Accounting-Volume-1-Canadian-9th-Edition
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Test Bank for Accounting Volume 1 Canadian 9th Edition – Horngren
SAMPLE
Accounting, Vol. 1, 9e Cdn. Ed. (Horngren et al.)
Chapter 5 Merchandising Operations and the Accounting Cycle
Objective 5-1
1) Inventory includes all goods that the company owns and expects to use in normal operations.
Answer: FALSE
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
2) Sales revenue and Net sales are synonymous terms.
Answer: FALSE
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
3) Cost of goods sold is an operating expense.
Answer: FALSE
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
4) Gross margin is equal to net sales plus cost of goods sold.
Answer: FALSE
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
5) Inventory is a current liability on the balance sheet.
Answer: FALSE
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
6) Net sales is equal to sales revenue plus sales returns and minus sales discounts.
Answer: FALSE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
7) Gross margin minus expenses equals gross profit.
Answer: FALSE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
8) Sales revenue minus sales returns and allowances and sales discounts equals:
A) gross margin.
B) income from operations.
C) cost of goods sold.
D) net sales.
Answer: D
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
Table 5-4
The following data is for the Atlantis Merchandising, which uses a periodic inventory system:
Sales revenue
$600,000
Interest revenue
12,000
Freight in
42,000
Beginning inventory
77,000
Purchase discounts
19,000
Sales returns and allowances
33,000
Operating expenses
77,000
Interest expense
9,000
Ending inventory
81,000
Purchases
415,000
Sales discounts
35,000
Omar Atlantis, Withdrawals
71,000
Purchase returns and allowances
39,000
9) Refer to Table 5-4. Net sales for Atlantis Merchandising are:
A) $532,000
B) $600,000
C) $567,000
D) $565,000
Answer: A
Explanation: A)
Sales $600,000
Returns & allowances 33,000
Discounts 35,000
Net sales $532,000
Cost of goods sold:
Beg. inventory $77,000
Net purchases (415-19-39) 357,000
Freight-in 42,000
Available $476,000
End. inventory 81,000
Cost of goods sold 395,000
Gross margin $137,000
Operating expenses 77,000
Operating income $60,000
Other income and expenses:
Interest income $12,000
Interest expense 9,000 3,000
Net income $63,000
Diff: 2
Learning Outcome: A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework
Skill: Application
Objective: 5-1 Use sales and gross margin to evaluate a company
Table 5-5
The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:
Salary payable
$1,100
Sales revenue
480,000
Interest revenue
3,000
Freight in
20,000
Beginning inventory
35,000
Sales discounts
18,000
Purchases of inventory
240,000
Purchase returns and allowances
35,000
Purchase discounts
10,000
Sales returns and allowances
35,000
Ending inventory
80,000
Operating expenses
85,000
Interest expense
7,000
Owner withdrawals
12,000
10) Refer to Table 5-5. The net sales for Speedy Boat Company are:
A) $427,000
B) $445,000
C) $480,000
D) $462,000
Answer: A
Explanation: A)
Sales $480,000
Returns & allowances 35,000
Discounts 18,000
Net sales $427,000
Cost of goods sold:
Beg. inventory $35,000
Net purchases (240-35-10) 195,000
Freight-in 20,000
Available $250,000
End. inventory 80,000
Cost of goods sold 170,000
Gross margin $257,000
Operating expenses 85,000
Operating income $172,000
Other income and expenses:
Interest revenue $3,000
Interest expense 7,000 (4,000)
Net income $168,000
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-1 Use sales and gross margin to evaluate a company
11) What is the difference between a sales return and a sales allowance?
A) A sales return reduces the amount receivable from the customer, but an allowance does not.
B) A sales return involves an adjustment to Inventory, but a sales allowance does not.
C) A sales return requires a debit to Sales returns and allowances, but a sales allowance does not.
D) A sales allowance is deducted from Sales revenue to calculate net sales, but a sales return is not.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
Match the following.
A) gross margin
B) sales returns and allowances
C) inventory
12) The excess of sales revenue over cost of goods sold
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
13) All goods that a business owns and expects to sell in the normal course of operation
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
14) A contra account to Sales Revenue
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
Answers: 12) A 13) C 14) B
15) Define gross margin and operating income. Explain how they are used in evaluating a company.
Answer: Gross margin is the excess of sales revenue over the cost of the goods sold. It helps measure a business’s success. A sufficiently high gross margin is vital to success. Gross margin must be high enough to cover the operating expenses of the firm in order to result in operating income for the period. Operating income is gross margin minus operating expenses plus any other operating revenues. There must be sufficient operating income to cover other expenses of the period to end up with a net income instead of a net loss.
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Comprehension
Objective: 5-1 Use sales and gross margin to evaluate a company
Objective 5-2
1) The entry to record the purchase of inventory on account in a perpetual inventory system includes a debit to the Purchases account.
Answer: FALSE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
2) Purchase returns of merchandise decrease the liability to a creditor.
Answer: TRUE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
3) In a purchase discount, the larger the quantity of merchandise purchased, the lower the price per item.
Answer: FALSE
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
4) Credit terms of 1/15 n/30 means the purchaser can deduct 1% of the invoice price if paid within 15 days.
Answer: TRUE
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
5) Quantity discounts offered by suppliers for large shipments of inventory are always recorded separately.
Answer: FALSE
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
6) FOB shipping point means that the title to the goods passes to the purchaser upon receipt of the goods and the seller is responsible for the cost of the freight.
Answer: FALSE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
7) Sales discounts is a contra account and has a normal credit balance.
Answer: FALSE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
8) When the seller accepts a return of undamaged goods from the purchaser, the seller’s journal entries would include two entries, if they are using a perpetual inventory system.
Answer: TRUE
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
9) A seller requesting payment will send the purchaser a purchase order.
Answer: FALSE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
10) The entry to record the return of $250 of inventory to a supplier under the perpetual inventory system is recorded with a debit to:
A) Accounts Payable and a credit to Purchases Discounts.
B) Purchases Returns and Allowances and a credit to Accounts Payable.
C) Accounts Payable and a credit to Inventory.
D) Inventory and a credit to Accounts Payable.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
11) Using a perpetual inventory system, the entry to record the purchase of merchandise on account involves a:
A) debit to Inventory.
B) debit to Accounts Payable.
C) credit to Inventory.
D) credit to Cash.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
12) Credit terms of 1/10 n/30 indicates that the buyer is:
A) allowed a 10% discount if payment is made within 30 days.
B) allowed a 1% discount if payment is made within 10 days.
C) allowed a 1% discount if payment is made within 30 days.
D) allowed a 30% discount if payment is made within 10 days.
Answer: B
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
13) Which of the following credit terms allows for a cash discount?
A) n/30
B) n/eom
C) n/60
D) 1/10 n/30
Answer: D
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
14) A merchandiser purchases inventory on account under a perpetual inventory system with terms of 2/10 n/30. The merchandiser would:
A) credit Inventory on date of payment if the discount is taken.
B) credit Inventory on date of payment if the discount is not taken.
C) credit Purchases Discounts on date of purchase if the discount is taken.
D) debit Purchases Discounts on date of purchase if the discount is not taken.
Answer: A
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
15) A company makes a purchase of $2,000 of inventory, subject to credit terms of 3/10 n/45 and returns $500 of inventory prior to payment. What is the amount of the payment assuming payment is made within the discount period?
A) $1,500
B) $1,455
C) $1,440
D) $1,560
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Analysis
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
16) If a purchaser returns goods purchased on account to the supplier under a perpetual inventory system, the purchaser would debit:
A) Inventory and credit Accounts Payable.
B) Accounts Payable and credit Inventory.
C) Inventory and credit Accounts Receivable.
D) Accounts Receivable and credit Inventory.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
17) When a discount is taken for prompt payment under a perpetual inventory system, the purchaser would credit:
A) Accounts Payable.
B) Accounts Receivable.
C) Purchases Discounts.
D) Inventory.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
18) A purchase return or allowance under a perpetual inventory system is credited to:
A) Accounts Payable.
B) Purchase Returns and Allowances.
C) Inventory.
D) Purchases.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
19) If the shipping terms are FOB shipping point and the freight bill is $200, the purchaser, using a perpetual inventory system would record payment of the freight with a debit to:
A) Inventory and credit to Cash for $200.
B) Accounts Payable and credit to Inventory for $200.
C) Inventory and credit to Purchases Discounts for $200.
D) Purchases Discounts and credit to Inventory for $200.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
20) When the seller accepts a return of goods from the purchaser originally sold on account, the seller’s journal entry would include a debit to:
A) Sales Discounts and credit to Cash.
B) Sales Returns and Allowances and credit to Accounts Receivable.
C) Sales Returns and Allowances and credit to Sales Discounts.
D) Sales Revenue and credit to Cash.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
21) Day Company purchased $3,000 of merchandise on credit, terms 3/15 n/30. The entry to record payment for the merchandise within the discount period under a perpetual inventory system would include a:
A) debit to Inventory of $1,940.
B) debit to Accounts Payable of $1,940.
C) credit to Purchase Discounts of $90.
D) credit to Inventory of $90.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
22) Mars Company purchased $2,500 of merchandise on account, terms 3/10 n/60. If payment was made within the discount period, the entry to record the payment under a perpetual inventory system would include a credit to:
A) Cash of $2,425.
B) Inventory of $2,352.
C) Accounts Payable of $2,400.
D) Cash for $2,400.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
23) Green Company purchased $3,600 of merchandise on account, terms 2/10 n/30. If payment was made after the expiration of the discount period and a perpetual inventory system is used, the entry to record the payment would include a:
A) credit to Inventory of $3,600.
B) credit to Cash of $3,528.
C) credit to Cash of $3,600.
D) debit to Accounts Payable of $3,528.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
24) The seller is responsible for the shipping costs when the shipping terms are:
A) FOB destination.
B) COD destination.
C) FOB shipping point.
D) COD shipping point.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
25) The buyer is responsible for the shipping costs when the shipping terms are:
A) FOB destination.
B) COD destination.
C) FOB shipping point.
D) COD shipping point.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
26) When the buyer pays the freight costs, the entry to record the payment under a perpetual inventory system would include a debit to:
A) Delivery Expense.
B) Purchases Discounts.
C) Inventory.
D) Freight In.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
27) When the seller is liable for the shipping costs, the payment for the freight in the seller’s accounts is recorded with a debit to:
A) Delivery Expense or Freight Out.
B) Freight In.
C) Inventory.
D) Cash.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
28) Under a perpetual inventory system, the entry to record the cost of goods sold would include a debit to:
A) Cost of Goods Sold and a credit to Inventory for the retail price of the inventory.
B) Inventory and a credit to Sales Revenue for the retail price of the inventory.
C) Cost of Goods Sold and a credit to Inventory for the cost of the inventory.
D) Inventory and a credit to Cost of Goods Sold for the cost of the inventory.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
29) Under a perpetual inventory system, the entry to record a sale on account would include a debit to:
A) Accounts Receivable and a credit to Sales Revenue for the retail price of the inventory.
B) Inventory and a credit to Sales Revenue for the retail price of the inventory.
C) Cost of Goods Sold and a credit to Inventory for the retail price of the inventory.
D) Accounts Receivable and a credit to Sales Revenue for the cost of the inventory.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
30) The entry to record the sale of merchandise for cash includes a:
A) debit to Accounts Receivable.
B) credit to Sales Discounts.
C) debit to Sales Revenue.
D) credit to Sales Revenue.
Answer: D
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
31) To update the inventory records for the sale of merchandise under a perpetual inventory system, the entry would include a:
A) debit to Inventory.
B) credit to Accounts Payable.
C) debit to Sales Revenue.
D) debit to Cost of Goods Sold.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
32) To update the inventory records for the sale of merchandise under a perpetual inventory system, the entry would include a:
A) credit to Inventory.
B) debit to Accounts Payable.
C) debit to Sales Revenue.
D) credit to Cost of Goods Sold.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
33) The entries to record a $5,000 cash sale under a perpetual inventory system, when the cost of the merchandise is $3,200, include a:
A) debit to Inventory for $5,000.
B) debit to Sales Revenue for $5,000.
C) credit to Cost of Goods Sold for $3,200.
D) debit to Cost of Goods Sold for $3,200.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
34) The entries to record a $4,500 sale on account under a perpetual inventory system, when the cost of the merchandise is $3,000, include a:
A) debit to Inventory for $3,000.
B) credit to Sales Revenue for $3,000.
C) debit to Sales Revenue for $4,500.
D) credit to Inventory for $3,000.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
35) Under a perpetual inventory system, the entry to record the return of inventory sold on account for $250 with a cost of $185 would be recorded by the seller as a:
A) debit to Accounts Receivable for $250.
B) debit to Sales Returns and Allowances for $185.
C) credit to Sales Revenue for $250.
D) credit to Cost of Goods Sold for $185.
Answer: D
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
36) Under a perpetual inventory system, the entry to record the return of inventory sold on account for $360 with a cost of $210 would be recorded by the seller as a:
A) credit to Accounts Receivable for $210.
B) credit to Sales Returns and Allowances for $210.
C) debit to Sales Revenue for $360.
D) debit to Inventory for $210.
Answer: D
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
37) Eastern Outfitters sold $2,500 of inventory to a customer on account, terms 3/15 n/40. Freight terms were FOB shipping point and freight charges totalled $150. The entry to record the sale would include a:
A) credit to Accounts Receivable for $2,350.
B) debit to Sales Revenue for $2,500.
C) credit to Sales Revenue for $2,500.
D) debit Accounts Receivable for $2,650.
Answer: C
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
38) A merchandiser received payment in full within the discount period on a $5,000 sales invoice, terms 2/15 n/30. The journal entry would include a:
A) debit to Cash for $5,000.
B) credit to Accounts Receivable for $5,000.
C) credit to Accounts Receivable for $5,900.
D) credit to Sales Discounts for $100.
Answer: B
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
39) A merchandiser received payment in full after the expiration of the discount period on a $3,000 sales invoice, terms 3/15 n/30. The journal entry would include a:
A) debit to Cash for $2,910.
B) credit to Accounts Receivable for $2,910.
C) debit to Sales Discount of $90.
D) debit to Cash for $3,000.
Answer: D
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
40) Under a perpetual inventory system, the entries to record a $2,600 sales return of undamaged goods for a sale originally made on account, when the merchandise had a cost of $1,200, include a:
A) debit to Inventory of $1,200.
B) debit to Sales Returns and Allowances of $1,200.
C) credit to Cost of Goods Sold of $2,600.
D) credit to Sales Returns and Allowances of $1,200.
Answer: A
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
41) Under a perpetual inventory system, the entries to record a $3,400 sales return for undamaged goods on an original cash sale when the merchandise had a cost of $1,500 include a debit to:
A) Accounts Receivable of $3,400.
B) Cost of Goods Sold of $1,500.
C) Sales Returns and Allowances of $1,500.
D) Inventory of $1,500.
Answer: D
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
42) Which of the following is true about freight in?
A) Freight in is added to the cost of merchandise inventory.
B) Freight in is a selling expense.
C) Freight in is an operating expense.
D) Freight in is deducted from Accounts payable.
Answer: A
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
43) Michelin Jewellers completed the following transactions. Michelin Jewellers uses the perpetual inventory system. On April 2, Michelin sold $9,000 of merchandise to a customer on account with terms of 3/15, n/30. Michelin’s cost of the merchandise sold was $5,500. On April 4, the customer reported damaged goods and Michelin granted a $1,000 sales allowance. On April 10, Michelin received payment from the customer. Which of the following entries correctly records the cash receipt on Michelin’s books?
A)
Cash
7,760
Sales discount
240
Accounts receivable
8,000
B)
Accounts receivable
8,000
Sales discount
240
Cash
7,760
C)
Cash
8,000
Accounts receivable
8,000
D)
Cash
7,760
Accounts receivable
7,760
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
Match the following.
A) sales discount
44) Reduction in the amount receivable from a customer, offered by the seller as an incentive for the customer to pay promptly.
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
Answers: 44) A
45) The following data pertain to Corbet Merchandising for the year ended December 31, 2013:
Beginning inventory $190,300
Purchases of inventory on credit during the year 450,000
Cost of goods sold during the year 65% of sales
Sales (75% on credit) during the year 800,000
a) Prepare entries for the following transactions using a perpetual inventory system:
1) Purchase of inventory during 2013
2) Sales during 2013
3) Cost of goods sold during 2013
b) Compute the balance in the inventory account on December 31, 2013.
Answer:
a) General Journal
Date
Accounts
Debit
Credit
1)
Inventory
450,000
Accounts Payable
450,000
To record inventory purchases during 2013.
2)
Cash
200,000
Accounts Receivable
600,000
Sales Revenue
800,000
To record cash and credit sales during 2013.
3)
Cost of Goods Sold
520,000
Inventory
520,000
To record cost of goods sold during 2013.
b) $190,300 + $450,000 – $520,000 = $120,300
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Analysis
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
46) Details of a purchase invoice, credit terms, and a purchase return are shown below. Assume the credit memo was received and payment made within the discount period.
Cost of merchandise as shown on purchase invoice $9,200
Cost of merchandise returned 3,700
Transportation charges, terms FOB shipping point 500
Credit terms 2/10 n/30
Compute the following:
a) amount of discount
b) amount paid by purchaser, within the discount period, including freight, if applicable
c) amount paid by purchaser if paid after expiration of discount including freight, if applicable
Answer:
a) ($9,200 – $3,700) × 0.02 = $110
b) ($5,500 × 0.98) + $500 = $5,890
c) $5,500 + $500 = $6,000
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Analysis
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
47) Details of purchase invoices including shipping terms, credit terms, and returns appear below. Compute the total amount to be paid in full settlement of each invoice, assuming that credit for returns is granted before the expiration of the discount period and payment is made within the discount period.
Invoice
Freight and Credit Terms
Transportation Charges
Returns and Allowances
a) $2,000
FOB destination, 3/10 n/45
$55
$200
b) $5,500
FOB shipping point, 2/10 n/30
$100
$50
c) $6,700
FOB shipping point, 2/10 n/45
$200
$350
d) $9,300
FOB destination, 2/10 n/60
$150
$550
Answer:
a) ($2,000 – $200) × 0.97 = $1,746
b) [($5,500 – $50) × 0.98] + $100 = $5,441
c) [($6,700 – $350) × 0.98] + $200 = $6,423
d) ($9,300 – $550) × 0.98 = $8,575
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Analysis
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
48) Tobermory Merchandising had the following transactions during May:
May 5 Purchased $2,700 of merchandise on account, terms 3/15 n/60,
FOB shipping point.
9 Paid transportation cost on the May 5 purchase, $250.
10 Returned $400 of defective merchandise purchased on May 5.
15 Paid for the May 5 purchase, less the return and the discount.
Required:
Assuming the perpetual inventory system is used, prepare the journal entries to record the above transactions.
Answer:
General Journal
Date
Accounts
Debit
Credit
May 5
Inventory
2,700
Accounts Payable
2,700
Purchased merchandise on account, 3/15 n/6.0
9
Inventory
250
Cash
250
Paid transportation cost on May 5 purchase.e.
10
Accounts Payable
400
Inventory
400
Returned defective merchandise purchased on May 5.
15
Accounts Payable
2,300
Cash
2,231
Inventory
69
Paid for May 5 purchase, less return and discount.
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
49) Romeo Merchandising had the following transactions in June. Prepare journal entries for these transactions assuming Romeo uses a perpetual inventory system.
June 2 Romeo received an $18,000 invoice from one of its suppliers. Terms
were 2/10 n/30, FOB shipping point. Romeo paid the freight bill
amounting to $2,000.
4 Romeo returned $2,500 of the merchandise billed on June 2 because it
was defective.
5 Romeo sold $8,000 of merchandise on account, terms 3/15 n/30.
The cost of the merchandise sold was $5,100.
10 Romeo paid the invoice dated June 2, less the return and the discount.
15 A customer returned $2,500 of merchandise sold on June 5. The cost of
the returned merchandise was $1,450.
19 Britt received payment on the remaining amount due from the sale of
June 5, less the return and the discount.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 2
Inventory
18,000
Accounts Payable
18,000
Inventory
2,000
Cash
2,000
4
Accounts Payable
2,500
Inventory
2,500
5
Accounts Receivable
8,000
Sales Revenue
8,000
Cost of Goods Sold
5,100
Inventory
5,100
10
Accounts Payable
15,500
Cash
15,190
Inventory
310
15
Sales Returns and Allowances
2,500
Accounts Receivable
2,500
Inventory
1,450
Cost of Goods Sold
1,450
19
Cash
5,335
Sales Discounts
165
Accounts Receivable
5,500
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
Table 5-6
The following are transactions for Latest Fashions for the month of June.
June 2 Purchased $2,000 of inventory under terms 1/10, n/60 and FOB shipping point
from Trendy Manufacturing. The merchandise had cost Trendy $1,800
June 7 Returned defective merchandise to Trendy Manufacturing with invoice price of $400.
June 8 Paid the freight charges on the purchase from Trendy Manufacturing in cash for $100.
June 9 Sold merchandise to New Miss Store on account for $5,000 with terms 2/15, n/60 FOB
shipping point. Cost of the merchandise sold was $4,000.
June 10 Paid Trendy Manufacturing the balance on account.
June 12 Granted sales allowance of $300 to New Miss Store for defective merchandise.
June 23 Collected balance owing from New Miss Store.
50) Refer to table 5-6. Prepare the journal entries for Latest Fashions for the transactions listed, assuming that Latest Fashions uses a perpetual inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 2
Inventory
2,000
Accounts Payable
2,000
7
Accounts Payable
400
Inventory
400
8
Inventory
100
Cash
100
9
Accounts Receivable
5,000
Sales Revenue
5,000
Cost of Goods Sold
4,000
Inventory
4,000
10
Accounts Payable
1,600
Inventory
16
Cash
1,584
12
Sales Returns and Allowances
300
Accounts Receivable
300
23
Cash
4,606
Sales Discount
94
Accounts Receivable
4,700
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
51) Refer to table 5-6. Prepare the journal entries for Trendy Manufacturing for the transactions listed, assuming that Trendy uses a perpetual inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 2
Accounts Receivable
2,000
Sales Revenue
2,000
Cost of Goods Sold
1,800
Inventory
1,800
7
Sales Returns and Allowances
400
Accounts Receivable
400
10
Cash
1,584
Sales Discount
16
Accounts Receivable
1,600
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
52) Refer to table 5-6. Prepare the journal entries for New Miss Store for the transactions listed, assuming that New Miss Store uses a perpetual inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 9
Inventory
5,000
Accounts Payable
5,000
7
Accounts Payable
300
Inventory
300
25
Accounts Payable
4,700
Inventory
94
Cash
4,606
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
Table 5-9
Reid Art Supply Company uses a perpetual inventory system. The company had the following transactions during August, 2013:
Aug. 5 Purchased $2,900 of merchandise on account; FOB shipping point, 3/15, n/60.
Aug. 9 Paid transportation costs of $440 for the Aug. 5 purchase.
Aug. 10 Returned $600 of defective merchandise purchased on Aug. 5.
Aug. 15 Paid the amount owing for the merchandise purchased Aug. 5.
53) Record the August journal entries for Reid Art Supply.
Answer:
General Journal
Date
Accounts
Debit
Credit
Aug 5
Inventory
2,900
Accounts Payable
2,900
9
Inventory
440
Cash
440
10
Accounts Payable
600
Inventory
600
15
Accounts Payable
2,300
Inventory
69
Cash
2,231
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
54) Sam Levine Merchandising had the following transactions during May:
May 1 Beginning inventory was 20 units valued at $25 per unit.
May 5 Purchased purchased 80 units of merchandise on account for $2,160, terms n/15,
FOB shipping point.
May 9 Paid transportation cost on the May 5 purchase, $240.
May 10 Returned two units of defective merchandise purchased on May 5.
May 11 Sold 30 units for $50 per unit on account.
May 15 Paid for the May 5 purchase, less the return.
May 20 Sold 10 units for $50 per unit on account.
Required:
Assuming FIFO and that the perpetual inventory system is used, prepare the journal entries to record the above transactions.
Assuming weighted-average and that the periodic inventory system is used, prepare the journal entries to record the above transactions.
Answer:
Requirement 1: Perpetual Inventory Method
Date
Account Name
Debit
Credit
May 5
Inventory
2,160
Accounts Payable
2,160
May 9
Inventory
240
Cash
240
May 10
Accounts Payable
54
Inventory
54
May 11
Accounts Receivable (30 × $50)
1,500
Sales
1,500
Cost of Goods Sold (20 × $25) + (10 × ($27 + $3))
800
Inventory
800
May 15
Accounts Payable ($2,160 – $54)
2,106
Cash
2,106
May 20
Accounts receivable
500
Sales
500
Cost of Goods Sold (10 × $30)
300
Inventory
300
Requirement 2: Periodic Inventory Method
Date
Account Name
Debit
Credit
May 5
Purchases
2,160
Accounts Payable
2,160
May 9
Frieght-in
240
Cash
240
May 10
Accounts Payable
54
Purchase Returns
54
May 11
Accounts Receivable
1,500
Sales
1,500
May 15
Accounts Payable
2,160
Cash
2,160
May 20
Accounts Receivable
500
Sales
500
Diff: 3
Learning Outcome: A-09 Explain and apply inventory costing methods
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
Objective 5-3
1) The adjusting entry to record inventory shrinkage would include a debit to the cost of goods sold account in a perpetual inventory system.
Answer: TRUE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
2) In the closing entry process, the sales returns and allowances account is debited.
Answer: FALSE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
3) The adjusting entry required when the inventory counted is greater than the balance in the inventory account has a credit to Cost of Goods Sold.
Answer: TRUE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
4) In a perpetual inventory system, the closing entries include a credit to the Inventory account in an amount that equals the ending inventory, and a debit to the Inventory account in an amount that equals the beginning inventory.
Answer: FALSE
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
5) Under a perpetual inventory system, the adjusting entry to account for inventory shrinkage would include a:
A) credit to Miscellaneous Expense.
B) credit to Cost of Goods Sold.
C) credit to Inventory.
D) debit to Miscellaneous Expense.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
6) Which accounts are affected in the closing process under a perpetual inventory system?
A) Gross Margin and Cost of Goods Sold.
B) Cost of Goods Sold, Sales Returns and Allowances, and Sales Discounts.
C) Gross Margin, Sales Returns and Allowances, and Sales Discounts.
D) Operating Expenses, Sales Revenue, and Purchases.
Answer: B
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
7) Under a perpetual inventory system, which accounts would be closed to Income Summary with credits?
A) Sales Returns and Allowances, Sales Revenue, and Inventory
B) Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold
C) Sales Revenue and Cost of Goods Sold
D) Sales Returns and Allowances and Sales Revenue
Answer: B
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
8) A company’s ledger shows an Inventory balance of $20,000 and a physical count of the inventory shows $19,000. Which of the following entries is needed to record the shrinkage?
A)
Cost of goods sold
1,000
Shrinkage expense
1,000
B)
Inventory
1,000
Cost of goods sold
1,000
C)
Cost of goods sold
1,000
Inventory
1,000
D)
Cash
1,000
Inventory
1,000
Answer: C
Diff: 2
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Application
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
9) An adjusted trial balance is shown below.
Debit
Credit
Cash
$12,600
Accounts receivable
2,400
Prepaid rent
800
Inventory
28,000
Accounts payable
$4,200
Salary payable
1,000
Notes payable
800
Capital
13,800
Withdrawals
1,000
Sales revenue
96,000
Sales returns and allowances
1,600
Sales discounts
400
Cost of goods sold
25,000
Salary expense
21,000
Rent expense
14,000
Amortization expense
8,500
Supplies expense
500
Total
$115,800
$115,800
What will the final balance in Capital be after the closing entries?
A) $37,800
B) $12,700
C) $24,000
D) $36,800
Answer: A
Explanation: A) Calculations: $13,800 – $1,000 + $96,000 – $71,000 = $37,800
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Application
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
10) State whether the following accounts are:
a) closed with a debit
b) closed with a credit
c) not closed
1) cost of goods sold ________
2) sales returns and allowances ________
3) salary expense ________
4) inventory (assume perpetual inventory system) ________
5) amortization expense ________
6) accumulated amortization ________
7) accounts receivable ________
8) sales discounts ________
9) interest expense ________
10) sales revenue ________
Answer: 1) b
2) b
3) b
4) c
5) b
6) c
7) c
8) b
9) b
10) a
Diff: 2
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
11) Following is a random list of some of the accounts and their balances on December 31, 2013, for Copperfield Merchandising. Copperfield uses a perpetual inventory system and all account balances are normal.
Inventory $ 67,000
Sales revenue 470,000
Interest revenue 28,000
Salary expense 46,000
Sales returns & allowances 30,000
Interest expense 13,000
Delivery expense 15,000
Sales discounts 25,000
Insurance expense 8,000
P.Copperfield, Capital 50,000
Utilities expense 29,000
Amortization expense 20,000
P Copperfield, Withdrawals 25,000
Cost of goods sold 259,000
Accounts payable 56,000
Accounts receivable 78,000
Cash 29,000
A physical count on December 31, 2013, reveals $65,000 of inventory on hand.
a) Prepare the entry to adjust the inventory account on December 31, 2013.
b) Prepare the closing entries on December 31, 2013.
Answer:
General Journal
Date
Accounts
Debit
Credit
a)
Dec. 31
Cost of Goods Sold
2,000
Inventory
2,000
b)
Dec. 31
Sales Revenue
470,000
Interest Revenue
28,000
Income Summary
498,000
31
Income Summary
447,000
Sales Ret. and Allow.
30,000
Sales Discounts
25,000
Cost of Goods Sold
261,000
Salary Expense
46,000
Utilities Expense
29,000
Amortization Expense
20,000
Delivery Expense
15,000
Interest Expense
13,000
Insurance Expense
8,000
31
Income Summary
51,000
P.Copperfield, Capital
51,000
31
P.Copperfield, Capital
25,000
P.Copperfield, Withdrawals
25,000
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Application
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
12) Underwater Adventures has the following account balances on August 31, 2014:
Accounts payable $8,800
Accounts receivable 9,600
Accumulated amortization – equipment 30,300
Cash 2,200
Cost of goods sold 341,500
Jacobson, capital 190,700
Jacobson, withdrawals 44,000
Equipment 88,000
Interest earned 2,000
Inventory 71,500
Operating expenses 175,500
Sales discounts 3,100
Sales returns and allowances 14,400
Sales revenue 520,600
Supplies 7,100
Unearned sales revenue 4,500
The following information as at August 31, 2014 was also available:
A physical count of items showed $1,200 of supplies on hand.
An inventory count showed inventory on hand of $66,400.
The equipment has an estimated useful life of eight years and is expected to have no salvage value.
Unearned sales revenue of $1,000 was earned.
Required:
Prepare the necessary adjusting journal entries at August 31, 2014. For simplicity all operating expenses are combined into a single operating expense account for financial statement purposes. Use the normal account name for the adjusting journal entries.
Prepare a classified balance sheet based on adjusted account balances.
Answer: General Journal
Date
Accounts
Debit
Credit
Aug 31
Supplies expense
5,900
Supplies
5,900
31
Cost of goods sold
5,100
Inventory
5,100
31
Amortization expense, equipment
11,000
Accumulated amort., equip.
11,000
31
Unearned sales revenue
1,000
Sales revenue
1,000
Underwater Adventures
Balance Sheet
August 31, 2014
Assets
Current assets:
Cash $2,200
Accounts receivable 9,600
Supplies 1,200
Inventory 66,400
Total current assets $79,400
Property, plant and equipment:
Equipment $88,000
Less: accumulated amortization 41,300 46,700
Total assets $126,100
Liabilities and Owner’s Equity
Current liabilities:
Accounts payable $8,800
Unearned sales revenue 3,500
Total current liabilities $12,300
Jacobson capital 113,800
Total liabilities and owner’s equity $126,100
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
Table 5-10
The December 31, 2014 adjusted trial balance for Camptown Company is shown below.
Debit
Credit
Cash
$12,600
Accounts receivable
2,400
Prepaid rent
800
Inventory
28,000
Accounts payable
$4,200
Salary payable
1,000
Notes payable
800
Capital
13,800
Drawing
1,000
Sales revenue
96,000
Sales returns and allowances
1,600
Sales discounts
400
Cost of goods sold
25,000
Salary expense
21,000
Rent expense
22,500
Supplies expense
500
Total
$115,800
$115,800
13) Using the information from Table 5-10 prepare an income statement in single-step format and the closing entries for Camptown Company.
Answer:
Camptown Company
Income Statement
For the Year Ended December 31, 2014
Revenues:
Sales revenue $ 96,000
Less: Sales discounts $ 400
Sales returns and allowances 1,600 2,000
Net sales revenue $ 94,000
Expenses:
Cost of goods sold $ 25,000
Salary expense 21,000
Rent expense 22,500
Supplies expense 500
Total expenses 69,000
Net income $ 25,000
General Journal
Date
Accounts
Debit
Credit
Dec 31
Sales revenue
96,000
Income summary
96,000
31
Income summary
71,000
Sales discounts
400
Sales returns and allowances
1,600
Cost of goods sold
25,000
Salary expense
21,000
Rent expense
22,500
Supplies expense
500
31
Income summary
25,000
Capital
25,000
31
Capital
1,000
Drawing
1,000
Diff: 2
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Application
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
Objective 5-4
1) Operating expenses are divided into manufacturing expenses and selling expenses on the income statement.
Answer: FALSE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
2) The multi-step income statement format shows subtotals to highlight significant relationships.
Answer: TRUE
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Comprehension
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
3) Gross margin minus operating expenses equals income from operations on a multi-step income statement.
Answer: TRUE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
4) A single-step format of the income statement will always have fewer sub-totals than the multi-step income statement format.
Answer: TRUE
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
5) The income from operations is presented on both the multi-step and single-step income statements.
Answer: FALSE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
6) The major revenue of a merchandiser is ________ while the major expense(s) is (are) ________.
A) sales revenue, cost of goods sold
B) gross margin, operating expenses
C) income from operations, cost of goods sold
D) sales revenue, operating expenses
Answer: A
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Comprehension
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
7) Inventory held by a business is a(n) ________ and when sold becomes a(n) ________.
A) liability, withdrawal
B) asset, expense
C) liability, asset
D) asset, contra asset
Answer: B
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Comprehension
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
Table 5-1
Sales revenue
$480,000
Cost of goods sold
300,000
Sales discounts
20,000
Sales returns and allowances
15,000
Operating expenses
85,000
Interest revenue
5,000
8) Referring to Table 5-1, what is gross margin?
A) $145,000
B) $105,000
C) $140,000
D) $90,000
Answer: A
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
9) Referring to Table 5-1, what is net sales revenue?
A) $400,000
B) $445,000
C) $415,000
D) $455,000
Answer: B
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
10) Referring to Table 5-1, what is the income from operations?
A) $20,000
B) $55,000
C) $60,000
D) $190,000
Answer: C
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
11) Referring to Table 5-1, what is the net income?
A) $60,000
B) $65,000
C) $55,000
D) $180,000
Answer: B
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
Table 5-2
Sales revenue
$382,000
Net sales revenue
$360,000
Gross margin
255,000
Operating expenses
132,000
Interest expense
30,000
Interest revenue
60,000
12) Referring to Table 5-2, if sales discounts amount to $15,000, the balance in Sales Returns and Allowances must be:
A) $7,000.
B) $29,000.
C) $22,000.
D) $8,000.
Answer: A
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
13) Referring to Table 5-2, what is the operating income or operating loss?
A) operating income of $123,000
B) operating loss of $177,000
C) operating loss of $27,000
D) operating income of $27,000
Answer: A
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
14) Referring to Table 5-2, cost of goods sold is:
A) $105,000.
B) $78,000.
C) $100,000.
D) $27,000.
Answer: A
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
15) Referring to Table 5-2, what is the net income or net loss?
A) net loss of $3,000
B) net income of $30,000
C) net loss of $30,000
D) net income of $153,000
Answer: D
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
16) Expenses other than cost of goods sold, that are incurred in the entity’s major line of business are called:
A) merchandising expenses.
B) servicing expenses.
C) other expenses.
D) operating expenses.
Answer: D
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
Match the following.
A) income from operations
B) operating expenses
C) other revenue
D) single-step income statement
E) cost of goods sold
17) Expenses, other than cost of goods sold, that are incurred in the entity’s major line of business
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
18) Gross margin minus operating expenses
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
19) The largest single expense of most merchandising businesses
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
20) A format that groups all revenues together and then lists and deducts all expenses together without drawing any subtotals
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
21) Revenue that originates outside the main operations of a business
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
Answers: 17) B 18) A 19) E 20) D 21) C
22) Given the following worksheet with the trial balance already entered, and the related adjustment information, complete the worksheet.
All Star Merchandising
Accounting Work Sheet
For the Year Ended December 31, 2014
Account Trial Adjustments Inc. Balance
Balance Statement Sheet
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Cash
15
Accounts Rec.
9
Inventory
30
Prepaid Rent
4
Furniture
18
Accumulated
Amortization-
Furniture
7
Accounts Payable
19
Salary Payable
0
Unearned Service Revenue
9
A.J. Star, Capital
40
A.J. Star,
Withdrawals
7
Sales Revenue
65
Sales Discounts
4
Sales Returns and Allowances
2
Cost of Goods Sold
30
Salary Expense
14
Rent Expense
0
Utilities Expense
7
Amortization Expense-
Furniture
140
140
Net Income
Additional information:
a) Prepaid rent expired, $3
b) Amortization on furniture, $2
c) Unearned sales revenue earned during the period, $4
d) Accrued salaries, $5
e) Physical count of ending inventory, $33
Answer: All Star Merchandising
Accounting Work Sheet
For the Year Ended December 31, 2014
Account Trial Adjustments Inc. Balance
Balance Statement Sheet
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Cash
15
15
Accounts Rec.
9
9
Inventory
30
3
33
Prepaid Rent
4
3
1
Furniture
18
18
Accumulated
Amortization-
Furniture
7
2
9
Accounts Payable
19
19
Salary Payable
0
5
5
Unearned Service Revenue
9
4
5
A.J. Star, Capital
40
40
A.J. Star,
Withdrawals
7
7
Sales Revenue
65
4
69
Sales Discounts
4
4
Sales Returns and Allowances
2
2
Cost of Goods Sold
30
3
27
Salary Expense
14
5
19
Rent Expense
0
3
3
Utilities Expense
7
7
Amortization Expense-
Furniture
0
2
2
140
140
17
17
64
69
83
78
Net Income
5
5
69
69
83
83
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
23) Following is a random list of accounts with normal balances for the Lexis Merchandising as of December 31, 2013. All adjusting entries have been made. Closing entries have not been made.
Lexis, Capital $159,000
Land 80,000
Sales discounts 18,000
Supplies expense 9,000
Interest revenue 14,000
Mortgage payable 80,000
Cash 22,000
Accounts receivable 34,000
Unearned service revenue 11,000
Salary expense 23,000
Accounts payable 36,000
Accumulated amort.-building 17,000
Equipment 46,000
Prepaid insurance 8,000
Interest expense 6,000
Lexis, Withdrawals 15,000
Sales revenue 285,000
Interest receivable 5,000
Inventory 28,000
Accumulated amort.-equipment 12,000
Insurance expense 21,000
Salary payable 6,000
Supplies 4,000
Cost of goods sold 156,000
Sales returns & allowances 13,000
Amortization expense-building 8,000
Amortization expense-equipment 8,000
Interest payable 14,000
Utilities expense 8,000
Delivery expense 7,000
Building 115,000
Prepare a multi-step income statement for Lexis Merchandising for the year ended December 31, 2013.
Answer: Lexis Merchandising
Income Statement
For the Year Ended December 31, 2013
Sales revenue $285,000
Less: Sales discounts $18,000
Sales returns & allowances 13,000 31,000
Net sales revenue $254,000
Cost of goods sold 156,000
Gross margin $ 98,000
Operating expenses:
Salary expense 23,000
Insurance expense 21,000
Amortization expense-building 8,000
Amortization expense-equipment 8,000
Supplies expense 9,000
Utilities expense 8,000
Delivery expense 7,000 84,000
Operating income 14,000
Other revenue and (expense):
Interest revenue 14,000
Interest expense 6,000 8,000
Net income $22,000
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
24) Following is a random list of accounts with normal balances for the Sisco Merchandising as of December 31, 2013. All adjusting entries have been made. Closing entries have not been made.
Sisco, Capital $159,000
Land 80,000
Sales discounts 18,000
Supplies expense 9,000
Interest revenue 14,000
Mortgage payable 80,000
Cash 22,000
Accounts receivable 34,000
Unearned service revenue 11,000
Salary expense 23,000
Accounts payable 36,000
Accumulated amort.-building 17,000
Equipment 46,000
Prepaid insurance 8,000
Interest expense 6,000
Sisco, Withdrawals 15,000
Sales revenue 285,000
Interest receivable 5,000
Inventory 28,000
Accumulated amort.-equipment 12,000
Insurance expense 21,000
Salary payable 6,000
Supplies 4,000
Cost of goods sold 156,000
Sales returns & allowances 13,000
Amortization expense-building 8,000
Amortization expense-equipment 8,000
Interest payable 14,000
Utilities expense 8,000
Delivery expense 7,000
Building 115,000
Prepare a single-step income statement for Sisco Merchandising for the year ended December 31, 2013.
Answer:
Sisco Merchandising
Income Statement
For the Year Ended December 31, 2013
Revenues:
Net sales (net of sales discounts, $18,000, and
sales returns and allowances, $13,000) $254,000
Interest revenue 14,000
Total revenue 268,000
Expenses:
Cost of goods sold 156,000
Salary expense 23,000
Insurance expense 21,000
Supplies expense 9,000
Amortization expense-building 8,000
Amortization expense-equipment 8,000
Utilities expense 8,000
Delivery expense 7,000
Interest expense 6,000
Total expenses 246,000
Net income $ 22,000
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
25) Please refer to the following trial balance.
Debit
Credit
Cash
$5,000
Accounts receivable
14,000
Inventory
20,000
Supplies
5,000
Land
100,000
Accounts payable
$3,000
Notes payable
25,000
Capital
90,000
Drawing
1,000
Sales revenues
160,000
Sales returns and allowances
2,000
Sales discounts
3,000
Cost of goods sold
80,000
Salary expense
5,000
Utility expense
23,000
Rent expense
18,000
Interest expense
2,000
Totals
$278,000
$278,000
Please prepare a multi-step income statement:
Answer:
Sales revenues
$160,000
Less: Sales returns and allowances
$2,000
Sales discounts
3,000
5,000
Net sales revenue
$155,000
Cost of goods sold
80,000
Gross profit
$75,000
Operating expenses
Salary expense
$5,000
Utility expense
23,000
Rent expense
18,000
46,000
Operating income
$29,000
Other revenue and (expense)
Interest expense
(2,000)
Net income
$27,000
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
26) Describe single-step and multi-step formats for income statements.
Answer: A single-step income statement only has two sections, one for revenues and the other for expenses; and, a single income amount for net income. A multi-step income statement has subtotals for gross margin and income from operations. The multi-step format is the most widely used format.
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Comprehension
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
27) Underwater Adventures has the following account balances on August 31, 2014:
Accounts payable $8,800
Accounts receivable 9,600
Accumulated amortization – equipment 30,300
Cash 2,200
Cost of goods sold 341,500
Jacobson, capital 190,700
Jacobson, withdrawals 44,000
Equipment 88,000
Interest earned 2,000
Inventory 71,500
Operating expenses 175,500
Sales discounts 3,100
Sales returns and allowances 14,400
Sales revenue 520,600
Supplies 7,100
Unearned sales revenue 4,500
The following information as at August 31, 2014 was also available:
A physical count of items showed $1,200 of supplies on hand.
An inventory count showed inventory on hand of $66,400.
The equipment has an estimated useful life of eight years and is expected to have no salvage value.
Unearned sales revenue of $1,000 was earned.
Required:
Prepare the necessary adjusting journal entries at August 31, 2014. For simplicity all operating expenses are combined into a single operating expense account for financial statement purposes. Use the normal account name for the adjusting journal entries.
Prepare a classified balance sheet based on adjusted account balances.
Answer: General Journal
Date
Accounts
Debit
Credit
Aug 31
Supplies expense
5,900
Supplies
5,900
31
Cost of goods sold
5,100
Inventory
5,100
31
Amortization expense, equipment
11,000
Accumulated amort., equip.
11,000
31
Unearned sales revenue
1,000
Sales revenue
1,000
Underwater Adventures
Balance Sheet
August 31, 2014
Assets
Current assets:
Cash $ 2,200
Accounts receivable 9,600
Supplies 1,200
Inventory 66,400
Total current assets $79,400
Property, plant and equipment:
Equipment $ 88,000
Less: accumulated amortization 41,300 46,700
Total assets $126,100
Liabilities and Owner’s Equity
Current liabilities:
Accounts payable $ 8,800
Unearned sales revenue 3,500
Total current liabilities $ 12,300
Jacobson capital 113,800
Total liabilities and owner’s equity $ 126,100
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
Table 5-10
The December 31, 2014 adjusted trial balance for Camptown Company is shown below.
Debit
Credit
Cash
$12,600
Accounts receivable
2,400
Prepaid rent
800
Inventory
28,000
Accounts payable
$4,200
Salary payable
1,000
Notes payable
800
Capital
13,800
Drawing
1,000
Sales revenue
96,000
Sales returns and allowances
1,600
Sales discounts
400
Cost of goods sold
25,000
Salary expense
21,000
Rent expense
22,500
Supplies expense
500
Total
$115,800
$115,800
28) Using the information from Table 5-10 prepare an income statement in single-step format and the closing entries for Camptown Company.
Answer: Camptown Company
Income Statement
For the Year Ended December 31, 2014
Revenues:
Sales revenue $96,000
Less: Sales discounts $400
Sales returns and allowances 1,600 2,000
Net sales revenue $94,000
Expenses:
Cost of goods sold $25,000
Salary expense 21,000
Rent expense 22,500
Supplies expense 500
Total expenses 69,000
Net income $ 25,000
General Journal
Date
Accounts
Debit
Credit
Dec 31
Sales revenue
96,000
Income summary
96,000
31
Income summary
71,000
Sales discounts
400
Sales returns and allowances
1,600
Cost of goods sold
25,000
Salary expense
21,000
Rent expense
22,500
Supplies expense
500
31
Income summary
25,000
Capital
25,000
31
Capital
1,000
Drawing
1,000
Diff: 2
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
Objective 5-5
1) The gross margin percentage is determined by dividing the gross margin by the net sales revenue.
Answer: TRUE
Diff: 1
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
2) The faster the sale of inventory and the collection of cash, the higher the profits will be for a business.
Answer: TRUE
Diff: 2
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Comprehension
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
3) There is no such thing as too high an inventory turnover ratio.
Answer: FALSE
Diff: 1
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
4) Inventory turnover does not affect profitability but does affect the amount of inventory on the shelf.
Answer: FALSE
Diff: 2
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Comprehension
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
5) The gross margin percentage is calculated as:
A) gross margin minus net sales revenue.
B) gross margin divided by net sales revenue.
C) gross margin plus net sales revenue.
D) gross margin times net sales revenue.
Answer: B
Diff: 2
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
6) Inventory turnover indicates how:
A) quickly inventory is received from the supplier after the order is placed.
B) many days it takes the inventory to travel between the seller’s warehouse and the buyer’s warehouse.
C) rapidly inventory is sold.
D) many days it takes from the time an order is received to the day it is shipped.
Answer: C
Diff: 2
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Comprehension
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
7) Inventory turnover is calculated as:
A) cost of goods sold divided by average inventory.
B) cost of goods sold minus average inventory.
C) cost of goods sold times average inventory.
D) average inventory divided by cost of goods sold.
Answer: A
Diff: 2
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
8) Please refer to the following trial balance.
Debit
Credit
Cash
$5,000
Accounts receivable
14,000
Inventory
20,000
Supplies
5,000
Land
100,000
Accounts payable
$3,000
Notes payable
25,000
Capital
90,000
Withdrawals
1,000
Sales revenues
160,000
Sales returns and allowances
2,000
Sales discounts
3,000
Cost of goods sold
80,000
Salary expense
5,000
Utility expense
23,000
Rent expense
18,000
Interest expense
2,000
Totals
$278,000
$278,000
How much is the gross profit percentage?
A) 50.0%
B) 51.6%
C) 46.8%
D) 48.4%
Answer: D
Explanation: D) Calculations: $155,000 – $80,000 = $75,000/$155,000 = 48.4%
Diff: 3
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
9) Alpha Company had $45,000 in beginning inventory and $80,000 in ending inventory. Cost of goods sold for the period was $25,000. The inventory turnover is:
A) 0.56.
B) 0.3125.
C) 0.4.
D) 4.0.
Answer: C
Explanation: C) Calculations: $25,000/(($45,000 + $80,000)/2)
Diff: 2
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
Match the following.
A) gross margin percentage
B) inventory turnover
10) Gross margin divided by net sales revenue
Diff: 1
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
11) Ratio of cost of goods sold to average inventory
Diff: 1
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
Answers: 10) A 11) B
Table 5-5
The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:
Salary payable
$1,100
Sales revenue
480,000
Interest revenue
3,000
Freight in
20,000
Beginning inventory
35,000
Sales discounts
18,000
Purchases of inventory
240,000
Purchase returns and allowances
35,000
Purchase discounts
10,000
Sales returns and allowances
35,000
Ending inventory
80,000
Operating expenses
85,000
Interest expense
7,000
Owner withdrawals
12,000
12) Based on the information in Table 5-5 provide the following:
Multi-step income statement
Gross margin percentage and the inventory turnover ratio for Speedy Boat Company. Comment on the effect that an increasing inventory turnover has on a business.
Answer:
Multi-step income statement
Speedy Boat Company
Income Statement
For the Period Ending December 31, 2013
Sales $480,000
Returns & allowances 35,000
Discounts 18,000
Net sales $427,000
Cost of goods sold:
Beg. inventory $35,000
Net purchases (240-35-10) 195,000
Freight-in 20,000
Available $250,000
End. inventory 80,000
Cost of goods sold 170,000
Gross margin $257,000
Operating expenses 85,000
Operating income $172,000
Other income and expenses:
Interest revenue $3,000
Interest expense 7,000 (4,000)
Net income $168,000
Ratios
Gross margin percentage = ($257,000/$427,000) = 60%
Inventor turnover = {$170,000/($35,000 + $80,000)/2] = 2.96 times
Increasing inventory turnover increases cash flow, reduces the risk of obsolescence, reduces the need for shelf space and warehousing, reduces the need for trade credit.
Diff: 3
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
Objective 5-6
1) The preparation of the income statement for a merchandising company that is following international financial reporting standards (IFRS) is not significantly different from the approach used by companies following accounting standards for private enterprises (ASPE).
Answer: TRUE
Diff: 2
Learning Outcome: A-18 Compare and contrast IFRS and ASPE
Skill: Knowledge
Objective: 5-6 Describe the merchandising operations effects of IFRS
2) What are two key criteria that merchandisers who report under international financial reporting standards (IFRS) must follow?
A) Revenue-recognition criteria and time-allotment assumption
B) Revenue-recognition criteria and matching objective
C) Revenue-recognition criteria and economic-period assumption
D) Revenue-recognition criteria and time-concern assumption
Answer: B
Diff: 2
Learning Outcome: A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework
Skill: Knowledge
Objective: 5-6 Describe the merchandising operations effects of IFRS
Match the following.
A) statement of comprehensive income
B) income statement
3) The name of the statement that presents revenues and expenses under IFRS
Diff: 1
Learning Outcome: A-18 Compare and contrast IFRS and ASPE
Skill: Knowledge
Objective: 5-6 Describe the merchandising operations effects of IFRS
Answers: 3) A
Objective 5-A1
1) The entry to record the purchase of inventory on account in a periodic inventory system includes a debit to the Purchases account.
Answer: TRUE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
2) When the seller accepts a return of undamaged goods from the purchaser, the seller’s journal entries would include two entries, if they are using a periodic inventory system.
Answer: FALSE
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
3) In a periodic inventory system, purchases of inventory are debited to an account entitled Purchases.
Answer: TRUE
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
4) In a periodic inventory system, purchase returns and allowances and purchase discounts are considered contra liability accounts.
Answer: FALSE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
5) Purchase discounts normally have a credit balance.
Answer: TRUE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
6) Using a periodic inventory system, the entry to record the purchase of merchandise on account involves a:
A) debit to Inventory.
B) debit to Accounts Payable.
C) credit to Inventory.
D) debit to Purchases.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
7) A merchandiser purchases inventory on account under a periodic inventory system with terms of 2/10 n/30. The merchandiser would:
A) credit Inventory on date of payment if the discount is taken.
B) credit Inventory on date of payment if the discount is not taken.
C) credit Purchases Discounts on date of purchase if the discount is taken.
D) credit Purchases Discounts on date of purchase if the discount is not taken.
Answer: C
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
8) If a purchaser returns goods purchased on account to the supplier under a periodic inventory system, the purchaser would debit:
A) Inventory and credit Accounts Payable.
B) Accounts Payable and credit Inventory.
C) Inventory and credit Accounts Receivable.
D) Accounts Payable and credit Purchase Returns.
Answer: D
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
9) When a discount is taken for prompt payment under a periodic inventory system, the purchaser would credit:
A) Accounts Payable.
B) Accounts Receivable.
C) Purchases Discounts.
D) Inventory.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
10) A purchase return or allowance under a periodic inventory system is credited to:
A) Accounts Payable.
B) Purchase Returns and Allowances.
C) Inventory.
D) Purchases.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
11) If the shipping terms are FOB shipping point and the freight bill is $200, the purchaser, using a periodic inventory system would record payment of the freight with a debit to:
A) Inventory and credit to Cash for $200.
B) Freight In and a credit to Cash for $200.
C) Inventory and credit to Purchases Discounts for $200.
D) Purchases Discounts and credit to Inventory for $200.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
12) Day Company purchased $3,000 of merchandise on credit, terms 3/15 n/30. The entry to record payment for the merchandise within the discount period under a periodic inventory system would include a:
A) debit to Inventory of $1,940.
B) debit to Accounts Payable of $1,940.
C) credit to Purchase Discounts of $90.
D) credit to Inventory of $90.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
13) Mars Company purchased $2,500 of merchandise on account, terms 3/10 n/60. If payment was made within the discount period, the entry to record the payment under a periodic inventory system would include a credit to:
A) Cash of $2,425.
B) Inventory of $2,352.
C) Accounts Payable of $2,400.
D) Cash for $2,400.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
14) When the buyer pays the freight costs, the entry to record the payment under a periodic inventory system would include a debit to:
A) Delivery Expense.
B) Purchases Discounts.
C) Inventory.
D) Freight In.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
15) When goods are shipped FOB destination and a periodic inventory system is used, the buyer would:
A) debit Freight In for the amount of the transportation charges.
B) debit Delivery Expense for the amount of the transportation charges.
C) make no journal entry for the transportation charges.
D) debit Inventory for the amount of the transportation charges.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
16) To update the inventory records for the sale of merchandise on account under a periodic inventory system, the entry would include:
A) a credit to Inventory.
B) a debit to Accounts Payable.
C) no entry as inventory records are not updated at the time of sale.
D) a debit to Cost of Goods Sold.
Answer: C
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
17) The entries to record a $5,000 cash sale under a periodic inventory system, when the cost of the merchandise is $3,200, include a:
A) debit to Inventory for $5,000.
B) credit to Sales Revenue for $5,000.
C) debit to Cost of Goods Sold for $3,200.
D) debit to Accounts Receivable for $5,000.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
18) Under a periodic inventory system, the entry to record the return of inventory sold on account for $250 with a cost of $185 would be recorded by the seller as a:
A) credit to Accounts Receivable for $250.
B) debit to Sales Returns and Allowances for $185.
C) credit to Sales Revenue for $250.
D) credit to Cost of Goods Sold for $185.
Answer: A
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
19) Under a periodic inventory system, the entry to record the return of inventory sold on account for $360 with a cost of $210 would be recorded by the seller as a:
A) credit to Accounts Receivable for $210.
B) debit to Sales Returns and Allowances for $360.
C) debit to Sales Revenue for $360.
D) debit to Inventory for $210.
Answer: B
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
20) Under a periodic inventory system, the entries to record a $2,600 sales return of undamaged goods for a sale originally made on account, when the merchandise had a cost of $1,200, include a:
A) debit to Inventory of $1,200.
B) debit to Sales Returns and Allowances of $2,600.
C) credit to Cost of Goods Sold of $2,600.
D) credit to Sales Returns and Allowances of $1,200.
Answer: B
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
21) Under a periodic inventory system, the entries to record a $3,400 sales return for undamaged goods on an original cash sale when the merchandise had a cost of $1,500 include a debit to:
A) Accounts Receivable of $3,400.
B) Cost of Goods Sold of $1,500.
C) Sales Returns and Allowances of $3,400.
D) Inventory of $1,500.
Answer: C
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
22) In a periodic inventory system, the entry to record the purchase of merchandise on account would include a:
A) debit to Accounts Payable.
B) debit to Inventory.
C) credit to Cash.
D) debit to Purchases.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
23) In a periodic inventory system, when a company returns merchandise previously purchased on account, the entry to record the return would include a:
A) debit to Inventory.
B) credit to Purchase Returns and Allowances.
C) debit to Sales Returns and Allowances.
D) credit to Accounts Payable.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
24) In a periodic inventory system, the entry to record the taking of a cash discount for the purchase of merchandise would include a:
A) credit to Purchase Discounts
B) credit to Inventory
C) debit to Purchase Discounts
D) credit to Purchase Returns and Allowances.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
25) In a periodic inventory system, the entry to record the payment of shipping costs by the company buying the merchandise when the terms are FOB shipping point would include a:
A) debit to Freight In.
B) debit to Delivery Expense.
C) credit to Cost of Goods Sold.
D) credit to Freight Out.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
26) In a periodic inventory system, the entry to record the sale of $2,000 of merchandise on account with a cost of $1,400 would include a:
A) credit to Accounts Receivable for $1,400.
B) debit to Accounts Receivable for $2,000.
C) debit to Cost of Goods Sold for $2,000.
D) credit to Inventory for $1,400.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
27) Avery Supplies uses a periodic inventory system. Avery purchased $10,000 of inventory on account. The terms were 3/10, n/30. The purchase was made on February 1. Avery paid the supplier on February 9. Which of the following journal entries properly records this payment transaction?
A)
Accounts Payable
9,700
Cash
9,700
B)
Accounts Payable
9,700
Purchase Discounts
300
Purchases
10,000
C)
Accounts Payable
10,000
Cash
9,700
Purchase Discounts
300
D)
Accounts Payable
10,000
Cash
10,000
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
28) Avery Supplies uses a periodic inventory system. Avery purchased $10,000 of inventory on account. The terms were 3/10, n/30. The purchase was made on February 1. On February 2, Avery returned $400 of damaged goods to the supplier and was granted an allowance. How should Avery properly record the allowance?
A)
Accounts Payable
400
Purchase Returns and Allowances
400
B)
Accounts Payable
9,600
Purchase Discounts
400
Purchases
10,000
C)
Accounts Payable
10,000
Cash
9,600
Purchase Returns and Allowances
400
D)
Accounts Payable
400
Cash
400
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
29) Tobermory Merchandising had the following transactions during May:
May 5 Purchased $2,700 of merchandise on account, terms 3/15 n/60,
FOB shipping point.
9 Paid transportation cost on the May 5 purchase, $250.
10 Returned $400 of defective merchandise purchased on May 5.
15 Paid for the May 5 purchase, less the return and the discount.
Required: Assuming the periodic inventory system is used, prepare the journal entries to record the above transactions.
Answer:
General Journal
Date
Accounts
Debit
Credit
May 5
Purchases
2,700
Accounts Payable
2,700
Purchased merchandise, terms 3/15 n/60.
9
Freight In
250
Cash
250
Paid transportation cost on May 5 purchase.
10
Accounts Payable
400
Purchase Returns and Allowances
400
Returned merchandise purchased May 5.
15
Accounts Payable
2,300
Cash
2,231
Purchase Discounts
69
Paid for May 5 purchase less return and discount.
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
30) Romeo Merchandising had the following transactions in June. Prepare journal entries for these transactions assuming Romeo uses a periodic inventory system.
June 2 Romeo received an $18,000 invoice from one of its suppliers. Terms
were 2/10 n/30, FOB shipping point. Romeo paid the freight bill
amounting to $2,000.
4 Romeo returned $2,500 of the merchandise billed on June 2 because it
was defective.
5 Romeo sold $8,000 of merchandise on account, terms 3/15 n/30.
10 Romeo paid the invoice dated June 2, less the return and the discount.
15 A customer returned $2,500 of merchandise sold on June 5.
19 Britt received payment on the remaining amount due from the sale of
June 5, less the return and the discount.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 2
Purchases
18,000
Accounts Payable
18,000
Freight In
2,000
Cash
2,000
4
Accounts Payable
2,500
Purchase Returns and Allowances
2,500
5
Accounts Receivable
8,000
Sales Revenue
8,000
10
Accounts Payable
15,500
Cash
15,190
Purchase Discounts
310
15
Sales Returns and Allowances
2,500
Accounts Receivable
2,500
19
Cash
5,335
Sales Discounts
165
Accounts Receivable
5,500
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
Table 5-6
The following are transactions for Latest Fashions for the month of June.
June 2 Purchased $2,000 of inventory under terms 1/10, n/60 and FOB shipping point
from Trendy Manufacturing. The merchandise had cost Trendy $1,800
June 7 Returned defective merchandise to Trendy Manufacturing with invoice price of $400.
June 8 Paid the freight charges on the purchase from Trendy Manufacturing in cash for $100.
June 9 Sold merchandise to New Miss Store on account for $5,000 with terms 2/15, n/60 FOB
shipping point. Cost of the merchandise sold was $4,000.
June 10 Paid Trendy Manufacturing the balance on account.
June 12 Granted sales allowance of $300 to New Miss Store for defective merchandise.
June 23 Collected balance owing from New Miss Store.
31) Refer to table 5-6. Prepare the journal entries for Latest Fashions for the transactions listed, assuming that Latest Fashions uses a periodic inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 2
Purchases
2,000
Accounts Payable
2,000
7
Accounts Payable
400
Purchase Returns and Allowances
400
8
Freight In
100
Cash
100
9
Accounts Receivable
5,000
Sales Revenue
5,000
10
Accounts Payable
1,600
Purchase Discounts
16
Cash
1,584
12
Sales Returns and Allowances
300
Accounts Receivable
300
25
Cash
4,606
Sales Discount
94
Accounts Receivable
4,700
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
32) Refer to table 5-6. Prepare the journal entries for Trendy Manufacturing for the transactions listed, assuming that Trendy uses a periodic inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 2
Accounts Receivable
2,000
Sales Revenue
2,000
7
Sales Returns and Allowances
400
Accounts Receivable
400
10
Cash
1,584
Sales Discount
16
Accounts Receivable
1,600
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
33) Refer to table 5-6. Prepare the journal entries for New Miss Store for the transactions listed, assuming that New Miss Store uses a periodic inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 9
Purchases
5,000
Accounts Payable
5,000
7
Accounts Payable
300
Purchase Returns and Allowances
300
25
Accounts Payable
4,700
Purchase Discounts
94
Cash
4,606
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
34) Sam Levine Merchandising had the following transactions during May:
May 1 Beginning inventory was 20 units valued at $25 per unit.
May 5 Purchased 80 units of merchandise on account for $2,160, terms n/15,
FOB shipping point.
May 9 Paid transportation cost on the May 5 purchase, $240.
May 10 Returned two units of defective merchandise purchased on May 5.
May 11 Sold 30 units for $50 per unit on account.
May 15 Paid for the May 5 purchase, less the return.
May 20 Sold 10 units for $50 per unit on account.
Required:
Assuming FIFO and that the perpetual inventory system is used, prepare the journal entries to record the above transactions.
Assuming weighted-average and that the periodic inventory system is used, prepare the journal entries to record the above transactions.
Answer:
Requirement 1: Perpetual Inventory Method
Date
Account Name
Debit
Credit
May 5
Inventory
2,160
Accounts Payable
2,160
May 9
Inventory
240
Cash
240
May 10
Accounts Payable
54
Inventory
54
May 11
Accounts Receivable (30 × $50)
1,500
Sales
1,500
Cost of Goods Sold (20 × $25) + (10 × ($27 + $3))
800
Inventory
800
May 15
Accounts Payable ($2,160 – $54)
2,106
Cash
2,106
May 20
Accounts receivable
500
Sales
500
Cost of Goods Sold (10 × $30)
300
Inventory
300
Requirement 2: Periodic Inventory Method
Date
Account Name
Debit
Credit
May 5
Purchases
2,160
Accounts Payable
2,160
May 9
Frieght-in
240
Cash
240
May 10
Accounts Payable
54
Purchase Returns
54
May 11
Accounts Receivable
1,500
Sales
1,500
May 15
Accounts Payable
2,160
Cash
2,160
May 20
Accounts Receivable
500
Sales
500
Diff: 3
Learning Outcome: A-09 Explain and apply inventory costing methods
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
Objective 5-A2
1) In a periodic inventory system, cost of goods sold is determined by subtracting the ending inventory from the cost of goods available for sale.
Answer: TRUE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
2) In a periodic inventory system, beginning inventory plus net purchases minus freight in equals cost of goods sold.
Answer: FALSE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
3) In a periodic inventory system, the cost of freight-in is part of the cost of goods available for sale.
Answer: TRUE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
Table 5-3
Sales revenue
$750,000
Interest revenue
18,000
Freight in
44,000
Beginning inventory
75,000
Purchases discounts
20,000
Sales returns and allowances
44,000
Operating expenses
99,000
Interest expense
15,000
Ending inventory
72,000
Purchases
415,000
Sales discounts
25,000
William Browning, Withdrawals
61,000
Purchase returns and allowances
36,000
4) Refer to Table 5-3. Net purchases are:
A) $359,000.
B) $415,000.
C) $395,000.
D) $439,000.
Answer: A
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
5) Refer to Table 5-3. The total cost of goods available for sale is:
A) $388,000.
B) $478,000.
C) $470,000.
D) $394,000.
Answer: B
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
6) Refer to Table 5-3. The cost of goods sold is:
A) $470,000.
B) $478,000.
C) $406,000.
D) $351,000.
Answer: C
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
7) Cost of goods sold is $7,400. Beginning inventory is $3,500 and ending inventory is $4,000. If there is no freight in and total purchases were $8,250, what were purchase returns and allowances?
A) $850
B) $500
C) $350
D) $550
Answer: C
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
8) Cost of goods sold is $108,000, beginning inventory is $20,000 and purchases is $100,000. What is ending inventory?
A) $32,000
B) $12,000
C) $128,000
D) $102,000
Answer: B
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
9) Cost of goods sold is $108,000 ,ending inventory is $12,000 and purchases is $100,000. What is beginning inventory?
A) $20,000
B) 32,000
C) $120,000
D) $102,000
Answer: A
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
10) Purchases of inventory minus purchase discounts and minus purchase returns and allowances equals:
A) gross purchases.
B) cost of goods available for sale.
C) net purchases.
D) cost of goods sold.
Answer: C
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
11) Beginning inventory plus net purchases and plus freight in equals:
A) net purchases.
B) cost of goods available for sale.
C) cost of goods sold.
D) gross purchases.
Answer: B
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
12) Cost of goods sold plus ending inventory equals:
A) net purchases.
B) cost of goods available for sale.
C) gross margin.
D) gross profit.
Answer: B
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Comprehension
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
Table 5-4
The following data is for the Atlantis Merchandising, which uses a periodic inventory system:
Sales revenue
$600,000
Interest revenue
12,000
Freight in
42,000
Beginning inventory
77,000
Purchase discounts
19,000
Sales returns and allowances
33,000
Operating expenses
77,000
Interest expense
9,000
Ending inventory
81,000
Purchases
415,000
Sales discounts
35,000
Omar Atlantis, Withdrawals
71,000
Purchase returns and allowances
39,000
13) Refer to Table 5-4. Net purchases for Atlantis Merchandising are:
A) $415,000.
B) $357,000.
C) $396,000.
D) $376,000.
Answer: B
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
14) Refer to Table 5-4. The total cost of goods available for sale for the Atlantis Merchandising is:
A) $434,000.
B) $408,000.
C) $476,000.
D) $441,000.
Answer: C
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
15) Refer to Table 5-4. The cost of goods sold for Atlantis Merchandising is:
A) $524,000.
B) $489,000.
C) $557,000.
D) $395,000.
Answer: D
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
Table 5-5
The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:
Salary payable
$1,100
Sales revenue
480,000
Interest revenue
3,000
Freight in
20,000
Beginning inventory
35,000
Sales discounts
18,000
Purchases of inventory
240,000
Purchase returns and allowances
35,000
Purchase discounts
10,000
Sales returns and allowances
35,000
Ending inventory
80,000
Operating expenses
85,000
Interest expense
7,000
Owner withdrawals
12,000
16) Refer to Table 5-5. The net purchases for Speedy Boat Company are:
A) $230,000.
B) $195,000.
C) $240,000.
D) $205,000.
Answer: B
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
17) Refer to Table 5-5. Cost of goods available for sale for Speedy Boat Company is:
A) $155,000.
B) $225,000.
C) $230,000.
D) $250,000.
Answer: D
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
18) Refer to Table 5-5. Cost of goods sold for Speedy Boat Company is:
A) $170,000.
B) $180,000.
C) $330,000.
D) $220,000.
Answer: A
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
19) In a periodic system, inventory balances and the cost of goods sold for the current period are determined:
A) at the time of sale.
B) on a frequent basis.
C) on the first day of each year.
D) when a physical inventory count is taken.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
20) The following refers to periodic inventory:
Net sales
$198,000
Purchases
92,000
Purchases returns and allowances
1,800
Purchases discounts
1,250
Freight in
1,590
Beginning merchandise inventory
63,000
Ending merchandise inventory
37,000
Compute cost of goods sold.
A) $116,540
B) $81,460
C) $114,950
D) $53,540
Answer: A
Explanation: A) Calculations: $63,000 + $88,950 + $1,590 – $37,000 = $116,540
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
21) Fill in the missing amounts for each case in the table presented below:
A
B
C
D
Beginning inventory
$6,000
$7,200
$9,100
Net purchase
9,000
32,700
32,000
Freight in
500
950
1,200
Cost of goods avail. for sale
50,000
17,250
45,600
Ending inventory
5,375
14,850
Cost of goods sold
32,600
14,800
Answer:
A
B
C
D
Beginning inventory
$ 6,000
$ 7,200
$11,950
$ 9,100
Net purchase
43,500
9,000
32,700
32,000
Freight in
500
1,050
950
1,200
Cost of goods avail. for sale
50,000
17,250
45,600
42,300
Ending inventory
17,400
5,375
14,850
27,500
Cost of goods sold
32,600
11,875
30,750
14,800
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
22) The following items were taken from the records of Slow Boat Company, which uses a periodic inventory system:
Salary payable $1,100
Sales revenue 480,000
Freight in 20,000
Beginning inventory 35,000
Purchases of inventory 240,000
Purchase returns and allowances 35,000
Purchase discounts 10,000
Sales returns and allowances 35,000
Ending inventory 80,000
Operating expenses 85,000
Prepare the cost of goods sold section for the Slow Boat Company’s income statement.
Answer: Beginning inventory $35,000
Purchases of inventory $240,000
Purchase returns and allowances 35,000)
Purchase discounts (10,000)
Net purchases 195,000
Freight in 20,000
Cost of goods available for sale $250,000
Ending inventory (80,000)
Cost of goods sold 170,000
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
Objective 5-A3
1) The adjusting entry to record inventory shrinkage would include a debit to the cost of goods sold account in a periodic inventory system.
Answer: FALSE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
2) In a periodic inventory system, the closing entries include a debit to the Inventory account in an amount that equals the ending inventory, and a credit to the Inventory account in an amount that equals the beginning inventory.
Answer: TRUE
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
3) Which accounts are affected in the closing process under a periodic inventory system?
A) Gross Margin and Cost of Goods Sold
B) Cost of Goods Sold, Sales Returns and Allowances, and Sales Discounts
C) Gross Margin, Sales Returns and Allowances, and Sales Discounts
D) operating expenses, Sales Revenue, and Purchases
Answer: D
Diff: 2
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
4) Under a periodic inventory system, which accounts would be closed to income summary with credits?
A) Sales Returns and Allowances, Sales Revenue, and Inventory
B) Sales Discounts, Sales Returns and Allowances, and Purchases
C) Sales Revenue and Cost of Goods Sold
D) Sales Returns and Allowances and Sales Revenue
Answer: B
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
Table 5-3
Sales revenue
$750,000
Interest revenue
18,000
Freight in
44,000
Beginning inventory
75,000
Purchases discounts
20,000
Sales returns and allowances
44,000
Operating expenses
99,000
Interest expense
15,000
Ending inventory
72,000
Purchases
415,000
Sales discounts
25,000
William Browning, Withdrawals
61,000
Purchase returns and allowances
36,000
5) Refer to Table 5-3. Net sales is:
A) $681,000.
B) $750,000.
C) $725,000.
D) $706,000.
Answer: A
Explanation: A)
Sales
$750,000
Less: Returns & allowances
44,000
Discounts
25,000
Net sales
$681,000
Cost of goods sold:
Beg. inventory
$75,000
Net purchases (415-20-36)
359,000
Freight-in
44,000
Available
$478,000
End. inventory
(72,000)
Cost of goods sold
406,000
Gross margin
$275,000
Operating expenses
99,000
Operating income
$176,000
Other income and expenses:
Interest revenue
$18,000
Interest expense
15,000
Total other income and expenses
3,000
Net income
$179,000
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
6) In a periodic inventory system, the closing process includes crediting the following accounts to bring their balances to zero:
A) Cost of Goods Sold and Freight In.
B) Purchases and Freight In.
C) Purchase Discounts and Sales Discounts.
D) Purchase Returns and Allowances and Purchase Discounts.
Answer: B
Diff: 2
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
7) In a periodic inventory system, the closing process includes:
A) debiting Purchases.
B) crediting Purchase Returns and Allowances.
C) debiting Sales Discounts.
D) debiting Inventory for the ending balance.
Answer: D
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
Match the following.
A) Cost of Goods Sold
8) The account used to offset the adjustment to inventory to the actual amount on hand
Diff: 1
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
Answers: 8) A
9) Following is a random list of some of the accounts and their December 31, 2014, balances for Carmen & Company. Carmen & Company uses a periodic inventory system and all account balances are normal.
Purchases $320,000
Sales revenue 460,000
Interest revenue 23,000
Salary expense 45,000
Freight in 17,000
Purchase discounts 31,000
Sales returns and allowances 35,000
Interest expense 18,000
Delivery expense 24,000
Sales discounts 27,000
Insurance expense 16,000
Purchase returns and allowances 46,000
B.J. Carmen, Capital 30,000
Utilities expense 14,000
Amortization expense-equipment 10,000
B.J. Carmen, Withdrawals 15,000
The beginning and ending amounts for inventory are $58,000 and $65,000, respectively.
Prepare the closing entries for Carmen & Company.
Answer: General Journal
Date
Accounts
Debit
Credit
Dec. 31
Sales Revenue
460,000
Interest Revenue
23,000
Purchase Discounts
31,000
Purchase Returns & Allowances
46,000
Income Summary
560,000
31
Income Summary
526,000
Sales Ret. and Allow
35,000
Sales Discounts
27,000
Purchases
320,000
Salary Expense
45,000
Freight in
17,000
Interest expense
18,000
Delivery Expense
24,000
Insurance Expense
16,000
Utilities Expense
14,000
Amortization Exp- equip
10,000
31
Income Summary
58,000
Inventory (beg bal)
58,000
31
Inventory (end bal)
65,000
Income Summary
65,000
31
Income Summary
41,000
B.J. Carmen, Capital
41,000
31
B.J. Carmen, Capital
15,000
B.J. Carmen, Withdrawals
15,000
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Application
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
Objective 5-A4
1) The caption “Net sales” in a multi-step income statement is different if a business uses the periodic instead of the perpetual inventory system.
Answer: FALSE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
2) Net purchases caption on the multi-step income statement is calculated by subtracting purchase discounts and purchase returns and allowances from purchases.
Answer: TRUE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
3) Inventory and cost of goods sold for a business using the periodic inventory system appear on the:
A) balance sheet and statement of owner’s equity, respectively
B) statement of owner’s equity and income statement, respectively
C) balance sheet and income statement, respectively
D) income statement and cash flow statement, respectively
Answer: C
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
Table 5-3
Sales revenue
$750,000
Interest revenue
18,000
Freight in
44,000
Beginning inventory
75,000
Purchases discounts
20,000
Sales returns and allowances
44,000
Operating expenses
99,000
Interest expense
15,000
Ending inventory
72,000
Purchases
415,000
Sales discounts
25,000
William Browning, Withdrawals
61,000
Purchase returns and allowances
36,000
4) Refer to Table 5-3. Operating income is:
A) $161,000
B) $214,000
C) $179,000
D) $176,000
Answer: D
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
5) Refer to Table 5-3. Net income is:
A) $161,000
B) $214,000
C) $179,000
D) $176,000
Answer: C
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
Table 5-4
The following data is for the Atlantis Merchandising, which uses a periodic inventory system:
Sales revenue
$600,000
Interest revenue
12,000
Freight in
42,000
Beginning inventory
77,000
Purchase discounts
19,000
Sales returns and allowances
33,000
Operating expenses
77,000
Interest expense
9,000
Ending inventory
81,000
Purchases
415,000
Sales discounts
35,000
Omar Atlantis, Withdrawals
71,000
Purchase returns and allowances
39,000
6) Refer to Table 5-4. The operating income for Atlantis Merchandising is:
A) $(11,000).
B) $63,000.
C) $51,000.
D) $60,000.
Answer: D
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
7) Refer to Table 5-4. The net income for Atlantis Merchandising is:
A) $(11,000).
B) $63,000.
C) $51,000.
D) $60,000.
Answer: B
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
Table 5-5
The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:
Salary payable
$1,100
Sales revenue
480,000
Interest revenue
3,000
Freight in
20,000
Beginning inventory
35,000
Sales discounts
18,000
Purchases of inventory
240,000
Purchase returns and allowances
35,000
Purchase discounts
10,000
Sales returns and allowances
35,000
Ending inventory
80,000
Operating expenses
85,000
Interest expense
7,000
Owner withdrawals
12,000
8) Refer to Table 5-5. The operating income for Speedy Boat Company is:
A) $156,000.
B) $172,000.
C) $168,000.
D) $160,000.
Answer: B
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
9) Refer to Table 5-5. The net income for Speedy Boat Company is:
A) $156,000.
B) $172,000.
C) $168,000.
D) $160,000.
Answer: C
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
Match the following.
A) net purchases
10) Purchases minus purchase discounts and minus purchase returns and allowances
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
Answers: 10) A
11) Following is a random list of some of the accounts and their December 31, 2014, balances for Milita Merchandising. Milita Merchandising uses a periodic inventory system and all account balances are normal.
Purchases $330,000
Sales revenue 470,000
Interest revenue 23,000
Salary expense 45,000
Freight in 17,000
Purchase discounts 31,000
Sales returns and allowances 40,000
Interest expense 18,000
Delivery expense 24,000
Sales discounts 27,000
Insurance expense 16,000
Purchase returns and allowances 49,000
Milita, Capital 35,000
Utilities expense 14,000
Amortization expense-equipment 10,000
Milita, Withdrawals 18,000
The beginning and ending amounts for inventory are $58,000 and $65,000, respectively.
Calculate the following for Milita Merchandising:
Net sales revenue $__________
Net purchases $__________
Cost of goods available for sale $__________
Cost of goods sold $__________
Gross margin $__________
Operating income $__________
Net income $__________
Answer: Net sales revenue
($470,000 – $40,000 – $27,000) = $403,000
Net purchases
($330,000 – $31,000 – $49,000) = $250,000
Cost of goods available for sale
($58,000 + $250,000 + $17,000) = $325,000
Cost of goods sold
($325,000 – $65,000) = $260,000
Gross margin
($403,000 – $260,000) = $143,000
Operating income
($143,000 – $45,000 – $24,000 – $16,000 – $14,000 – $10,000) = $34,000
Net income
($34,000 + $23,000 – $18,000) = $39,000
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
Table 5-5
The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:
Salary payable
$1,100
Sales revenue
480,000
Interest revenue
3,000
Freight in
20,000
Beginning inventory
35,000
Sales discounts
18,000
Purchases of inventory
240,000
Purchase returns and allowances
35,000
Purchase discounts
10,000
Sales returns and allowances
35,000
Ending inventory
80,000
Operating expenses
85,000
Interest expense
7,000
Owner withdrawals
12,000
12) Based on the information in Table 5-5 provide the following:
Multi-step income statement
Gross margin percentage and the inventory turnover ratio for Speedy Boat Company. Comment on the effect that an increasing inventory turnover has on a business.
Answer:
Multi-step income statement
Speedy Boat Company
Income Statement
For the Period Ending December 31, 2013
Sales $480,000
Returns & allowances 35,000
Discounts 18,000
Net sales $427,000
Cost of goods sold:
Beg. inventory $35,000
Net purchases (240-35-10) 195,000
Freight-in 20,000
Available $250,000
End. inventory 80,000
Cost of goods sold 170,000
Gross margin $257,000
Operating expenses 85,000
Operating income $172,000
Other income and expenses:
Interest revenue $3,000
Interest expense 7,000 (4,000)
Net income $168,000
Ratios
Gross margin percentage = ($257,000/$427,000) = 60%
Inventor turnover = {$170,000/($35,000 + $80,000)/2] = 2.96 times
Increasing inventory turnover increases cash flow, reduces the risk of obsolescence, reduces the need for shelf space and warehousing, reduces the need for trade credit.
Diff: 3
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
Objective 5-B1
1) Describe the difference between a perpetual inventory system and a periodic inventory system.
Answer: The perpetual inventory system is used by businesses that sell expensive products or that have fairly sophisticated computer systems. This system keeps track of the inventory as it is both bought and sold, constantly updating the inventory account to current levels. This system offers management more control over inventory but requires a tremendous amount of record keeping. The sale of inventory requires not just one but two entries to record the transaction. One entry to record the sales price in the revenue account and another to record the cost in the cost of goods sold account.
The periodic inventory system is used by businesses that sell relatively inexpensive goods without the aid of sophisticated computers. This system does not keep track of the daily buying and selling of merchandise at cost. The only way to determine the cost of goods sold is to take a physical count of the merchandise on hand and to assume that if it is not on hand, it has been sold. This system does not offer as much control over inventory, but is much easier to account for on a daily basis.
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Comprehension
Objective: 5-B1 Compare the perpetual and periodic inventory systems
Objective 5-C1
1) Goods and services taxes add an extra cost to the value of inventory.
Answer: FALSE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST
2) Benny’s Shoes and Feet Stuff operates in a province where HST is applicable at a rate of 12%. Last week he purchased $5,000 of shoe inventory on credit. Which of the following journal entries correctly records this transaction if Benny’s Shoes and Feet Stuff uses a periodic inventory system?
A)
Purchases
5,000
HST Recoverable
600
Accounts Payable
5,600
B)
Purchases
5,000
HST Payable
600
Accounts Payable
5,600
C)
Inventory
5,000
HST Recoverable
600
Accounts Payable
5,600
D)
Inventory
5,000
HST Payable
600
Accounts Payable
5,600
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST
Match the following.
A) HST Payable
B) HST Recoverable
3) The tax account debited when goods are purchased
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST
Answers: 3) B
Table 5-7
Marvelous Merchandising charges GST on all its sales at the rate of 5% and pays GST on all its purchases at the rate of 5%. For purposes of this question, any applicable PST is ignored. The following are transactions for the month of May.
May 8 Purchased inventory, on account, FOB destination, from Stranhern Wholesale
$1,000 plus applicable GST.
10 Returned defective merchandise to Stranhern, $300 plus applicable GST.
12 Sold merchandise to Dainty Store on account for $3,000 plus applicable GST.
FOB shipping point. Cost of the merchandise sold was $2,500.
28 Collected balance on account from Dainty Store.
30 Paid balance on account to Stranhern.
4) Refer to Table 5-7. Prepare the journal entries for Marvelous Merchandising for the month of May, assuming that Marvelous Merchandising uses a perpetual inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
May 8
Inventory
1,000
GST Recoverable
50
Accounts Payable
1,050
10
Accounts Payable
315
GST Recoverable
15
Inventory
300
12
Accounts Receivable
3,150
GST Payable
150
Sales Revenue
3,000
Cost of Goods Sold
2,500
Inventory
2,500
28
Cash
3,150
Accounts Receivable
3,150
30
Accounts Payable
735
Cash
735
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST
5) Refer to Table 5-7. Prepare the journal entries for Marvelous Merchandising for the month of May, assuming that Marvelous Merchandising uses a periodic inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
May 8
Purchases
1,000
GST Recoverable
50
Accounts Payable
1,050
10
Accounts Payable
315
GST Recoverable
15
Purchase Returns and Allowances
300
12
Accounts Receivable
3,150
GST Payable
150
Sales Revenue
3,000
28
Cash
3,150
Accounts Receivable
3,150
30
Accounts Payable
735
Cash
735
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST
Table 5-8
Marvelous Merchandising charges GST on all its sales at the rate of 5% and pays GST on all its purchases at the rate of 5%. For purposes of this question, any applicable PST is ignored. The following are transactions for the month of May. Marvelous uses a perpetual inventory system.
May 8 Purchased inventory, on account, FOB destination, from Stranhern Wholesale,
$1,000 plus applicable GST.
10 Returned defective merchandise to Stranhern, $300 plus applicable GST.
12 Sold merchandise to Dainty Store on account for $3,000 plus applicable GST.
FOB shipping point. Cost of the merchandise sold was $2,500.
28 Collected balance on account from Dainty Store.
30 Paid balance on account to Stranhern.
General Journal
Date
Accounts
Debit
Credit
May 8
Inventory
1,000
GST Recoverable
50
Accounts Payable
1,050
10
Accounts Payable
315
GST Recoverable
15
Inventory
300
12
Accounts Receivable
3,150
GST Payable
150
Sales Revenue
3,000
Cost of Goods Sold
2,500
Inventory
2,500
28
Cash
3,150
Accounts Receivable
3,150
30
Accounts Payable
735
Cash
735
6) Refer to Table 5-8. Prepare the remittance payment of GST on June 15, based on the assumption that the only transactions for May are those listed in Table 5-8.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 15
GST Payable
150
GST Recoverable
35
Cash
115
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST
SAMPLE
Accounting, Vol. 1, 9e Cdn. Ed. (Horngren et al.)
Chapter 5 Merchandising Operations and the Accounting Cycle
Objective 5-1
1) Inventory includes all goods that the company owns and expects to use in normal operations.
Answer: FALSE
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
2) Sales revenue and Net sales are synonymous terms.
Answer: FALSE
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
3) Cost of goods sold is an operating expense.
Answer: FALSE
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
4) Gross margin is equal to net sales plus cost of goods sold.
Answer: FALSE
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
5) Inventory is a current liability on the balance sheet.
Answer: FALSE
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
6) Net sales is equal to sales revenue plus sales returns and minus sales discounts.
Answer: FALSE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
7) Gross margin minus expenses equals gross profit.
Answer: FALSE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
8) Sales revenue minus sales returns and allowances and sales discounts equals:
A) gross margin.
B) income from operations.
C) cost of goods sold.
D) net sales.
Answer: D
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
Table 5-4
The following data is for the Atlantis Merchandising, which uses a periodic inventory system:
Sales revenue
$600,000
Interest revenue
12,000
Freight in
42,000
Beginning inventory
77,000
Purchase discounts
19,000
Sales returns and allowances
33,000
Operating expenses
77,000
Interest expense
9,000
Ending inventory
81,000
Purchases
415,000
Sales discounts
35,000
Omar Atlantis, Withdrawals
71,000
Purchase returns and allowances
39,000
9) Refer to Table 5-4. Net sales for Atlantis Merchandising are:
A) $532,000
B) $600,000
C) $567,000
D) $565,000
Answer: A
Explanation: A)
Sales $600,000
Returns & allowances 33,000
Discounts 35,000
Net sales $532,000
Cost of goods sold:
Beg. inventory $77,000
Net purchases (415-19-39) 357,000
Freight-in 42,000
Available $476,000
End. inventory 81,000
Cost of goods sold 395,000
Gross margin $137,000
Operating expenses 77,000
Operating income $60,000
Other income and expenses:
Interest income $12,000
Interest expense 9,000 3,000
Net income $63,000
Diff: 2
Learning Outcome: A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework
Skill: Application
Objective: 5-1 Use sales and gross margin to evaluate a company
Table 5-5
The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:
Salary payable
$1,100
Sales revenue
480,000
Interest revenue
3,000
Freight in
20,000
Beginning inventory
35,000
Sales discounts
18,000
Purchases of inventory
240,000
Purchase returns and allowances
35,000
Purchase discounts
10,000
Sales returns and allowances
35,000
Ending inventory
80,000
Operating expenses
85,000
Interest expense
7,000
Owner withdrawals
12,000
10) Refer to Table 5-5. The net sales for Speedy Boat Company are:
A) $427,000
B) $445,000
C) $480,000
D) $462,000
Answer: A
Explanation: A)
Sales $480,000
Returns & allowances 35,000
Discounts 18,000
Net sales $427,000
Cost of goods sold:
Beg. inventory $35,000
Net purchases (240-35-10) 195,000
Freight-in 20,000
Available $250,000
End. inventory 80,000
Cost of goods sold 170,000
Gross margin $257,000
Operating expenses 85,000
Operating income $172,000
Other income and expenses:
Interest revenue $3,000
Interest expense 7,000 (4,000)
Net income $168,000
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-1 Use sales and gross margin to evaluate a company
11) What is the difference between a sales return and a sales allowance?
A) A sales return reduces the amount receivable from the customer, but an allowance does not.
B) A sales return involves an adjustment to Inventory, but a sales allowance does not.
C) A sales return requires a debit to Sales returns and allowances, but a sales allowance does not.
D) A sales allowance is deducted from Sales revenue to calculate net sales, but a sales return is not.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
Match the following.
A) gross margin
B) sales returns and allowances
C) inventory
12) The excess of sales revenue over cost of goods sold
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
13) All goods that a business owns and expects to sell in the normal course of operation
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
14) A contra account to Sales Revenue
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
Answers: 12) A 13) C 14) B
15) Define gross margin and operating income. Explain how they are used in evaluating a company.
Answer: Gross margin is the excess of sales revenue over the cost of the goods sold. It helps measure a business’s success. A sufficiently high gross margin is vital to success. Gross margin must be high enough to cover the operating expenses of the firm in order to result in operating income for the period. Operating income is gross margin minus operating expenses plus any other operating revenues. There must be sufficient operating income to cover other expenses of the period to end up with a net income instead of a net loss.
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Comprehension
Objective: 5-1 Use sales and gross margin to evaluate a company
Objective 5-2
1) The entry to record the purchase of inventory on account in a perpetual inventory system includes a debit to the Purchases account.
Answer: FALSE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
2) Purchase returns of merchandise decrease the liability to a creditor.
Answer: TRUE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
3) In a purchase discount, the larger the quantity of merchandise purchased, the lower the price per item.
Answer: FALSE
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
4) Credit terms of 1/15 n/30 means the purchaser can deduct 1% of the invoice price if paid within 15 days.
Answer: TRUE
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
5) Quantity discounts offered by suppliers for large shipments of inventory are always recorded separately.
Answer: FALSE
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
6) FOB shipping point means that the title to the goods passes to the purchaser upon receipt of the goods and the seller is responsible for the cost of the freight.
Answer: FALSE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
7) Sales discounts is a contra account and has a normal credit balance.
Answer: FALSE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
8) When the seller accepts a return of undamaged goods from the purchaser, the seller’s journal entries would include two entries, if they are using a perpetual inventory system.
Answer: TRUE
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
9) A seller requesting payment will send the purchaser a purchase order.
Answer: FALSE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
10) The entry to record the return of $250 of inventory to a supplier under the perpetual inventory system is recorded with a debit to:
A) Accounts Payable and a credit to Purchases Discounts.
B) Purchases Returns and Allowances and a credit to Accounts Payable.
C) Accounts Payable and a credit to Inventory.
D) Inventory and a credit to Accounts Payable.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
11) Using a perpetual inventory system, the entry to record the purchase of merchandise on account involves a:
A) debit to Inventory.
B) debit to Accounts Payable.
C) credit to Inventory.
D) credit to Cash.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
12) Credit terms of 1/10 n/30 indicates that the buyer is:
A) allowed a 10% discount if payment is made within 30 days.
B) allowed a 1% discount if payment is made within 10 days.
C) allowed a 1% discount if payment is made within 30 days.
D) allowed a 30% discount if payment is made within 10 days.
Answer: B
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
13) Which of the following credit terms allows for a cash discount?
A) n/30
B) n/eom
C) n/60
D) 1/10 n/30
Answer: D
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
14) A merchandiser purchases inventory on account under a perpetual inventory system with terms of 2/10 n/30. The merchandiser would:
A) credit Inventory on date of payment if the discount is taken.
B) credit Inventory on date of payment if the discount is not taken.
C) credit Purchases Discounts on date of purchase if the discount is taken.
D) debit Purchases Discounts on date of purchase if the discount is not taken.
Answer: A
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
15) A company makes a purchase of $2,000 of inventory, subject to credit terms of 3/10 n/45 and returns $500 of inventory prior to payment. What is the amount of the payment assuming payment is made within the discount period?
A) $1,500
B) $1,455
C) $1,440
D) $1,560
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Analysis
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
16) If a purchaser returns goods purchased on account to the supplier under a perpetual inventory system, the purchaser would debit:
A) Inventory and credit Accounts Payable.
B) Accounts Payable and credit Inventory.
C) Inventory and credit Accounts Receivable.
D) Accounts Receivable and credit Inventory.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
17) When a discount is taken for prompt payment under a perpetual inventory system, the purchaser would credit:
A) Accounts Payable.
B) Accounts Receivable.
C) Purchases Discounts.
D) Inventory.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
18) A purchase return or allowance under a perpetual inventory system is credited to:
A) Accounts Payable.
B) Purchase Returns and Allowances.
C) Inventory.
D) Purchases.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
19) If the shipping terms are FOB shipping point and the freight bill is $200, the purchaser, using a perpetual inventory system would record payment of the freight with a debit to:
A) Inventory and credit to Cash for $200.
B) Accounts Payable and credit to Inventory for $200.
C) Inventory and credit to Purchases Discounts for $200.
D) Purchases Discounts and credit to Inventory for $200.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
20) When the seller accepts a return of goods from the purchaser originally sold on account, the seller’s journal entry would include a debit to:
A) Sales Discounts and credit to Cash.
B) Sales Returns and Allowances and credit to Accounts Receivable.
C) Sales Returns and Allowances and credit to Sales Discounts.
D) Sales Revenue and credit to Cash.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
21) Day Company purchased $3,000 of merchandise on credit, terms 3/15 n/30. The entry to record payment for the merchandise within the discount period under a perpetual inventory system would include a:
A) debit to Inventory of $1,940.
B) debit to Accounts Payable of $1,940.
C) credit to Purchase Discounts of $90.
D) credit to Inventory of $90.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
22) Mars Company purchased $2,500 of merchandise on account, terms 3/10 n/60. If payment was made within the discount period, the entry to record the payment under a perpetual inventory system would include a credit to:
A) Cash of $2,425.
B) Inventory of $2,352.
C) Accounts Payable of $2,400.
D) Cash for $2,400.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
23) Green Company purchased $3,600 of merchandise on account, terms 2/10 n/30. If payment was made after the expiration of the discount period and a perpetual inventory system is used, the entry to record the payment would include a:
A) credit to Inventory of $3,600.
B) credit to Cash of $3,528.
C) credit to Cash of $3,600.
D) debit to Accounts Payable of $3,528.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
24) The seller is responsible for the shipping costs when the shipping terms are:
A) FOB destination.
B) COD destination.
C) FOB shipping point.
D) COD shipping point.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
25) The buyer is responsible for the shipping costs when the shipping terms are:
A) FOB destination.
B) COD destination.
C) FOB shipping point.
D) COD shipping point.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
26) When the buyer pays the freight costs, the entry to record the payment under a perpetual inventory system would include a debit to:
A) Delivery Expense.
B) Purchases Discounts.
C) Inventory.
D) Freight In.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
27) When the seller is liable for the shipping costs, the payment for the freight in the seller’s accounts is recorded with a debit to:
A) Delivery Expense or Freight Out.
B) Freight In.
C) Inventory.
D) Cash.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
28) Under a perpetual inventory system, the entry to record the cost of goods sold would include a debit to:
A) Cost of Goods Sold and a credit to Inventory for the retail price of the inventory.
B) Inventory and a credit to Sales Revenue for the retail price of the inventory.
C) Cost of Goods Sold and a credit to Inventory for the cost of the inventory.
D) Inventory and a credit to Cost of Goods Sold for the cost of the inventory.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
29) Under a perpetual inventory system, the entry to record a sale on account would include a debit to:
A) Accounts Receivable and a credit to Sales Revenue for the retail price of the inventory.
B) Inventory and a credit to Sales Revenue for the retail price of the inventory.
C) Cost of Goods Sold and a credit to Inventory for the retail price of the inventory.
D) Accounts Receivable and a credit to Sales Revenue for the cost of the inventory.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
30) The entry to record the sale of merchandise for cash includes a:
A) debit to Accounts Receivable.
B) credit to Sales Discounts.
C) debit to Sales Revenue.
D) credit to Sales Revenue.
Answer: D
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
31) To update the inventory records for the sale of merchandise under a perpetual inventory system, the entry would include a:
A) debit to Inventory.
B) credit to Accounts Payable.
C) debit to Sales Revenue.
D) debit to Cost of Goods Sold.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
32) To update the inventory records for the sale of merchandise under a perpetual inventory system, the entry would include a:
A) credit to Inventory.
B) debit to Accounts Payable.
C) debit to Sales Revenue.
D) credit to Cost of Goods Sold.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
33) The entries to record a $5,000 cash sale under a perpetual inventory system, when the cost of the merchandise is $3,200, include a:
A) debit to Inventory for $5,000.
B) debit to Sales Revenue for $5,000.
C) credit to Cost of Goods Sold for $3,200.
D) debit to Cost of Goods Sold for $3,200.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
34) The entries to record a $4,500 sale on account under a perpetual inventory system, when the cost of the merchandise is $3,000, include a:
A) debit to Inventory for $3,000.
B) credit to Sales Revenue for $3,000.
C) debit to Sales Revenue for $4,500.
D) credit to Inventory for $3,000.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
35) Under a perpetual inventory system, the entry to record the return of inventory sold on account for $250 with a cost of $185 would be recorded by the seller as a:
A) debit to Accounts Receivable for $250.
B) debit to Sales Returns and Allowances for $185.
C) credit to Sales Revenue for $250.
D) credit to Cost of Goods Sold for $185.
Answer: D
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
36) Under a perpetual inventory system, the entry to record the return of inventory sold on account for $360 with a cost of $210 would be recorded by the seller as a:
A) credit to Accounts Receivable for $210.
B) credit to Sales Returns and Allowances for $210.
C) debit to Sales Revenue for $360.
D) debit to Inventory for $210.
Answer: D
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
37) Eastern Outfitters sold $2,500 of inventory to a customer on account, terms 3/15 n/40. Freight terms were FOB shipping point and freight charges totalled $150. The entry to record the sale would include a:
A) credit to Accounts Receivable for $2,350.
B) debit to Sales Revenue for $2,500.
C) credit to Sales Revenue for $2,500.
D) debit Accounts Receivable for $2,650.
Answer: C
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
38) A merchandiser received payment in full within the discount period on a $5,000 sales invoice, terms 2/15 n/30. The journal entry would include a:
A) debit to Cash for $5,000.
B) credit to Accounts Receivable for $5,000.
C) credit to Accounts Receivable for $5,900.
D) credit to Sales Discounts for $100.
Answer: B
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
39) A merchandiser received payment in full after the expiration of the discount period on a $3,000 sales invoice, terms 3/15 n/30. The journal entry would include a:
A) debit to Cash for $2,910.
B) credit to Accounts Receivable for $2,910.
C) debit to Sales Discount of $90.
D) debit to Cash for $3,000.
Answer: D
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
40) Under a perpetual inventory system, the entries to record a $2,600 sales return of undamaged goods for a sale originally made on account, when the merchandise had a cost of $1,200, include a:
A) debit to Inventory of $1,200.
B) debit to Sales Returns and Allowances of $1,200.
C) credit to Cost of Goods Sold of $2,600.
D) credit to Sales Returns and Allowances of $1,200.
Answer: A
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
41) Under a perpetual inventory system, the entries to record a $3,400 sales return for undamaged goods on an original cash sale when the merchandise had a cost of $1,500 include a debit to:
A) Accounts Receivable of $3,400.
B) Cost of Goods Sold of $1,500.
C) Sales Returns and Allowances of $1,500.
D) Inventory of $1,500.
Answer: D
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
42) Which of the following is true about freight in?
A) Freight in is added to the cost of merchandise inventory.
B) Freight in is a selling expense.
C) Freight in is an operating expense.
D) Freight in is deducted from Accounts payable.
Answer: A
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
43) Michelin Jewellers completed the following transactions. Michelin Jewellers uses the perpetual inventory system. On April 2, Michelin sold $9,000 of merchandise to a customer on account with terms of 3/15, n/30. Michelin’s cost of the merchandise sold was $5,500. On April 4, the customer reported damaged goods and Michelin granted a $1,000 sales allowance. On April 10, Michelin received payment from the customer. Which of the following entries correctly records the cash receipt on Michelin’s books?
A)
Cash
7,760
Sales discount
240
Accounts receivable
8,000
B)
Accounts receivable
8,000
Sales discount
240
Cash
7,760
C)
Cash
8,000
Accounts receivable
8,000
D)
Cash
7,760
Accounts receivable
7,760
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
Match the following.
A) sales discount
44) Reduction in the amount receivable from a customer, offered by the seller as an incentive for the customer to pay promptly.
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
Answers: 44) A
45) The following data pertain to Corbet Merchandising for the year ended December 31, 2013:
Beginning inventory $190,300
Purchases of inventory on credit during the year 450,000
Cost of goods sold during the year 65% of sales
Sales (75% on credit) during the year 800,000
a) Prepare entries for the following transactions using a perpetual inventory system:
1) Purchase of inventory during 2013
2) Sales during 2013
3) Cost of goods sold during 2013
b) Compute the balance in the inventory account on December 31, 2013.
Answer:
a) General Journal
Date
Accounts
Debit
Credit
1)
Inventory
450,000
Accounts Payable
450,000
To record inventory purchases during 2013.
2)
Cash
200,000
Accounts Receivable
600,000
Sales Revenue
800,000
To record cash and credit sales during 2013.
3)
Cost of Goods Sold
520,000
Inventory
520,000
To record cost of goods sold during 2013.
b) $190,300 + $450,000 – $520,000 = $120,300
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Analysis
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
46) Details of a purchase invoice, credit terms, and a purchase return are shown below. Assume the credit memo was received and payment made within the discount period.
Cost of merchandise as shown on purchase invoice $9,200
Cost of merchandise returned 3,700
Transportation charges, terms FOB shipping point 500
Credit terms 2/10 n/30
Compute the following:
a) amount of discount
b) amount paid by purchaser, within the discount period, including freight, if applicable
c) amount paid by purchaser if paid after expiration of discount including freight, if applicable
Answer:
a) ($9,200 – $3,700) × 0.02 = $110
b) ($5,500 × 0.98) + $500 = $5,890
c) $5,500 + $500 = $6,000
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Analysis
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
47) Details of purchase invoices including shipping terms, credit terms, and returns appear below. Compute the total amount to be paid in full settlement of each invoice, assuming that credit for returns is granted before the expiration of the discount period and payment is made within the discount period.
Invoice
Freight and Credit Terms
Transportation Charges
Returns and Allowances
a) $2,000
FOB destination, 3/10 n/45
$55
$200
b) $5,500
FOB shipping point, 2/10 n/30
$100
$50
c) $6,700
FOB shipping point, 2/10 n/45
$200
$350
d) $9,300
FOB destination, 2/10 n/60
$150
$550
Answer:
a) ($2,000 – $200) × 0.97 = $1,746
b) [($5,500 – $50) × 0.98] + $100 = $5,441
c) [($6,700 – $350) × 0.98] + $200 = $6,423
d) ($9,300 – $550) × 0.98 = $8,575
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Analysis
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
48) Tobermory Merchandising had the following transactions during May:
May 5 Purchased $2,700 of merchandise on account, terms 3/15 n/60,
FOB shipping point.
9 Paid transportation cost on the May 5 purchase, $250.
10 Returned $400 of defective merchandise purchased on May 5.
15 Paid for the May 5 purchase, less the return and the discount.
Required:
Assuming the perpetual inventory system is used, prepare the journal entries to record the above transactions.
Answer:
General Journal
Date
Accounts
Debit
Credit
May 5
Inventory
2,700
Accounts Payable
2,700
Purchased merchandise on account, 3/15 n/6.0
9
Inventory
250
Cash
250
Paid transportation cost on May 5 purchase.e.
10
Accounts Payable
400
Inventory
400
Returned defective merchandise purchased on May 5.
15
Accounts Payable
2,300
Cash
2,231
Inventory
69
Paid for May 5 purchase, less return and discount.
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
49) Romeo Merchandising had the following transactions in June. Prepare journal entries for these transactions assuming Romeo uses a perpetual inventory system.
June 2 Romeo received an $18,000 invoice from one of its suppliers. Terms
were 2/10 n/30, FOB shipping point. Romeo paid the freight bill
amounting to $2,000.
4 Romeo returned $2,500 of the merchandise billed on June 2 because it
was defective.
5 Romeo sold $8,000 of merchandise on account, terms 3/15 n/30.
The cost of the merchandise sold was $5,100.
10 Romeo paid the invoice dated June 2, less the return and the discount.
15 A customer returned $2,500 of merchandise sold on June 5. The cost of
the returned merchandise was $1,450.
19 Britt received payment on the remaining amount due from the sale of
June 5, less the return and the discount.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 2
Inventory
18,000
Accounts Payable
18,000
Inventory
2,000
Cash
2,000
4
Accounts Payable
2,500
Inventory
2,500
5
Accounts Receivable
8,000
Sales Revenue
8,000
Cost of Goods Sold
5,100
Inventory
5,100
10
Accounts Payable
15,500
Cash
15,190
Inventory
310
15
Sales Returns and Allowances
2,500
Accounts Receivable
2,500
Inventory
1,450
Cost of Goods Sold
1,450
19
Cash
5,335
Sales Discounts
165
Accounts Receivable
5,500
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
Table 5-6
The following are transactions for Latest Fashions for the month of June.
June 2 Purchased $2,000 of inventory under terms 1/10, n/60 and FOB shipping point
from Trendy Manufacturing. The merchandise had cost Trendy $1,800
June 7 Returned defective merchandise to Trendy Manufacturing with invoice price of $400.
June 8 Paid the freight charges on the purchase from Trendy Manufacturing in cash for $100.
June 9 Sold merchandise to New Miss Store on account for $5,000 with terms 2/15, n/60 FOB
shipping point. Cost of the merchandise sold was $4,000.
June 10 Paid Trendy Manufacturing the balance on account.
June 12 Granted sales allowance of $300 to New Miss Store for defective merchandise.
June 23 Collected balance owing from New Miss Store.
50) Refer to table 5-6. Prepare the journal entries for Latest Fashions for the transactions listed, assuming that Latest Fashions uses a perpetual inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 2
Inventory
2,000
Accounts Payable
2,000
7
Accounts Payable
400
Inventory
400
8
Inventory
100
Cash
100
9
Accounts Receivable
5,000
Sales Revenue
5,000
Cost of Goods Sold
4,000
Inventory
4,000
10
Accounts Payable
1,600
Inventory
16
Cash
1,584
12
Sales Returns and Allowances
300
Accounts Receivable
300
23
Cash
4,606
Sales Discount
94
Accounts Receivable
4,700
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
51) Refer to table 5-6. Prepare the journal entries for Trendy Manufacturing for the transactions listed, assuming that Trendy uses a perpetual inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 2
Accounts Receivable
2,000
Sales Revenue
2,000
Cost of Goods Sold
1,800
Inventory
1,800
7
Sales Returns and Allowances
400
Accounts Receivable
400
10
Cash
1,584
Sales Discount
16
Accounts Receivable
1,600
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
52) Refer to table 5-6. Prepare the journal entries for New Miss Store for the transactions listed, assuming that New Miss Store uses a perpetual inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 9
Inventory
5,000
Accounts Payable
5,000
7
Accounts Payable
300
Inventory
300
25
Accounts Payable
4,700
Inventory
94
Cash
4,606
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
Table 5-9
Reid Art Supply Company uses a perpetual inventory system. The company had the following transactions during August, 2013:
Aug. 5 Purchased $2,900 of merchandise on account; FOB shipping point, 3/15, n/60.
Aug. 9 Paid transportation costs of $440 for the Aug. 5 purchase.
Aug. 10 Returned $600 of defective merchandise purchased on Aug. 5.
Aug. 15 Paid the amount owing for the merchandise purchased Aug. 5.
53) Record the August journal entries for Reid Art Supply.
Answer:
General Journal
Date
Accounts
Debit
Credit
Aug 5
Inventory
2,900
Accounts Payable
2,900
9
Inventory
440
Cash
440
10
Accounts Payable
600
Inventory
600
15
Accounts Payable
2,300
Inventory
69
Cash
2,231
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
54) Sam Levine Merchandising had the following transactions during May:
May 1 Beginning inventory was 20 units valued at $25 per unit.
May 5 Purchased purchased 80 units of merchandise on account for $2,160, terms n/15,
FOB shipping point.
May 9 Paid transportation cost on the May 5 purchase, $240.
May 10 Returned two units of defective merchandise purchased on May 5.
May 11 Sold 30 units for $50 per unit on account.
May 15 Paid for the May 5 purchase, less the return.
May 20 Sold 10 units for $50 per unit on account.
Required:
Assuming FIFO and that the perpetual inventory system is used, prepare the journal entries to record the above transactions.
Assuming weighted-average and that the periodic inventory system is used, prepare the journal entries to record the above transactions.
Answer:
Requirement 1: Perpetual Inventory Method
Date
Account Name
Debit
Credit
May 5
Inventory
2,160
Accounts Payable
2,160
May 9
Inventory
240
Cash
240
May 10
Accounts Payable
54
Inventory
54
May 11
Accounts Receivable (30 × $50)
1,500
Sales
1,500
Cost of Goods Sold (20 × $25) + (10 × ($27 + $3))
800
Inventory
800
May 15
Accounts Payable ($2,160 – $54)
2,106
Cash
2,106
May 20
Accounts receivable
500
Sales
500
Cost of Goods Sold (10 × $30)
300
Inventory
300
Requirement 2: Periodic Inventory Method
Date
Account Name
Debit
Credit
May 5
Purchases
2,160
Accounts Payable
2,160
May 9
Frieght-in
240
Cash
240
May 10
Accounts Payable
54
Purchase Returns
54
May 11
Accounts Receivable
1,500
Sales
1,500
May 15
Accounts Payable
2,160
Cash
2,160
May 20
Accounts Receivable
500
Sales
500
Diff: 3
Learning Outcome: A-09 Explain and apply inventory costing methods
Skill: Application
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
Objective 5-3
1) The adjusting entry to record inventory shrinkage would include a debit to the cost of goods sold account in a perpetual inventory system.
Answer: TRUE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
2) In the closing entry process, the sales returns and allowances account is debited.
Answer: FALSE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
3) The adjusting entry required when the inventory counted is greater than the balance in the inventory account has a credit to Cost of Goods Sold.
Answer: TRUE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
4) In a perpetual inventory system, the closing entries include a credit to the Inventory account in an amount that equals the ending inventory, and a debit to the Inventory account in an amount that equals the beginning inventory.
Answer: FALSE
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
5) Under a perpetual inventory system, the adjusting entry to account for inventory shrinkage would include a:
A) credit to Miscellaneous Expense.
B) credit to Cost of Goods Sold.
C) credit to Inventory.
D) debit to Miscellaneous Expense.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
6) Which accounts are affected in the closing process under a perpetual inventory system?
A) Gross Margin and Cost of Goods Sold.
B) Cost of Goods Sold, Sales Returns and Allowances, and Sales Discounts.
C) Gross Margin, Sales Returns and Allowances, and Sales Discounts.
D) Operating Expenses, Sales Revenue, and Purchases.
Answer: B
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
7) Under a perpetual inventory system, which accounts would be closed to Income Summary with credits?
A) Sales Returns and Allowances, Sales Revenue, and Inventory
B) Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold
C) Sales Revenue and Cost of Goods Sold
D) Sales Returns and Allowances and Sales Revenue
Answer: B
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
8) A company’s ledger shows an Inventory balance of $20,000 and a physical count of the inventory shows $19,000. Which of the following entries is needed to record the shrinkage?
A)
Cost of goods sold
1,000
Shrinkage expense
1,000
B)
Inventory
1,000
Cost of goods sold
1,000
C)
Cost of goods sold
1,000
Inventory
1,000
D)
Cash
1,000
Inventory
1,000
Answer: C
Diff: 2
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Application
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
9) An adjusted trial balance is shown below.
Debit
Credit
Cash
$12,600
Accounts receivable
2,400
Prepaid rent
800
Inventory
28,000
Accounts payable
$4,200
Salary payable
1,000
Notes payable
800
Capital
13,800
Withdrawals
1,000
Sales revenue
96,000
Sales returns and allowances
1,600
Sales discounts
400
Cost of goods sold
25,000
Salary expense
21,000
Rent expense
14,000
Amortization expense
8,500
Supplies expense
500
Total
$115,800
$115,800
What will the final balance in Capital be after the closing entries?
A) $37,800
B) $12,700
C) $24,000
D) $36,800
Answer: A
Explanation: A) Calculations: $13,800 – $1,000 + $96,000 – $71,000 = $37,800
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Application
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
10) State whether the following accounts are:
a) closed with a debit
b) closed with a credit
c) not closed
1) cost of goods sold ________
2) sales returns and allowances ________
3) salary expense ________
4) inventory (assume perpetual inventory system) ________
5) amortization expense ________
6) accumulated amortization ________
7) accounts receivable ________
8) sales discounts ________
9) interest expense ________
10) sales revenue ________
Answer: 1) b
2) b
3) b
4) c
5) b
6) c
7) c
8) b
9) b
10) a
Diff: 2
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
11) Following is a random list of some of the accounts and their balances on December 31, 2013, for Copperfield Merchandising. Copperfield uses a perpetual inventory system and all account balances are normal.
Inventory $ 67,000
Sales revenue 470,000
Interest revenue 28,000
Salary expense 46,000
Sales returns & allowances 30,000
Interest expense 13,000
Delivery expense 15,000
Sales discounts 25,000
Insurance expense 8,000
P.Copperfield, Capital 50,000
Utilities expense 29,000
Amortization expense 20,000
P Copperfield, Withdrawals 25,000
Cost of goods sold 259,000
Accounts payable 56,000
Accounts receivable 78,000
Cash 29,000
A physical count on December 31, 2013, reveals $65,000 of inventory on hand.
a) Prepare the entry to adjust the inventory account on December 31, 2013.
b) Prepare the closing entries on December 31, 2013.
Answer:
General Journal
Date
Accounts
Debit
Credit
a)
Dec. 31
Cost of Goods Sold
2,000
Inventory
2,000
b)
Dec. 31
Sales Revenue
470,000
Interest Revenue
28,000
Income Summary
498,000
31
Income Summary
447,000
Sales Ret. and Allow.
30,000
Sales Discounts
25,000
Cost of Goods Sold
261,000
Salary Expense
46,000
Utilities Expense
29,000
Amortization Expense
20,000
Delivery Expense
15,000
Interest Expense
13,000
Insurance Expense
8,000
31
Income Summary
51,000
P.Copperfield, Capital
51,000
31
P.Copperfield, Capital
25,000
P.Copperfield, Withdrawals
25,000
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Application
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
12) Underwater Adventures has the following account balances on August 31, 2014:
Accounts payable $8,800
Accounts receivable 9,600
Accumulated amortization – equipment 30,300
Cash 2,200
Cost of goods sold 341,500
Jacobson, capital 190,700
Jacobson, withdrawals 44,000
Equipment 88,000
Interest earned 2,000
Inventory 71,500
Operating expenses 175,500
Sales discounts 3,100
Sales returns and allowances 14,400
Sales revenue 520,600
Supplies 7,100
Unearned sales revenue 4,500
The following information as at August 31, 2014 was also available:
A physical count of items showed $1,200 of supplies on hand.
An inventory count showed inventory on hand of $66,400.
The equipment has an estimated useful life of eight years and is expected to have no salvage value.
Unearned sales revenue of $1,000 was earned.
Required:
Prepare the necessary adjusting journal entries at August 31, 2014. For simplicity all operating expenses are combined into a single operating expense account for financial statement purposes. Use the normal account name for the adjusting journal entries.
Prepare a classified balance sheet based on adjusted account balances.
Answer: General Journal
Date
Accounts
Debit
Credit
Aug 31
Supplies expense
5,900
Supplies
5,900
31
Cost of goods sold
5,100
Inventory
5,100
31
Amortization expense, equipment
11,000
Accumulated amort., equip.
11,000
31
Unearned sales revenue
1,000
Sales revenue
1,000
Underwater Adventures
Balance Sheet
August 31, 2014
Assets
Current assets:
Cash $2,200
Accounts receivable 9,600
Supplies 1,200
Inventory 66,400
Total current assets $79,400
Property, plant and equipment:
Equipment $88,000
Less: accumulated amortization 41,300 46,700
Total assets $126,100
Liabilities and Owner’s Equity
Current liabilities:
Accounts payable $8,800
Unearned sales revenue 3,500
Total current liabilities $12,300
Jacobson capital 113,800
Total liabilities and owner’s equity $126,100
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
Table 5-10
The December 31, 2014 adjusted trial balance for Camptown Company is shown below.
Debit
Credit
Cash
$12,600
Accounts receivable
2,400
Prepaid rent
800
Inventory
28,000
Accounts payable
$4,200
Salary payable
1,000
Notes payable
800
Capital
13,800
Drawing
1,000
Sales revenue
96,000
Sales returns and allowances
1,600
Sales discounts
400
Cost of goods sold
25,000
Salary expense
21,000
Rent expense
22,500
Supplies expense
500
Total
$115,800
$115,800
13) Using the information from Table 5-10 prepare an income statement in single-step format and the closing entries for Camptown Company.
Answer:
Camptown Company
Income Statement
For the Year Ended December 31, 2014
Revenues:
Sales revenue $ 96,000
Less: Sales discounts $ 400
Sales returns and allowances 1,600 2,000
Net sales revenue $ 94,000
Expenses:
Cost of goods sold $ 25,000
Salary expense 21,000
Rent expense 22,500
Supplies expense 500
Total expenses 69,000
Net income $ 25,000
General Journal
Date
Accounts
Debit
Credit
Dec 31
Sales revenue
96,000
Income summary
96,000
31
Income summary
71,000
Sales discounts
400
Sales returns and allowances
1,600
Cost of goods sold
25,000
Salary expense
21,000
Rent expense
22,500
Supplies expense
500
31
Income summary
25,000
Capital
25,000
31
Capital
1,000
Drawing
1,000
Diff: 2
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Application
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system
Objective 5-4
1) Operating expenses are divided into manufacturing expenses and selling expenses on the income statement.
Answer: FALSE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
2) The multi-step income statement format shows subtotals to highlight significant relationships.
Answer: TRUE
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Comprehension
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
3) Gross margin minus operating expenses equals income from operations on a multi-step income statement.
Answer: TRUE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
4) A single-step format of the income statement will always have fewer sub-totals than the multi-step income statement format.
Answer: TRUE
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
5) The income from operations is presented on both the multi-step and single-step income statements.
Answer: FALSE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
6) The major revenue of a merchandiser is ________ while the major expense(s) is (are) ________.
A) sales revenue, cost of goods sold
B) gross margin, operating expenses
C) income from operations, cost of goods sold
D) sales revenue, operating expenses
Answer: A
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Comprehension
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
7) Inventory held by a business is a(n) ________ and when sold becomes a(n) ________.
A) liability, withdrawal
B) asset, expense
C) liability, asset
D) asset, contra asset
Answer: B
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Comprehension
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
Table 5-1
Sales revenue
$480,000
Cost of goods sold
300,000
Sales discounts
20,000
Sales returns and allowances
15,000
Operating expenses
85,000
Interest revenue
5,000
8) Referring to Table 5-1, what is gross margin?
A) $145,000
B) $105,000
C) $140,000
D) $90,000
Answer: A
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
9) Referring to Table 5-1, what is net sales revenue?
A) $400,000
B) $445,000
C) $415,000
D) $455,000
Answer: B
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
10) Referring to Table 5-1, what is the income from operations?
A) $20,000
B) $55,000
C) $60,000
D) $190,000
Answer: C
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
11) Referring to Table 5-1, what is the net income?
A) $60,000
B) $65,000
C) $55,000
D) $180,000
Answer: B
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
Table 5-2
Sales revenue
$382,000
Net sales revenue
$360,000
Gross margin
255,000
Operating expenses
132,000
Interest expense
30,000
Interest revenue
60,000
12) Referring to Table 5-2, if sales discounts amount to $15,000, the balance in Sales Returns and Allowances must be:
A) $7,000.
B) $29,000.
C) $22,000.
D) $8,000.
Answer: A
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
13) Referring to Table 5-2, what is the operating income or operating loss?
A) operating income of $123,000
B) operating loss of $177,000
C) operating loss of $27,000
D) operating income of $27,000
Answer: A
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
14) Referring to Table 5-2, cost of goods sold is:
A) $105,000.
B) $78,000.
C) $100,000.
D) $27,000.
Answer: A
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
15) Referring to Table 5-2, what is the net income or net loss?
A) net loss of $3,000
B) net income of $30,000
C) net loss of $30,000
D) net income of $153,000
Answer: D
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
16) Expenses other than cost of goods sold, that are incurred in the entity’s major line of business are called:
A) merchandising expenses.
B) servicing expenses.
C) other expenses.
D) operating expenses.
Answer: D
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
Match the following.
A) income from operations
B) operating expenses
C) other revenue
D) single-step income statement
E) cost of goods sold
17) Expenses, other than cost of goods sold, that are incurred in the entity’s major line of business
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
18) Gross margin minus operating expenses
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
19) The largest single expense of most merchandising businesses
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
20) A format that groups all revenues together and then lists and deducts all expenses together without drawing any subtotals
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
21) Revenue that originates outside the main operations of a business
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
Answers: 17) B 18) A 19) E 20) D 21) C
22) Given the following worksheet with the trial balance already entered, and the related adjustment information, complete the worksheet.
All Star Merchandising
Accounting Work Sheet
For the Year Ended December 31, 2014
Account Trial Adjustments Inc. Balance
Balance Statement Sheet
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Cash
15
Accounts Rec.
9
Inventory
30
Prepaid Rent
4
Furniture
18
Accumulated
Amortization-
Furniture
7
Accounts Payable
19
Salary Payable
0
Unearned Service Revenue
9
A.J. Star, Capital
40
A.J. Star,
Withdrawals
7
Sales Revenue
65
Sales Discounts
4
Sales Returns and Allowances
2
Cost of Goods Sold
30
Salary Expense
14
Rent Expense
0
Utilities Expense
7
Amortization Expense-
Furniture
140
140
Net Income
Additional information:
a) Prepaid rent expired, $3
b) Amortization on furniture, $2
c) Unearned sales revenue earned during the period, $4
d) Accrued salaries, $5
e) Physical count of ending inventory, $33
Answer: All Star Merchandising
Accounting Work Sheet
For the Year Ended December 31, 2014
Account Trial Adjustments Inc. Balance
Balance Statement Sheet
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Cash
15
15
Accounts Rec.
9
9
Inventory
30
3
33
Prepaid Rent
4
3
1
Furniture
18
18
Accumulated
Amortization-
Furniture
7
2
9
Accounts Payable
19
19
Salary Payable
0
5
5
Unearned Service Revenue
9
4
5
A.J. Star, Capital
40
40
A.J. Star,
Withdrawals
7
7
Sales Revenue
65
4
69
Sales Discounts
4
4
Sales Returns and Allowances
2
2
Cost of Goods Sold
30
3
27
Salary Expense
14
5
19
Rent Expense
0
3
3
Utilities Expense
7
7
Amortization Expense-
Furniture
0
2
2
140
140
17
17
64
69
83
78
Net Income
5
5
69
69
83
83
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
23) Following is a random list of accounts with normal balances for the Lexis Merchandising as of December 31, 2013. All adjusting entries have been made. Closing entries have not been made.
Lexis, Capital $159,000
Land 80,000
Sales discounts 18,000
Supplies expense 9,000
Interest revenue 14,000
Mortgage payable 80,000
Cash 22,000
Accounts receivable 34,000
Unearned service revenue 11,000
Salary expense 23,000
Accounts payable 36,000
Accumulated amort.-building 17,000
Equipment 46,000
Prepaid insurance 8,000
Interest expense 6,000
Lexis, Withdrawals 15,000
Sales revenue 285,000
Interest receivable 5,000
Inventory 28,000
Accumulated amort.-equipment 12,000
Insurance expense 21,000
Salary payable 6,000
Supplies 4,000
Cost of goods sold 156,000
Sales returns & allowances 13,000
Amortization expense-building 8,000
Amortization expense-equipment 8,000
Interest payable 14,000
Utilities expense 8,000
Delivery expense 7,000
Building 115,000
Prepare a multi-step income statement for Lexis Merchandising for the year ended December 31, 2013.
Answer: Lexis Merchandising
Income Statement
For the Year Ended December 31, 2013
Sales revenue $285,000
Less: Sales discounts $18,000
Sales returns & allowances 13,000 31,000
Net sales revenue $254,000
Cost of goods sold 156,000
Gross margin $ 98,000
Operating expenses:
Salary expense 23,000
Insurance expense 21,000
Amortization expense-building 8,000
Amortization expense-equipment 8,000
Supplies expense 9,000
Utilities expense 8,000
Delivery expense 7,000 84,000
Operating income 14,000
Other revenue and (expense):
Interest revenue 14,000
Interest expense 6,000 8,000
Net income $22,000
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
24) Following is a random list of accounts with normal balances for the Sisco Merchandising as of December 31, 2013. All adjusting entries have been made. Closing entries have not been made.
Sisco, Capital $159,000
Land 80,000
Sales discounts 18,000
Supplies expense 9,000
Interest revenue 14,000
Mortgage payable 80,000
Cash 22,000
Accounts receivable 34,000
Unearned service revenue 11,000
Salary expense 23,000
Accounts payable 36,000
Accumulated amort.-building 17,000
Equipment 46,000
Prepaid insurance 8,000
Interest expense 6,000
Sisco, Withdrawals 15,000
Sales revenue 285,000
Interest receivable 5,000
Inventory 28,000
Accumulated amort.-equipment 12,000
Insurance expense 21,000
Salary payable 6,000
Supplies 4,000
Cost of goods sold 156,000
Sales returns & allowances 13,000
Amortization expense-building 8,000
Amortization expense-equipment 8,000
Interest payable 14,000
Utilities expense 8,000
Delivery expense 7,000
Building 115,000
Prepare a single-step income statement for Sisco Merchandising for the year ended December 31, 2013.
Answer:
Sisco Merchandising
Income Statement
For the Year Ended December 31, 2013
Revenues:
Net sales (net of sales discounts, $18,000, and
sales returns and allowances, $13,000) $254,000
Interest revenue 14,000
Total revenue 268,000
Expenses:
Cost of goods sold 156,000
Salary expense 23,000
Insurance expense 21,000
Supplies expense 9,000
Amortization expense-building 8,000
Amortization expense-equipment 8,000
Utilities expense 8,000
Delivery expense 7,000
Interest expense 6,000
Total expenses 246,000
Net income $ 22,000
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
25) Please refer to the following trial balance.
Debit
Credit
Cash
$5,000
Accounts receivable
14,000
Inventory
20,000
Supplies
5,000
Land
100,000
Accounts payable
$3,000
Notes payable
25,000
Capital
90,000
Drawing
1,000
Sales revenues
160,000
Sales returns and allowances
2,000
Sales discounts
3,000
Cost of goods sold
80,000
Salary expense
5,000
Utility expense
23,000
Rent expense
18,000
Interest expense
2,000
Totals
$278,000
$278,000
Please prepare a multi-step income statement:
Answer:
Sales revenues
$160,000
Less: Sales returns and allowances
$2,000
Sales discounts
3,000
5,000
Net sales revenue
$155,000
Cost of goods sold
80,000
Gross profit
$75,000
Operating expenses
Salary expense
$5,000
Utility expense
23,000
Rent expense
18,000
46,000
Operating income
$29,000
Other revenue and (expense)
Interest expense
(2,000)
Net income
$27,000
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
26) Describe single-step and multi-step formats for income statements.
Answer: A single-step income statement only has two sections, one for revenues and the other for expenses; and, a single income amount for net income. A multi-step income statement has subtotals for gross margin and income from operations. The multi-step format is the most widely used format.
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Comprehension
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
27) Underwater Adventures has the following account balances on August 31, 2014:
Accounts payable $8,800
Accounts receivable 9,600
Accumulated amortization – equipment 30,300
Cash 2,200
Cost of goods sold 341,500
Jacobson, capital 190,700
Jacobson, withdrawals 44,000
Equipment 88,000
Interest earned 2,000
Inventory 71,500
Operating expenses 175,500
Sales discounts 3,100
Sales returns and allowances 14,400
Sales revenue 520,600
Supplies 7,100
Unearned sales revenue 4,500
The following information as at August 31, 2014 was also available:
A physical count of items showed $1,200 of supplies on hand.
An inventory count showed inventory on hand of $66,400.
The equipment has an estimated useful life of eight years and is expected to have no salvage value.
Unearned sales revenue of $1,000 was earned.
Required:
Prepare the necessary adjusting journal entries at August 31, 2014. For simplicity all operating expenses are combined into a single operating expense account for financial statement purposes. Use the normal account name for the adjusting journal entries.
Prepare a classified balance sheet based on adjusted account balances.
Answer: General Journal
Date
Accounts
Debit
Credit
Aug 31
Supplies expense
5,900
Supplies
5,900
31
Cost of goods sold
5,100
Inventory
5,100
31
Amortization expense, equipment
11,000
Accumulated amort., equip.
11,000
31
Unearned sales revenue
1,000
Sales revenue
1,000
Underwater Adventures
Balance Sheet
August 31, 2014
Assets
Current assets:
Cash $ 2,200
Accounts receivable 9,600
Supplies 1,200
Inventory 66,400
Total current assets $79,400
Property, plant and equipment:
Equipment $ 88,000
Less: accumulated amortization 41,300 46,700
Total assets $126,100
Liabilities and Owner’s Equity
Current liabilities:
Accounts payable $ 8,800
Unearned sales revenue 3,500
Total current liabilities $ 12,300
Jacobson capital 113,800
Total liabilities and owner’s equity $ 126,100
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
Table 5-10
The December 31, 2014 adjusted trial balance for Camptown Company is shown below.
Debit
Credit
Cash
$12,600
Accounts receivable
2,400
Prepaid rent
800
Inventory
28,000
Accounts payable
$4,200
Salary payable
1,000
Notes payable
800
Capital
13,800
Drawing
1,000
Sales revenue
96,000
Sales returns and allowances
1,600
Sales discounts
400
Cost of goods sold
25,000
Salary expense
21,000
Rent expense
22,500
Supplies expense
500
Total
$115,800
$115,800
28) Using the information from Table 5-10 prepare an income statement in single-step format and the closing entries for Camptown Company.
Answer: Camptown Company
Income Statement
For the Year Ended December 31, 2014
Revenues:
Sales revenue $96,000
Less: Sales discounts $400
Sales returns and allowances 1,600 2,000
Net sales revenue $94,000
Expenses:
Cost of goods sold $25,000
Salary expense 21,000
Rent expense 22,500
Supplies expense 500
Total expenses 69,000
Net income $ 25,000
General Journal
Date
Accounts
Debit
Credit
Dec 31
Sales revenue
96,000
Income summary
96,000
31
Income summary
71,000
Sales discounts
400
Sales returns and allowances
1,600
Cost of goods sold
25,000
Salary expense
21,000
Rent expense
22,500
Supplies expense
500
31
Income summary
25,000
Capital
25,000
31
Capital
1,000
Drawing
1,000
Diff: 2
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Application
Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system
Objective 5-5
1) The gross margin percentage is determined by dividing the gross margin by the net sales revenue.
Answer: TRUE
Diff: 1
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
2) The faster the sale of inventory and the collection of cash, the higher the profits will be for a business.
Answer: TRUE
Diff: 2
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Comprehension
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
3) There is no such thing as too high an inventory turnover ratio.
Answer: FALSE
Diff: 1
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
4) Inventory turnover does not affect profitability but does affect the amount of inventory on the shelf.
Answer: FALSE
Diff: 2
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Comprehension
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
5) The gross margin percentage is calculated as:
A) gross margin minus net sales revenue.
B) gross margin divided by net sales revenue.
C) gross margin plus net sales revenue.
D) gross margin times net sales revenue.
Answer: B
Diff: 2
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
6) Inventory turnover indicates how:
A) quickly inventory is received from the supplier after the order is placed.
B) many days it takes the inventory to travel between the seller’s warehouse and the buyer’s warehouse.
C) rapidly inventory is sold.
D) many days it takes from the time an order is received to the day it is shipped.
Answer: C
Diff: 2
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Comprehension
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
7) Inventory turnover is calculated as:
A) cost of goods sold divided by average inventory.
B) cost of goods sold minus average inventory.
C) cost of goods sold times average inventory.
D) average inventory divided by cost of goods sold.
Answer: A
Diff: 2
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
8) Please refer to the following trial balance.
Debit
Credit
Cash
$5,000
Accounts receivable
14,000
Inventory
20,000
Supplies
5,000
Land
100,000
Accounts payable
$3,000
Notes payable
25,000
Capital
90,000
Withdrawals
1,000
Sales revenues
160,000
Sales returns and allowances
2,000
Sales discounts
3,000
Cost of goods sold
80,000
Salary expense
5,000
Utility expense
23,000
Rent expense
18,000
Interest expense
2,000
Totals
$278,000
$278,000
How much is the gross profit percentage?
A) 50.0%
B) 51.6%
C) 46.8%
D) 48.4%
Answer: D
Explanation: D) Calculations: $155,000 – $80,000 = $75,000/$155,000 = 48.4%
Diff: 3
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
9) Alpha Company had $45,000 in beginning inventory and $80,000 in ending inventory. Cost of goods sold for the period was $25,000. The inventory turnover is:
A) 0.56.
B) 0.3125.
C) 0.4.
D) 4.0.
Answer: C
Explanation: C) Calculations: $25,000/(($45,000 + $80,000)/2)
Diff: 2
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
Match the following.
A) gross margin percentage
B) inventory turnover
10) Gross margin divided by net sales revenue
Diff: 1
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
11) Ratio of cost of goods sold to average inventory
Diff: 1
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
Answers: 10) A 11) B
Table 5-5
The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:
Salary payable
$1,100
Sales revenue
480,000
Interest revenue
3,000
Freight in
20,000
Beginning inventory
35,000
Sales discounts
18,000
Purchases of inventory
240,000
Purchase returns and allowances
35,000
Purchase discounts
10,000
Sales returns and allowances
35,000
Ending inventory
80,000
Operating expenses
85,000
Interest expense
7,000
Owner withdrawals
12,000
12) Based on the information in Table 5-5 provide the following:
Multi-step income statement
Gross margin percentage and the inventory turnover ratio for Speedy Boat Company. Comment on the effect that an increasing inventory turnover has on a business.
Answer:
Multi-step income statement
Speedy Boat Company
Income Statement
For the Period Ending December 31, 2013
Sales $480,000
Returns & allowances 35,000
Discounts 18,000
Net sales $427,000
Cost of goods sold:
Beg. inventory $35,000
Net purchases (240-35-10) 195,000
Freight-in 20,000
Available $250,000
End. inventory 80,000
Cost of goods sold 170,000
Gross margin $257,000
Operating expenses 85,000
Operating income $172,000
Other income and expenses:
Interest revenue $3,000
Interest expense 7,000 (4,000)
Net income $168,000
Ratios
Gross margin percentage = ($257,000/$427,000) = 60%
Inventor turnover = {$170,000/($35,000 + $80,000)/2] = 2.96 times
Increasing inventory turnover increases cash flow, reduces the risk of obsolescence, reduces the need for shelf space and warehousing, reduces the need for trade credit.
Diff: 3
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
Objective 5-6
1) The preparation of the income statement for a merchandising company that is following international financial reporting standards (IFRS) is not significantly different from the approach used by companies following accounting standards for private enterprises (ASPE).
Answer: TRUE
Diff: 2
Learning Outcome: A-18 Compare and contrast IFRS and ASPE
Skill: Knowledge
Objective: 5-6 Describe the merchandising operations effects of IFRS
2) What are two key criteria that merchandisers who report under international financial reporting standards (IFRS) must follow?
A) Revenue-recognition criteria and time-allotment assumption
B) Revenue-recognition criteria and matching objective
C) Revenue-recognition criteria and economic-period assumption
D) Revenue-recognition criteria and time-concern assumption
Answer: B
Diff: 2
Learning Outcome: A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework
Skill: Knowledge
Objective: 5-6 Describe the merchandising operations effects of IFRS
Match the following.
A) statement of comprehensive income
B) income statement
3) The name of the statement that presents revenues and expenses under IFRS
Diff: 1
Learning Outcome: A-18 Compare and contrast IFRS and ASPE
Skill: Knowledge
Objective: 5-6 Describe the merchandising operations effects of IFRS
Answers: 3) A
Objective 5-A1
1) The entry to record the purchase of inventory on account in a periodic inventory system includes a debit to the Purchases account.
Answer: TRUE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
2) When the seller accepts a return of undamaged goods from the purchaser, the seller’s journal entries would include two entries, if they are using a periodic inventory system.
Answer: FALSE
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
3) In a periodic inventory system, purchases of inventory are debited to an account entitled Purchases.
Answer: TRUE
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
4) In a periodic inventory system, purchase returns and allowances and purchase discounts are considered contra liability accounts.
Answer: FALSE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
5) Purchase discounts normally have a credit balance.
Answer: TRUE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
6) Using a periodic inventory system, the entry to record the purchase of merchandise on account involves a:
A) debit to Inventory.
B) debit to Accounts Payable.
C) credit to Inventory.
D) debit to Purchases.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
7) A merchandiser purchases inventory on account under a periodic inventory system with terms of 2/10 n/30. The merchandiser would:
A) credit Inventory on date of payment if the discount is taken.
B) credit Inventory on date of payment if the discount is not taken.
C) credit Purchases Discounts on date of purchase if the discount is taken.
D) credit Purchases Discounts on date of purchase if the discount is not taken.
Answer: C
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
8) If a purchaser returns goods purchased on account to the supplier under a periodic inventory system, the purchaser would debit:
A) Inventory and credit Accounts Payable.
B) Accounts Payable and credit Inventory.
C) Inventory and credit Accounts Receivable.
D) Accounts Payable and credit Purchase Returns.
Answer: D
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
9) When a discount is taken for prompt payment under a periodic inventory system, the purchaser would credit:
A) Accounts Payable.
B) Accounts Receivable.
C) Purchases Discounts.
D) Inventory.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
10) A purchase return or allowance under a periodic inventory system is credited to:
A) Accounts Payable.
B) Purchase Returns and Allowances.
C) Inventory.
D) Purchases.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
11) If the shipping terms are FOB shipping point and the freight bill is $200, the purchaser, using a periodic inventory system would record payment of the freight with a debit to:
A) Inventory and credit to Cash for $200.
B) Freight In and a credit to Cash for $200.
C) Inventory and credit to Purchases Discounts for $200.
D) Purchases Discounts and credit to Inventory for $200.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
12) Day Company purchased $3,000 of merchandise on credit, terms 3/15 n/30. The entry to record payment for the merchandise within the discount period under a periodic inventory system would include a:
A) debit to Inventory of $1,940.
B) debit to Accounts Payable of $1,940.
C) credit to Purchase Discounts of $90.
D) credit to Inventory of $90.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
13) Mars Company purchased $2,500 of merchandise on account, terms 3/10 n/60. If payment was made within the discount period, the entry to record the payment under a periodic inventory system would include a credit to:
A) Cash of $2,425.
B) Inventory of $2,352.
C) Accounts Payable of $2,400.
D) Cash for $2,400.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
14) When the buyer pays the freight costs, the entry to record the payment under a periodic inventory system would include a debit to:
A) Delivery Expense.
B) Purchases Discounts.
C) Inventory.
D) Freight In.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
15) When goods are shipped FOB destination and a periodic inventory system is used, the buyer would:
A) debit Freight In for the amount of the transportation charges.
B) debit Delivery Expense for the amount of the transportation charges.
C) make no journal entry for the transportation charges.
D) debit Inventory for the amount of the transportation charges.
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
16) To update the inventory records for the sale of merchandise on account under a periodic inventory system, the entry would include:
A) a credit to Inventory.
B) a debit to Accounts Payable.
C) no entry as inventory records are not updated at the time of sale.
D) a debit to Cost of Goods Sold.
Answer: C
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
17) The entries to record a $5,000 cash sale under a periodic inventory system, when the cost of the merchandise is $3,200, include a:
A) debit to Inventory for $5,000.
B) credit to Sales Revenue for $5,000.
C) debit to Cost of Goods Sold for $3,200.
D) debit to Accounts Receivable for $5,000.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
18) Under a periodic inventory system, the entry to record the return of inventory sold on account for $250 with a cost of $185 would be recorded by the seller as a:
A) credit to Accounts Receivable for $250.
B) debit to Sales Returns and Allowances for $185.
C) credit to Sales Revenue for $250.
D) credit to Cost of Goods Sold for $185.
Answer: A
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
19) Under a periodic inventory system, the entry to record the return of inventory sold on account for $360 with a cost of $210 would be recorded by the seller as a:
A) credit to Accounts Receivable for $210.
B) debit to Sales Returns and Allowances for $360.
C) debit to Sales Revenue for $360.
D) debit to Inventory for $210.
Answer: B
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
20) Under a periodic inventory system, the entries to record a $2,600 sales return of undamaged goods for a sale originally made on account, when the merchandise had a cost of $1,200, include a:
A) debit to Inventory of $1,200.
B) debit to Sales Returns and Allowances of $2,600.
C) credit to Cost of Goods Sold of $2,600.
D) credit to Sales Returns and Allowances of $1,200.
Answer: B
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
21) Under a periodic inventory system, the entries to record a $3,400 sales return for undamaged goods on an original cash sale when the merchandise had a cost of $1,500 include a debit to:
A) Accounts Receivable of $3,400.
B) Cost of Goods Sold of $1,500.
C) Sales Returns and Allowances of $3,400.
D) Inventory of $1,500.
Answer: C
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
22) In a periodic inventory system, the entry to record the purchase of merchandise on account would include a:
A) debit to Accounts Payable.
B) debit to Inventory.
C) credit to Cash.
D) debit to Purchases.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
23) In a periodic inventory system, when a company returns merchandise previously purchased on account, the entry to record the return would include a:
A) debit to Inventory.
B) credit to Purchase Returns and Allowances.
C) debit to Sales Returns and Allowances.
D) credit to Accounts Payable.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
24) In a periodic inventory system, the entry to record the taking of a cash discount for the purchase of merchandise would include a:
A) credit to Purchase Discounts
B) credit to Inventory
C) debit to Purchase Discounts
D) credit to Purchase Returns and Allowances.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
25) In a periodic inventory system, the entry to record the payment of shipping costs by the company buying the merchandise when the terms are FOB shipping point would include a:
A) debit to Freight In.
B) debit to Delivery Expense.
C) credit to Cost of Goods Sold.
D) credit to Freight Out.
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
26) In a periodic inventory system, the entry to record the sale of $2,000 of merchandise on account with a cost of $1,400 would include a:
A) credit to Accounts Receivable for $1,400.
B) debit to Accounts Receivable for $2,000.
C) debit to Cost of Goods Sold for $2,000.
D) credit to Inventory for $1,400.
Answer: B
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
27) Avery Supplies uses a periodic inventory system. Avery purchased $10,000 of inventory on account. The terms were 3/10, n/30. The purchase was made on February 1. Avery paid the supplier on February 9. Which of the following journal entries properly records this payment transaction?
A)
Accounts Payable
9,700
Cash
9,700
B)
Accounts Payable
9,700
Purchase Discounts
300
Purchases
10,000
C)
Accounts Payable
10,000
Cash
9,700
Purchase Discounts
300
D)
Accounts Payable
10,000
Cash
10,000
Answer: C
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
28) Avery Supplies uses a periodic inventory system. Avery purchased $10,000 of inventory on account. The terms were 3/10, n/30. The purchase was made on February 1. On February 2, Avery returned $400 of damaged goods to the supplier and was granted an allowance. How should Avery properly record the allowance?
A)
Accounts Payable
400
Purchase Returns and Allowances
400
B)
Accounts Payable
9,600
Purchase Discounts
400
Purchases
10,000
C)
Accounts Payable
10,000
Cash
9,600
Purchase Returns and Allowances
400
D)
Accounts Payable
400
Cash
400
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
29) Tobermory Merchandising had the following transactions during May:
May 5 Purchased $2,700 of merchandise on account, terms 3/15 n/60,
FOB shipping point.
9 Paid transportation cost on the May 5 purchase, $250.
10 Returned $400 of defective merchandise purchased on May 5.
15 Paid for the May 5 purchase, less the return and the discount.
Required: Assuming the periodic inventory system is used, prepare the journal entries to record the above transactions.
Answer:
General Journal
Date
Accounts
Debit
Credit
May 5
Purchases
2,700
Accounts Payable
2,700
Purchased merchandise, terms 3/15 n/60.
9
Freight In
250
Cash
250
Paid transportation cost on May 5 purchase.
10
Accounts Payable
400
Purchase Returns and Allowances
400
Returned merchandise purchased May 5.
15
Accounts Payable
2,300
Cash
2,231
Purchase Discounts
69
Paid for May 5 purchase less return and discount.
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
30) Romeo Merchandising had the following transactions in June. Prepare journal entries for these transactions assuming Romeo uses a periodic inventory system.
June 2 Romeo received an $18,000 invoice from one of its suppliers. Terms
were 2/10 n/30, FOB shipping point. Romeo paid the freight bill
amounting to $2,000.
4 Romeo returned $2,500 of the merchandise billed on June 2 because it
was defective.
5 Romeo sold $8,000 of merchandise on account, terms 3/15 n/30.
10 Romeo paid the invoice dated June 2, less the return and the discount.
15 A customer returned $2,500 of merchandise sold on June 5.
19 Britt received payment on the remaining amount due from the sale of
June 5, less the return and the discount.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 2
Purchases
18,000
Accounts Payable
18,000
Freight In
2,000
Cash
2,000
4
Accounts Payable
2,500
Purchase Returns and Allowances
2,500
5
Accounts Receivable
8,000
Sales Revenue
8,000
10
Accounts Payable
15,500
Cash
15,190
Purchase Discounts
310
15
Sales Returns and Allowances
2,500
Accounts Receivable
2,500
19
Cash
5,335
Sales Discounts
165
Accounts Receivable
5,500
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
Table 5-6
The following are transactions for Latest Fashions for the month of June.
June 2 Purchased $2,000 of inventory under terms 1/10, n/60 and FOB shipping point
from Trendy Manufacturing. The merchandise had cost Trendy $1,800
June 7 Returned defective merchandise to Trendy Manufacturing with invoice price of $400.
June 8 Paid the freight charges on the purchase from Trendy Manufacturing in cash for $100.
June 9 Sold merchandise to New Miss Store on account for $5,000 with terms 2/15, n/60 FOB
shipping point. Cost of the merchandise sold was $4,000.
June 10 Paid Trendy Manufacturing the balance on account.
June 12 Granted sales allowance of $300 to New Miss Store for defective merchandise.
June 23 Collected balance owing from New Miss Store.
31) Refer to table 5-6. Prepare the journal entries for Latest Fashions for the transactions listed, assuming that Latest Fashions uses a periodic inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 2
Purchases
2,000
Accounts Payable
2,000
7
Accounts Payable
400
Purchase Returns and Allowances
400
8
Freight In
100
Cash
100
9
Accounts Receivable
5,000
Sales Revenue
5,000
10
Accounts Payable
1,600
Purchase Discounts
16
Cash
1,584
12
Sales Returns and Allowances
300
Accounts Receivable
300
25
Cash
4,606
Sales Discount
94
Accounts Receivable
4,700
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
32) Refer to table 5-6. Prepare the journal entries for Trendy Manufacturing for the transactions listed, assuming that Trendy uses a periodic inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 2
Accounts Receivable
2,000
Sales Revenue
2,000
7
Sales Returns and Allowances
400
Accounts Receivable
400
10
Cash
1,584
Sales Discount
16
Accounts Receivable
1,600
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
33) Refer to table 5-6. Prepare the journal entries for New Miss Store for the transactions listed, assuming that New Miss Store uses a periodic inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 9
Purchases
5,000
Accounts Payable
5,000
7
Accounts Payable
300
Purchase Returns and Allowances
300
25
Accounts Payable
4,700
Purchase Discounts
94
Cash
4,606
Diff: 3
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
34) Sam Levine Merchandising had the following transactions during May:
May 1 Beginning inventory was 20 units valued at $25 per unit.
May 5 Purchased 80 units of merchandise on account for $2,160, terms n/15,
FOB shipping point.
May 9 Paid transportation cost on the May 5 purchase, $240.
May 10 Returned two units of defective merchandise purchased on May 5.
May 11 Sold 30 units for $50 per unit on account.
May 15 Paid for the May 5 purchase, less the return.
May 20 Sold 10 units for $50 per unit on account.
Required:
Assuming FIFO and that the perpetual inventory system is used, prepare the journal entries to record the above transactions.
Assuming weighted-average and that the periodic inventory system is used, prepare the journal entries to record the above transactions.
Answer:
Requirement 1: Perpetual Inventory Method
Date
Account Name
Debit
Credit
May 5
Inventory
2,160
Accounts Payable
2,160
May 9
Inventory
240
Cash
240
May 10
Accounts Payable
54
Inventory
54
May 11
Accounts Receivable (30 × $50)
1,500
Sales
1,500
Cost of Goods Sold (20 × $25) + (10 × ($27 + $3))
800
Inventory
800
May 15
Accounts Payable ($2,160 – $54)
2,106
Cash
2,106
May 20
Accounts receivable
500
Sales
500
Cost of Goods Sold (10 × $30)
300
Inventory
300
Requirement 2: Periodic Inventory Method
Date
Account Name
Debit
Credit
May 5
Purchases
2,160
Accounts Payable
2,160
May 9
Frieght-in
240
Cash
240
May 10
Accounts Payable
54
Purchase Returns
54
May 11
Accounts Receivable
1,500
Sales
1,500
May 15
Accounts Payable
2,160
Cash
2,160
May 20
Accounts Receivable
500
Sales
500
Diff: 3
Learning Outcome: A-09 Explain and apply inventory costing methods
Skill: Application
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
Objective 5-A2
1) In a periodic inventory system, cost of goods sold is determined by subtracting the ending inventory from the cost of goods available for sale.
Answer: TRUE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
2) In a periodic inventory system, beginning inventory plus net purchases minus freight in equals cost of goods sold.
Answer: FALSE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
3) In a periodic inventory system, the cost of freight-in is part of the cost of goods available for sale.
Answer: TRUE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
Table 5-3
Sales revenue
$750,000
Interest revenue
18,000
Freight in
44,000
Beginning inventory
75,000
Purchases discounts
20,000
Sales returns and allowances
44,000
Operating expenses
99,000
Interest expense
15,000
Ending inventory
72,000
Purchases
415,000
Sales discounts
25,000
William Browning, Withdrawals
61,000
Purchase returns and allowances
36,000
4) Refer to Table 5-3. Net purchases are:
A) $359,000.
B) $415,000.
C) $395,000.
D) $439,000.
Answer: A
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
5) Refer to Table 5-3. The total cost of goods available for sale is:
A) $388,000.
B) $478,000.
C) $470,000.
D) $394,000.
Answer: B
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
6) Refer to Table 5-3. The cost of goods sold is:
A) $470,000.
B) $478,000.
C) $406,000.
D) $351,000.
Answer: C
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
7) Cost of goods sold is $7,400. Beginning inventory is $3,500 and ending inventory is $4,000. If there is no freight in and total purchases were $8,250, what were purchase returns and allowances?
A) $850
B) $500
C) $350
D) $550
Answer: C
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
8) Cost of goods sold is $108,000, beginning inventory is $20,000 and purchases is $100,000. What is ending inventory?
A) $32,000
B) $12,000
C) $128,000
D) $102,000
Answer: B
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
9) Cost of goods sold is $108,000 ,ending inventory is $12,000 and purchases is $100,000. What is beginning inventory?
A) $20,000
B) 32,000
C) $120,000
D) $102,000
Answer: A
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
10) Purchases of inventory minus purchase discounts and minus purchase returns and allowances equals:
A) gross purchases.
B) cost of goods available for sale.
C) net purchases.
D) cost of goods sold.
Answer: C
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
11) Beginning inventory plus net purchases and plus freight in equals:
A) net purchases.
B) cost of goods available for sale.
C) cost of goods sold.
D) gross purchases.
Answer: B
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
12) Cost of goods sold plus ending inventory equals:
A) net purchases.
B) cost of goods available for sale.
C) gross margin.
D) gross profit.
Answer: B
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Comprehension
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
Table 5-4
The following data is for the Atlantis Merchandising, which uses a periodic inventory system:
Sales revenue
$600,000
Interest revenue
12,000
Freight in
42,000
Beginning inventory
77,000
Purchase discounts
19,000
Sales returns and allowances
33,000
Operating expenses
77,000
Interest expense
9,000
Ending inventory
81,000
Purchases
415,000
Sales discounts
35,000
Omar Atlantis, Withdrawals
71,000
Purchase returns and allowances
39,000
13) Refer to Table 5-4. Net purchases for Atlantis Merchandising are:
A) $415,000.
B) $357,000.
C) $396,000.
D) $376,000.
Answer: B
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
14) Refer to Table 5-4. The total cost of goods available for sale for the Atlantis Merchandising is:
A) $434,000.
B) $408,000.
C) $476,000.
D) $441,000.
Answer: C
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
15) Refer to Table 5-4. The cost of goods sold for Atlantis Merchandising is:
A) $524,000.
B) $489,000.
C) $557,000.
D) $395,000.
Answer: D
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
Table 5-5
The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:
Salary payable
$1,100
Sales revenue
480,000
Interest revenue
3,000
Freight in
20,000
Beginning inventory
35,000
Sales discounts
18,000
Purchases of inventory
240,000
Purchase returns and allowances
35,000
Purchase discounts
10,000
Sales returns and allowances
35,000
Ending inventory
80,000
Operating expenses
85,000
Interest expense
7,000
Owner withdrawals
12,000
16) Refer to Table 5-5. The net purchases for Speedy Boat Company are:
A) $230,000.
B) $195,000.
C) $240,000.
D) $205,000.
Answer: B
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
17) Refer to Table 5-5. Cost of goods available for sale for Speedy Boat Company is:
A) $155,000.
B) $225,000.
C) $230,000.
D) $250,000.
Answer: D
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
18) Refer to Table 5-5. Cost of goods sold for Speedy Boat Company is:
A) $170,000.
B) $180,000.
C) $330,000.
D) $220,000.
Answer: A
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
19) In a periodic system, inventory balances and the cost of goods sold for the current period are determined:
A) at the time of sale.
B) on a frequent basis.
C) on the first day of each year.
D) when a physical inventory count is taken.
Answer: D
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
20) The following refers to periodic inventory:
Net sales
$198,000
Purchases
92,000
Purchases returns and allowances
1,800
Purchases discounts
1,250
Freight in
1,590
Beginning merchandise inventory
63,000
Ending merchandise inventory
37,000
Compute cost of goods sold.
A) $116,540
B) $81,460
C) $114,950
D) $53,540
Answer: A
Explanation: A) Calculations: $63,000 + $88,950 + $1,590 – $37,000 = $116,540
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
21) Fill in the missing amounts for each case in the table presented below:
A
B
C
D
Beginning inventory
$6,000
$7,200
$9,100
Net purchase
9,000
32,700
32,000
Freight in
500
950
1,200
Cost of goods avail. for sale
50,000
17,250
45,600
Ending inventory
5,375
14,850
Cost of goods sold
32,600
14,800
Answer:
A
B
C
D
Beginning inventory
$ 6,000
$ 7,200
$11,950
$ 9,100
Net purchase
43,500
9,000
32,700
32,000
Freight in
500
1,050
950
1,200
Cost of goods avail. for sale
50,000
17,250
45,600
42,300
Ending inventory
17,400
5,375
14,850
27,500
Cost of goods sold
32,600
11,875
30,750
14,800
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
22) The following items were taken from the records of Slow Boat Company, which uses a periodic inventory system:
Salary payable $1,100
Sales revenue 480,000
Freight in 20,000
Beginning inventory 35,000
Purchases of inventory 240,000
Purchase returns and allowances 35,000
Purchase discounts 10,000
Sales returns and allowances 35,000
Ending inventory 80,000
Operating expenses 85,000
Prepare the cost of goods sold section for the Slow Boat Company’s income statement.
Answer: Beginning inventory $35,000
Purchases of inventory $240,000
Purchase returns and allowances 35,000)
Purchase discounts (10,000)
Net purchases 195,000
Freight in 20,000
Cost of goods available for sale $250,000
Ending inventory (80,000)
Cost of goods sold 170,000
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
Objective 5-A3
1) The adjusting entry to record inventory shrinkage would include a debit to the cost of goods sold account in a periodic inventory system.
Answer: FALSE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
2) In a periodic inventory system, the closing entries include a debit to the Inventory account in an amount that equals the ending inventory, and a credit to the Inventory account in an amount that equals the beginning inventory.
Answer: TRUE
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
3) Which accounts are affected in the closing process under a periodic inventory system?
A) Gross Margin and Cost of Goods Sold
B) Cost of Goods Sold, Sales Returns and Allowances, and Sales Discounts
C) Gross Margin, Sales Returns and Allowances, and Sales Discounts
D) operating expenses, Sales Revenue, and Purchases
Answer: D
Diff: 2
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
4) Under a periodic inventory system, which accounts would be closed to income summary with credits?
A) Sales Returns and Allowances, Sales Revenue, and Inventory
B) Sales Discounts, Sales Returns and Allowances, and Purchases
C) Sales Revenue and Cost of Goods Sold
D) Sales Returns and Allowances and Sales Revenue
Answer: B
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
Table 5-3
Sales revenue
$750,000
Interest revenue
18,000
Freight in
44,000
Beginning inventory
75,000
Purchases discounts
20,000
Sales returns and allowances
44,000
Operating expenses
99,000
Interest expense
15,000
Ending inventory
72,000
Purchases
415,000
Sales discounts
25,000
William Browning, Withdrawals
61,000
Purchase returns and allowances
36,000
5) Refer to Table 5-3. Net sales is:
A) $681,000.
B) $750,000.
C) $725,000.
D) $706,000.
Answer: A
Explanation: A)
Sales
$750,000
Less: Returns & allowances
44,000
Discounts
25,000
Net sales
$681,000
Cost of goods sold:
Beg. inventory
$75,000
Net purchases (415-20-36)
359,000
Freight-in
44,000
Available
$478,000
End. inventory
(72,000)
Cost of goods sold
406,000
Gross margin
$275,000
Operating expenses
99,000
Operating income
$176,000
Other income and expenses:
Interest revenue
$18,000
Interest expense
15,000
Total other income and expenses
3,000
Net income
$179,000
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
6) In a periodic inventory system, the closing process includes crediting the following accounts to bring their balances to zero:
A) Cost of Goods Sold and Freight In.
B) Purchases and Freight In.
C) Purchase Discounts and Sales Discounts.
D) Purchase Returns and Allowances and Purchase Discounts.
Answer: B
Diff: 2
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
7) In a periodic inventory system, the closing process includes:
A) debiting Purchases.
B) crediting Purchase Returns and Allowances.
C) debiting Sales Discounts.
D) debiting Inventory for the ending balance.
Answer: D
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
Match the following.
A) Cost of Goods Sold
8) The account used to offset the adjustment to inventory to the actual amount on hand
Diff: 1
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
Answers: 8) A
9) Following is a random list of some of the accounts and their December 31, 2014, balances for Carmen & Company. Carmen & Company uses a periodic inventory system and all account balances are normal.
Purchases $320,000
Sales revenue 460,000
Interest revenue 23,000
Salary expense 45,000
Freight in 17,000
Purchase discounts 31,000
Sales returns and allowances 35,000
Interest expense 18,000
Delivery expense 24,000
Sales discounts 27,000
Insurance expense 16,000
Purchase returns and allowances 46,000
B.J. Carmen, Capital 30,000
Utilities expense 14,000
Amortization expense-equipment 10,000
B.J. Carmen, Withdrawals 15,000
The beginning and ending amounts for inventory are $58,000 and $65,000, respectively.
Prepare the closing entries for Carmen & Company.
Answer: General Journal
Date
Accounts
Debit
Credit
Dec. 31
Sales Revenue
460,000
Interest Revenue
23,000
Purchase Discounts
31,000
Purchase Returns & Allowances
46,000
Income Summary
560,000
31
Income Summary
526,000
Sales Ret. and Allow
35,000
Sales Discounts
27,000
Purchases
320,000
Salary Expense
45,000
Freight in
17,000
Interest expense
18,000
Delivery Expense
24,000
Insurance Expense
16,000
Utilities Expense
14,000
Amortization Exp- equip
10,000
31
Income Summary
58,000
Inventory (beg bal)
58,000
31
Inventory (end bal)
65,000
Income Summary
65,000
31
Income Summary
41,000
B.J. Carmen, Capital
41,000
31
B.J. Carmen, Capital
15,000
B.J. Carmen, Withdrawals
15,000
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Application
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system
Objective 5-A4
1) The caption “Net sales” in a multi-step income statement is different if a business uses the periodic instead of the perpetual inventory system.
Answer: FALSE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
2) Net purchases caption on the multi-step income statement is calculated by subtracting purchase discounts and purchase returns and allowances from purchases.
Answer: TRUE
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
3) Inventory and cost of goods sold for a business using the periodic inventory system appear on the:
A) balance sheet and statement of owner’s equity, respectively
B) statement of owner’s equity and income statement, respectively
C) balance sheet and income statement, respectively
D) income statement and cash flow statement, respectively
Answer: C
Diff: 2
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
Table 5-3
Sales revenue
$750,000
Interest revenue
18,000
Freight in
44,000
Beginning inventory
75,000
Purchases discounts
20,000
Sales returns and allowances
44,000
Operating expenses
99,000
Interest expense
15,000
Ending inventory
72,000
Purchases
415,000
Sales discounts
25,000
William Browning, Withdrawals
61,000
Purchase returns and allowances
36,000
4) Refer to Table 5-3. Operating income is:
A) $161,000
B) $214,000
C) $179,000
D) $176,000
Answer: D
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
5) Refer to Table 5-3. Net income is:
A) $161,000
B) $214,000
C) $179,000
D) $176,000
Answer: C
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
Table 5-4
The following data is for the Atlantis Merchandising, which uses a periodic inventory system:
Sales revenue
$600,000
Interest revenue
12,000
Freight in
42,000
Beginning inventory
77,000
Purchase discounts
19,000
Sales returns and allowances
33,000
Operating expenses
77,000
Interest expense
9,000
Ending inventory
81,000
Purchases
415,000
Sales discounts
35,000
Omar Atlantis, Withdrawals
71,000
Purchase returns and allowances
39,000
6) Refer to Table 5-4. The operating income for Atlantis Merchandising is:
A) $(11,000).
B) $63,000.
C) $51,000.
D) $60,000.
Answer: D
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
7) Refer to Table 5-4. The net income for Atlantis Merchandising is:
A) $(11,000).
B) $63,000.
C) $51,000.
D) $60,000.
Answer: B
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
Table 5-5
The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:
Salary payable
$1,100
Sales revenue
480,000
Interest revenue
3,000
Freight in
20,000
Beginning inventory
35,000
Sales discounts
18,000
Purchases of inventory
240,000
Purchase returns and allowances
35,000
Purchase discounts
10,000
Sales returns and allowances
35,000
Ending inventory
80,000
Operating expenses
85,000
Interest expense
7,000
Owner withdrawals
12,000
8) Refer to Table 5-5. The operating income for Speedy Boat Company is:
A) $156,000.
B) $172,000.
C) $168,000.
D) $160,000.
Answer: B
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
9) Refer to Table 5-5. The net income for Speedy Boat Company is:
A) $156,000.
B) $172,000.
C) $168,000.
D) $160,000.
Answer: C
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Application
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
Match the following.
A) net purchases
10) Purchases minus purchase discounts and minus purchase returns and allowances
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
Answers: 10) A
11) Following is a random list of some of the accounts and their December 31, 2014, balances for Milita Merchandising. Milita Merchandising uses a periodic inventory system and all account balances are normal.
Purchases $330,000
Sales revenue 470,000
Interest revenue 23,000
Salary expense 45,000
Freight in 17,000
Purchase discounts 31,000
Sales returns and allowances 40,000
Interest expense 18,000
Delivery expense 24,000
Sales discounts 27,000
Insurance expense 16,000
Purchase returns and allowances 49,000
Milita, Capital 35,000
Utilities expense 14,000
Amortization expense-equipment 10,000
Milita, Withdrawals 18,000
The beginning and ending amounts for inventory are $58,000 and $65,000, respectively.
Calculate the following for Milita Merchandising:
Net sales revenue $__________
Net purchases $__________
Cost of goods available for sale $__________
Cost of goods sold $__________
Gross margin $__________
Operating income $__________
Net income $__________
Answer: Net sales revenue
($470,000 – $40,000 – $27,000) = $403,000
Net purchases
($330,000 – $31,000 – $49,000) = $250,000
Cost of goods available for sale
($58,000 + $250,000 + $17,000) = $325,000
Cost of goods sold
($325,000 – $65,000) = $260,000
Gross margin
($403,000 – $260,000) = $143,000
Operating income
($143,000 – $45,000 – $24,000 – $16,000 – $14,000 – $10,000) = $34,000
Net income
($34,000 + $23,000 – $18,000) = $39,000
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Analysis
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
Table 5-5
The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:
Salary payable
$1,100
Sales revenue
480,000
Interest revenue
3,000
Freight in
20,000
Beginning inventory
35,000
Sales discounts
18,000
Purchases of inventory
240,000
Purchase returns and allowances
35,000
Purchase discounts
10,000
Sales returns and allowances
35,000
Ending inventory
80,000
Operating expenses
85,000
Interest expense
7,000
Owner withdrawals
12,000
12) Based on the information in Table 5-5 provide the following:
Multi-step income statement
Gross margin percentage and the inventory turnover ratio for Speedy Boat Company. Comment on the effect that an increasing inventory turnover has on a business.
Answer:
Multi-step income statement
Speedy Boat Company
Income Statement
For the Period Ending December 31, 2013
Sales $480,000
Returns & allowances 35,000
Discounts 18,000
Net sales $427,000
Cost of goods sold:
Beg. inventory $35,000
Net purchases (240-35-10) 195,000
Freight-in 20,000
Available $250,000
End. inventory 80,000
Cost of goods sold 170,000
Gross margin $257,000
Operating expenses 85,000
Operating income $172,000
Other income and expenses:
Interest revenue $3,000
Interest expense 7,000 (4,000)
Net income $168,000
Ratios
Gross margin percentage = ($257,000/$427,000) = 60%
Inventor turnover = {$170,000/($35,000 + $80,000)/2] = 2.96 times
Increasing inventory turnover increases cash flow, reduces the risk of obsolescence, reduces the need for shelf space and warehousing, reduces the need for trade credit.
Diff: 3
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Application
Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system
Objective 5-B1
1) Describe the difference between a perpetual inventory system and a periodic inventory system.
Answer: The perpetual inventory system is used by businesses that sell expensive products or that have fairly sophisticated computer systems. This system keeps track of the inventory as it is both bought and sold, constantly updating the inventory account to current levels. This system offers management more control over inventory but requires a tremendous amount of record keeping. The sale of inventory requires not just one but two entries to record the transaction. One entry to record the sales price in the revenue account and another to record the cost in the cost of goods sold account.
The periodic inventory system is used by businesses that sell relatively inexpensive goods without the aid of sophisticated computers. This system does not keep track of the daily buying and selling of merchandise at cost. The only way to determine the cost of goods sold is to take a physical count of the merchandise on hand and to assume that if it is not on hand, it has been sold. This system does not offer as much control over inventory, but is much easier to account for on a daily basis.
Diff: 3
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Comprehension
Objective: 5-B1 Compare the perpetual and periodic inventory systems
Objective 5-C1
1) Goods and services taxes add an extra cost to the value of inventory.
Answer: FALSE
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Comprehension
Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST
2) Benny’s Shoes and Feet Stuff operates in a province where HST is applicable at a rate of 12%. Last week he purchased $5,000 of shoe inventory on credit. Which of the following journal entries correctly records this transaction if Benny’s Shoes and Feet Stuff uses a periodic inventory system?
A)
Purchases
5,000
HST Recoverable
600
Accounts Payable
5,600
B)
Purchases
5,000
HST Payable
600
Accounts Payable
5,600
C)
Inventory
5,000
HST Recoverable
600
Accounts Payable
5,600
D)
Inventory
5,000
HST Payable
600
Accounts Payable
5,600
Answer: A
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST
Match the following.
A) HST Payable
B) HST Recoverable
3) The tax account debited when goods are purchased
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST
Answers: 3) B
Table 5-7
Marvelous Merchandising charges GST on all its sales at the rate of 5% and pays GST on all its purchases at the rate of 5%. For purposes of this question, any applicable PST is ignored. The following are transactions for the month of May.
May 8 Purchased inventory, on account, FOB destination, from Stranhern Wholesale
$1,000 plus applicable GST.
10 Returned defective merchandise to Stranhern, $300 plus applicable GST.
12 Sold merchandise to Dainty Store on account for $3,000 plus applicable GST.
FOB shipping point. Cost of the merchandise sold was $2,500.
28 Collected balance on account from Dainty Store.
30 Paid balance on account to Stranhern.
4) Refer to Table 5-7. Prepare the journal entries for Marvelous Merchandising for the month of May, assuming that Marvelous Merchandising uses a perpetual inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
May 8
Inventory
1,000
GST Recoverable
50
Accounts Payable
1,050
10
Accounts Payable
315
GST Recoverable
15
Inventory
300
12
Accounts Receivable
3,150
GST Payable
150
Sales Revenue
3,000
Cost of Goods Sold
2,500
Inventory
2,500
28
Cash
3,150
Accounts Receivable
3,150
30
Accounts Payable
735
Cash
735
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST
5) Refer to Table 5-7. Prepare the journal entries for Marvelous Merchandising for the month of May, assuming that Marvelous Merchandising uses a periodic inventory system.
Answer:
General Journal
Date
Accounts
Debit
Credit
May 8
Purchases
1,000
GST Recoverable
50
Accounts Payable
1,050
10
Accounts Payable
315
GST Recoverable
15
Purchase Returns and Allowances
300
12
Accounts Receivable
3,150
GST Payable
150
Sales Revenue
3,000
28
Cash
3,150
Accounts Receivable
3,150
30
Accounts Payable
735
Cash
735
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST
Table 5-8
Marvelous Merchandising charges GST on all its sales at the rate of 5% and pays GST on all its purchases at the rate of 5%. For purposes of this question, any applicable PST is ignored. The following are transactions for the month of May. Marvelous uses a perpetual inventory system.
May 8 Purchased inventory, on account, FOB destination, from Stranhern Wholesale,
$1,000 plus applicable GST.
10 Returned defective merchandise to Stranhern, $300 plus applicable GST.
12 Sold merchandise to Dainty Store on account for $3,000 plus applicable GST.
FOB shipping point. Cost of the merchandise sold was $2,500.
28 Collected balance on account from Dainty Store.
30 Paid balance on account to Stranhern.
General Journal
Date
Accounts
Debit
Credit
May 8
Inventory
1,000
GST Recoverable
50
Accounts Payable
1,050
10
Accounts Payable
315
GST Recoverable
15
Inventory
300
12
Accounts Receivable
3,150
GST Payable
150
Sales Revenue
3,000
Cost of Goods Sold
2,500
Inventory
2,500
28
Cash
3,150
Accounts Receivable
3,150
30
Accounts Payable
735
Cash
735
6) Refer to Table 5-8. Prepare the remittance payment of GST on June 15, based on the assumption that the only transactions for May are those listed in Table 5-8.
Answer:
General Journal
Date
Accounts
Debit
Credit
June 15
GST Payable
150
GST Recoverable
35
Cash
115
Diff: 2
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Application
Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST
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