2. A service company earns net income by buying and selling merchandise. Ans: False

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1 Chapter 6: Accounting For Merchandising Activities True/False 1. Merchandise consists of products that a company acquires for the purpose of reselling them to customers. 2. A service company earns net income by buying and selling merchandise. 3. A wholesaler is a company that buys products from manufacturers and sells them to consumers. 4. A retailer is a middleman that buys products from manufacturers and sells them to wholesalers. 5. Gross profit is also called gross margin. 6. Cost of goods sold represents the cost of buying and preparing merchandise for sale. 7. Z-Mart had sales of $350,000. Its cost of goods sold was $200,000. Its gross profit was $550, Z-Mart had net sales of $545,000. Its cost of goods was $345,000. Its gross margin was $200, Z-Mart had a gross profit of $340,000 based on sales of $700,000. Its cost of goods sold was $350, Cost of goods sold is reported on both the income statement and the balance sheet. 11. Merchandise inventory refers to products a company owns for purposes of selling to customers. 1

2 12. A merchandising company's operating cycle begins with the sale of merchandise and ends with the collection of cash from the sale. 13. Companies try to lengthen their operating cycles to increase net income. 14. Merchandise inventory is included in the Long Term Assets section of the balance sheet. 15. Merchandise inventory includes merchandise and office supplies. 16. Assets tied up in inventory are not productive assets. 17. A periodic inventory system requires updating the inventory account at the beginning of an accounting period. 18. A perpetual inventory system gives a continuous record of the amount of inventory on hand. 19. In a perpetual inventory system, the net cost of purchases is accumulated in the Inventory account. 20. Periodic inventory systems were historically used by companies that sold large quantities of low-value items. 21. In a periodic inventory system, Purchases is a temporary account. 22. In a periodic inventory system, cost of goods sold is not recorded as each sale occurs. 23. Trade discounts are entered into the accounting system. 24. Credit terms are the listing of the amounts and timing of payments between a buyer and a seller. 2

3 25. The terms 2/10, n/30 means that the seller offers the purchaser a 2% cash discount if the amount is paid in full within 10 days. Otherwise, the full amount is due in 30 days. 26. Sellers offer a purchase discount to buyers for prompt payment for purchases on account. 27. Z-Mart did not take advantage of a supplier's offer of 2/10, n/30, and paid the invoice at the end of the month. By not taking the discount Z-Mart lost the equivalent of 18% annual interest on the amount of the purchase. 28. A debit to Sales Returns and Allowances and a credit to Accounts Receivable mean that a customer returned merchandise. 29. Sales of $350,000 and net sales of $323,000 may reflect sales discounts of $27, The Merchandise Inventory account balance at the end of one period is the amount of beginning inventory in the next period. 31. The amount of gross profit for a merchandising business will be the same under both the accrual basis and the cash basis of accounting. 32. A classified multiple-step income statement is a format that shows intermediate totals between sales and net income and detailed calculations of net sales and cost of goods sold. 33. Sales Discounts are closed to Income Summary. 34. Accounts unique to merchandising companies include Merchandise Inventory, Sales, Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold. 35. Businesses normally get a full credit for the goods and services tax (GST) they have paid. 3

4 Multiple Choice A merchandising company: A) Earns net income from buying and selling merchandise. B) Buys products from manufacturers and sells to retailers. C) Buys products from manufacturers and sells them to consumers. D) Reports cost of goods sold on the income statement. --- Merchandisers: A) Earn net income from buying and selling merchandise. B) Receive fees in exchange for services. C) Earn net income from commissions. D) Earn net income from fares. E) Do not report gross profit. - Wholesalers: A) Buy products from manufacturers and sell to retailers. B) Buy products from other wholesalers and sell to consumers. C) Buy products from manufacturers and sell to consumers. D) Buy products from retailers and sell to consumers Retailers: A) Buy products from manufacturers and sell to wholesalers. B) Buy products from wholesalers and sell to other wholesalers. C) Buy products from manufacturers and wholesalers and sell to consumers. D) Buy only from wholesalers

5 Gross profit is: A) The same as net income. B) Subtracted from operating income to get net income. C) Net sales less cost of goods sold. D) A special general ledger account. E) Only calculated when using the perpetual inventory system. Cost of goods sold is: A) Another term for net sales. B) The term used for the cost of buying and preparing merchandise. C) An operating expense. D) Also called gross margin. E) The cost of goods sold to customers. Z-Mart had sales of $358,500. Its cost of goods sold was $143,400. What is the gross profit? A) $214,600. B) $215,100. C) $354,700. D) $501,900. E) 40% Z-Mart had sales of $569,300. Its gross profit was $239,106. What is the cost of goods sold? A) $276,194. B) $330,194. C) $357,194. D) $808,406. E) 42%. - Merchandise inventory is: A) Reported on the balance sheet under plant and equipment. B) Products a company owns for resale to customers. C) Reported on the income statement as an expense. D) Includes supplies. E) Included on a service company's balance sheet. 5

6 The operating cycle of a merchandising company: A) Begins with the purchase of merchandise. B) Ends with the collection of cash from the sale of merchandise. C) Varies among types of businesses. D) Applies to both cash and credit sales. The cash sales operating cycle moves from: A) Purchases to inventory for sale to cash sales. B) Purchases to inventory for sale to accounts receivable to cash sales. C) Inventory for sale to cash sales to purchases. D) Accounts receivable to purchases to inventory for sale to cash sales. E) Accounts receivable to inventory for sale to cash sales A periodic inventory system: A) Requires updating the inventory account every month. B) Records the cost of new merchandise purchased in a permanent account. C) Does not require a physical count of inventory. D) Records the cost of new merchandise purchased in a temporary account. Ans: D -- A perpetual inventory system: A) Gives a continuous record of the amount of inventory on hand. B) Uses a Purchases account for the cost of new merchandise purchased. C) Was historically used by companies that sold large quantities of low-balance items. D) Is not widely used in practice. -- A periodic inventory system: A) Gives more timely information. B) Is widely used in practice. C) Was historically used by companies that sold large quantities of low-value items. D) Provides point of sale data. E) Does not use a Purchases account. 6

7 2/10, n/30 is interpreted as: A) 2% cash discount if the whole amount is paid within 10 days, the balance is due in 30 days. B) 10% cash discount if the whole amount is paid within 2 days, the balance is 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. A trade discount is: A) A term used by a purchaser to describe a cash discount given to customers for prompt payment. B) A reduction below a 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 To calculate the total cost of a merchandise purchase, the invoice account must be adjusted for which of the following? A) Any discounts given to a purchaser by a supplier. B) Any returns and allowances received from a supplier. C) Any freight costs paid by a purchaser. D) Any taxes or other costs necessary to make the goods ready for sale Merchandising companies must account for: A) Sales. B) Sales discounts. C) Sales returns and allowances. D) Cost of goods sold. Sales returns: 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 related to purchase discounts. An income statement on which the cost of goods sold and operating expenses are added together 7

8 and subtracted from net sales in one step to get net income is a(n): A) Balanced income statement. B) Single-step income statement. C) Multiple-step income statement. D) Merchandise income statement. E) Unclassified income statement Expenses that support the overall operations of a business and include the expenses of such activities as providing accounting services, human resource management, and financial management are called: A) Operating expenses. B) Selling expenses. C) Purchasing expenses. D) General and administrative expenses. E) Miscellaneous expenses. Ans: D --- Classified multiple-step income statements: A) Are required by Canada Revenue Agency. B) Are generally used for internal reporting. C) Are required for the perpetual system. D) List cost of goods sold as an operating expense. E) Do not report gross profit Gross profit is derived from: A) Sales. B) Beginning inventory. C) Ending inventory. D) Cost of goods sold If a merchandising company ends a period with a larger inventory than it owned at the beginning of the period, then: A) The cost of goods sold was larger than net purchases. B) Net income was larger than gross profit. C) The cost of goods sold was smaller than net purchases. D) The cost of goods available for sale was smaller than the cost of goods sold. E) Gross profit was larger than the cost of goods sold. 8

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