Financial Accounting: Tools for Business Decision Making, 5th Edition Chapter 5

1. The operating cycle of a merchandising company is ordinarily shorter than that of a service
company.
True
A.
False
B.
A service company does not have the additional time involved in the inventory cycle
(Operating Cycles).

2. Discount terms of 2/10, n/30 mean that a 10% cash discount is available if payment is made
within 30 days.
True
A.
False
B.
These discount terms mean a 2% discount may be taken if paid within 10 days of the
invoice date and the entire invoice is due in 30 days (Purchase Discounts).

3. Sales Returns and Allowances is a contra revenue account.

True
A.
False
B.
Sales Returns and Allowances is a contra revenue account (Sales Returns and Allowances).

4. Gross profit is the difference between net sales and cost of goods sold.
True
A.
False
B.
Gross profit is calculated by subtracting cost of goods sold from net sales (Gross Profit).

5. If the profit margin ratio is 5% and total expenses are $1,330,000, the net sales are
$1,400,000.
True
A.
False
B.
Net income divided by net sales gives the profit margin ratio. This formula verifies that the
statement is true (Profit Margin Ratio).

6. Sales Discounts is a contra asset account.

A.
B.

True
False

Like Sales Returns and Allowance, Sales Discounts is a contra revenue account to Sales
(Sales Discounts).

7. If a company's Net Cash Provided by Operating Activities is $4,250,000 and its Net Income
is $3,465,000 then its Quality of Earnings Ratio is 1.2.
True
A.
False
B.
Quality of Earnings ratio is Net Cash Provided by Operating Activities divided by Net
Income (Keeping an Eye On Cash).

8. Cost of goods sold is determined at the end of an accounting period under the:
single entry inventory system.
A.
periodic inventory system.
B.
double entry inventory system.
C.
perpetual inventory system.
D.

9. A company with merchandise that has a high unit value would probably use a:
perpetual inventory system.
A.
double
entry inventory system.
B.
periodic inventory system.
C.
single entry inventory system.
D.

10. Beginning inventory is $12,000; purchases are $34,000; sales are $60,000; and cost of
goods sold is $31,000. Ending inventory is:
$15,000.
A.
$31,000.
B.
$46,000.
C.
$14,000.
D.

11.

When credit terms of 1/10, n/30 are offered, the discount period is:
1 day.
A.

B.
C.
D.

10 days.
20 days.
30 days.

12. Freight-in costs incurred by the seller on outgoing merchandise are recorded in the:
Sales account.
A.
Cost of Goods Sold account.
B.
Freight-in account.
C.
Freight-out account.
D.

13. Martin Company purchases $4,200 of merchandise on March 1, with credit terms of 3/10,
n/30. If Martin pays on March 11, what is the cost of this purchase?
$4,200
A.
$3,780
B.
$4,074
C.
$3,864
D.

14. Which of the following would be classified in an income statement as a nonoperating

activity?
Advertising expense
A.
Interest expense
B.
Freight-out
C.
Cost of goods sold
D.

15. Which of the following would be classified in an income statement as a nonoperating

activity?
Receiving dividend revenue from an investment
A.
Returning merchandise
B.
C. Receiving an allowance for merchandise damaged in shipment
Paying for a purchase of inventory
D.

16.

A sales discount is based on:

invoice price plus freight-in.
A.
invoice less discount.
B.
invoice price plus freight-out.
C.

D.

invoice price less returns and allowances.

17. Myers and Company sold $1,800 of merchandise on account to Oscar, Inc. on March 1
with credit terms of 2/10, n/30. Oscar returned $500 of the merchandise due to poor quality
on March 3. If Oscar pays for the purchase on March 11, what entry does Myers make to
record receipt of the payment?
Cash
1,764
A.
Accounts Receivable
1,764
Cash
1,800
B.
Sales Returns and Allowances
500
Accounts Receivable
1,300
Cash
1,274
C.
Sales Discounts
26
Accounts Receivable
1,300
Cash
1,800
D.
Sales Discounts
36
Accounts Receivable
1,764

18. In a perpetual inventory system what accounts are credited when merchandise is returned
by a customer to the seller?
A. Sales Returns and Allowances and Accounts Receivable
Accounts Receivable and Cost of Goods Sold
B.
Merchandise Inventory and Cost of Goods Sold
C.
D. Sales Returns and Allowances and Merchandise Inventory

19. Assume that sales are $450,000, sales discounts are $10,000, net income is $35,000, and
cost of goods sold is $320,000. Gross profit and operating expenses are, respectively:
$130,000 and $95,000.
A.
$120,000 and $95,000.
B.
$130,000 and $85,000.
C.
$120,000 and $85,000.
D.

20. Which of the following would appear on both a single-step and a multiple-step income
statement?
Gross profit
A.
Income from operations
B.
Cost of goods sold
C.
Other expenses and losses
D.

21. A company has the following accounts balances: Sales $2,000,000; Sales Returns and
Allowances $250,000; Sales Discounts $50,000; and Cost of Goods Sold $1,275,000. The
gross profit rate is:
25%.
A.
36%.
B.
51%.
C.
64%.
D.

22. A company has the following balances: Sales $312,000; Sales Returns and Allowances
$24,000; Sales Discounts $48,000; Cost of Goods Sold $144,000; Operating Expenses
$84,000. The profit margin ratio is:
2%.
A.
3%.
B.
4%.
C.
5%.
D.

23.

24.

A merchandiser that sells directly to consumers is a:

retailer.
A.
wholesaler.
B.
customer.
C.
service enterprise.
D.

A company that is a wholesaler would be a business that:

sells to consumers at a discount.
A.
B. conducts large sales for consumers on a recurring basis.
C. sells to another business which will sell to a consuming customer.
provides automotive repairs.
D.

25. Select the one correct response for the seller from the following four choices.
A. Sales Discounts would be credited for defective merchandise returned by a customer.
B. Sales Discounts would be debited for defective merchandise returned by a customer.
C. Sales Returns and Allowances would be credited for defective merchandise returned
by a customer.
D. Sales Returns and Allowances would be debited for defective merchandise returned
by a customer.

26. A retailer makes a $100 sale with terms of 2/10, n/30 on the first of the month. The
customer returns $20 of merchandise for credit on account. Select the correct journal entry
for the retailer for full payment within the discount period.
Cash
78.40
A.
Sales Discounts
1.60
Accounts Receivable
80.00
Accounts Payable
80.00
B.
Cash
78.40
Purchases Discounts
1.60
Cash
98.00
C.
Sales Discounts
2.00
Accounts Receivable
100.00
Cash
78.40
D.
Purchases Discounts
1.60
Accounts Payable
80.00

27. Given the following Quality of Earnings Ratios, which suggests the company may be using
the most conservative accounting techniques?
0.6.
A.
1.3.
B.
1.8.
C.
1.5.
D.

28. In a periodic inventory system when is the cost of the merchandise sold determined?
At the time of the sale.
A.
At the end of the period.
B.
Periodically during the period.
C.
Any one of the above can be used.
D.