TRUE/FALSE

1.One of the most important differences between a service business and a retail business is in what is
sold.
ANS: T

2. In a merchandise business, sales minus operating expenses equals net income.

ANS: F

3. Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it
intends to sell.
ANS: F

4. Service businesses provide services for income, while a merchandising business sells merchandise.
ANS: T

5. In many retail businesses, inventory is the largest current asset.

ANS: T

6. Under a periodic inventory system, the merchandise on hand at the end of the year is determined by
a physical count of the inventory.
ANS: T

7.In the periodic inventory system, purchases of merchandise for resale are debited to the Purchases
account.
ANS: T

8. Under the periodic inventory system, the cost of merchandise sold is equal to the beginning
merchandise inventory plus the cost of merchandise purchased plus the ending merchandise inventory.
ANS: F

9. In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the
beginning inventory.
ANS: F

10. In a periodic inventory system, the cost of merchandise purchased includes the cost of freight-in.
ANS: T

11. As we compare a merchandise business to a service business, the financial statement that changes
the most is the Balance Sheet.
ANS: F

12. When a merchandising business is compared to a service business, the financial statement that is
not affected by that change is the Statement of Owner's Equity.
ANS: T

13. The ending merchandise inventory for 2010 is the same as the beginning merchandise inventory
for 2011.
ANS: T

14. In a multiple-step income statement the dollar amount for income from operations is always the
same as net income.
ANS: F
15. Net sales is equal to sales minus cost of merchandise sold.
ANS: F

16. Gross profit minus selling expenses equals net income.

ANS: F

17. The form of the balance sheet in which assets, liabilities, and owner's equity are presented in a
downward sequence is called the report form.
ANS: T

18. On the income statement in the single-step form, the total of all expenses is deducted from the total
of all revenues.
ANS: T

19. The single-step income statement is easier to prepare, but a criticism of this format is that gross
profit and income from operations are not readily available.
ANS: T

20. Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed
asset, is listed as Other Income on the multiple-step income statement.

ANS: T

21. Freight in is the amount paid by the company to deliver merchandise sold to a customer.
ANS: F

22. In the merchandising income statement, sales will be reduced by sales discounts and sales returns
and allowances to arrive at net sales.
ANS: T

23. Other income and expenses are items that are not related to the primary operating activity.
ANS: T

24. Freight-in is considered a cost of purchasing inventory.

ANS: T

25.The cost of merchandise inventory is limited to the purchase price less any purchase discounts.
ANS: F

26. Cost of Merchandise Sold is often the largest expense on a merchandising company income
statement.
ANS: T

27.Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise
sold are recorded.
ANS: T

28. Under the periodic inventory system, the cost of merchandise sold is recorded when sales are
made.
ANS: F
29. If payment is due by the end of the month in which the sale is made, the invoice terms are
expressed as n/30.
ANS: F

30. When merchandise that was sold is returned, a credit to sales returns and allowances is made.
ANS: F

31. In a perpetual inventory system, when merchandise is returned to the seller, Cost of Merchandise
Sold is debited as part of the transaction.
ANS: F

32. Sales Returns and Allowances is a contra-revenue account.

ANS: T

33. Sales Discounts is a revenue account with a credit balance.

ANS: F

34.Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated
as credit sales.
ANS: F

35. Sales to customers who use nonbank credit cards, such as American Express, are generally treated
as credit sales.
ANS: T

36. Retailers record all credit card sales as credit sales.

ANS: F

37. The service fee that credit card companies charge retailers varies and is the primary reason why
some businesses do not accept all credit cards.
ANS: T

38. A seller may grant a buyer a reduction in selling price and this is called a sales allowance.
ANS: T

39. The effect of a sales return and allowance is a reduction in sales revenue and a decrease in cash or
accounts receivable.
ANS: T

40. Merchandise Inventory normally has a debit balance.

ANS: T

41. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice
date to take advantage of the cash discount.
ANS: F

42. Discounts taken by the buyer for early payment of an invoice are credited to Sales Discounts by the
buyer.
ANS: F

43. In a perpetual inventory system, merchandise returned to vendors reduces the merchandise
inventory account.
ANS: T

44. Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. If
payment is made within 10 days of the purchase, the entry to record the payment will include a credit
to Cash and a credit to Purchase Discounts.
ANS: F

45. Purchases of merchandise are typically credited to the merchandise inventory account under the
perpetual inventory system.
ANS: F

46. When the seller offers a sales discount, even if borrowing has to be done, it is generally
advantageous for the buyer to pay within the discount period.
ANS: T

47. When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called
a trade discount.
ANS: T

48. A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is
called cash discounts.
ANS: F

49. Sellers and buyers are required to record trade discounts.

ANS: F

50. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for
shipment, the terms are stated as FOB destination.
ANS: F

51. A sale of P750 on account, subject to a sales tax of 6%, would be recorded as an account
receivable of P750.
ANS: F

52. When merchandise is sold for P600 plus 6% sales tax, the Sales account should be credited for
P636.
ANS: F

53. The abbreviation FOB stands for Free On Board.

ANS: T

54. Merchandise is sold for P3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs
of P150. If P500 of the merchandise is returned prior to payment and the invoice is paid within the
discount period, the amount of the sales discount is P65.
ANS: F

55. If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination.
ANS: F

56. When the terms of sale are FOB shipping point, the buyer should pay the freight charges.
ANS: T
57. If merchandise costing P3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of
P125, is paid within 10 days, the amount of the purchases discount is P70.
ANS: T

58. The chart of accounts for a merchandise business would include an account called Delivery
Expense.
ANS: T

59. There is no difference between the recording of cash sales and the recording of MasterCard or
VISA sales.
ANS: T

60. When companies use a perpetual inventory system, the recording of the purchase of inventory will
include a debit to purchases.
ANS: F

61. Most companies will not take a purchases discount, because 1% or 2% discounts are insignificant.
ANS: F

62. The seller may prepay the freight costs even though the terms are FOB shipping point.
ANS: T

63. The seller records the sales tax as part of the sales amount.
ANS: F

64. The buyer will include the sales tax as part of the cost of items purchased for use.
ANS: T

65. A business using the perpetual inventory system, with its detailed subsidiary records, does not
need to take a physical inventory.
ANS: F

66. Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the
merchandise to the buyer's place of business.
ANS: F

67. Purchased goods in transit should be included in the ending inventory of the buyer if the goods
were shipped FOB shipping point.
ANS: T

68. Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of
the buyer.
ANS: T

69. If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included
in the general ledger.
ANS: T

70. The adjusting entry to record inventory shrinkage would generally include a debit to Cost of
Merchandise Sold.
ANS: T

71. Closing entries for a merchandising business are not similar to those for a service business.
ANS: F

72. The ratio of net sales to assets measures how effectively a business is using its assets to generate
sales.
ANS: T

73. Because many companies use computerized accounting systems, periodic inventory is widely used.
ANS: F

74. Computerized systems can be used to capture accounting information such as accounts receivable,
inventory items, accounts payable, and sales.
ANS: T

75. The accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and Freight In
are found on the balance sheet.
ANS: F
orting

MATCHING

Match each of the following terms with the appropriate definition below.
a. Freight In e. Purchase Returns and Allowances
b. Freight Out f. Sales Returns and Allowances
c. Merchandise Inventory g. Purchases
d. Sales Discounts h. Trade Discount
1. Account used to record merchandise purchased under a periodic inventory system.
2. Account used to record merchandise purchased under a perpetual inventory system.
3. Early payment discount offered to customers by the seller.
4. Expense account for recording shipping costs paid by the seller.
5. Discounts off the list price offered by wholesalers.
6. Account where returned merchandise or price adjustments are recorded by the buyer
under the periodic inventory system.
7. Account used to record shipping cost of merchandise by the buyer under a periodic
inventory system.
8. Account where returned merchandise or price adjustments are recorded by the seller.

1. ANS: G
2. ANS: C
3. ANS: D
4. ANS: B
5. ANS: H
6. ANS: E
7. ANS: A
8. ANS: F

Match each of the following terms with the correct definition below.
a. Credit terms e. Perpetual Inventory system
b. FOB Destination f. Inventory Shrinkage
c. FOB Shipping Point g. Single-Step Income Statement
d. Periodic Inventory system h. Multiple-Step Income Statement
9. Shipping terms where the ownership of merchandise passes to the buyer when the buyer
receives the merchandise.
10. Losses of inventory due to theft, damage, spoilage, etc. that cause the actual inventory on hand
to be less than that on record.
11. Statement where net income is determined by deducting all expenses from all revenues.
12. Payment arrangements determined by the seller as to when invoices are due and whether early
payment discount is offered.
13. Inventory system that updates the Merchandise Inventory account for every purchase and sale
transaction.
14. Inventory system that updates the Merchandise Inventory account only at the end of the
accounting period based on a physical count of merchandise on hand.
15. Statement that includes subtotals for net sales, gross profit and net operating income in
determining net income.
16. Shipping terms where the ownership of merchandise passes to the buyer when the seller
delivers the merchandise to the freight carrier.

9. ANS: B
10. ANS: F
11. ANS: G
12. ANS: A
13. ANS: E
14. ANS: D
15. ANS: H
16. ANS: C

MULTIPLE CHOICE

1. Which one of the following is not a difference between a retail business and a service business?
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
ANS: C

2. Net income plus operating expenses is equal to

a. cost of merchandise sold
b. cost of merchandise available for sale
c. net sales
d. gross profit
ANS: D

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

a. Sales
b. Net Sales
c. Gross Sales
d. Gross Profit
ANS: A

4.What is the term applied to the excess of net revenue from sales over the cost of merchandise sold?
a. gross profit
b. income from operations
c. net income
d. gross sales
ANS: A

5. The term "inventory" can indicate

a. merchandise held for sale in the normal course of business
b. equipment used to manufacture products
c. supplies
d. any asset
ANS: A

6. A company using the periodic inventory system has the following account balances:
Merchandise Inventory at the beginning of the year, P3,600; Freight-In, P650; Purchases, P10,700;
Purchases Returns and Allowances, P1,950; Purchases Discounts, P330. The cost of merchandise
purchased is equal to
a. P12,670
b. P9,070
c. P8,420
d. P17,230
ANS: B

7. A company, using the periodic inventory system, has merchandise inventory costing P175 on
hand at the beginning of the period. During the period, merchandise costing P635 is purchased. At
year-end, merchandise inventory costing P160 is on hand. The cost of merchandise sold for the year is
a. P970
b. P650
c. P300
d. P620
ANS: B

8. Expenses that are incurred directly or entirely in connection with the sale of merchandise are
classified as
a. selling expenses
b. general expenses
c. other expenses
d. administrative expenses
ANS: A

9. Office salaries, depreciation of office equipment, and office supplies are examples of what
type of expense?
a. selling expense
b. miscellaneous expense
c. administrative expense
d. other expense
ANS: C

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
a. multiple-step statement
b. revenue statement
c. report-form statement
d. single-step statement
ANS: D

11. Multiple-step income statements show

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
ANS: C

12. When the three sections of a balance sheet are presented on a page in a downward sequence, it
is called the
a. account form
b. comparative form
c. horizontal form
d. report form
ANS: D

13. The statement of owner's equity shows

a. only net income, beginning and ending capital
b. only total assets, beginning and ending capital
c. only net income, beginning capital, and withdrawals
d. all the changes in the owner's capital as a result of net income, net loss, additional
investments, and withdrawals
ANS: D

14. Merchandise inventory is classified on the balance sheet as a

a. Current Liability
b. Current Asset
c. Long-Term Asset
d. Long-Term Liability
ANS: B

15. Which account is not classified as a selling expense?

a. Sales Salaries
b. Freight-Out
c. Sales Discounts
d. Advertising Expense
ANS: C

16. The primary difference between a periodic and perpetual inventory system is that a
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
ANS: A
17. The inventory system employing accounting records that continuously disclose the amount of
inventory is called
a. retail
b. periodic
c. physical
d. perpetual
ANS: D

18. When the perpetual inventory system is used, the inventory sold is shown on the income statement
as
a. cost of merchandise sold
b. purchases
c. purchases returns and allowances
d. net purchases
ANS: A

19. When comparing a retail business to a service business, the financial statement that changes the
most is the
a. Balance Sheet
b. Income Statement
c. Statement of Owner's Equity
d. Statement of Cash Flow
ANS: B

20. When comparing a retail business to a service business, the financial statement that changes the
least is the
a. Balance Sheet
b. Income Statement
c. Statement of Owner's Equity
d. Statement of Cash Flow
ANS: C

21. Gross profit is equal to:

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
ANS: D

22. Using the following information, what is the amount of cost of merchandise sold?

Purchases P32,000 Purchases discounts P960

Merchandise inventory 5,700 Merchandise inventory 6,370
September 1 September 30
Sales returns and 910 Sales 63,000
allowances
Purchases returns and 1,200 Freight In 1,040
allowances
a. P26,900
b. P20,530
c. P30,210
d. P28,130
ANS: C

23. Using the following information, what is the amount of gross profit?
Purchases P32,000 Purchases discounts P960
Merchandise inventory 5,700 Merchandise inventory 6,370
September 1 September 30
Sales returns and 910 Sales 63,000
allowances
Purchases returns and 1,200 Freight In 1,040
allowances

a. P34,870
b. P31,880
c. P27,460
d. P62,090
ANS: B

24. Using the following information, what is the amount of net sales?

Purchases P32,000 Purchases discounts P960

Merchandise inventory 5,700 Merchandise inventory 6,370
September 1 September 30
Sales returns and 910 Sales 63,000
allowances
Purchases returns and 1,200 Freight In 1,040
allowances

a. P28,970
b. P63,130
c. P63,000
d. P62,090
ANS: D

25. Using the following information, what is the amount of merchandise available for sale?

Purchases P32,000 Purchases discounts P960

Merchandise inventory 5,700 Merchandise inventory 6,370
September 1 September 30
Sales returns and 910 Sales 63,000
allowances
Purchases returns and 1,200 Freight In 1,040
allowances

a. P35,540
b. P36,580
c. P37,700
d. P34,500
ANS: B

26. Where are selling and administrative expenses found on the multiple-step income statement?
a. before gross profit
b. after sales and before gross profit
c. after net income before expenses
d. after gross profit
ANS: D

27. Dorman Co. sold merchandise to Smith Co. on account, P18,000, terms 2/15, net 45. The cost
of the merchandise sold is P15,500. Dorman Co. issued a credit memo for P1,750 for merchandise
returned that originally cost P1,400. The Smith Co. paid the invoice within the discount period. What
is amount of net sales from the above transactions?
a. P16,250
b. P14,100
c. P15,925
d. P13,818
ANS: C

28. Using a perpetual inventory system, the entry to record the sale of merchandise on account
includes a
a. debit to Sales
b. debit to Merchandise Inventory
c. credit to Merchandise Inventory
d. credit to Accounts Receivable
ANS: C

29. Which of the following accounts has a normal debit balance?

a. Accounts Payable
b. Sales Returns and Allowances
c. Sales
d. Interest Revenue
ANS: B

30. Merchandise is ordered on June 13; the merchandise is shipped by the seller and the invoice is
prepared, dated, and mailed by the seller on June 16; the merchandise is received by the buyer on June
18; the entry is made in the buyer's accounts on June 19. The credit period begins with what date?
a. June 13
b. June 16
c. June 18
d. June 19
ANS: B

31. Using a perpetual inventory system, the entry to record the return from a customer of merchandise
sold on account includes a
a. credit to Sales Returns and Allowances
b. debit to Merchandise Inventory
c. credit to Merchandise Inventory
d. debit to Cost of Merchandise Sold
ANS: B

32. If merchandise sold on account is returned to the seller, the seller may inform the customer of the
details by issuing a
a. sales invoice
b. purchase invoice
c. credit memo
d. debit memo
ANS: C

33. The arrangements between buyer and seller as to when payments for merchandise are to be made
are called
a. credit terms
b. net cash
c. cash on demand
d. gross cash
ANS: A

34. In credit terms of 3/15, n/45, the "3" represents the

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
ANS: D

35. Merchandise with a sales price of P800 is sold on account with term 2/10, n/30. The journal
entry to record the sale would include a
a. debit to Cash for P800
b. Debit to Sales Discounts for P16
c. Credit to Sales for P800
d. Debit to Accounts Receivable for P784
ANS: C

36. Merchandise subject to terms 1/10, n/30, FOB shipping point, is sold on account to a customer
for P25,000. The seller paid freight costs of P2,000 and issued a credit memo for P10,000 prior to
payment. What is the amount of the cash discount allowable?
a. P170
b. P150
c. P130
d. P250
ANS: B

37. Which of the following accounts has a normal credit balance?

a. Sales Returns and Allowances
b. Sales
c. Merchandise Inventory
d. Delivery Expense
ANS: B
38. The entry to record the return of merchandise from a customer would include a
a. debit to Sales
b. credit to Sales
c. debit to Sales Returns and Allowances
d. credit to Sales returns and Allowances
ANS: C

39. Sales to customers who use bank credit cards such as MasterCard and Visa are usually recorded by
a
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
ANS: B

40. Sales to customers who use bank credit cards, such as MasterCard and Visa, are generally
treated as
a. sales on account
b. sales returns
c. cash sales
d. sales when the credit card company remits the cash
ANS: C

41. When a buyer returns merchandise purchased for cash, the buyer may record the transaction
using the following entry
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
ANS: B

42. When merchandise is returned under the perpetual inventory system, the buyer would credit
a. Merchandise Inventory
b. Purchases Returns and Allowances
c. Accounts Payable
d. Accounts Receivable
ANS: A

43. When purchases of merchandise are made for cash, the transaction may be recorded with the
following entry
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
ANS: B

44. Using a perpetual inventory system, the entry to record the purchase of P30,000 of
merchandise on account would include a
a. debit to Accounts Payable
b. debit to Merchandise Inventory
c. credit to Merchandise Inventory
d. credit to Sales
ANS: B

45. Using a perpetual inventory system, the entry to record the return of merchandise purchased
on account includes a
a. debit to Cost of Merchandise Sold
b. credit to Accounts Payable
c. credit to Merchandise Inventory
d. credit to Sales
ANS: C

46. In recording the cost of merchandise sold for cash, based on data available from perpetual
inventory records, the journal entry is
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
ANS: B

47. The amount of the total cash paid to the seller for merchandise purchased for consumption
would normally include
a. only the list price
b. only the sales tax
c. the list price plus the sales tax
d. the list price less the sales tax
ANS: C

48. A retailer purchases merchandise with a catalog list price of P15,000. The retailer receives a
30% trade discount and credit terms of 2/10, n/30. What amount should the retailer debit to the
Merchandise Inventory account?
a. P4,500
b. P10,500
c. P10,290
d. P14,700
ANS: B

49. A sales invoice included the following information: merchandise price, P5,000; freight, P900;
terms 1/10, n/eom, FOB shipping point. Assuming that a credit for merchandise returned of P700 is
granted prior to payment and that the invoice is paid within the discount period, what is the amount of
cash that should be received by the seller?
a. P5,157
b. P4,300
c. P4,257
d. P4,950
ANS: A
Selling price 5,000 - return 700 = 4,300.
4,300 x .99 (1 minus the discount allowed) = 4,257.
4,257 + prepaid shipping 900 = 5,157.
50. Which of the following accounts usually has a debit balance?
a. Purchase Discounts
b. Sales Tax Payable
c. Allowance for Doubtful Accounts
d. Freight-In
ANS: D

51. Merchandise is sold for cash. The selling price of the merchandise is P3,000 and the sale is
subject to a 7% state sales tax. The journal entry to record the sale would include
a. A debit to Cash for P3,000.
b. A credit to Sales for P3,210.
c. A credit to Sales Tax Payable for P210.
d. None of these answers are correct.
ANS: C

52. If the buyer is to pay the freight costs of delivering merchandise, delivery terms are stated as
a. FOB shipping point
b. FOB destination
c. FOB n/30
d. FOB buyer
ANS: A

53. If the seller is to pay the freight costs of delivering merchandise, the delivery terms are stated
as
a. FOB shipping point
b. FOB destination
c. FOB n/30
d. FOB seller
ANS: B

54. If title to merchandise purchases passes to the buyer when the goods are shipped from the
seller, the terms are
a. n/30
b. FOB shipping point
c. FOB destination
d. consigned
ANS: B

55. Merchandise with an invoice price of P5,000 is purchased on September 2 subject to terms of
2/10, n/30, FOB destination. Freight costs paid by the seller totaled P200. What is the cost of the
merchandise if paid on September 12, assuming the discount is taken?
a. P5,200
b. P5,096
c. P4,704
d. P4,900
ANS: D

56. When goods are shipped FOB destination and the seller pays the freight charges, the buyer
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 freight.
ANS: D

57. Anthony Company sold Madison Company merchandise on account FOB shipping point,
2/10, net 30, for P20,000. Anthony prepaid the P300 shipping charge. Which of the following entries
does Anthony make to record this sale?
a. Accounts Receivable-Madison, debit P20,000; Sales, credit P20,000
b. Accounts Receivable-Madison, debit P20,000; Sales, credit P20,000, and
Accounts Receivable-Madison, debit P300; Cash, credit P300
c. Accounts Receivable-Madison, debit P20,500; Sales, credit P20,500
d. Accounts Receivable-Madison, debit P20,000; Sales, credit P20,000, and
Freight Out, debit P300; Cash, credit P300
ANS: B

58. Emma Co. sold Isabella Co. merchandise on account FOB shipping point, 2/10, net 30, for
P25,000. Emma Co. prepaid the P500 shipping charge. Using the perpetual inventory method, which
of the following entries will Isabella Co. make to record payment of the merchandise if Isabella
Co. pays within the discount period?
a. Accounts Payable-Emma Co., debit P25,000; Freight In, credit P500; Cash, credit P24,500
b. Accounts Payable-Emma Co., debit P25,500; Merchandise Inventory, credit P500; Cash,
credit P25,000
c. Accounts Payable-Emma Co., debit P25,000; Freight In, debit P500; Cash, credit P25,500
d. Accounts Payable-Emma Co., debit P25,500; Merchandise Inventory, debit P500; Cash,
credit P26,000
ANS: B

59. A chart of accounts for a merchandising business

a. usually is the same as the chart of accounts for a service business
b. usually requires more accounts than does the chart of accounts for a service business
c. usually is standardized by the FASB for all merchandising businesses
d. always uses a three-digit numbering system
ANS: B

60. Cumberland Co. sells P1,200 of inventory to Hancock Co. for cash. Cumberland paid P850 for
the merchandise. Under a perpetual inventory system, which of the following journal entry(ies) would
be recorded?
a. Cash P1,200 Dr, Merchandise Inventory P850 Cr
b. Cash P1,200 Dr, Sales P1,200 Cr, Cost of Merchandise Sold P850 Dr, Merchandise
Inventory P850 Cr.
c. Cash P1,200 Dr, Sales P1,200 Cr
d. Accounts Receivable P1,200 Dr, Sales P1,200 Cr, Cost of Merchandise Sold P850 Dr,
Merchandise Inventory P850 Cr.
ANS: B

61. Isaac Co. sells merchandise on credit to Sonar Co in the amount of P9,600. The invoice is
dated on April 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?
a. P80, April 30
b. P192, April 25
c. P96, April 30
d. P96, April 25
ANS: C

62. Isaac Co. sells merchandise on credit to Sonar Co in the amount of P9,600. The invoice is
dated on April 15 with terms of 1/15, net 45. If Sonar Co. chooses not to take the discount, by when
should the payment be made?
a. April 30
b. May 30
c. May 15
d. April 25
ANS: B

63. Discounts taken by a buyer because of early payment are recorded on the seller’s accounting
records as
a. Purchases discount
b. Sales discount
c. Trade discount
d. Early payment discount
ANS: B

64. Taking advantage of a 2/10, n/30 purchases discount is equal to a savings yearly rate of
approximately
a. 2%
b. 24%
c. 20%
d. 36%
ANS: D

65. Who pays the freight costs when the terms are FOB shipping point?
a. the ultimate customer
b. the buyer
c. the seller
d. either the seller or the buyer
ANS: B

66. Who pays the freight cost when the terms are FOB destination?
a. the seller
b. the buyer
c. the customer
d. either the buyer or the seller
ANS: A

67. A retailer purchases merchandise with a catalog list price of P15,000. The retailer receives a
15% trade discount and credit terms of 2/10, n/30. How much cash will be needed to pay this invoice
within the discount period?
a. P15,000
b. P14,700
c. P12,750
d. P12,495
ANS: D

68. What type of company would normally offer trade discounts to its customers?
a. Service companies
b. Retailers
c. Wholesalers
d. On-line retailers
ANS: C

69. Which of the following accounts will only be found in the chart of accounts of a
merchandising company?
a. Sales
b. Accounts Receivable
c. Merchandise Inventory
d. Accounts Payable
ANS: C

70. Which of the following items would affect the cost of merchandise inventory acquired during
the period?
a. quantity discounts
b. cash discounts
c. freight-in
d. all of these costs
ANS: D

71. If title to merchandise purchases passes to the buyer when the goods are delivered to the
buyer, the terms are
a. consigned
b. n/30
c. FOB shipping point
d. FOB destination
ANS: D

72. If title to merchandise purchases passes to the buyer when the goods are shipped from the
seller, the terms are
a. n/30
b. FOB shipping point
c. FOB destination
d. consigned
ANS: B

73. If the merchandise costs P5,000, insurance in transit costs P250, tariff costs P75, processing
the purchase order by the purchasing department costs P25, and the company receiving dock personnel
cost P20, what is the total cost charged to the merchandise?
a. P5,325
b. P5,370
c. P5,350
d. P5,000
ANS: A

74. Under the perpetual inventory system, all purchases of merchandise are debited to the account
entitled
a. Merchandise Inventory
b. Cost of Merchandise Sold
c. Cost of Merchandise Available for Sale
d. Purchases
ANS: A

75. When the perpetual inventory system is used, the inventory sold is debited to
a. supplies expense
b. cost of merchandise sold
c. merchandise inventory
d. sales
ANS: B

76. Under a perpetual inventory system

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
ANS: A

77. The proper journal entry to record the receipt of inventory purchased on account in a perpetual
inventory system would be:
a. Jan 1 Inventory 540.00
Accounts Payable 540.00
b. Jan 1 Office Supplies 540.00
Accounts Payable 540.00
c. Jan 1 Purchases 540.00
Accounts Payable 540.00
d. Jan 1 Purchases 540.00
Accounts Receivable 540.00
ANS: A

78. Which of the following items should not be included in the cost of ending merchandise
inventory?
a. purchased units in transit, shipped FOB shipping point
b. purchased units in transit, shipped FOB destination
c. units on hand in the warehouse
d. sold units in transit, not invoiced and shipped FOB destination
ANS: B

79. The Corbit Corp. sold merchandise for cash, P7,200. The cost of the merchandise sold was
P3,950. The journal entry(s) to record this transaction would be
a. Cash 7,200
Merchandise Inventory 7,200
 Cost of Merchandise Sold 3,950
Sales 3,950
b. Cash 7,200
Sales 7,200

Cost of Merchandise Sold 3,950

Merchandise Inventory 3,950
c. Cash 7,200
Sales 7,200

Cost of Merchandise Sold 7,200

Merchandise Inventory 7,200
d. Cash 3,950
Sales 3,950

Cost of Merchandise Sold 3,950

Merchandise Inventory 3,950
ANS: B

80. Inventory shortage is recorded when

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.
ANS: D

81. If the physical count of the inventory revealed P72,000 of merchandise on hand and the
inventory records reported P73,200, what would be the necessary adjusting entry to record inventory
shortage?
a. Merchandise inventory debit P72,000; Cost of Merchandise Sold credit P72,000.
b. Merchandise inventory debit P1,200; Cost of Merchandise Sold credit P1,200.
c. Cost of Merchandise Sold debit P73,200; Merchandise Inventory credit P72,000.
d. Cost of Merchandise Sold debit P1,200; Merchandise Inventory credit P1,200.
ANS: D

82. Which account will be included in both service and merchandising companies closing entries?
a. Sales
b. Cost of Merchandise Sold
c. Purchase Discounts
d. Sales Returns and Allowances
ANS: A

83. Ramone Company had P600,000 in Net Sales for the year 2010. The total assets at the
beginning of the year were P240,000 and total assets at the end of the year were P280,000. The ratio
of net sales to total assets is (round answer to 2 decimal places):
a. 2.31 c. .43
b. 1.15 d. .87
ANS: A
84. Cleary Company had total Sales of P550,000; Sales Discounts of P10,000; Sales Returns of
P40,000 and Cost of Merchandise Sold of P200,000 during 2010. The total asset balance at the
beginning of the year was P175,000 and at the end of the year was P167,000. Calculate the ratio of net
sales to total assets (Round answer to 2 decimal points).
a. 1.75 c. .34
b. 2.92 d. .57
ANS: B

85. What is the major difference between a periodic and perpetual inventory system?
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 for the cost of the 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.
ANS: D

86. Which of the following accounts will not be found on the Cost of Merchandise Sold section
on the Income Statement?
a. Purchases
b. Freight In
c. Sales Returns and Allowances
d. Merchandise Inventory
ANS: C

87. Under the periodic inventory system, the journal entry to record the purchase of merchandise
inventory will include a debit to
a. Merchandise Inventory
b. Purchases
c. Accounts Payable
d. Cost of Merchandise Purchased
ANS: B

88. 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
a. No entry is made.
b. Cost of merchandise sold
c. Inventory
d. Purchases
ANS: A

89. Under a periodic inventory system, closing entries will include

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
ANS: D
90. The proper journal entry to record the receipt of inventory purchased on account in a periodic
inventory system would be:
a. Jan 1 Inventory 450.00
Accounts Payable 450.00
b. Jan 1 Office Supplies 450.00
Accounts Payable 450.00
c. Jan 1 Purchases 450.00
Accounts Payable 450.00
d. Jan 1 Purchases 450.00
Accounts Receivable 450.00
ANS: C

91. Which of the following accounts should be closed to Income Summary at the end of the fiscal
year?
a. Merchandise Inventory
b. Accumulated Depreciation
c. Drawing
d. Cost of Merchandise Sold
ANS: D