CHAPTER 5

ACCOUNTING FOR MERCHANDISING OPERATIONS

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

sg This question also appears in the Study Guide.

st This question also appears in a self-test at the student companion website.

a This question covers a topic in an appendix to the chapter.

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

SUMMARY OF Learning OBJECTIVES BY QUESTION TYPE

Note: TF = True-False BE = Brief Exercise C = Completion

MC = Multiple Choice Ex = Exercise SA = Short-Answer

MA = Matching

CHAPTER LEARNING OBJECTIVES

1. Identify the differences between service and merchandising companies. Because of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual and a periodic inventory system.

2. Explain the recording of purchases under a perpetual inventory system. The company debits the Inventory account for all purchases of merchandise, and freight-in, and credits it for purchase discounts and purchase returns and allowances.

3. Explain the recording of sales revenues under a perpetual inventory system. When a merchandising company sells inventory, it debits Accounts Receivable (or Cash) and credits Sales Revenue for the selling price of the merchandise. At the same time, it debits Cost of Goods Sold and credits Inventory for the cost of the inventory items sold. Sales returns and allowances and sales discounts are debited and are contra revenue accounts.

4. Explain the steps in the accounting cycle for a merchandising company. Each of the required steps in the accounting cycle for a service company applies to a merchandising company. A worksheet is again an optional step. Under a perpetual inventory system, the company must adjust the Inventory account to agree with the physical count.

5. Distinguish between a multiple-step and a single-step income statement. A multiple-step income statement shows numerous steps in determining net income, including nonoperating activities sections. A single-step income statement classifies all data under two categories, revenues or expenses, and determines net income in one step.

a6. Prepare a worksheet for a merchandising company. The steps in preparing a worksheet for a merchandising company are the same as for a service company. The unique accounts for a merchandiser are Inventory, Sales Revenue, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold.

a7. Explain the recording of purchases and sales of inventory under a periodic inventory system. In recording purchases under a periodic system, companies must make entries for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. In recording sales, companies must make entries for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.

TRUE-FALSE STATEMENTS

1. Retailers and wholesalers are both considered merchandisers.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

2. The steps in the accounting cycle are different for a merchandising company than for a service company.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

3. Sales minus operating expenses equals gross profit.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

4. Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

5. A periodic inventory system requires a detailed inventory record of inventory items.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

6. Freight terms of FOB Destination means that the seller pays the freight costs.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

7. Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

8. Sales revenues are earned during the period cash is collected from the buyer.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10. The revenue recognition principle applies to merchandisers by recognizing sales revenues when the performance obligation is satisfied.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

11. Sales Returns and Allowances and Sales Discounts are both designed to encourage customers to pay their accounts promptly.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

12. To grant a customer a sales return, the seller credits Sales Returns and Allowances.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

13. A company’s unadjusted balance in Inventory will usually not agree with the actual amount of inventory on hand at year-end.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

14. For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15. A merchandising company has different types of adjusting entries than a service company.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

16. Nonoperating activities exclude revenues and expenses that result from secondary or auxiliary operations.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

17. Operating expenses are different for merchandising and service enterprises.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

18. Net sales appears on both the multiple-step and single-step forms of an income statement.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

19. A multiple-step income statement provides users with more information about a company’s income performance.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

20. The multiple-step form of income statement is easier to read than the single-step form.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

21. Inventory is classified as a current asset in a classified balance sheet.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22. Gain on sale of equipment and interest expense are reported under other revenues and gains in a multiple-step income statement.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

23. The gross profit section for a merchandising company appears on both the multiple-step and single-step forms of an income statement.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

24. In a multiple-step income statement, income from operations excludes other revenues and gains and other expenses and losses.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

25. A single-step income statement reports all revenues, both operating and other revenues and gains, at the top of the statement.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

26. If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.

Ans: T, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

27. Gross profit represents the merchandising profit of a company.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

28. Gross profit is a measure of the overall profitability of a company.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29. Gross profit rate is computed by dividing cost of goods sold by net sales.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

a30. In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a31. Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a32. Under a periodic inventory system, the acquisition of inventory is charged to the Purchases account.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a33. Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a34. Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases to produce net purchases.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

35. Inventory is reported as a long-term asset on the balance sheet.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

36. Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

37. The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

38. Sales revenue should be recorded in accordance with the matching principle.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

39. Sales returns and allowances and sales discounts are subtracted from sales in reporting net sales in the income statement.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

40. A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

41. If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

42. The major difference between the balance sheets of a service company and a merchandising company is inventory.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

43. Net income is gross profit less

a. financing expenses.

b. operating expenses.

c. other expenses and losses.

d. other expenses.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

44. An enterprise which sells goods to customers is known as a

a. proprietorship.

b. corporation.

c. retailer.

d. service firm.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

45. Which of the following would not be considered a merchandising company?

a. Retailer

b. Wholesaler

c. Service firm

d. Dot Com firm

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

46. A merchandising company that sells directly to consumers is a

a. retailer.

b. wholesaler.

c. broker.

d. service company.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

47. Two categories of expenses for merchandising companies are

a. cost of goods sold and financing expenses.

b. operating expenses and financing expenses.

c. cost of goods sold and operating expenses.

d. sales and cost of goods sold.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

48. The primary source of revenue for a wholesaler is

a. investment income.

b. service fees.

c. the sale of merchandise.

d. the sale of fixed assets the company owns.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

49. Sales revenue less cost of goods sold is called

a. gross profit.

b. net profit.

c. net income.

d. marginal income.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

50. After gross profit is calculated, operating expenses are deducted to determine

a. gross margin.

b. net income.

c. gross profit on sales.

d. net margin.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

51. Cost of goods sold is determined only at the end of the accounting period in

a. a perpetual inventory system.

b. a periodic inventory system.

c. both a perpetual and a periodic inventory system.

d. neither a perpetual nor a periodic inventory system.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

52. Which of the following expressions is incorrect?

a. Gross profit – operating expenses = net income

b. Sales revenue – cost of goods sold – operating expenses = net income

c. Net income + operating expenses = gross profit

d. Operating expenses – cost of goods sold = gross profit

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

53. Detailed records of goods held for resale are not maintained under a

a. perpetual inventory system.

b. periodic inventory system.

c. double entry accounting system.

d. single entry accounting system.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

54. A perpetual inventory system would likely be used by a(n)

a. automobile dealership.

b. hardware store.

c. drugstore.

d. convenience store.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

55. Which of the following is a true statement about inventory systems?

a. Periodic inventory systems require more detailed inventory records.

b. Perpetual inventory systems require more detailed inventory records.

c. A periodic system requires cost of goods sold be determined after each sale.

d. A perpetual system determines cost of goods sold only at the end of the accounting period.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

56. In a perpetual inventory system, cost of goods sold is recorded

a. on a daily basis.

b. on a monthly basis.

c. on an annual basis.

d. with each sale.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

57. If a company determines cost of goods sold each time a sale occurs, it

a. must have a computer accounting system.

b. uses a combination of the perpetual and periodic inventory systems.

c. uses a periodic inventory system.

d. uses a perpetual inventory system.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

58. Under a perpetual inventory system, acquisition of merchandise for resale is debited to the

a. Inventory account.

b. Purchases account.

c. Supplies account.

d. Cost of Goods Sold account.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

59. The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit

a. Accounts Payable.

b. Purchase Returns and Allowances.

c. Sales Revenue.

d. Inventory.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

60. The Inventory account is used in each of the following except the entry to record

a. goods purchased on account.

b. the return of goods purchased.

c. payment of freight on goods sold.

d. payment within the discount period.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

61. A buyer would record a payment within the discount period under a perpetual inventory system by crediting

a. Accounts Payable.

b. Inventory.

c. Purchase Discounts.

d. Sales Discounts.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

62. If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the

a. Inventory account will be increased.

b. Inventory account will not be affected.

c. seller will bear the freight cost.

d. carrier will bear the freight cost.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

63. Freight costs paid by a seller on merchandise sold to customers will cause an increase

a. in the selling expense of the buyer.

b. in operating expenses for the seller.

c. to the cost of goods sold of the seller.

d. to a contra-revenue account of the seller.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

64. Paden Company purchased merchandise from Emmett Company with freight terms of FOB shipping point. The freight costs will be paid by the

a. seller.

b. buyer.

c. transportation company.

d. buyer and the seller.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

65. Glenn Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Glenn Company pays within the discount period?

a. $8,100

b. $8,280

c. $8,820

d. $9,000

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $9,000 ( (1 – .02) ( $8,820

66. Scott Company purchased merchandise with an invoice price of $3,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

a. 20%

b. 24%

c. 18%

d. 36%

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: [360 ( (30 ( 10)] ( 1% ( 18%

67. If a company is given credit terms of 2/10, n/30, it should

a. hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.

b. pay within the discount period and recognize a savings.

c. pay within the credit period but don’t take the trouble to invest the cash while waiting to pay the bill.

d. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.

Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

68. In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited to

a. Inventory.

b. Purchase Discounts.

c. Purchase Allowance.

d. Sales Discounts.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

69. Jake’s Market recorded the following events involving a recent purchase of merchandise:

Received goods for $60,000, terms 2/10, n/30.

Returned $1,200 of the shipment for credit.

Paid $300 freight on the shipment.

Paid the invoice within the discount period.

As a result of these events, the company’s inventory increased by

a. $57,624.

b. $57,918.

c. $57,924.

d. $59,100.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: [($60,000 ( $1,200( .98)] ( 300 ( $57,924

70. Costner’s Market recorded the following events involving a recent purchase of merchandise:

Received goods for $40,000, terms 2/10, n/30.

Returned $800 of the shipment for credit.

Paid $200 freight on the shipment.

Paid the invoice within the discount period.

As a result of these events, the company’s inventory

a. increased by $38,416.

b. increased by $38,612.

c. increased by $38,616.

d. increased by $39,400.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: [($40,000 ( $800) ( .98] ( $200 ( $38,616

71. Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in

a. Freight Expense.

b. Freight – In.

c. Inventory.

d Freight – Out.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

72. Glover Co. returned defective goods costing $5,000 to Mal Company on April 19, for credit. The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by Glover Co. on April 19, in receiving full credit is:

a. Accounts Payable 5,000

Inventory 5,000

b. Accounts Payable 5,000

Inventory 150

Cash 5,150

c. Accounts Payable 5,000

Purchase Discounts 120

Inventory 4,850

d. Accounts Payable 5,000

Inventory 120

Cash 4,850

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

73. McIntyre Company made a purchase of merchandise on credit from Marvin Company on August 8, for $9,000, terms 3/10, n/30. On August 17, McIntyre makes the appropriate payment to Marvin. The entry on August 17 for McIntyre Company is:

a. Accounts Payable 9,000

Cash 9,000

b. Accounts Payable 8,730

Cash 8,730

c. Accounts Payable 9,000

Purchase Returns and Allowances 270

MC. 73 (Cont.)

Cash 8,730

d. Accounts Payable 9,000

Inventory 270

Cash 8,730

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $9,000 ( .97 ( $8,730

74. On July 9, Sheb Company sells goods on credit to Wooley Company for $5,000, terms 1/10, n/60. Sheb receives payment on July 18. The entry by Sheb on July 18 is:

a. Cash 5,000

Accounts Receivable 5,000

b. Cash 5,000

Sales Discounts 50

Accounts Receivable 4,950

c. Cash 4,950

Sales Discounts 50

Accounts Receivable 5,000

d. Cash 5,050

Sales Discounts 50

Accounts Receivable 5,000

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $5,000 ( .99 ( $4,950

75. On November 2, 2014, Kasdan Company has cash sales of $6,000 from merchandise having a cost of $3,600. The entries to record the day’s cash sales will include:

a. a $3,600 credit to Cost of Goods Sold.

b. a $6,000 credit to Cash.

c. a $3,600 credit to Inventory.

d a $6,000 debit to Accounts Receivable.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

76. A credit sale of $4,000 is made on April 25, terms 2/10, n/30, on which a return of $250 is granted on April 28. What amount is received as payment in full on May 4?

a. $3,675

b. $3,750

c. $3,920

d $4,000

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: ($4,000 ( $250) ( .98 ( $3,675

77. The entry to record the receipt of payment within the discount period on a sale of $2,000 with terms of 2/10, n/30 will include a credit to

a. Sales Discounts for $40.

b. Cash for $1,960.

c. Accounts Receivable for $2,000.

d. Sales Revenue for $2,000.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

78. The collection of a $6,000 account within the 2 percent discount period will result in a

a. debit to Sales Discounts for $120.

b. debit to Accounts Receivable for $5,880.

c. credit to Cash for $5,880.

d. credit to Accounts Receivable for $5,880.

Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $6,000 ( .02 ( $120

79. Company X sells $900 of merchandise on account to Company Y with credit terms of 2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is the amount of Company Y’s check?

a. $630

b. $720

c. $810

d. $882

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $900 ( .98 ( $882

80. Cleese Company sells merchandise on account for $5,000 to Langston Company with credit terms of 2/10, n/30. Langston Company returns $1,000 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?

a. $3,920

b. $4,000

c. $4,900

d. $4,920

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: ($5,000 ( $1,000) ( .98 ( $3,920

81. The collection of a $1,500 account after the 2 percent discount period will result in a

a. debit to Cash for $1,470.

b. debit to Accounts Receivable for $1,500.

c. debit to Cash for $1,500.

d. debit to Sales Discounts for $30.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

82. The collection of a $1,000 account after the 2 percent discount period will result in a

a. debit to Cash for $980.

b. credit to Accounts Receivable for $1,000.

c. credit to Cash for $1,000.

d. debit to Sales Discounts for $20.

Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

83. In a perpetual inventory system, the Cost of Goods Sold account is used

a. only when a cash sale of merchandise occurs.

b. only when a credit sale of merchandise occurs.

c. only when a sale of merchandise occurs.

d. whenever there is a sale of merchandise or a return of merchandise sold.

Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

84. Sales revenues are usually considered earned when

a. cash is received from credit sales.

b. an order is received.

c. goods have been transferred from the seller to the buyer.

d. adjusting entries are made.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

85. A sales invoice is a source document that

a. provides support for goods purchased for resale.

b. provides evidence of incurred operating expenses.

c. provides evidence of credit sales.

d. serves only as a customer receipt.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

86. Sales revenue

a. may be recorded before cash is collected.

b. will always equal cash collections in a month.

c. only results from credit sales.

d. is only recorded after cash is collected.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

87. The journal entry to record a credit sale is

a. Cash

Sales Revenue

b. Cash

Service Revenue

c. Accounts Receivable

Service Revenue

d. Accounts Receivable

Sales Revenue

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

88. Sales Returns and Allowances is increased when

a. an employee does a good job.

b. goods are sold on credit.

c. goods that were sold on credit are returned.

d. customers refuse to pay their accounts.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

89. The Sales Returns and Allowances account is classified as a(n)

a. asset account.

b. contra asset account.

c. expense account.

d. contra revenue account.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

90. A credit granted to a customer for returned goods requires a debit to

a. Sales Revenue and a credit to Cash.

b. Sales Returns and Allowances and a credit to Accounts Receivable.

c. Accounts Receivable and a credit to a contra-revenue account.

d. Cash and a credit to Sales Returns and Allowances.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

91. If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales

a. discount.

b. return.

c. contra asset.

d. allowance.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

92. A credit sale of $3,600 is made on July 15, terms 2/10, n/30, on which a return of $200 is granted on July 18. What amount is received as payment in full on July 24?

a. $3,332

b. $3,440

c. $3,528

d $3,600

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: ($3,600 ( $200) ( .98 ( $3,332

93. When goods are returned that relate to a prior cash sale,

a. the Sales Returns and Allowances account should not be used.

b. the cash account will be credited.

c. Sales Returns and Allowances will be credited.

d. Accounts Receivable will be credited.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

94. The Sales Returns and Allowances account does not provide information to management about

a. possible inferior merchandise.

b. the percentage of credit sales versus cash sales.

c. inefficiencies in filling orders.

d. errors in overbilling customers.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

95. A Sales Returns and Allowances account is not debited if a customer

a. returns defective merchandise.

b. receives a credit for merchandise of inferior quality.

c. utilizes a prompt payment incentive.

d. returns goods that are not in accordance with specifications.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

96. As an incentive for customers to pay their accounts promptly, a business may offer its customers

a. a sales discount.

b. free delivery.

c. a sales allowance.

d. a sales return.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

97. The credit terms offered to a customer by a business firm are 2/10, n/30, which means that

a. the customer must pay the bill within 10 days.

b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date.

c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.

d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

98. A sales discount does not

a. provide the purchaser with a cash saving.

b. reduce the amount of cash received from a credit sale.

c. increase a contra-revenue account.

d. increase an operating expense account.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

99. Company A sells $2,500 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is the amount of Company B’s check?

a. $1,750

b. $2,000

c. $2,250

d. $2,450

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: $2,500 ( .98 ( $2,450

100. Kern Company sells merchandise on account for $8,000 to Block Company with credit terms of 2/10, n/30. Block Company returns $1,600 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?

a. $6,272

b. $6,400

c. $7,840

d. $7,872

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: ($8,000 ( $1,600) ( .98 ( $6,272

101. Carter Company sells merchandise on account for $4,000 to Hannah Company with credit terms of 2/10, n/30. Hannah Company returns $600 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Carter Company make upon receipt of the check?

a. Cash 3,400

Accounts Receivable 3,400

b. Cash 3,332

Sales Returns and Allowances 668

Accounts Receivable 4,000

c. Cash 3,332

Sales Returns and Allowances 600

Sales Discounts 68

Accounts Receivable 4,000

d. Cash 3,920

Sales Discounts 80

Sales Returns and Allowances 600

Accounts Receivable 3,400

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

102. Which of the following would not be classified as a contra account?

a. Sales Revenue

b. Sales Returns and Allowances

c. Accumulated Depreciation

d. Sales Discounts

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

103. Which of the following accounts has a normal credit balance?

a. Sales Returns and Allowances

b. Sales Discounts

c. Sales Revenue

d. Selling Expense

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

104. With respect to the income statement,

a. contra-revenue accounts do not appear on the income statement.

b. sales discounts increase the amount of sales.

c. contra-revenue accounts increase the amount of operating expenses.

d. sales discounts are included in the calculation of gross profit.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

105. When a seller grants credit for returned goods, the account that is credited is

a. Sales Revenue.

b. Sales Returns and Allowances.

c. Inventory.

d. Accounts Receivable.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

106. The respective normal account balances of Sales Revenue, Sales Returns and Allowances, and Sales Discounts are

a. credit, credit, credit.

b. debit, credit, debit.

c. credit, debit, debit.

d. credit, debit, credit.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

107. All of the following are contra revenue accounts except

a. sales revenue.

b. sales allowances.

c. sales discounts.

d. sales returns.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

108. A merchandising company using a perpetual system will make

a. the same number of adjusting entries as a service company does.

b. one more adjusting entry than a service company does.

c. one less adjusting entry than a service company does.

d. different types of adjusting entries compared to a service company.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

109. In preparing closing entries for a merchandising company, the Income Summary account will be credited for the balance of

a. sales revenue.

b. inventory.

c. sales discounts.

d. freight-out.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

110. A merchandising company using a perpetual system may record an adjusting entry by

a. debiting Income Summary.

b. crediting Income Summary.

c. debiting Cost of Goods Sold.

d. debiting Sales Revenue.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

111. The operating cycle of a merchandiser is

a. always one year in length.

b. generally longer than it is for a service company.

c. about the same as for a service company.

d. generally shorter than it is for a service company.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

112. When the physical count of Rosanna Company inventory had a cost of $4,350 at year end and the unadjusted balance in Inventory was $4,500, Rosanna will have to make the following entry:

a. Cost of Goods Sold 150

Inventory 150

b. Inventory 150

Cost of Goods Sold 150

c. Income Summary 150

Inventory 150

d. Cost of Goods Sold 4,500

Inventory 4,500

Ans: A, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $4,500 ( $4,350 ( $150

113. Arquette Company’s financial information is presented below.

Sales Revenue $ ???? Cost of Goods Sold 540,000

Sales Returns and Allowances 40,000 Gross Profit ????

Net Sales 900,000

The missing amounts above are:

Sales Revenue Gross Profit

a. $940,000 $360,000

b. $860,000 $360,000

c. $940,000 $420,000

d. $860,000 $420,000

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: $900,000 ( $40,000 ( $940,000; $900,000 ( $540,000 ( $360,000

114. The sales revenue section of an income statement for a retailer would not include

a. Sales discounts.

b. Sales revenue.

c. Net sales.

d. Cost of goods sold.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

115. The operating expense section of an income statement for a wholesaler would not include

a. freight-out.

b. utilities expense.

c. cost of goods sold.

d. insurance expense.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

116. Income from operations will always result if

a. the cost of goods sold exceeds operating expenses.

b. revenues exceed cost of goods sold.

c. revenues exceed operating expenses.

d. gross profit exceeds operating expenses.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

117. Indicate which one of the following would appear on the income statement of both a merchandising company and a service company.

a. Gross profit

b. Operating expenses

c. Sales revenues

d. Cost of goods sold

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

118. Conrad Company reported the following balances at June 30, 2014:

Sales Revenue $16,200

Sales Returns and Allowances 600

Sales Discounts 300

Cost of Goods Sold 7,500

Net sales for the month is

a. $7,800

b. $15,300.

c. $15,600.

d. $16,200.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $16,200 ( $600 ( $300 ( $15,300

119. Income from operations appears on

a. both a multiple-step and a single-step income statement.

b. neither a multiple-step nor a single-step income statement.

c. a single-step income statement.

d. a multiple-step income statement.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

120. Gross profit does not appear

a. on a multiple-step income statement.

b. on a single-step income statement.

c. to be relevant in analyzing the operation of a merchandiser.

d. on the income statement if the periodic inventory system is used because it cannot be calculated.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

121. Which of the following is not a true statement about a multiple-step income statement?

a. Operating expenses are similar for merchandising and service enterprises.

b. There may be a section for nonoperating activities.

c. There may be a section for operating assets.

d. There is a section for cost of goods sold.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

122. Which one of the following is shown on a multiple-step but not on a single-step income statement?

a. Net sales

b. Net income

c. Gross profit

d. Cost of goods sold

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

123. All of the following items would be reported as other expenses and losses except

a. freight-out.

b. casualty losses.

c. interest expense.

d. loss from employees’ strikes.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

124. If a company has net sales of $700,000 and cost of goods sold of $455,000, the gross profit percentage is

a. 25%.

b. 35%.

c. 65%.

d. 100%.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($700,000 ( $455,000) ( $700,000 ( 35%

125. A company shows the following balances:

Sales Revenue $2,500,000

Sales Returns and Allowances 450,000

Sales Discounts 50,000

Cost of Goods Sold 1,400,000

What is the gross profit percentage?

a. 30%

b. 44%

c. 56%

d. 70%

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $2,500,000 ( $450,000 ( $50,000 ( $2,000,000; ($2,000,000 ( $1,400,000) ( $2,000,000 ( 30%

126. The gross profit rate is computed by dividing gross profit by

a. cost of goods sold.

b. net income.

c. net sales.

d. sales revenue.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

127. In terms of liquidity, inventory is

a. more liquid than cash.

b. more liquid than accounts receivable.

c. more liquid than prepaid expenses.

d. less liquid than store equipment.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

128. On a classified balance sheet, inventory is classified as

a. an intangible asset.

b. property, plant, and equipment.

c. a current asset.

d. a long-term investment.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

129. Gross profit for a merchandiser is net sales minus

a. operating expenses.

b. cost of goods sold.

c. sales discounts.

d. cost of goods available for sale.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

130. During 2014, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.

Parker’s gross profit is

a. $24,000.

b. $27,000.

c. $45,000.

d. $90,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

131. During 2014, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.

Yoder’s income from operations is

a. $18,000.

b. $27,000.

c. $45,000.

d. $90,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

132. During 2014, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.

Yoder’s net income is

a. $24,000.

b. $27,000.

c. $45,000.

d. $90,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

133. Financial information is presented below:

Operating Expenses $ 60,000

Sales Revenue 225,000

Cost of Goods Sold 135,000

Gross profit would be

a. $30,000.

b. $90,000.

MC. 133 (Cont.)

c. $165,000.

d. $225,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $225,000 ( $135,000 ( $90,000

134. Financial information is presented below:

Operating Expenses $ 60,000

Sales Revenue 225,000

Cost of Goods Sold 135,000

The gross profit rate would be

a. .133.

b. .400.

c. .600.

d. .733.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($225,000 ( $135,000) ( $225,000 ( .40

135. Financial information is presented below:

Operating Expenses $ 90,000

Sales Returns and Allowances 26,000

Sales Discounts 12,000

Sales 300,000

Cost of Goods Sold 158,000

Gross profit would be

a. $104,000.

b. $116,000.

c. $130,000.

d. $142,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $300,000 ( $26,000 ( $12,000 ( $262,000; $262,000 ( $158,000 ( $104,000

136. Financial information is presented below:

Operating Expenses $ 90,000

Sales Returns and Allowances 26,000

Sales Discounts 12,000

Sales Revenue 300,000

Cost of Goods Sold 158,000

The gross profit rate would be

a. .347.

b. .397.

c. .473.

d. .542.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $300,000 ( $26,000 ( $12,000 ( $262,000; ($262,000 ( $158,000) ( $262,000 ( .397

137. Financial information is presented below:

Operating Expenses $ 90,000

Sales Returns and Allowances 18,000

Sales Discounts 12,000

Sales Revenue 320,000

Cost of Goods Sold 174,000

The amount of net sales on the income statement would be

a. $290,000.

b. $302,000.

c. $308,000.

d. $320,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $320,000 ( $18,000 ( $12,000 ( $290,000

138. Financial information is presented below:

Operating Expenses $ 90,000

Sales Returns and Allowances 18,000

Sales Discounts 12,000

Sales Revenue 320,000

Cost of Goods Sold 174,000

Gross profit would be

a. $26,000.

b. $116,000.

c. $128,000.

d. $134,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $320,000 ( $18,000 ( $12,000 ( $290,000; $290,000 ( $174,000 ( $116,000

139. Financial information is presented below:

Operating Expenses $ 90,000

Sales Returns and Allowances 18,000

Sales Discounts 12,000

Sales Revenue 320,000

Cost of Goods Sold 174,000

The gross profit rate would be

a. .363.

b. .400.

c. .456.

d. .503.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $320,000 ( $18,000 ( $12,000 ( $290,000;($290,000 ( $174,000) ( $290,000 ( .40

140. If a company has sales revenue of $630,000, net sales of $600,000, and cost of goods sold of $390,000, the gross profit rate is

a. 35%.

b. 38%

c. 62%.

d. 65%.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($600,000 ( $390,000) ( $600,000 ( 35%

141. Dawson’s Fashions sold merchandise for $40,000 cash during the month of July. Returns that month totaled $1,000. If the company’s gross profit rate is 40%, Murray’s will report monthly net sales revenue and cost of goods sold of

a. $39,000 and $23,400.

b. $39,000 and $24,000.

c. $40,000 and $23,400.

d. $40,000 and $24,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

142. During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

Baxter’s gross profit for August, 2014 is

a. $20,000.

b. $21,000.

c. $23,000.

d. $24,000.

Ans: D, LO:5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $60,000 ( $36,000 ( $24,000

143. During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

Baxter’s nonoperating income (loss) for the month of August, 2014 is

a. $0.

b. $1,000.

c. $2,000.

d. $3,000.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $1,000 ( $2,000 ( $3,000

144. During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

Baxter’s operating income for the month of August, 2014 is

a. $20,000.

b. $21,000.

c. $23,000.

d. $24,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $60,000 ( $36,000 ( $4,000 ( $20,000

145. During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

Baxter’s net income for August, 2014 is

a. $20,000.

b. $21,000.

c. $23,000.

d. $24,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $60,000 ( $36,000 ( 4,000 ( $1,000 ( $2,000 ( $23,000

a146. In a worksheet for a merchandising company, Inventory would appear in the

a. trial balance and adjusted trial balance columns only.

b. trial balance and balance sheet columns only.

c. trial balance, adjusted trial balance, and balance sheet columns.

d. trial balance, adjusted trial balance, and income statement columns.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a147. The Inventory account balance appearing in a perpetual inventory worksheet represents the

a. ending inventory.

b. beginning inventory.

c. cost of merchandise purchased.

d. cost of merchandise sold.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a148. The following information is available for Dennehy Company:

Sales Revenue $390,000 Freight-In $30,000

Ending Inventory 37,500 Purchase Returns and Allowances 15,000

Purchases 270,000 Beginning Inventory 45,000

Dennehy’s cost of goods sold is

a. $262,500.

b. $285,000.

MC. 148 (Cont.)

c. $292,500.

d. $345,000.

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $45,000 + $270,000 ( $15,000 + $30,000 ( $37,500 ( $292,500

,

a149. At the beginning of September, 2014, Stella Company reported Inventory of $8,000. During the month, the company made purchases of $35,600. At September 30, 2014, a physical count of inventory reported $8,400 on hand. Cost of goods sold for the month is

a. $35,200.

b. $35,600.

c. $36,000.

d. $43,600.

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $8,000 + $35,600 ( $8,400 ( $35,200

,

a150. At the beginning of the year, Hunt Company had an inventory of $750,000. During the year, the company purchased goods costing $2,400,000. If Hunt Company reported ending inventory of $900,000 and sales of $3,750,000, the company’s cost of goods sold and gross profit rate must be

a. $1,500,000 and 66.7%.

b. $2,250,000 and 40%.

c. $1,500,000 and 40%.

d. $2,250,000 and 60%.

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $$750,000 +$2,400,000 ( $900,000 ( $2,250,000; ($3,750,000 ( $2,250,000) ( $3,750,000 ( 40%

a151. During the year, Slick’s Pet Shop’s inventory decreased by $25,000. If the company’s cost of goods sold for the year was $500,000, purchases must have been

a. $475,000.

b. $500,000.

c. $525,000.

d. Unable to determine.

Ans: A, LO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $500,000 ( $25,000 ( $475,000

a152. Cost of goods available for sale is computed by adding

a. beginning inventory to net purchases.

b. beginning inventory to the cost of goods purchased.

c. net purchases and freight-in.

d. purchases to beginning inventory.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

a 153. The Freight-In account

a. increases the cost of merchandise purchased.

b. is contra to the Purchases account.

c. is a permanent account.

d. has a normal credit balance.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a 154. Net purchases plus freight-in determines

a. cost of goods sold.

b. cost of goods available for sale.

c. cost of goods purchased.

d. total goods available for sale.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a155. Goldblum Company has the following account balances:

Purchases $96,000

Sales Returns and Allowances 12,800

Purchase Discounts 8,000

Freight-In 6,000

Delivery Expense 10,000

The cost of goods purchased for the period is

a. $80,800.

b. $88,000.

c. $94,000.

d. $104,000.

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution: $96,000 ( $8,000 + $6,000 ( $94,000

,

a156. McKendrick Shoe Store has a beginning inventory of $45,000. During the period, purchases were $195,000; purchase returns, $6,000; and freight-in $15,000. A physical count of inventory at the end of the period revealed that $30,000 was still on hand. The cost of goods available for sale was

a. $189,000.

b. $204,000.

c. $219,000.

d. $249,000.

Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution: $45,000 + $195,000 ( $6,000 + $15,000 ( $249,000

a157. In a periodic inventory system, a return of defective merchandise to a supplier is recorded by crediting

a. Accounts Payable.

b. Inventory.

c. Purchases.

d. Purchase Returns and Allowances.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a158. Which one of the following transactions is recorded with the same entry in a perpetual and a periodic inventory system?

a. Cash received on account with a discount

b. Payment of freight costs on a purchase

c. Return of merchandise sold

d. Sale of merchandise on credit

Ans: A, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a159. The journal entry to record a return of merchandise purchased on account under a periodic inventory system would be

a. Accounts Payable

Purchase Returns and Allowances

b. Purchase Returns and Allowances

Accounts Payable

c. Accounts Payable

Inventory

d. Inventory

Accounts Payable

Ans: A, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a160. Under a periodic inventory system, acquisition of merchandise is debited to the

a. Inventory account.

b. Cost of Goods Sold account.

c. Purchases account.

d. Accounts Payable account.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a161. Which of the following accounts has a normal credit balance?

a. Purchases

b. Sales Returns and Allowances

c. Freight-In

d. Purchase Discounts

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a162. The respective normal account balances of Purchases, Purchase Discounts, and Freight-in are

a. credit, credit, debit.

b. debit, credit, credit.

c. debit, credit, debit.

d. debit, debit, debit.

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a163. Cobb Company’s accounting records show the following at the year ending on December 31, 2014:

Purchase Discounts $ 11,200

Freight – In 15,600

Purchases 402,000

Beginning Inventory 47,000

Ending Inventory 57,600

Purchase Returns 12,800

Using the periodic system, the cost of goods purchased is

a. $378,000.

b. $383,000.

c. $393,600.

d. $404,200.

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $402,000 ( $11,200 ( $12,800 ( $15,600 ( $393,600

a164. Cobb Company’s accounting records show the following at the year ending on December 31, 2014:

Purchase Discounts $ 11,200

Freight – In 15,600

Purchases 402,000

Beginning Inventory 47,000

Ending Inventory 57,600

Purchase Returns 12,800

Using the periodic system, the cost of goods sold is

a. $378,000.

b. $383,000.

c. $393,600.

d. $404,200.

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $47,000 + $402,000 ( $11,200 ( $12,800 + $15,600 ( $57,600 ( $383,000

165. Ezra Company has sales revenue of $60,000, cost of goods sold of $36,000 and operating expenses of $14,000 for the year ended December 31. Ezra’s gross profit is

a. $0.

b. $10,000.

c. $24,000.

d. $46,000.

Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution: $60,000 ( $36,000 ( $24,000

166. Rae Company uses a perpetual inventory system made a purchase of merchandise on credit from Tyree Corporation on August 3, for $9,000, terms 2/10, n/45. On August 10, Rae makes the appropriate payment to Tyree. The entry on August 10 for Rae Company is

a. Accounts Payable 9,000

Cash 9,000

b. Accounts Payable 8,820

Cash 8,820

c. Accounts Payable 9,000

Purchase Returns and Allowances 180

Cash 8,820

d. Accounts Payable 9,000

Inventory 180

Cash 8,820

Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $9,000 ( .98 ( $8,820

167. Kate Company uses a perpetual inventory system purchased inventory from Phoebe Company. The shipping costs were $500 and the terms of the shipment were FOB shipping point. Kate would have the following entry regarding the shipping charges:

a. There is no entry on Kate’s books for this transaction.

b. Freight Expense 500

Cash 500

c. Freight-Out 500

Cash 500

d. Inventory 500

Cash 500

Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

168. In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting

a. Purchases.

b. Purchase Returns.

c. Purchase Allowance.

d. Inventory.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

169. On October 4, 2014, JT Corporation had credit sales transactions of $4,000 from merchandise having cost $2,400. The entries to record the day’s credit transactions include a

a. debit of $4,000 to Inventory.

b. credit of $4,000 to Sales Revenue.

c. debit of $2,400 to Inventory.

d. credit of $2,400 to Cost of Goods Sold.

Ans: B, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

170. Which of the following accounts is not closed to Income Summary?

a. Cost of Goods Sold

b. Inventory

c. Sales Revenue

d. Sales Discounts

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

171. In the Augie Company, sales were $750,000, sales returns and allowances were $30,000, and cost of goods sold was $450,000. The gross profit rate was

a. 36%.

b. 37.5%.

c. 40%.

d. 41.7%.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($750,000 ( $30,000) ( $450,000 ( $270,000; $270,000 ( $720,000 ( 37.5%

172. Net sales is sales revenue less

a. sales discounts.

b. sales returns.

c. sales returns and allowances.

d. sales discounts and sales returns and allowances.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

173. In the balance sheet, ending inventory is reported

a. in current assets immediately following accounts receivable.

b. in current assets immediately following prepaid expenses.

c. in current assets immediately following cash.

d. under property, plant, and equipment.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a174. Cost of goods available for sale is computed by adding

a. freight-in to net purchases.

b. beginning inventory to net purchases.

c. beginning inventory to purchases and freight-in.

d. beginning inventory to cost of goods purchased.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

175. The Income statement is

a. required under GAAP but not under IFRS.

b. required under IFRS in the same format as under GAAP.

c. required under IFRS but not under GAAP.

d. required under IFRS with some differences as compared to GAAP.

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

176. The basic accounting entries for merchandising are

a. the same under GAAP and under IFRS.

b. required under GAAP but not under IFRS.

c. required under IFRS but not under GAAP.

d. required under IFRS with some differences as compared to GAAP.

IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

177. Under GAAP, companies can choose which inventory system?

Perpetual Periodic

a. Yes No

b. Yes Yes

c. No Yes

d. Yes No

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

178. Under IFRS, companies can choose which inventory system?

Perpetual Periodic

a. Yes No

b. Yes Yes

c. No Yes

d. Yes No

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

179. Companies cannot use the

a. periodic inventory system under GAAP.

b. periodic inventory system under IFRS.

c. perpetual system under IFRS.

d. both periodic and perpetual can be used under GAAP and IFRS.

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

180. Inventories are defined by IFRS as

a. held-for-sale in the ordinary course of business.

b. in the process of production for sale in the ordinary course of business.

c. in the form of materials or supplies to be consumed in the production process or in the providing of services.

d. All of these answer choices are correct.

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

181. Under GAAP, companies generally classify income statement items by

a. function.

b. nature.

c. nature or function

d. date incurred.

IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

182. Under IFRS, companies must classify income statement items by

a. function.

b. nature.

c. nature or function

d. date incurred.

IFRS. Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

183. Under GAPP, income statement items are generally described as

a. administration, distribution, manufacturing, etc.

b. salaries, depreciation, utilities, etc.

c. administration, depreciation, manufacturing, etc.

d. salaries, distribution, utilities, etc.

IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

184. Under IFRS, income statement items are generally described as

a. administration, distribution, manufacturing, etc.

b. salaries, depreciation, utilities, etc.

c. administration, depreciation, manufacturing, etc.

d. salaries, distribution, utilities, etc.

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

185. For the income statement, IFRS requires

a. single-step approach.

b. multiple-step approach.

c. single-step approach or multiple-step approach.

d. no specific income statement approach.

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

186. Under IFRS, companies can apply revaluation to

a. land, buildings, and intangible assets.

b. land, buildings, but not intangible assets.

c. intangible assets, but not land or beer.

d. no assets.

IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

187. The use of IFRS results in more transactions affecting

a. net income but not other comprehensive income.

b. other comprehensive income, but not net income.

c. but net income and other comprehensive income.

d. neither net income nor other comprehensive income.

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

188. Comprehensive income under IFRS

a. includes unrealized gains and losses included in net income, in contrast to GAAP.

b. includes unrealized gains and losses included in net income, similar to GAAP.

c. excludes unrealized gains and losses included in net income, in contrast to GAAP.

d. excludes unrealized gains and losses included in net income, similar to GAAP.

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

189. The number of years of income statement information to be presented is

a. 2 years under both GAAP and IFRS.

b. 3 years under both GAAP and IFRS.

c. 2 years under GAAP and 3 years under IFRS.

d. 3 years under GAAP and 2 years under IFRS.

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Multiple Choice Questions

BRIEF Exercises

BE 190

Presented here are the components in Bradley Company’s income statement. Determine the missing amounts.

Sales Cost of Gross Operating Net

Revenue Goods Sold _Profit Expenses Income

$75,000 (a) $35,000 (b) $17,000

(c) $86,000 $59,000 $48,000 (d)

Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 190 (5 min.)

a. $40,000

b. $18,000

c. $145,000

d. $11,000

BE 191

Prepare the necessary journal entries on the books of Kelly Carpet Company to record the following transactions, assuming a perpetual inventory system (you may omit explanations):

(a) Kelly purchased $45,000 of merchandise on account, terms 2/10, n/30.

(b) Returned $3,000 of damaged merchandise for credit.

(c) Paid for the merchandise purchased within 10 days.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 191 (5 min.)

(a) Inventory 45,000

Accounts Payable 45,000

(b) Accounts Payable 3,000

Inventory 3,000

(c) Accounts Payable ($45,000 – $3,000) 42,000

Inventory ($42,000 × .02) 840

Cash ($42,000 – $840) 41,160

BE 192

Garth Company sold goods on account to Kyle Enterprises with terms of 2/10, n/30. The goods had a cost of $600 and a selling price of $1,100. Both Garth and Kyle use a perpetual inventory system. Record the sale on the books of Garth and the purchase on the books of Kyle.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 192 (3 min.)

Journal entry on Garth’s books:

Accounts Receivable…. 1,100

Sales. 1,100

Cost of Goods Sold….. . 600

Inventory………… 600

Journal entry on Kyle’s books:

Inventory……………… 1,100

Accounts Payable 1,100

BE 193

Richter Company sells merchandise on account for $2,500 to Lynch Company with credit terms of 3/10, n/60. Lynch Company returns $200 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Richter Company make upon receipt of the check and the damaged merchandise?

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 193 (3 min.)

Sales Returns and Allowances 200

Sales Discounts ($2,300 × .03) 69

Cash ($2,500 – $200 – $69) 2,231

Accounts Receivable 2,500

BE 194

Charlie Company uses a perpetual inventory system. During May, the following transactions and events occurred.

May 13 Sold 8 motors at a cost of $45 each to Scruffy Brothers Supply Company, terms 4/10, n/30. The motors cost Charlie $26 each.

May 16 One defective motor was returned to Charlie.

May 23 Received payment in full from Scruffy Brothers. Round to nearest dollar.

Instructions

Journalize the May transactions for Charlie Company (seller) assuming that Charlie uses a perpetual inventory system. You may omit explanations. Round amounts to nearest dollar.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 194 (8 min.)

May 13 Accounts Receivable 360

Sales Revenue 360

Cost of Goods Sold 208

Inventory 208

May 16 Sales Returns and Allowances 45

Accounts Receivable 45

Inventory 26

Cost of Goods Sold 26

May 23 Cash 302

Sales Discounts ($315 × .04) 13

Accounts Receivable ($360 – $45) 315

BE 195

The income statement for Pepe Serna Company for the year ended December 31, 2014 is as follows:

PEPE SERNA COMPANY

Income Statement

For the Year Ended December 31, 2014

Revenues

Sales revenue $58,000

Interest revenue 3,000

Total revenues 61,000

Expenses

Cost of goods sold $33,000

Salaries and wages expense 13,000

Interest expense 1,000

Total expenses 47,000

Net income $ 14,000

Prepare the entries to close the revenue and expense accounts at December 31, 2014. You may omit explanations for the transactions.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 195 (5 min.)

Dec. 31 Sales Revenue 58,000

Interest Revenue 3,000

Income Summary 61,000

31 Income Summary 47,000

Cost of Goods Sold 33,000

Salaries and Wages Expense 13,000

Interest Expense 1,000

BE 196

Hoyt Company provides this information for the month of November, 2014: sales on credit $170,000; cash sales $70,000; sales discounts $2,000; and sales returns and allowances $9,000. Prepare the sales revenues section of the income statement based on this information.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 196 (3 min.)

HOYT COMPANY

Income Statement (Partial)

For the Month Ended November 30, 2014

Sales Revenue $240,000

Less: Sales Returns and Allowances $9,000

Sales Discounts 2,000 11,000

Net Sales $229,000

BE 197

During October, 2014, Red’s Catering Company generated revenues of $14,000. Sales discounts totaled $200 for the month. Expenses were as follows: Cost of goods sold of $7,700 and operating expenses of $2,000.

Calculate (1) gross profit and (2) income from operations for the month.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 197 (4 min.)

(1) Gross profit: $6,100 ($14,000 – $200 – $7,700)

(2) Income from operations: $4,100 ($6,100 – $2,000)

aBE 198

For each of the following, determine the missing amounts.

Beginning Goods Available Cost of Ending

Inventory Purchases for Sale Goods Sold Inventory

1. $10,000 ________ $ 45,000 $25,000 _______

2. ______ $220,000 $265,000 _______ $40,000

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

aSolution 198 (4 min.)

1. Purchases $35,000 ($45,000 – $10,000), Ending inventory $20,000 ($45,000 – $25,000)

2. Beginning inventory $45,000 ($265,000 – $220,000), Cost of Goods Sold $225,000 ($265,000 – $40,000)

aBE 199

Assume that Swann Company uses a periodic inventory system and has these account balances: Purchases $525,000; Purchase Returns and Allowances $14,000; Purchase Discounts $9,000; and Freight-In $15,000. Determine net purchases and cost of goods purchased.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

aSolution 199 (4 min.)

Calculation of Net purchases and Cost of goods purchased

Purchases $525,000

Less: Purchase returns and Allowances $14,000

Purchase discounts 9,000 23,000

Net purchases 502,000

Add: Freight-in 15,000

Cost of goods purchased $517,000

aBE 200

Assume that Swann Company uses a periodic inventory system and has these account balances: Purchases $630,000; Purchase Returns and Allowances $25,000; Purchase Discounts $11,000; and Freight-In $19,000; beginning inventory of $45,000; ending inventory of $55,000; and net sales of $750,000. Determine the cost of goods sold.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 200 (6 min.)

Inventory, beginning $ 45,000

Purchases $630,000

Less: Purchase returns and allowances $25,000

Purchase discounts 11,000 36,000

Net purchases 594,000

Add: Freight-in 19,000

Cost of goods purchased 613,000

Cost of goods available for sale 658,000

Inventory, ending 55,000

Cost of goods sold $603,000

aBE 201

Scruffy Brothers Supply uses a periodic inventory system. During May, the following transactions and events occurred.

May 13 Purchased 8 motors at a cost of $45 each from Charlie Company, terms 4/10, n/30. The motors cost Charlie Company $26 each.

May 16 Returned 1 defective motor to Charlie.

May 23 Paid Charlie Company in full. Round to nearest dollar.

Instructions

Journalize the May transactions for Scruffy Brothers. You may omit explanations.