Merchandising - Review Materials (Theories)

BASIC CONCEPTS
Trading vs. Service Business

Accounting equation
1. Which one of the following is not a difference between a retail business and a service business? (M)
a. in what is sold
b. the inclusion of gross profit in the income statement
c. accounting equation
d. merchandise inventory included in the balance sheet
Chart of account
59. A chart of accounts for a merchandising business usually (M)
a. is the same as the chart of accounts for a service business
b. requires more accounts than does the chart of accounts for a service business
c. is standardized by the FASB for all merchandising businesses
d. does not have a Cost of Merchandise Sold account if a perpetual inventory system is used
Financial Statements
19. When comparing a retail business to a service business, the financial statement that changes the most is the (M)
a. Balance Sheet c. Statement of Retained Earnings
b. Income Statement d. Statement of Cash Flow
43. Which of the following appears in the income statement of a merchandising business, but not in the income statement of a business that renders only services?
A. Interest revenue. C. Advertising expense.
B. Gross profit. D. Income tax expense.
110.Indicate which one of the following would appear on the income statement of both a merchandising company and a service company.
a. Gross profit c. Sales revenues
b. Operating expenses d. Cost of goods sold
20. When comparing a retail business to a service business, the financial statement that changes the least is the (M)
12. The major difference in the statement of retained earnings between a service business and a merchandising business is:
A. that the retained earnings statement of a service business includes Dividends.
B. that the retained earnings statement of a merchandising business includes Dividends.
C. that the retained earnings statement of a merchandising business shows the Cost of Goods Sold.
D. nothing. There are no differences between the two.
Chart of accounts
86. Which account will be included in both service and merchandising companies closing entries? (E)
a. Sales c. Sales Discounts
b. Cost of Merchandise Sold d. Sales Returns and Allowances
74. Which of the following accounts, will only be found in the chart of accounts of a merchandising company? (E)
a. Sales c. Merchandise Inventory
b. Accounts Receivable d. Accounts Payable
Adjusting & closing process

*. Which account causes the main difference between merchandiser’s adjusting and closing process and that of a service business?
a. Interest revenue. c. Accounts receivable.
b. Cost of goods sold. d. Advertising expense. RPCPA 0598
Recognition Criteria
Revenue Recognition
. Sales revenues are usually considered earned when
A. cash is received from a sale on account
B. legal ownership of goods has been transferred from the seller to the buyer
C. a sales order has been received
D. the goods leave the seller’s business
41. Sales revenue is recognized in the period in which:

A. Merchandise is delivered to the customer.
B. The customer orders the merchandise.
C. Cash payment is received by the seller.
D. Purchases are made to replace the merchandise sold.
79. 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.
81. Sales revenue

a. may be recorded before cash is collected.
b. will always equal cash collections in a month.
c. only results from credit sales.
d. is only recorded after cash is collected.
Purchase Recognition
*. A purchase should be recognized in the accounting records when
a. Payment is made for the item purchased.
b. The purchase requisition is sent to the processing department.
c. The buyer receives the seller’s bill.
d. Title transfer from the seller to the buyer. RPCPA 0598
8. Transferring title refers to a:

A. change of ownership. C. change of seller.
B. change of buyer. D. legal document.
27. Purchases are entered into the asset account, Inventory, at:
A. the time of purchase.
B. the time of sale to consumers.
C. the time of the inventory count.
D. the end of the accounting period.
*. Ramos ordered merchandise from Santos on December 10, 1985; terms FOB shipping point. Santos shipped the goods on December 27, 1985 and Ramos received them on January 2, 1986. When
should Ramos record the amount payable?
a. December 10, 1985. c. December 31, 1985.
b. December 27, 1985. d. January 2, 1986. RPCPA 1086
Business Documents
Document flow
. Which of the following most accurately depicts the documentation flow used in the process of acquiring inventory?
A. Purchase order, receiving report, vendor invoice
B. Purchase requisition, purchase order, vendor invoice
C. Purchase order, vendor invoice, receiving report
D. Purchase requisition, purchase order, receiving report
Purchase order
14. The process of acquiring merchandise from a supplier begins with the:
A. check for payment. C. purchase order.
B. receiving report. D. invoice.
. A paper document that is used to formally request a vendor to sell and deliver specific products (inventory) at specified prices is called a
A. purchase requisition C. receiving report
B. purchase order D. vendor invoice
17. A purchase order:
A. identifies the need for merchandise and begins the purchasing process.
B. identifies that the merchandise has been received and ends the purchasing process.
C. is sent by the purchasing department to the customer who purchases the item.
D. includes the invoice, receiving report, purchase order and purchase request.
Receiving report
15. Once the merchandise is received from the supplier, the company:
A. issues an invoice. C. issues a purchase order.
B. issues a check. D. completes a receiving report.
18. A receiving report is prepared by what department?

A. Accounting C. Purchasing
B. Shipping (Receiving) D. Marketing
Sales invoice
80. A sales invoice is a source document that
a. provides support for goods purchased for resale.
b. provides evidence of incurred operating expenses.
c. provides evidence of credit sales.
d. serves only as a customer receipt.
16. Which of the following is sent by the company who ships the goods to the company who ordered the goods?
A. An invoice C. Check
B. Purchase order D. Receiving report
Credit memorandum
83. A credit memorandum is prepared when
a. an employee does a good job.
b. goods are sold on credit.
c. goods that were sold on credit are returned.
d. customers refuse to pay their accounts.
85. A credit memorandum is used as documentation for a journal entry that requires a debit to
a. Sales and a credit to Cash.
b. Sales Returns and Allowances and a credit to Accounts Receivable.
c. Accounts Receivable and a credit to a contra-revenue account.
d. Cash and a credit to Sales Returns and Allowances.
32. If merchandise sold on account is returned to the seller, the seller may inform the customer of the details by issuing a (E)
a. sales invoice c. credit memorandum
b. purchase invoice d. debit memorandum
6. A customer purchased items on account from ABC Company. After a few days, the customer returned the goods. ABC will issue a:
A. debit memorandum. C. credit memorandum.
B. return receipt. D. refund check.
Debit memorandum
28. The document that supports the return of goods to the supplier is called a(n):
A. cost of goods sold. C. debit memorandum.
B. sales returns and allowances. D. credit memorandum.
104.A debit memorandum is: (M)

A) Required whenever a journal entry is recorded.
B) The source document for the purchase of merchandise inventory.
C) Required when a purchase discount is granted.
D) The document a buyer issues to inform the seller of a debit made to the seller's account in the buyer's records.
E) Not necessary in a perpetual inventory system.
FOB Terms
6. FOB means:
A. freight on board. C. fee on board.
B. from our buyer. D. free on board.
FOB Shipping Point

Change of title
77. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are (E)
a. n/30 c. FOB destination
b. FOB shipping point d. consigned
54. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are (E)
a. n/30 c. FOB destination
b. FOB shipping point d. consigned
Buyer bears risk of transit

50. Merchandise sold FOB shipping point indicates that:
A. The seller pays the freight.
B. The buyer bears the risk of transit.
C. The common carrier holds title until the merchandise is delivered.
D. The sale is not consummated until the merchandise reaches the point to which it is being shipped. S, S & T
Buyer pays freight

. Which term indicates that the buyer will be responsible for transportation charges for goods purchased?
A. Freight-in C. Transportation-in
B. FOB shipping point D. FOB destination
10. Which of the following indicates that the shipment is free on board and the buyer pays all of the shipping and freight costs?
A. Cash on delivery C. FOB destination
B. FOB shipping point D. 2/10, n/30
52. If the buyer is to pay the transportation costs of delivering merchandise, delivery terms are stated as (E)
a. FOB shipping point c. FOB n/30
b. FOB destination d. FOB buyer
71. Who pays the freight costs when the terms are FOB shipping point? (M)
a. the ultimate customer c. the seller
b. the buyer d. either the seller or the buyer
76. In a transaction where the merchandise invoice indicates F.O.B. shipping point, who pays the cost of shipping?
a. the buyer d. the freight forwarder
b. the seller e. none of the above
c. the common carrier
64. Bryan Company purchased merchandise from Cates Company with freight terms of FOB shipping point. The freight costs will be paid by the
a. seller. c. transportation company.
b. buyer. d. buyer and the seller.
FOB Destination
Free of transportation charges
. Which term indicates to a buyer that merchandise is free of transportation charges?
A. FOB shipping point C. Transportation-in
B. Freight-In D. FOB Destination
. Sebastian Merchandising purchased goods on account from Nemo Incorporated. The goods were purchased FOB destination for $200. How would these freight charges be recorded in Sebastian’s
accounting records assuming that the company uses a perpetual inventory system?
A. They would not be included in Sebastian’s accounting records.
B. Debit freight-expense, credit accounts payable
C. Debit freight-out, credit accounts payable
D. Debit inventory and credit accounts payable
Change of title
76. If title to merchandise purchases passes to the buyer when the goods are delivered to the buyer, the terms are (E)
a. consigned c. FOB shipping point
b. n/30 d. FOB destination
51. Merchandise sold FOB destination indicates that:

A. The seller holds title until the merchandise is received at the buyer's location.
B. The buyer is responsible for delivery of the merchandise to the destination.
C. The full order is back ordered to its destination.
D. The buyer pays the freight to the destination. S, S & T
Seller pays freight

53. If the seller is to pay the transportation costs of delivering merchandise, the delivery terms are stated as (E)
a. FOB shipping point c. FOB n/30
b. FOB destination d. FOB seller
11. Which of the following indicates that the shipment is free on board and the seller pays all of the shipping and freight costs?
A. Cash on delivery C. FOB destination
B. FOB shipping D. 2/10, n/30
72. Who pays the freight cost when the terms are FOB destination? (E)
a. the seller c. the customer
b. the buyer d. either the buyer or the seller
56. When goods are shipped FOB destination and the seller pays the transportation charges, the buyer (M)
a. journalizes a reduction for the cost of the merchandise.
b. journalizes a reimbursement to the seller.
c. does not take a discount.
d. makes no journal entry for the transportation.
Freight costs
Freight-in
7. Freight charges that are paid by a buyer are:
A. added to cost of goods sold.
B. added to inventory.
C. subtracted from inventory.
D. subtracted from cost of goods sold.
66. The cost of the transportation of inventory purchased:

A. Is expensed. C. Becomes part of the cost of inventory.
B. Increases income. D. Reduces the sales price.
Freight-out
63. Freight costs paid by a seller on merchandise sold to customers will cause an increase
a. in the selling expense of the buyer.
b. in operating expenses for the seller.
c. to the cost of goods sold of the seller.
d. to a contra-revenue account of the seller.
Comprehensive
60. Which of the following statements is incorrect?
a. Both freight-in and freight-out affect gross profit.
b. Freight-in appears as part of cost of goods sold.
c. Freight-out is a shipping expense.
d. Freight-in occurs when the terms of the invoice are FOB shipping point.
e. When the seller bears the shipping cost, the inventory is stated as FOB destination.
Trade Discount
9. A discount given to a customer for purchasing a large volume of merchandise is typically referred to as a
a. quantity discount. c. trade discount.
b. cash discount. d. size discount. S, S & S
101.A trade discount is: (E)

A) A term used by a purchaser to describe a cash discount given to customers for prompt payment.
B) A reduction in price below the list price.
C) A term used by a seller to describe a cash discount granted to customers for prompt payment.
D) A reduction in price for prompt payment.
E) Also called a rebate.
Credit Terms
In general
33. The arrangements between buyer and seller as to when payments for merchandise are to be made are called (E)
a. credit terms c. cash on demand
b. net cash d. gross cash
. The discount period is a
A. specified amount and timing of payments that a customer agrees to in return for being allowed to purchase goods on account
B. deduction in the invoice price granted to a customer due to a slight flaw in the product
C. period of time during which, if payment is made, a cash discount may be deducted from the invoice price
D. deduction in the price of a product because of a sale
26. The discount period is determined by the:

A. seller of the merchandise. C. customer.
B. purchaser of the merchandise. D. amount of the invoice.
. 1/10 is a term that represents the

A. period of time during which, if payment is made, a discount may be deducted from the invoice price
B. specified amount and timing of payments to which a customer agrees in return for being allowed to purchase goods on account
C. period of time that a customer has to return unwanted or defective goods
D. period of time that a buyer has to make payment for goods received
34. In credit terms of 1/10, n/30, the "1" represents the (E)
a. number of days in the discount period
b. full amount of the invoice
c. number of days when the entire amount is due
d. percent of the cash discount
14. If an invoice states 5/15, n/60, the 15 refers to:

A. the percent that can be taken for the discount.
B. the days in the discount period.
C. the days in which to pay the bill in full.
D. the percent of the bill that has to be paid in the discount period.
13. If an invoice reads n/15, it means that:

A. the company has 15 days to pay the bill in full.
B. the company has 15 days to take the discount.
C. the company takes 15% off of the total of the invoice.
D. the company pays 85% of the invoice.
. The company purchases goods with the terms 1/15, n/45. What do the terms mean?
A. A 1% discount is available for 45 days; otherwise, the invoice must be paid in 15 days.
B. A 1% discount is available for 15 days after the invoice date; otherwise, the invoice must be paid in 45 days.
C. A 15% discount is available and the invoice is due in 45 days.
D. A 15% discount is available and the invoice is due in 15 days.
46. The credit term 2/10 n/30 means (E)

A. That after 10 days 2% interest is charged.
B. That there is a 10% discount if payment is received within 30 days.
C. That there is a 2% discount if payment is received within 10 days.
D. There is a 10% discount if paid immediately and 2% if paid within 30 days.
100.The credit terms 2/10, n/30 are interpreted as: (E)

A) 2% cash discount if the amount is paid within 10 days, with the balance due in 30 days.
B) 10% cash discount if the amount is paid within 2 days, with balance due in 30 days.
C) 30% discount if paid within 2 days.
D) 30% discount if paid within 10 days.
E) 2% discount if paid within 30 days.
92. The credit terms offered to a customer by a business firm are 2/10, n/30, which means that
a. the customer must pay the bill within 10 days.
b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date.
c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.
d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.
Due date
62. Apple Co sells merchandise on credit to Zea Co in the amount of $8,000. The invoice is dated on September 15 with terms of 1/15, net 45. If Zea Co. chooses not to take the discount, by when should the
payment be made? (M)
a. September 30 c. October 15
b. October 30 d. September 25
Discount rate
1
. A company records the following journal entry: debit Cash $1,470, debit Sales Discounts $30, and credit Accounts Receivable $1,500. This means that a customer has taken a ___ cash discount for early
payment. (D)
A. 1% D. 10%
B. 2% E. 15%
C. 5%
Purchase Discount
Credit terms
16. Which of the following credit terms allows a discount of 3% if payment is made within 15 days of the invoice; otherwise, the total amount of the invoice must be paid within 30 days from the date of the
invoice?
A. 3/15, EOM C. 3/15, n/30
B. 3/EOM, n/30 D. 15/3, n/30
Paid within discount period, with prepaid shipping charges

13. When a company repays the seller for shipping costs on an FOB shipping transaction, which of the following is true?
A. A purchase discount can still be taken net of the prepaid shipping charges.
B. A purchase discount can still be taken on the gross amount of the invoice.
C. A purchase discount cannot be taken when shipping charges are prepaid.
D. The shipping costs do not affect the invoice cost.
Effect on inventory cost

20. Discounts allowed for customers who pay their invoices early:
A. reduce the cost of the purchased inventory.
B. increase the cost of the purchased inventory.
C. are called manufacturers’ discounts.
D. are called allowances.
Business decision
67. If a company is given credit terms of 2/10, n/30, it should
a. hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.
b. pay within the discount period and recognize a savings.
c. pay within the credit period but don't take the trouble to invest the cash while waiting to pay the bill.
d. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.
Sales Discount
Definition
63. Discounts taken by a buyer because of early payment are recorded on the seller’s accounting records as (E)
a. Purchases discount c. Trade discount
b. Sales discount d. Early payment discount
Purpose
76. The basic purpose of offering customers cash discounts such as 2/10, n/30 is to:
A. Increase sales.
B. Reduce net sales.
C. Speed up the collection of accounts receivable.
D. Focus management's attention upon customers that fail to take advantage of all available cash discounts.
91. 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.
Discount, due date

61. Apple Co sells merchandise on credit to Zea Co in the amount of $8,000. The invoice is dated on September 15 with terms of 1/15, net 45. What is the amount of the discount and up to what date must
the invoice be paid in order for the buyer to take advantage of the discount? (D)
a. $160, September 30 c. $80, September 30
b. $160, September 25 d. $80, September 25
Effect
93. 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.
Sales return & allowances

Sales allowance
86. If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales
a. discount. c. contra asset.
b. return. d. allowance.
71. Emily Beverages is not satisfied with the quality of merchandise purchased from American Supplies. If American Supplies agrees to settle this matter by granting Emily Beverages a sales allowance,
Emily Beverages will:
A. Return the entire shipment to American Supplies and receive a full refund.
B. Return only that portion of the merchandise that it is unable to sell within the discount period.
C. Keep the merchandise, but pay a reduced purchase price.
D. Keep the merchandise and sell it at a reduced sales price.
Sales Returns & Allowances

89. The Sales Returns and Allowances account does not provide information to management about
a. possible inferior merchandise.
b. the percentage of credit sales versus cash sales.
c. inefficiencies in filling orders.
d. errors in overbilling customers.
Inventoriable costs
Invoice cost, insurance in transit, tariff costs
78. If the merchandise costs $4,000, insurance in transit costs $200, tariff costs $50, processing the purchase order by the purchasing department costs $35, and the company receiving dock personnel cost
$15, what is the total cost charged to the merchandise? (D)
a. $4,250 c. $4,300
b. $4,285 d. $4,000
Physical Count
Conduct of count
8. Physical inventory counts must be done:
A. when using the periodic method of inventory.
B. when using bar code scan technology.
C. when using the perpetual method of inventory.
D. regardless of method inventory.
Inventory shortage
85. Inventory shortage is recorded when (M)
a. merchandise is returned by a buyer.
b. merchandise purchased from a seller is incomplete or short.
c. merchandise is returned to a seller.
d. there is a difference between a physical count of inventory and inventory records.
PERIODIC INVENTORY SYSTEM

Application
35. Merchandising companies that are small and do not use a perpetual inventory system may elect to use:
A. A physical inventory system C. An inventory shrinkage method
B. A periodic inventory system D. An inventory subsidiary ledger system.
44. Which of the following factors would suggest the use of a periodic inventory system?
A. A small company.
B. A high volume of many different, low-cost items.
C. Neither a or b.
D. Both a and b.
63. Periodic inventory systems are used primarily by:

A. Small businesses with manual accounting systems.
B. Large manufacturing companies.
C. Small businesses that sell a low volume of high-priced items.
D. Companies that sell a high volume of low-priced items and record sales transactions on point-of-sale terminals.
40. Which of the following companies would be more likely to use a periodic inventory system?
A. IBM C. Sears
B. 1st Bank of New York D. A newspaper stand
Cash sales
40. Sales to customers who use bank credit cards, such as MasterCard and Visa, are generally treated as (E)
a. sales on account
b. sales returns
c. cash sales
d. sales when the credit card company remits the cash
Cost of Goods Sold

11. Under the periodic inventory method, the amount of inventory is:
A. constantly updated.
B. only known when a physical count is taken.
C. adjusted after each sale.
D. adjusted after each purchase.
51. Cost of goods sold is determined only at the end of the accounting period in
a. a perpetual inventory system.
b. a periodic inventory system.
c. both a perpetual and a periodic inventory system.
d. neither a perpetual nor a periodic inventory system.
61. In a periodic inventory system, the cost of goods sold is:

A. Recorded as sales transactions occur.
B. Determined by a computation which is performed at year-end, after the taking of a complete physical inventory.
C. Equal to the beginning inventory, plus purchases made during the period, less sales revenue for the period.
D. Determined by subtracting the balance in the Gross Profit account from the amount of net sales.
Comprehensive
65. Which of the following statements about a periodic inventory system is not correct?
A. These systems are used primarily by small businesses with manual accounting systems.
B. The system does not include an up-to-date inventory ledger.
C. The balance in the Inventory account remains unchanged until the end of the period.
D. The Cost of Goods Sold account is updated as sales transactions occur.
PERPETUAL INVENTORY SYSTEM

Characteristics
More detailed records
55. Which of the following is a true statement about inventory systems?
a. Periodic inventory systems require more detailed inventory records.
b. Perpetual inventory systems require more detailed inventory records.
c. A periodic system requires cost of goods sold be determined after each sale.
d. A perpetual system determines cost of goods sold only at the end of the accounting period.
Use of merchandise inventory account

22. The inventory system that uses the merchandise inventory account as an asset account is called the:
A. periodic system. C. merchandising system.
B. perpetual system. D. retailing system.
Merchandise transaction recorded as they occur

52. In a perpetual inventory system:
A. Merchandising transactions are recorded as they occur.
B. No effort is made to record the cost of goods sold until year-end.
C. Entries are made in the Cost of Goods Sold account whenever merchandise is purchased or sold.
D. The need for ever taking physical inventory is eliminated.
Cost of good sold

56. In a perpetual inventory system, cost of goods sold is recorded
a. on a daily basis. c. on an annual basis.
b. on a monthly basis. d. with each sale.
57. If a company determines cost of goods sold each time a sale occurs, it
a. must have a computer accounting system.
b. uses a combination of the perpetual and periodic inventory systems.
c. uses a periodic inventory system.
d. uses a perpetual inventory system.
78. In a perpetual inventory system, the Cost of Goods Sold account is used
a. only when a cash sale of merchandise occurs.
b. only when a credit sale of merchandise occurs.
c. only when a sale of
merchandise occurs.
d. whenever there is a sale o
f merchandise or a return of merchandise sold.
Inventory balance
17. The inventory system employing accounting records that continuously disclose the amount of inventory is called (E)
a. retail c. physical
b. periodic d. perpetual
Two entries for sales

54. In a perpetual inventory system, two entries usually are made to record each sales transaction. The purposes of these entries are best described as follows:
A. One entry recognizes the sales revenue, and the other recognizes the cost of goods sold.
B. One entry records the purchase of the merchandise, and the other records the sale.
C. One entry records the cost of goods sold, and the other reduces the balance in the Inventory account.
D. One entry updates the general ledger, and the other updates the subsidiary ledgers.
Application
36. Which of the following would not tend to make a manufacturer choose a perpetual inventory system?
A. Management wants information about quantities of specific products
B. A low volume of sales transactions and a computerized accounting system
C. A high volume of sales transactions and a manual accounting system
D. Items in inventory with high per unit costs
38. Which of the following factors would suggest the use of a perpetual inventory system?
A. A small company.
C. Neither a or b.
D. Both a and b.
42. Which of the following companies would be more likely to use a perpetual inventory system?
A. Corner deli. C. James Dean, CPA.
B. Home Depot. D. A manufacturer of nuts and bolts.
54. A perpetual inventory system would likely be used by a(n)

a. automobile dealership. c. drugstore.
b. hardware store. d. convenience store.
Use of merchandise inventory account

81. Under a perpetual inventory system (E)
a. accounting records continuously disclose the amount of inventory
b. increases in inventory resulting from purchases are debited to Purchases
c. there is no need for a year-end physical count
d. the purchase returns and allowances account is credited when goods are returned to vendors
1
.$30/$1,500 = 2% discount
NATURE OF ACCOUNT
Inventory
5. The term "inventory" indicates (E)
a. merchandise held for sale in the normal course of business
b. materials in the process of production or held for production
c. supplies
d. both (a) and (b)
37. Which of the following should not be classified as inventory in the balance sheet of a large automobile dealership?
A. Pickup trucks offered for sale.
B. Used cars taken in trade and offered for sale on the company's used-car lot.
C. Spark plugs, oil filters, and other parts which are intended for use by the service department in repairing and
servicing customers' cars.
D. "Company cars" provided to specific company executives for their personal use.
81. Merchandise inventory: (E)

A) Is reported on the balance sheet as a current asset.
B) Refers to products a company owns and intends to sell.
C) Can include the cost of shipping the goods to the store and making them ready for sale.
D) Does not appear on the balance sheet of a service company.
E) All of the above.
Inventory shrinkage
64. Inventory shrinkage is caused by:
A. Shoplifting. C. Spoilage.
B. Breakage. D. All three of the above.
118.Inventory shrinkage: (M)

A) Refers to the loss of inventory.
B) Is determined by comparing a physical count of inventory with recorded inventory amounts.
C) Is recognized by debiting Cost of Goods Sold.
D) Can be caused by theft or deterioration.
Sales
9. The account in which the revenue earned from the sale of merchandise is entered is:
A. Retained earnings. C. Cash.
B. Sales. D. Inventory.
3. Generally, the revenue account for a merchandising business is entitled (E)

a. Sales c. Gross Sales
b. Net Sales d. Gross Profit
33. The price of the goods sold and services rendered during a given accounting period is called:
A. Net income C. Revenue
B. Profit D. Equity
73. The term revenue can best be described as:

A. The selling price of goods and services rendered to customers during a given accounting period.
B. The cash received from selling goods and serving customers during a given accounting period.
C. The net increase in owners' equity during a given period.
D. The "bottom line" in the income statement.
Sales return
12. Merchandise returned by the customer for a cash refund is called a:
A. sales return. C. debit memorandum.
B. sales allowance. D. credit memorandum.
109.Sales returns: (E)

A) Refer to merchandise that customers return to the seller after the sale.
B) Refer to reductions in the selling price of merchandise sold to customers.
C) Represent cash discounts.
D) Represent trade discounts.
E) Are not recorded under the perpetual inventory system until the end of each accounting period.

86. If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this
transaction is known as a sales
a. discount. c. contra asset.
b. return. d. allowance.
89. The Sales Returns and Allowances account does not provide information to management about
a. possible inferior merchandise.
b. the percentage of credit sales versus cash sales.
c. inefficiencies in filling orders.
d. errors in overbilling customers.
90. A Sales Returns and Allowances account is not debited if a customer

a. returns defective merchandise.
b. receives a credit for merchandise of inferior quality.
c. utilizes a prompt payment incentive.
d. returns goods that are not in accordance with specifications.
110.Sales returns and allowances: (M)

A) Can provide useful information about dissatisfied customers and the possibility of lost future sales.
B) Are recorded in separate contra-revenue accounts.
C) Are rarely disclosed in published financial statements.
D) Are closed to the Income Summary account.
Sales discount
63. Discounts taken by a buyer because of early payment are recorded on the seller’s accounting records as (E)
a. Purchases discount c. Trade discount
b. Sales discount d. Early payment discount
Purchases
126.An account used in the perpetual inventory system that is not used in the periodic inventory system is (E)
A) Merchandise Inventory D) Accounts Payable
B) Sales E) Purchases
C) Sales Returns and Allowances
Purchase on account
65. In accounting, when a company makes a purchase “on account,” it is the equivalent of
a. purchasing with a discount c. purchasing on credit
b. purchasing in bulk d. purchasing with a sales tax exemption
Purchase discount
25. A discount offered as an inducement for prompt payment of an invoice is called a(n):
A. invoice discount. C. early discount.
B. purchase discount. D. cash discount.
Purchase allowance
. A purchase allowance refers to a(n)
A. reduction in price for damaged or defective goods
B. discount for paying for goods on time
C. increase in units purchased
D. decrease in units purchased
Cost of goods sold

77. Cost of goods sold: (M)
A) Is another term for merchandise sales.
B) Is the term used for the cost of buying and preparing merchandise for sale.
C) Is another term for revenue.
D) Is also called gross margin.
E) Is a term only used by service firms.
19. Costs of Goods Sold includes which of the following?

A. The actual cost of the item C. Management salaries
B. Administrative fees D. Depreciation expense
Periodic inventory system

51. Cost of goods sold is determined only at the end of the accounting period in
a. a perpetual inventory system.
b. a periodic inventory system.
c. both a perpetual and a periodic inventory system.
d. neither a perpetual nor a periodic inventory system.
Perpetual inventory system

56. In a perpetual inventory system, cost of goods sold is recorded
a. on a daily basis. c. on an annual basis.
b. on a monthly basis. d. with each sale.
57. If a company determines cost of goods sold each time a sale occurs, it
a. must have a computer accounting system.
b. uses a combination of the perpetual and periodic inventory systems.
c. uses a periodic inventory system.
d. uses a perpetual inventory system.
78. In a perpetual inventory system, the Cost of Goods Sold account is used
a. only when a cash sale of merchandise occurs.
b. only when a credit sale of merchandise occurs.
c. only when a sale of merchandise occurs.
d. whenever there is a sale of merchandise or a return of merchandise sold.
18. When the perpetual inventory system is used, the inventory sold is shown on the income statement as (E)
a. cost of merchandise sold c. purchases returns and allowances
b. purchases d. net purchases
Gross profit & gross profit ratio
Gross profit
Revenues less cost of sales
4. What is the term applied to the excess of net revenue from sales over the cost of merchandise sold? (E)
a. gross profit c. net income
b. income from operations d. gross sales
21. Gross profit is equal to: (M)

a. sales plus (sales discounts and sales returns and allowances) plus cost of merchandise sold
b. sales plus sales returns and allowances less sales discounts less cost of merchandise sold
c. sales plus sales discounts less sales returns and allowances less cost of merchandise sold
d. sales less (sales discounts and sales returns and allowances) less cost of merchandise sold
Contribution to operating expenses, taxes & income

6. The dollars of gross profit means that the:
A. company will subtract taxes from this number to arrive at net profit or net loss.
B. company has this much money to pay for all other expenses, except taxes.
C. company has this much money to pay for all other expenses, including taxes.
D. this number is the same as net income.
Net income plus operating expenses

2. Net income plus operating expenses is equal to (E)
a. cost of merchandise sold c. net sales
b. cost of goods available for sale d. gross profit
Comprehensive
80. Gross profit: (D)
A) Is also called gross margin.
B) Less other expenses equals net income.
C) Equals net sales less cost of goods sold.
D) Must cover all operating expenses to yield a return for the owner of the business.
Gross profit ratio

95. The gross margin ratio: (E)
A) Is also called the net profit ratio.
B) Measures a merchandising firm's ability to earn a profit from the sale of inventory.
C) Is also called the profit margin.
D) Is a measure of liquidity.
E) Should be greater than 1.
Operating expenses
Selling expenses
124.Expenses of promoting sales by displaying and advertising merchandise, making sales, and delivering goods to
customers are: (M)
A) General and administrative expenses. D) Purchasing expenses.
B) Cost of goods sold. E) Nonoperating activities.
C) Selling expenses.
8. Expenses that are incurred directly or entirely in connection with the sale of merchandise are classified as (E)
a. selling expenses c. other expenses
b. general expenses d. administrative expenses
15. Which account is not classified as a selling expense? (E)
a. Sales Salaries c. Sales Discounts
b. Transportation-Out d. Advertising Expense
Administrative expenses
9. Office salaries, depreciation of office equipment, and office supplies are examples of what type of expense? (E)
a. selling expense c. administrative expense
b. miscellaneous expense d. other expense
Selling and administrative expenses

26. Where are selling and administrative expenses found on the multi-step income statement? (M)
a. before gross profit c. after net income before expenses
b. after sales and before gross profit d. after gross profit
General and administrative expenses

121.Expenses that support the overall operations of a business and include the expenses relating to accounting, human
resource management, and financial management are called: (E)
A) Cost of goods sold. D) General and administrative expenses.
B) Selling expenses. E) Nonoperating activities.
C) Purchasing expenses.
FINANCIAL STATEMENT CLASSIFICATION

Inventory
Balance sheet
10. The Inventory account appears on the:
A. balance sheet. C. income statement.
B. statement of retained earnings. D. list of liabilities.
Asset
6. Inventory for a merchandising business is classified as a(n):
A. liability. C. part of stockholder’s equity.
B. revenue. D. asset.
Current assets
14. Merchandise inventory is classified on the balance sheet as a (E)
a. Current Liability c. Long-Term Asset
b. Current Asset d. Long-Term Liability
121.On a classified balance sheet, merchandise inventory is classified as

a. an intangible asset. c. a current asset.
b. property, plant, and equipment. d. a long-term investment.
83. Merchandise inventory: (M)

A) Is a long-term asset.
B) Is a current asset.
C) Includes supplies.
D) Is classified with investments on the balance sheet.
E) Must be sold within one month.
163.In the balance sheet, ending merchandise inventory is reported

a. in current assets immediately following accounts receivable.
b. in current assets immediately following prepaid expenses.
c. in current assets immediately following cash.
d. under property, plant, and equipment.
Ending inventory
85. The current period's ending inventory is: (M)
A) The next period's beginning inventory. D) The current period's net purchases.
B) The current period's cost of goods sold. E) The current period's beginning inventory.
C) The prior period's beginning inventory.
Net Sales
Sales
16. Sales is a(n) ______________ account.
A. asset C. revenue
B. liability D. contra-

17. Sales Returns and Allowances appear on the (E)
A. balance sheet. C. income statement.
B. statement of retained earnings. D. income statement and balance sheet.
Cost of goods sold

9. The Cost of Goods Sold account appears on the:
A. balance sheet.
B. statement of retained earnings.
C. income statement.
D. post-closing trial balance.
6. The account in which inventory differences are shown is:

A. Sales.
B. Cost of Goods Sold.
C. Inventory Expense.
D. Revenue.
Delivery expenses
60. The cost of delivering merchandise to the customer is:
A. Part of cost of goods sold. C. An operating expense.
B. Used in the calculation of net sales. D. A reduction of gross profit.
NORMAL BALANCE & ACCOUNT BALANCES

Normal balances
Normal debit balance
29. Which of the following accounts has a normal debit balance? (M)
a. Accounts Payable c. Sales
b. Sales Returns and Allowances d. Interest Revenue
50. Which of the following accounts usually has a debit balance? (E)
a. Purchase Discounts c. Allowance for Doubtful Accounts
b. Sales tax Payable d. Transportation-In
74. All of the following accounts normally have debit balances except:
A. Transportation-in.
B. Cost of Goods Sold.
C. Sales Returns & Allowances.
D. All of the above accounts normally have debit balances.
Normal credit balance

98. Which of the following accounts has a normal credit balance?
a. Sales Returns and Allowances c. Sales
b. Sales Discounts d. Selling Expense
37. Which of the following accounts has a normal credit balance? (E)
a. Sales Returns and Allowances c. Merchandise Inventory
b. Sales d. Delivery Expense
151.Which of the following accounts has a normal credit balance?

a. Purchases c. Freight-in
b. Sales Returns and Allowances d. Purchase Discounts
Comprehensive
101.The respective normal account balances of Sales, Sales Returns and Allowances, and Sales Discounts are
a. credit, credit, credit. c. credit, debit, debit.
b. debit, credit, debit. d. credit, debit, credit.
152.The respective normal account balances of Purchases, Purchase Discounts, and Freight-in are
a. credit, credit, debit. c. debit, credit, debit.
b. debit, credit, credit. d. debit, debit, debit.
PERMANENT & TEMPORARY ACCOUNTS

CONTRA ACCOUNTS & ADJUNCT ACCOUNTS
Contra account
Contra revenue accounts
84. The Sales Returns and Allowances account is classified as a(n)
a. asset account. c. expense account.
b. contra asset account. d. contra revenue account.
55. Which account listed below is classified as a contra-revenue account?

A. Cost of Goods Sold. C. Sales Discounts.
B. Gross profit. D. Purchases.
Not a contra account

102.All of the following are contra revenue accounts except
a. sales. c. sales discounts.
b. sales allowances. d. sales returns.
97. Which of the following would not be classified as a contra account?

a. Sales c. Accumulated Depreciation
b. Sales Returns and Allowances d. Sales Discounts
CONTROL ACCOUNTS & SUBSIDIARY ACCOUNTS

Control accounts
Subsidiary accounts
Stock cards
53. Detailed records of goods held for resale are not maintained under a
a. perpetual inventory system.
b. periodic inventory system.
c. double entry accounting system.
d. single entry accounting system.
Accounts receivable subsidiary ledger

7. A list of credit customers is called a(n):
A. accounts payable subsidiary ledger.
B. general ledger.
C. accounts receivable subsidiary ledger.
D. general journal.
Accounts Payable subsidiary ledger

6. The name of the supplier (vendor) is listed in the:
A. accounts payable subsidiary ledger.
B. accounts payable total.
C. liabilities ledger.
D. inventory ledger.
19. A record to keep the amount owed to each supplier is called a(n):
A. accounts receivable subsidiary ledger.
B. accounts payable subsidiary ledger.
C. transportation ledger.
D. general ledger for accounts payable.
49. The purchasing agent of Ace Service Co. wants to know the dollar amount of inventory purchased on account during the
year from a particular supplier. This information can be found most easily in Ace Service's:
A. Inventory subsidiary ledger. C. Inventory controlling account.
B. Accounts payable controlling account. D. Accounts payable subsidiary ledger.
TRANSACTION ANALYSIS
Effect on Asset, Liabilities & Equity
Purchases
. When a merchandising business purchases goods for resale, those goods get recorded as
A. raw materials on the balance sheet
B. cost of goods sold on the income statement
C. inventory on the balance sheet
D. cost of goods sold on the balance sheet
Cash sale
47. Stone Company sold inventory costing $700 for $850 on account. If Stone Company operates under the accrual basis,
what effect will this transaction have on the owners' equity side of the balance sheet?
a. none since the customer to whom the inventory was sold has not yet paid
b. none since sales and/or cost of goods sold are income statement accounts
c. decrease owners' equity by $700
d. increase owners' equity by $150
e. increase owners' equity by $850
Cost of sales
. The following entry was taken from James Merchandising Company:
Cost of goods sold $3,000
Merchandise Inventory $3,000
What affect does this transaction have on the accounting equation?
A. Assets and equity will decrease
B. Assets will decrease and equity will increase
C. Assets and equity will increase
D. None of the above
Effect on Asset, Liabilities, Equity, Revenue & Expenses

Credit card sales
. Aphrodite Company accepts a credit card as payment for $1,500 worth of services performed for a customer. If the
credit card company charges a 4 percent handling fee, recording the transaction on Aphrodite’s records will
a. increase assets by $1,440 c. increase revenue by $1,500
b. increase expenses by $60 d. all of the above
Sales discounts & allowance

32. Sales discounts and allowance:
A. Properly recorded will reduce net profit.
B. Properly recorded will increase net profit.
C. Will not affect net profit.
D. Are always immaterial and need not be recorded.
Sales returns & allowances

8. Sales returns and allowances from a customer:
A. increase cost of goods sold.
B. increase revenue.
C. decrease cost of goods sold.
D. have no effect on cost of goods sold.
Effect on Individual Accounts

Merchandise account
60. The Merchandise Inventory account is used in each of the following except the entry to record
a. goods purchased on account. c. payment of freight on goods sold.
b. the return of goods purchased. d. payment within the discount period.
Sales
10. Which of the following accounts is NOT used to account for merchandise sales transactions?
A. Accounts payable C. Sales discounts
B. Accounts receivable D. Sales returns and allowances
Credit sale
24. When a merchandiser sells on account, which of the following accounts is NOT needed to record the transaction?
A. Cost of goods sold C. Inventory
B. Accounts receivable D. Cash
Sales discount
93. 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.
Freight-in
143.The Freight-in account
a. increases the cost of merchandise purchased.
b. is contra to the Purchases account.
c. is a permanent account.
d. has a normal credit balance.
Perpetual inventory method

Freight costs, FOB shipping point
12. Under a perpetual inventory system, the account to which transportation charges on incoming merchandise is generally
entered is:
A. inventory. C. FOB destination.
B. FOB shipping. D. delivery expense.
62. If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the
a. Merchandise Inventory account will be increased.
b. Merchandise Inventory account will not be affected.
c. seller will bear the freight cost.
d. carrier will bear the freight cost.
BOOKS OF ACCOUNTS
Chart of Accounts
Merchandising vs. Service Business
59. A chart of accounts for a merchandising business usually (E*)
a. is the same as the chart of accounts for a service business
b. requires more accounts than does the chart of accounts for a service business
c. is standardized by the FASB for all merchandising businesses
d. does not have a Cost of Merchandise Sold account if a perpetual inventory system is used
Merchandise inventory
74. Which of the following accounts, will only be found in the chart of accounts of a merchandising company? (E)
a. Sales c. Merchandise Inventory
b. Accounts Receivable d. Accounts Payable
Perpetual inventory system

51. If a company uses a perpetual inventory system, it will maintain all the following accounts except:
a. cost of goods sold
b. inventory
c. sales
d. purchases
e. All of the above accounts are used with a perpetual inventory system.
Control Accounts & Subsidiary Accounts

Stock cards
53. Detailed records of goods held for resale are not maintained under a
a. perpetual inventory system. c. double entry accounting system.
b. periodic inventory system. d. single entry accounting system.
55. Which of the following is a true statement about inventory systems?

a. Periodic inventory systems require more detailed inventory records.
b. Perpetual inventory systems require more detailed inventory records.
c. A periodic system requires cost of goods sold be determined after each sale.
d. A perpetual system determines cost of goods sold only at the end of the accounting period.
Accounts receivable subsidiary ledger

7. A list of credit customers is called a(n):
A. accounts payable subsidiary ledger. C. accounts receivable subsidiary ledger.
B. general ledger. D. general journal.
Accounts Payable subsidiary ledger
6. The name of the supplier (vendor) is listed in the:
A. accounts payable subsidiary ledger. C. liabilities ledger.
B. accounts payable total. D. inventory ledger.
19. A record to keep the amount owed to each supplier is called a(n):
A. accounts receivable subsidiary ledger. C. transportation ledger.
B. accounts payable subsidiary ledger. D. general ledger for accounts payable.
49. The purchasing agent of Ace Service Co. wants to know the dollar amount of inventory purchased on account during the
year from a particular supplier. This information can be found most easily in Ace Service's:
A. Inventory subsidiary ledger. C. Inventory controlling account.
B. Accounts payable controlling account. D. Accounts payable subsidiary ledger.
DOUBLE-ENTRY ACCOUNTING
Rules on Debit & Credit
49. Which of the following accounts is increased with a debit?
a. Accounts Payable d. Capital
b. Notes Payable e. Sales Revenue
c. Merchandise Inventory
PERIODIC INVENTORY SYSTEM

Nature
. A method of accounting for inventories in which the inventory account is brought up to date at the end of a period is
called a
A. perpetual inventory system C. periodic inventory system
B. permanent inventory system D. cyclical inventory system
Application
35. Merchandising companies that are small and do not use a perpetual inventory system may elect to use:
A. A physical inventory system C. An inventory shrinkage method
B. A periodic inventory system D. An inventory subsidiary ledger system.
44. Which of the following factors would suggest the use of a periodic inventory system?
A. A small company.
C. Neither a or b.
D. Both a and b.
63. Periodic inventory systems are used primarily by:

A. Small businesses with manual accounting systems.
B. Large manufacturing companies.
C. Small businesses that sell a low volume of high-priced items.
D. Companies that sell a high volume of low-priced items and record sales transactions on point-of-sale terminals.
40. Which of the following companies would be more likely to use a periodic inventory system?
A. IBM C. Sears
B. 1st Bank of New York D. A newspaper stand
Recording sales
Accounts affected
10. Which of the following accounts is NOT used to account for merchandise sales transactions?
A. Accounts payable
B. Accounts receivable
C. Sales discounts
D. Sales returns and allowances
Cash sales
40. Sales to customers who use bank credit cards, such as MasterCard and Visa, are generally treated as (E)
a. sales on account
b. sales returns
c. cash sales
d. sales when the credit card company remits the cash
Recording cost of goods sold

Cost of Goods Sold
11. Under the periodic inventory method, the amount of inventory is:
A. constantly updated.
B. only known when a physical count is taken.
C. adjusted after each sale.
D. adjusted after each purchase.
61. In a periodic inventory system, the cost of goods sold is:

A. Recorded as sales transactions occur.
B. Determined by a computation which is performed at year-end, after the taking of a complete physical inventory.
C. Equal to the beginning inventory, plus purchases made during the period, less sales revenue for the period.
D. Determined by subtracting the balance in the Gross Profit account from the amount of net sales.
Determining Ending Inventory

52. In a periodic inventory system the quantity of ending inventory is determined by:
a. subtracting units sold from units purchased
b. a physical inventory count
c. looking at the balance in the inventory account
d. subtracting cost of goods sold from the beginning inventory balance
e. adding units sold to the beginning inventory balance
Journal Entries
No entries
FOB destination
56. When goods are shipped FOB destination and the seller pays the transportation charges, the buyer (M)
a. journalizes a reduction for the cost of the merchandise.
b. journalizes a reimbursement to the seller.
c. does not take a discount.
d. makes no journal entry for the transportation.
Cost of sales
49. In a periodic inventory system, the cost of inventories sold is:
A. Debited to accounts receivable. C. Debited to cost of goods sold.
B. Credited to cost of goods sold. D. Not recorded at the time of sale. S, S & T
90. Under the periodic inventory system, the journal entry to record the cost of merchandise sold at the point of sale will
include the following account (E)
a. No entry is made. c. Inventory
b. Cost of merchandise sold d. Purchases sold
Debit entries
Purchases
89. Under the periodic inventory system, the journal entry to record the purchase of merchandise inventory will include a
debit to (E)
a. Merchandise Inventory c. Accounts Payable
b. Purchases d. Cost of Merchandise Purchased
150.Under a periodic inventory system, acquisition of merchandise is debited to the

a. Merchandise Inventory account. c. Purchases account.
b. Cost of Goods Sold account. d. Accounts Payable account.
47. In a periodic inventory system, the cost of purchases is debited to:

A. Purchases. C. Inventory.
B. Cost of goods sold. D. Accounts payable. S, S & T
Net Purchases Method - Discount lost

68. Arista Artworks Co. records purchases net of all available purchase discounts. If the company makes payment after the
discount has expired, the entry to record the payment should include a:
A. Debit to Purchase Discounts Lost. C. Debit to Sales Discounts.
B. Credit to Purchase Discounts Lost. D. Credit to Sales Discounts.
Cash or credit sale

11. Sara, a customer, purchased $500 of merchandise from Tammy’s store. Under the perpetual inventory system, Tammy
will record a:
A. debit to Accounts Receivable or to Cash for $500.
B. credit to Accounts Receivable or to Cash for $500.
C. credit to Cost of Goods Sold for $500.
D. debit to Sales for $500.
Cash sale & credit sale

15. Tammy’s General Store has cash sales for the week of $5,000 and credit sales of $3,500. The account(s) to be debited
for these transactions is/are:
A. MasterCard sales; Visa sales; and cash.
B. Cash; Accounts Receivable.
C. Cash only.
D. MasterCard sales; Visa sales.
Credit sale
46. A sale on account would be recorded by:
A. Debiting revenue. C. Crediting liabilities.
B. Crediting assets. D. Debiting assets. S, S & T
67. A journal entry to record the sale of inventory on account will include a
a. debit to inventory. c. debit to sales.
b. debit to accounts receivable. d. credit to cost of goods sold.
. Sebastian Company sold $750 worth of merchandise to Sam with the terms 2/10, n/30. In recording this sale, Sebastian
company would include a
A. debit to sales discounts for $15 C. debit to accounts receivable for $750
B. credit to sales for $765 D. credit sales for $735
Credit sale with sale allowance
. Sebastian Company sold $750 worth of merchandise to Sam with the terms 2/10, n/30. The goods were slightly
damaged, so Sebastian immediately made an agreement with Sam to knock $50 off of the price. In recording this sale,
Sebastian Company would record a
A. debit to Accounts Receivable for $750, a credit to Revenue for $700 and a credit to Sales Returns and Allowances
for $50
B. debit to Accounts Receivable for $700, a debit to Sales Returns & Allowances for $50, and a credit to Revenue for
$750
C. credit to Accounts Receivable for $700 and a debit to cash for $700
D. credit to Sales Discounts for $50, a debit to Accounts Receivable for $750 and a credit to Revenue for $700
Sale for Cash + Notes

58. Hughes Aircraft sold a four-passenger airplane for $380,000, receiving a $50,000 down payment and a 12% note for the
balance. The journal entry to record this sale would include a: (E*)
A. Credit to cash. C. Debit to notes receivable.
B. Debit to cash discount. D. Credit to notes receivable. S, S & T

38. The entry to record the return of merchandise from a customer would include a (M)
a. debit to Sales c. debit to Sales Returns and Allowances
b. credit to Sales d. credit to Sales returns and Allowances
72. The Sales Returns and Allowances account is debited when:

A. Merchandise is returned to a supplier.
B. Merchandise is returned by a customer.
C. Payment is made to a supplier within the discount period.
D. An account receivable is collected within the discount period.
90. A Sales Returns and Allowances account is not debited if a customer

a. returns defective merchandise.
b. receives a credit for merchandise of inferior quality.
c. utilizes a prompt payment incentive.
d. returns goods that are not in accordance with specifications.
Collection within discount period

73. The collection of a $600 account within the 2 percent discount period will result in a
a. debit to Sales Discounts for $12.
b. debit to Accounts Receivable for $588.
c. credit to Cash for $588.
d. credit to Accounts Receivable for $588.
Collection after discount period

76. The collection of a $900 account after the 2 percent discount period will result in a
a. debit to Cash for $882.
c. debit to Cash for $900.
d. debit to Sales Discounts for $18.
Credit entries
Purchase returns
147.In a periodic inventory system, a return of defective merchandise by a customer is recorded by crediting (M)
a. Accounts Payable. c. Purchases.
b. Merchandise Inventory. d. Purchase Returns and Allowances.
Credit sale
35. Merchandise with a sales price of $500 is sold on account with term 2/10, n/30. The journal entry to record the sale
would include a (M)
a. debit to Cash for $500 c. Credit to Sales for $500
b. Debit to Sales Discounts for $10 d. Debit to Accounts Receivable for $490

*. The account credited for a receipt of cash on account is
a. Accounts Payable. c. Cash.
b. Service Revenue. d. Accounts Receivable. RPCPA 0598
b. credit to Accounts Receivable for $600.
72. The entry to record the receipt of payment within the discount period on a sale of $750 with terms of 2/10, n/30 will
include a credit to
a. Sales Discounts for $15. c. Accounts Receivable for $750.
b. Cash for $735. d. Sales for $750.
Complete entries
Purchase on account
92. The proper journal entry to record the receipt of inventory purchased on account in a periodic inventory system would
be: (M)
a. Jan 1 Inventory 250.00
Accounts Payable 250.00
b. Jan 1 Office Supplies 250.00
c. Jan 1 Purchases 250.00
d. Jan 1 Purchases 250.00
Accounts Receivable 250.00
Purchase returns
149.The journal entry to record a return of merchandise purchased on account under a periodic inventory system would be
a. Accounts Payable
Purchase Returns and Allowances
b. Purchase Returns and Allowances
Accounts Payable
c. Accounts Payable
Inventory
d. Inventory
Accounts Payable
Payment within discount period

. On June 6, 2006, Kohen Sales Company purchased merchandise on account for $1,900 with the terms 2/15, n/30. The
goods were paid for within the discount period. On June 26, 2006, Kohen returned $200 worth of defective
merchandise. If Kohen uses the perpetual inventory method, what entry would it post in the accounting records for the
payment of the goods?
A. Debit accounts payable, credit merchandise inventory for $1,900
B. Debit accounts payable for $1,900, credit merchandise inventory for $1,862 and credit purchase discount for $38
C. Debit accounts payable for $1,862 and credit cash for $1,862
D. Debit accounts payable for $1,900, credit merchandise inventory for $38 and credit cash for $1,862
Payment net of returns, within discount period

. Adams Company sells merchandise on account to Samuel Company for $1,500 with the terms 2/10, n/30. Samuel
Company returns $100 worth of damaged goods prior to payment of the invoice. If Samuel Company makes the
payment for the goods within the discount period, then after the return, what will the entry recorded in the accounting
records of Adams be? (Assume that the company uses a perpetual inventory system.)
A. Debit cash and credit accounts receivable for $1,400
B. Debit cash and credit accounts receivable for $$1,372
C. Debit cash for $1,372, credit accounts receivable for $1,400 and credit sales discounts for $28
D. Debit cash for $1,372, debit sales discounts for $28 and credit accounts receivable for $1,400
Bank credit card sales

39. Sales to customers who use bank credit cards such as MasterCard and Visa are usually recorded by a (M)
a. debit to Bank Credit Card Sales, debit to Credit Card Expense, and a credit to Sales
b. debit to Cash and a credit to Sales
c. debit to Cash, credit to Credit Card Expense, and a credit to Sales
d. debit to Sales, debit to Credit Card Expense, and a credit to Cash
Cash sales
39. Sales to customers who use bank credit cards such as MasterCard and Visa are usually recorded by a (M)
a. debit to Bank Credit Card Sales, debit to Credit Card Expense, and a credit to Sales
b. debit to Cash and a credit to Sales
c. debit to Cash, credit to Credit Card Expense, and a credit to Sales
d. debit to Sales, debit to Credit Card Expense, and a credit to Cash
Credit sales
82. The journal entry to record a credit sale is
a. Cash
Sales
b. Cash
Service Revenue
c. Accounts Receivable
Service Revenue
d. Accounts Receivable
Sales
20. When a retailer sells merchandise on account, the general entry for the sale would be:
A. debiting Accounts Receivable and crediting Sales.
B. debiting Accounts Receivable and crediting Inventory.
C. debiting Accounts Receivable and crediting Cost of Goods Sold.
D. debiting Cost of Goods Sold and crediting Sales.
. When the sale of merchandise is made on account, the transaction should be recorded with which of the following
entries (assuming a periodic inventory system)?
A. Debit merchandise inventory and credit sales revenue
B. Debit accounts receivable and credit sales revenue
C. Credit accounts receivable and debit sales revenue
D. Credit merchandise inventory and debit cash
147.On February 1, 2008, Cogwell Company sells merchandise on account to Livingston Company for $5,000. The entry to
record this transaction by Cogwell Company is
A. debit Sales and credit Accounts Payable for P5,000
B. debit Cash and credit Sales for P5,000
C. debit Accounts Receivable and credit Sales for P5,000
D. debit Notes Receivable and credit Accounts Receivable for P5,000
128.On October 1, Courtland Company sold merchandise in the amount of $5,800 to Carter Company, with credit terms of
2/10, n/30. The cost of the items sold is $4,000. Courtland uses the periodic inventory system. The journal entry or
entries that Courtland will make on October 1 is: (M)
A) Sales 5,800
Accounts receivable 5,800
B) Sales 5,800
Cost of goods sold 4,000
Merchandise Inventory 4,000
C) Accounts receivable 5,800
Sales 5,800
D) Accounts receivable 5,800
Sales 5,800
Merchandise inventory 4,000
E) Accounts receivable 4,000
Sales 4,000
Credit sale with prepaid freight

57. Black Company sold Red Company merchandise on account FOB shipping point, 2/10, net 30, for $10,000.
Black prepaid the $200 shipping charge. Which of the following entries does Black make to record this sale? (D)
a. Accounts Receivable-Red, debit $10,000; Sales, credit $10,000
b. Accounts Receivable-Red, debit $10,000; Sales, credit $10,000, and Accounts Receivable-Red, debit $200; Cash,
credit $200
c. Accounts Receivable-Red, debit $10,400; Sales, credit $10,400
d. Accounts Receivable-Red, debit $10,000; Sales, credit $10,000, and Transportation Out, debit $200; Cash,
credit $200

. On October 1, Courtland Company sold merchandise in the amount of $5,800 to Carter Company, with credit terms of
2/10, n/30. The cost of the items sold is $4,000. Courtland uses the periodic inventory system. Carter pays the invoice
on October 8, and takes the appropriate discount. The journal entry that Courtland makes on October 8 is: (M)
A) Cash 5,800
B) Cash 4,000
C) Cash 3,920
Sales discounts 80
D) Cash 5,684
E) Cash 5,684
Sales discounts 116
. On October 1, Courtland Company sold merchandise in the amount of $5,800 to Carter Company, with credit terms of
2/10, n/30. The cost of the items sold is $4,000. Courtland uses the periodic inventory system. On October 4, Carter
returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned
is $350. Carter pays the invoice on October 8, and takes the appropriate discount. The journal entry that Courtland
makes on October 8 is: (D)
A) Cash 5,800
B) Cash 4,000
C) Cash 5194
Sales discounts 106
Accounts receivable 5300
D) Cash 5,684
E) Cash 5,684
Sales discounts 116

115.On October 1, Whaley Company sold merchandise in the amount of $5,800 to Lee Company, with credit terms of 2/10,
n/30. The cost of the items sold is $4,000. Whaley uses the perpetual inventory system. Lee pays the invoice on
October 8, and takes the appropriate discount. The journal entry that Whaley makes on October 8 is:
A) Cash 5,800
B) Cash 4,000
C) Cash 3,920
Sales discounts 80
D) Cash 5,684
E) Cash 5,684
Sales discounts 116
Collection, with sales return & within discount period

96. Feine Company sells merchandise on account for $2,000 to Tang Company with credit terms of 2/10, n/30. Tang
Company returns $300 of merchandise that was damaged, along with a check to settle the account within the discount
period. What entry does Feine Company make upon receipt of the check?
a. Cash .................................................................................... 1,700
Accounts Receivable .................................................. 1,700
b. Cash .................................................................................... 1,666
Sales Returns and Allowances ............................................ 334
c. Cash .................................................................................... 1,666
Sales Discounts ................................................................... 34
d. Cash .................................................................................... 1,960
Sales Discounts ................................................................... 40
Sales Returns and Allowances ................................... 300
Explanation of entry
111.A debit to Sales Returns and Allowances and a credit to Accounts Receivable: (M)
A) Reflects an increase in amount due from a customer.
B) Recognizes that a customer returned merchandise and/or received an allowance.
C) Requires a debit memorandum to recognize the customer's return.
D) Is recorded when a customer takes a discount.
Comprehensive
65. Which of the following statements about a periodic inventory system is not correct?
A. These systems are used primarily by small businesses with manual accounting systems.
B. The system does not include an up-to-date inventory ledger.
C. The balance in the Inventory account remains unchanged until the end of the period.
D. The Cost of Goods Sold account is updated as sales transactions occur.
PERPETUAL INVENTORY SYSTEM

Basic Concepts
Characteristics
17. The inventory system employing accounting records that continuously disclose the amount of inventory is called (E)
a. retail c. physical
b. periodic d. perpetual
. Under a perpetual inventory system

A. accounting records for inventory are continuously updated
B. the purchases account is debited for all inventory purchases
C. accounting records for inventory are updated periodically
D. there is no need for a physical inventory
81. Under a perpetual inventory system (E)

a. accounting records continuously disclose the amount of inventory
b. increases in inventory resulting from purchases are debited to Purchases
c. there is no need for a year-end physical count
d. the purchase returns and allowances account is credited when goods are returned to vendors
52. In a perpetual inventory system:

A. Merchandising transactions are recorded as they occur.
B. No effort is made to record the cost of goods sold until year-end.
C. Entries are made in the Cost of Goods Sold account whenever merchandise is purchased or sold.
D. The need for ever taking physical inventory is eliminated.
36. Which of the following would not tend to make a manufacturer choose a perpetual inventory system?
A. Management wants information about quantities of specific products
B. A low volume of sales transactions and a computerized accounting system
C. A high volume of sales transactions and a manual accounting system
D. Items in inventory with high per unit costs
38. Which of the following factors would suggest the use of a perpetual inventory system?
A. A small company.
C. Neither a or b.
D. Both a and b.
54. In a perpetual inventory system, two entries usually are made to record each sales transaction. The purposes of these
entries are best described as follows: (E*)
A. One entry recognizes the sales revenue, and the other recognizes the cost of goods sold.
B. One entry records the purchase of the merchandise, and the other records the sale.
C. One entry records the cost of goods sold, and the other reduces the balance in the Inventory account.
D. One entry updates the general ledger, and the other updates the subsidiary ledgers.
18. When the perpetual inventory system is used, the inventory sold is shown on the income statement as (E)
a. cost of merchandise sold c. purchases returns and allowances
b. purchases d. net purchases
50. A perpetual inventory system offers all of the following characteristics except:
a. it is less expensive than a periodic system
b. inventory balances are always current
c. it helps salespeople determine whether there is a sufficient supply on hand to fill the customer orders
d. it enhances internal control
e. All of the above are characteristics of a perpetual inventory system.
Application
42. Which of the following companies would be more likely to use a perpetual inventory system?
A. Corner deli. C. James Dean, CPA.
B. Home Depot. D. A manufacturer of nuts and bolts.
54. A perpetual inventory system would likely be used by a(n)

a. automobile dealership. c. drugstore.
b. hardware store. d. convenience store.
Recording purchases & payment

Merchandise Inventory account transactions
22. The inventory system that uses the merchandise inventory account as an asset account is called the:
A. periodic system. C. merchandising system.
B. perpetual system. D. retailing system.
60. The Merchandise Inventory account is used in each of the following except the entry to record
a. goods purchased on account. c. payment of freight on goods sold.
b. the return of goods purchased. d. payment within the discount period.
Freight costs, FOB shipping point

12. Under a perpetual inventory system, the account to which transportation charges on incoming merchandise is generally
entered is:
A. inventory. C. FOB destination.
B. FOB shipping. D. delivery expense.
62. If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the
a. Merchandise Inventory account will be increased.
b. Merchandise Inventory account will not be affected.
c. seller will bear the freight cost.
d. carrier will bear the freight cost.
Freight-out
. Which of the following transactions will not require an entry to adjust the merchandise inventory account in a perpetual
inventory system?
A. An approved purchase allowance for poor quality goods purchased
B. Payment of freight charges for goods shipped to a customer
C. A purchase discount taken on goods ordered from a vendor
D. Payment of freight charges for goods ordered from a vendor
Recording Sales & Cost of Sales

Credit Sale
24. When a merchandiser sells on account, which of the following accounts is NOT needed to record the transaction?
A. Cost of goods sold C. Inventory
B. Accounts receivable D. Cash
Journal Entries
Debit entries
Purchases
58. Under a perpetual inventory system, acquisition of merchandise for resale is debited to the
a. Merchandise Inventory account. c. Supplies account.
b. Purchases account. d. Cost of Goods Sold account.
79. Under the perpetual inventory system, all purchases of merchandise are debited to the account entitled (E)
a. Merchandise Inventory c. Cost of Merchandise Available for Sale
b. Cost of Merchandise Sold d. Purchases
46. In a perpetual inventory system, the cost of purchases is debited to:

A. Purchases. C. Inventory.
B. Cost of goods sold. D. Accounts payable. S, S & T
29. Under the perpetual inventory method, the account to which purchased goods are recorded is:
A. Purchases as a credit. C. Cost of Goods Sold as a debit.
B. Inventory as a debit. D. Purchases as a debit.
44. Using a perpetual inventory system, the entry to record the purchase of $30,000 of merchandise on account would
include a (E)
a. debit to Sales c. credit to Merchandise Inventory
b. debit to Merchandise Inventory d. credit to Sales
52. Braswell’s Shoe Super Store purchases shoes to resell on account for $3,000. What account should be debited for this
transaction?
a. Inventory c. Cash
b. Accounts Payable d. Sales
Credit purchase
44. Using a perpetual inventory system, the entry to record the purchase of $30,000 of merchandise on account would
include a (E)
b. debit to Merchandise Inventory d. credit to Sales
Purchase with trade discount, credit term

48. A retailer purchases merchandise with a catalog list price of $10,000. The retailer receives a 25% trade discount and
credit terms of 2/10, n/30. What amount should the retailer debit to the Merchandise Inventory account? (M)
a. $7,500 c. $9,800
b. $10,000 d. $7,350
Cash or credit sale

will record a:
Cost of Sales
48. In a perpetual inventory system, the cost of inventory sold is:
B. Credited to cost of goods sold. D. Not recorded at the time. S, S & T
80. When the perpetual inventory system is used, the inventory sold is debited to (E)
a. supplies expense c. merchandise inventory
b. cost of merchandise sold d. sales
Sales return from a credit sale

31. Using a perpetual inventory system, the entry to record the return from a customer of merchandise sold on account
includes a (E)
a. credit to Sales Returns and Allowances c. credit to Merchandise Inventory
b. debit to Merchandise Inventory d. debit to Cost of Merchandise Sold
Sales discount
73. The collection of a $600 account within the 2 percent discount period will result in a
a. debit to Sales Discounts for $12.
d. credit to Accounts Receivable for $588.

c. debit to Cash for $900.
Credit entries
Purchases
61. Opelika Ice Cream, Inc., has just acquired some syrup for use in making frozen popsicles. Opelika paid $300 for the
syrup and expects it to last all summer. The entry that Opelika records includes a:
a. debit to Cash c. debit to Accounts Payable
b. credit to Cash d. credit to Supplies
53. Braswell’s Shoe Super Store purchases shoes to resell on account for $3,000. What account should be credited for this
transaction?
a. Inventory c. Cash
b. Accounts Payable d. Sales
Purchase returns
45. Using a perpetual inventory system, the entry to record the return of merchandise purchased on account includes a (E)
a. debit to Cost of Merchandise Sold c. credit to Merchandise Inventory
b. credit to Accounts Payable d. credit to Sales
59. The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would
credit
a. Accounts Payable. c. Sales.
b. Purchase Returns and Allowances. d. Merchandise Inventory.
42. When merchandise is returned under the perpetual inventory system, the buyer would credit (M)
a. Merchandise Inventory c. Accounts Payable
b. Purchases Returns and Allowances d. depending on the inventory system used.
158.In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting
a. Purchases. c. Purchase Allowance.
b. Purchase Returns. d. Merchandise Inventory.
Purchase discount
9. Alpha Company received an invoice from Beta Company for $5,550 with terms of 3/10, n/45 on March 8. If Alpha pays
the bill on March 15, they will credit inventory under a perpetual inventory system for:
A. $ 0. C. $ 166.50
B. $ 555.00 D. $5550.00
Payment within the discount period

8. A company pays an invoice early and takes 4% off of the original invoice price. The account to be credited for this
amount under a perpetual inventory system is:
A. inventory. C. discount.
B. accounts payable. D. cash.
68. In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the
discount period is credited to
a. Merchandise Inventory. c. Purchase Allowance.
b. Purchase Discounts. d. Sales Discounts.
61. A buyer would record a payment within the discount period under a perpetual inventory system by crediting
a. Accounts Payable. c. Purchase Discounts.
b. Merchandise Inventory. d. Sales Discounts.
9. Alpha Company received an invoice from Beta Company for $5,550 with terms of 3/10, n/45 on March 8. If Alpha pays
the bill on March 15, they will credit inventory under a perpetual inventory system for:
A. $ 0. C. $ 166.50
B. $ 555.00 D. $5550.00
Payment after the discount period

12. ABC Corporation has received an invoice for $4500 with terms of 3/15, n/50. If ABC pays the invoice on the
seventeenth day, the Cash account will be:
A. credited for $4,500. C. debited for $4,365.
B. credited for $4,365. D. credited for $ 135.
. Melody Land uses a perpetual inventory system and records purchases of merchandise at net cost. The company
recently purchased 200 compact discs at an invoice price of $4,000 and terms of 2/10, n/30. Half of these discs had
been mislabeled and were returned immediately to the supplier. The journal entry to record payment of this invoice after
the discount period has expired will include a:
A. Debit to Inventory for $2,000. C. Debit to an expense account for $40.
B. Credit to Cash for $2,000. D. Credit to Cash for $1,960.
Payment after discount period, purchase returns

. Melody Land uses a perpetual inventory system and records purchases of merchandise at net cost. The company
recently purchased 200 compact discs at an invoice price of $4,000 and terms of 2/10, n/30. Half of these discs had
been mislabeled and were returned immediately to the supplier. The journal entry to record payment of this invoice after
the discount period has expired will include a:
A. Debit to Inventory for $2,000. C. Debit to an expense account for $40.
B. Credit to Cash for $2,000. D. Credit to Cash for $1,960.
Credit sales
159.On October 4, 2008, Terry Corporation had credit sales transactions of $2,800 from merchandise having cost $1,900.
The entries to record the day's credit transactions include a
a. debit of $2,800 to Merchandise Inventory.
b. credit of $2,800 to Sales.
c. debit of $1,900 to Merchandise Inventory.
d. credit of $1,900 to Cost of Goods Sold.
Cost of sales
28. Using a perpetual inventory system, the entry to record the sale of merchandise on account includes a (E)
b. debit to Merchandise Inventory d. credit to Accounts Receivable
Sales allowance
7. If damaged goods are received by the merchandiser and are kept with a reduction in price, the account to be credited for
the reduction in price under a perpetual inventory system is:
A. inventory. C. discount.
B. accounts payable. D. cash.
Sales return from prior credit sale

100.When a seller grants credit for returned goods, the account that is credited is
a. Sales. c. Merchandise Inventory.
b. Sales Returns and Allowances. d. Accounts Receivable.
Sales return from prior cash sale

88. When goods are returned that relate to a prior cash sale,
a. the Sales Returns and Allowances account should not be used.
b. the cash account will be credited.
c. Sales Returns and Allowances will be credited.
d. Accounts Receivable will be credited.

b. credit to Accounts Receivable for $600.
72. The entry to record the receipt of payment within the discount period on a sale of $750 with terms of 2/10, n/30 will
include a credit to
a. Sales Discounts for $15. c. Accounts Receivable for $750.
b. Cash for $735. d. Sales for $750.
Partial entries
14. Under a perpetual inventory system, when goods are returned to the retailer from a customer:
A. Cost of Goods Sold is debited; Sales Returns and Allowances is credited.
B. Sales Returns and Allowances is debited; Cost of Goods Sold is credited.
C. Sales is debited; Cost Goods Sold is credited.
D. Inventory is debited; Sales is credited.
22. Cary, a customer of ABC Retail, returned $45 of goods that were purchased on account. Under the perpetual inventory
system, ABC will record a:
A. debit to Sales Returns and Allowances and a credit to Accounts Receivable-Cary for $45.
B. debit to Sales and a credit to Accounts Receivable-Cary for $45.
C. debit to Cost of Goods Sold and a credit to Inventory for $45.
D. debit to Sales and a credit to Cost of Goods Sold for $45.
Complete entries
Cash purchase
18. Tayler Corporation purchased merchandise from Brandon Corporation for cash. The journal entry for Tayler Corporation
under a perpetual inventory system will be:
A. debit Inventory; credit Cash.
B. debit Cash; credit Inventory.
C. debit Inventory; credit Accounts Payable-Brandon Corporation.
D. debit Inventory; credit Accounts Receivable-Taylor Corporation.
48. Under the perpetual inventory system which journal entry would indicate a purchase of merchandise?
A. Debit, Inventory and credit, Cash.
B. Debit, Purchases and credit, Cash.
C. Debit, Costs of Goods Sold and credit, Inventory.
D. Debit, Inventory and credit, Cost of Goods Sold.
43. When purchases of merchandise are made for cash, the transaction may be recorded with the following entry (M)
a. debit Cash; credit Merchandise Inventory
b. debit Merchandise Inventory; credit Cash
c. debit Merchandise Inventory; credit Cash Discounts
d. debit Merchandise Inventory; credit Purchases
41. When a buyer returns merchandise purchased for cash, the buyer may record the transaction using the following entry
(M)
a. debit Merchandise Inventory; credit Cash
b. debit Cash; credit Merchandise Inventory
c. debit Cash; credit Sales Returns and Allowances
d. debit Sales Returns and Allowances; credit Cash
56. The Chimney Company acquired merchandise inventory for $800 cash. A week later they discovered a defect in the
merchandise inventory and returned it to the supplier for a cash refund. The journal entry that would be required for the
return of the merchandise inventory would be:
Dr. Cr.
a. Cash 800
Merchandise Inventory 800
b. Merchandise Inventory 800
Cash 800
c. Accounts Payable 800
d. Merchandise Inventory 800
Accounts Payable 800
e. Cash 800
Credit purchase
21. When merchandise is purchased on account under the perpetual inventory system, the journal entry is:
A. debit Purchases and credit Accounts Payable.
B. debit Accounts Payable and credit Inventory.
C. debit Inventory and credit Accounts Payable.
D. debit Accounts Payable and credit Purchases.
10. Meranda Corporation purchases $3,500 of inventory on account from Ashley Corporation. The journal entry to record
this purchase for Meranda under a perpetual inventory system is:
A. debit Inventory; credit cash.
B. debit Accounts Payable-Ashley; credit Inventory.
C. debit Inventory; credit Accounts Payable-Meranda.
D. debit Inventory; credit Accounts Payable-Ashley.
. Jacob Company purchased $200 worth of merchandise on account from Jones Company. How would Jacob Company
record this transaction in its accounting records assuming that the company uses a perpetual inventory system?
A. Debit cost of goods sold and credit cash
B. Debit inventory and credit cash
C. Credit cost of goods sold and debit accounts payable
D. Debit inventory and credit accounts payable
89. Casey’s Company purchased merchandise inventory on account for $600. This transaction was properly recorded. A
week later, Casey’s Company discovered a defect in the merchandise inventory and returned the merchandise inventory
to the supplier for credit. As the accountant, you would tell the bookkeeper to record the return of the merchandise
inventory by:
a. debiting Merchandise Inventory and crediting Accounts Payable for $600
b. debiting Accounts Payable and crediting Merchandise Inventory for $600
c. debiting Merchandise Inventory and crediting Cash for $600
d. debiting Cash and crediting Merchandise Inventory for $600
e. debiting Cash and crediting Accounts Payable for $600
34. Ace Bonding Company purchased merchandise inventory on account. The inventory costs $2,000 and is expected to
sell for $3,000. How should Ace record the purchase? (D)
A. debit Inventory, 2,000; credit Accounts Payable, 2,000
B. debit Cost of Goods Sold, 2,000; debit Deferred Revenue, 1,000; credit Sales in Advance, 3,000
C. debit Cost of Goods Sold, 2,000; credit Inventory Payable, 2,000
D. debit Cost of Goods Sold, 2,000; debit Profit, 1,000, credit Sales payable, 3,000 S&S 6e
64. Jones Chapel Grocery and Gas has purchased $300 of goods on account to sell. The entry to record this purchase is:
a. Cash 300
Inventory 300
b. Inventory 300
Cash 300
c. Inventory 300
d. Accounts Payable 300
Inventory 300
82. The proper journal entry to record the receipt of inventory purchased on account in a perpetual inventory system would
be: (E)
a. Jan 1 Inventory 250.00
b. Jan 1 Office Supplies 250.00
c. Jan 1 Purchases 250.00
d. Jan 1 Purchases 250.00
Accounts Receivable 250.00
65. Ace Bonding Company purchased merchandise inventory on account. The inventory costs $2,000 and is expected to
sell for $3,000. How should Ace record the purchase?
A) Inventory 2,000
Accounts payable2,000
B) Cost of goods sold 2,000
Deferred revenue 1,000
Sales in advance 3,000
C) Cost of goods sold 2,000
Inventory payable2,000
D) Cost of goods sold 2,000
Profit 1,000
Sales payable 3,000
Purchase with downpayment

54. The Chandelier Company purchased $4,000 of merchandise inventory, paying cash for 20% of the purchase, with the
remainder on account. The entry would include a:
a. debit to Cash for $800, debit to Accounts Payable for $3,200, and credit to Merchandise Inventory for $4,000
b. debit to Cash for $800, debit to Notes Payable for $3,200, and credit to Merchandise Inventory for $4,000
c. debit to Merchandise Inventory for $4,000, credit to Cash for $800, and credit to Notes Payable for $3,200
d. debit to Merchandise Inventory for $4,000, credit to Cash for $800, and credit to Accounts Payable for $3,200
e. debit to Merchandise Inventory for $800, and credit to Cash for $800
63. Wernli Company acquired merchandise inventory for $8,000, paying one-fourth in cash and the remainder on open
account. The journal entry necessary to record this transaction is:
Dr. Cr.
a. Cash 2,000
b. Cash 2,000
Accounts Receivable 6,000
c. Cash 2,000
Accounts Payable 6,000
d. Merchandise Inventory 8,000
Cash 2,000
e. Merchandise Inventory 8,000
Cash 2,000
Accounts Receivable 6,000
Purchase return
. Sebastian Merchandising purchased $1,000 worth of goods from Nemo Incorporated for cash. Sebastian returned $300
worth of those items after immediately realizing that it had purchased too much. How would Sebastian record the return
of the goods assuming that the company uses a perpetual inventory system?
A. Debit inventory, credit accounts payable C. Debit inventory, credit purchase returns
B. Credit inventory, debit purchase returns D. Credit inventory, debit accounts payable
23. Casey Company purchases goods for resale from Tim Corporation. The amount of the purchase is $12,500 with terms
of 3/10, n/30. Casey returns $500 of the goods. Under the perpetual inventory method, the journal entry to record the
return is (M)
A. debit Accounts Payable; credit Purchase Returns and Allowances.
B. debit Purchase Returns and Allowances; credit Accounts Payable.
C. debit Accounts Payable; credit Inventory.
D. debit Accounts Payable; credit Purchase Discounts.
Purchase return from a prior cash purchase

41. When a buyer returns merchandise purchased for cash, the buyer may record the transaction using the following entry
(M)
a. debit Merchandise Inventory; credit Cash
b. debit Cash; credit Merchandise Inventory
c. debit Cash; credit Sales Returns and Allowances
d. debit Sales Returns and Allowances; credit Cash
56. The Chimney Company acquired merchandise inventory for $800 cash. A week later they discovered a defect in the
merchandise inventory and returned it to the supplier for a cash refund. The journal entry that would be required for the
return of the merchandise inventory would be:
Dr. Cr.
a. Cash 800
b. Merchandise Inventory 800
Cash 800
c. Accounts Payable 800
d. Merchandise Inventory 800
e. Cash 800
Purchase returns from a prior credit purchase

23. Casey Company purchases goods for resale from Tim Corporation. The amount of the purchase is $12,500 with terms
of 3/10, n/30. Casey returns $500 of the goods. Under the perpetual inventory method, the journal entry to record the
return is:
A. debit Accounts Payable; credit Purchase Returns and Allowances.
B. debit Purchase Returns and Allowances; credit Accounts Payable.
C. debit Accounts Payable; credit Inventory.
D. debit Accounts Payable; credit Purchase Discounts.
89. Casey’s Company purchased merchandise inventory on account for $600. This transaction was properly recorded. A
week later, Casey’s Company discovered a defect in the merchandise inventory and returned the merchandise inventory
to the supplier for credit. As the accountant, you would tell the bookkeeper to record the return of the merchandise
inventory by:
a. debiting Merchandise Inventory and crediting Accounts Payable for $600
b. debiting Accounts Payable and crediting Merchandise Inventory for $600
c. debiting Merchandise Inventory and crediting Cash for $600
d. debiting Cash and crediting Merchandise Inventory for $600
e. debiting Cash and crediting Accounts Payable for $600
Purchase return after payment within discount period

. On June 6, 2006, Kohen Sales Company purchased merchandise on account for $1,900 with the terms 2/15, n/30. The
goods were paid for within the discount period. On June 26, 2006, Kohen returned $200 worth of defective
merchandise. If Kohen uses the perpetual inventory method, what entry would it post in the accounting records for the
return of goods? (M)
A. Debit cash, credit purchase returns for $196
B. Debit cash, credit merchandise inventory for $196
C. Debit cash, credit purchase returns for $200
D. Debit cash, credit merchandise inventory for $200
Payment of freight-in
. Sebastian Merchandising purchased goods on account from Nemo Incorporated. The goods were purchased FOB
shipping point for $200. How would these freight charges be recorded in Sebastian’s accounting records assuming the
company uses a perpetual inventory system?
A. They would not be included in Sebastian’s accounting records.
B. Debit freight-expense, credit accounts payable
C. Debit freight-out, credit accounts payable
D. Debit inventory and credit cash
157.Cartier Company purchased inventory from Pissaro Company. The shipping costs were $400 and the terms of the
shipment were FOB shipping point. Cartier would have the following entry regarding the shipping charges:
a. There is no entry on Cartier's books for this transaction.
b. Freight Expense................................................................... 400
Cash ........................................................................... 400
c. Freight-out ........................................................................... 400
Cash ........................................................................... 400
d. Merchandise Inventory ........................................................ 400
Cash ........................................................................... 400
Payment within discount period

11. ABC Corporation pays an invoice for $350 in time to take a 3% discount. The journal entry to record the payment of this
invoice is:
A. debit Accounts Payable $350; credit Cash $350.
B. debit Accounts Payable $340; credit Cash $340.
C. debit Accounts Payable $340, debit Inventory $10; credit Cash for $350.
D. debit Accounts Payable $350; credit Inventory $10.50, credit Cash for $339.50.
. The Best Company purchases $1,000 worth of goods with the terms 1/15, n/45 on January 1, 2006. Best Company paid
for the goods on January 10, 2006. How would Best record the payment for the goods in his accounting records
assuming that the company uses a perpetual inventory system?
A. Debit accounts payable for $1,000 and credit cash for $1,000
B. Debit accounts payable for $1,000, credit cash for $990 and credit inventory for $10
C. Debit accounts payable for $990 and credit cash for $990
D. Debit accounts payable for $990, credit cash for $1,000 and debit discount expense for $10
156.Logan Company made a purchase of merchandise on credit from Claude Corporation on August 3, for $6,000, terms
2/10, n/45. On August 10, Logan makes the appropriate payment to Claude. The entry on August 10 for Logan
Company is
a. Accounts Payable ................................................................. 6,000
Cash .............................................................................. 6,000
b. Accounts Payable ................................................................. 5,880
Cash .............................................................................. 5,880
c. Accounts Payable ................................................................. 6,000
Purchase Returns and Allowances ............................... 120
Cash .............................................................................. 5,880
d. Accounts Payable ................................................................. 6,000
Merchandise Inventory .................................................. 120
Cash .............................................................................. 5,880
Payment within discount period, prepaid freight

58. Orange Co. sold Red Co. merchandise on account FOB shipping point, 2/10, net 30, for $10,000. Orange Co. prepaid
the $200 shipping charge. Using the perpetual inventory system, which of the following entries will Red Co. make if Red
Co. pays within the discount period? (D)
a. Accounts Payable-Orange Co., debit $10,000; Transportation In, credit $200; Cash, credit $9,800
b. Accounts Payable-Orange Co., debit $10,200; Merchandise Inventory, credit $200; Cash, credit $10,000
c. Accounts Payable-Orange Co., debit $10,000; Transportation In, debit $200; Cash, credit $10,200
d. Accounts Payable-Orange Co., debit $10,200; Merchandise Inventory, debit $200; Cash, credit $10,400
Sales
will record a:
Credit sale
82. The journal entry to record a credit sale is
a. Cash
Sales
b. Cash
Service Revenue
c. Accounts Receivable
Service Revenue
d. Accounts Receivable
Sales
Cost of Sales
48. In a perpetual inventory system, the cost of inventory sold is:
B. Credited to cost of goods sold. D. Not recorded at the time. S, S & T
80. When the perpetual inventory system is used, the inventory sold is debited to (E)
a. supplies expense c. merchandise inventory
b. cost of merchandise sold d. sales
. Using a perpetual inventory system requires that each sale be recorded in the accounting records immediately. In
addition to the record of sale, a company must also make which of the following entries simultaneously?
A. Debit merchandise inventory, credit cost of goods sold
B. Credit purchases, debit merchandise inventory
C. Debit cost of goods sold and credit merchandise inventory
D. No additional entry is needed
46. In recording the cost of merchandise sold for cash, based on data available from perpetual inventory records, the journal
entry is (M)
a. debit Cost of Merchandise Sold; credit Sales
b. debit Cost of Merchandise Sold; credit Merchandise Inventory
c. debit Merchandise Inventory; credit Cost of Merchandise Sold
d. debit Accounts Receivable; credit Merchandise Inventory
53. The entry to record the cost of merchandise inventory sold involves a:
a. debit to Merchandise Inventory and a credit to Sales Revenue
b. debit to Cost of Goods Sold and a credit to Merchandise Inventory
c. debit to Merchandise Inventory and a credit to Cost of Goods Sold
d. debit to Cost of Goods Sold and a credit to Sales Revenue
e. debit to Merchandise Inventory and a credit to Accounts Receivable
21. The entry to record the company’s cost of selling merchandise under a perpetual inventory system would be a:
A. debit to Accounts Receivable and a credit to Sales.
B. debit to Inventory and a credit to Cost of Goods Sold.
C. debit to Cost of Goods Sold and a credit to Inventory.
D. debit to Cost of Goods Sold and a credit to Sales.
23. Bill’s Bikes had sales for the week of $3,569, of which $2,900 was on credit and $659 in cash sales. The cost of the
bikes sold was $1,888. The journal entries would include a:
A. debit to Cost of Goods Sold for $1,888; credit to Inventory for $1,888.
B. debit to Cash for $3569, credit to Sales for $3,569.
C. debit to Cash for $3,569 and a credit to Cost of Goods Sold for $3,569.
D. debit to Cost of Goods Sold for $1,888; credit to Sales of $1,888.
Cash sale & Cost of Sales

60. Robles Co. sells $1,000 of inventory to Salas Co. for cash. Robles paid $650 for the merchandise. Under a perpetual
inventory system, the following journal entry(ies) would be recorded. (M)
a. Cash 1,000 Dr, Merchandise Inventory 650 Cr
b. Cash 1,000 Dr, Sales 1,000 Cr, Cost of Merchandise Sold 650 Dr, Merchandise Inventory 650 Cr.
c. Cash 1,000 Dr, Sales 1,000 Cr
d. Accounts Receivable 1,000 Dr, Sales 1,000 Cr, Cost of Merchandise Sold 650 Dr, Merchandise Inventory 650 Cr.
60. Java Coffee sold merchandise inventory costing $2,000 for $3,500 in cash. As the accountant, you would tell the
bookkeeper to:
a. debit Cash for $3,500, credit Sales for $2,500, and credit Merchandise Inventory for $2,000
b. debit Cash for $3,500, debit Cost of Goods Sold for $2,000, credit Sales for $3,500, and credit Merchandise
Inventory for $2,000
c. debit Cash for $3,500, debit Merchandise Inventory for $2,000, credit Sales for $3,500, and credit Cost of Goods
Sold for $2,000
d. debit Sales for $3,500, debit Merchandise Inventory for $2,000, credit Cash for $3,500, and credit Cost of Goods
Sold for $2,000
e. debit Sales for $3,500, debit Cost of Goods Sold for $2,000, credit Cash for $3,500, and credit Merchandise
Inventory for $2,000
84. The Paula Corp. sold merchandise for cash, $6,900. The cost of the merchandise (COMS) sold was $4,250. The journal
entry(s) to record this transaction would be (M)
a. Cash 6,900
COMS 4,250
Sales 4,250
b. Accounts Rec 6,900
Sales 6,900
COMS 4,250
Merchandise Inv 4,250
c. Cash 6,900
Sales 6,900
COMS 6,900
d. Cash 4,250
Sales 4,250
COMS 4,250
e. Cash 6,900
Sales 6,900
COMS 4,250
64. The Pierce Company assembles and sells personal computers. The company sold a computer costing $3,000 to a
customer for $4,000. The customer paid cash. The journal entry that Pierce would make to record the sale of the
computer would be:
Dr. Cr.
a. Cash 4,000
Sales 1,000
b. Merchandise Inventory 3,000
Sales 1,000
Cash 4,000
c. Cash 4,000
Net Income 1,000
d. Cash 4,000
Cost of Goods Sold 3,000
Sales 4,000
e. Sales 4,000
Cash 4,000
Cost of Goods Sold 3,000
Credit sale & cost of sales

. Jacob Company purchased $200 worth of merchandise on account from Jones Company. How would Jones Company
record this transaction in its accounting records assuming that it uses a perpetual inventory system?
A. Debit accounts receivable and credit revenue, debit cost of goods sold and credit inventory
B. Credit accounts receivable and debit revenue, debit cost of goods sold and credit inventory
C. Debit cash and credit revenue, debit inventory and credit cost of goods sold
D. Credit revenue and debit accounts receivable, debit inventory and credit cost of goods sold
64. Davis Hardware Company, uses a perpetual inventory system. How should Davis record the sale of merchandise
costing $620 for $960 on account?
A) Inventory 620
Sales 960
Revenue from sales 960
B) Accounts receivable 960
Sales revenue 960
Cost of goods sold 620
Inventory 620
C) Inventory 620
Gain on sale 340
Sales revenue 960
D) Accounts receivable 960
Sales revenues 620
Gain on sale 340
114.On October 1, Robinson Company sold merchandise in the amount of $5,800 to Rosser, with credit terms of 2/10, n/30.
The cost of the items sold is $4,000. Robinson uses the perpetual inventory system. The journal entry or entries that
Robinson will make on October 1 is: (M)
A) Sales 5,800
B) Sales 5,800
C) Accounts receivable 5,800
Sales 5,800
D) Accounts receivable 5,800
Sales 5,800
Merchandise inventory 4,000
E) Accounts receivable 4,000
Sales 4,000
Sales return from a credit sale

14. Under a perpetual inventory system, when goods are returned to the retailer from a customer:
A. Cost of Goods Sold is debited; Sales Returns and Allowances is credited.
B. Sales Returns and Allowances is debited; Cost of Goods Sold is credited.
C. Sales is debited; Cost Goods Sold is credited.
D. Inventory is debited; Sales is credited.
22. Cary, a customer of ABC Retail, returned $45 of goods that were purchased on account. Under the perpetual inventory
system, ABC will record a:
A. debit to Sales Returns and Allowances and a credit to Accounts Receivable-Cary for $45.
B. debit to Sales and a credit to Accounts Receivable-Cary for $45.
C. debit to Cost of Goods Sold and a credit to Inventory for $45.
D. debit to Sales and a credit to Cost of Goods Sold for $45.

130.On October 1, Courtland Company sold merchandise in the amount of $ 5,800 to Carter Company, with credit terms of
2/10, n/30. The cost of the items sold is $4,000. Courtland uses the periodic inventory system. On October 4, Carter
returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned
is $350. The entry or entries that Courtland must make on October 4 is: (M)
A) Sales returns and allowances 500
Merchandise inventory 350
B) Sales returns and allowances 500
C) Accounts receivable 500
Sales returns and allowances 500
E) Sales returns and allowances 350
116.On October 1, Mutch Company sold merchandise in the amount of $5,800 to Carr Company, with credit terms of 2/10,
n/30. The cost of the items sold is $4,000. Mutch uses the perpetual inventory system. On October 4, Carr returns
some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is
$350. The entry or entries that Mutch must make on October 4 is: (M)
A) Sales returns and allowances 500
B) Sales returns and allowances 500
C) Accounts receivable 500
E) Sales returns and allowances 350

115.On October 1, Whaley Company sold merchandise in the amount of $5,800 to Lee Company, with credit terms of 2/10,
n/30. The cost of the items sold is $4,000. Whaley uses the perpetual inventory system. Lee pays the invoice on
October 8, and takes the appropriate discount. The journal entry that Whaley makes on October 8 is:
A) Cash 5,800
B) Cash 4,000
C) Cash 3,920
Sales discounts 80
D) Cash 5,684
E) Cash 5,684
Sales discounts 116
Collection with sales return & within discount period

96. Feine Company sells merchandise on account for $2,000 to Tang Company with credit terms of 2/10, n/30. Tang
Company returns $300 of merchandise that was damaged, along with a check to settle the account within the discount
period. What entry does Feine Company make upon receipt of the check? (E)
a. Cash .................................................................................... 1,700
b. Cash .................................................................................... 1,666
c. Cash .................................................................................... 1,666
Sales Discounts ................................................................... 34
d. Cash .................................................................................... 1,960
Sales Discounts ................................................................... 40
Sales Returns and Allowances ................................... 300
Explanation of entry
103.A company uses the perpetual inventory system and recorded the following entry:
Cash 2,450
This entry reflects a: (M)
A) Purchase.
B) Return.
C) Sale.
D) Payment of the account payable and recognition of a cash discount taken.
E) Purchase and recognition of a cash discount taken.
Physical Count
Probable result
58. Jamaica’s Department Store uses a perpetual inventory system. At year-end, the balance in the Inventory controlling
account is $1,600,000. Assuming that the inventory records have been maintained properly, a year-end physical
inventory:
A. Is unnecessary.
B. Is needed to establish the ending inventory, as the $1,600,000 balance in the Inventory controlling account
represents the beginning inventory.
C. Probably will indicate more than $1,600,000 in merchandise on hand.
D. Probably will indicate less than $1,600,000 in merchandise on hand.
Adjustment
59. Adonis Products uses a perpetual inventory system. At year-end the Inventory account had a balance of $275,000, but a
complete year-end physical inventory indicated goods on hand costing only $269,000. Adonis should:
A. Reduce its cost of goods sold by $6,000.
B. Record a $6,000 current liability.
C. Reduce the balance in its Inventory controlling account and inventory subsidiary ledger by $6,000.
D. Reduce the balance in the Inventory controlling account and record a current liability, both in the amount of $6,000.
Periodic vs. Perpetual inventory system

16. The primary difference between a periodic and perpetual inventory system is that a (M)
a. periodic system determines the inventory on hand only at the end of the accounting period
b. periodic system keeps a record showing the inventory on hand at all times
c. periodic system provides an easy means to determine inventory shrinkage
d. periodic system records the cost of the sale on the date the sale is made
148.Which one of the following transactions is recorded with the same entry in a perpetual and a periodic inventory system?
a. Cash received on account with a discount
b. Payment of freight costs on a purchase
c. Return of merchandise sold
d. Sale of merchandise on credit
126.An account used in the perpetual inventory system that is not used in the periodic inventory system is (E)
A) Merchandise Inventory D) Accounts Payable
B) Sales E) Purchases
C) Sales Returns and Allowances
57. In comparing a perpetual inventory system with a periodic inventory system, which of the following statements is not
correct?
A. Most large companies use perpetual inventory systems.
B. A periodic system does not include an inventory subsidiary ledger.
C. The perpetual method is easier to apply in a manual accounting system.
D. Regardless of the system in use, most businesses take a physical inventory at least once a year.
87. What is the major difference between a periodic and perpetual inventory system? (M)
a. Under the periodic inventory system, the purchase of inventory will be debited to the Purchases account
b. Under the periodic inventory system, no journal entry is recorded at the time of the sale of inventory.
c. Under the periodic inventory system, all adjustments such as purchases returns and allowances and discounts are
reconciled at the end of the month.
d. All are correct.
61. Which of the following statements is correct?

a. Purchase returns and allowances are accounted for separately under the perpetual inventory system but are
combined into the inventory account under the periodic inventory system.
b. The perpetual inventory system continually updates the inventory, purchase discounts, and cost of goods sold
accounts.
c. The perpetual inventory system requires a closing entry in order to determine cost of goods sold before cost of
goods sold can be closed to the income summary account.
d. The purchases account is used under both the periodic and perpetual inventory systems.
e. Under the periodic inventory system, neither the cost of goods sold account nor the inventory account is computed
on a daily basis.
49. Which of the following attributes associated with a perpetual and periodic inventory system is incorrect?
a. Historically, the periodic system has been associated with low volume, high value items.
b. Historically, the perpetual system has been considered more expensive and cumbersome to maintain.
c. The perpetual system is better able to aid management in pricing and ordering inventory.
d. Computerized inventory systems and optical scanning equipment are examples of ways to implement a perpetual
inventory system.
e. The perpetual inventory system is more likely than the periodic inventory system to isolate inventory shrinkage due
to breakage, loss, or theft.
Comprehensive
Use the following to answer questions 91-94:
Satellite Warehouse is a small retail business that specializes in the sale of top-of-the-line televisions. This year, the store
has begun to carry the Flat TV manufactured by Swan Co. Thus far this year, Satellite has recorded the following
transactions involving the Flat TV:
Jan. 5. Purchased 8 Flat TVs at a unit cost of $1,300
Jan. 18. Purchased 5 additional Flat TVs at $1,300 each
Feb. 12. Sold 9 Flat TVs to the Duke Hotel for $14,700
. If Satellite uses a perpetual inventory system, the journal entry to record the purchase on January 18th would include
which of the following?
A. A debit to the Purchases account for $6,500.
B. A debit to the Cost of Goods Sold for $6,500
C. A credit to Inventory for $6,500.
D. A debit to Inventory for $6,500.
. The gross profit on the Flat TVs as of February 12th is:
A. $11,700. C. $6,500.
B. $3,000. D. $14,700.
93. If Satellite uses a perpetual inventory system, the journal entry to record the sale on February 12th would include all of
the following except:
A. A debit to the Cost of Goods Sold for $11,700.
B. A credit to Sales Revenue for $14,700.
C. A credit to Purchases for $11,700.
D. A credit to Inventory for $11,700.
94. Satellite maintains a subsidiary ledger account for each type of TV carried in the store. An examination of the account
for the Flat TV model at the end of February would show:
A. 4 units on hand with a total value of $1,300.
B. 4 units on hand with a total value of $5,200.
C. 13 units on hand with a total value of $16,900.
D. The amount that Satellite owes to Swan.
Recording Purchases & Payments

Questions 65 thru 70 are based on the following information.
Based on the following information,
1. $5,000 of merchandise inventory was ordered on April 2, 2007
2. $2,000 of this merchandise was received on April 5, 2007
3. On April 6, 2007, an invoice dated April 4, 2007, with terms of 2/10, net 30 for $2,150 which included a $150
prepaid freight cost, was received.
4. On April 10, 2007, $500 of the merchandise was returned to the seller.
68. The entry for April 10, 2007 would include? (D)
a. Debit to Merchandise Inventory $500 c. Credit to Merchandise Inventory $500
b. Debit to Purchases Returns $500 d. Credit to Accounts Payable $500
65. What would be recorded as purchases discount if the invoice is paid within the discount period? (M*)
a. $100 c. $43
b. $30 d. $33
66. What would be recorded as the cash payment if the invoice is paid within the discount period? (E*)
a. $1,470 c. $2,150
b. $1,520 d. $1,620
67. What would be recorded as net purchases amount after all of the transactions have been recorded? (D)
a. $2,000 c. $1,620
b. $2,150 d. $1,470
69. By what date does the invoice need to be paid in order to take the advantage of the discount? (D)
a. April 15, 2007 c. April 10, 2007
b. April 16, 2007 d. April 14, 2007
70. What would be the cash payment if the company decides to pay the invoice on April 30, 2007? (M)
a. $1,650 c. $2,150
b. $1,620 d. $2,000
WORKSHEET PREPARATION
Merchandise inventory
153.In a worksheet for a merchandising company, Merchandise Inventory would appear in the
a. trial balance and adjusted trial balance columns only.
b. trial balance and balance sheet columns only.
c. trial balance, adjusted trial balance, and balance sheet columns.
d. trial balance, adjusted trial balance, and income statement columns.
154.The Merchandise Inventory account balance appearing in a worksheet represents the

a. ending inventory. c. cost of merchandise purchased.
b. beginning inventory. d. cost of merchandise sold.
Unadjusted trial balance

127.When preparing an unadjusted trial balance using a periodic inventory system, the amount shown for Merchandise
Inventory is: (M)
A) The ending inventory amount.
B) The beginning inventory amount.
C) Equal to the cost of goods sold.
D) Equal to the cost of goods purchased.
E) Equal to the gross profit.
ADJUSTING ENTRIES
Merchandising vs. Service Business
*. Which account causes the main difference between merchandiser’s adjusting and closing process and that of a service
business? (E*)
103.A merchandising company using a perpetual system will make

a. the same number of adjusting entries as a service company does.
b. one more adjusting entry than a service company does.
c. one less adjusting entry than a service company does.
d. different types of adjusting entries compared to a service company.
Perpetual Inventory System

105.A merchandising company using a perpetual system may record an adjusting entry by
a. debiting Income Summary. c. debiting Cost of Goods Sold.
b. crediting Income Summary. d. debiting Sales.
FINANCIAL STATEMENTS
The Balance Sheet
Merchandise Inventory
121. On a classified balance sheet, merchandise inventory is classified as
a. an intangible asset. c. a current asset.
b. property, plant, and equipment. d. a long-term investment.
. Since merchandise inventory is normally sold within one year or one operating cycle, it is reported on the
balance sheet as
A. cost of goods sold inventory C. work in process inventory
B. property plant and equipment D. a current asset
163. In the balance sheet, ending merchandise inventory is reported

a. in current assets immediately following accounts receivable.
b. in current assets immediately following prepaid expenses.
c. in current assets immediately following cash.
d. under property, plant, and equipment.
83. Which of the following items should not be included in the cost of ending merchandise inventory? (M)
a. units on consignment
b. purchased units in transit, shipped FOB destination
c. units on hand in the warehouse
d. both (a) and (c)
The Income Statement

Trading vs. Service Business
19. When comparing a retail business to a service business, the financial statement that changes the most is the
(M)
. Which of the following accounts would most likely appear on the income statement for a merchandising
company, but not on the income statement for a service company?
A. Selling & Administrative Expenses C. Cost of Goods Sold
B. Revenue D. Payroll Tax Expense
43. Which of the following appears in the income statement of a merchandising business, but not in the income
statement of a business that renders only services?
A. Interest revenue. C. Advertising expense.
B. Gross profit. D. Income tax expense.
110. Indicate which one of the following would appear on the income statement of both a merchandising
company and a service company.
a. Gross profit c. Sales revenues
b. Operating expenses d. Cost of goods sold
Formula
Net sales
112. Sales less sales discounts less sales returns and allowances equals: (M)
A) Net purchases. D) Gross profit.
B) Cost of goods sold. E) Net income.
C) Net sales.
162. Net sales is sales less

a. sales discounts.
b. sales returns.
c. sales returns and allowances.
d. sales discounts and sales returns and allowances.
25. Net sales is computed by taking:

A. Gross sales – Sales returns and allowances + Sales discounts.
B. Gross sales – Sales returns and allowances – Sales discounts.
C. Gross sales + Sales returns and allowances + Sales discounts.
D. Gross sales – Cash received for sales.
53. Net sales is calculated by:

A. Subtracting cost of sales from sales.
B. Subtracting sales returns and sales discounts from sales.
C. Subtracting sales returns, cost of sales and sales discounts from sales.
D. Subtracting gross profit from sales.
69. To arrive at net sales:

A. Add sales discounts to sales.
B. Subtract the cost of goods sold from the sales price.
C. Subtract sales returns and sales discounts from sales.
D. Subtract accounts receivable from sales.
Cost of goods purchased

144. Net purchases plus freight-in determines
a. cost of goods sold. c. cost of goods purchased.
b. cost of goods available for sale. d. total goods available for sale.
52. Purchases equal the invoice amount (E)

A. Plus freight-in, plus discounts lost.
B. Less purchase returns, plus purchase allowances.
C. Plus freight-in, less purchase discounts.
D. Plus discounts, less purchase returns. S, S & T
Cost of goods available for sale

164. Cost of goods available for sale is computed by adding
a. freight-in to net purchases.
b. beginning inventory to net purchases.
c. beginning inventory to purchases and freight-in.
d. beginning inventory to cost of goods purchased.
142. Cost of goods available for sale is computed by adding

a. beginning inventory to net purchases.
b. beginning inventory to the cost of goods purchased.
c. net purchases and freight-in.
d. purchases to beginning inventory.
86. Beginning inventory plus net cost of purchases is:

A) Cost of goods sold.
B) Merchandise available for sale.
C) Ending inventory.
D) Sales.
E) Shown on the balance sheet.
Cost of goods sold

48. The calculation of cost of goods sold under the periodic system is
a. beginning inventory + purchases
b. beginning inventory + ending inventory - purchases
c. beginning inventory + ending inventory + purchases
d. beginning inventory + purchases - ending inventory
e. ending inventory + purchases - beginning inventory
62. In a periodic inventory system, the formula used in computing the cost of goods sold may be summarized as
follows:
A. Beginning inventory + purchases - ending inventory.
B. Beginning inventory + purchases - net sales.
C. Ending inventory + purchases - net sales.
D. Balance in the Cost of Goods Sold account, less the balance in the Inventory Shrinkage account.
50. Cost of goods sold is given by:

A. Beginning inventory - net purchases + ending inventory.
B. Beginning inventory + accounts payable - purchases.
C. Purchases + ending inventory - beginning inventory.
D. Purchases + beginning inventory - ending inventory. S, S & T
Gross profit
. Sales revenue less cost of goods sold is called
A. net operating income C. contribution margin
B. net income D. gross margin
49. Sales revenue less cost of goods sold is called

a. gross profit. c. net income.
b. net profit. d. marginal income.
. In the multiple-step income statement, sales less cost of goods sold equals Gleim
A. Gross profit.
B. Operating profit.
C. Net income from continuing operations.
D. Pretax income from continuing operations.
. The difference between sales and cost of goods sold (COGS) is known as:
A. Unrealized holding gain C. Operating profit
B. Realized holding gain D. Gross profit Stalla
45. Gross profit is the difference between:

A. Net sales and the cost of goods sold.
B. The cost of merchandise purchased and the cost of merchandise sold.
C. Net sales and net income.
D. Net sales and all expenses.
89. Gross profit is defined as:

a. net income before the effect of income taxes
b. the income generated by the company after subtracting all operating expenses.
c. the difference between total assets and total liabilities
d. net income less the dividends declared during the period
e. sales minus cost of goods sold
122. Gross profit for a merchandiser is net sales minus
a. operating expenses. c. sales discounts.
b. cost of goods sold. d. cost of goods available for sale.
Gross profit percentage

119. The gross profit rate is computed by dividing gross profit by
a. cost of goods sold. c. net sales.
b. net income. d. sales.
67. A company's gross profit rate is computed by dividing:

A. Net sales by gross profit. C. Gross profit by the cost of goods sold.
B. Cost of goods sold by gross profit. D. Gross profit by net sales
Income from operations

43. Income from operations is gross profit less
a. administrative expenses. c. other expenses and losses.
b. operating expenses. d. selling expenses.
50. After gross profit is calculated, operating expenses are deducted to determine
a. gross margin. c. gross profit on sales.
b. net income. d. net margin.
Correct formula
. Which of the following equations is correct?
A. Beginning Inventory + Purchases – Cost of Goods sold = Ending Inventory
B. Beginning Inventory + Ending Inventory = Cost of Goods Sold + Purchases
C. Sales + Cost of Goods Sold = Gross Margin
D. Cost of Goods Sold + Beginning Inventory = Ending Inventory – Purchases
Incorrect formula
52. Which of the following expressions is incorrect?
a. Gross profit – operating expenses = net income
b. Sales – cost of goods sold – operating expenses = net income
c. Net income + operating expenses = gross profit
d. Operating expenses – cost of goods sold = gross profit
Single Step vs. Multi-Step

Gross profit
115. Which one of the following is shown on a multiple-step but not on a single-step income statement? (E)
a. Net sales c. Gross profit
b. Net income d. Cost of goods sold
Single-Step Income Statement

Total revenues less total expenses
10. The form of income statement that derives its name from the fact that the total of all expenses is deducted
from the total of all revenues is called a (E*)
a. multiple-step statement c. report-form statement
b. revenue statement d. single-step statement
. A statement on which cost of goods sold and operating expenses (selling and administrative) are added
together and subtracted in total from sales to get net income is a(n)
A. multi-step income statement C. single-step income statement
B. merchandising income statement D. traditional income statement
Total expenses
120. An income statement that includes cost of goods sold as another expense and shows only one subtotal
for total expenses is a: (E)
A) Balanced income statement. D) Combined income statement.
B) Single-step income statement. E) Simplified income statement.
C) Multiple-step income statement.
Gross profit
113. Gross profit does not appear
a. on a multiple-step income statement.
b. on a single-step income statement.
c. to be relevant in analyzing the operation of a merchandiser.
d. on the income statement if the periodic inventory system is used because it cannot be calculated.
. Gross profit does not appear on a

A. multi-step income statement
B. single-step income statement
C. contribution margin income statement
D. multi-step or single-step income statement
Multiple-Step Income Statement

123. Multiple-step income statements: (M)
A. Are required by the FASB.
B. Contain more detail than a simple listing of revenues and expenses.
C. Are required for the perpetual inventory system.
D. List cost of goods sold as an operating expense.
E Can only be used in perpetual inventory systems.
11. Multiple-step income statements show (M)

a. gross profit but not income from operations
b. neither gross profit nor income from operations
c. both gross profit and income from operations
d. income from operations but not gross profit
. A statement on which cost of goods sold is subtracted from sales to obtain gross margin is a
A. merchandising income statement C. traditional income statement
B. multi-step income statement D. multi-step earnings statement
110. A classified income statement typically includes all of the following except:
a. sales revenue section. c. capital investments.
b. cost of goods sold. d. other revenues and gains.
Sales Revenue
Inclusion
119. In a classified multi-step income statement, the sales revenue section includes all of the following except
a. Sales. c. Sales discounts.
b. Gain on sale of investment. d. Sales returns and allowances.
Exclusions
107. The sales revenue section of an income statement for a retailer would not include (M*)
a. Sales discounts. c. Net sales.
b. Sales. d. Cost of goods sold.
Contra-sales account
73. If sales discounts are shown as a separate item in financial statements, they should be shown as a(n):
A. Deduction from accounts receivable. C. Operating expense.
B. Deduction from gross sales revenue. D. Current liability.
99. With respect to the income statement,

a. contra-revenue accounts do not appear on the income statement.
b. sales discounts increase the amount of sales.
c. contra-revenue accounts increase the amount of operating expenses.
d. sales discounts are included in the calculation of gross profit.
Cost of goods purchased

Inclusions
102. The amount recorded for merchandise inventory includes: (M)
A) Any purchase discounts. D) Any trade discounts.
B) Any returns and allowances. E) All of the above.
C) Any necessary freight costs.
75. Which of the following items would affect the cost of merchandise inventory acquired during the period? (M)
a. quantity discounts c. transportation-in
b. cash discounts d. all of the above
Freight-in
143. The Freight-in account
a. increases the cost of merchandise purchased.
b. is contra to the Purchases account.
c. is a permanent account.
d. has a normal credit balance.
Ending inventory
51. Ending inventory is equal to the cost of items on hand plus:
A. Items in transit sold f.o.b. shipping point. C. Items in transit sold f.o.b. destination.
B. Purchases in transit f.o.b. destination. D. None of the above. S, S & T
Cost of goods sold

88. Which of the following accounts will not be found on the Cost of Merchandise Sold section on the Income
Statement? (E)
a. Purchases c. Sales Returns and Allowances
b. Transportation In d. Merchandise Inventory
Ratio analysis
12. A high gross profit percentage means:
A. the cost of goods sold was relatively low.
B. the cost of goods sold was relatively high.
C. selling expenses are very low.
D. general and administrative expenses are very high.
13. A low gross profit percentage means that:

17. A company’s gross profit percentage decreases from 58% to 51%. What does this mean?
A. This means that net income will be higher.
B. This means that net income will be lower.
C. This means that there will be a net loss.
D. We cannot determine anything definite from the information given.
70. As a retailer, which of the following percentages is the most attractive to you?
A. Gross profit of 30%.
B. Cost of goods sold as a percentage of net sales equal to 70%.
C. Gross margin of 30%.
D. All three are the same.
. Holland Company and Tilburg Company sell the same type of merchandise. The following represents
information from their accounting records:
Holland Tilburg
Sales $1,300,000 $1,600,000
Cost of Goods Sold 1,100,000 1,200,000
Net Income 100,000 100,000
Based on the information for both companies presented above, which of the following statements is true?
A. Tilburg has a higher gross margin percentage than Holland does.
B. Holland has a higher gross margin percentage than Tilburg does.
C. Holland has higher operating expenses than Tilburg does.
D. Tilburg’s products cost less than Holland’s do.
. Holland Company and Tilburg Company sell the same type of merchandise. The following represents
information from their accounting records:
Holland Tilburg
Sales $1,300,000 $1,600,000
Cost of goods sold 1,100,000 1,200,000
Net Income 100,000 100,000
Based on the information for both companies presented above, which of the following statements is false?
A. Tilburg has a higher gross margin ratio than Holland does.
B. Holland has lower operating expenses than Tilburg does.
C. Tilburg has a lower profit margin ratio than Holland does.
D. Tilburg has higher operating expenses than Holland does.
Operating expense section

Inclusion
60. The cost of delivering merchandise to the customer is:
A. Part of cost of goods sold. C. An operating expense.
B. Used in the calculation of net sales. D. A reduction of gross profit.
Exclusion
108. The operating expense section of an income statement for a wholesaler would not include (M)
a. freight-out. c. cost of goods sold.
b. utilities expense. d. insurance expense.
Selling expense
9. Depreciation is an example of a(n):
A. inventory expense. C. selling expense.
B. asset expense. D. delivery expense.

31. Operating income is:
A. A measure of profitability after deducting cost of sales from net sales.
B. A measure of profitability after deducting cost of sales and all expense incurred in operating the business
from net sales.
C. A measure of liquidity after deducting cost of sales from net sales.
D. The equivalent of net sales.
109. Income from operations will always result if

a. the cost of goods sold exceeds operating expenses.
b. revenues exceed cost of goods sold.
c. revenues exceed operating expenses.
d. gross profit exceeds operating expenses.
. A company will have a net income if gross profits exceed

A. operating expenses
B. cost of goods sold
C. both cost of goods sold and operating expenses
D. selling expenses
Other expenses and losses

116. All of the following items would be reported as other expenses and losses except
a. freight-out.
b. casualty losses.
c. interest expense.
d. loss from employees' strikes.
Statement Of Changes In Owner’s Equity

Statement Of Retained Earnings
12. The major difference in the statement of retained earnings between a service business and a merchandising
business is:
A. that the retained earnings statement of a service business includes Dividends.
B. that the retained earnings statement of a merchandising business includes Dividends.
C. that the retained earnings statement of a merchandising business shows the Cost of Goods Sold.
D. nothing. There are no differences between the two.
20. When comparing a retail business to a service business, the financial statement that changes the least is the
(M)
CLOSING ENTRIES
Merchandising vs. service business
86. Which account will be included in both service and merchandising companies closing entries? (E)
a. Sales c. Sales Discounts
b. Cost of Merchandise Sold d. Sales Returns and Allowances
*. Which account causes the main difference between merchandiser’s adjusting and closing process and that of a service
business?
Periodic inventory method

Cost of Goods Sold
56. In a periodic inventory system, which of the following accounts may be closed by debiting the Cost of Goods Sold?
A. Sales, Inventory (beginning), and Gross Profit.
B. Inventory (beginning) and Purchases.
C. Purchases and Inventory (ending).
D. Sales, Inventory (beginning), and Cost of Goods Available for Sale.
93. Which of the following accounts should be closed to Income Summary at the end of the fiscal year? (E)
a. Merchandise Inventory c. Drawing
b. Accumulated Depreciation d. Cost of Merchandise Sold
Comprehensive
91. Under a periodic inventory system, closing entries will include (M)
a. Dr. Sales, Purchases Returns and Allowances, Purchases Discounts
b. Cr. Purchases, Sales Discounts, Sales Returns and Allowances
c. Adjust Merchandise Inventory Account to match physical inventory
d. All are correct
Perpetual inventory method

104.In preparing closing entries for a merchandising company, the Income Summary account will be credited for the balance
of
a. sales. c. sales discounts.
b. merchandise inventory. d. freight-out.
160.Which of the following accounts is not closed to Income Summary?

a. Cost of Goods Sold c. Sales
b. Merchandise Inventory d. Sales Discounts
34. The Cost of Goods Sold account is closed by

A. Debiting Cost of Goods Sold and crediting Income Summary
B. Debiting Cost of Goods Sold and crediting Retained Earnings
C. Debiting Income Summary and crediting Cost of Goods Sold
D. Debiting Retained Earnings and crediting Cost of Goods Sold
119.Which of the following accounts would be closed with a debit? (M)

A) Sales Discounts. D) Operating Expenses.
B) Sales Returns and Allowances. E) All of the above.
C) Cost of Goods Sold.
INCOME STATEMENT
Format
Single-Step Income Statement
10. The form of income statement that derives its name from the fact that the total of all expenses is deducted from the total
of all revenues is called a (E)
a. multiple-step statement c. report-form statement
b. revenue statement d. single-step statement
120.An income statement that includes cost of goods sold as another expense and shows only one subtotal for total
expenses is a: (E)
A) Balanced income statement. D) Combined income statement.
B) Single-step income statement. E) Simplified income statement.
C) Multiple-step income statement.
113.Gross profit does not appear

a. on a multiple-step income statement.
b. on a single-step income statement.
c. to be relevant in analyzing the operation of a merchandiser.
d. on the income statement if the periodic inventory system is used because it cannot be calculated.
Multiple-Step Income Statement

123.Multiple-step income statements: (M)
A) Are required by the FASB.
B) Contain more detail than a simple listing of revenues and expenses.
C) Are required for the perpetual inventory system.
D) List cost of goods sold as an operating expense.
E) Can only be used in perpetual inventory systems.
112.Income from operations appears on

a. both a multiple-step and a single-step income statement.
b. neither a multiple-step nor a single-step income statement.
c. a single-step income statement.
d. a multiple-step income statement.
11. Multiple-step income statements show (M)

a. gross profit but not income from operations
b. neither gross profit nor income from operations
c. both gross profit and income from operations
d. income from operations but not gross profit
Single Step vs. Multi-Step

Gross profit
115.Which one of the following is shown on a multiple-step but not on a single-step income statement?
a. Net sales c. Gross profit
b. Net income d. Cost of goods sold
Net Sales Revenue

Formula
112.Sales less sales discounts less sales returns and allowances equals: (M)
A) Net purchases. D) Gross profit.
B) Cost of goods sold. E) Net income.
C) Net sales.
162.Net sales is sales less

a. sales discounts.
b. sales returns.
c. sales returns and allowances.
d. sales discounts and sales returns and allowances.
25. Net sales is computed by taking:

A. Gross sales – Sales returns and allowances + Sales discounts.
B. Gross sales – Sales returns and allowances – Sales discounts.
C. Gross sales + Sales returns and allowances + Sales discounts.
D. Gross sales – Cash received for sales.
53. Net sales is calculated by:

A. Subtracting cost of sales from sales.
B. Subtracting sales returns and sales discounts from sales.
C. Subtracting sales returns, cost of sales and sales discounts from sales.
D. Subtracting gross profit from sales.
69. To arrive at net sales:

A. Add sales discounts to sales.
B. Subtract the cost of goods sold from the sales price.
C. Subtract sales returns and sales discounts from sales.
D. Subtract accounts receivable from sales.
Exclusions
107.The sales revenue section of an income statement for a retailer would not include
a. Sales discounts. c. Net sales.
b. Sales. d. Cost of goods sold.
119.In a classified multi-step income statement, the sales revenue section includes all of the following except
a. Sales. c. Sales discounts.
b. Gain on sale of investment. d. Sales returns and allowances.
Contra-sales account
73. If sales discounts are shown as a separate item in financial statements, they should be shown as a(n):
A. Deduction from accounts receivable. C. Operating expense.
B. Deduction from gross sales revenue. D. Current liability.
Net Purchases
Formula
Gross purchases
144.Net purchases plus freight-in determines
a. cost of goods sold. c. cost of goods purchased.
b. cost of goods available for sale. d. total goods available for sale.
Net purchases
52. Purchases equal the invoice amount:
A. Plus freight-in, plus discounts lost.
B. Less purchase returns, plus purchase allowances.
C. Plus freight-in, less purchase discounts.
D. Plus discounts, less purchase returns. S, S & T
Inclusions
102.The amount recorded for merchandise inventory includes: (M)
A) Any purchase discounts. D) Any trade discounts.
B) Any returns and allowances. E) All of the above.
C) Any necessary freight costs.
75. Which of the following items would affect the cost of merchandise inventory acquired during the period? (M)
a. quantity discounts c. transportation-in
b. cash discounts d. all of the above
Cost of goods available for sale

Formula
164.Cost of goods available for sale is computed by adding
a. freight-in to net purchases.
b. beginning inventory to net purchases.
c. beginning inventory to purchases and freight-in.
d. beginning inventory to cost of goods purchased.
142.Cost of goods available for sale is computed by adding

a. beginning inventory to net purchases.
b. beginning inventory to the cost of goods purchased.
c. net purchases and freight-in.
d. purchases to beginning inventory.
86. Beginning inventory plus net cost of purchases is:

A) Cost of goods sold.
B) Merchandise available for sale.
C) Ending inventory.
D) Sales.
E) Shown on the balance sheet.
Ending inventory
51. Ending inventory is equal to the cost of items on hand plus:
A. Items in transit sold f.o.b. shipping point. C. Items in transit sold f.o.b. destination.
B. Purchases in transit f.o.b. destination. D. None of the above. S, S & T
Cost of goods sold

Formula
50. Cost of goods sold is given by:
A. Beginning inventory - net purchases + ending inventory.
B. Beginning inventory + accounts payable - purchases.
C. Purchases + ending inventory - beginning inventory.
D. Purchases + beginning inventory - ending inventory. S, S & T
62. In a periodic inventory system, the formula used in computing the cost of goods sold may be summarized as follows:
A. Beginning inventory + purchases - ending inventory.
B. Beginning inventory + purchases - net sales.
C. Ending inventory + purchases - net sales.
D. Balance in the Cost of Goods Sold account, less the balance in the Inventory Shrinkage account.
Exclusion
88. Which of the following accounts will not be found on the Cost of Merchandise Sold section on the Income Statement?
(E)
a. Purchases c. Sales Returns and Allowances
b. Transportation In d. Merchandise Inventory
Gross profit
Formula
Sales less cost of goods sold
49. Sales revenue less cost of goods sold is called
a. gross profit. c. net income.
b. net profit. d. marginal income.
. In the multiple-step income statement, sales less cost of goods sold equals Gleim
A. Gross profit. C. Net income from continuing operations.
B. Operating profit. D. Pretax income from continuing operations.
. The difference between sales and cost of goods sold (COGS) is known as:
A. Unrealized holding gain C. Operating profit
B. Realized holding gain D. Gross profit Stalla
45. Gross profit is the difference between:

A. Net sales and the cost of goods sold.
B. The cost of merchandise purchased and the cost of merchandise sold.
C. Net sales and net income.
D. Net sales and all expenses.
89. Gross profit is defined as:

a. net income before the effect of income taxes
b. the income generated by the company after subtracting all operating expenses.
c. the difference between total assets and total liabilities
d. net income less the dividends declared during the period
e. sales minus cost of goods sold
122.Gross profit for a merchandiser is net sales minus

a. operating expenses. c. sales discounts.
b. cost of goods sold. d. cost of goods available for sale.
Inclusion
99. With respect to the income statement,
a. contra-revenue accounts do not appear on the income statement.
b. sales discounts increase the amount of sales.
c. contra-revenue accounts increase the amount of operating expenses.
d. sales discounts are included in the calculation of gross profit.

Formula
119.The gross profit rate is computed by dividing gross profit by
a. cost of goods sold. c. net sales.
b. net income. d. sales.
67. A company's gross profit rate is computed by dividing:

A. Net sales by gross profit. C. Gross profit by the cost of goods sold.
B. Cost of goods sold by gross profit. D. Gross profit by net sales
Ratio analysis
12. A high gross profit percentage means:
13. A low gross profit percentage means that:

17. A company’s gross profit percentage decreases from 58% to 51%. What does this mean?
A. This means that net income will be higher.
B. This means that net income will be lower.
C. This means that there will be a net loss.
D. We cannot determine anything definite from the information given.
70. As a retailer, which of the following percentages is the most attractive to you?
A. Gross profit of 30%.
B. Cost of goods sold as a percentage of net sales equal to 70%.
C. Gross margin of 30%.
D. All three are the same.
Operating expense section

Exclusion
108.The operating expense section of an income statement for a wholesaler would not include
a. freight-out. c. cost of goods sold.
b. utilities expense. d. insurance expense.
Selling expense
9. Depreciation is an example of a(n):
A. inventory expense. C. selling expense.
B. asset expense. D. delivery expense.

Definition
31. Operating income is:
A. A measure of profitability after deducting cost of sales from net sales.
B. A measure of profitability after deducting cost of sales and all expense incurred in operating the business from net
sales.
C. A measure of liquidity after deducting cost of sales from net sales.
D. The equivalent of net sales.
Formula
109.Income from operations will always result if
a. the cost of goods sold exceeds operating expenses.
b. revenues exceed cost of goods sold.
c. revenues exceed operating expenses.
d. gross profit exceeds operating expenses.
43. Income from operations is gross profit less

a. administrative expenses.
b. operating expenses.
c. other expenses and losses.
d. selling expenses.
50. After gross profit is calculated, operating expenses are deducted to determine
a. gross margin.
b. net income.
c. gross profit on sales.
d. net margin.
Other expenses and losses

116.All of the following items would be reported as other expenses and losses except
a. freight-out.
b. casualty losses.
c. interest expense.
d. loss from employees' strikes.
Incorrect statement
52. Which of the following expressions is incorrect?
a. Gross profit – operating expenses = net income
b. Sales – cost of goods sold – operating expenses = net income
c. Net income + operating expenses = gross profit
d. Operating expenses – cost of goods sold = gross profit
Comprehensive
114.Which of the following is not a true statement about a multiple-step income statement?
a. Operating expenses are often classified as selling and administrative expenses.
b. There may be a section for nonoperating activities.
c. There may be a section for operating assets.
d. There is a section for cost of goods sold.

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BASIC CONCEPTS

Trading vs. Service Business

Adjusting & closing process

41. Sales revenue is recognized in the period in which:

79. Sales revenues are usually considered earned when

81. Sales revenue

8. Transferring title refers to a:

18. A receiving report is prepared by what department?

104.A debit memorandum is: (M)

FOB Shipping Point

Buyer bears risk of transit

Buyer pays freight

51. Merchandise sold FOB destination indicates that:

Seller pays freight

66. The cost of the transportation of inventory purchased:

101.A trade discount is: (E)

26. The discount period is determined by the:

. 1/10 is a term that represents the

14. If an invoice states 5/15, n/60, the 15 refers to:

13. If an invoice reads n/15, it means that:

46. The credit term 2/10 n/30 means (E)

100.The credit terms 2/10, n/30 are interpreted as: (E)

Paid within discount period, with prepaid shipping charges

Effect on inventory cost

Discount, due date

Sales return & allowances

Sales Returns & Allowances

PERIODIC INVENTORY SYSTEM

63. Periodic inventory systems are used primarily by:

Cost of Goods Sold

61. In a periodic inventory system, the cost of goods sold is:

PERPETUAL INVENTORY SYSTEM

Use of merchandise inventory account

Merchandise transaction recorded as they occur

Cost of good sold

Two entries for sales

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

Use of merchandise inventory account

81. Merchandise inventory: (E)

118.Inventory shrinkage: (M)

3. Generally, the revenue account for a merchandising business is entitled (E)

73. The term revenue can best be described as:

109.Sales returns: (E)

Sales return & allowances

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

110.Sales returns and allowances: (M)

Cost of goods sold

19. Costs of Goods Sold includes which of the following?

Periodic inventory system

Perpetual inventory system

21. Gross profit is equal to: (M)

Contribution to operating expenses, taxes & income

Net income plus operating expenses

Gross profit ratio

Selling and administrative expenses

General and administrative expenses

FINANCIAL STATEMENT CLASSIFICATION

121.On a classified balance sheet, merchandise inventory is classified as

83. Merchandise inventory: (M)