Solution to extra practice questions 3 PDF

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Practice Question for mid semester 2021....

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Week 3

1. Merchandising businesses that sell to retailers are known as: *a. wholesalers. b. brokers. c. companies. d. service firms.

2. A merchandiser that sells directly to the consumers is a:

*a. retailer. b. broker. c. wholesaler. d. service enterprise.

3. Two categories of expenses in all merchandising companies are: *a. cost of sales and operating expenses. b. cost of sales and financing expenses. c. operating expenses and sales. d. sales and cost of sales.

4. The operating cycle of a merchandising company is:

*a. ordinarily longer than that of a service company. b. always one year in length. c. about the same as that of a service company. d. ordinarily shorter than that of a service company.

5. Gross profit is found on the statement of profit or loss of both merchandisers and service

businesses, but only merchandisers have ‘Cost of Sales’. True or False? False Feedback: net sales less cost of sales = gross profit. Because only merchandisers have ‘Cost of Sales’, gross profit is found on the statement of profit or loss of merchandisers.

6. The primary difference between a periodic and perpetual inventory system is that a periodic system:

*a. determines the inventory on hand only at the end of the accounting period. b. keeps a record showing the inventory on hand at all times. c. provides better control over inventories. d. records the cost of the sale on the date the sale is made.

7. Under a perpetual inventory system, acquisition of merchandise for resale is debited to:

*a. the Inventory account. b. the Cost of sales account. c. the Purchases account. d. the Supplies account. 8. Billy’s Boots purchased inventory with an invoice price of $5,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Billy’s Boots pays within the discount period? *a. $4,900. b. $5,000. c. $5,100. d. $4,800.

Feedback: Credit terms of 2/10, n/30 means that a 2% cash discount may be deducted from the

invoice price if payment is made within 10 days of the invoice date; otherwise the invoice price is due 30 days from the invoice date ($5,000 x .98 = $4,900). 9. Freight costs incurred by a seller on merchandise sold to customers will cause an increase:

*a. in operating expenses for the seller. b. in the selling expenses of the buyer. c. to the cost of sales of the seller. d. to a discount received account of the seller.

Feedback: Freight costs incurred by the seller on outgoing inventory are an operating expense to the seller.

10. Sales revenues are usually considered earned when:

*a. goods are transferred from the seller to the buyer. b. cash is received from credit sales. c. an order is received. d. goods are invoiced to the customer.

11. The Sales returns and allowances account is classified as an: *a. contra revenue account. b. asset account. c. contra asset account. d. expense account.

12. Which of the following accounting concepts and principles best explain why the journal entry format for purchase allowance is the same as that for purchase returns? a. the monetary principle. b. the accounting entity concept.

c. the going concern principle. d. the accounting period concept. e. the full disclosure principle. Feedback: the monetary principle suggests that accountants record the monetary effect of a transaction. In terms of the effect on the quantity of inventory on hand, purchases returns and purchases allowances are two different transactions because purchases returns reduce the quantity of inventory on hand but purchases allowance does not change the quantity of inventory on hand. In terms of monetary or financial effect, however, purchases returns and purchases allowances both reduce the cost of inventory on hand. The transaction of purchase allowance reduces the cost inventory on hand because the purchaser is granted an allowance, that is, a reduction in the price.

13.

Financial information is presented below: Operating expenses Sales returns and allowances

$ 45,000 13,000

Sales discount

6,000

Sales revenue

150,000

Costs of sales

77,000

The amount of net sales on the income statement would be:

*a. $137,000. b. $131,000. c. $144,000. d. $150,000.

Feedback: Sales returns and allowance, a contra revenue account, is deducted from sales in the income statement to arrive at net sales ($150,000 - $13,000 = $137,000). 14. Financial information is presented below:

Operating expenses Sales returns and allowances

$ 45,000 13,000

Sales discount

6,000

Sales revenue

150,000

Costs of sales

77,000

The amount of gross profit on the income statement would be: *a. $60,000. b. $54,000. c. $76,000. d. $73,000. Feedback: Cost of sales is deducted from net sales to determine gross profit ($150,000 – $13,000 – $77,000 = $60,000).

15. Which of the following does not affect the gross profit?

*a. An increase in rental of storage space. b. Selling products with a lower mark up. c. Being forced to pay higher prices for inventory. d. Increased competition resulting in having to lower selling prices.

16. Metal Music Ltd is a retail store specialising in musical instruments and consumables for rock and metal musicians. The following transactions were completed in February:

Feb.

6

Purchased electric guitars from Guitars R Us Ltd $840, terms 3/7, n/30.

7

Paid freight on Guitars R Us Ltd purchase $40.

8

Sold inventory to customers $900, terms n/30. The inventory cost $600.

10

Received credit of $84 from Guitars R Us Ltd for a guitar that was returned.

11

Purchased guitar strings from Strings N Things for cash $300.

13

Paid Guitars R Us Ltd in full.

What is the correct entry for the transaction that occurred on Feb 13? Round to the nearest dollar. *a. Dr Accounts payable 756, Cr Discount received 23, Cr Cash 733 b. Dr Accounts payable 840, Cr Discount received 25, Cr Cash 815 c. Dr Accounts payable 796, Cr Discount received 24, Cr Cash 772 d. Dr Accounts payable 880, Cr Discount received 26, Cr Cash 854 e. Dr Accounts payable 716, Cr Discount received 21, Cr Cash 695 Feedback: Accounts payable ($840 – $84) 756 Discount received ($756 x 3%) (or inventory) Cash

23 733

Discount should be based on gross amount 840 less any returns/allowance 84.

17. A merchandiser using a perpetual inventory system has a general ledger account ‘Inventory’. True or False? Answer: True 18. A merchandiser using a periodic inventory system has a general ledger account ‘Inventory’. True or False? Answer: True Feedback on Q17 and 18: There is a general ledger account ‘Inventory ’under both a perpetual system and a periodic system. However, the balance of general ledger account ‘Inventory’ is continuously updated under a perpetual inventory system while the balance of general ledger account ‘Inventory’ under a periodic system shows its opening balance (meaning opening inventory) only and won’t be updated until a merchandiser performs and posts closing entries based on a physical stocktake. 19. On 10 Feb, Hammer Hardware sold goods to James Brown Ltd at a price of $2,750 and James

Brown Ltd paid Hammer Hardware in full. On 12 Feb, James Brown Ltd returned some goods costing $750 to Hammer Hardware. What is the correct accounting entry to record the Feb 12 transaction in James Brown Ltd’s books under a perpetual inventory system?

*a. Debit Cash $750; credit Inventory $750. b. Debit Accounts Payable $750; credit Inventory $750. c. Debit Cash $750; credit Purchase returns and allowance $750. d. Debit Accounts Receivable $750; credit Inventory $750. Feedback: When James Brown Ltd returned some goods, it must have asked for a refund in the form of cash rather than credit because the Feb 10 purchase was a cash purchase (Dr Inventory 2750 Cr Cash 2750). To journalise the purchase return, the best journal entry is thus a).

20. In a fully classified statement of profit or loss by a merchandiser, freight-in *a. incorporated in cost of sales b. incorporated in operating expenses c. incorporated in selling expenses d. incorporated in administration expenses e. incorporated in financial expenses...