CH 05

CHAPTER 5
MERCHANDISING OPERATIONS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S
TAXONOMY
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

True-False Statements
1. 1 K 12. 1 K 23. 3 K 34. 4 C 45. 5 K
2. 1 K 13. 1 K 24. 3 K 35. 4 K 46. 6 AP
3. 1 K 14. 1 K 25. 3 K 36. 4 K 47. 6 C
4. 1 K 15. 1 K 26. 3 K 37. 4 K 48. 6 K
5. 1 K 16. 2 K 27. 3 K 38. 4 K 49. 7 K
6. 1 C 17. 2 K 28. 3 K 39. 4 K 50. 7 K
7. 1 C 18. 2 K 29. 3 K 40. 4 K 51. *8 K
8. 1 K 19. 2 K 30. 3 C 41. 4 K 52. *8 K
9. 1 C 20. 2 K 31. 3 K 42. 4 K
10. 1 K 21. 2 AP 32. 3 AP 43. 4 C
11. 1 K 22. 2 C 33. 3 K 44. 5 K
Multiple Choice Questions
53. 1 K 82. 2 K 111. 3 AP 140. 3 AN 169. 6 AP
54. 1 K 83. 2 AP 112. 3 AP 141. 3 C 170. 4 AP
55. 1 K 84. 2 AP 113. 3 K 142. 4 K 171. 4 AP
56. 1 K 85. 2 C 114. 3 K 143. 4 K 172. 6 AP
57. 1 K 86. 2 AP 115. 3 AP 144. 4 K 173. 6 AP
58. 1 K 87. 2 C 116. 3 AP 145. 4 K 174. 4 C
59. 1 K 88. 2 C 117. 3 AP 146. 4 K 175. 4 K
60. 1 K 89. 2 AP 118. 3 AP 147. 4 K 176. 5 C
61. 1 K 90. 2 AP 119. 3 AP 148. 4 K 177. 5 C
62. 1 K 91. 2 K 120. 3 K 149. 4 K 178. 5,6 AP
63. 1 K 92. 2 AN 121. 3 AP 150. 4 K 179. 5,6 AP
64. 1 K 93. 2 AP 122. 3 C 151. 4 K 180. 5 AP
65. 1 C 94. 2 AP 123. 3 C 152. 4 K 181. 5 AP
66. 1 K 95. 2 AN 124. 3 K 153. 4 K 182. 5 K
67. 1 K 96. 2 AP 125. 3 K 154. 4 K 183. 5 K
68. 1 K 97. 2 AN 126. 3 C 155. 4 K 184. 5 AN
69. 1 K 98. 2 K 127. 3 AP 156. 4 K 185. 5 K
70. 1 K 99. 2 AP 128. 3 AP 157. 4 K 186. 5 AP
71. 1 K 100. 2 C 129. 3 AP 158. 4 K 187. 5 AP
72. 1 K 101. 2 C 130. 3 K 159. 4 K 188. 6 K
73. 1 K 102. 2 AP 131. 3 AP 160. 4 AP 189. 6 AP
74. 1 K 103. 2 AP 132. 3 AP 161. 6 AP 190. 6 K
75. 1 K 104. 2 K 133. 3 AP 162. 6 AP 191. 6 K
76. 1 K 105. 2 K 134. 3 AP 163. 4 AP 192. 6 K
77. 1 K 106. 3 K 135. 3 K 164. 6 AP 193. 6 C
78. 1 C 107. 3 K 136. 3 K 165. 6 AP 194. 6 AP
79. 1 K 108. 3 K 137. 3 K 166. 4 AP 195. 6 AP
80. 1 K 109. 3 AP 138. 3 AP 167. 4 AP 196. 6 AP
81. 1 C 110. 3 AP 139. 3 AP 168. 6 AP 197. 6 AP
FOR INSTRUCTOR USE ONLY
5-2 Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition
Multiple Choice Questions (Cont.)

198. 6 C 200. 6 AP 202. 6 AP *204. 8 AP *206. 8 AP
199. 6 AP 201. 6 AP *203. 8 AP *205. 8 AP
Brief Exercises
207. 1,4 AP 209. 2,3 AP 211. 4 AP 213. 5 AP
208. 2,3 AP 210. 3 AP 212. 5 AP 214. 6 AP
Exercises
215. 2 AP 220. 2,3 AP 225. 4 K 230. 5 AP *235. 8 AP
216. 2 AP 221. 2,3 AP 226. 4,6 AP 231. 5 AP *236. 8 AP
217. 2,3 AP 222. 2,3 AP 227. 4,6 AP 232. 6 AP
218. 2,3 AP 223. 3 AP 228. 4,6 AP *233. 8 AP
219. 2,3 AP 224. 3 AP 229. 4,6 AP *234. 8 AP
Completion Statements
237. 1 K 239. 1 K 241. 2 K 243. 3 K 245. 4 K
238. 1 K 240. 2 K 242. 3 K 244. 3 K 246. 6 K
Matching
247. 1-6 K
Short-Answer Essay Questions
248. 1 C 251. 3 C 254. 4 C 257. 2 C
249. 3 C 252. 4 C 255. 6 C 258. 2 C
250. 3 C 253. 4 C 256. 6 K
*
This topic is dealt with in an Appendix to the chapter.
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 1
Item Type Item Type Item Type Item Type Item Type Item Type
1. TF 10. TF 56. MC 65. MC 74. MC 207. BE
2. TF 11. TF 57. MC 66. MC 75. MC 237. C
3. TF 12. TF 58. MC 67. MC 76. MC 238. C
4. TF 13. TF 59. MC 68. MC 77. MC 239. C
5. TF 14. TF 60. MC 69. MC 78. MC 247. Ma
6. TF 15. TF 61. MC 70. MC 79. MC 248. SA
7. TF 53. MC 62. MC 71. MC 80. MC
8. TF 54. MC 63. MC 72. MC 81. MC
9. TF 55. MC 64. MC 73. MC 82. MC
16. TF 84. MC 92. MC 100. MC 215. Ex 240. C
17. TF 85. MC 93. MC 101. MC 216. Ex 241. C
18. TF 86. MC 94. MC 102. MC 217. Ex 247. Ma
19. TF 87. MC 95. MC 103. MC 218. Ex 257. SA
20. TF 88. MC 96. MC 104. MC 219. Ex 258. SA
21. TF 89. MC 97. MC 105. MC 220. Ex
22. TF 90. MC 98. MC 208. BE 221. Ex
83. MC 91. MC 99. MC 209. BE 222. Ex

Merchandising Operations 5-3
Item Type Item Type Item Type Item Type Item Type Item Type
23. TF 106. MC 117. MC 128. MC 139. MC 222. Ex
24. TF 107. MC 118. MC 129. MC 140. MC 223. Ex
25. TF 108. MC 119. MC 130. MC 141. MC 224. Ex
26. TF 109. MC 120. MC 131. MC 208. BE 242. C
27. TF 110. MC 121. MC 132. MC 209. BE 243. C
28. TF 111. MC 122. MC 133. MC 210. BE 244. C
29. TF 112. MC 123. MC 134. MC 217. Ex 247. Ma
30. TF 113. MC 124. MC 135. MC 218. Ex 249. SA
31. TF 114. MC 125. MC 136. MC 219. Ex 250. SA
32. TF 115. MC 126. MC 137. MC 220. Ex 251. SA
33. TF 116. MC 127. MC 138. MC 221. Ex
34. TF 43. TF 150. MC 159. MC 207. BE 252. SA
35. TF 142. MC 151. MC 160. MC 211. BE 253. SA
36. TF 143. MC 152. MC 163. MC 225. Ex 254. SA
37. TF 144. MC 153. MC 166. MC 226. Ex
38. TF 145. MC 154. MC 167. MC 227. Ex
39. TF 146. MC 155. MC 170. MC 228. Ex
40. TF 147. MC 156. MC 171. MC 229. Ex
41. TF 148. MC 157. MC 174. MC 245. C
42. TF 149. MC 158. MC 175. MC 247. Ma
44. TF 178. MC 182. MC 186. MC 230. Ex
45. TF 179. MC 183. MC 187. MC 231. Ex
176. MC 180. MC 184. MC 212. BE 247. Ma
177. MC 181. MC 185. MC 213. BE
46. TF 168. MC 189. MC 196. MC 214. BE 247. Ma
47. TF 169. MC 190. MC 197. MC 226. Ex 255. SA
48. TF 172. MC 191. MC 198. MC 227. Ex 256. SA
161. MC 173. MC 192. MC 199. MC 228. Ex
162. MC 178. MC 193. MC 200. MC 229. Ex
164. MC 179. MC 194. MC 201. MC 232. Ex
165. MC 188. MC 195. MC 202. MC 246. C
49. TF 50. TF 247. Ma
51. TF 203. MC 205. MC 233. Ex 235. Ex
52. TF 204. MC 206. MC 234. Ex 236. Ex
Note: TF = True-False C = Completion

MC = Multiple Choice Ex = Exercise
Ma = Matching SA = Short Answer Essay
CHAPTER LEARNING OBJECTIVES

1. Identify the differences between a service company and a merchandising company.
Because of the presence of inventory, a merchandising company has sales revenue, cost of
goods sold, and gross profit. To account for inventory, a merchandising company must
choose between a perpetual inventory system and a periodic inventory system.
2. Explain the recording of purchases under a perpetual inventory system. The Inventory
account is debited for all purchases of merchandise and for freight costs, and it is credited
for purchase discounts and purchase returns and allowances.
3. Explain the recording of sales revenues under a perpetual inventory system. When
inventory is sold, Accounts Receivable (or Cash) is debited and Sales Revenue is credited
for the selling price of the merchandise. At the same time, Cost of Goods Sold is debited and
Inventory is credited for the cost of inventory items sold. Separate contra revenue accounts
are maintained for Sales Returns and Allowances and Sales Discounts. These accounts are
debited as needed to record returns, allowances, or discounts related to the sale.
4. Distinguish between a single-step and a multiple-step income statement. In a single-

step income statement, companies classify all data under two categories, revenues or
expenses, and net income is determined in one step. A multiple-step income statement
shows numerous steps in determining net income, including results of nonoperating
activities.
5. Determine cost of goods sold under a periodic system. The periodic system uses
multiple accounts to keep track of transactions that affect inventory. To determine cost of
goods sold, first calculate cost of goods purchased by adjusting purchases for returns,
allowances, discounts, and freight-in. Then calculate cost of goods sold by adding cost of
goods purchased to beginning inventory and subtracting ending inventory.
6. Explain the factors affecting profitability. Profitability is affected by gross profit, as

measured by the gross profit rate, and by management’s ability to control costs, as
measured by the profit margin ratio.
7. Identify a quality of earnings Indicator. Earnings have high quality if they provide a full
and transparent depiction of how a company performed. An indicator of the quality of
earnings is the quality of earnings ratio, which is net cash provided by operating activities
divided by net income. Measures above 1 suggest the company is employing conservative
accounting practices. Measures significantly below 1 might suggest the company is using
aggressive accounting to accelerate the recognition of income.
*8. Explain the recording of purchases and sales of inventory under a periodic inventory
system. To record purchases, entries are required for (a) cash and credit purchases, (b)
purchase returns and allowances, (c) purchase discounts, and (d) freight costs. To record
sales, entries are required for (a) cash and credit sales, (b) sales returns and allowances,
and (c) sales discounts.

TRUE-FALSE STATEMENTS
1. Retailers and wholesalers are both considered merchandising enterprises.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
2. The operating cycle of a merchandising company ordinarily is shorter than that of a

service company.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
3. Sales revenue minus operating expenses equals gross profit.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
4. Under a perpetual inventory system, the cost of goods sold is determined each time a
sale occurs.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics
5. A periodic inventory system does not require a detailed record of inventory items.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
6. The operating cycle involves the purchase and sale of merchandise inventory as well as
the subsequent collection of cash from credit sales.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
7. The purchase of inventory and its eventual sale lengthen the operating cycle of a
merchandising company.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
8. Under the periodic inventory system, cost of goods sold is treated as an account.
Business Economics
9. An advantage of using the periodic inventory system is that it requires less record
keeping than the perpetual inventory system.
Business Economics
10. The periodic inventory system provides an up to date amount of inventory on hand.
11. A very small business most likely would have to use the perpetual inventory system.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics
12. The computer has increased greatly the use of the periodic inventory system.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC:
None, IMA: Business Economics

13. Cost of Goods Sold is considered an expense of a merchandising firm.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
14. Operating expenses are subtracted from revenue for a service enterprise and from gross
profit for a merchandising enterprise.
Reporting
15. Net sales minus cost of goods sold is called gross profit.
Reporting
16. Under the perpetual inventory system, purchases of merchandise for sale are recorded
in the Inventory account.
IMA: FSA
17. Freight costs incurred by the seller on outgoing merchandise are an operating expense
to the seller.
IMA: FSA
18. The terms 2/10, net/30 mean that a 2 percent discount is allowed on payments made
within the 10 days discount period.
19. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 20 days after
the invoice date to take advantage of the cash discount.
20. Discounts taken by the buyer for early payment of an invoice are called sales discounts
by the buyer.
21. If merchandise costing $5,000, with terms 2/10, n/30, is paid within 10 days, the amount
of the purchase discount is $100.
Ans: T, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Quantitative Methods
22. When an invoice is paid within the discount period, the amount of the discount decreases
Inventory.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
23. Sales revenues are only earned during the period cash is collected from the buyer.
24. Cash register tapes provide evidence of credit sales.

IMA: FSA

25. The Sales Returns and Allowances account and the Sales Discount account are both
classified as expense accounts.
Reporting
26. The revenue recognition principle applies to merchandising companies by recognizing

sales revenues when the performance obligation is satisfied.
Reporting
27. Sales allowances and Sales discounts are both designed to encourage customers to pay
their accounts promptly.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC:
28. Sales Discounts is a contra revenue account to Sales Revenue.

Reporting
29. The normal balance of Sales Returns and Allowances is a credit.

Reporting
30. When the terms of sale include a sales discount, it usually is advisable for the buyer to
pay within the discount period.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics
31. Sales Discounts and Sales Returns and Allowances both have normal debit balances.
Reporting
32. Merchandise is sold for $5,000 with terms 1/10, n/30. If $1,000 of the merchandise is
returned prior to payment and the invoice is paid within the discount period, the amount
of the sales discount is $40.
Ans: T, LO: 3, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
33. The terms 2/10, n/30 mean that a 2 percent discount is allowed on payments made over
10 but before 30 days after the invoice date.
IMA: Quantitative Methods
34. The multiple-step income statement is considered more useful than the single-step
income statement because it highlights the components of net income.
Reporting
35. In a single-step income only one step is required in determining net income.
Reporting
36. Freight-out appears as an operating expense in the income statement.

Reporting

37. Gross profit appears on both the single-step and multiple-step forms of an income
statement.
Reporting
38. Nonoperating activities include revenues and expenses that are related to the company’s
main line of operations.
Reporting
39. Operating expenses include interest expense and income tax expense.
Reporting
40. Income from operations appears on both the single-step and multiple-step forms of an
income statement.
Reporting
41. A merchandising company’s net income is determined by subtracting operating

expenses from gross profit.
Reporting
42. Sales revenues, cost of goods sold, and gross profit are amounts on a merchandising
company's income statement not commonly found on the income statement of a service
company.
Reporting
43. The income statement for a merchandising company presents only two amounts not
shown on a service company income statement.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
44. Under the periodic system, the purchases account is used to accumulate all purchases
of merchandise for resale.
45. With the periodic inventory system, goods available for sale must be calculated before
cost of goods sold.
46. If net sales are $750,000 and cost of goods sold is $600,000, the gross profit rate is
20%.
Ans: T, LO: 6, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
47. The gross profit amount is generally considered to be more informative than the gross
profit rate.
Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
48. Gross profit rate is computed by dividing cost of goods sold by net sales.

Reporting

49. The quality of earnings ratio is calculated as net income divided by net cash provided by
operating activities.
Reporting
50. A quality of earnings ratio significantly less than 1 suggests that a company may be
using more aggressive accounting techniques in order to accelerate income recognition.
Reporting
*51. Under the periodic system, when a customer returns goods, Purchases Returns and
Allowances is debited.
IMA: FSA
*52. Under the periodic inventory system, acquisitions of merchandise are not recorded in the
Inventory account.
IMA: FSA
Answers to True-False Statements

1. T 9. T 17. T 25. F 33. F 41. T 49. F
2. F 10 F 18. T 26. T 34. T 42. T 50. T
3. F 11. F 19. F 27. F 35. T 43. F *51. F
4. T 12. F 20. F 28. T 36. T 44. T *52. T
5. F 13. T 21. T 29. F 37. F 45. T
6. T 14. T 22. T 30. T 38. F 46. T
7. T 15. T 23. F 31. T 39. F 47. F
8. F 16. T 24. F 32. T 40. F 48. F
MULTIPLE CHOICE QUESTIONS
53. Merchandising companies that sell to retailers are known as

a. brokers.
b. corporations.
c. wholesalers.
d. service firms.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
54. Which of the following would not be considered a merchandising operation?

a. Retailer
b. Wholesaler
c. Service firm
d. Merchandising company
Business Economics

55. Which of the following activities is not a component of the operating cycle?
a. Sale of merchandise
b. Payment of employees’ salaries
c. Collection of cash from merchandise sales
d. Purchase of merchandise
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
56. Which of the following companies would be most likely to use a perpetual inventory
system?
a. Grain company
b. Beauty salon
c. Clothing store
d. Fur dealer
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
57. Gross profit equals the difference between

a. net income and operating expenses.
b. sales revenue and cost of goods sold.
c. sales revenue and operating expenses.
d. sales revenue and cost of goods sold plus operating expenses.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
58. Each of the following companies is a merchandising company except a

a. wholesale parts company.
b. candy store.
c. moving company.
d. furniture store.
Business Economics
59. Net income will result if gross profit exceeds

a. cost of goods sold.
b. operating expenses.
c. purchases.
d. cost of goods sold plus operating expenses.
Reporting
60. A merchandiser will earn an operating income of exactly $0 when

a. net sales equals cost of goods sold.
b. cost of goods sold equals gross margin.
c. operating expenses equal net sales.
d. gross profit equals operating expenses.
Reporting

61. A merchandiser that sells directly to consumers is a

a. retailer.
b. wholesaler.
c. broker.
d. service enterprise.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
62. Two categories of expenses in merchandising companies are

a. cost of goods sold and financing expenses.
b. operating expenses and financing expenses.
c. cost of goods sold and operating expenses.
d. other expenses and cost of goods sold.
Reporting
63. The primary source of revenue for a wholesaler is

a. investment income.
b. service revenue.
c. the sale of merchandise.
d. the sale of plant assets the company owns.
Reporting
64. Generally, the revenue account for a merchandising enterprise is called

a. Sales Revenue or Sales.
b. Investment Income.
c. Gross Profit.
d. Net Sales.
Reporting
65. 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 account purchase returns and allowances is credited when goods are returned to
vendors.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
66. The operating cycle of a merchandising company is

a. always one year in length.
b. ordinarily longer than that of a service company.
c. about the same as that of a service company.
d. ordinarily shorter than that of a service company.
Reporting

67. Sales revenue less cost of goods sold is called

a. gross profit.
b. net profit.
c. net income.
d. marginal income.
Reporting
68. After gross profit is calculated, operating expenses are deducted to determine
a. gross margin.
b. net income.
c. gross profit on sales.
d. net margin.
Reporting
69. Which of the following expressions is incorrect?

a. Gross profit - Operating expenses = Net income
b. Sales revenue - cost of goods sold - Operating expenses = Net income
c. Net income + Operating expenses = Gross profit
d. Operating expenses - Cost of goods sold = Gross profit
Reporting
70. Detailed records of goods held for resale are not maintained under a
a. perpetual inventory system.
b. periodic inventory system.
c. double entry accounting system.
d. single entry accounting system.
71. A perpetual inventory system would most likely be used by a(n)

a. automobile dealership.
b. hardware store.
c. drugstore.
d. convenience store.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
72. Which of the following 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 goods sold be determined after each sale.
d. A perpetual system determines cost of goods sold only at the end of the accounting
period.
Business Economics

73. The figure for which of the following items is determined at a different time under the
perpetual inventory method than under the periodic method?
a. Sales Revenue
b. Cost of Goods Sold
c. Purchases
d. Accounts Receivable
74. In a perpetual inventory system, cost of goods sold is recorded

a. on a daily basis.
b. on a monthly basis.
c. on an annual basis.
d. each time a sale occurs.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
75. The primary difference between a periodic and perpetual inventory system is that a
periodic system
a. keeps a record showing the inventory on hand at all time.
b. provides better control over inventories.
c. records the cost of the sale on the date the sale is made.
d. determines the inventory on hand only at the end of the accounting period.
IMA: FSA
76. When using the periodic system the physical inventory count is used to determine
a. only the sales value of goods in the ending inventory.
b. both the cost of the goods in ending inventory and the sales value of goods sold
during the period.
c. both the cost of the goods sold and the cost of ending inventory.
d. only the cost of merchandise sold during the period.
Reporting
77. Inventory becomes part of cost of goods sold when a company

a. pays for the inventory.
b. purchases the inventory.
c. sells the inventory.
d. receives payment from the customer.
Reporting
78. Which statement is incorrect?

a. Periodic inventory systems provide better control over inventories than perpetual
inventory systems.
b. Computers and electronic scanners allow more companies to use a perpetual
inventory system.
c. Freight-in is debited to Inventory when a perpetual inventory system is used.
d. Regardless of the inventory system that is used, companies should take a physical
inventory count.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

79. If a company determines cost of goods sold each time a sale occurs, it
a. must have a computer accounting system.
b. uses a combination of the perpetual and periodic inventory systems.
c. uses a periodic inventory system.
d. uses a perpetual inventory system.
80. The periodic inventory system is used most commonly by companies that sell
a. low-priced, high-volume merchandise.
b. high-priced, high-volume merchandise.
c. high-priced, low-volume merchandise.
d. high-priced, low and high-volume merchandise.
Reporting
81. What is a difference between merchandising companies and service enterprises?

a. Merchandising companies must prepare multiple-step income statements and service
enterprises must prepare single-step income statements.
b. Merchandising companies generally have a longer operating cycle than service
enterprises.
c. Cost of goods sold is an expense for service enterprises but not for merchandising
companies.
d. All are differences.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
82. Under the perpetual inventory system, which of the following accounts would not be
used?
a. Sales Revenue
b. Purchases
c. Cost of Goods Sold
d. Inventory
Ans: B, LO: 2 , Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
None, IMA: FSA
83. Under a perpetual inventory system, acquisition of merchandise for resale is debited to
a. the Inventory account.
b. the Purchases account.
c. the Supplies account.
d. the Cost of Goods Sold account.
Ans: A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
84. The journal entry to record a return of merchandise purchased on account under a
perpetual inventory system would credit
a. Accounts Payable.
b. Purchase Returns and Allowances.
c. Sales Revenue.
d. Inventory.
Ans: D, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

85. Which of the following items does not result in an adjustment in the merchandise
inventory account under a perpetual system?
a. A purchase of merchandise.
b. A return of merchandise inventory to the supplier
c. Payment of freight costs for goods shipped to a customer
d. Payment of freight costs for goods received from a supplier
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
86. A company using a perpetual inventory system that returns goods previously purchased
on credit would
a. debit Accounts Payable and credit Inventory.
b. debit Sales and credit Accounts Payable.
c. debit Cash and credit Accounts Payable.
d. debit Accounts Payable and credit Purchases.
IMA: FSA
87. If a purchaser using a perpetual inventory system pays the transportation costs, then the
a. Inventory account is increased.
b. Inventory account is not affected.
c. Freight-Out account is increased.
d. Delivery Expense account is increased.
88. Freight costs incurred by a seller on merchandise sold to customers will cause an
increase
a. in the selling expenses of the buyer.
b. in operating expenses for the seller.
c. to the cost of goods sold of the seller.
d. to a contra-revenue account of the seller.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
89. Conway Company purchased merchandise inventory with an invoice price of $9,000 and
credit terms of 2/10, n/30. What is the net cost of the goods if Conway Company pays
within the discount period?
a. $9,000
b. $8,820
c. $8,100
d. $8,280
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Solution: $9,000  .98  $8,820
90. A buyer borrows money at 6% interest to pay a $6,000 invoice with terms 1/10, n/30 on
the 10th day of the discount period. The loan is repaid on the 30th day of the invoice.
What is the buyer’s net savings for this total event?
a. $0
b. $40.00
c. $40.80
d. $80.00
Problem Solving, IMA: Business Economics

Solution: ($6,000  .01)  ($6,000  .06  20/360)  $40

91. In the credit terms of 1/10, n/30, the “1” 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, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
92. Farwell Company purchased merchandise with an invoice price of $2,000 and credit
terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate
inherent in the credit terms?
a. 2%
b. 12%
c. 18%
d. 36%
Ans: C, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Solution: [360  (30  10)]  1%  18%
93. Davies Company purchased merchandise inventory with an invoice price of $9,000 and
credit terms of 2/10, n/30. What is the net cost of the goods if Davies Company pays
within the discount period?
a. $9,000
b. $8,856
c. $8,820
d $7,200
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Solution: $9,000  .98  $8,820
94. A credit sale of $1,900 is made on April 25, terms 2/10, net/30, on which a return of $100
is granted on April 28. What amount is received as payment in full on May 4?
a. $1,764
b. $1,862
c. $1,900
d $1,800
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Solution: ($1,900  $100)  .98  $1,764
95. Grayson Company purchased merchandise with an invoice price of $2,000 and credit
terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate
inherent in the credit terms?
a. 2%
b. 12%
c. 24%
d 36%
Ans: D, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Solution: [360  (30  10)]  2%  36%

96. A credit sale of $700 is made on July 15, terms 2/10, net/30, on which a return of $50 is
granted on July 18. What amount is received as payment in full on July 24?
a. $700
b. $637
c. $650
d $686
Solution: ($700  $50)  .98  $637
97. If a company is given credit terms of 2/10, n/30, it should

a. hold off paying the bill until the end of the credit period, while investing the money at
10% annual interest during this time.
b. pay within the discount period and recognize a savings.
c. pay within the credit period but don't take the trouble to invest the cash while waiting
to pay the bill.
d. recognize that the supplier is desperate for cash and withhold payment until the end
of the credit period while negotiating a lower sales price.
Ans: B, LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics
98. A purchase invoice is a document that

a. provides support for goods purchased for cash.
b. provides evidence of incurred operating expenses.
c. provides evidence of credit purchases.
d. serves only as a customer receipt.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Internal Controls
99. Adams Company is a retailer and uses a perpetual inventory system. Which statement is
correct?
a. Returns of merchandise by Adams Company to a manufacturer are credited to
Inventory.
b. Freight paid to get merchandise to Adams Company’s store is debited to Freight
Expense.
c. A return of merchandise by one of Adams Company’s customers is credited to
Inventory.
d. Discounts taken by Adams Company’s customers are credited to Inventory.
100. As the president of Harter Company, you notice that no discounts have been taken when
settling accounts payables. What would be an acceptable explanation?
a. All invoices have credit terms of n/30.
b. There is not sufficient cash to pay within the discount period.
c. Discounts are missed because no one knows how to enter them in the new
accounting software.
d. The full amount of the invoice is being paid within the discount period and the
treasurer is pocketing the discount amount.

101. When using a perpetual inventory system, why are discounts credited to Inventory?
a. The discounts are debited to discount expense and thus the credit has to be made to
merchandise inventory.
b. The discounts reduce the cost of the inventory.
c. The discounts are a reduction of business expenses.
d. None of these answers choices are correct.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
102. Tony’s Market recorded the following events involving a recent purchase of inventory:
Received goods for $40,000, terms 2/10, n/30.
Returned $800 of the shipment for credit.
Paid $200 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory
a. increased by $38,416.
b. increased by $39,400.
c. increased by $38,612.
d. increased by $38,616.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: [($40,000  $800)  .98] + $200  $38,616
103. Stan’s Market recorded the following events involving a recent purchase of inventory:
Received goods for $90,000, terms 2/10, n/30.
Returned $1,800 of the shipment for credit.
Paid $450 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory
a. increased by $86,436.
b. increased by $88,650.
c. increased by $86,877.
d. increased by $86,886.
Solution: [($90,000  $1,800)  .98] + $450  $86,886
104. Assets purchased for resale are recorded in which of the following accounts?
a. Supplies
b. Inventory
c. Equipment
d. More than one of these answer choices is correct.
Reporting
105. Under the perpetual system, cash freight costs incurred by the buyer for the transporting
of goods is recorded in which account?
a. Freight Expense
b. Freight-In
c. Inventory
d. Freight-Out
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

106. Which of the following accounts is classified as a contra revenue account?

a. Sales Revenue
b. Cost of Goods Sold
c. Sales Returns and Allowances
d. Purchase Discounts
Reporting
107. Sales revenues are usually considered earned when

a. cash is received from credit sales.
b. an order is received.
c. goods have been transferred from the seller to the buyer.
d. adjusting entries are made.
Reporting
108. Sales revenue

a. may be recorded before cash is collected.
b. will always equal cash collections in a month.
c. only results from credit sales.
d. is only recorded after cash is collected.
Reporting
109. The journal entry to record a credit sale ignoring cost of goods sold is
a. Cash
Sales Revenue
b. Cash
Service Revenue
c. Accounts Receivable
Sales Returns and Allowances
d. Accounts Receivable
Sales Revenue
Ans: D, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA
110. Under the perpetual inventory system, in addition to making the entry to record a sale, a
company would
a. debit Inventory and credit Cost of Goods Sold.
b. debit Cost of Goods Sold and credit Purchases.
c. debit Cost of Goods sold and credit Inventory.
d. make no additional entry until the end of the period.
Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
111. When sales of merchandise are made for cash, the transaction may be recorded by the
following entry:
a. Debit Sales Revenue, credit Cash
b. Debit Cash, credit Sales Revenue
c. Debit Sales Revenue, credit Cash Discounts
d. Debit Sales Revenue, credit Sales Returns and Allowances
Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

112. The entry to record a sale of $1,200 with terms of 2/10, n/30 will include a
a. debit to Sales Discounts for $24.
b. debit to Sales Revenue for $1,176.
c. credit to Accounts Receivable for $1,200.
d. credit to Sales Revenue for $1,200.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA
113. A sales invoice is prepared when goods

a. are sold for cash.
b. are sold on credit.
c. sold on credit are returned.
d. are sold on credit or for cash.
Business Economics
114. The Sales Returns and Allowances account is classified as a(n)

a. asset account.
b. contra asset account.
c. expense account.
d. contra revenue account.
Reporting
115. The entry to record the return of goods from a customer would include a
a. debit to Sales Revenue.
b. credit to Sales Revenue.
c. debit to Sales Returns and Allowances.
d. credit to Sales Returns and Allowances.
Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
116. The entry to record the receipt of payment within the discount period on a sale of $700
with terms of 2/10, n/30 will include a
a. credit to Sales Discounts for $14.
b. debit to Sales Revenue for $686.
c. credit to Accounts Receivable for $700.
d. credit to Sales Revenue for $700.
117. The entry to record a sale of $700 with terms of 2/10, n/30 will include a
a. credit to Sales Discounts for $14.
b. debit to Cash for $686.
c. credit to Accounts Receivable for $700.
d. credit to Sales Revenue for $700.

118. The collection of an $900 account within the 2 percent discount period will result in a
a. debit to Sales Discounts for $18.
b. debit to Accounts Receivable for $882.
c. credit to Cash for $882.
d. credit to Accounts Receivable for $882.
Solution: $900  .02  $18
119. A sales invoice is used as documentation for a journal entry that requires a debit to
a. Cash and a credit to Sales Revenue.
b. Sales Returns and Allowances and a credit to Accounts Receivable.
c. Accounts Receivable and a credit to Sales Revenue.
d. Cash and a credit to Sales Returns and Allowances.
Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
120. If a customer agrees to retain merchandise 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.
Business Economics
121. When goods are returned that relate to a prior cash sale
a. the Sales Returns and Allowances account should not be used.
b. the Cash account will be credited.
c. Sales Returns and Allowances will be credited.
d. Accounts Receivable will be credited.
Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
122. The Sales Returns and Allowances account does not provide information to
management about
a. possible inferior merchandise.
b. the percentage of credit sales versus cash sales.
c. inefficiencies in filling orders.
d. errors in filling customers.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC:
123. A Sales Returns and Allowances account is not debited if a customer

a. returns defective merchandise.
b. receives a credit for merchandise of inferior quality.
c. utilizes a prompt payment incentive.
d. returns goods that are not in accordance with specifications.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC:

124. As an incentive for customers to pay their accounts promptly, a business may offer its
customers
a. a sales discount.
b. free delivery.
c. a sales allowance.
d. a sales return.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC:
125. The credit terms offered to a customer by a business firm were 2/10, n/30, which means
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.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC:
126. A sales discount does not

a. provide the purchaser with a cash saving.
b. reduce the amount of cash received from a credit sale.
c. increase a contra revenue account.
d. increase an operating expense account.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
127. Anderson Inc. sells $900 of merchandise on account to Baltic Company with credit terms
of 2/10, n/30. If Baltic Company remits a check taking advantage of the discount offered,
what is the amount of Baltic Company's check?
a. $882
b. $900
c. $810
d. $840
Solution: $900  .98  $882
128. Aber Company sells merchandise on account for $1,800 to Borth Company with credit
terms of 2/10, n/30. Borth Company returns $300 of merchandise that was damaged,
along with a check to settle the account within the discount period. What is the amount of
the check?
a. $1,464
b. $1,476
c. $1,470
d. $1,350
Solution: ($1,800  $300)  .98  $1,470

129. Casin Company sells $700 of merchandise on account to Delta Exploration with credit
terms of 2/10, n/30. If Delta Exploration remits a check taking advantage of the discount
offered, what is the amount of Delta Exploration's check?
a. $490
b. $686
c. $630
d. $560
Solution: $700  .98  $686
130. Which sales accounts normally have a debit balance?

a. Sales Discounts
b. Sales Returns and Allowances.
c. Both Sales Discounts and Sales Returns and Allowances have debit balances.
d. Neither Sales Discounts or Sales Returns and Allowances have debit balances.
Reporting
131. Fehr Company sells merchandise on account for $5,000 to Kelly Company with credit
terms of 2/10, n/30. Kelly Company returns $1,000 of merchandise that was damaged,
along with a check to settle the account within the discount period. What is the amount of
the check?
a. $4,900
b. $4,920
c. $4,000
d. $3,920
Solution: ($5,000  $1,000)  .98  $3,920
132. Piper Company sells merchandise on account for $1,500 to Morton Company with credit
terms of 2/10, n/30. Morton Company returns $500 of merchandise that was damaged,
along with a check to settle the account within the discount period. What entry does
Piper Company make upon receipt of the check?
a. Cash 1,000
Accounts Receivable 1,000
b. Cash 980
Sales Returns and Allowances 520
Accounts Receivable . 1,500
c. Cash 980
Sales Discounts 20
d. Cash 1,470
Sales Discounts 30

Solution: ($1,500  $500)  .02  $20 Sales discount
133. The collection of a $600 account beyond the 2 percent discount period will result in a
a. debit to Cash for $588.
b. debit to Accounts Receivable for $600.
c. debit to Cash for $600.
d. debit to Sales Discounts for $12.
Solution: $600  0  $600
134. The collection of a $700 account beyond the 2 percent discount period will result in a
a. debit to Cash for $686.
b. credit to Accounts Receivable for $700.
c. credit to Cash for $700.
d. debit to Sales Discounts for $14.
Solution: $700  0  $700
135. Which of the following would not be classified as a contra account?

a. Sales Revenue
b. Sales Returns and Allowances
c. Accumulated Depreciation
d. Sales Discounts
Reporting
136. Which of the following accounts has a normal credit balance?

a. Sales Returns and Allowances
b. Sales Discounts
c. Sales Revenue
d. Cost of Goods Sold
Reporting
137. With respect to the income statement

a. contra revenue accounts do not appear on the income statement.
b. sales discounts increase the amount of sales.
c. contra revenue accounts increase the amount of operating expenses.
d. sales discounts are included in the calculation of gross profit.
Reporting
138. When a seller records a return of goods, the account that is credited is
a. Sales Revenue.
b. Sales Returns and Allowances.
c. Inventory.
d. Accounts Receivable.
Ans: D, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

139. The respective normal account balances of Sales, Sales Returns and Allowances, and
Sales Discounts are
a. credit, credit, credit.
b. debit, credit, debit.
c. credit, debit, debit.
d. credit, debit, credit.
Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
140. Rains Company is a furniture retailer. On January 14, 2014, Rains purchased
merchandise inventory at a cost of $48,000. Credit terms were 2/10, n/30. The inventory
was sold on account for $80,000 on January 21, 2014. Credit terms were 1/10, n/30. The
accounts payable was settled on January 23, 2014 and the accounts receivables were
settled on January 30, 2014. Which statement is correct?
a. Cash flows were affected on January 14 and January 21.
b. Gross profit percentage is 60%.
c. On January 30, 2014, customers should remit cash in the amount of $79,200.
d. There is not enough information available to answer this question.
Ans: C, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Solution: $80,000  .99  $79,200
141. Which statement is incorrect?

a. The sales revenue account is used to record the sales of goods held for resale to
customers.
b. Sales discounts are recorded as debits to the sales revenue account.
c. The sales revenue account is a revenue account.
d. The sales revenue account has a normal credit balance and is closed at the end of
the accounting period.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
142. Indicate which one of the following would not appear on both a single-step income
statement and a multiple-step income statement.
a. Gross profit
b. Operating expenses
c. Sales revenue
d. Cost of goods sold
Reporting
143. 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.
Reporting

144. Gross profit does not appear

a. on a multiple-step income statement.
b. on a single-step income statement.
c. to be relevant in analyzing the operation of a merchandising company.
d. on either a multiple-step or single-step income statement.
Reporting
145. Gross profit equals the difference between net sales and
a. operating expenses.
b. cost of goods sold.
c. net income.
d. cost of goods sold plus operating expenses.
Reporting
146. Positive operating income will result if gross profit exceeds

a. costs of goods sold.
b. salaries and wages expense.
c. cost of goods sold plus operating expenses.
d. operating expenses.
Reporting
147. What is the term applied to the excess of net sales over the cost of goods sold?
a. Income before income taxes
b. Income from operations
c. Net income
d. Gross profit
Reporting
148. Operating expenses would include

a. interest expense.
b. income tax expense.
c. freight-out.
d. freight-out and interest.
Reporting
149. Which of the following is not a true statement about a multiple-step income statement?
a. Operating expenses do not include income tax expense.
b. There may be a section for non-operating activities.
c. There may be a section for operating assets.
d. There is a section for cost of goods sold.
Reporting
150. An advantage of the single-step income statement over the multiple-step form is
a. the amount of information it provides.
b. its comprehensiveness.
c. its simplicity.
d. its use in computing ratios.

Reporting
151. Income from operations appears on
a. both a multiple-step and a single-step income statement.
b. neither a multiple-step nor a single-step income statement.
c. a single-step income statement.
d. a multiple-step income statement.
Reporting
152. Income from operations is gross profit less

1. operating expenses and other expenses and losses.
2. operating expenses plus other revenues and gains.
3. operating expenses.
a. 1
b. 2
c. 3
d. both 1 and 2
Reporting
153. Multiple-step income statements show

a. gross profit but not income from operations.
b. neither gross profit nor income from operations.
c. both income from operations and gross profit.
d. income from operations but not gross profit.
Reporting
154. Interest expense would be classified on a multiple-step income statement under the
heading
a. Other expenses and losses.
b. Other revenues and gains.
c. Operating expenses.
d. Cost of goods sold.
Ans: A , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
155. Gross profit for a merchandising company is net sales minus

a. operating expenses.
c. sales discounts.
d. cost of goods available for sale.
Reporting
156. The sales section of an income statement for a retailer would not include
a. Sales discounts.
b. Sales revenue.
c. Net sales.
d. Cost of goods sold.
Reporting

157. The operating expenses section of an income statement for a merchandising company
would not include
a. Freight-out.
b. Utilities expense.
c. Cost of goods sold.
d. Insurance expense.
Reporting
158. Indicate which one of the following would appear on the income statement of both a
merchandising company and a service company.
a. Gross profit
b. Operating expenses
c. Sales revenue
d. Cost of goods sold
Reporting
159. Gross profit does not appear

a. on a merchandising company income statement.
b. on a service company income statement.
c. to be relevant in analyzing the operation of a merchandising company.
d. on the income statement if the periodic inventory system is used because it cannot
be calculated.
Reporting
160. Financial information is presented below:

Operating expenses $ 36,000
Sales revenue 150,000
Cost of goods sold 105,000
Gross profit would be
a. $114,000.
b. $ 36,000.
c. $ 45,000.
d. $ 24,000.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: $150,000  $105,000  $45,000

The gross profit rate would be
a. .70.
b. .24
c. .06.
d. .30.
Solution: ($150,000  $105,000)  $150,000  .30


The profit margin would be
a. .70.
b. .06.
c. .30.
d. .94.
Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: ($150,000  $105,000  $36,000)  $150,000  .06

Sales returns and allowances 7,000
Sales discounts 3,000
a. $56,000.
b. $49,000.
c. $52,000.
d. $59,000.
Solution: ($150,000  $7,000  $3,000)  $91,000  $49,000

a. .33.
b. .35.
c. .65.
d. .27.
Solution: $150,000  $7,000  $3,000  $140,000; ($140,000  $91,000)  $140,000  .35


a. .21.
b. .14.
c. .35.
d. .15.
Solution: $150,000  $7,000  $3,000  $140,000; ($140,000  $91,000  $28,000)  $140,000  .15

The amount of net sales on the income statement would be
a. $154,000.
b. $150,000.
c. $160,000.
d. $156,000.
Solution: $160,000  $4,000  $6,000  $150,000

a. $90,000.
b. $70,000.
c. $60,000.
d. $66,000.
Solution: ($160,000  $4,000  $6,000)  $90,000  $60,000


a. .40.
b. .60.
c. .44.
d. .45.
Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: $160,000  $4,000  $6,000  $150,000; ($150,000  $90,000)  $150,000  .40

a. .40.
b. .09.
c. .16.
d. .10.
Solution: $160,000  $4,000  $6,000  $150,000; ($150,000  $90,000  $45,000)  $150,000  .10

The amount of net sales on the income statement would be
a. $128,000.
b. $125,000.
c. $140,000.
d. $137,000.
Solution: $140,000  $12,000  $3,000  $125,000


a. $40,000.
b. $43,000.
c. $55,000.
d. $52,000.
Solution: ($140,000  $12,000  $3,000)  $85,000  40,000

a. .68.
b. .39.
c. .32.
d. .34.
Solution: $140,000  $12,000  $3,000  $125,000; ($125,000  $85,000)  $125,000  .32

a. .32.
b. .16.
c. .03.
d. .04.
Solution: $140,000  $12,000  $3,000  $125,000; ($125,000  $85,000  $35,000)  $125,000  .04

174. What is an advantage of using the multiple-step income statement?

a. It highlights the components of net income.
b. Gross profit is not a separate item.
c. It is easier to prepare than the single-step income statement.
d. Net income will be higher than net income computed using the single-step income
statement.
Reporting
175. For a jewelry retailer, which is an example of Other Revenues and Gains?
a. Repair revenue
b. Unearned revenue
c. Gain on sale of display cases
d. Discount received for paying for merchandise inventory within the discount period
Reporting
176. When using a periodic inventory system, which statement concerning the computation of
cost of goods sold is correct?
a. The amount of ending inventory is determined on the last day of the accounting
period.
b. Cost of goods available for sale includes net purchases plus the ending inventory.
c. Purchases represent cash paid for purchases during the accounting period.
d. Freight-in is ignored.
Reporting
177. When using the periodic inventory system, which of the following is not a step in
determining cost of goods purchased?
a. Add freight-in
b. Subtract purchase returns and allowances
c. Subtract cost of ending inventory
d. All of these are necessary steps
Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
178. At the beginning of the year, Uptown Athletic had an inventory of $400,000. During the
year, the company purchased goods costing $1,500,000. If Uptown Athletic reported
ending inventory of $500,000 and sales of $2,000,000, their cost of goods sold and
gross profit rate would be
a. $1,000,000 and 70%.
b. $1,400,000 and 30%.
c. $1,000,000 and 30%.
d. $1,400,000 and 70%.
Ans: B, LO: 5,6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: $400,000 + $1,500,000  $500,000  $1,400,000; ($2,000,000  $1,400,000)  $2,000,000  3090

179. At the beginning of the year, Wildcat Athletic had an inventory of $200,000. During the
year, the company purchased goods costing $800,000. If Wildcat Athletic reported
ending inventory of $300,000 and sales of $1,000,000, their cost of goods sold and
gross profit rate would be
a. $500,000 and 70%
b. $700,000 and 30%.
c. $500,000 and 30%.
d. $700,000 and 70%.
Ans: B, LO: 5,6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: $200,000 + $800,000  $300,000  $700,000; ($1,000,000  $700,000)  $1,000,000  30%
180. During the year, Megan’s Pet Shop’s merchandise inventory decreased by $60,000. If
the company’s cost of goods sold for the year was $900,000, purchases would have
been
a. $960,000.
b. $840,000.
c. $780,000.
d. Unable to determine.
Solution: $900,000  $60,000  $840,000
181. During the year, Sarah’s Pet Shop’s merchandise inventory decreased by $40,000. If the
company’s cost of goods sold for the year was $600,000, purchases would have been
a. $640,000.
b. $560,000.
c. $520,000.
d. Unable to determine.
Solution: $600,000  $40,000  $560,000
182. The amount of cost of good available for sale during the year depends on the amounts of
a. beginning merchandise inventory and cost of goods sold.
b. beginning merchandise inventory, net cost of purchases, and ending merchandise
inventory.
c. beginning merchandise inventory, cost of goods sold, and ending merchandise
inventory.
d. beginning merchandise inventory and net costs of purchases.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting
183. Which of the following is not considered in computing net cost of purchases?
a. Purchases returns and allowances
b. Purchases
c. Freight paid on purchased goods
d. Freight paid on goods shipped to customers

184. Assume Grammar Company uses the periodic inventory system and has a beginning
inventory balance of $5,000, purchases of $75,000, and sales of $125,000. Grammar
closes its records once a year on December 31. In the accounting records, the inventory
account would be expected to have a balance on December 31 prior to adjusting and
closing entries that was
a. equal to $5,000.
b. more than $5,000.
c. less than $5,000.
d. indeterminate.
Ans: A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
185. All of the following statements are true regarding the periodic inventory system except
a. Under the periodic inventory system, the balance of cost of goods sold is calculated
at the end of the period.
b. Under the periodic inventory system, the balance in ending inventory is calculated at
the end of the period.
c. Using the periodic inventory system affects the balance sheet contents differently
than when the perpetual system is used.
d. Under the periodic system, a company uses separate accounts to record freight
costs, returns, and discounts.
Reporting
186. Sampson Company's accounting records show the following for the year ending on
December 31, 2014.
Purchase Discounts $ 5,600
Freight-In 7,800
Purchases 350,010
Beginning Inventory 23,500
Ending Inventory 28,800
Purchase Returns and Allowances 6,400
Using the periodic system, the cost of goods purchased is

a. $330,210.
b. $354,210.
c. $358,610.
d. $345,810.
Solution: $350,010  $5,600  $6,400 + $7,800  $345,810

187. Sampson Company's accounting records show the following at the year ending on
December 31, 2014.
Purchase Discounts $ 5,600
Freight-In 7,800
Purchases 350,010
Beginning Inventory 23,500
Ending Inventory 28,800
Purchase Returns and Allowances 6,400
Using the periodic system, the cost of goods sold is

a. $351,110.
b. $348,910.
c. $340,510.
d. $359,510.
Solution: [$23,500 + ($350,010  $5,600  $6,400 + $7,800)]  $28,800  $340,510
188. Which of the following provides the best rationale regarding analysts' views about the
information value of the gross profit rate versus the gross profit amount?
a. The gross profit amount is more informative than the gross profit rate because it is a
dollar amount rather than a ratio.
b. The gross profit amount is less informative than the gross profit rate because the
latter presents a meaningful relationship between gross profit and net sales.
c. The gross profit amount is more informative than the gross profit rate because the
gross profit rate is only used to describe a few industries while the gross profit
amount is universally used.
d. The gross profit amount is more informative than the gross profit rate because high
volume operations are able to calculate the gross profit rate but not the gross profit
amount.
Business Economics
189. Bolton Company's gross profit rate last year was 32.0% and this year it is 28.4%. Which
of the following would not be a possible cause for this decline in the gross profit rate?
a. Bolton must pay higher prices to suppliers without passing these costs on to
customers.
b. Bolton may have begun selling products with a higher markup.
c. Bolton's average margin between selling price and inventory cost is decreasing.
d. Bolton may have seen a decline in total gross profit while maintaining net sales.
Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None,
190. Haverty Industries increased its gross profit rate from 18.4% in 2013 to 23.7% in 2014.
Which of the following would be a possible explanation for this change?
a. Haverty's global sourcing efforts at the beginning of 2014 resulted in a lower cost of
merchandise sold.
b. Haverty's new profit lines with lower margins in 2014 became a larger component of
their sales.
c. Haverty increased its product markdowns in 2014.
d. Haverty's average margin between the selling price and the inventory cost decreased
over this two-year period.
Ans: A, LO: 6, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None,

191. Which of the following statements is true regarding profit margin?
a. Profit margin can be improved by decreasing the gross profit rate and/or controlling
operating expenses and other costs
b. Profit margin does not vary across industries.
c. Discount stores with high merchandise turnover generally have higher profit margins.
d. If the profit margin has a higher value, this suggests favorable return on each dollar
of sales.
Reporting
192. The gross profit rate is computed by dividing gross profit by

a. sales revenue.
c. net sales.
d. operating expenses.
Reporting
193. A decline in a company’s gross profit could be caused by all of the following except
a. selling products with a lower markup.
b. clearance of discontinued inventory.
c. paying lower prices to its suppliers.
d. increasing competition resulting in a lower selling price.
Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
194. If Hostell Company has net sales of $500,000 and cost of goods sold of $325,000,
Hostell’s gross profit rate is
a. 50%.
b. 35%.
c. 54%.
d. 100%.
Solution: ($500,000  $325,000)  $500,000  $35%
195. If Indiana Ink, Inc. has net sales of $400,000 and cost of goods sold of $300,000,
Indiana Ink’s gross profit rate is
a. 75%.
b. 33%
c. 25%.
d. 100%.
Solution: ($400,000  $300,000)  $400,000  $25%

196. A company shows the following balances:

Sales Revenue $1,000,000
Sales Returns and Allowances 175,000
Sales Discounts 25,000
Cost of Goods Sold 560,000
What is the gross profit rate?

a. 56%
b. 70%
c. 44%
d. 30%
Solution: [($1,000,000  $175,000  $25,000)  $560,000]  $800,000  $30%
197. A company shows the following balances:

Sales Revenue $ 800,000
Sales Returns and Allowances 75,000
What is the gross profit rate?
a. 53%
b. 60%
c. 40%
d. 47%
Solution: [($800,000  $75,000  $25,000)  $420,000]  $700,000  $40%
198. What is a difference between the profit margin and the gross profit rate?
a. None, these are interchangeable terms.
b. The gross profit rate is computed by dividing net sales by gross profit and the profit
margin is computed by dividing net sales by net income.
c. The gross profit rate will normally be higher than the profit margin ratio.
d. A profit margin of 7% means that 7 cents of each net sales dollar ends up in net
income and a gross profit rate of 7% means that the cost of the goods were 7% of
the selling price.
Ans: C, LO: 6, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None,
IMA: Reporting
199. Andrea’s Fashions sold merchandise for $95,000 cash during the month of July. Returns
that month totaled $2,000. If the company’s gross profit rate is 40%, Andrea’s will report
monthly net sales revenue and cost of goods sold of
a. $95,000 and $57,000.
b. $93,000 and $37,200.
c. $93,000 and $55,800.
d. $95,000 and $55,800.
Solution: $95,000  $2,000  $93,000; $93,000  .60  $55,800

200. Betty’s Fabrics sold merchandise for $114,000 cash during the month of July. Returns
that month totaled $2,400. If the company’s gross profit rate is 40%, Betty will report
monthly net sales revenue and cost of goods sold of
a. $114,000 and $68,400.
b. $111,600 and $44,640.
c. $111,600 and $66,960.
d. $114,000 and $66,960.
Solution: $114,000  $2,400  $111,600; $111,600  .60  $66,960
201. American Importers reports net income of $50,000 and cost of goods sold of $450,000. If
the company’s gross profit rate was 40%, net sales were
a. $750,000.
b. $1,125,000.
c. $1,175,000.
d. $825,000.
Solution: $450,000  (1  .40)  $750,000
202. United Services and Supplies reports net income of $60,000 and cost of goods sold of
$360,000. US&S’s gross profit rate was 40%, net sales were
a. $600,000.
b. $900,000.
c. $960,000.
d. $660,000.
Solution: $360,000  (1  .40)  $600,000
*203. Erin Corporation purchases $500 of merchandise on credit. Using the periodic inventory
approach, Erin would record this transaction as:
a. Inventory 500
Accounts Payable 500
b. Accounts Payable 500
Purchases 500
c. Purchases 500
d. Accounts Payable 500
Inventory 500

*204. Crowder Corporation recorded the return of $200 of goods originally sold on credit to
Discount Industries. Using the periodic inventory approach, Crowder would record this
transaction as:
a. Inventory 200
Accounts Receivable 200
b. Sales Returns and Allowances 200
Accounts Receivable 200
c. Accounts Payable 200
d. Accounts Receivable 200
*205. Turner Corporation returned $150 of goods originally purchased on credit from Morgan
Industries. Using the periodic Inventory approach, Turner would record this transaction
as:
a. Inventory 150
b. Accounts Payable 150
Inventory 150
c. Purchase Returns and Allowances 150
d. Accounts Payable 150
Purchase Returns and Allowances 150
*206. Ramos Company receives a payment on account from Martinez Industries. Based on the
original sale of $8,000 using the periodic inventory approach, Ramos honors the 3%
cash discount and records the payment. Which of the following is the correct entry for
Ramos to record?
a. Cash 7,760
Sales Discounts 240
Inventory 8,000
b. Accounts Receivable 8,000
Cash 7,840
Purchase Discounts 160
c. Cash 7,760
Sales Discounts 240
d. Cash 7,760
Purchase Discounts 240
Accounts Payable 8,000
Solution: $8,000  .03  $240 sales discount

Answers to Multiple Choice Questions

53. c 73. b 93. c 113. b 133. c 153. c 173. d 193. c
54. c 74. d 94. a 114. d 134. b 154. a 174. a 194. b
55. b 75. d 95. d 115. c 135. a 155. b 175. c 195. c
56. d 76. c 96. b 116. c 136. c 156. d 176. a 196. d
57. b 77. c 97. b 117. d 137. d 157. c 177. c 197. c
58. c 78. a 98. c 118. a 138. d 158. b 178. b 198. c
59. b 79. d 99. a 119. c 139. c 159. b 179. b 199. c
60. d 80. a 100. a 120. d 140. c 160. c 180. b 200. c
61. a 81. b 101. b 121. b 141. b 161. d 181. b 201. a
62. c 82. b 102. d 122. b 142. a 162. b 182. d 202. a
63. c 83. a 103. d 123. c 143. d 163. b 183. d *203. c
64. a 84. d 104. b 124. a 144. b 164. b 184. a *204. b
65. a 85. c 105. c 125. c 145. b 165. d 185. c *205. d
66. b 86. a 106. c 126. d 146. d 166. b 186. d *206. c
67. a 87. a 107. c 127. a 147. d 167. c 187. c
68. b 88. b 108. a 128. c 148. c 168. a 188. b
69. d 89. b 109. d 129. b 149. c 169. d 189. b
70. b 90. b 110. c 130. c 150. c 170. b 190. a
71. a 91. d 111. b 131. d 151. d 171. a 191. d
72. b 92. c 112. d 132. c 152. c 172. c 192. c

BRIEF EXERCISES
Be. 207
Presented here are the components in Rowland Company’s income statement. Determine the
missing amounts.
Sales Cost of Gross Operating Net

Revenue_ Goods Sold _Profit Expenses Income
$75,000 (a) $35,000 (b) $17,000
(c) $56,000 $59,000 $48,000 (d)
Ans: N/A, LO: 1,4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution 207 (5 min.)
a. $ 40,000
b. $ 18,000
c. $115,000
d. $ 11,000
Be. 208
On September 4, Roberta’s Knickknacks buys merchandise on account from Dolan Company.

The selling price of the goods is $900 and the cost of goods is $600. Both companies use the
perpetual inventory systems Journalize the transactions on the books of both companies.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA

Roberta’s Knickknacks records
Sept. 4 Inventory ............................................................................. 900

Accounts Payable ...................................................... 900
Dolan Company records
Sept.4 Accounts Receivable .......................................................... 900

Sales Revenue........................................................... 900
Cost of Goods Sold ............................................................ 600

Inventory .................................................................... 600
Be. 209
Menke Company is a furniture retailer and uses the perpetual inventory system. On January 14,
2014, Menke purchased merchandise inventory at a cost of $45,000. Credit terms were 2/10,
n/30. The inventory was sold on account for $60,000 on January 21, 2014. Credit terms were
1/10, n/30. The accounts payable was settled on January 23, 2014, and the accounts
receivables were settled on January 30, 2014. Prepare journal entries to record each of these
transactions.
Jan. 14 Inventory.............................................................................. 45,000

Accounts Payable....................................................... 45,000
Jan. 21 Accounts Receivable........................................................... 60,000

Sales Revenue........................................................... 60,000
Cost of Goods Sold............................................................. 45,000

Inventory..................................................................... 45,000
Jan. 23 Accounts Payable................................................................ 45,000

Cash........................................................................... 44,100
Inventory..................................................................... 900
Jan. 30 Cash .................................................................................... 59,400

Sales Discounts................................................................... 600
Accounts Receivable.................................................. 60,000

Be. 210
Prepare the journal entries to record the following transactions on Markowitz Company’s books
using a perpetual inventory system. On February 6, Markowitz Company sold $105,000 of
merchandise to the Lyman Company, terms 2/10, net /30. The cost of the merchandise sold was
$70,000. On February 8, the Lyman Company returned $14,000 of the merchandise purchased
on February 6. The cost of the merchandise returned was $7,000. On February 16 Markowitz
Company received the balance due from the Lyman Company.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Feb 6 Accounts Receivable .......................................................... 105,000

Sales Revenue........................................................... 105,000
Cost of Goods Sold ............................................................ 70,000

Inventory .................................................................... 70,000
Feb 8 Sales Returns and Allowances ........................................... 14,000

Accounts Receivable ................................................. 14,000
Inventory ............................................................................. 7,000

Cost of Goods Sold ................................................... 7,000
Feb 16 Cash ($91,000 x .98) .......................................................... 89,180

Sales Discounts .................................................................. 1,820
Accounts Receivable ($105,000 – $14,000) .............. 91,000
Be. 211
Lovett Company provides this information for the month of November, 2014: sales on credit
$140,000; cash sales $50,000; sales discount $2,000; and sales returns and allowances
$8,000. Prepare the sales revenues section of the income statement based on this information.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
LOVETT COMPANY
Income Statement(Partial)
For the Month Ended November 30, 2014
Sales Revenue.................................................................... $190,000

Less: Sales Returns and Allowances ............................... $ 8,000
Sales Discounts ...................................................... 2,000 10,000
Net Sales 180,000

Be. 212
Assume that Mitchell Company uses a periodic inventory system and has these account
balances: Purchases $570,000; Purchase Returns and Allowances $14,000; Purchases
Discounts $9,000; and Freight-In $15,000. Determine net purchases and cost of goods
purchased.
Calculation of Net Purchases and Cost of goods purchased
Purchases........................................................................... $570,000
Less: Purchases returns and allowances ......................... $14,000
Purchase discounts ................................................ 9,000 23,000
Net Purchases................................................................... 547,000
Add: Freight-in..................................................................... 15,000
Cost of Goods Purchased................................................. $562,000
Be. 213
Assume that Mitchell Company uses a periodic inventory system and has these account
balances: Purchases $620,000; Purchase Returns and Allowances $25,000; Purchases
Discounts $11,000; and Freight-In $19,000; beginning inventory of $45,000; ending inventory of
$55,000; and net sales of $750,000. Determine the amounts to be reported for cost of goods
sold and gross profit.
Calculation of cost of goods sold

Inventory, beginning............................................................ $45,000
Cost of goods sold
Purchases........................................................................... $620,000
Less: Purchases returns and allowances ......................... $25,000
Purchase discounts ................................................ 11,000 36,000
Net purchases..................................................................... 584,000
Add: Freight-In..................................................................... 19,000
Cost of goods purchased.................................................... 603,000
Cost of goods available for sale.......................................... 648,000
Inventory, ending................................................................. 55,000
Cost of goods sold............................................................... $593,000
Calculation of gross profit
Net sales............................................................................. $750,000

Cost of goods sold............................................................... 593,000
Gross profit.......................................................................... $157,000

Be. 214
Horner Corporation reported net sales of $150,000, cost of goods sold of $96,000, operating
expenses of $35,000, other expenses of $10,000, net income of $9,000. Calculate the following
values. 1. Profit margin. 2. Gross profit rate.
Net income $ 9,000

1. Profit margin = = =6%
Net sales $150,000
Gross profit ($150,000 - $96,000)

2. Gross profit rate = = = 36%
Net sales $150,000
EXERCISES
Ex. 215
Sue Cole is a new accountant with Simon Company. Simon purchased merchandise on account
for $9,000. The credit terms are 1/10, n/30. Sue has talked with the company's banker and
knows that she could earn 6% on any money invested in the company's savings account.
Instructions
(a) Should Sue pay the invoice within the discount period or should she keep the $9,000 in
the savings account and pay at the end of the credit period? Support your
recommendation with a calculation showing which action would be best.
(b) If Sue forgoes the discount, it may be viewed as paying an interest rate of 1% for the use
of $9,000 for 20 days. Calculate the annual rate of interest that this is equivalent to.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA
PC: Problem Solving, IMA: Business Economics
(a) Yes, Sue should take the discount.

Discount of 1% on $9,000 $90
Interest received on $9,000 (for 20 days at 6%) 30 ($9,000  6%  20  360)
Savings by taking the discount $60
(b) The equivalent annual interest rate is:

1%  360  20 = 18%.
Ex. 216
This information relates to Sherper Co.
1. On April 5 purchased merchandise from Newport Company for $22,000, terms 2/10, n/10.
2. On April 6 paid freight costs of $900 on merchandise purchased from Newport.
3. On April 7 purchased equipment on account for $26,000.
Ex. 216 (Cont.)

4. On April 8 returned some of April 5 merchandise to Newport Company which cost $2,000.
5. On April 15 paid the amount due to Newport Company in full.
Instructions
(a) Prepare the journal entries to record the transactions listed above on the books of Sherper
Co. Sherper Co. uses a perpetual inventory system.
(b) Assume that Sherper Co. paid the balance due to Newport Company on May 4 instead of
April 15. Prepare the journal entry to record this payment.

(a) (1) April 5 Inventory...................................................... 22,000
Accounts Payable................................ 22,000
(2) April 6 Inventory...................................................... 900
Cash..................................................... 900
(3) April 7 Equipment.................................................... 26,000
Accounts Payable................................ 26,000
(4) April 8 Accounts Payable........................................ 2,000
Inventory.............................................. 2,000
(5) April 15 Accounts Payable
($22,000 – $2,000).................................. 20,000
Inventory
[($22,000 – $2,000)  2%].................. 400
Cash ($20,000 – $400).......................... 19,600
(b) May 4 Accounts Payable ($22,000 – $2,000)................ 20,000

Cash........................................................... 20,000
Ex. 217
(a) Bazil Company purchased merchandise on account from Office Suppliers for $62,000, with
terms of 1/10, n/30. During the discount period, Bazil returned some merchandise and paid
$59,400 as payment in full. Bazil uses a perpetual inventory system. Prepare the journal
entries that Bazil Company made to record the:
(1) purchase of merchandise.
(2) return of merchandise.
(3) payment on account.
(b) Weaver Company sold merchandise to Moore Company on account for $84,000 with credit
terms of ?/10, n/30. The cost of the merchandise sold was $63,000. During the discount
period, Moore Company returned $4,000 of merchandise and paid its account in full
(minus the discount) by remitting $78,400 in cash. Both companies use a perpetual
inventory system. Prepare the journal entries that Weaver Company made to record the:
(1) sale of merchandise.
(2) return of merchandise.
(3) collection on account.


Solution 217 (15-20 min.)
(a) To compute the amount due after returns but before the discount divide $59,400 by .99
(100% - 1%).
$59,400  .99 = $60,000.
Subtract $60,000 from $62,000 to determine that $2,000 of merchandise was returned.
(1) Inventory ............................................................................. 62,000

Accounts Payable ...................................................... 62,000
(2) Accounts Payable ............................................................... 2,000

Inventory .................................................................... 2,000
(3) Accounts Payable ($62,000 - $2,000) ................................ 60,000

Inventory ($60,000 x .01)........................................... 600
Cash ($60,000 x .99)................................................. 59,400
(b) Moore Company returns $4,000 of merchandise and owes $80,000 to Weaver Company.
$78,400  $80,000 = .98
100% - 98% = 2%
The missing discount percentage is 2%. $80,000  2% = $1,600 sales discount.
$80,000 - $1,600 = $78,400 cash received on account.
(1) Accounts Receivable .......................................................... 84,000

Sales Revenue........................................................... 84,000
Cost of Goods Sold............................................................. 63,000

Inventory..................................................................... 63,000
(2) Sales Returns and Allowances ........................................... 4,000

Inventory.............................................................................. 3,000*
Cost of Goods Sold..................................................... 3,000
* (cost = sales price x .75 as shown in sales entries)
(3) Cash ................................................................................... 78,400

Sales Discounts .................................................................. 1,600
Ex. 218
June 4 Black Company purchased $9,000 worth of merchandise, terms n/30 from Hayes
Company. The cost of the merchandise was $6,300.
12 Black returned $500 worth of goods to Hayes for full credit. The goods had a cost of
$350 to Hayes.
12 Black paid the account in full.

Ex. 218 (Cont.)
Instructions
Prepare the journal entries to record these transactions in (a) Black’s records and (b) Hayes’
records. Assume use of the perpetual inventory system for both companies.
(a) Black’s books
June 4 Inventory 9,000

Accounts Payable………………………………. 9,000
12 Accounts Payable………………………………………… 500

Inventory 500
12 Accounts Payable………………………………………… 8,500

Cash………………………………………………. 8,500
(b) Hayes’ books
June 4 Accounts Receivable…………………………………….. 9,000

Sales Revenue…………………………………… 9,000
4 Cost of Goods Sold………………………………………. 6,300

Inventory 6,300
12 Sales Returns and Allowance…………………………… 500

Accounts Receivable……………………………. 500
12 Inventory 350
Cost of Goods Sold 350
12 Cash……………………………………………………….. 8,500
Accounts Receivable……………………………. 8,500

Ex. 219
On October 1, the Kile Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $150
each. During the month of October the following transactions occurred. Assume Kile uses a
perpetual inventory system.
Oct. 4 Purchased 180 bicycles at a cost of $145 each from the Nixon Bicycle Company,
terms 2/10, n/30.
5 Paid freight of $1,000 on the October 4 purchase.
6 Sold 10 bicycles from the October 1 inventory to Team America for $250 each, terms
2/10, n/30.
7 Received credit from the Nixon Bicycle Company for the return of 8 defective
bicycles.
13 Issued a credit memo to Team America for the return of a defective bicycle.
14 Paid Nixon Bicycle Company in full, less discount.
Instructions
Prepare the journal entries to record the transactions assuming the company uses a perpetual
inventory system.
Oct. 4 Inventory ............................................................................. 26,100

Accounts Payable ...................................................... 26,100
5 Inventory ............................................................................. 1,000

Cash .......................................................................... 1,000
6 Accounts Receivable .......................................................... 2,500

Sales Revenue........................................................... 2,500
Cost of Goods Sold ............................................................ 1,500

Inventory .................................................................... 1,500
7 Accounts Payable ............................................................... 1,160

Inventory .................................................................... 1,160
13 Sales Returns and Allowances ........................................... 250

Accounts Receivable ................................................. 250
Inventory ............................................................................. 150

Cost of Goods Sold ................................................... 150
14 Accounts Payable ($26,100 - $1,160) ................................ 24,940

Cash ($24,940  .98).................................................. 24,441
Inventory ($24,940  .02) .......................................... 499

Ex. 220
On September 1, Pennington Supply had an inventory of 20 backpacks at a cost of $25 each.

The company uses a perpetual inventory system. During September, the following transactions
and events occurred.
Sept. 4 Purchased 50 backpacks at $25 each from Sievert, terms 2/10, n/30.
6 Received credit of $100 for the return of 4 backpacks purchased on September 4 that
were defective.
9 Sold 25 backpacks for $40 each to Lilly Books, terms 2/10, n/30.
13 Sold 15 backpacks for $40 each to Stoner Office Supply, terms n/30.
14 Paid Sievert in full, less discount.
Instructions
Journalize the September transactions for Pennington Supply.
Sept. 4 Inventory .......................................................................... 1,250

Accounts Payable ................................................... 1,250
6 Accounts Payable ............................................................ 100

Inventory ................................................................. 100
9 Accounts Receivable ....................................................... 1,000

Sales Revenue........................................................ 1,000
Cost of Goods Sold ......................................................... 625

Inventory ................................................................. 625
13 Accounts Receivable ....................................................... 600

Sales Revenue........................................................ 600
Cost of Goods Sold ......................................................... 375

Inventory ................................................................. 375
14 Accounts Payable ($1,250 - $100) .................................. 1,150

Cash ($1,150  .98)................................................. 1,127
Inventory ($1,150  .02) ........................................... 23

Ex. 221
Petersen Book Store entered into the transactions listed below. In the journal provided, prepare
Petersen’s necessary entries, assuming use of the perpetual inventory system.
July 6 Purchased $1,600 of merchandise on credit, terms n/30.
8 Returned $100 of the items purchased on July 6.
9 Paid freight charges of $90 on the items purchased July 6.
19 Sold merchandise on credit for $4,400, terms 1/10, n/30. The merchandise had
an inventory cost of $2,700.
22 Of the merchandise sold on July 19, $300 of it was returned. The items had cost
the store $150.
28 Received payment in full from the customer of July 19.
31 Paid for the merchandise purchased on July 6.

July 6 Inventory 1,600

Accounts Payable……………………………………… 1,600
8 Accounts Payable……………………………………………… 100

Inventory 100
9 Inventory 90
Cash …………………………………………………… 90
19 Accounts Receivable …………………………………………. 4,400

Sales Revenue………………………………………… 4,400
Cost of Goods Sold……………………………………………. 2,700

Inventory 2,700
22 Sales Returns and Allowances……………………………….. 300

Accounts Receivable…………………………………. 300
Inventory 150
Cost of Goods Sold…………………………………… 150
28 Cash ($4,100 x .99) …………………………………………… 4,059

Sales Discounts………………………………………………… 41
31 Accounts Payable ($1,600 - $100)…………………………… 1,500

Cash 1,500
Ex. 222
Presented here are selected transactions for the Leiss Company during April. Leiss uses the
perpetual inventory system.
April 1 Sold merchandise to Mann Company for $4,000, terms 2/10, n/30. The
merchandise sold had a cost of $2,500.
2. Purchased merchandise from Wild Corporation for $8,000, terms 1/10, n/30.
4 Purchased merchandise from Ryan Company for $1,000, n/30.
10 Received payment from Mann Company for purchase of April 1 less appropriate
discount.
11 Paid Wild Corporation for April 2 purchase.
Instructions
Journalize the April transactions for Leiss Company.
April 1 Accounts Receivable 4,000

Sales Revenue………………………………………… 4,000

Inventory 2,500
2 Inventory 8,000
Accounts Payable…………………………………….. 8,000
4 Inventory 1,000
10 Cash ($4,000 x .98) 3,920

Sales Discounts ($4,000 x .02) 80
Accounts Receivable………………………………… 4,000
11 Accounts Payable……………………………………………… 8,000

Inventory ($8,000 x .01) 80
Cash ($8,000 x .99) 7,920

Ex. 223
Norman Company completed the following transactions in October: Norman uses a perpetual
inventory system.
Credit Sales Sales Returns Date of

Date Amount Terms Date Amount Collection
Oct. 3 $ 800 2/10, n/30 Oct. 8
Oct. 11 1,500 3/10, n/30 Oct. 14 $ 300 Oct. 16
Oct. 17 5,000 1/10, n/30 Oct. 20 1,200 Oct. 29
Oct. 21 1,700 2/10, n/60 Oct. 23 400 Oct. 27
Oct. 23 6,000 2/10, n/30 Oct. 27 500 Oct. 28
Instructions
(a) Indicate the cash received for each collection. Show your calculations.
(b) Prepare the journal entry for the
(1) Oct. 17 sale. The merchandise sold had a cost of $3,000.
(2) Oct. 23 sales return. The merchandise returned had a cost of $200.
(3) Oct. 28 collection.

(a) Oct. 8 $784 [Sales $800 - Sales discount $16 ($800  .02)]
16 $1,164 [Sales $1,500 - Sales return $300 = $1,200;

$1,200 - Sales discount $36 ($1,200  .03)]
29 $3,800 [Sales $5,000 - Sales return $1,200 = $3,800;

(discount lapsed)]

$1,300 - Sales discount $26 ($1,300  .02)]

$5,500 - Sales discount $110 ($5,500  .02)]
(b) (1) Oct. 17 Accounts Receivable ........................................ 5,000

Sales Revenue.......................................... 5,000
Cost of Goods Sold............................................ 3,000

Inventory................................................... 3,000
(2) Oct. 23 Sales Returns and Allowances ......................... 400

Accounts Receivable ................................ 400
Inventory............................................................ 200
Cost of Goods Sold................................... 200
(3) Oct. 28 Cash .................................................................. 5,390

Sales Discounts ................................................ 110
Accounts Receivable ................................ 5,500

Ex. 224
The following transactions are for Kale Company.
(1) On December 3 Kale Company sold $500,000 of merchandise to Thomson Co., terms
1/10, n/10. The cost of the merchandise sold was $320,000.
(2) On December 8 Thomson Co. was granted an allowance of $20,000 for merchandise
purchased on December 3.
(3) On December 13 Kale Company received the balance due from Thomson Co.
Instructions
(a) Prepare the journal entries to record these transactions on the books of Kale Company.
Kale uses a perpetual inventory system.
(b) Assume that Kale Company received the balance due from Thomson Co. on January 2 of
the following year instead of December 13. Prepare the journal entry to record the receipt
of payment on January 2.
(a). (1) Dec 3 Accounts Receivable........................................ 500,000

Sales Revenue.......................................... 500,000
Cost of Goods Sold.......................................... 320,000
Inventory.................................................... 320,000
(2) Dec 8 Sales Returns and Allowances......................... 20,000
Accounts Receivable................................. 20,000
(3) Dec. 13 Cash ($480,000 – $4,800)................................ 475,200
Sales Discounts
[($500,000 – $20,000)  1%]..................... 4,800
Accounts Receivable
($500,000 – $20,000).................. 480,000
(b) Jan 2 Cash................................................................. 480,000

Accounts Receivable
($500,000 – $20,000).............................. 480,000
Ex. 225
Instructions
State the missing items identified by ?.
1. Gross profit - Operating expenses = ?

2. Cost of goods sold + Gross profit = ?
3. Sales revenue - (? + ?) = Net sales
4. Income from operations + ? - ? = Net income
5. Net sales - Cost of goods sold = ?
Ans: N/A, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

1. Income from operations (or Net income)

2. Net sales
3. Sales discounts, Sales returns and allowances
4. Other revenues and gains, Other expenses and losses
5. Gross profit
Ex. 226
Financial information is presented here for two companies.
King Company Queen Company
Sales revenue $56,000 ?

Sales returns and allowances ? 5,000
Net sales 50,000 80,000
Cost of goods sold 33,000 ?
Gross profit ? 32,000
Operating expenses 12,000 ?
Net income ? 14,000
Instructions
(a) Compute the missing amounts.
(b) Calculate the profit margin and the gross profit rate for each company.
(a) King Company
Sales returns = $6,000 ($56,000 – $50,000 = $6,000)

Gross profit = $17,000 ($50,000 – $33,000 = $17,000)
Net income = $5,000 ($17,000 – $12,000)
Queen Company
Sales revenue = $85,000 ($80,000 + $5,000)

Cost of goods sold = $48,000 ($80,000 – $32,000)
Operating expenses = $18,000 ($32,000 – $14,000)
(b) King Queen

$5,000 $14,000
Profit margin $50,000
= .10
$80,000
= .175
$17,000 $32,000
Gross profit rate $50,000
= .34
$80,000
= .40

Ex. 227
The following information is available for Quayle Company:
Sales revenue $618,000

Operating expenses 114,000
Interest expense 19,000
Interest revenue 20,000
Instructions
1. Use the above information to prepare a multiple-step income statement for the year ended
December 31, 2014.
2. Compute the profit margin.
1. QUAYLE COMPANY
Income Statement
For the Year Ended December 31, 2014
Sales
Sales revenue..................................................................... $618,000
Less: Sales returns and allowances ................................. 20,000
Net sales ............................................................................ $598,000
Gross profit.............................................................. 200,000
Operating expenses 114,000
Income from operations....................................................... 86,000
Other revenues and gains
Interest revenue....................................................... 20,000
Other expenses and losses
Interest expense...................................................... 19,000
Net income.......................................................................... $ 87,000
2. Profit margin: $87,000 ÷ $598,000 = 14.5%

Ex. 228
The adjusted trial balance of McCoy Company included the following selected accounts:
Debit Credit
Sales Revenue $645,000
Sales Returns and Allowances $ 50,000
Freight-Out 2,000
Advertising Expense 15,000
Interest Expense 19,000
Salaries and Wages Expense 84,000
Utilities Expense 23,000
Depreciation Expense 3,500
Interest Revenue 25,000
Instructions
1. Use the above information to prepare a multiple-step income statement for the year ended
December 31, 2014.
2. Calculate the profit margin and gross profit rate.
1. MCCOY COMPANY
Income Statement
For the Year Ended December 31, 2014
Sales revenue..................................................................... $645,000

Less: Sales returns and allowances ................................. $ 50,000
Sales discounts ....................................................... 9,500 59,500
Net sales ............................................................................ 585,500
Gross profit.......................................................................... 189,500
Operating expenses
Salaries and Wages Expense....................................... $ 84,000
Utilities Expense............................................................ 23,000
Advertising Expense...................................................... 15,000
Depreciation Expense .................................................. 3,500
Freight-Out.................................................................... 2,000
Total operating expenses........................................ 127,500
Income from operations....................................................... 62,000
Other revenues and gains
Interest revenue............................................................. 25,000
Other expenses and losses
Interest expense............................................................ 19,000
Net income.......................................................................... $ 68,000
2. Profit margin = $68,000 ÷ $585,500 = 11.6%

Gross profit rate = $189,500 ÷ $585,500 = 32.4%
Ex. 229
Presented below is information for Zales Company for the month of January 2014.
Cost of goods sold $280,000 Rent expense $35,000

Freight-out 7,000 Sales discounts 8,000
Insurance expense 12,000 Sales returns and allowances 13,000
Salaries and wages expense 42,000 Sales revenue 421,000
Instructions
(a) Prepare a multiple-step income statement.
(b) Calculate the profit margin and the gross profit rate.
(a) ZALES COMPANY

Income Statement
For the Month Ended January 31, 2014
____________________________________________________________________________
_
Sales
Sales revenue..................................................... $421,000
Less: Sales returns and
allowances........................................... $13,000
Sales discounts......................................... 8,000 21,000
Net sales............................................................. 400,000
Cost of goods sold........................................................ 280,000
Gross profit.................................................................... 120,000
Operating expenses
Salaries and wages expense............................... 42,000
Rent expense....................................................... 35,000
Insurance expense............................................... 12,000
Freight-out............................................................ 7,000
Total operating expense.............................. 96,000
Net income ................................................................... $ 24,000
$24,000
(b) Profit margin = = .06
$400,000
$120,000
Gross profit rate = = .30
$400,000
Ex. 230
The trial balance of Rachel Company at the end of its fiscal year, August 31, 2014, includes
these accounts: Inventory $29,200; Purchases $144,000; Sales Revenue $190,000; Freight-In
$8,000; Sales Returns and Allowances $3,000; Freight-Out $1,000; and Purchases Returns and
Allowances $5,000. The ending inventory is $25,000.
Instructions
Prepare a cost of goods sold section for the year ending August 31.

Inventory, September 1, 2013................................................. $ 29,200

Purchases............................................................................... $144,000
Less: Purchase returns and allowances................................ 5,000
Net purchases......................................................................... 139,000
Add: Freight-in........................................................................ 8,000
Cost of goods purchased........................................................ 147,000
Cost of goods available for sale.............................................. 176,200
Inventory, August 31, 2014..................................................... 25,000
Cost of goods sold........................................................... $151,200
Ex. 231
Below is a series of cost of goods sold sections for Mikey Inc., Nancie Co., and Oscar Inc.
Mikey Nancie Oscar
Beginning inventory $ 250 $ 120 $ (g)

Purchases 1,700 1,080 43,590
Purchase returns and allowances 40 (d) (h)
Net purchases (a) 1,020 41,590
Freight-in 130 (e) 2,740
Cost of goods purchased (b) 1,230 (i)
Cost of goods available for sale 2,240 1,350 49,530
Ending inventory 310 (f) 6,230
Cost of goods sold (c) 1,130 43,300
Instructions
Fill in the lettered blanks to complete the cost of goods sold sections.
(a) $1,660 ($1,700 – $40)

(b) $1,790 ($1,660 + $130)
(c) $1,930 ($2,240 – $310)
(d) $60 ($1,080 – $1,020)

(e) $210 ($1,230 – $1,020)
(f) $220 ($1,350 – $1,130)
(g) $5,200 ($49,530 – $44,330 from (i))

(h) $2,000 ($43,590 – $41,590)
(i) $44,330 ($41,590 + $2,740)

Ex. 232
The following information is available from the annual reports of Flynn Company and Tolan Inc.
(Amounts in millions)
Flynn Tolan
Sales revenue $32,622 $40,457
Cost of goods sold 20,739 24,431
Operating expenses 7,428 9,188
Income before taxes 4,455 6,838
Net income 2,594 4,072
Instructions
1. Calculate the profit margin and gross profit rate for each company.
2. What conclusion concerning the relative profitability of the two companies can be drawn from
these data?
Flynn Tolan
1. Profit margin: $2,594 $4,072
———— = 8.0% ———— = 10.1%
$32,622 $40,457
Gross profit rate: $32,622 - $20,739 $40,457 - $24,431

———————— ————————
$32,622 $40,457
$11,883 $16,026
———— = 36.4% ———— = 39.6%
$32,622 $40,457
2. Because all of Tolan’s profitability ratios are higher than Flynn’s, it can be concluded that
Tolan is the more profitable of the two companies.
*Ex. 233
June 4 Deere Company purchased $3,500 worth of merchandise, terms n/30 from Gilbert
Company. The cost of the merchandise was $2,500.
13 Deere returned $600 worth of goods to Gilbert for full credit. The goods had a cost of
$400 to Johnson.
13 Deere paid the account in full.
Instructions
Prepare the journal entries to record these transactions in (a) Deere’s records and (b) Gilbert’s
records. Assume use of the periodic inventory system for both companies.

*Solution 233 (15-20 min.)
(a) Deere’s books
June 4 Purchases ……………………………………………….. 3,500

Accounts Payable………………………………. 3,500
13 Accounts Payable………………………………………… 600

Purchase Returns and Allowances……………. 600
13 Accounts Payable………………………………………… 2,900

Cash………………………………………………. 2,900
(b) Gilbert’s books
June 4 Accounts Receivable…………………………………….. 3,500

Sales Revenue…………………………………… 3,500
13 Sales Returns and Allowance…………………………… 600

Accounts Receivable……………………………. 600
13 Cash……………………………………………………….. 2,900
Accounts Receivable……………………………. 2,900
*Ex. 234
On September 1, Hendricks Supply had an inventory of 18 backpacks at a cost of $20 each.

The company uses a periodic inventory system. During September, the following transactions
and events occurred.
Sept. 4 Purchased 50 backpacks at $20 each from Neufeld, terms 2/10, n/30.
6 Received credit of $100 for the return of 5 backpacks purchased on Sept. 4 that were
defective.
9 Sold 30 backpacks for $30 each to Brewer Books, terms 2/10, n/30.
13 Sold 10 backpacks for $30 each to Stoner Office Supply, terms n/30.
14 Paid Neufeld in full, less discount.
Instructions
Journalize the September transactions for Hendricks Supply.

Sept. 4 Purchases ........................................................................ 1,000

Accounts Payable ................................................... 1,000
6 Accounts Payable ............................................................ 100

Purchase Returns and Allowances ......................... 100

Sales Revenue........................................................ 900

Sales Revenue........................................................ 300
14 Accounts Payable ($1,000 - $100) .................................. 900

Cash ($900  .98).................................................... 882
Purchase Discounts ($900  .02) ........................... 8
*Ex. 235
Presented here are selected transactions for the Foyle Company during April. Foyle uses the
periodic inventory system.
April 1 Sold merchandise to Land Company for $4,000, terms 2/10, n/30. The
merchandise sold had a cost of $2,000.
2 Purchased merchandise from Webb Corporation for $6,000, terms 1/10, n/30.
4 Purchased merchandise from Ryan Company for $2,000, n/30.
10 Received payment from Land Company for purchase of April 1 less appropriate
discount.
11 Paid Webb Corporation for April 2 purchase.
Instructions
Journalize the April transactions for Foyle Company.
April 1 Accounts Receivable…………………………………………… 4,000

Sales Revenue………………………………………… 4,000
2 Purchases……………………………………………………… 6,000
4 Purchases ……… ……………………………………………… 2,000


*Solution 235 (Cont.)

10 Cash ($4,000 x .98) … ……………………………………….. 3,920
Sales Discounts ($4,000 x .02)……………………………….. 80
Accounts Receivable…………………………………… 4,000
11 Accounts Payable………………………………………………… 6,000

Purchase Discounts ($6,000 x .01)….. 60
Cash ($6,000 x .99)……………………………………. 5,940
*Ex. 236
This information relates to Tandi Co.
1. On April 5 purchased merchandise from Buehler Company for $33,000, terms 2/10, net/30.
2. On April 6 paid freight costs of $900 on merchandise purchased from Buehler Company.
3. On April 7 purchased equipment on account for $26,000.
4. On April 8 returned some of the April 5 merchandise to Buehler Company which cost $3,000.
5. On April 15 paid the amount due to Buehler Company in full.
Instructions
(a) Prepare the journal entries to record these transactions on the books of Tandi Co. using a
periodic inventory system.
(b) Assume that Tandi Co. paid the balance due to Buehler Company on May 4 instead of
April 15. Prepare the journal entry to record this payment.
*Solution 236 (10 min.)
(a) (1) April 5 Purchases.................................................. 33,000

Accounts Payable............................... 33,000
(2) April 6 Freight-In.................................................... 900
Cash................................................... 900
(3) April 7 Equipment.................................................. 26,000
Accounts Payable............................... 26,000
(4) April 8 Accounts Payable...................................... 3,000
Purchase Returns and Allowances...... 3,000
($33,000 – $3,000)
(5) April 15 Accounts Payable...................................... 30,000
Purchase Discounts............................ 600
[($33,000 – $3,000)  2%]
Cash ($30,000 – $600)....................... 29,400
(b) May 4 Accounts Payable...................................... 30,000

($33,000 – $3,000)
Cash.................................................... 30,000

COMPLETION STATEMENTS
237. A _________________ buys and sells inventory rather than performing services as their
primary source of revenue.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
238. Cost of goods sold is deducted from net sales revenue for the period in order to arrive at
________________.
Reporting
239. Inventory on hand can be obtained from detailed inventory records when a
________________ inventory system is maintained.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
240. The acquisition of inventory is debited to the ____________ account when a perpetual
inventory system is used.
IMA: FSA
241. The freight costs incurred by a seller on outgoing inventory are an ________________ to
the seller.
Reporting
242. When a customer returns inventory previously purchased on credit, the entry to record the
credit granted to the customer requires a debit to the ___________________ account and
a credit to the ________________ account.
IMA: FSA
243. Every credit sales transaction should be supported by a _________________ that

provides written evidence of the sale.
244. Sales Returns and Allowances and Sales Discounts are both ______________ accounts
and have normal _______________ balances.
Reporting
245. Gross profit is obtained by subtracting ________________ from ________________.

Reporting
246. A useful measure of profitability is the ratio of net income to _____________.

Reporting

Answers to Completion Statements

237. merchandiser 243. Sales invoice
238. gross profit 244. contra revenue, debit
239. perpetual 245. cost of goods sold, net sales
240. Inventory 246. net sales
241. operating expense
242. Sales Returns and Allowances,
Accounts Receivable
MATCHING
247. Match the items below by entering the appropriate code letter in the space provided.
A. Net sales F. Contra revenue

B. Sales discount G. Freight-out
C. Credit terms H. Gross profit
D. Periodic inventory system I. Sales invoice
E. Gross profit rate J. Purchase discount
_____ 1. A reduction given by the seller for prompt payment of a credit sale.
_____ 2. Provides support for a credit sale.
_____ 3. Gross profit divided by net sales.
_____ 4. Sales less sales returns and allowances and sales discounts.
_____ 5. Specifies the amount of cash discount and time period during which it is offered.
_____ 6. Net sales less cost of goods sold.
_____ 7. Freight cost to deliver goods to customers reported as an operating expense.
_____ 8. Requires a physical count of goods on hand to compute cost of goods sold.
_____ 9. A cash discount claimed by a buyer for prompt payment of a balance due.
_____ 10. An account that is offset against a revenue account on the income statement.
Ans: N/A, LO: 1-6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None,
IMA: Reporting
Answers to Matching
1. B 6. H
2. I 7. G
3. E 8. D
4. A 9. J
5. C 10. F

SHORT-ANSWER ESSAY QUESTIONS

S-A-E 248
You are at a company picnic and the company president starts a conversation with you. The
president says “Since we use the perpetual inventory system, there is no reason to take a
physical count of our inventory.” What is your response to the president’s remarks?
Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Communications, IMA: FSA
Solution 248
You have made a very good observation, but human and mechanical shortcomings need to be
considered. The perpetual inventory system maintains detailed records of each inventory
purchase, sale and return. This does not mean that everything has been correctly recorded.
Some possible causes of discrepancies between the goods on hand and the amounts shown in
the accounting system include (1) inventory items were coded incorrectly, (2) cashiers failed to
properly scan inventory items, (3) inventory items were damaged or stolen, or (4) goods
returned by customers were not properly entered in the accounting records. It is necessary to
reconcile amounts in the ledger to actual quantities. Discrepancies should be properly
accounted for and investigated.
S-A E 249
A merchandising company frequently has a need to use contra accounts related to the sale of
goods. Identify the contra accounts that have normal debit balances and explain why they are
not considered expenses.
PC: Communications, IMA: Business Economics
Solution 249
The contra accounts related to the sale of goods that have normal debit balances are Sales
Discounts and Sales Returns and Allowances. These accounts have debit balances but are not
expenses because they are adjustments of sales, not operating, selling, or administrative
expenses. They are an adjustment of the inflow from the sale of goods, rather than a cost used
to help earn revenue.
S-A E 250
Alice Gray believes revenues from credit sales may be earned before they are collected in cash.
Do you agree? Explain.
Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Communications, IMA: Reporting
Solution 250
Agree. In accordance with the revenue recognition principle, sales revenues are generally
considered to be earned when the goods are transferred from the seller to the buyer; that is,
when the exchange transaction occurs. The earning of revenue is not dependent on the
collection of credit sales.

S-A E 251
To encourage bookstores to buy a broader range of book titles many publishers allow
bookstores to return unsold books to the publisher. This results in very significant returns each
year. To ensure proper recognition of revenues, how should publishing companies account for
these returns?
Solution 251
In most industries returns are not significant, and they are therefore accounted for as they occur.
When returns are expected to be significant, the company should make an adjusting entry at the
end of the period to estimate the amount of returns that will result from the period's sales, so
that revenues will not be overstated during the period.
S-A E 252
In a single-step income statement, all data are classified under two categories: (1) Revenues, or
(2) Expenses. If the income statement is recast in a multiple-step format, what additional
information or intermediate components of income would be presented?
Solution 252
The items reported in a multiple-step income statement that are not reported in a single-step
income statement are: gross revenues as well as net revenues, gross profit, detailed selling and
administrative expenses, income from operations, other revenues and gains, and other
expenses and losses. For companies using the periodic inventory method the computation of
cost of goods sold using beginning and ending inventories, purchases (gross and net) are also
broken out.
S-A-E 253
Distinguish between cost of goods sold and operating expenses, describe the nature of these
two items and their placement on the income statement.
Solution 253
Cost of goods sold includes the cost of obtaining the goods held for resale; it is deducted
directly from net sales on the income statement. Operating expenses, on the other hand, include
selling and general administrative expenses; they appear directly below the gross profit on the
income statement.
S-A E 254
The income statement for a merchandising company presents five amounts not shown on a
service company’s income statement. Identify and briefly explain the five unique amounts.

Solution 254
The items reported for a merchandising company that are not reported for a service company
are sales revenue, sales returns and allowances, sales discounts, cost of goods sold, and gross
profit. Sales revenue, sales returns and allowances, and sales discounts comprise net sales.
Cost of goods sold represents the total cost of merchandise sold during the period. Gross profit
is the excess of net sales over the cost of goods sold.
S-A E 255
What factors affect a company's gross profit rate—that is, what can cause the gross profit rate to
increase and what can cause it to decrease?
Solution 255
Factors affecting a company's gross profit rate include selling products with a higher (or lower)
"markup," increased competition that results in lower selling prices, and price increases or
decrease from suppliers.
S-A E 256
The following are the gross profit percentages for Naylor Company:
Year Gross Profit

Percentage
2012 33%
2013 34%
2014 36%
2015 13%
List four possible explanations for the low gross profit percentage in 2015.
Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution 256
Possible explanations for 2015’s low gross profit percentage:
1. Errors have occurred.

2. Cost of buying merchandise inventory increased, but the selling price was not increased.
3. Merchandise inventory has been stolen.
4. Some sales were not recorded.
5. The economy is weak and commissioned sales personnel lowered selling prices without
authorization.
6. Inferior goods are being sold and customers are subsequently given sales allowances
which reduce net sales.

S-A E 257 (Ethics)

Hiller Corporation manufactures electronic components for use in many consumer products.
Their raw materials are purchased literally from all over the world. Depending on the country
involved, purchase terms vary widely. Some suppliers, for example, require full prepayment,
while others are content to receive payment within six months of receipt of the goods.
Because of this situation, Hiller never closes its books until at least ten days after month end. In
this way, it can sort out ownership of goods in transit, and document which goods were received
by month end, and which were not.
Donna Gordon, a new accountant, was asked to record about $50,000 in inventory as having
been received before month end. She argued that the shipping documents clearly showed that
the goods were actually received on the 8th of the current month. Her boss, busy with month-
end reports, curtly tells Donna to check the shipping terms. She did so, and found the notation
"FOB (free on board) shipper's dock" on the document. She hadn't seen that particular notation
before, but she reasoned that if the selling company considered it shipped when it reached their
dock, Hiller should consider it received when it reached Hiller's dock. She did not record the sale
until after month end.
Required:
1. Why are accountants concerned with the timing in the recording of purchases?
2. Was there a violation of ethical standards here? Explain.
Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution 257
1. Accountants are concerned with timing because they seek to make sure that sales are
recorded in the proper period so that revenues and expenses are properly matched; to make
sure that goods recorded as owned by the company actually are owned as of the last date of
the period; and to make certain that sales recorded have been actually completed.
2. The only ethical principle that may be involved is one of competence. Donna does not
appear to know enough about reading shipping documents to make a proper determination
of ownership. The goods were owned by Hiller as soon as they left the shipper's dock.
Otherwise, the goods would have been owned by no one while in transit. It does not appear
that Donna compromised her integrity or that she sought some sort of gain from her mistake.
It does seem likely that she should have known how to interpret the shipping documents.
S-A E 258 (Communication)

Sandy Lang and Mandy Starr, two salespersons in adjoining territories, regularly compete for
bonuses. During the last month, their dollar volume of sales, on which the bonuses are based,
was nearly equal. On May 30, 2014, each made a large sale. Both orders were shipped on May
31, 2014, the last day of the month, and both were received by the customers on June 5, 2014.
Sandy's sale was FOB shipping point (ownership passes to buyer at time of shipping), and
Mandy's was FOB destination (ownership passes to buyer at time of receipt). The printed policy
of the company states that sales "count" for purposes of calculating bonuses on the date that
ownership passes to the purchaser. Sandy's sale was therefore counted in her May monthly
total of sales while Mandy's sale was not. Mandy is quite upset. She has asked you to just
include it, or to take Sandy's off as well. She also has told you that you are being unethical for
allowing Sandy to get a bonus just for choosing a particular shipping method.

S-A E 258 (Cont.)
As the accounting manager write a memo to Mandy on June 15, 2014, and explain your
position.
PC: Communications, IMA: FSA
Solution 258
MEMO
TO: Mandy Starr
FROM: Accounting Manager
RE: Sales Bonuses
DATE: June 15, 2014
As you know, sales bonuses are based upon the revenue generated by each salesperson in
accordance with the printed policy of the company. This policy states that you will receive
bonus credit based on the date of title transfer for goods sold. Your disputed sale of May 30,
2014, was shipped on May 31, 2014, with terms “FOB Destination”. Our records indicate that
this shipment was received by the customer on June 5, 2014. This puts title transfer into your
June 2014 bonus payment. I can appreciate your being upset that this large sale was not
counted in your May 2014 bonus but it will appear in your June 2014 bonus payment in
accordance with the policy which is consistency applied. It would be unethical and
unprofessional for me to change the written policy and it would violate the consistency of that
policy’s application.
I do understand your disappointment, but this sale does count in June—and it just may make
the difference in June's bonus. Please call me if I can be of further help.
(signature)

IFRS QUESTIONS
1. The Income statement is
a. required under GAAP but not under IFRS.
b. required under IFRS in the same format as under GAAP.
c. required under IFRS but not under GAAP.
d. required under IFRS with some differences as compared to GAAP.
Business Economics
2. The basic accounting entries for merchandising are

a. the same under GAAP and under IFRS.
b. required under GAAP but not under IFRS.
c. required under IFRS but not under GAAP.
d. required under IFRS with some differences as compared to GAAP.
Business Economics
3. Under GAAP, companies can choose which inventory system?

Perpetual Periodic
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No
Business Economics
4. Under IFRS, companies can choose which inventory system?

Perpetual Periodic
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No
Business Economics
5. Companies cannot use the

a. periodic inventory system under GAAP.
b. periodic inventory system under IFRS.
c. perpetual system under IFRS.
d. None of these answer choices are correct.
Business Economics
6. Inventories are defined by IFRS as

a. held-for-sale in the ordinary course of business.
b. in the process of production for sale in the ordinary course of business.
c. in the form of materials or supplies to be consumed in the production process or in
the providing of services.
d. All of these answer choices are correct.
Business Economics

7. Under GAAP, companies generally classify income statement items by

a. function.
b. nature.
c. nature or function
d. date incurred.
Business Economics
8. Under IFRS, companies must classify income statement items by

a. function.
b. nature.
c. nature or function
d. date incurred.
Business Economics
9. Under GAAP, income statement items are generally described as

a. administration, distribution, manufacturing, etc.
b. salaries, depreciation, utilities, etc.
c. administration, depreciation, manufacturing, etc.
d. salaries, distribution, utilities, etc.
Business Economics
10. Under IFRS, income statement items classified by nature are generally described as
a. administration, distribution, manufacturing, etc.
b. salaries, depreciation, utilities, etc.
c. administration, depreciation, manufacturing, etc.
d. salaries, distribution, utilities, etc.
Business Economics
11. For the income statement, IFRS requires

a. single-step approach.
b. multiple-step approach.
c. single-step approach or multiple-step approach.
d. no specific income statement approach.
Business Economics
12. Under IFRS, companies can apply revaluation to

a. land, buildings, and intangible assets.
b. land, buildings, but not intangible assets.
c. intangible assets, but not land.
d. no assets.
Business Economics
13. The use of IFRS results in more transactions affecting

a. net income but not other comprehensive income.
b. other comprehensive income, but not net income.
c. net income and other comprehensive income.
d. neither net income nor other comprehensive income.

Business Economics
14. Comprehensive income under IFRS
a. includes unrealized gains and losses included in net income, in contrast to GAAP.
b. includes unrealized gains and losses included in net income, similar to GAAP.
c. excludes unrealized gains and losses included in net income, in contrast to GAAP.
d. excludes unrealized gains and losses included in net income, similar to GAAP.
Business Economics
15. The number of years of income statement information to be presented is

a. 2 years under both GAAP and IFRS.
b. 3 years under both GAAP and IFRS.
c. 2 years under GAAP and 3 years under IFRS.
d. 3 years under GAAP and 2 years under IFRS.
Business Economics

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CHAPTER 5

Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

Multiple Choice Questions (Cont.)

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

FOR INSTRUCTOR USE ONLY

Note: TF = True-False C = Completion

CHAPTER LEARNING OBJECTIVES

4. Distinguish between a single-step and a multiple-step income statement. In a single-

6. Explain the factors affecting profitability. Profitability is affected by gross profit, as

FOR INSTRUCTOR USE ONLY

2. The operating cycle of a merchandising company ordinarily is shorter than that of a

3. Sales revenue minus operating expenses equals gross profit.

FOR INSTRUCTOR USE ONLY

13. Cost of Goods Sold is considered an expense of a merchandising firm.

24. Cash register tapes provide evidence of credit sales.

FOR INSTRUCTOR USE ONLY

26. The revenue recognition principle applies to merchandising companies by recognizing

28. Sales Discounts is a contra revenue account to Sales Revenue.

29. The normal balance of Sales Returns and Allowances is a credit.

36. Freight-out appears as an operating expense in the income statement.

FOR INSTRUCTOR USE ONLY

41. A merchandising company’s net income is determined by subtracting operating

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

53. Merchandising companies that sell to retailers are known as

54. Which of the following would not be considered a merchandising operation?

FOR INSTRUCTOR USE ONLY

57. Gross profit equals the difference between

58. Each of the following companies is a merchandising company except a

59. Net income will result if gross profit exceeds

60. A merchandiser will earn an operating income of exactly $0 when

FOR INSTRUCTOR USE ONLY

61. A merchandiser that sells directly to consumers is a

62. Two categories of expenses in merchandising companies are

63. The primary source of revenue for a wholesaler is

64. Generally, the revenue account for a merchandising enterprise is called

65. Under a perpetual inventory system

66. The operating cycle of a merchandising company is

FOR INSTRUCTOR USE ONLY

67. Sales revenue less cost of goods sold is called

69. Which of the following expressions is incorrect?

71. A perpetual inventory system would most likely be used by a(n)

72. Which of the following is a true statement about inventory systems?

FOR INSTRUCTOR USE ONLY

74. In a perpetual inventory system, cost of goods sold is recorded

77. Inventory becomes part of cost of goods sold when a company

78. Which statement is incorrect?

FOR INSTRUCTOR USE ONLY

81. What is a difference between merchandising companies and service enterprises?

FOR INSTRUCTOR USE ONLY

Solution: $9,000  .98  $8,820

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

Solution: [360  (30  10)]  1%  18%

Solution: $9,000  .98  $8,820