Financial Accounting Tools For Business Decision Making 6th Canadian Edition by Paul D. Kimmel Test Bank

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Financial Accounting Tools For Business Decision Making 6th Canadian Edition by Paul D. Kimmel Test Bank

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WITH ANSWERS
Financial Accounting Tools For Business Decision Making 6th Canadian Edition by Paul D. Kimmel Test Bank

CHAPTER 5

 

MERCHANDISING OPERATIONS

 

Summary of Question TYPEs by STUDY Objective and Level of difficulty

 

Item SO LOD Item SO LOD Item SO LOD Item SO LOD Item SO LOD
True-False Statements
1. 1 E 13. 2 E 25. 3 M 37. 4 M *49. 6 M
2. 1 E 14. 2 E 26. 3 E 38. 4 M *50. 6 E
3. 1 E 15. 2 E 27. 3 E 39. 4 E *51. 6 M
4. 1 E 16. 2 E 28. 3 E 40. 5 E *52. 6 E
5. 1 E 17. 2 E 29. 3 M 41. 5 M *53. 6 M
6. 1 E 18. 2 E 30. 3 M 42. 5 M *54. 6 E
7. 1 M 19. 2 M 31. 4 M 43. 5 E *55. 6 E
8. 1 E 20. 2 M 32. 4 E 44. 5 E *56. 6 M
9. 1 M 21. 3 E 33. 4 E 45. 5 E *57. 6 M
10. 2 M 22. 3 E 34. 4 E 46. 5 E      
11. 2 M 23. 3 M 35. 4 E 47. 5 M      
12. 2 M 24. 3 M 36. 4 M *48. 6 E      
Multiple Choice Questions
58. 1 E 79. 1,6 E 100. 3 E 121. 4 E 142. 5 E
59. 1 E 80. 2 E 101. 3 E 122. 4 E 143. 5 M
60. 1 E 81. 2 M 102. 3 M 123. 4 E 144. 5 M
61. 1 M 82. 2 E 103. 3 E 124. 4 H *145. 6 M
62. 1 M 83. 2 M 104. 3 M 125. 4 M *146. 6 E
63. 1 E 84. 2 M 105. 3 E 126. 4 E *147. 6 E
64. 1 M 85. 2 E 106. 3 E 127. 4 E *148. 6 E
65. 1 E 86. 2 M 107. 3 M 128. 4 M *149. 6 E
66. 1 E 87. 2 E 108. 3 E 129. 4 E *150. 6 E
67. 1 E 88. 2 E 109. 3 M 130. 4 M *151. 6 M
68. 1 M 89. 2 E 110. 3 M 131. 4 E *152. 6 M
69. 1 M 90. 3 E 111. 3 E 132. 4 M *153. 6 E
70. 1 E 91. 3 M 112. 3 E 133. 4 M *154. 6 E
71. 1 E 92. 3 E 113. 3 E 134. 5 M *155. 6 E
72. 1 E 93. 3 E 114. 3 E 135. 5 M *156. 6 M
73. 1 E 94. 3 E 115. 4 E 136. 5 E *157. 6 M
74. 1 M 95. 3 E 116. 4 E 137. 5 M *158. 6 M
75. 1 E 96. 3 M 117. 4 E 138. 5 E *159. 6 M
76. 1 E 97. 3 E 118. 4 E 139. 5 M *160. 6 M
77. 1,6 M 98. 3 E 119. 4 E 140. 5 E *161. 6 M
78. 1,6 E 99. 3 M 120. 4 M 141. 5 E      

 

Note:      E = Easy         M = Medium        H = Hard

 

*This topic is dealt with in an Appendix to the chapter.

 

 

Summary of Question TYPEs by STUDY Objective and Level of difficulty (Continued)

 

Item SO LOD Item SO LOD Item SO LOD Item SO LOD Item SO LOD
Exercises
162. 2 H 168. 2,3,6 E 174. 4,5 E *180. 6 H *186. 6 E
163. 2,3 E 169. 3 M 175. 4,5 E *181. 6 M *187. 6 M
164. 2,3 M 170. 3 E 176. 4,5 E *182. 6 E *188. 6 E
165. 2,3 E 171. 4 E 177. 4,5 E *183. 6 E      
166. 2,3 E 172. 4 E 178. 5 M *184. 6 E      
167. 2,3 H 173. 4 M 179. 5,6 H *185. 6 M      
Matching
189. 13,5,6 E,M                        
Short-Answer Essay
190. 1 E 193. 4 E 196. 4 E 199. 5 E      
191. 1,2,6 M 194. 4 E 197. 4 M *200. 6 E      
192. 1,6 E 195. 4 M 198. 4,5 M            

 

Note:      E = Easy         M = Medium        H = Hard

 

*This topic is dealt with in an appendix to the chapter.

 

 

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Study Objective 1
1. TF 6. TF 59. MC 64. MC 69. MC 74. MC 79. MC
2. TF 7. TF 60. MC 65. MC 70. MC 75. MC 189. Ma
3. TF 8. TF 61. MC 66. MC 71. MC 76. MC 190. SAE
4. TF 9. TF 62. MC 67. MC 72. MC 77. MC 191. SAE
5. TF 58. MC 63. MC 68. MC 73. MC 78. MC 192. SAE
Study Objective 2
10. TF 15. TF 20. TF 84. MC 89. MC 166. Ex    
11. TF 16. TF 80. MC 85. MC 162. Ex 167. Ex    
12. TF 17. TF 81. MC 86. MC 163. Ex 168. Ex    
13. TF 18. TF 82. MC 87. MC 164. Ex 189. Ma    
14. TF 19. TF 83. MC 88. MC 165. Ex 191. SAE    
Study Objective 3
21. TF 28. TF 94. MC 101. MC 108. MC 163. Ex 170. Ex
22. TF 29. TF 95. MC 102. MC 109. MC 164. Ex 189. Ma
23. TF 30. TF 96. MC 103. MC 110. MC 165. Ex    
24. TF 90. MC 97. MC 104. MC 111. MC 166. Ex    
25. TF 91. MC 98. MC 105. MC 112. MC 167. Ex    
26. TF 92. MC 99. MC 106. MC 113. MC 168. Ex    
27. TF 93. MC 100. MC 107. MC 114. MC 169. Ex    
Study Objective 4
31. TF 37. TF 118. MC 124. MC 130. MC 173. Ex 194. SAE
32. TF 38. TF 119. MC 125. MC 131. MC 174. Ex 195. SAE
33. TF 39. TF 120. MC 126. MC 132. MC 175. Ex 196. SAE
34. TF 115. MC 121. MC 127. MC 133. MC 176. Ex 197. SAE
35. TF 116. MC 122. MC 128. MC 171. Ex 177. Ex 198. SAE
36. TF 117. MC 123. MC 129. MC 172. Ex 193. SAE    
Study Objective 5
40. TF 44. TF 134. MC 138. MC 142. MC 175. Ex 179. Ex
41. TF 45. TF 135. MC 139. MC 143. MC 176. Ex 189. Ma
42. TF 46. TF 136. MC 140. MC 144. MC 177. Ex 198. SAE
43. TF 47. TF 137. MC 141. MC 174. Ex 178. Ex 199. SAE
*Study Objective 6
*48. TF *55. TF *146. MC *153. MC *160. MC *183. Ex *191. SAE
*49. TF *56. TF *147. MC *154. MC *161. MC *184. Ex *192. SAE
*50. TF *57. TF *148. MC *155. MC *168. Ex *185. Ex *200. SAE
*51. TF *77. MC *149. MC *156. MC *179. Ex *186. Ex    
*52. TF *78. MC *150. MC *157. MC *180. Ex *187. Ex    
*53. TF *79. MC *151. MC *158. MC *181. Ex *188. Ex    
*54. TF *145. MC *152. MC *159. MC *182. Ex *189. Ma    

Note:   TF  =  True/False              Ma = Matching

MC = Multiple Choice       Ex  =  Exercise                 SAE = Short Answer Essay

 

*This topic is dealt with in an Appendix to the chapter.

CHAPTER STUDY OBJECTIVES

 

 

  1. Identify the differences between service and merchandising companies. A service company performs services. It has service or fee revenue and operating expenses. A merchandising company sells goods. It has sales revenue, cost of goods sold, and gross profit in addition to operating expenses. Both types of company may also report non-operating items and each would report income tax expense.

 

 

  1. Prepare entries for purchases under a perpetual inventory system. The Merchandise Inventory account is debited for all purchases of merchandise and for freight costs if those costs are paid by the buyer (shipping terms FOB shipping point). It is credited for purchase discounts, and purchase returns and allowances.

 

 

  1. Prepare entries for sales under a perpetual inventory system. When inventory is sold, two entries are required: (1) Cash or Accounts Receivable is debited and Sales is credited for the selling price of the merchandise, and (2) Cost of Goods Sold is debited and Merchandise Inventory is credited for the cost of inventory items sold. Contra revenue accounts are used to record sales returns and allowances and sales discounts. Two journal entries are also required for sales returns so that both the selling price and the cost of the returned merchandise are recorded. Freight costs paid by the seller (shipping terms FOB destination) are recorded as an operating expense.

 

 

  1. Prepare a single-step and a multiple-step income statement. In a single-step income statement, all data (except for income tax expense) are classified under two categoriesrevenues or expensesand profit before income tax is determined in one step. Income tax expense is separated from the other expenses and reported separately after profit before income tax to determine profit (loss).

A multiple-step income statement shows several steps in determining profit. Step 1 deducts sales returns and allowances and sales discounts from gross sales to determine net sales. Step 2 deducts the cost of goods sold from net sales to determine gross profit. Step 3 deducts operating expenses (which can be classified by nature or by function) from gross profit to determine profit from operations. Step 4 adds or deducts any non-operating items to determine profit before income tax. Finally, step 5 deducts income tax expense to determine profit (loss).

 

 

  1. Calculate the gross profit margin and profit margin. The gross profit margin, calculated by dividing gross profit by net sales, measures the gross profit earned for each dollar of sales. The profit margin, calculated by dividing profit by net sales, measures the profit earned for each dollar of sales. Both are measures of profitability that are closely watched by management and other interested parties.

 

 

*6.   Prepare entries for purchases and sales under a periodic inventory system and calculate cost of goods sold (Appendix 5A). The periodic inventory system differs from the perpetual inventory system in that separate temporary accounts are used in the periodic system to record (1) purchases, (2) purchase returns and allowances, (3) purchase discounts, and (4) freight costs that are paid by the buyer (shipping terms FOB shipping point). The formula for cost of goods purchased is as follows: Purchases purchase returns and allowances purchase discounts = net purchases; and net purchases + freight in = cost of goods purchased.

Both systems use temporary accounts to record (1) sales, (2) sales returns and allowances, and (3) sales discounts. However, in a periodic inventory system, only one journal entry is made to record a sale of merchandise as the cost of goods sold is not recorded throughout the period. Instead, the cost of goods sold is determined at the end of the period.

To determine the cost of goods sold, first calculate the cost of goods purchased, as indicated above. Then, calculate the cost of goods sold as follows: Beginning inventory + cost of goods purchased = cost of goods available for sale; and cost of goods available for sale ending inventory = cost of goods sold.

At the end of the period, the Merchandise Inventory account is adjusted to reflect its proper balance as determined from the inventory count results. The change in this account is allocated to the Cost of Goods Sold account as are the balances in the Freight In and Purchases account and any related contra accounts.

 

TRUE-FALSE STATEMENTS

 

 

  1. A physical inventory count should be done at least once a year regardless of whether a perpetual or periodic inventory system is being used.

 

 

  1. The operating cycle of a merchandising company is generally shorter than that of a service company.

 

 

  1. Sales less operating expenses equal gross profit.

 

 

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

 

 

  1. Inventory is usually the largest current asset for a merchandiser.

 

 

  1. Cost of Goods Sold is considered an operating expense for a merchandising company.

 

 

  1. Operating expenses are subtracted from revenue for a service company and from gross profit for a merchandising company.

 

 

  1. Gross sales less cost of goods sold is called gross profit.

 

 

  1. Cost of goods available for sale is considered an operating expense for a merchandising company.

 

 

  1. When the terms of sale are FOB shipping point, the seller is responsible for any damages to the goods during shipping.

 

 

  1. Freight terms will specify the point at which ownership of the goods is transferred from the seller to the buyer.

 

 

  1. Under a perpetual inventory system, freight costs incurred by the buyer are added to the Merchandise Inventory account.

 

 

  1. Under the perpetual inventory system, purchases of merchandise for sale are recorded in the Merchandise Inventory account.

 

 

  1. Freight costs incurred on incoming merchandise are an operating expense to the buyer.

 

 

  1. The terms 2/10, n/30 mean that a 2% discount is allowed on payments made over 10 days but within the credit period.

 

 

  1. Discounts taken for early payment of an invoice are called sales discounts by the buyer.

 

 

  1. If merchandise costing $2,500, terms 2/10 n/30, is paid within 10 days, the amount of the purchase discount is $250.

 

 

  1. Under the perpetual inventory system, a discount taken for early payment is credited to the Merchandise Inventory account.

 

 

  1. A quantity discount is recorded separately, the same way as a purchase discount.

 

 

  1. If a quantity discount of 10% is received on a purchase of $10,000, inventory would be recorded at $9,000.

 

 

  1. Sales revenues are earned when the goods are transferred from buyer to seller.

 

 

  1. Sales revenues are recorded by the seller when an order is placed by a buyer.

 

 

  1. The Sales Returns and Allowances account and the Sales Discounts account are both classified as expense accounts.

 

 

  1. When goods are shipped FOB shipping point, freight costs are an operating expense for the seller.

 

 

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

 

 

  1. Sales Discounts is a contra revenue account to Sales.

 

 

  1. The normal balance of Sales Returns and Allowances is a credit.

 

 

  1. When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period.

 

 

  1. Merchandise is sold for $2,500 with terms 1/10, n/30. If $500 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $20.

 

 

  1. When returned merchandise is defective, the sellers sales account is debited.

 

 

  1. The multiple-step income statement is considered more useful than the single-step income statement for a merchandising company because it highlights the components of profit.

 

 

  1. Operating expenses are similar in merchandising and service companies.

 

 

  1. Gross profit appears on both the single-step and multiple-step forms of the income statement.

 

 

  1. Non-operating activities include revenues and expenses that are related to the companys main operations.

 

 

  1. Corporations following IFRS must classify their expenses either by nature or by function.

 

 

  1. Profit from operations appears on both the single-step and multiple-step forms of the income statement.

 

 

  1. A merchandising companys profit from operations is determined by subtracting cost of goods sold from net sales.

 

 

  1. Interest revenue for a merchandising company is usually reported in the non-operating activities section of the income statement.

 

 

  1. Companies following ASPE may classify their expenses by nature, but not by function.

 

 

  1. Gross profit is a measure of the overall profit of a company.

 

 

  1. Gross profit is expressed as a percentage of gross sales.

 

 

  1. Gross profit margin is the same as the gross profit amount.

 

 

  1. If net sales are $1,000,000 and cost of goods sold is $800,000, the gross profit margin is 20%.

 

 

  1. The gross profit amount is generally considered to be more informative than the gross profit margin.

 

 

  1. Gross profit margin is calculated by dividing cost of goods sold by net sales.

 

 

  1. Profit margin indicates whether a company is controlling operating expenses relative to sales.

 

 

  1. Profit margin is calculated by dividing profit by net sales.

 

 

*48. Under a periodic inventory system, purchase of inventory is debited to the Purchases account.

 

 

*49. Under a periodic inventory system, freight incurred on merchandise purchases by the buyer should be debited to the Merchandise Inventory account.

 

 

*50. Under a periodic inventory system, purchases of merchandise are usually credited to the Purchases account.

 

 

*51. Under a periodic inventory system, freight incurred on merchandise sales by the seller should be debited to the Freight In account.

 

 

*52. Purchase Returns and Allowances and Purchase Discounts are contra expense accounts with normal credit balances.

 

 

*53. Freight In is subtracted from the Purchases account to arrive at cost of goods purchased.

 

 

*54. A key difference between the periodic and perpetual inventory systems is the timing of the calculation of cost of goods sold.

 

 

*55. The cost of goods sold section of an income statement prepared under a periodic inventory system will contain more detail than under a perpetual inventory system.

 

 

*56. On the income statement for a company using the periodic inventory system, the inventory at the beginning of the period is added to the cost of merchandise purchased for the period to calculate the cost of goods available for sale during the period.

 

 

*57. Compared to a perpetual inventory system, the use of the periodic inventory system will result in a different value for inventory on the statement of financial position.

 

 

Answers to True-False Statements

 

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. T 13. T 25. F 37. F *49. F
2. F 14. F 26. T 38. T *50. F
3. F 15. F 27. F 39. F *51. F
4. T 16. F 28. T 40. F *52. T
5. T 17. F 29. T 41. F *53. F
6. F 18. T 30. F 42. F *54. T
7. T 19. F 31. T 43. T *55. T
8. F 20. T 32. T 44. F *56. T
9. F 21. F 33. F 45. F *57. F
10. F 22. F 34. F 46. T    
11. T 23. F 35. T 47. T    
12. T 24. F 36. F *48. T    

 

MULTIPLE CHOICE QUESTIONS

 

 

  1. The time it takes to go from cash to cash in producing revenues is called the

(a) accounting cycle.

(b) purchasing cycle.

(c) operating cycle.

(d) merchandising cycle.

 

 

  1. Gross profit equals the difference between net sales and

(a) profit.

(b) cost of goods sold.

(c) operating expenses.

(d) cost of goods sold plus operating expenses.

 

 

  1. Each of the following companies is a merchandising company except a

(a) wholesale parts company.

(b) candy store.

(c) moving company.

(d) furniture store.

 

 

  1. Profit will result if gross profit exceeds

(a) cost of goods sold.

(b) operating expenses.

(c) purchases.

(d) cost of goods sold plus operating expenses.

 

 

  1. A merchandiser will have profit from operations of exactly $0 when

(a) net sales equals cost of goods sold.

(b) cost of goods sold equals gross profit.

(c) operating expenses equal net sales.

(d) gross profit equals operating expenses.

 

 

  1. The largest current asset for a merchandiser is usually

(a) inventory.

(b) prepaid expenses.

(c) cash.

(d) accounts receivable.

 

 

  1. The primary source of revenue for a wholesaler is generated by

(a) investments.

(b) providing services.

(c) the sale of merchandise.

(d) the sale of property, plant, and equipment the company owns.

 

 

  1. Generally, the revenue account for a merchandising company is called

(a) Sales Revenue or Sales.

(b) Investment Revenue.

(c) Gross Profit.

(d) Net Sales.

 

 

  1. The operating cycle of a merchandising company is

(a) always one year in length.

(b) generally longer than that of a service company.

(c) about the same as that of a service company.

(d) generally shorter than that of a service company.

 

 

  1. Net sales less cost of goods sold is called

(a) gross profit.

(b) cost of goods sold.

(c) profit.

(d) profit before income taxes.

 

 

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

(a) gross margin.

(b) profit (loss) before income tax.

(c) cost of goods sold.

(d) profit margin.

 

 

  1. Which of the following formulas is incorrect?

(a) Gross profit operating expenses = profit before income tax.

(b) Net sales cost of goods sold = gross profit.

(c) Net sales gross profit = cost of goods sold.

(d) Operating expenses cost of goods sold = gross profit.

 

 

  1. Beginning inventory plus purchases equals

(a) cost of goods available for sale.

(b) cost of goods sold.

(c) ending inventory.

(d) total inventory on hand.

 

 

  1. Which of the following is true about inventory systems?

(a) Periodic inventory systems require more detailed inventory records.

(b) Perpetual inventory systems require more detailed inventory records.

(c) A periodic system requires cost of goods sold to be recorded after each sale.

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

 

 

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

(a) on a daily basis.

(b) on a monthly basis.

(c) on an annual basis.

(d) each time a sale occurs.

 

 

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

(a) keeps a detailed record showing the inventory on hand at all times.

(b) provides better control over inventories.

(c) records the cost of goods sold on the date the sale is made.

(d) determines the cost of goods sold at the end of the accounting period.

 

 

  1. The physical inventory count is used to determine

(a) cost of inventory purchased during the period.

(b) cost of inventory sold during the period.

(c) the cost of inventory on hand.

(d) the cost of goods available for sale.

 

 

  1. Inventory becomes part of the cost of goods sold when a company

(a) pays for the inventory.

(b) purchases the inventory.

(c) sells the inventory.

(d) receives payment from the customer.

 

 

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

(a) must have a computerized accounting system.

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

(c) uses a periodic inventory system.

(d) uses a perpetual inventory system.

 

 

  1. Under a perpetual inventory system

(a) there is no need for a year-end physical count.

(b) increases in inventory resulting from purchases are debited to Purchases.

(c) accounting records continuously disclose the amount of inventory.

(d) the account Purchase Returns and Allowances is credited when goods are returned to vendors.

 

 

  1. Under a perpetual inventory system, the following is determined each time a sale occurs:

(a) Gross Profit.

(b) Cost of Goods Sold.

(c) Purchases.

(d) Accounts Receivable.

 

 

  1. Under the perpetual inventory system, which of the following accounts would not be used?

(a) Sales

(b) Purchases

(c) Cost of Goods Sold

(d) Merchandise Inventory

 

 

  1. The abbreviation FOB stands for

(a) free on board.

(b) freight on board.

(c) free only (to) buyer.

(d) freight charge on buyer.

 

 

  1. On July 10, Swant Inc. purchased $1,000 of inventory on terms of 2/10, n/45. The amount due on August 25 is

(a) $1,020.

(b) $1,000.

(c) $980.

(d) $990.

 

 

  1. Under a perpetual inventory system, purchase of inventory is recorded as a debit to the

(a) Supplies account.

(b) Purchases account.

(c) Merchandise Inventory account.

(d) Cost of Goods Sold account.

 

 

  1. The journal entry by the buyer to record a return of merchandise purchased on account under a perpetual inventory system would credit

(a) Accounts Payable.

(b) Purchase Returns and Allowances.

(c) Sales.

(d) Merchandise Inventory.

 

 

  1. A company using a perpetual inventory system that returns goods purchased on credit would

(a) debit Accounts Payable and credit Merchandise Inventory.

(b) debit Sales and credit Accounts Payable.

(c) debit Cash and credit Accounts Payable.

(d) debit Accounts Payable and credit Purchases.

 

 

  1. If a purchaser using a perpetual inventory system pays freight costs, then the

(a) Merchandise Inventory account is increased.

(b) Merchandise Inventory account is not affected.

(c) Freight Out account is increased.

(d) Freight In account is increased.

 

 

  1. Freight costs incurred by a seller on merchandise sold to customers will cause an increase

(a) in the selling expenses of the buyer.

(b) in operating expenses for the seller.

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

(d) to a contra revenue account of the seller.

 

 

  1. Cashmere Corporation purchased merchandise inventory with an invoice price of $16,000 and credit terms of 2/10, n/30. How much cash will Cashmere pay if they pay within the discount period?

(a) $16,000

(b) $15,680

(c) $14,720

(d) $14,400

 

 

  1. For a company using a perpetual inventory system, the journal entry to record the purchase of $3,500 of goods on account, with terms of 4/10, n/30, would include a

(a) debit to accounts payable of $3,500.

(b) credit to accounts payable of $3,360.

(c) debit to merchandise inventory of $3,360.

(d) debit to merchandise inventory of $3,500.

 

 

  1. A purchase invoice is a document that

(a) provides support for goods sold for cash.

(b) provides evidence of operating expenses incurred.

(c) provides evidence of credit purchases.

(d) serves only as a customer receipt.

 

 

  1. Under the perpetual inventory system, in addition to making the entry to record the sale, the seller would

(a) debit Merchandise Inventory and credit Cost of Goods Sold.

(b) debit Cost of Goods Sold and credit Purchases.

(c) debit Cost of Goods Sold and credit Merchandise Inventory.

(d) make no additional entry until the end of the period.

 

 

  1. Sales revenues are usually considered earned when

(a) cash is received from credit sales.

(b) an order is received.

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

(d) adjusting entries are made.

 

 

  1. Sales Discounts is a(n)

(a) contra revenue account.

(b) contra asset account.

(c) revenue account.

(d) expense account.

 

 

  1. Evidence of cash sales is usually supported by

(a) purchase invoices.

(b) sales invoices.

(c) purchase orders.

(d) cash register tapes.

 

 

  1. Gross sales less sales returns and allowances less sales discounts equals

(a) collectible sales.

(b) net sales.

(c) total sales.

(d) operating sales.

 

 

  1. The entry to record a sale of $525 with terms of 2/10, n/30 will include a

(a) debit to Sales Discounts for $10.50.

(b) debit to Sales for $514.50.

(c) credit to Accounts Receivable for $525.

(d) credit to Sales for $525.

 

 

  1. A sales invoice is prepared when goods

(a) are sold for cash.

(b) are sold on credit.

(c) sold on credit are returned.

(d) are sold on credit or for cash.

 

 

  1. Sales Returns and Allowances is a(n)

(a) asset account.

(b) contra asset account.

(c) expense account.

(d) contra revenue account.

 

 

  1. The entry to record the return of goods from a customer would include a

(a) debit to Sales.

(b) credit to Sales.

(c) debit to Sales Returns and Allowances.

(d) credit to Sales Returns and Allowances.

 

 

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

(a) debit to Sales Discounts for $40.

(b) debit to Accounts Receivable for $1,960.

(c) credit to Cash for $1,960.

(d) credit to Accounts Receivable for $1,960.

 

 

  1. Freight paid by the seller to a customers business is recorded as a

(a) credit to Sales.

(b) debit to Sales.

(c) debit to an operating expense.

(d) credit to Cost of Goods Sold.

 

 

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

(a) discount.

(b) return.

(c) contra asset.

(d) allowance.

 

 

  1. When goods from a cash sale are returned, the effect on the sellers accounts will be

(a) an increase in net sales.

(b) a decrease in gross sales.

(c) an increase in gross sales.

(d) a decrease in net sales.

 

 

  1. Management may be alerted to a quality problem with their merchandise by a sudden increase in which account?

(a) Sales

(b) Sales Returns and Allowances

(c) Sales Discounts

(d) Cost of Goods Sold

 

 

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

(a) returns defective merchandise.

(b) receives a credit for merchandise of inferior quality.

(c) pays within the discount period.

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

 

 

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

(a) a sales discount.

(b) free delivery.

(c) a sales allowance.

(d) a sales return.

 

 

  1. The credit terms offered by a company are 2/10, n/30, which means that

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

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

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

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

 

 

  1. A sales discount does not

(a) provide the purchaser with a cash saving.

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

(c) increase a contra revenue account.

(d) increase an operating expense account.

 

 

  1. Company A sells $500 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B pays within the discount period, how much cash will Company A receive?

(a) $400

(b) $410

(c) $490

(d) $500

 

 

  1. Chocolate Corporation sells merchandise on account for $3,000 to Marshmallow Corporation with credit terms of 2/10, n/30. Marshmallow returns $600 of merchandise that was damaged, along with a cheque to settle the account within the discount period. What is the amount of the cheque?

(a) $2,952

(b) $2,940

(c) $2,400

(d) $2,352

 

 

  1. Mountain Corp. sells merchandise on account for $2,000 to Cliff Corp., terms 2/10, n/30. Cliff returns $800 worth of merchandise that was damaged, along with a cheque to settle the account within the discount period. What entry does Mountain make upon receipt of the cheque?

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