practical problems for financial accounting PDF

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Chapter 6--Accounting for Merchandising Businesses Student: ___________________________________________________________________________ 1. One of the most important differences between a service business and a retail business is in what is sold. True False

2. In a merchandise business, sales minus operating expenses equals net income. True False

3. Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends to sell. True False

4. Service businesses provide services for income, while a merchandising business sells merchandise. True False

5. In many retail businesses, inventory is the largest current asset. True False

6. Under a periodic inventory system, the merchandise on hand at the end of the year is determined by a physical count of the inventory. True False

7. In the periodic inventory system, purchases of merchandise for resale are debited to the Purchases account. True False

8. Under the periodic inventory system, the cost of merchandise sold is equal to the beginning merchandise inventory plus the cost of merchandise purchased plus the ending merchandise inventory. True False

9. In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the beginning inventory. True False

10. In a periodic inventory system, the cost of merchandise purchased includes the cost of freight-in. True False

11. As we compare a merchandise business to a service business, the financial statement that changes the most is the Balance Sheet. True False

12. When a merchandising business is compared to a service business, the financial statement that is not affected by that change is the Statement of Owner's Equity. True False

13. The ending merchandise inventory for 2010 is the same as the beginning merchandise inventory for 2011. True False

14. In a multiple-step income statement the dollar amount for income from operations is always the same as net income. True False

15. Net sales is equal to sales minus cost of merchandise sold. True False

16. Gross profit minus selling expenses equals net income. True False

17. 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. True False

18. On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues. True False

19. The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income from operations are not readily available. True False

20. 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. True False

21. Freight in is the amount paid by the company to deliver merchandise sold to a customer. True False

22. In the merchandising income statement, sales will be reduced by sales discounts and sales returns and allowances to arrive at net sales. True False

23. Other income and expenses are items that are not related to the primary operating activity. True False

24. Freight-in is considered a cost of purchasing inventory. True False

25. The cost of merchandise inventory is limited to the purchase price less any purchase discounts. True False

26. Cost of Merchandise Sold is often the largest expense on a merchandising company income statement. True False

27. Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are recorded. True False

28. Under the periodic inventory system, the cost of merchandise sold is recorded when sales are made. True False

29. If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30. True False

30. When merchandise that was sold is returned, a credit to sales returns and allowances is made. True False

31. In a perpetual inventory system, when merchandise is returned to the seller, Cost of Merchandise Sold is debited as part of the transaction. True False

32. Sales Returns and Allowances is a contra-revenue account. True False

33. Sales Discounts is a revenue account with a credit balance. True False

34. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales. True False

35. Sales to customers who use nonbank credit cards, such as American Express, are generally treated as credit sales. True False

36. Retailers record all credit card sales as credit sales. True False

37. The service fee that credit card companies charge retailers varies and is the primary reason why some businesses do not accept all credit cards. True False

38. A seller may grant a buyer a reduction in selling price and this is called a sales allowance. True False

39. The effect of a sales return and allowance is a reduction in sales revenue and a decrease in cash or accounts receivable. True False

40. Merchandise Inventory normally has a debit balance. True False

41. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30days after the invoice date to take advantage of the cash discount. True False

42. Discounts taken by the buyer for early payment of an invoice are credited to Sales Discounts by the buyer. True False

43. In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account. True False

44. Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. If payment is made within 10 days of the purchase, the entry to record the payment will include a credit to Cash and a credit to Purchase Discounts. True False

45. Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system. True False

46. When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period. True False

47. When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount. True False

48. A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called cash discounts. True False

49. Sellers and buyers are required to record trade discounts. True False

50. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms are stated as FOB destination. True False

51. A sale of $750 on account, subject to a sales tax of 6%, would be recorded as an account receivable of $750. True False

52. When merchandise is sold for $600 plus 6% sales tax, the Sales account should be credited for $636. True False

53. The abbreviation FOB stands for Free On Board. True False

54. Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight 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 $65. True False

55. If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination. True False

56. When the terms of sale are FOB shipping point, the buyer should pay the freight charges. True False

57. If merchandise costing $3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of $125, is paid within 10 days, the amount of the purchases discount is $70. True False

58. The chart of accounts for a merchandise business would include an account called Delivery Expense. True False

59. There is no difference between the recording of cash sales and the recording of MasterCard or VISA sales. True False

60. When companies use a perpetual inventory system, the recording of the purchase of inventory will include a debit to purchases. True False

61. Most companies will not take a purchases discount, because 1% or 2% discounts are insignificant. True False

62. The seller may prepay the freight costs even though the terms are FOB shipping point. True False

63. The seller records the sales tax as part of the sales amount. True False

64. The buyer will include the sales tax as part of the cost of items purchased for use. True False

65. A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take a physical inventory. True False

66. Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer's place of business. True False

67. Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped FOB shipping point. True False

68. Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the buyer. True False

69. If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in the general ledger. True False

70. The adjusting entry to record inventory shrinkage would generally include a debit to Cost of Merchandise Sold. True False

71. Closing entries for a merchandising business are not similar to those for a service business. True False

72. The ratio of net sales to assets measures how effectively a business is using its assets to generate sales. True False

73. Because many companies use computerized accounting systems, periodic inventory is widely used. True False

74. Computerized systems can be used to capture accounting information such as accounts receivable, inventory items, accounts payable, and sales. True False

75. The accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and Freight In are found on the balance sheet. True False

76. Match each of the following terms with the appropriate definition below. 1. Account used to record merchandise purchased under a periodic inventory system. 2. Account used to record shipping cost of merchandise by the buyer under a periodic inventory system. 3. Expense account for recording shipping costs paid by the seller. 4. Account where returned merchandise or price adjustments are recorded by the seller. 5. Early payment discount offered to customers by the seller. 6. Discounts off the list price offered by wholesalers. 7. Account used to record merchandise purchased under a perpetual inventory system. 8. Account where returned merchandise or price adjustments are recorded by the buyer under the periodic inventory system.

Purchases ____ Merchandise Inventory ____ Sales Discounts ____ Delivery Expense ____ Trade Discount ____ Purchase Returns and Allowances ____ Freight In ____ Sales Returns and Allowances ____

77. Match each of the following terms with the correct definition below. 1. Shipping terms where the ownership of merchandise passes to the buyer when the buyer receives the merchandise. 2. Shipping terms where the ownership of merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier. 3. Statement where net income is determined by deducting all expenses from all revenues. 4. Statement that includes subtotals for net sales, gross profit and net operating income in determining net income. 5. Inventory system that updates the Merchandise Inventory account only at the end of the accounting period based on a physical count of merchandise on hand. 6. Inventory system that updates the Merchandise Inventory account for every purchase and sale transaction. 7. Payment arrangements determined by the seller as to when invoices are due and whether early payment discount is offered. 8. Losses of inventory due to theft, damage, spoilage, etc. that cause the actual inventory on hand to be less than that on record.

FOB Destination ____ Inventory Shrinkage ____ Single-Step Income Statement ____ Credit terms ____

Perpetual Inventory system ____ Periodic Inventory system ____ Multiple- Step Income Statement ____ FOB Shipping Point ____

78. Which one of the following is not a difference between a retail business and a service business? A. in what is sold B. the inclusion of gross profit in the income statement C. accounting equation D. merchandise inventory included in the balance sheet

79. Net income plus operating expenses is equal to A. cost of merchandise sold B. cost of merchandise available for sale C. net sales D. gross profit

80. Generally, the revenue account for a merchandising business is entitled A. Sales B. Fees Earned C. Gross Sales D. Gross Profit

81. What is the term applied to the excess of net revenue from sales over the cost of merchandise sold? A. gross profit B. income from operations C. net income D. gross sales

82. The term "inventory" can indicate A. merchandise held for sale in the normal course of business B. equipment used to manufacture products C. supplies D. any asset

83. A company using the periodic inventory system has the following account balances: Merchandise Inventory at the beginning of the year, $3,600; Freight-In, $650; Purchases, $10,700; Purchases Returns and Allowances, $1,950; Purchases Discounts, $330. The cost of merchandise purchased is equal to A. $12,670 B. $9,070 C. $8,420 D. $17,230

84. A company, using the periodic inventory system, has merchandise inventory costing $175 on hand at the beginning of the period. During the period, merchandise costing $635 is purchased. At year-end, merchandise inventory costing $160 is on hand. The cost of merchandise sold for the year is A. $970 B. $650 C. $300 D. $620

85. Expenses that are incurred directly or entirely in connection with the sale of merchandise are classified as A. selling expenses B. general expenses C. other expenses D. administrative expenses

86. Office salaries, depreciation of office equipment, and office supplies are examples of what type of expense? A. selling expense B. miscellaneous expense C. administrative expense D. other expense

87. The form of income statement that derives its name from the fact that the total of all expenses is deducted from the total of all revenues is called a A. multiple-step statement B. revenue statement C. report-form statement D. single-step statement

88. Multiple-step income statements show A. gross profit but not income from operations B. neither gross profit nor income from operations C. both gross profit and income from operations D. income from operations but not gross profit

89. When the three sections of a balance sheet are presented on a page in a downward sequence, it is called the A. account form B. comparative form C. horizontal form D. report form

90. The statement of owner's equity shows A. only net income, beginning and ending capital B. only total assets, beginning and ending capital C. only net income, beginning capital, and withdrawals D. all the changes in the owner's capital as a result of net income, net loss, additional investments, and withdrawals

91. Merchandise inventory is classified on the balance sheet as a A. Current Liability B. Current Asset C. Long-Term Asset D. Long-Term Liability

92. Which account is not classified as a selling expense? A. Sales Salaries B. Freight-Out C. Freight-In D. Advertising Expense

93. 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

94. The inventory system employing accounting records that continuously disclose the amount of inventory is called A. retail B. periodic C. physical D. perpetual

95. 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

96. When comparing a retail business to a service business, the financial statement that changes the most is the A. Balance Sheet B. Income Statement C. Statement of Owner's Equity D. Statement of Cash Flow

97. When comparing a retail business to a service business, the financial statement that changes the least is the A. Balance Sheet B. Income Statement C. Statement of Owner's Equity D. Statement of Cash Flow

98. Gross profit is equal to: A. sales plus (sales discounts and sales returns and allowances) plus cost of merchandise sold B. sales plus sales returns and allowances less sales discounts less cost of merchandise sold C. sales plus sales discounts less sales returns and allowances less cost of merchandise sold D. sales less (sales discounts and sales returns and allowances) less cost of merchandise sold

99. Using the following information, what is the amount of cost of merchandise sold?

Purchases Merchandise inventory September 1

$32,000 5,700

Sales returns and allowances Purchases returns and allowances

910 1,200

Purchases discounts Merchandise inventory September 30 Sales Freight In

$960 6,370 63,000 1,040

A. $26,900 B. $20,530 C. $30,210 D. $28,130 100. Using the following information, what is the amount of gross profit? Purchases Merchandise inventory September 1 Sales returns and allowances Purchases returns and allowances

$32,000 5,700

$960 6,370

910

Purchases discounts Merchandise inventory September 30 Sales

1,200

Freight In

1,040

63,000

A. $34,870 B. $31,880 C. $27,460 D. $62,090 101. Using the following information, what is the amount of net sales?

Purchases Merchandise inventory September 1 Sales returns and allowances Purchases returns and allowances

A. $28,970 B. $63,130 C. $63,000 D. $62,090

$32,000 5,700

$960 6,370

910

Purchases discounts Merchandise inventory September 30 Sales

1,200

Freight In

1,040

63,000

102. Using the following information, what is the amount of merchandise available for sale?

Purchases Merchandise inventory September 1 Sales returns and allowances Purchases returns and allowances

$32,000 5,700

$960 6,370

910

Purchases discounts Merchandise inventory September 30 Sales

1,200

Freight In

1,040

63,000

A. $35,540 B. $36,580 C. $37,700 D. $34,500 103. Where are selling and administrative expenses found on the multiple-step income statement? A. before gross profit B. after sales and before gross profit C. after net income before expenses D. after gross profit

104. Dorman Co. sold merchandise to Smith Co. on account, $23,500, terms 2/15, net 45. The cost of the merchandise sold is $16,000. Dorman Co. issued a credit memo for $1,750 for merchandise returned that originally cost $1,400. The Smith Co. paid the invoice within the discount period. What is amount of net sales from the above transactions? A. $23,030 B....