventory system, the entry to record the return from a customer of merchandise sold on account includes a: a. credit to Sales Returns and Allowances b. credit to Merchandise Inventory c. credit to Cost of Merchandise Sold d. debit to Cost of Merchandise Sold ANS: C

DIF: 1

OBJ: 02b

26. If merchandise sold on account is returned to the seller, the seller may inform the customer of the details by issuing a: a. sales invoice b. purchase invoice c. credit memorandum d. debit memorandum ANS: C

DIF: 1

OBJ: 02b

27. A sales invoice included the following information: merchandise price, $8,000; transportation, $400; terms 2/10, n/eom, FOB shipping point. Assuming that a credit for merchandise returned of $800 is granted prior to payment, that the transportation is prepaid by the seller, and that the invoice is paid within the discount period, what is the amount of cash received by the seller? a. $7,200 b. $7,456 c. $7,600 d. $7,056 ANS: B

DIF: 3

OBJ: 02b

28. Sales to customers who use bank credit cards, such as MasterCard and Visa, are generally treated as: a. sales on account b. sales returns c. cash sales d. sales when the credit card company remits the cash ANS: C

DIF: 1

OBJ: 02b

29. If the buyer is to pay the transportation costs of delivering merchandise, delivery terms are stated as: a. FOB shipping point b. FOB destination c. FOB n/30 d. FOB buyer ANS: A

DIF: 1

OBJ: 02c

30. Which of the following accounts has a normal credit balance? a. Sales Returns and Allowances b. Sales c. Merchandise Inventory d. Transportation Out ANS: B

DIF: 1

OBJ: 02c

31. Merchandise subject to terms 1/10, n/30, FOB shipping point, is sold on account to a customer for $18,000. The seller paid transportation costs of $1,000 and issued a credit memorandum for $5,000 prior to payment. What is the amount of the cash discount allowable? a. $190 b. $180 c. $170 d. $130 ANS: D

DIF: 3

OBJ: 02c

32. If the seller is to pay the transportation costs of delivering merchandise, the delivery terms are stated as: a. FOB shipping point b. FOB destination c. FOB n/30 d. FOB seller ANS: B

DIF: 1

OBJ: 02c

33. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are: a. n/30 b. FOB shipping point c. FOB destination d. consigned ANS: B

DIF: 1

OBJ: 02c

34. If title to merchandise purchases passes to the buyer when the goods ...