Basic Financial Accounting and Reporting

Final Exam – Part I

December 21, 2020

Test VI –

A) TRUE OR FALSE (RIGHT MINUS WRONG)

The following questions are worth +5 points each. Wrong answer -3 points each.

1. Statement 1: The accounts Purchases, Purchases Returns and Allowances, Purchases Discounts and Freight
In are found on the balance sheet.
Statement 2: Computerized systems can be used to capture accounting information such as Accounts
Receivable, Inventory items, Accounts Payable and Sales.
Statement 3: Because many companies use computerized accounting systems, periodic inventory is widely
used.

2. Statement 1: Closing entries for a merchandising business are not similar to those for a service business.
Statement 2: The adjusting entry to record inventory shrinkage would generally include a debit to Cost of
Merchandise Sold.
Statement 3: If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is
included in the general ledger.

3. Statement 1: Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory
of the buyer.
Statement 2: Purchased goods in transit should be included in the ending inventory of the buyer if the goods
were shipped FOB shipping point.
Statement 3: Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the
merchandise to the buyer’s place of business.

4. Statement 1: A business using the perpetual inventory system, with its detailed subsidiary records, does not
need to take a physical inventory.
Statement 2: The seller may prepay the freight costs even though the terms are FOB shipping point.
Statement 3: Most companies will not take a purchase discount, because 1% or 2% discounts are
insignificant.

5. Statement 1: When companies use a perpetual inventory system, the recording of the purchase of inventory
will include a debit to purchases.
Statement 2: Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of
$150. If $500 of the merchandise is returned prior to payment and the invoice is paid within the discount
period, the amount of the sales discount is $65.

6. Statement 1: If the buyer bears the freight costs related to a purchase, the terms are said to be FOB
destination.
Statement 2: When the terms of sale are FOB shipping point, the buyer should pay the freight charges.
Statement 3: If merchandise costing $3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of
$125, is paid within 10 days, the amount of the purchases discount is $70.

7. Statement 1: The chart of accounts for a merchandise business would include an account called Delivery
Expense.
Statement 2: A deduction allowed to wholesalers and retailers from the price of merchandise listed in
catalogs is called cash discounts.
Statement 3: Sellers and buyers are required to record trade discounts.

8. Statement 1: If the ownership of merchandise passes to the buyer when the seller delivers the merchandise
for shipment, the terms are stated as FOB destination.
Basic Financial Accounting and Reporting
Final Exam – Part I
December 21, 2020

Statement 2: In a perpetual inventory system, merchandise returned to vendors reduces the merchandise
inventory account.
Statement 3: 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 Purchases Discounts.

9. Statement 1: Purchases of merchandise are typically credited to the merchandise inventory account under the
perpetual inventory system.
Statement 2: 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.
Statement 3: The effect of sales return and allowance is a reduction in sales revenue and a decrease in cash or
accounts receivable.

10. Statement 1: Merchandise inventory normally has a debit balance.

Statement 2: 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.
Statement 3: Discounts taken by the buyer for early payment of an invoice are credited to Sales Discounts by
the buyer.

11. Statement 1: When merchandise that was sold in returned, a credit to sales returns and allowances is made.
Statement 2: In a perpetual inventory system, when merchandise is returned to the seller, Cost of
Merchandise Sold is debited as part of the transaction.
Statement 3: Sales Discounts is a revenue account with a credit balance.

12. Statement 1: Under the perpetual inventory system, when a sale is made, both the sale and cost of
merchandise sold are recorded.
Statement 2: Under the periodic inventory system, the cost of merchandise sold is recorded when a sales are
made.
Statement 3: If payment is due by the end of the month in which the sale is made, the invoice terms are
expressed as n/30.

13. Statement 1: Other income and expenses are items that are not related to the primary operating activity.
Statement 2: Freight In is considered a cost of purchasing inventory.
Statement 3: The cost of merchandise inventory is limited to the purchase price less any purchase discounts.

14. Statement 1: 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.
Statement 2: Freight In is the amount paid by the company to deliver merchandise sold to a customer.
Statement 3: In the merchandising income statement, sales will be reduced by sales discounts and sales
returns and allowances to arrive at net sales.

15. Statement 1: Net sales is equal to sales minus cost of merchandise sold.
Statement 2: Gross profit minus selling expenses equals net income.
Statement 3: 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.

B) MULTIPLE CHOICE

16. Under the perpetual inventory system the account that is not closed to the Profit and Loss Summary account
is:
a. Cost of Sales
b. Inventory
c. Sales
Basic Financial Accounting and Reporting
Final Exam – Part I
December 21, 2020

d. Sales discount

17.Which of these expressions is correct?

a. Gross profit less expenses = profit.
b. Sales less cost of sales less expenses = profit.
c. Profit plus expenses = gross profit.
d. All of the expressions are correct.

18.Detailed records of goods held for resale are maintained under a

a. perpetual inventory system.
b. periodic inventory system.
c. double entry accounting system.
d. single entry accounting system.

19. With a perpetual inventory system the return of inventory to a supplier is recorded in the purchaser’s books
by crediting
a. Purchases.
b. Purchase Returns.
c. Purchase Allowance.
d. Inventory

20.Which of these 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 sales be determined after each sale.
d. A perpetual system determines cost of sales only at the end of the accounting period.

21. Under the perpetual inventory system the Inventory account can be used to record all of these transactions,
except
a. the purchase of goods on credit.
b. the return of goods purchased.
c. payment of suppliers within the discount period.
d. the inventory account can be used to record all the above transactions.

22. Bryan Fertilisers purchased inventory from Cates Company with freight terms of FOB destination. The
freight costs will be paid by the
a. seller.
b. buyer.
c. transportation company.
d. buyer and the seller.

23.A credit note 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.

24. If a customer agrees to retain inventory that is defective because the seller is willing to reduce the selling
price, this transaction is known as a sales
a. discount.
b. return.
c. contra asset.
d. allowance.
Basic Financial Accounting and Reporting
Final Exam – Part I
December 21, 2020

25. Under the perpetual inventory system accounting standards require any discount received for paying for
inventory purchased within the discount period to be
a. Credited to the Bank account.
b. Credited to the Inventory account.
c. Credited to the Cost of Sales account.
d. Credited to the Accounts payable account.

26.Which statement is correct? When goods are returned and require a cash refund
a. the Cash account will be debited.
b. the Cash account will be credited.
c. the Sales Returns and Allowances account will be credited.
d. the Accounts Receivable account will be credited.

27. In a perpetual inventory system the Cost of Sales account is used

a. only when a cash sale of inventory occurs.
b. only when a credit sale of inventory occurs.
c. only for cash and credit sales of inventory
d. whenever there is a sale of inventory or a return of inventory sold.

28.The credit terms offered to a customer by a business 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.

29. With respect to sales discount which statement is correct?

a. Sales discount is a contra-revenue account that is deducted from sales.
b. Sales discount is classified as ‘other revenue’ and appears below gross profit.
c. Sales discount is classified as a finance expense.
d. Sales discount is deducted from cost of sales.

30. The respective normal account balances of Sales, Sales Returns and Allowances, and Sales discount are
a. credit, debit, debit.
b. debit, credit, debit.
c. credit, credit, credit.
d. credit, debit, credit.

BONUS QUESTIONS:
1. Did you ask anyone in answering this exam? If you did, how many percent of your answers were copied?
2. If you copied and you lied in your answer in number 1 bonus question, then what do you think is the grade that
you deserve knowing that exams are meant to test one’s knowledge and character?

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