ACTG240 – Fundamentals of Financial Accounting

Practice Quiz 06

Objectives
LO6.1. Distinguish service, merchandising, and manufacturing operations.
LO6.2. Explain common principles of internal control.
LO6.3. Apply internal control principles to cash receipts and payments.
LO6.4. Perform the key control of reconciling cash to bank statements.
LO6.5. Explain the use of a perpetual inventory system as a control.
LO6.6. Analyze purchase and sales transactions under a perpetual inventory system.
LO6.7. Analyze a merchandiser’s multistep income statement

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True/False Questions
1. Unlike manufacturers and merchandisers, service companies do not incur operating
expenses.
True False
2. A company must solely be a service company, a merchandising company, or a
manufacturer.
True False
3. Operating cycle activities involve both inflows and outflows of cash.
True False
4. In a perpetual inventory system, only one journal entry is required when goods are sold from
inventory.
True False
5. A retailer is a company that buys products from manufacturers and sells them to
wholesalers.
True False
6. Cost of goods sold is reported on both the income statement and the balance sheet.
True False
7. FOB shipping point means that ownership of goods passes to the buyer when the goods
reach their destination.
True False
8. If a merchandiser offers a sales discount of 2/10, net/30 on a sale of $1,000, the amount due
in 30 days is the net amount of $980.
True False
9. A merchandising company's operating cycle begins with the sale of merchandise and ends
with the cash collection from sales.
True False
10. Cash equivalents are short-term, highly liquid investments purchased within three months of
maturity.
True False

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Multiples Questions
1. Which of the following statements is true?
A. Because gross profit percentages are so consistent from period to period, they are not
very useful for analyzing one company over time.
B. Because gross profit percentages are so variable across industries, they are most useful in
comparing companies from different industries.
C. Because gross profit percentages are so variable across industries, they are more useful in
analyzing one company over time.
D. Because gross profit percentages are so consistent across industries, they are most useful
in comparing companies from different industries.
2. How many of the following statements regarding discounts are true?
 If a company offers a discount to encourage prompt payment and the discount is taken, the
discount reduces the amount of Net Sales. true
 Credit terms of "2/10, n/30" mean that if payment is made in two days, a 10% discount may
be taken; if not paid within two days, the full invoice price will be due in thirty days. false
 The terms "sales discounts" and "purchase discounts" are used interchangeably by a
company. false

A. None
B. One
C. Two
D. Three
3. Which of the following statements regarding sales returns and allowances is true?
A. Recording sales returns and allowances in a separate account is an important internal
control that allows management to evaluate the volume of returns and allowances as a
potential indicator of the quality of their products.
B. The Sales Returns and Allowances account balance should be added to the Sales account
balance when computing net sales.
C. Sales Returns and Allowances account is an example of a contra-asset account.
D. Recording a sales allowance requires two entries.

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4. Which of the following statements regarding gross profit percentage is not true?
A. It is possible for a company to increase both its gross profit percentage and net income
without increasing the dollar amount of sales.
B. A rising gross profit percentage indicates management's inability to control production
and inventory costs.
C. The gross profit percentage can be used to determine if a company is making enough on
each sale to cover its operating expenses.
D. Gross profit percentages vary across companies.
5. When a customer returns a defective product for credit, the seller would record the
transaction using which of the following accounts?
A. Purchase Returns and Allowances
B. Sales Returns and Allowances
C. Sales
D. Sales Discounts
6. Internal controls are concerned with:
A. only manual systems of accounting.
B. the extent of government regulations.
C. protecting against theft of assets and enhancing the reliability of accounting information.
D. preparing income tax returns.
7. Intel makes microchips from raw materials acquired from suppliers. Intel is a :
A. service company.
B. retail company.
C. manufacturer.
D. merchandising company.
8. BetterBuy purchases computers from companies like Hewlett Packard and IBM and sells
them to consumers. BetterBuy is a:
A. merchandising company at the retail level.
B. service company.
C. merchandising company at the wholesale level.
D. manufacturer.

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9. Which of the following is an activity in the operations of a manufacturer, but not in the
operations of a merchandising or service company?
A. Selling the good to consumers.
B. Receiving cash.
C. Selling the good to other firms.
D. Buying raw materials.
10. On December 31, 2011, you count 300 tie clips in inventory. During the next quarter, you
carefully record the effect of each purchase and sale transaction on inventory. You buy 128
tie clips during the next quarter. On March 31, 2012, you count 288 tie clips in inventory.
Which of the following is not true?
A. Ending inventory on March 31, 2012 should be 288 tie clips. true
B. Your company uses the perpetual inventory method.
C. Your company's records would show that 140 tie clips were sold during the quarter. true
D. You are certain that no shrinkage or theft must have occurred even though you have not
taken a physical count to verify the inventory on hand.
11. Which of the following statements regarding periodic versus perpetual inventory systems is
true?
A. Periodic inventory systems provide a superior means of determining optimal times to
reorder merchandise.
B. Periodic inventory systems require a greater investment in technology to implement them.
C. Perpetual inventory systems may assist in determining inventory lost due to shrinkage.
D. Periodic inventory systems allow sales personnel to provide more immediate information
regarding availability of inventory.
12. At the end of the accounting period, which of the following accounts would not be closed?
A. Sales Discounts
B. Cost of Goods Sold
C. Sales Returns & Allowances
D. Inventory Income statement accounts are temporary accounts and are closed at the end of the
accounting period. Inventory is a permanent account on the balance sheet and is not
closed.

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13. Merchandise was sold on credit for $3,000, terms 1/10, n/30. How should the seller record
the cash collection?
A. Debit Cash, $3,000, and credit Accounts Receivable, $3,000, if collected within the
discount period.
B. Debit Cash, $3,000, and credit Accounts Receivable, $2,970, and Sales Discounts, $30, if
collected within the discount period.
C. Debit Cash, $3,000, and credit Accounts Receivable, $2,970, and Sales Discounts, $30, if
collected after the discount period.
D. Debit Cash, $3,000, and credit Accounts Receivable, $3,000, if collected after the
When payment is received within the discount period, Sales Discounts is debited [1% discount
--> $3,000(.01) = $30]. If payment is received after the discount period, the gross amount is
discount period.
collected, debited to Cash, and credited to Accounts Receivable.
14. A company had the following partial list of account balances at year-end:

Sales Returns and Allowances $500

Sales Revenue - Sales Returns &
Accounts Receivable $9,000 Allowances - Sales Discounts
Sales Discounts $700
Sales Revenue $57,200
Selling and Administrative Expense $300

The amount of net sales reported on the income statement would be:
A. $57,200.
B. $64,200.
C. $56,000.
D. $55,700.

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15. Central Company sold goods for $5,000 to Western Company on March 12 on credit. Terms
of the sale were 2/10, n/30. At the time of the sale, Central recorded the transaction by
debiting accounts receivable for $5,000 and crediting sales revenue for $5,000. Western paid
the balance due, less the discount, on March 21. To record the March 21 transaction, Central
would debit: Sales Revenue $5,000
Less: Discount (5,000 * 2%) (100)
A. Cash for $4,900. Cash received $4,900
B. Accounts Receivable for $4,900.
When the payment is received from the accounts receivable, the cash account is
C. Cash for $5,000. increased by the amount collected. a 2% discount was availed by the payer because
they had paid within 10 days.
D. Accounts Receivable for $5,000.
16. Which of the following is a true statement?
contra-revenue: Sales discounts, sales returns and
A. Sales discounts is a contra-asset account allowances
B. Sales returns & allowances is a contra-revenue account
C. Sales returns & allowances is a credit balance account.
D. Sales discounts is a contra-account to inventory.
17. Contra-revenue accounts:
A. are liabilities.
B. are recorded with a credit.
C. are recorded with a debit.
D. are expenses.
18. When sales discounts in the current year exceed sales discounts in the prior year, assuming
all else remains unchanged, what is the effect on the gross profit percentage?
A. The percentage will not change.
B. The percentage will increase.
C. The percentage will decrease.
D. It may increase or decrease.
19. When goods are sold to a customer with credit terms of 2/15, n/30, the customer will:
A. receive a 15% discount if they pay within 2 days.
B. receive a 2% discount if they pay 15% of the amount due within 30 days.
C. receive a 15% discount if they pay within 30 days.
D. receive a 2% discount if they pay within 15 days.

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20. When merchandise is sold, the cost of the merchandise is removed from Inventory and
reported on a multistep the income statement as
A. Inventory expense
B. Cost of goods sold
C. General & administrative expenses
D. Non-operating expenses

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Essay Questions
Question 1:
A company reported the following:
Net Sales = Sales Revenue - Sales Discounts
- Sales returns & allowances
= $348,700

a. Gross Profit = Net Sales - Cost of goods

sold = $98,700
b. Income before Income Taxes
= Net Income - Income Tax Expenses
= $8,500
c. Other Expenses
= Gross Profit - General, Selling...
= $32,700
a. What is the amount of Gross Profit?
b. What is the amount of Income before Income Taxes?
c. What is the amount of other expenses (non-operating)?
Question 2:
The following is a listing of some of the balance sheet accounts and all of the income statement
accounts for Direct Sports International PLC as they appear on the 12/31/18 Adjusted Trial
balance.

Required:
a. Prepare a multi-step income statement for 2018 for Direct Sports International PLC.
b. Compute the Gross Profit Percentage for 2018 for Direct Sports International PLC.