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Fundamentals of Financial Accounting, 6e (Phillips)
Chapter 6 Merchandising Operations and the Multistep Income Statement
1) A company either performs a service, sells inventory that it purchases from others, or
manufacturers a product; it cannot serve more than one of these functions.
Answer: FALSE
Explanation: Companies may sell goods that it manufactures.
Difficulty: 2 Medium
Topic: Operating Cycles
Learning Objective: 06-01 Distinguish between service and merchandising operations.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) A retailer is a company that buys products from manufacturers and sells them to wholesalers.
Answer: FALSE
Explanation: A retailer sells products to the final consumer.
Difficulty: 1 Easy
Bloom's: Remember
3) A merchandising company's operating cycle begins with the acquisition of inventory and ends
with the cash collection from sales.
Answer: TRUE
Explanation: A merchandising operating cycle begins with the acquisition of inventory for
resale and ends when the cash from the sale is collected.
Difficulty: 1 Easy
Bloom's: Remember
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
4) Inventory shrinkage is the difference between inventory in the warehouse and inventory
counted.
Answer: FALSE
Explanation: Any discrepancy that exists between inventory recorded in the accounting records
and inventory counted is known as shrinkage.
Difficulty: 1 Easy
Topic: Inventory Systems
Learning Objective: 06-02 Explain the differences between periodic and perpetual inventory
systems.
Bloom's: Remember
5) Generally, a physical count of inventory is performed annually in both a perpetual inventory

system and a periodic inventory system.
Answer: TRUE
Explanation: An annual physical inventory count is required in a periodic system to adjust the
inventory account and determine the cost of goods sold. Annual physical inventory counts are
performed when a perpetual system is in use to ensure the accuracy of the accounting records
and estimate shrinkage.
Difficulty: 1 Easy
systems.
Bloom's: Remember
6) FOB shipping point means that ownership of goods passes to the buyer when the goods leave
the seller's place of business.
Answer: TRUE
Explanation: FOB shipping point means that title transfers when the goods leave the seller's
place of business.
Difficulty: 1 Easy
Topic: Recording Inventory Purchases
Learning Objective: 06-03 Analyze purchase transactions under a perpetual inventory system.
Bloom's: Remember
2
7) If a merchandiser offers a sales discount of 2/10, net/30 on a sale of $2,000, the amount due in
10 days is the net amount of $1,960.
Answer: TRUE
Explanation: If the sales discount is taken by payment within 10 days, $1,960 is due; if not, the
invoice amount of $2,000 is due in 30 days.
Bloom's: Apply
AACSB: Analytical Thinking
8) Sales discounts are discounts that consumers get from buying clearance items at a reduced
price.
Answer: FALSE
Explanation: Sales discounts are deductions from the selling price, which are offered to
customers to encourage them to make payments promptly.
Difficulty: 1 Easy
Topic: Recording Inventory Sales
Learning Objective: 06-04 Analyze sales transactions under a perpetual inventory system.
Bloom's: Remember
9) In a periodic inventory system, only one journal entry is required to record the sale of
inventory.
Answer: TRUE
Explanation: In a periodic system, only one journal entry is required when inventory is sold.
However, in a perpetual system, two journal entries are made when inventory is sold.
Difficulty: 1 Easy
Bloom's: Remember
3
10) Companies make a month-end adjustment for expected returns by decreasing Sales Revenue
and decreasing Cost of Goods Sold.
Answer: TRUE
Explanation: Companies make a month-end adjustment for anticipated sales discounts by
decreasing Sales Revenue, decreasing Cost of Goods Sold, increasing a liability Refund
Liability, and increasing Inventory–Estimated Returns.
Bloom's: Remember
11) Most companies report sales revenue, sales returns and allowances, and sales discounts, as
well as net sales on their externally reported income statements.
Answer: FALSE
Explanation: Externally reported income statements typically begin with net sales. Sales
revenue, sales returns and allowances, and sales discounts would be disclosed on internal reports.
Bloom's: Remember
12) Gross profit is a ledger account name included with other income statement accounts.
Answer: FALSE
Explanation: Gross profit is a subtotal on the multistep income statement. It is not the name of
an account.
Topic: Multistep Income Statement
Learning Objective: 06-06 Prepare and analyze a merchandiser's multistep income statement.
Bloom's: Remember
4
13) The gross profit percentage is computed by dividing operating income by net sales.
Answer: FALSE
Explanation: Gross profit percentage = [(Net sales − Cost of goods sold) ÷ Net sales] × 100
Difficulty: 1 Easy
Topic: Gross Profit Analysis
Bloom's: Remember
14) The periodic inventory system uses the Inventory account to keep track of the amount of
inventory that is purchased.
Answer: FALSE
Explanation: The periodic inventory system uses the Purchases account to keep track of the
amount of inventory that is purchased.
Difficulty: 1 Easy
Topic: Recording Inventory Transactions in a Periodic System
Learning Objective: 06-S2 Record inventory transactions in a periodic system.
Bloom's: Remember
15) The periodic inventory system uses the Purchases account to keep track of the amount of
inventory that is purchased.
Answer: TRUE
Explanation: The periodic inventory system uses the Purchases account to keep track of the
amount of inventory that is purchased.
Difficulty: 1 Easy
Bloom's: Remember
5
16) In a periodic inventory system, the cost of goods sold is recorded as each sale occurs.
Answer: FALSE
Explanation: Unlike a perpetual inventory system, a periodic system does not track the cost of
goods sold during the accounting period. The cost of goods sold is computed and recorded at the
end of the period after the number of units on hand are counted and the dollar valuation of the
ending inventory is computed.
Difficulty: 1 Easy
Bloom's: Remember
17) When a periodic inventory system is in use, at the end of each period a "book-to-physical"
adjustment will be made to reduce inventory for shrinkage.
Answer: FALSE
Explanation: Since a periodic inventory system doesn't provide an up-to-date record of
inventory on hand, it's impossible to determine shrinkage.
Bloom's: Remember
18) When a periodic inventory system is in use, the Inventory account is updated only at the end
of the period.
Answer: TRUE
Explanation: Unlike a perpetual inventory system, a periodic system does not track the cost of
goods sold during the accounting period. Purchases of inventory are recorded in the Purchases
account. Then, an entry is made at year-end to adjust the Inventory account to reflect the quantity
and cost of the inventory that is on hand.
Difficulty: 1 Easy
Bloom's: Remember
6
19) Intel makes microchips from raw materials acquired from suppliers. Intel is a:
A) service company.
B) retail company.
C) manufacturer.
D) merchandising company.
Answer: C
Explanation: A manufacturer processes raw materials into a finished product to sell to
customers.
Difficulty: 1 Easy
Bloom's: Understand
20) BetterBuy purchases computers from companies like Hewlett Packard and IBM and sells
them to consumers. BetterBuy is a:
A) merchandising company at the retail level.
B) service company.
C) merchandising company at the wholesale level.
D) manufacturer.
Answer: A
Explanation: BetterBuy sells products to the final consumer at the retail level.
Difficulty: 1 Easy
Bloom's: Understand
7
21) Which of the following is a merchandising company?
A) General Motors
B) H&R Block
C) The Gap
D) Proctor & Gamble
Answer: C
Explanation: Merchandising companies, such as The Gap, are called retailers when they sell
directly to individual consumers and wholesalers when they sell their inventory to retail
businesses for resale to consumers. General Motors and Proctor and Gamble are manufacturers
and H&R Block is a service provider.
Difficulty: 1 Easy
Bloom's: Remember
22) Which of the following is an activity common to the operations of merchandising,

manufacturing, and service companies?
A) Producing the product
B) Incurring operating expenses
C) Buying goods or raw materials
D) Selling a physical product
Answer: B
Explanation: Regardless of the type of business, all businesses incur operating expenses.
Bloom's: Understand
8
23) Which of the following is an activity in the operations of a manufacturer, but not in the
operations of a merchandising or service company?
A) Selling goods to consumers
B) Receiving cash
C) Selling goods to other firms
D) Buying raw materials
Answer: D
Explanation: Manufacturers process raw materials into a finished product.
Difficulty: 1 Easy
Bloom's: Understand
24) A company buys footwear and clothing from manufacturers, which it resells to discount
stores in a large urban area. This company is an example of a:
A) wholesale merchandising company.
B) service company.
C) retail merchandising company.
D) secondary service company.
Answer: A
Explanation: This is a wholesaler because the company does not sell products to the final
consumer.
Difficulty: 1 Easy
Bloom's: Understand
9
25) The receipt of cash is one of the operating activities of:
A) companies that sell goods but not companies that sell services.
B) companies that sell to consumers but do not sell to other companies.
C) merchandising, manufacturing, and service companies.
D) companies that sell goods they bought from others but not of companies that make the goods
they sell.
Answer: C
Explanation: All types of businesses have operating activities that involve cash receipts.
Difficulty: 1 Easy
Bloom's: Understand
26) A series of activities that generates revenues and collects cash from customers is called:
A) the operating cycle.
B) the financing cycle.
C) the accounting cycle.
D) the perpetual cycle.
Answer: A
Explanation: The operating cycle is a series of activities that a company undertakes to generate
revenues and, ultimately, cash.
Difficulty: 1 Easy
Bloom's: Remember
10
27) Sleepy Head Coffee Shop buys coffee, mugs, and pastries from Morning Show Co. for sale
to consumers. What type of company is Sleepy Head Coffee Shop?
A) Retail merchandiser
B) Wholesale merchandiser
C) Manufacturer
D) Service business
Answer: A
Explanation: Merchandising companies differ in that their cycle begins with buying products,
which are sold to customers, which leads to collecting cash that can be used to pay operating
expenses and buy more inventory. Merchandising companies are called retailers when they sell
directly to individual consumers and wholesalers when they sell their inventory to retail
businesses for resale to consumers. Manufacturers make rather than buy the products they sell.
Service companies sell services to customers.
Difficulty: 1 Easy
Bloom's: Remember
28) Which line item would be found on a merchandiser's balance sheet and not on a service
firm's?
A) Supplies
B) Cost of Goods Sold
C) Inventory
D) Sales Revenue
Answer: C
Explanation: Service companies sell services to customers. Merchandising companies differ in
that their cycle begins with buying products, which are sold to customers, which leads to
collecting cash that can be used to pay operating expenses and buy more inventory.
Merchandisers report Inventory on their balance sheets.
Difficulty: 1 Easy
Bloom's: Remember
11
29) Which line item would be found on a merchandiser's income statement and not on a service
firm's?
A) Inventory
B) Service Revenue
C) Depreciation Expense
D) Cost of Goods Sold
Answer: D
Explanation: Merchandisers report an expense called Cost of Goods Sold, which represents the
total cost of all goods sold to customers during the period. Service companies do not incur this
expense because they do not sell goods.
Difficulty: 1 Easy
Bloom's: Remember
30) ________ sell their inventory to ________ for resale to consumers.

A) Wholesalers; retailers
B) Retailers; wholesalers
C) Manufacturers; wholesalers
D) Manufacturers; service companies
Answer: A
Explanation: Wholesalers sell their inventory to retail businesses who then sell it to consumers.
Bloom's: Remember
12
31) Inventory is reported as a(n) ________ on the ________.
A) current asset; balance sheet
B) current asset; balance sheet and income statement
C) expense; income statement
D) expense; balance sheet
Answer: A
Explanation: A merchandiser reports inventory as a current asset on its balance sheet because it
expects to sell the inventory within the next twelve months or their operating cycle, whichever is
shorter.
Difficulty: 1 Easy
Bloom's: Remember
32) Which of the following is inventory?

A) Tangible property held for sale in the normal course of business.
B) Office supplies that a company plans to use in the next few months.
C) Equipment used to manufacture products which will be sold later.
D) Raw materials and work in process.
Answer: A
Explanation: Inventory consists of goods acquired for resale to customers.
Difficulty: 1 Easy
Bloom's: Remember
13
33) Inventory reports the:
A) cost of goods available for sale.
B) cost of merchandise purchased and sold.
C) cost of goods that have been delivered to customers.
D) selling price times the quantity of goods sold.
Answer: A
Explanation: Inventory reports the merchandiser's total cost of acquiring goods that it has not yet
sold. Or, in other words, Inventory reports the cost of the goods that are available for sale to
customers.
Difficulty: 1 Easy
Bloom's: Remember
34) Sales Revenue reports the:

A) cost of merchandise available to sell.
B) cost of merchandise purchased.
C) cost times the quantity of goods sold.
Answer: D
Explanation: Sales Revenue and Cost of Goods Sold indicate the total selling price and cost of
all goods that the merchandiser did sell to customers during the period.
Difficulty: 1 Easy
Bloom's: Remember
14
35) Cost of goods sold reports the:
A) cost of merchandise available to sell.
B) cost of merchandise purchased.
C) cost times the quantity of goods sold.
Answer: C
all goods that the merchandiser did sell to customers during the period.
Difficulty: 1 Easy
Bloom's: Remember
36) Orbit, Inc. has sales of $28,000, beginning inventory of $3,500, purchases of $17,500, and
ending inventory of $4,900. The cost of goods sold is:
A) $16,100.
B) $21,000.
C) $28,000.
D) $11,900.
Answer: A
Explanation: Cost of goods sold = Beginning inventory + Purchases − Ending inventory
= $3,500 + $17,500 − $4,900 = $16,100
Difficulty: 3 Hard
Bloom's: Apply
15
37) Seasons has sales of $42,000, beginning inventory of $4,900, purchases of $24,500, and
ending inventory of $3,500. The cost of goods sold is:
A) $29,400.
B) $25,900.
C) $16,100.
D) $23,100.
Answer: B
= $4,900 + $24,500 − $3,500 = $25,900
Difficulty: 3 Hard
Bloom's: Apply
38) Broad, Inc. had a beginning inventory of $50,000 and an ending inventory of $80,000. Its
Cost of Goods Sold for the year was $970,000. What was the amount of purchases that it made
for the year?
A) $940,000
B) $1,000,000
C) $1,050,000
D) $1,060,000
Answer: B
Explanation: Ending inventory = Beginning inventory + Purchases − Cost of goods sold
Purchases = Ending inventory − Beginning inventory + Cost of goods sold
= $80,000 − $50,000 + $970,000 = $1,000,000
Difficulty: 3 Hard
systems.
Bloom's: Apply
16
39) Elm Corporation is a merchandising company. The year began with inventory of $35,100,
Purchases for the year were $67,600, and the Ending Inventory was $18,200. What is the Cost of
Goods Sold that would be reported on the income statement?
A) $120,900
B) $50,700
C) $14,300
D) $84,500
Answer: D
Cost of goods sold = Beginning inventory + Purchases − Ending inventory
= $35,100 + $67,600 − $18,200 = $84,500
Difficulty: 3 Hard
systems.
Bloom's: Apply
40) Madison Manufacturing's ending inventory count was $65,000, cost of goods sold was
$35,100, and purchases were $72,800, its beginning inventory must have been:
A) $42,900.
B) $172,900.
C) $102,700.
D) $27,300.
Answer: D
Beginning inventory = Cost of goods sold − Purchases + Ending inventory
= $35,100 − $72,800 + $65,000 = $27,300
systems.
Bloom's: Apply
17
41) Which of the following is the equation for cost of goods sold?
A) Beginning inventory + Purchases − Ending inventory
B) Beginning inventory + Purchases + Ending inventory
C) Net purchases − Ending inventory
D) Ending inventory + Purchases − Beginning inventory
Answer: A
systems.
Bloom's: Remember
42) Beginning inventory plus purchases equals:

A) ending inventory.
B) cost of goods sold.
C) goods available for sale.
D) net purchases.
Answer: C
Explanation: Goods available for sale = Beginning inventory + Purchases
Difficulty: 1 Easy
systems.
Bloom's: Remember
43) Beginning inventory plus purchases minus ending inventory equals:

A) net sales.
C) goods available for sale.
D) net purchases.
Answer: B
systems.
Bloom's: Remember
18
44) Jackson Manufacturing Company had a beginning inventory of $30,000. During the year, the
company recorded inventory purchases of $90,000 and cost of goods sold of $100,000. The
ending inventory must equal:
A) $20,000.
B) $50,000.
C) $52,000.
D) $54,000.
Answer: A
Ending inventory = Beginning inventory + Purchases − Cost of goods sold
= $30,000 + $90,000 − $100,000 = $20,000
systems.
Bloom's: Analyze
45) Buckeye Co. had beginning inventory of $18,000, cost of goods sold of $42,000, and ending
inventory of $24,000. Purchases were:
A) $36,000.
B) $30,000.
C) $27,000.
D) $48,000.
Answer: D
Purchases = Cost of goods sold − Beginning inventory + Ending inventory
= $42,000 − $18,000 + $24,000 = $48,000
systems.
Bloom's: Analyze
19
46) Sheridan's beginning inventory is $140,000, goods purchased during the period cost
$480,000, and the cost of goods sold for the period is $560,000. What is the amount of its ending
inventory?
A) $180,000
B) $80,000
C) $100,000
D) $60,000
Answer: D
= $140,000 + $480,000 − $560,000 = $60,000
systems.
Bloom's: Apply
47) A ________ inventory system will always give updated balances for ________.
A) perpetual; Cost of Goods Sold
B) periodic; Inventory
C) perpetual; Goods Available for Sale
D) periodic; Cost of Goods Sold
Answer: A
Explanation: A perpetual inventory system will always give updated balances for Inventory and
Cost of Goods Sold. Goods available for sale is the subtotal of beginning and purchases; it is not
an account.
Difficulty: 1 Easy
systems.
Bloom's: Remember
20
48) Under the periodic inventory system:
A) inventory records are updated immediately after each purchase.
B) inventory must be counted at the end of each accounting period.
C) inventory does not have to be counted. (It can be taken from the accounting records.)
D) inventory levels must be counted every day.
Answer: B
Explanation: In a periodic inventory system, inventory records are not updated during the
accounting period. An inventory count is required at the end of the period in order to adjust the
balance in the inventory account and to determine cost of goods sold.
systems.
Bloom's: Understand
49) A company starts the period with 300 computers in inventory, purchases 90 more, returns 12
of them to suppliers, and has 249 in inventory at the end of the period. If there is no shrinkage,
how many computers were sold?
A) 141
B) 129
C) 51
D) 249
Answer: B
Explanation: Units sold = Units in beginning inventory + Units purchased − Units returned −
Ending inventory
= 300 + 90 − 12 − 249 = 129
systems.
Bloom's: Apply
21
50) In a retail business that uses a perpetual inventory system, scanning a bar code does not:
A) calculate the amount owed by the customer.
B) identify the item sold to be removed from the Inventory account.
C) identify the item sold to be recorded in the Cost of Goods Sold account.
D) calculate the gross profit.
Answer: D
Explanation: Scanning identifies the item sold so the inventory account is adjusted and the
amount charged to the customer is recorded. The gross profit is not calculated by scanning the
bar code.
Difficulty: 1 Easy
systems.
Bloom's: Understand
AACSB: Technology
51) The perpetual inventory method of tracking inventory is considered superior to the periodic
method because the perpetual method:
A) makes calculations easier and less technology can be deployed.
B) tells what inventory a company should have on hand at any point in time.
C) saves a company from ever having to count the goods in inventory.
D) is more consistent with how companies calculated inventory in the past.
Answer: B
Explanation: The perpetual inventory method is considered superior to the periodic method
because it provides an updated inventory account balance after every purchase, sale and return of
inventory during the period.
systems.
Bloom's: Understand
22
52) On December 31, 2018, you count 600 backpacks in inventory. During the next quarter, you
carefully record the effect of each purchase and sale transaction on inventory. You buy 256
backpacks during the next quarter. On March 31, 2019, you count 576 backpacks in inventory.
Which of the following is not correct?
A) Ending inventory on March 31, 2019 should be 576 backpacks.
B) Your company uses the perpetual inventory method.
C) Your company's records would show that 280 backpacks were sold during the quarter.
D) The amount of shrinkage cannot be determined with this type of inventory system.
Answer: D
Explanation: Units in beginning inventory + Units purchased − Units sold = Units in ending
inventory
= 600 + 256 − 280 = 576
Since the effect of each purchase and sale is recorded, a perpetual inventory system is in use.
Shrinkage can be determined in a perpetual inventory system by comparing recorded inventory
to the physical count.
systems.
Bloom's: Analyze
53) Which of the following statements regarding shrinkage is not correct?

A) Perpetual inventory systems can help managers detect shrinkage.
B) Shrinkage is another term for inventory loss due to theft, error, or fraud.
C) Shrinkage is detected by comparing the balance in the inventory ledger account with the
results of the physical inventory count.
D) It is easier to detect shrinkage in a periodic inventory system than in a perpetual inventory
system.
Answer: D
Explanation: Shrinkage is another term for inventory loss due to theft, fraud, or error. One of the
benefits of a perpetual inventory system is that it allows managers to estimate shrinkage. It
cannot be detected in a periodic system because it does not provide an up-to-date record of the
inventory that should be on hand when you count it.
systems.
Bloom's: Remember
23
54) In order to calculate shrinkage:
A) both periodic and perpetual inventory systems are needed.
B) a periodic inventory system is more effective.
C) a perpetual inventory system requires an occasional count of actual inventory.
D) it does not matter which system one uses.
Answer: C
Explanation: Calculating shrinkage using a perpetual inventory system requires a physical count
to compare to the ledger balance which has been perpetually updated for purchases, sales, and
returns. Shrinkage cannot be calculated using a periodic inventory system.
Difficulty: 1 Easy
systems.
Bloom's: Remember
55) Alvarado Company began the current month with inventory costing $18,000, then purchased
inventory at a cost of $63,000. The perpetual inventory system indicates that inventory costing
$54,000 was sold during the month for $72,000. If an inventory count shows that inventory
costing $26,100 is actually on hand at month-end, what amount of shrinkage occurred during the
month?
A) $900
B) $9,000
C) $26,091
D) $27,000
Answer: A
Explanation: The difference between the ending balance in the inventory account and the
physical inventory count is the amount of possible shrinkage.
$18,000 + $63,000 − $54,000 = $27,000 ending inventory.
$27,000 − $26,100 (actual count) = $900 shrinkage.
systems.
Bloom's: Apply
24
56) Windsor, Inc. uses a perpetual inventory system and reported $250,000 of inventory at the
beginning of the month based on a physical count of inventory. During the month, the company
bought $22,500 of inventory and sold inventory that had cost $15,000. At the end of the month,
the physical count of inventory shows $255,000 on hand. How much shrinkage occurred during
the month?
A) $17,500
B) $12,500
C) $2,500
D) $5,000
Answer: C
Explanation: A difference between the physical inventory count and the inventory account
balance is considered shrinkage. $250,000 + $22,500 − $15,000 = $257,500 inventory account
balance. A physical count of $255,000 reveals a difference of $2,500.
systems.
Bloom's: Apply
57) Which of the following statements regarding periodic and perpetual inventory systems is
correct?
A) Perpetual inventory systems are inferior for determining optimal times to reorder inventory.
B) Periodic inventory systems require a greater investment in technology.
C) Perpetual inventory systems may assist in determining inventory lost due to shrinkage.
D) Periodic inventory systems allow sales personnel to provide more immediate information
regarding availability of inventory.
Answer: C
Explanation: A benefit of a perpetual inventory system is that it allows managers to estimate
shrinkage.
Difficulty: 1 Easy
systems.
Bloom's: Remember
25
58) Which of the following statements regarding inventory counts is not correct?
A) Companies need to perform a physical count of their inventory at least yearly regardless of
which inventory system is being used.
B) A perpetual inventory system does not require a physical count during the accounting period
to determine cost of goods sold.
C) In a perpetual inventory system, the inventory count is compared to the inventory account
balance to reveal shrinkage.
D) If a company uses a perpetual inventory system and the inventory count at the end of the
accounting period is greater than the balance in the inventory ledger account, there must have
been shrinkage.
Answer: D
Explanation: Inventory counts are necessary in both periodic and perpetual inventory systems.
Shrinkage is indicated if the inventory count is less than the inventory ledger account balance. In
a perpetual inventory system, cost of goods sold is determined at the time of each sale, so a
physical count is not necessary during the period.
systems.
Bloom's: Understand
59) Companies using a perpetual inventory system:

A) never physically count their inventory.
B) must count their inventory at least once a week.
C) still need to count their inventory at the end of the period.
D) never know the amount of inventory shrinkage.
Answer: C
Explanation: A physical inventory count is necessary even if a perpetual inventory system is
used.
systems.
Bloom's: Remember
26
60) Palm Industries had cost of goods sold of $40,000. If purchases were $46,000 and ending
inventory was $12,000, Ace's beginning inventory must have been:
A) $6,000.
B) $18,000.
C) $52,000.
D) $34,000.
Answer: A
Beginning inventory = Cost of goods sold − Purchases + Ending inventory
= $40,000 − $46,000 + $12,000 = $6,000
Difficulty: 3 Hard
systems.
Bloom's: Apply
61) Goods available for sale can:

A) be sold and then become Cost of Goods Sold on the income statement.
B) not be sold and thus are not reported as Cost of Goods Sold on the balance sheet.
C) not be sold and thus are reported as Inventory on the income statement.
D) be sold and thus reported as Cost of Goods Sold on the balance sheet.
Answer: A
all goods that the merchandiser did sell to customers during the period. Both are reported on the
income statement.
Difficulty: 1 Easy
systems.
Bloom's: Remember
27
62) Berkley Company had beginning inventory of $4,000 and purchases of $20,000. If half of its
inventory was sold, Berkley's goods available for sale will:
A) be split between cost of goods sold and ending inventory.
B) appear only as an expense on the income statement.
C) appear only as an expense on the balance sheet.
D) appear only as an asset on the income statement.
Answer: A
Explanation: The sum of beginning inventory and purchases represents the cost of goods
available for sale. If half of the inventory was sold, it would be reported as Cost of Goods Sold,
an expense on the income statement. The other half still on hand would be reported as Inventory,
an asset, on the balance sheet.
Difficulty: 1 Easy
systems.
Bloom's: Remember
63) Broadmor's beginning inventory was $9,000. During the month, the company purchased an
additional $45,000 of inventory and sold goods that cost $36,000. Ending inventory was:
A) $9,000
B) $90,000
C) $18,000
D) $0
Answer: C
= $9,000 + $45,000 − $36,000 = $18,000
Difficulty: 3 Hard
systems.
Bloom's: Apply
28
64) To determine cost of goods sold for the period requires:
A) subtracting ending inventory from the goods available for sale, which is the beginning
inventory plus purchases.
B) adding ending inventory to the goods available for sale, which is the beginning inventory plus
purchases.
C) subtracting beginning inventory from the goods available for sale, which is the ending
inventory plus purchases.
D) adding beginning inventory to the goods available for sale, which is the ending inventory plus
purchases.
Answer: A
Explanation: Beginning inventory + purchases = goods available for sale. Goods available for
sale − ending inventory = cost of goods sold.
Difficulty: 1 Easy
Topic: Inventory Systems; Recording Inventory Transactions in a Periodic System
systems.
Bloom's: Remember
65) Which inventory system updates the inventory account only at the end of the accounting
period?
A) LIFO
B) Perpetual
C) FIFO
D) Periodic
Answer: D
Explanation: When a periodic inventory system is in use, inventory records are updated
"periodically," at the end of the accounting period. To determine how much merchandise has
been sold, periodic systems require that inventory be physically counted at the end of the period.
Difficulty: 1 Easy
systems.
Bloom's: Remember
29
66) Which inventory system records a change in the Inventory account every time goods are
bought, sold or returned?
A) Periodic
B) Perpetual
C) FOB Shipping Point
D) FOB Destination
Answer: B
Explanation: When a Perpetual inventory system is in use, Inventory records are updated
"perpetually," every time inventory is bought, sold, or returned.
Difficulty: 1 Easy
systems.
Bloom's: Remember
67) Sheridan Co. uses a perpetual inventory system. On May 1, beginning inventory was
$350,000. During May, Sheridan purchased $122,500 of inventory and sold $248,500 of
inventory. After the store closed on May 31, employees counted the inventory in the store and
found that $210,000 of inventory remained unsold. What was Sheridan's inventory shrinkage?
A) $14,000
B) $224,000
C) $262,500
D) $161,000
Answer: A
= $350,000 + $122,500 − $248,500 = $224,000
Shrinkage = Recorded amount − Actual count
= $224,000 − $210,000 = $14,000
Difficulty: 3 Hard
systems.
Bloom's: Apply
30
68) After performing a physical count of inventory at the end of the accounting period, it was
discovered that the amount of inventory on hand was less than the accounting records reported.
The entry to record this inventory shrinkage includes:
A) credit to Cost of Goods Sold.
B) debit to Inventory.
C) credit to Purchase Discounts.
D) credit to Inventory.
Answer: D
Explanation: The entry to record shrinkage includes a debit to Cost of Goods Sold (to increase
this expense account) and credit Inventory (to decrease this asset account).
Difficulty: 3 Hard
systems.
Bloom's: Apply
69) Coranado Company purchases $70,000 of inventory from a wholesaler who allows 45 days
to pay. In addition, the wholesaler offers a 3% discount if payment is made within 12 days.
These payment terms would be expressed as:
A) 0.03/12, n/45.
B) n/45, 3/12.
C) n/45, 0.03/12.
D) 3/12, n/45.
Answer: D
Explanation: Credit terms that offer 3% off for payment within 12 days, or the full amount due
in 45 days if payment is not made within the 12-day discount period, are expressed 3/12, n/45.
Difficulty: 1 Easy
Bloom's: Analyze
31
70) Monte Vista uses the perpetual inventory system. At the beginning of the quarter, Monte
Vista has $60,000 in inventory. During the quarter the company purchases $15,800 of new
inventory from a vendor, returned $1,400 of inventory to the vendor, and took advantage of
discounts from the vendor of $400. At the end of the quarter the balance in inventory is $53,000.
What is the cost of goods sold?
A) $21,000
B) $22,800
C) $7,000
D) $23,800
Answer: A
Explanation: Net Purchases = Purchases − Purchase returns − Purchase discounts
= $15,800 − $1,400 − $400 = $14,000
Cost of goods sold = Beginning inventory + Net purchases − Ending inventory
= $60,000 + $14,000 − $53,000 = $21,000
Bloom's: Apply
71) When a perpetual system is used and transportation cost is incurred to obtain inventory, the
transportation cost is:
A) added to Inventory.
B) reported as Selling, General & Administrative Expense on the income statement.
C) reported as a contra-account that is subtracted from sales revenue when determining net sales.
D) deducted from the Cost of Goods Sold when determining gross profit.
Answer: A
Explanation: When it is incurred to obtain inventory, transportation cost (also called freight-in)
is added to the Inventory account.
Difficulty: 1 Easy
Bloom's: Understand
32
72) Assume that a perpetual inventory system is in use. Which of the following statements
regarding the journal entries prepared is correct?
A) "Freight-out" or delivery costs associated with sales should be included in Cost of Goods
Sold.
B) When a company receives payment from a customer for a sale, Cash is debited and Accounts
Payable is credited.
C) When a company grants an allowance to a customer, Inventory is credited when using a
perpetual inventory system.
D) When a customer returns inventory, the seller debits Sales Revenue (or Sales Returns &
Allowances) under a perpetual inventory system.
Answer: D
Explanation: Freight-out is a selling expense on the income statement. When a company
receives payment for a sale, Cash is debited and Accounts Receivable is credited. When a
company grants an allowance, Sales Revenue & Allowances is debited and Accounts Receivable
is credited. If the inventory is returned, there are two entries. First, Sales Returns & Allowances
is debited and Accounts Receivable is credited. Second, Inventory is debited and Cost of Goods
Sold is credited.
Bloom's: Analyze
73) Verde Co. returned $500 of merchandise that was purchased on account. As a result of this
transaction, assets will:
A) decrease and liabilities will decrease.
B) decrease and net income will decrease.
C) stay the same and net income will decrease.
D) stay the same and liabilities will decrease.
Answer: A
Explanation: When merchandise that was purchased on account is returned, Inventory, an asset
account, will decrease and Accounts Payable, a liability account, will decrease. When
merchandise is returned, there is no effect on revenue or expenses and, as a result, there is no
effect on net income.
Bloom's: Understand
33
74) If merchandise purchased on credit is returned to the seller for a full refund, what would be
the effect on the accounts listed below?
A) Increase Inventory; No effect on Cost of Goods Sold; Decrease Accounts Payable.
B) Decrease Inventory; Decrease Cost of Goods Sold; No effect on Accounts Payable.
C) No effect on Inventory; Decrease Cost of Goods Sold; Decrease Accounts Payable.
D) Decrease Inventory; No effect on Cost of Goods Sold; Decrease Accounts Payable.
Answer: D
Explanation: When merchandise purchased on credit is returned to the seller for a full refund,
the Inventory account decreases and Accounts Payable account deceases.
Bloom's: Understand
75) On April 6, Portland purchased $25,000 of inventory, terms 1/15, n/30. Portland uses a
perpetual inventory system. The company paid for the purchase on April 26. The entry to record
the payment on April 26 includes which of the following?
A) A credit to Inventory for $250.
B) A debit to Accounts Payable for $24,500.
C) A credit to Accounts Payable for $25,000.
D) A credit to Cash for $25,000.
Answer: D
Explanation: Payment on April 26 would not qualify for the discount, so the entry would be
debit Accounts Payable and credit Cash for $25,000.
Bloom's: Apply
34
76) Purple Corp. purchased $10,000 of merchandise on June 3, subject to the terms, 2/10, n/30.
On June 9, it pays for all the merchandise purchased on June 3. The entry on June 9 will reduce:
A) Accounts Payable by $9,800.
B) net income by $200.
C) stockholders' equity by $200.
D) Inventory by $200.
Answer: D
Explanation: Since payment was made within the discount period, the related entry will decrease
Accounts Payable, a liability account, by $10,000 (the entire amount owed), decrease Cash, an
asset account, by $9,800 [or ($10,000 − ($10,000 × 0.02)], and decrease Inventory, an asset
account, by $200 (or $10,000 × 0.02). Since revenues and expenses are not included in this entry,
there is no effect on net income or stockholders' equity.
Difficulty: 3 Hard
Bloom's: Understand
77) Moreland Moldings purchased goods on credit costing $85,000 with terms of 3/10 n/30.
Payment is made to the seller 7 days after the purchase. How would the payment be recorded?
A) Debit Inventory for $2,550, debit Cash for $82,450, and credit Accounts Payable for $85,000.
B) Debit Accounts Payable for $85,000, credit Cash for $82,450, and credit Cost of Goods Sold
for $2,550.
C) Debit Accounts Payable for $85,000 credit Cash for $82,450, and credit Inventory for $2,550.
D) Debit Accounts Payable and credit Cash for $85,000.
Answer: C
Explanation: Since payment was made within the discount period, the related entry will debit
Accounts Payable (to decrease this liability account) for $85,000 (the entire amount owed),
credit Cash (to decrease this an asset account) for $82,450 [or ($85,000 − ($85,000 × 0.03)], and
credit Inventory (to decrease this asset account) for $2,550 (or $85,000 × 0.03).
Difficulty: 3 Hard
Bloom's: Understand
35
78) Willetta Company purchases inventory for $10,000 with terms 3/10, n/30. It then returns
$2,000 of the inventory purchased to the supplier and also receives an allowance for defective
inventory of $100. The company pays the amount due within the discount period. What is the
amount of the discount that will be taken?
A) $300
B) $237
C) $240
D) $297
Answer: B
Explanation: Purchase discount = (Purchase − Purchase return − Purchase allowance) ×
Discount percentage
= ($10,000 − $2,000 − $100) × 0.03 = $237
Bloom's: Apply
79) Polk Company uses a perpetual inventory system and had the following transactions during
November:
November 6—Purchased $8,700 of inventory on account, terms 2/10, n/30.

November 8—Returned $1,200 of defective units and received full credit.
November 15—Paid the amount due.
What journal entry will be recorded by Polk Company on November 6?

A) Debit Inventory and credit Accounts Payable for $8,700.
B) Debit Cost of Goods Sold and credit Accounts Payable for $8,526.
C) Debit Purchases and credit Accounts Payable for $8,700.
D) Debit Inventory and credit Accounts Payable for $8,526.
Answer: A
Explanation: When inventory is purchased on credit in a perpetual inventory system, the
Inventory account is increased (debited) and Accounts Payable is increased (credited) for the
cost of the inventory purchased.
Difficulty: 1 Easy
Bloom's: Apply
36
November:


A) Debit Inventory and credit Cost of Goods Sold for $1,200.
B) Debit Accounts Payable and credit Inventory for $1,200.
C) Debit Inventory and credit Accounts Payable for $1,200.
D) Debit Accounts Payable and credit Purchase Returns for $1,200.
Answer: B
Explanation: When inventory is returned using a perpetual inventory system, the Inventory
account is decreased (credited) and Accounts Payable is decreased (debited).
Difficulty: 1 Easy
Bloom's: Apply
November:


A) Debit Accounts Payable and credit Cash for $7,350
B) Debit Accounts Payable for $7,500, credit Purchase Discount for $150, and credit Cash for
$7,350
C) Debit Accounts Payable for $7,500, credit Inventory for $150, and credit Cash for $7,350
D) Debit Accounts Payable for $7,350, credit Inventory for $150, and credit Cash for $7,200
Answer: C
Explanation: Debit Accounts Payable for $7,500, credit Inventory for $150 (or $7,500 × 0.02),
and credit Cash for $7,350 (or $7,500 − $150).
Bloom's: Apply
37
82) A company using a perpetual inventory system made the following entry: Debit Accounts
Payable for $3,000, credit Inventory for $60, and credit Cash for $2,940. What does this entry
reflect?
A) A purchase of inventory at a discount.
B) A return of inventory for credit.
C) A sale of inventory on account.
D) A payment within the discount period for inventory previously purchased on credit.
Answer: D
Explanation: When a perpetual inventory system is used, a purchase discount taken is recorded
as a deduction to the Inventory account. Accounts Payable is debited for the full amount owed
and cash is credited for the actual amount paid.
Bloom's: Analyze
83) On July 1, Darin Company sold inventory costing $5,000 to Dee Company for $6,000, terms
3/10, n/30. Both companies use a perpetual inventory system. What journal entry will be
recorded by Dee Company on July 1?
A) Debit Purchases and credit Accounts Payable for $6,000.
B) Debit Inventory and credit Accounts Receivable for $6,000.
C) Debit Inventory and credit Accounts Payable for $6,000.
D) Debit Cost of Goods Sold and credit Inventory for $4,500.
Answer: C
Explanation: Using a perpetual inventory system, the purchaser records purchases on credit by
debiting Inventory and crediting Accounts Payable.
Difficulty: 1 Easy
Bloom's: Apply
38
84) On July 1, Darin Company sold inventory costing $5,000 to Dee Company for $6,000, terms
3/10, n/30. Both companies use the perpetual inventory system. Dee Company pays the invoice
on July 8 and takes the appropriate discount. What journal entry will be recorded by Dee
Company on July 8?
A) Debit Accounts Payable and credit Cash for $6,000
B) Debit Accounts Payable for $5,820, credit Inventory for $180, and credit Cash for $6,000
C) Debit Accounts Payable for $6,000, credit Cash for $5,820, and credit Inventory for $180
D) Debit Cost of Goods Sold and credit Cash for $5,000
Answer: C
Explanation: Debit Accounts Payable for $6,000, credit Inventory for $180 (or $6,000 × 0.03),
and credit Cash for $5,820 (or $6,000 − $180).
Bloom's: Apply
85) In a perpetual inventory system, paying transportation charges on goods purchased FOB
shipping point would have which of the following effects?
A) Decrease Operating Expenses
B) Increase Selling, General, and Administrative Expenses
C) Decrease Cost of Goods Sold
D) Increase Inventory
Answer: D
Explanation: Payment of the transportation charges would be debited to Inventory (assets
increase) and credited to Cash (assets decrease).
Bloom's: Analyze
39
86) The purchase of merchandise on account in a perpetual system is recorded with a debit to
________ and a credit to ________.
A) Inventory; Accounts Payable
B) Accounts Payable; Inventory
C) Inventory; Accounts Receivable
D) Accounts Receivable; Inventory
Answer: A
Explanation: The entry to record a purchase of inventory on account includes a debit to
Inventory (to decrease this asset account) and a credit to Accounts Payable (to increase this
liability account).
Difficulty: 3 Hard
Bloom's: Apply
87) Glenrosa Company bought inventory FOB shipping point from Monterosa Company for
$8,200 cash, including shipping charges. On December 31, the last day of the accounting year,
the goods were on a truck owned by Common Carrier, Inc., and not expected to arrive until
January 3. Which company should include these goods in its December 31 inventory?
A) Glenrosa should include the $8,200 in its inventory.
B) Glenrosa owns the inventory, but Common Carrier has possession of it. Each of them should
include half of the inventory, $4,100 each.
C) Common Carrier should include the $8,200 in its inventory, since the inventory is on its truck.
D) Glenrosa owns the inventory, but Common Carrier has possession of it. Neither of them can
include the $8,200 in its December 31 inventory.
Answer: A
Explanation: Glenrosa owns and should report the inventory as an asset on its balance sheet.
Difficulty: 3 Hard
Bloom's: Apply
40
88) Glenrosa Company bought inventory from Monterosa Company, FOB destination. On
December 31, the last day of the accounting year, the goods were on a truck owned by Common
Carrier, Inc., and not expected to arrive until January 2. Which company should include these
goods in its December 31 inventory?
A) Monterosa
B) Glenrosa
C) Common Carrier
D) None of them should include these goods in inventory.
Answer: A
Explanation: Since the goods were in transit, title has not passed to Glenrosa and thus they are
Monterosa's inventory on its balance sheet.
Bloom's: Understand
89) Alpha Company bought inventory from Omega Company, FOB shipping point. On
December 31, the last day of the accounting year, the goods were on a truck owned by Theta,
Inc., exactly halfway between Alpha and Omega. Which company should include these goods in
its December 31 inventory?
A) Omega
B) Alpha
C) Theta
D) Alpha and Omega should each include half of the goods in inventory.
Answer: B
Explanation: Since the goods were shipped FOB shipping point, title has passed to Alpha and
thus they are Alpha's inventory on its balance sheet.
Bloom's: Understand
41
90) Which of the following costs should be added to the buyer's Inventory account?
A) Freight-in costs with terms FOB shipping point
B) Freight-out costs with terms FOB destination
C) Freight-in costs with terms FOB destination
D) Freight-out costs with terms FOB shipping point
Answer: A
Explanation: If the terms of sale are FOB shipping point, ownership of the goods transfers to the
purchaser at the shipping point, so the purchaser would pay the transportation cost. This
transportation cost (also called freight-in) is recorded as an addition to the purchaser's Inventory
account because it is a cost the purchaser incurs to obtain the inventory. In general, a purchaser
should include in the Inventory account any costs needed to get the inventory into a condition
and location ready for sale. Costs that are incurred after the inventory has been made ready for
sale, such as freight-out to deliver goods to customers, should be treated as selling expenses.
Bloom's: Understand
91) Inventory cost consists of purchase price:

A) plus freight-in.
B) plus freight-out.
C) less freight-in.
D) less freight-out.
Answer: A
Explanation: If the terms of sale are FOB shipping point, ownership of the goods transfers to the
purchaser at the shipping point, so the purchaser would pay the transportation cost. This
transportation cost (also called freight-in) is recorded as an addition to the purchaser's Inventory
account because it is a cost the purchaser incurs to obtain the inventory. In general, a purchaser
should include in the Inventory account any costs needed to get the inventory into a condition
and location ready for sale. Costs that are incurred after the inventory has been made ready for
sale, such as freight-out to deliver goods to customers, should be treated as selling expenses.
Difficulty: 1 Easy
Bloom's: Remember
42
92) Assume that a company uses a perpetual inventory system and records the return of
inventory previously purchased on account with a debit to Accounts Payable and a credit to
Inventory. This entry is:
A) incorrect and will cause assets to be overstated.
B) incorrect and will cause assets to be understated.
C) incorrect and will cause liabilities to overstated.
D) correct.
Answer: D
Explanation: This entry is correct.
Difficulty: 3 Hard
Bloom's: Apply
93) Harvard, Inc. paid an invoice for $1,000, with discount terms of 2/7, n/30, within the
discount period and will write a check in the amount of:
A) $1,000.
B) $980.
C) $1,020.
D) $998.
Answer: B
Explanation: Payment = Amount owed − Discount
= $1,000 − ($1,000 × 0.02) = $1,000 − $20 = $980
Difficulty: 3 Hard
Bloom's: Apply
43
94) The journal entry to record taking a discount when paying for goods previously purchased on
account includes a:
A) credit to two asset accounts.
B) credit to a liability account.
C) debit to an asset account.
D) debit to an expense account.
Answer: A
Explanation: The journal entry includes a debit to Accounts Payable for the original cost (to
decrease this liability account) and a credit to Cash for the discounted amount (to decrease this
asset account) and Inventory for the amount of the discount (to decrease this asset account).
Bloom's: Understand
95) The journal entry to record the payment within the discount period for goods previously
purchased on account causes:
A) equity to decrease.
B) total stockholders' equity to increase.
C) total assets to decrease.
D) total assets to increase.
Answer: C
Bloom's: Understand
44
96) The journal entry to record taking a discount when paying for goods previously purchased on
account:
A) decreases assets and liabilities.
B) increases assets and stockholders' equity.
C) decreases liabilities and increases in stockholders' equity.
D) decreases assets and stockholders' equity.
Answer: A
Bloom's: Understand
97) A sale is recorded when goods leave the seller's shipping department when the merchandise
is shipped:
A) Goods in transit, shipped collect.
B) FOB destination.
C) FOB shipping point.
D) Freight-out, seller shipped.
Answer: C
Explanation: When the sales agreement specifies FOB shipping point, the sale is recorded when
the goods leave the seller's shipping department.
Difficulty: 1 Easy
Bloom's: Remember
45
98) When using a perpetual inventory system, the Cost of Goods Sold is recorded:
A) each time a sale is made.
B) at the end of each month.
C) at the end of the accounting period.
D) at the end of each day.
Answer: A
Explanation: Inventory records are updated each time an item is sold, returned or bought when
using a perpetual inventory system.
Difficulty: 1 Easy
Bloom's: Remember
99) In a perpetual system, when inventory is sold on account:

A) Sales Revenue is increased and Accounts Receivable is decreased.
B) Sales Revenue, Cost of Goods Sold, and Accounts Receivable are increased while Inventory
is decreased.
C) Sales Revenue and Accounts Receivable are increased, and Cost of Goods Sold and Inventory
are decreased.
D) Sales Revenue is increased and Inventory is decreased.
Answer: B
Explanation: When a company makes a sale on account under the perpetual system, it will
increase Accounts Receivable, an asset account, and increase Sales Revenue, a revenue account.
In addition, because a perpetual inventory system updates these accounts, it will increase Cost of
Goods Sold, an expense account, and decrease Inventory, an asset account.
Bloom's: Understand
46
100) If merchandise costing $500 is sold on account for $620, how is this transaction recorded
when using a perpetual inventory system?
A) Debit Accounts Receivable, credit Sales Revenue for $620; debit Cost of Goods Sold, and
credit Inventory for $500.
B) Debit Accounts Receivable and credit Sales Revenue for $620.
C) Debit Cash and credit Sales Revenue for $620; debit Cost of Goods Sold and credit Inventory
for $500.
D) Debit Accounts Receivable and credit Sales Revenue for $620; debit Inventory and credit
Cost of Goods Sold for $500.
Answer: A
Explanation: The company will debit Accounts Receivable (to increase that asset account) and
credit Sales Revenue (to increase that revenue account) for $620. In addition, because a perpetual
inventory system updates these accounts, it will debit Cost of Goods Sold (to increase that
expense account) and credit Inventory (to decrease that asset account) for $500.
Difficulty: 3 Hard
Bloom's: Apply
101) The five-step revenue model requires:

A) sales revenue to be reported at the amount the seller expects to be entitled to receive from
customers.
B) recording sales returns and allowances at the time of the sale.
C) a sales return that results in issuing store credit to be accounted for with a credit to Cash.
D) only actual sales allowances to be accounted for with an adjustment.
Answer: A
Explanation: The five-step revenue model requires revenue to be reported at the amount the
seller expects to be entitled to receive. It's impractical to record sales returns and allowances at
the time of sale. When a return is issued for store credit, Deferred Revenue is credited rather than
Cash. Expected returns and allowances are accounted for through an adjustment at the end of the
period (month).
Bloom's: Understand
47
102) When a customer returns for credit a defective product it had purchased, the seller would
record the transaction by:
A) debiting Cash.
B) debiting Sales Revenue.
C) crediting Sales Revenue.
D) debiting Cost of Goods Sold.
Answer: B
Explanation: A sales return is recorded by debiting Sales (or Sales Returns & Allowances) and
crediting Cash.
Bloom's: Remember
103) Holly uses a perpetual inventory system. Holly sells $3,500 of blue jeans. The customer
later brings $420 of blue jeans back to Holly because they are defective. Those blue jeans had a
cost of $140. The customer agrees to keep the blue jeans and Holly agrees to a $140 allowance.
Which of the following is one of the entries that Holly will use to record the return?
A) Debit Cash for $140 and credit Inventory for $140.
B) Debit Inventory for $140 and credit Cash for $140.
C) Debit Cash for $140 and credit Sales Revenue for $140.
D) Debit Sales Revenue for $140 and credit Cash for $140.
Answer: D
Explanation: The allowance granted to the customer will be recorded by a debit to Sales
Revenue (or Sales Returns & Allowances) and a credit to Cash for $140, the amount of the
allowance granted.
Bloom's: Apply
48
104) Cypress, Inc. sold merchandise for cash to a customer. The customer returned some of that
merchandise because it was not satisfactory. What journal entry will Cypress use to record the
return?
A) Debit Sales Revenue and credit Inventory.
B) Debit Cash and credit Sales Revenue.
C) Debit Cost of Goods Sold and credit Inventory.
D) Debit Sales Revenue and credit Cash.
Answer: D
Explanation: The company will debit Sales Revenue (or Sales Returns & Allowances) and credit
Cash for the selling price of the merchandise. In addition, because a perpetual inventory system
updates these accounts, it will debit Inventory and credit Cost of Goods Sold for the cost of the
merchandise.
Difficulty: 3 Hard
Bloom's: Apply
105) If merchandise costing $500 that was sold for cash at a price of $620 is returned by the
customer, how would this transaction recorded when using a perpetual inventory system?
A) Debit Cash and credit Sales Revenue for $620.
B) Debit Inventory and credit Cost of Goods Sold for $620.
C) Debit Sales Revenue and credit Cash for $620; debit Cost of Goods Sold and credit Inventory
for $500.
D) Debit Sales Revenue and credit Cash for $620; debit Inventory and credit Cost of Goods Sold
for $500.
Answer: D
Explanation: The company will debit Sales Revenue (or Sales Returns & Allowances) and credit
Cash for $620. In addition, because a perpetual inventory system updates these accounts, it will
debit Inventory and credit Cost of Goods Sold for $500.
Difficulty: 3 Hard
Bloom's: Apply
49
106) If a company returns an item to a supplier, the supplier will record the return as:
A) a sales return.
B) shrinkage.
C) a sales discount.
D) a purchase return.
Answer: A
Explanation: The supplier, who is the seller in this situation, would account for this transaction
as a sales return.
Difficulty: 1 Easy
Bloom's: Understand
107) Which of the following statements is correct about accounting for expected sales returns?
A) Expected returns are disclosed in the notes to the financial statements, but journal entries are
not required.
B) Since no inventory has yet been received, a liability, Inventory—Estimated Returns, is
credited for the cost of the expected returned items.
C) Since no cash has yet been paid, a liability, Refund Liability, is credited for the sales price of
expected returns.
D) Sales Revenue will be debited and Cost of Goods Sold will be credited for the sales price of
expected returns.
Answer: C
Explanation: For month-end adjustments for expected returns, cash has not been received so a
liability called Refund Liability is credited. Also, inventory has not yet been returned, it is only
expected to be returned. An account called Inventory—Estimated Returns is used. Cost of Goods
Sold will be credited for the cost of items expected to be returned.
Bloom's: Understand
50
108) Which one of the following statements regarding sales discounts is correct?
A) If a company offers a discount to encourage prompt payment and the discount is taken, the
discount reduces the amount of net sales.
B) Credit terms of "2/10, n/30" means that if payment is made in two days, a 10% discount may
be taken; if not paid within two days, the full invoice price will be due in thirty days.
C) The terms "sales discounts" and "purchase discounts" are used interchangeably by a company.
D) A sales discount is subtracted from Sales Revenue whereas a purchase discount is added to
Cost of Goods Sold.
Answer: A
Explanation: Sales discounts are subtracted in calculating net sales. Credit terms of "2/10, n/30"
mean that a 2% discount is offered if payment is made within 10 days; otherwise the full amount
is due in 30 days. Sales discounts are from a seller's perspective; purchase discounts are from a
purchaser's perspective.
Bloom's: Understand
109) When goods are sold to a customer with credit terms of 2/15, n/30, the customer will
receive a:
A) 15% discount if they pay within 2 days.
B) 2% discount if they pay 15% of the amount due within 30 days.
C) 15% discount if they pay within 30 days.
D) 2% discount if they pay within 15 days.
Answer: D
Explanation: The credit terms, 2/15, n/30, mean that 2% of the invoice amount may be deducted
if the invoice is paid in 15 days. Otherwise, the full amount is due in 30 days.
Difficulty: 1 Easy
Bloom's: Understand
51
110) Devonshire, Inc. sold merchandise inventory on account at a price of $16,000 with payment
terms of 1/10, n/30. The merchandise cost Devonshire $11,000. If the customer paid for the
merchandise 5 days after receiving the invoice, how much cash was collected by Devonshire?
A) $11,000
B) $15,840
C) $10,890
D) $16,000
Answer: B
Explanation: The customer paid within the 10-day discount period and, as such, will take
advantage of the 1% discount. The amount of cash paid by the customer and received by
Devonshire is $15,840 [$16,000 − ($16,000 × 0.01)].
Difficulty: 3 Hard
Bloom's: Apply
111) A company sells goods at a selling price of $20,000. The cost of the goods is $15,000.
Under a perpetual inventory system, the journal entries prepared to record the credit sale will
include one with a debit to:
A) Inventory and a credit to Sales Revenue for $15,000.
B) Cost of Goods Sold and a credit to Inventory for $15,000.
C) Inventory and credit to Sales Revenue for $20,000.
D) Cost of Goods Sold and a credit to Sales Revenue for $15,000.
Answer: B
Explanation: When a perpetual inventory system is in use, the entries to record the sale when the
perpetual inventory system. first, a debit to Accounts Receivable and a credit to Sales Revenue
for $20,000, the selling price, and, second, a debit to Cost of Goods Sold and a credit to
Inventory for $15,000, the cost of the inventory that was sold.
Bloom's: Apply
52
112) Clarendon Corp. sold $1,000 of merchandise to a customer on terms of 1/10, n/30. Its
customer paid within the discount period. As a result of its customer making the payment within
the discount period, Clarendon's total assets will:
A) increase by $990.
B) increase by $1,000.
C) decrease by $10.
D) remain the same.
Answer: C
Explanation: As a result of the customer's making payment within the discount period,
Clarendon's cash will increase by $990 (or $1,000 × 0.99) and its accounts receivable will
decrease by $1,000. Thus, total assets will decrease by $10 (or increase of $1,000 − decrease of
$990).
Bloom's: Understand
113) Mitchell uses a perpetual inventory system. Mitchell sells a computer from inventory for
$1,198 on credit. Mitchell originally bought the computer from IBM for $790. What journal
entry (entries) will Mitchell prepare to record the sale?
A) Debit Cash and credit Sales Revenue for $1,198; debit Cost of Goods Sold and credit
Inventory for $790.
B) Debit Accounts Receivable for $1,198, credit Inventory for $790, and credit Gross Profit for
$408.
C) Debit Accounts Receivable and credit Sales Revenue for $1,198; debit Cost of Goods Sold
and credit Inventory for $790.
D) Debit Inventory for $790, debit Cost of Goods Sold for $408, and credit Accounts Receivable
for $1,198.
Answer: C
Explanation: Two entries are required to record a sale when a perpetual inventory system is in
use. The first entry includes a debit to Accounts Receivable and a credit to Sales Revenue for
$1,198, the selling price of the goods sold. The second entry includes a debit to Cost of Goods
Sold and a credit to Inventory for $790, the cost of the goods that were sold.
Bloom's: Apply
53
114) Missouri Company uses a perpetual inventory system. On October 1, Missouri Company
sold inventory on account in the amount of $6,500 to Montebello Company, terms 1/10, n/30.
The items cost Missouri $4,200. On October 4, Montebello returns some of the inventory. This
inventory had a selling price of $500 and a cost of $200. On October 8, Montebello Company
paid Missouri Company the amount due on that date.
What journal entry (entries) will Missouri prepare on October 1 to record this sale?
A) Debit Accounts Receivable and credit Sales Revenue for $6,500.
B) Debit Sales Revenue for $6,500 and credit Accounts Receivable and credit for $6,500; debit
Cost of Goods Sold and credit Inventory for $4,200.
C) Debit Cost of Goods Sold for $4,200, debit Gross Profit for $2,300, and credit Sales Revenue
for $6,500.
D) Debit Accounts Receivable and credit Sales Revenue for $6,500; debit Cost of Goods Sold
and credit Inventory for $4,200.
Answer: D
Explanation: Two entries are required to record a sale when the perpetual inventory method is
used; one to record the sales revenue and one to record the cost of goods sold.
Bloom's: Apply
54
What journal entry (entries) will Missouri Company make on October 4 to record the sales
return?
A) Debit Sales Revenue and credit Accounts Receivable for $500; debit Inventory and credit
Cost of Goods Sold for $200.
B) Debit Sales Revenue for $200 and credit Accounts Receivable for $200.
C) Debit Sales for $500 and credit Inventory for $500.
D) Debit Accounts Receivable and credit Sales Revenue for $500; debit Cost of Goods Sold and
credit Inventory for $200.
Answer: A
Explanation: To account for this transaction, Missouri would make two entries to basically
reverse the entries recorded when the goods were sold. The first entry includes a debit to Sales
Revenue (or Sales Returns & Allowances) and a credit to Accounts Receivable for $500. The
second entry includes a debit to Inventory and a credit to Cost of Goods Sold for $200.
Bloom's: Apply
55
What is the amount of cash received by Missouri Company on October 8 for the receipt of
payment from Montebello?
A) $6,500
B) $5,940
C) $6,435
D) $6,300
Answer: B
Explanation: The customer paid within the discount period, so the amount due is 99% of the net
amount purchased of $6,000 ($6,500 − $500). The cash received is $6,000 × 0.99 = $5,940.
Bloom's: Apply
117) Juan sells $75,000 of TVs to a customer. The credit terms state a 2% discount if paid in 7
days and a 1% discount if paid in 8-14 days. The customer pays in 12 days. How much cash does
Juan receive?
A) $75,000
B) $73,500
C) $74,250
D) $1,500
Answer: C
Explanation: The customer paid in the 8-14 day discount period and, as such, is entitled to a 1%
discount in the amount of $750 (or $75,000 × 0.01). The debit to Cash equals $74,250 (or
$75,000 − $750).
Bloom's: Apply
56
118) If a company that uses a perpetual inventory system sold inventory which cost $1,000 for a
selling price of $3,000, the accounting equation would show a net:
A) increase in assets and net increase in stockholders' equity.
B) increase in assets and net decrease in liabilities.
C) decrease in assets and net increase in liabilities.
D) decrease in assets and net decrease in stockholders' equity.
Answer: A
Explanation: Net assets would increase by $2,000 because Accounts Receivable increases by
$3,000 and Inventory decreases by $1,000. Sales Revenue increases by $3,000, which increases
stockholders' equity by $3,000, and Cost of Goods Sold increases by $1,000, which decreases
stockholders' equity by $1,000. As a result, stockholders' equity would increase by $2,000.
Bloom's: Analyze
119) On June 15, Oakley Inc. sells inventory on account to Sunglass Hut (SH) for $1,000, terms
2/10, n/30. On June 20, SH returns to Oakley inventory that SH had purchased for $300. On June
24, SH completely fulfills its obligation to Oakley by making a cash payment. What is the
amount of cash paid by SH to Oakley?
A) $680
B) $686
C) $700
D) $1,000
Answer: B
Explanation: Sales discount = (Sale − Sales return) × Discount %
= ($1,000 − $300) × 2% = $14
Cash paid by customer = Sales revenue − Sales return − Sales discount
= $1,000 − $300 − $14 = $686
Difficulty: 3 Hard
Bloom's: Apply
57
120) Which of the following is a correct statement?
A) Sales discounts are offered to compensate customers for unsatisfactory merchandise.
B) Sales discounts are offered to encourage prompt payment by customers.
C) Sales discounts may result in creating a liability Deferred Revenue.
D) Sales discounts may result in creating an account Inventory—Estimated Returns.
Answer: B
Explanation: A company offers its customers a discount to promote early collection of its
accounts receivable. The Deferred Revenue and Inventory—Estimated Returns accounts are used
in accounting for expected returns, not sales discounts.
Bloom's: Remember
121) When a company collects from a customer who pays within the discount period, the
discount:
A) is a reduction in the initial sales revenue.
B) is an addition to the cost of goods sold.
C) is a reduction to the inventory account.
D) is an addition to the sales returns and allowances account.
Answer: A
Explanation: When a company collects from a customer who pays within the discount period,
the discount is a reduction in the initial sales price.
Bloom's: Analyze
58
122) Medlock Company sold inventory on credit for $3,000, terms 2/10, n/30. The cost of the
merchandise to Medlock was $2,400. How much cash will Medlock receive if payment is
received within the discount period?
A) $3,000
B) $2,352
C) $2,400
D) $2,940
Answer: D
Explanation: When payment is received within the discount period, Cash is debited for $2,940,
the amount received [$3,000 − ($3,000 × 0.02)].
Bloom's: Apply
123) On March 12, Pierson Company sold goods that cost $3,500 to Colonade Company for
$6,000 on credit. Terms of the sale were 1/10, n/30.Colonade paid the balance due on March 21.
What amount of cash did Pierson receive?
A) $5,940
B) $6,000
C) $3,500
D) $3,465
Answer: A
Explanation: When payment is received within the discount period, the amount received is the
sales price less the discount $5,940 (or $6,000 − $60).
Bloom's: Analyze
59
124) Sales returns and allowances:
A) are not included on most externally reported income statements.
B) are offered as a way to encourage customers to make prompt payment.
C) would include terms "2/15, n/60" which allows the customer to take a 15% discount if paid in
2 days.
D) are included on external financial statements to allow investors to compare the company's
results with industry standards.
Answer: A
Explanation: Sales returns and allowances are tracked internally to inform management
decisions, this information is not generally included on external financial statements. Sales
discounts encourage customers to make prompt payment.
Topic: Inventory Systems; Recording Inventory Sales
systems.; 06-04 Analyze sales transactions under a perpetual inventory system.
Bloom's: Apply
125) Neakanie Industries sells specialized mountain bikes. Each specialized bike purchased
includes free maintenance service for 12 months. The price of the specialized bike is $1,000.
When sold separately, a maintenance contract is $200 and a comparable but non-specialized bike
is $600. Which of the following is correct?
A) Neakanie fulfills its performance obligation at the time of delivery of the bike.
B) Neakanie will recognize $1,000 of revenue at the end of 12 months.
C) Neakanie must allocate the purchase price based on the stand-alone selling prices of the bike
and the service.
D) Neakanie will recognize $500 of revenue at the date of sale and the remaining $500 at the end
of 12 months.
Answer: C
Explanation: When a company sells a bundled product, the transaction price is allocated to the
performance obligations based on stand-alone selling prices.
Learning Objective: 06-05 Analyze sales of bundled items under a perpetual inventory system.
Bloom's: Understand
60
is $600. What amount of revenue will Neakanie recognize at the date of sale for each bike?
A) $400.
B) $600.
C) $750.
D) $1,000.
Answer: C
Explanation: $1,000 × [$600/($600 + $200)] = $750
Bloom's: Apply
is $600. If Neakanie sold 3 bikes on December 1, how much total revenue would the company
recognize on December 31?
A) $2,937.50.
B) $2,250.00.
C) $2,312.50.
D) $250.00.
Answer: C
Explanation: $1,000 × [$600/($600 + $200)] = $750; $750 × 3 = $2,250; $1,000 × [$200/($600
+ $200)] = $250; $250 × 3 × 1/12 = $62.50; $2,250 + $62.50 = $2,312.50.
Difficulty: 3 Hard
Bloom's: Apply
61
128) Inventory costing $3,000 is sold for $4,000 with terms 2/10, n/30. If the buyer pays within
the discount period, what amount will be reported on the income statement as net sales?
A) $3,920
B) $4,000
C) $1,000
D) $3,200
Answer: A
Explanation: Sales discounts = Sales revenue × Discount percentage
= $4,000 × 0.02 = $80
Net Sales = Sales revenue − Sales discounts
= $4,000 − $80 = $3,920
Bloom's: Apply
129) Which of the following line items below is present in both the multistep income statement
and an income statement in which expenses are simply subtracted from revenues to arrive at net
income?
A) Income before income tax expense
B) Income from operations
C) Net income
D) Gross profit
Answer: C
Explanation: Both income statements report net income. The multistep income statement also
includes subtotals for gross profit, income from operations, and income before income tax
expense.
Difficulty: 1 Easy
Bloom's: Remember
62
130) Merchandisers record revenue when they:
A) fulfill their performance obligations by transferring control of the goods to customers.
B) deliver the goods and collect the cash from their customers.
C) receive cash in advance from their customers.
D) receive the order to deliver goods to customers.
Answer: A
Explanation: As required by the revenue recognition principle, merchandisers record revenue
when they fulfill their performance obligations by transferring control of the goods to customers.
Difficulty: 1 Easy
Bloom's: Remember
131) Eugene Co. has inventory it purchased for $6,000. It sells the inventory to a customer for
$10,000, including installation. Installation sold separately costs $1,000 and the inventory sold
separately costs $10,000. What amount of Service Revenue is recognized by Eugene for
installation once it has been completed?
A) $909.
B) $1,000.
C) $10,000.
D) $0, all the revenue is recorded as Sales Revenue since the installation was included in the
contract.
Answer: A
Explanation: There are 2 performance obligations so the sales price is allocated to each
performance obligation. $1,000/($1,000 + $10,000) = 0.0909; $10,000 × 0.0909 = $909.
Difficulty: 3 Hard
Bloom's: Apply
63
132) Eugene Co. has inventory it purchased for $6,000. It sells the inventory to a customer for
$10,000, including installation. Installation sold separately costs $1,000 and the inventory sold
separately costs $10,000. What amount of Sales Revenue is recognized by Eugene when delivery
of the inventory has been made to the customer, but the installation has not been completed?
A) $10,000
B) $9,091
C) $9,000
D) $909
Answer: B
Explanation: There are 2 performance obligations so the sales price is allocated to each
performance obligation. $10,000/($1,000 + $10,000) = 0.9091; $10,000 × 0.9091 = $9,091.
Difficulty: 3 Hard
Bloom's: Apply
133) Which of the following would not be considered a bundled product offering?
A) Sale of a $50 pair of jeans
B) $5 meal deal at Happy Jack
C) $200 flight on an airline providing 2 free checked bags
D) $30,000 new car with scheduled maintenance included
Answer: A
Explanation: The jeans are not a bundled product, the other choices are bundles.
Difficulty: 3 Hard
Bloom's: Apply
64
134) Sales Revenue is a(n) ________ account and ________ is an expense account.
A) asset; Sales Discounts
B) revenue; Sales Returns and Allowances
C) revenue; Cost of Goods Sold
D) liability; Gross Profit
Answer: C
Explanation: Sales Revenue is a revenue account whereas Cost of Goods Sold is an expense
account.
Difficulty: 3 Hard
Bloom's: Apply
135) Sales discounts should appear in the financial statements as a(n):

A) addition to inventory.
B) addition to sales.
C) operating expense.
D) deduction from sales.
Answer: D
Explanation: Net sales = Sales revenue − Sales returns and allowances − Sales discounts
Difficulty: 1 Easy
Bloom's: Remember
136) XYZ Company sold merchandise for $5,000, with payment terms of 2/10, n/30. If the
customer pays within the discount period and takes the discount, XYZ will receive:
A) $4,900.
B) $5,000.
C) $3,500.
D) $100.
Answer: A
Explanation: Payment = Amount owed − Discount
= $5,000 − ($5,000 × 0.02) = $5,000 − $100 = $4,900
Difficulty: 3 Hard
Bloom's: Apply
65
137) Sales Discounts is a ________ account with a normal ________ balance.
A) contra-asset; debit
B) contra-revenue; credit
C) contra-asset; credit
D) contra-revenue; debit
Answer: D
Explanation: Sales Discounts is a contra-revenue account and, as such, it has a normal debit
balance.
Difficulty: 1 Easy
Bloom's: Remember
138) Sales Returns and Allowances are reported on the:

A) income statement only.
B) balance sheet only.
C) both the income statement and the balance sheet.
D) statement of cash flows only.
Answer: A
Explanation: When used, the Sales Returns and Allowances account is reported on the income
statement.
Difficulty: 1 Easy
Bloom's: Remember
66
139) Multistep income statements:
A) are required for merchandise companies.
B) contain more detail than just listing revenues and expenses.
C) are required when the perpetual inventory method is used.
D) classify Cost of Goods Sold as a selling expense.
Answer: B
Explanation: Multistep income statements provide subtotals for gross margin, income from
operations, and income before income taxes. To show how much profit is earned from product
sales, without being clouded by other operating costs, merchandise companies often present their
income statement using a multistep format.
Difficulty: 1 Easy
Bloom's: Remember
140) Which of the following is the most common wording for a measure of the company's
income from regular operating activities, before considering the effects of interest, income taxes,
and any nonrecurring items?
A) Income from operations
B) Income from core operations
C) Income from peripheral operations
D) Income before interest, taxes, and nonrecurring items
Answer: A
Explanation: Income from operations is a measure of the company's income from regular
operating activities, before considering the effects of interest, income taxes, and any
nonrecurring items.
Difficulty: 1 Easy
Bloom's: Remember
67
141) Assuming the perpetual inventory system is used, which of the following statements about
the multistep income statement is correct?
A) Sales discounts affect the calculation of Gross Profit.
B) Contra-accounts affect the Cost of Goods Sold.
C) Contra-revenue accounts increase Other Expenses.
D) Sales discounts are a Selling, General, and Administrative Expense.
Answer: A
Explanation: Net sales = Sales revenue − Sales discounts − Sales returns & allowances
Gross profit = Net sales − Cost of goods sold
As shown above, sales discounts affect the calculation of cost of goods sold and both contra-
revenue accounts are included in the calculation of net sales. When a perpetual inventory system
is used, Cost of Goods Sold is an account (rather than an amount that is calculated).
Difficulty: 1 Easy
Topic: Recording Inventory Sales; Multistep Income Statement
Learning Objective: 06-04 Analyze sales transactions under a perpetual inventory system.; 06-
06 Prepare and analyze a merchandiser's multistep income statement.
Bloom's: Remember
142) When inventory is sold, the cost of the inventory is removed from inventory and reported
on a multistep the income statement as:
A) inventory expense.
C) selling, general, and administrative expenses.
D) operating expenses.
Answer: B
Explanation: The cost of inventory sold during the period is reported on the income statement as
cost of goods sold.
Difficulty: 1 Easy
Bloom's: Analyze
68
143) Multiple-step income statements:
A) separate core results from peripheral results.
B) includes one subtotal for revenues and one for expenses.
C) exclude certain significant items from net income.
D) only report core results.
Answer: A
Explanation: A multistep income statement presents important subtotals, such as gross profit, to
help distinguish core operating results from other, less significant items that affect net income.
Difficulty: 1 Easy
Bloom's: Remember
144) Which of the following statements about a multistep income statement is correct?
A) It groups all revenues together.
B) It reports a different amount of net income than a single-step income statement.
C) It includes expenses that would not appear on a single-step income statement.
D) A key measure available on a multistep income statement is the amount of profit earned over
the cost of goods sold.
Answer: D
Explanation: A key measure available on a multistep income statement is the amount of profit
earned over the cost of goods sold. The multistep format separates the revenues and expenses
that relate to core operations from all the other (peripheral) items that affect net income.
Multiple-step and single-step statements report all the same revenues and expenses and, so, the
net income is the same.
Bloom's: Understand
69
145) Which of the following would generally be considered an operating revenue or expense?
A) Income from renting out extra warehouse space
B) Interest on a note payable
C) Dividends earned on an investment is another company's stock
D) Depreciation
Answer: D
Explanation: Operating expenses include salaries and wages, utilities, advertising, rent, and the
costs of delivering inventory to customers. These expenses are subtracted from gross profit to
yield income from operations, which is a measure of the company's income from regular
operating activities, before considering the effects of interest, income taxes, and any
nonrecurring items.
Difficulty: 1 Easy
Bloom's: Understand
146) Which of the following statements about a multistep income statement is not correct?
A) Income before income taxes = Net income + Income tax expense
B) Depreciation is subtracted in the calculation of core operating results.
C) Income from operations = Income before income tax expense + Other revenues (expenses),
net
D) Income from operations = Net income + Income tax expense − Other revenues (expenses),
net
Answer: C
Explanation: Net income = Income from operations + Other revenues (expenses), net − Income
tax expense or, in other words, Income from operations = Income before income tax expense −
Other revenues (expenses), net.
Difficulty: 3 Hard
Bloom's: Analyze
70
147) Which of the following statements about the multistep income statement is not correct?
A) The multistep income statement provides a subtotal of Income before Income Tax Expense.
B) Income from Operations is the amount of revenues minus expenses from the company's main
business activities.
C) Any revenues and/expenses from activities other than the company's main business are
peripheral results and are included in Income from Operations.
D) Income before Income Tax Expense and Income from Operations are different if there are
any peripheral revenues and expenses.
Answer: C
Explanation: Revenues and expenses from activities other than the company's main business are
peripheral results and are shown as separate items after the subtotal Income from Operations.
Difficulty: 1 Easy
Bloom's: Understand
148) McQueen, Inc. buys premium ice cream at a cost of $3.00 a gallon and sells it for $8 a
gallon. Selling, general, and administrative expenses are $1.50 per gallon. Which of the
following statements is correct?
A) Gross profit per gallon is $5.00.
B) Gross profit per gallon is $3.50.
C) The difference between the selling price and the cost is recorded in the gross profit account.
D) The difference between the selling price and the cost is recorded in the Net Profit account.
Answer: A
Explanation: Gross profit = Net sales − Cost of goods sold
= $8.00 − $3.00 = $5.00
The difference between selling price and cost is the company's gross profit (also called gross
margin), which is a subtotal on the multistep income statement, but is not an account.
Bloom's: Apply
71
149) Sales revenue equals $367,810, sales returns and allowances are $10,000, and sales
discounts total $14,180. The cost of goods sold is $216,490, operating expenses are $28,500, and
the company incurs $31,640 of income tax expense. Which of the following statements is
correct?
A) Net sales equal $343,630 and gross profit is $98,640.
B) Net sales equal $67,000 and gross profit is $98,640.
C) Net sales equal $343,630 and gross profit is $127,140.
D) Net sales equal $367,810 and gross profit is $67,000.
Answer: C
Explanation: Gross profit = Sales revenue − Sales returns & allowances − Sales discounts −
Cost of goods sold
= $367,810 − $10,000 − $14,180 − $216,490 = $127,140
Bloom's: Apply
150) The gross profit equation is:

A) (Sales Revenue + Sales Returns & Allowances) − Cost of Goods Sold.
B) (Sales + Sales Discounts) − Cost of Goods Sold.
C) (Sales Revenue − Sales Returns & Allowances − Sales Discounts) − Cost of Goods Sold.
D) (Sales Revenue − Sales Returns & Allowances − Sales Discounts) + Cost of Goods Sold.
Answer: C
Explanation: Gross Profit = (Sales Revenue − Sales Returns & Allowances − Sales Discounts) −
Cost of Goods Sold
Topic: Multistep Income Statement; Gross Profit Analysis
Bloom's: Remember
72
151) To make it easier for financial statement users to compare account balances from one
period to the next, companies report:
A) comprehensive financial statements.
B) comparative financial statements.
C) consistent financial statements.
D) consolidated financial statements.
Answer: B
Explanation: Comparative financial statements contain two or more columns of numbers, with
each column representing the financial results for different time periods. This makes it easy for
financial statement users to compare account balances from one period to the next.
Difficulty: 1 Easy
Bloom's: Remember
152) The gross profit percentage is an indication of how:

A) well management is controlling expenses.
B) measures the percentage of profit earned on each dollar of sales.
C) much cash is generated per dollar of sales.
D) efficient management is in utilizing assets.
Answer: B
Explanation: The gross profit percentage tells you the percentage of profit earned on each dollar
of sales, after considering the cost of products sold.
Difficulty: 1 Easy
Bloom's: Remember
73
153) The accounting records of the Meadowbrook Company show the following:
Cost of Goods Sold $ 140,000

Income Tax 10,000
Interest and Other Expenses 14,000
Sales Discounts 2,000
Sales Revenue 200,000
Selling and Administrative Expense 20,000
What is the gross profit?

A) $36,000.
B) $38,000.
C) $58,000.
D) $60,000.
Answer: C
Gross profit = (Sales Revenue − Sales discounts − Cost of goods sold)
= ($200,000 − $2,000) − $140,000 = $58,000
Difficulty: 3 Hard
Bloom's: Apply
74
154) The gross profit percentage for Elk Roofing Products is 20%. If the company has Net Sales
of $850,000 for the year, what was the amount of Cost of Goods Sold?
A) $750,000
B) $170,000
C) $680,000
D) $250,000
Answer: C
Gross profit percentage = (Gross profit ÷ Net sales) × 100
Gross profit percentage ÷ 100 = Gross profit ÷ Net sales
Gross profit = (Gross profit percentage ÷ 100) × Net sales
= (20% ÷ 100) × $850,000 = $170,000
Cost of goods sold = Net sales − Gross profit
= $850,000 − $170,000 = $680,000
Difficulty: 3 Hard
Bloom's: Apply
75
155) A company reported the following:

General, Selling, and Administrative Expenses 52,800
Income Tax Expense 3,600
Inventory 12,000
Net Income 22,560
Sales Returns & Allowances 2,320
What is the amount of gross profit?

A) $75,360
B) $78,960
C) $84,000
D) $26,160
Answer: B
Explanation: Gross profit = Sales revenue − Sales discounts − Sales returns & allowances −
Cost of goods sold
= $284,000 − $2,720 − $2,320 − $200,000 = $78,960
Bloom's: Apply
76
156) A company reported the following:

General, Selling, and Administrative Expenses 52,800
Inventory 12,000
Net Income 22,560
What is the amount of income before income taxes?

A) $7,600
B) $26,160
C) $10,400
D) $14,000
Answer: B
Explanation: Net sales − Cost of Goods Sold − Operating expenses = Income before taxes
$278,960 − $200,000 − $52,800 = $26,160
Bloom's: Apply
157) Which of the following statements about gross profit is correct?

A) Gross profit = Net sales − Cost of goods sold.
B) Gross profit is recorded by a credit to the Gross Profit account.
C) A company sells $10,000 of goods. If the gross profit percentage is 32%, net income would
be $3,200.
D) If net sales are $100 and cost of goods sold is $50 then the gross profit percentage is 100%.
Answer: A
Explanation: Gross profit is a subtotal on the multistep income statement; it is not the name of
an account.
Gross Profit = Net sales − Cost of goods sold
Gross profit percentage = [(Net sales − Cost of goods sold ÷ Net sales)] × 100
= [($100 − $50) ÷ $100] × 100 = 50% (rather than 100%).
Bloom's: Analyze
77
158) Which of the following statements regarding gross profit percentage is not correct?
A) It is possible for a company to increase both its gross profit percentage and net income
without increasing the dollar amount of sales.
B) A decreasing gross profit percentage means that the company is selling products for a greater
markup over its cost.
C) The gross profit percentage measures the percentage of profit earned on each dollar of sales.
D) Gross profit percentages vary across industries.
Answer: B
Explanation: An increasing gross profit percentage means that the company is selling products
for a greater markup over its cost.
Difficulty: 3 Hard
Bloom's: Understand
159) A company has net sales of $612,850 and cost of goods sold of $441,252. The company's
gross profit percentage is:
A) 72%.
B) 0.28%.
C) 38.9%.
D) 28%.
Answer: D
Explanation: Gross Profit Percentage = [(Net Sales − Cost of Goods Sold) ÷ Net Sales] × 100
= [($612,850 − $441,252) ÷ $612,850] × 100 = 28%
Difficulty: 1 Easy
Bloom's: Apply
78
160) A company has gross profit of $58,300 and a gross profit percentage of 25%. What were
the company's net sales?
A) $233,200.
B) $14,575.
C) $72,825.
D) $711,260.
Answer: A
Gross profit percentage = (Gross profit ÷ Net sales) × 100
Net sales = (Gross profit ÷ Gross profit percentage) × 100
= $58,300 ÷ 25% = $233,200
Difficulty: 3 Hard
Bloom's: Apply
161) A company reported a gross profit percentage of 20% with net sales of $347,800. What is
the amount of cost of goods sold?
A) $69,560
B) $278,240
C) $260,850
D) $86,950
Answer: B
Explanation: Gross profit = Net sales × Gross profit percentage
= $347,800 × 0.20 = $69,560
Net sales − Cost of goods sold = Gross profit
Cost of goods sold = Net sales − Gross profit
= $347,800 − $69,560 = $278,240
Difficulty: 3 Hard
Bloom's: Apply
79
162) A retail store that increases all of its product prices by 25% will experience a(n) ________
in its overall gross profit percentage but may experience a(n) ________ in sales volume.
A) increase, increase
B) decrease, decrease
C) decrease, increase
D) increase, decrease
Answer: D
Explanation: All else being equal, a higher sales price will experience an increase in its overall
gross profit percentage but may result in an decrease in sales volume.
Bloom's: Analyze
163) Gross profit equals:

A) Net sales minus cost of goods sold.
B) Revenues minus expenses.
C) Revenues minus inventory.
D) Beginning inventory plus purchases minus ending inventory.
Answer: A
Difficulty: 1 Easy
Bloom's: Remember
80
164) Under the gross method, purchase and sales discounts are recorded:
A) when the cash is paid or received.
B) at the time of initial purchase or sale.
C) as an increase to the purchase or sales price.
D) as an increase to Cost of Goods Sold or to Inventory.
Answer: A
Explanation: Purchase and sales discounts are recorded when the cash is paid or received when
the "gross method" is used.
Difficulty: 1 Easy
Topic: Gross Profit Analysis; Recording Inventory Transactions in a Periodic System
Learning Objective: 06-S1 Record purchase and sales discounts under a perpetual inventory
system.
Bloom's: Remember
165) Assuming that all else is equal, which of the following companies is most profitable?
A) A company with low gross profit percentage and low sales volume
B) A company with high gross profit percentage and high sales volume
C) A company with low gross profit percentage and high cost of goods sold
D) A company with low sales volume and high cost of goods sold
Answer: B
Explanation: A higher gross profit ratio means that greater profit is available to cover operating
and other expenses. A higher sales volume would increase the amount of gross profit.
Bloom's: Understand
81
166) Hazelwood Company had beginning inventory of $54,000. During the period the company
purchased $109,800 of merchandise. At the end of the period, Hazelwood's inventory was
$39,600. If the gross profit percentage was 40%, what was Hazelwood's sales revenue?
A) $82,800
B) $32,400
C) $135,000
D) $207,000
Answer: D
= $54,000 + $109,800 − $39,600 = $124,200
Net sales percentage = Cost of goods sold percentage + Gross profit percentage
Cost of goods sold percentage = 100% − Gross profit percentage
= 100% − 40% = 60% (or 0.60)
Cost of goods sold ÷ Net sales = Cost of goods sold percentage
Net sales = Cost of goods sold ÷ Cost of goods sold percentage
= $124,200 ÷ 0.60 = $207,000
Difficulty: 3 Hard
Bloom's: Apply
167) The gross profit percentage is the ratio to watch if you are worried about increased
competition. If the company lowers its prices to retain market share without lowering its cost of
goods sold, its gross profit percentage will:
A) increase.
B) decrease.
C) stay the same.
D) equal zero.
Answer: B
Explanation: Gross profit percentage = ((Net sales − Cost of goods sold) ÷ Net sales) × 100
If the selling price per unit decreases and cost of goods sold per unit stays the same, the gross
profit percentage will decrease.
Bloom's: Understand
82
168) Belmont Industries announces that its gross profit rose 5% but its income before income
taxes fell. Which of the following statements is correct?
A) This is not possible given that net income is determined by gross profit.
B) This must mean that selling, general, and administrative expenses increased by more than 5%.
C) This must mean that sales revenue rose more than expenses.
D) This must mean that cost of goods sold decreased.
Answer: B
Explanation: Income before income taxes = Net sales − Cost of goods sold − Operating
expenses
Income before income taxes = Gross profit − Operating expenses
If gross profit increases, income before income taxes will decrease if operating expenses increase
by a greater amount
Difficulty: 3 Hard
Bloom's: Analyze
169) If a company achieves a small increase in its gross profit percentage from one year to the
next, the company:
A) will have a higher net income.
B) must have had a sales volume increase.
C) must have decreased its operating expenses.
D) might be obtaining products at a lower cost per unit.
Answer: D
Explanation: The gross profit percentage is not tied to sales volume. An increase in the gross
profit percentage would result from an increase in the selling price and/or a decrease in the cost
of the product.
An increase in the gross profit percentage will not necessarily result in a higher net income.
Other factors, such as an increase in operating expenses, could cause net income to remain
unchanged or decrease.
Difficulty: 3 Hard
Bloom's: Analyze
83
170) Over a two-year period, Orchid Co.'s gross profit percentage went from 70.4% to 69.7%.
Which of the following could not have been the cause of this change?
A) Reduced selling prices
B) Rising product cost as a percentage of sales
C) Increased competition from a competitor
D) An increase in selling price
Answer: D
If gross profit percentage decreases, there must have been a decrease in the selling price, an
increase in the cost of the product, or some combination of the two.
Difficulty: 3 Hard
Bloom's: Analyze
171) Hayward Co. reported net sales revenues of $23.76 billion and cost of goods sold of $7.2
billion. Its gross profit percentage was:
A) 30.3%.
B) 69.7%.
C) 3.3%.
D) 2.3%.
Answer: B
= [($23.76 − $7.2) ÷ $23.76] × 100 = 69.7%
Difficulty: 1 Easy
Bloom's: Apply
84
172) Pixie Products reported net sales revenue of $18.8 billion and cost of goods sold of $5.6
billion, while Stardust Inc. reported net sales revenue of $22.3 billion and cost of goods sold of
$9.3 billion. Which of the following statements is correct?
A) While Stardust Inc. generated more revenue than Pixie Inc., Stardust Inc. generated a lower
gross profit percentage.
B) Pixie Inc. generated a lower gross profit percentage because its sales revenue was lower.
C) Stardust Inc. did a better job of controlling product costs as a percentage of sales than did
Pixie Inc.
D) The selling price of the products sold by Pixie Inc. must have been higher than the price of
products sold by Stardust Inc.
Answer: A
Pixie:
= [($18.8 − $5.6) ÷ $18.8] × 100 = 70.2%
Stardust:
= [($22.3 − $9.3) ÷ $22.3] × 100 = 58.3%
While Stardust Inc. generated more revenue than Pixie Inc., Stardust Inc. generated a lower gross
profit percentage. Differences in gross profit percentages are due to differences in the selling
prices and/or differences in product costs.
Bloom's: Analyze
85
173) Lansing Company has a gross profit percentage of 61%, while Arbor Company has a gross
profit percentage of 37%. Which of the following statements is correct?
A) Lansing Company will report a higher net income than Arbor Company.
B) Arbor Company must have a greater sales volume than Lansing Company.
C) Lansing Company is more efficient at controlling selling, general, and administrative
expenses than Arbor Company.
D) Lansing Company and Arbor Company both earn enough on each sale to make a contribution
to their operating costs.
Answer: D
Explanation: The gross profit percentage is the amount of profit generated by a dollar of sales to
cover operating expenses of the company. Both companies have a positive amount of gross profit
or contribution toward covering the operating expenses of the company. A higher gross profit
percentage does not necessarily mean higher net income, because Arbor Company could have
more gross profit and/or lower operating expenses. Selling, general, and administrative expenses
do not affect gross profit.
Bloom's: Analyze
174) Which of the following statements about gross profit percentages is correct?
A) Because gross profit percentages are so consistent from period to period, they are not very
useful for analyzing one company over time.
B) Because gross profit percentages are so variable across industries, they are most useful in
comparing companies from different industries.
C) Because gross profit percentages are so variable across industries, they are more useful in
analyzing one company over time.
D) Because gross profit percentages are so consistent across industries, they are most useful in
comparing companies from different industries.
Answer: C
Explanation: Gross profit percentages can be compared for a single company over time or to
other companies within the same industry.
Bloom's: Understand
86
175) The following is a listing of some of the balance sheet accounts and all of the income
statement accounts for Northview Company as they appear on the company's adjusted trial
balance.
Accounts Payable $ 30,000

Accounts Receivable 33,000
Inventory 60,000
Advertising Expense 36,000
Cost of Goods Sold 267,000
Delivery Expense 18,000
Insurance Expense 3,000
Rent Expense 36,000
Net sales would be:

A) $90,000.
B) $372,000.
C) $390,000.
D) $480,000.
Answer: C
Explanation: Net sales = Sales revenue − Sales discounts − Sales returns and allowances
= $480,000 − $33,000 − $57,000 = $390,000
Difficulty: 1 Easy
Bloom's: Apply
87
balance.

Inventory 60,000
Rent Expense 36,000
Gross profit would be:

A) $105,000.
B) $111,000.
C) $123,000.
D) $213,000.
Answer: C
= $390,000 − $267,000 = $123,000
Bloom's: Apply
88
balance.

Inventory 60,000
Rent Expense 36,000
Income from operations would be:

A) $18,000.
B) $30,000.
C) $33,000.
D) $36,000.
Answer: B
Explanation: Income from operations = Net sales − Cost of goods sold − Selling, general, and
administrative expenses
= $390,000 − $267,000 − ($36,000 + $18,000 + $3,000 + $36,000) = $30,000
Difficulty: 3 Hard
Bloom's: Apply
89
balance.

Inventory 60,000
Rent Expense 36,000
Net income would be:

A) $24,000.
B) $27,000.
C) $30,000.
D) $42,000.
Answer: A
Explanation: Net income = Net sales − Cost of goods sold − Selling, general, and administrative
expenses − Income tax expense
= $390,000 − $267,000 − ($36,000 + $18,000 + $3,000 + $36,000) − $6,000 = $24,000
Bloom's: Apply
90
balance.

Inventory 60,000
Rent Expense 36,000
The gross profit percentage would be closest to:

A) 25.6%.
B) 31.5%.
C) 55.6%.
D) 68.5%.
Answer: B
= [($390,000 − $267,000) ÷ $390,000] × 100 = 31.5% (rounded)
Bloom's: Apply
91
180) An account used in the periodic inventory system that is not used in the perpetual inventory
system is:
A) Inventory
B) Sales Revenue
C) Sales Returns & Allowances
D) Purchases
Answer: D
Explanation: When inventory is purchased, it is debited to Purchases when a periodic inventory
system is in use. It would be debited to Inventory when a perpetual system is in use.
Difficulty: 1 Easy
Bloom's: Remember
181) On October 1, Robertson Company sold inventory in the amount of $5,800 to Alberta, Inc.
with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses a periodic
inventory system. The journal entry (or entries) prepared by Robertson on October 1 is(are):
A) Debit Sales Revenue and credit Accounts Receivable for $5,800.
B) Debit Sales Revenue and credit Accounts Receivable for $5,800; debit Cost of Goods Sold
C) Debit Accounts Receivable and credit Sales Revenue for $5,800.
D) Debit Accounts Receivable and credit Sales Revenue for $5,800; Debit Cost of Goods Sold
Answer: C
Explanation: When a periodic inventory system is in use, the entry to record a sale includes a
debit to Accounts Receivable and a credit to Sales Revenue. Unlike a perpetual inventory
system, a periodic system does not track the cost of goods sold during the accounting period.
Bloom's: Apply
92
182) On October 1, Robertson Company sold inventory in the amount of $5,800 to Alberta, Inc.
with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses a periodic
inventory system. Alberta pays the invoice on October 8 and takes the appropriate discount.
What journal entry will be recorded by Robertson on October 8?
A) Debit Cash and credit Accounts Receivable for $5,800.
B) Debit Cash and credit Accounts Receivable for $4,000.
C) Debit Cash for $3,920, debit Sales Revenue for $80, and credit Accounts Receivable for
$4,000.
D) Debit Cash for $5,684, debit Sales Revenue for $116, and credit Accounts Receivable for
$5,800.
Answer: D
Explanation: Debit Cash for $5,684 (or $5,800 − $116), debit Sales Revenue (or Sales
Discounts) for $116 (or $5,800 × 0.02), and credit Accounts Receivable for $5,800.
system.; 06-S2 Record inventory transactions in a periodic system.
Bloom's: Apply
183) On October 1, Robertson Company sold inventory in the amount of $5,800 to Alberta, with
credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses the periodic
inventory system. On October 4, Alberta returns some of the inventory. The selling price of the
inventory is $500 and the cost of the inventory returned is $350. What journal entry (entries) will
be recorded by Robertson October 4?
A) Debit Sales Revenue and credit Accounts Receivable for $500; debit Inventory and credit
Cost of Goods Sold for $350
B) Debit Sales Revenue and credit Accounts Receivable for $500
C) Debit Accounts Receivable and credit Sales Revenue for $500
D) Debit Accounts Receivable and credit Sales Revenue for $500; debit Cost of Goods Sold and
credit Inventory for $350
Answer: B
Explanation: When a periodic inventory system is in use, the entry to record a sales return
includes a debit to Sales Revenue (or Sales Returns & Allowances) and a credit to Accounts
Receivable. Unlike a perpetual inventory system, a periodic system does not track the cost of
goods sold during the accounting period.
system.
Bloom's: Apply
93
184) On July 1, Ruth Co. sold inventory costing $9,000 to Diana, Inc. for $12,000, terms 2/10,
n/30. Both companies use the net method to account for sales discounts. If Diana pays within the
discount period, what journal entry will be recorded by Ruth Company when payment is
received?
A) Debit Cash for $11,760 and credit Accounts Receivable for $11,760.
B) Debit Cash for $11,760, debit Sales Revenue for $240 and credit Accounts Receivable for
$12,000.
C) Debit Cash for $12,000 and credit Accounts Receivable for $12,000.
D) Debit Accounts Payable for $12,000, credit Cash for $11,760 and credit Inventory for $240.
Answer: A
Explanation: At the time of sale, Ruth would have made a debit to Accounts Receivable and a
credit to Sales Revenue for the net amount, $11,760. Since payment is made within the discount
period, Cash is debited and Accounts Receivable is credited for $11,760.
system.
Bloom's: Apply
185) Which of the following statements is incorrect regarding sales discounts?

A) If a customer pays within the discount period, the selling price of the merchandise is reduced.
B) Sales Discounts is a contra-revenue account and is subtracted from Sales Revenue.
C) The net and gross methods have identical journal entries, just made at different points in time.
D) If a company takes advantage of sales discounts on its purchases, the cost of the inventory is
ultimately reduced as a result of the discount.
Answer: C
Explanation: The end result of the net and gross methods is identical; however, the journal
entries are different.
system.
Bloom's: Understand
94
186) FAD Company uses a periodic inventory system and its inventory records for the period
contain the following information:
Beginning inventory (75 units @ $50/unit) $ 3,750

Purchases (150 units @ $50/unit) 7,500
Ending inventory (125 units @ $50/unit) 6,250
What is the amount of cost of goods available for sale?

A) $11,250
B) $17,500
C) $5,000
D) $13,750
Answer: A
Explanation: Cost of goods available for sale = Beginning inventory + Purchases
= $3,750 + $7,500 = $11,250
Difficulty: 1 Easy
Bloom's: Apply

The journal entry necessary at the end of the period to transfer beginning inventory and net
purchases to cost of goods sold will include which of the following?
A) Credit Inventory for $6,250.
B) Debit Purchases for $11,250.
C) Debit Inventory for $6,250.
D) Debit Cost of Goods Sold for $11,250.
Answer: D
Explanation: The end-of-period adjustment to transfer beginning inventory and net purchases to
cost of goods sold includes a debit to Cost of goods sold and a credit to Inventory and Purchases.
Difficulty: 3 Hard
Bloom's: Apply
95

The journal entry necessary at the end of the period to adjust cost of goods sold for the ending
inventory still on hand will include which of the following?
A) Debit Inventory for $6,250.
B) Credit Cost of Goods Sold for $11,250.
C) Debit Purchases for $11,250.
D) Credit Inventory for $6,250.
Answer: A
Explanation: The end-of-period adjustment to adjust cost of goods sold for the ending inventory
on hand requires a debit to Inventory for the ending inventory amount and a credit to Cost of
goods sold.
Bloom's: Apply
96
189) Turquoise, Inc. is trying to decide whether to purchase identical inventory from one of the
following suppliers:
Supplier A Supplier B
Cost $ 200 $ 220
Invoice terms 1/10, n/30 2/10, n/30
Shipping terms FOB shipping point FOB destination
Shipping cost $ 20 $ 24
Required:
Assume the company will pay within the discount period. What is the actual cost of the
inventory if purchased from each supplier? (Round your final answers to 2 decimal places.)
Answer:
Supplier A Supplier B
Cost $ 200.00 $ 220.00
Shipping cost 20.00 0.00 *
Purchase discount (2.00 ) (4.40 )
Shipping cost $ 218.00 $ 215.60
*The terms are FOB destination, so the supplier incurs the transportation cost.
Calculation of purchase discount:
Purchase discount = Invoice price × Discount percentage
Supplier A:
$200 × 0.01 = $2.00
Supplier B:
$220 × 0.02 = $4.40
Bloom's: Apply; Evaluate
97
190) Two different companies, Vogel and Hatcher, entered into the following inventory
transactions during December. Both companies use a perpetual inventory system.
December 3 – Vogel Corporation sold inventory on account to Hatcher Corp. for $240,000,
terms 2/10, n/30. This inventory originally cost Vogel $160,000.
December 8 – Hatcher Corp. returned inventory to Vogel Corporation for a credit of $15,000.
Vogel returned this inventory to inventory at its original cost of $10,000.
December 12 – Hatcher Corp. paid Vogel Corporation for the amount owed.
Required:
a. Prepare the journal entries to record these transactions on the books of Vogel Corporation.
b. What is the amount of net sales to be reported on Vogel Corporation's income statement?
c. What is the Vogel Corporation's gross profit percentage?
Answer:
a.
Cash ($225,000 − $4,500) = $220,500
Sales Revenue = ($240,000 − $15,000) × 0.02 = $4,500
b.
Net sales = Sales revenue − Sales returns and allowances − Sales discounts
= $240,000 − $15,000 − $4,500 = $220,500
c.
Gross profit percentage = [(Net sales − Cost of goods sold)] ÷ Net sales × 100
= [($220,500 − $150,000 ÷ $220,500)] × 100 = 32% (rounded)
Topic: Recording Inventory Sales; Gross Profit Analysis
05 Analyze sales of bundled items under a perpetual inventory system.; 06-S1 Record purchase
and sales discounts under a perpetual inventory system.
Bloom's: Apply
98
191) During its first month of operations, Purrfect Pets purchased 6,000 bags of dog food at a
cost of $5 a bag and sold all 6,000 bags of dog food on account with payment terms of 3/10, n/30
for $10 each. A total of 2,600 of these bags were sold to customers who paid within the discount
period; the other customers paid after the discount period had ended. Sales allowances totaling
$200 were granted to customers whose dogs did not like the dog food.
Required:
a. Calculate the gross profit for the month.

b. Calculate the gross profit percentage for the month.
Answer:
a.
Sales revenue = 6,000 bags × $10 per bag = $60,000
Sales discount = Sales revenue − (Sales revenue × Discount percentage)
= (2,600 bags × $10 × 0.03) = $780
Net sales = Sales revenue − Sales discount − Sales returns and allowances
= $60,000 − $780 − $200 = $59,020
Cost of goods sold = 6,000 bags × $5 = $30,000

= $59,020 − $30,000 = $29,020
b.
Gross profit percentage = [(Net sales − Cost of goods sold) ÷ Net sales] × 100
= [($59,020 − $30,000) ÷ $59,020] × 100 = 49.2% (rounded)
Topic: Recording Inventory Sales; Multistep Income Statement; Gross Profit Analysis
06 Prepare and analyze a merchandiser's multistep income statement.
Bloom's: Apply
99
192) The following is a listing of all of the income statement accounts for Mulberry Street
Sportswear as they appear on the adjusted trial balance as of December 31.
Advertising Expense $12,000

Rent Expense 12,000
Interest Expense 5,000
Required:
a. Prepare a multistep income statement.

b. Compute the gross profit percentage.
Answer:
a.
*Selling, General, and Administrative Expenses = Advertising Expense $12,000 + Delivery
Expense $6,000 + Insurance Expense $1,000 + Rent Expense $12,000 = $31,000
†Other Revenue (Expenses), net is made up of Interest Expense $5,000
b.
Gross profit percentage = [(Net sales − Cost of goods sold) ÷ Net sales] × 100
= [($130,000 − $89,000) ÷ $130,000] × 100 = 31.5% (rounded)
Bloom's: Apply
100
Match the term to the appropriate definition. There are more definitions than terms.
A) A ratio indicating the percentage of profit earned on each dollar of sales, after considering the
cost of products sold.
B) A sales price reduction given to customers for prompt payment of their account balance.
C) Presents important subtotals, such as gross profit, to help distinguish core operating results
from other, less significant items that affect net income.
D) Expresses the relationship between inventory on hand, purchased, and sold; shown as either
BI + P – EI = CGS or BI + P – CGS = EI.
E) Refunds and price reductions given to customers after goods have been sold and found
unsatisfactory.
F) A cash discount received for prompt payment of a purchase on account.
G) The cost of inventory lost to theft, fraud, and error.
H) Net sales minus cost of goods sold. It is a subtotal, not an account.
I) A reduction in the cost of inventory purchases associated with unsatisfactory goods.
J) The sum of beginning inventory and purchases for the period.
193) Cost of Goods Sold Equation

Difficulty: 1 Easy
Topic: Inventory Systems; Recording Inventory Purchases; Recording Inventory Sales;
Multistep Income Statement; Gross Profit Analysis
systems.; 06-03 Analyze purchase transactions under a perpetual inventory system.; 06-04
Analyze sales transactions under a perpetual inventory system.; 06-06 Prepare and analyze a
merchandiser's multistep income statement.
Bloom's: Remember
194) Goods Available for Sale

Difficulty: 1 Easy
Bloom's: Remember
101
195) Gross Profit (or Gross Margin)
Difficulty: 1 Easy
Bloom's: Remember
196) Gross Profit Percentage

Difficulty: 1 Easy
Bloom's: Remember
197) Multistep Income Statement

Difficulty: 1 Easy
Bloom's: Remember
Answers: 193) D 194) J 195) H 196) A 197) C
102
A) The sum of beginning inventory and purchases for the period.

B) Presents important subtotals, such as gross profit, to help distinguish core operating results
C) A term of sale indicating that goods are owned by the seller until they are delivered to the
buyer.
D) Sells goods that have been obtained from a supplier.
E) Inventory records are updated every time inventory is bought, sold, or returned.
F) A sales price reduction given to customers for prompt payment of their account balance.
G) Inventory records are updated at the end of the accounting period. To determine how much
merchandise has been sold, inventory must be physically counted at the end of the period.
H) A term of sale indicating that goods are owned by the buyer the moment they leave the
seller's premises.
I) Sells services rather than physical goods.
J) Assets acquired for resale to customers.
198) FOB Destination

Difficulty: 1 Easy
Topic: Operating Cycles; Inventory Systems; Recording Inventory Purchases; Recording
Inventory Sales
Learning Objective: 06-01 Distinguish between service and merchandising operations.; 06-02
Explain the differences between periodic and perpetual inventory systems.; 06-03 Analyze
purchase transactions under a perpetual inventory system.; 06-04 Analyze sales transactions
under a perpetual inventory system.
Bloom's: Remember
199) FOB Shipping Point

Difficulty: 1 Easy
Inventory Sales
Bloom's: Remember
103
200) Merchandising Company
Difficulty: 1 Easy
Inventory Sales
Bloom's: Remember
201) Periodic Inventory System

Difficulty: 1 Easy
Inventory Sales
Bloom's: Remember
202) Perpetual Inventory System

Difficulty: 1 Easy
Inventory Sales
Bloom's: Remember
203) Service Company

Difficulty: 1 Easy
Inventory Sales
Bloom's: Remember
Answers: 198) C 199) H 200) D 201) G 202) E 203) I
104
A) Presents important subtotals, such as gross profit, to help distinguish core operating results
B) A reduction in the cost of inventory purchases associated with unsatisfactory goods.
C) Refunds and price reductions given to customers after goods have been sold and found
unsatisfactory.
D) A ratio indicating the percentage of profit earned on each dollar of sales, after considering the
cost of products sold.
E) Net sales minus cost of goods sold. It is a subtotal, not an account.
F) A sales price reduction given to customers for prompt payment of their account balance.
G) The sum of beginning inventory and purchases for the period.
H) A cash discount received for prompt payment of a purchase on account.
I) Assets acquired for resale to customers.
J) The cost of inventory lost to theft, fraud, and error.
204) Inventory
Difficulty: 1 Easy
Inventory Sales
Bloom's: Remember
205) Purchase Discount

Difficulty: 1 Easy
Inventory Sales
Bloom's: Remember
105
Test Bank for Fundamentals of Financial Accounting, 6th Edition, Fred Phillips, Robert Libby
206) Purchase Returns and Allowances

Difficulty: 1 Easy
Inventory Sales
Bloom's: Remember
207) Sales Discount

Difficulty: 1 Easy
Inventory Sales
Bloom's: Remember
208) Sales Returns & Allowances

Difficulty: 1 Easy
Inventory Sales
Bloom's: Remember
209) Shrinkage
Difficulty: 1 Easy
Inventory Sales
Bloom's: Remember
Answers: 204) I 205) H 206) B 207) F 208) C 209) J
106
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his force, the ninth corps could have replaced it. If lord Wellington
failed, the Lines were gone, and with them the whole Peninsula.
He judged it best to remain on the defensive; to strengthen the
Lines; and to get the works at Almada sufficiently forward;
meanwhile, quieting the troubles occasioned by the Patriarch, to
perfect the discipline of the Portuguese troops, and improve the
organization of the militia in rear of the enemy. In this view, the light
division, supported by a brigade of cavalry, occupied Valle and the
heights overlooking the marsh and inundation; the bridge at the
English end of the causeway was mined; a sugar-loaf hill, looking
straight down the approach, was crowned with embrasures for
artillery and laced in front with a zigzag covered way, capable of
containing five hundred infantry: thus the causeway being blocked,
the French could not, while the inundation kept up, make any sudden
irruption from Santarem.
On the left of the light division, posts were extended along the
inundation to Malhorquija; thence, by a range of heights to Rio
Mayor; and behind the latter place, Anson’s cavalry was stationed in
observation of the roads leading from Pernes and Alcanhede. In rear
of Anson, a position was entrenched at Alcoentre, and occupied by a
division of infantry. Thus all the routes leading upon the Lines
between the Tagus and the Monte Junta, were secured by what are
technically called heads of cantonments, under cover of which, the
other divisions were disposed in succession; the first and the head-
quarters being at Cartaxo, a few miles in the rear of Valle; the
remainder at Alemquer and Sobral. Torres Vedras was, however,
always occupied in force, lest the enemy should make a sudden
march round the Monte Junta.
Massena, satisfied that his front was safe, continued to build
boats, fortified a post at Tancos, on the Tagus, and expected, with
impatience, the arrival of a convoy escorted by five thousand men,
with which general Gardanne was coming from Ciudad Rodrigo. This
reinforcement, consisting of detachments and convalescents left in
Castile when the army entered Portugal, marched by Belmonte and
the Estrada Nova, and the 27th, was at Cardijos, within a few
leagues of the French bridges on the Zezere. The advance of a
cavalry patrol on either side would have opened the
communications, and secured the junction; but, at that moment,
Gardanne, harassed by the ordenança, and deceived by a false
rumour that general Hill was in Abrantes, ready to move against him,
suddenly retreated upon Sabugal, with such haste and blindness
that he sacrificed a part of his convoy, and lost many men.
Notwithstanding this event, Massena, expecting to be joined by
the ninth corps, greatly strengthened his position at Santarem, which
enabled him to draw the bulk of his forces to his right, and to
continue his marauding excursions in the most daring manner.
General Ferey, with a strong detachment of the sixth corps, crossing
the Zezere, foraged the country as far as Castello Branco without
difficulty, and returned without loss: Junot occupied Leiria and Ourem
with detachments of the eighth corps, and on the 9th of December a
battalion endeavoured to surprise Coimbra: Trant, however, baffled
that project. Meanwhile, Drouet avowed a design to invade the Tras
os Montes, but the 22d of December occupied the line of the Coa
with the ninth corps, and Massena’s patroles appeared again on the
Mondego above Coimbra, making inquiries about the fords: all the
spies likewise reported that a great reunion of forces from the south
was to have place near Madrid.
These things gave reason to fear, either that Massena intended to
file behind the Mondego and seize Oporto, or that the reinforcements
coming to him were so large that he meant to establish bridges over
the Mondego, and occupy the northern country also. It was known
that a tenth corps was forming at Burgos; the head of the fifth corps
was again in Estremadura; the French boats at Punhete and
Barquiña were numerous and large; and in all parts there was
evidence of great forces assembling for a mighty effort on both sides
of the Tagus.
It was calculated that, before the end of January, more than forty
thousand fresh troops would co-operate with Massena; and
preparations were made accordingly. An outward line of defence,
from Aldea Gallega to Setuval, was already in a forward state;
Abrantes, Palmella, and St. Felippe de Setuval had been at last
provisioned; and a chain of forts parallel to the Tagus were
constructing on the hills lining the left bank from Almada to Traffaria.
Labourers had also been continually employed in strengthening the
works of Alhandra, Aruda, and Monte Agraça, which were now
nearly impregnable, soldiers only being wanting to defy the utmost
force that could be brought against them. To procure these, lord
Wellington wrote earnestly to lord Liverpool on the 29th of
December, demonstrating the absolute necessity of reinforcing the
army; and, on the receipt of his letter, five thousand British were
ordered to embark for Lisbon, and three regiments were drafted from
Sicily.
Sickness obliged general Hill to go home in December; and, as
Soult was known to be collecting a disposable force behind the
Morena, the troops on the left bank of the Tagus were augmented,
and marshal Beresford assumed the command: for the Portuguese
army was now generally incorporated with the British divisions. His
force, composed of eighteen guns, two divisions of infantry, and five
regiments of cavalry, Portuguese and British, was about fourteen
thousand men, exclusive of Carlos d’Espana’s brigade, which, being
at Abrantes, was under the marshal’s orders.
To prevent the passage of the Tagus; to intercept all
communication between Massena and Soult; to join the main body of
the army, by Vellada if in retreat; and by Abrantes if in advance; were
the instructions given to Beresford; hence, fixing his quarters at
Chamusca, he disposed his troops along the Tagus, from Almeyrim
by Chamusca, as high as the mouth of the Zezere, establishing
signals between his different quarters. He also beat the roads
leading towards Spanish Estremadura; established a sure and rapid
intercourse with Elvas and the other frontier fortresses; organized
good sources of intelligence at Golegao, at Santarem, and especially
at Thomar, and, in addition to these general precautions, erected
batteries opposite the mouth of the Zezere. But, against the advice
of the engineers, he placed them at too great distance Appendix, No. X.
from the river, and in other respects unsuitable, and Section 1.
offering nothing threatening to the enemy: for the French craft
dropped down frequently towards Santarem, without hindrance, until
colonel Colborne, of the sixty-sixth regiment, moored a guard-boat
close to the mouth of the Zezere, disposing fires in such a manner
on the banks of the Tagus that nothing could pass without being
observed.
On the side of Santarem, as all the country between Alcanhete
and the Ponte Seca continued impracticable from the rain, the main
bodies of both armies were, of necessity, tranquil. Anson’s cavalry,
however, acting in concert with major Fenwick, who came down from
Obidos towards Rio Mayor, harassed the enemy’s foraging parties;
and in the Upper Beira several actions of importance had taken
place with the militia, which it is time to notice as forming an
essential part of lord Wellington’s combinations.
It will be remembered that the ninth corps, being ordered to scour
Biscay and Upper Castile in its progress towards the frontier of
Portugal, was so long delayed that, instead of keeping the
communications of Massena free, and securing his base, Drouet lost
all connexion with the army of Portugal. Meanwhile the Partidas of
Leon and Salamanca gave such employment to Serras’ division that
the Tras os Montes were unmolested, and Silveira, falling down to
the Lower Douro, appeared, on the 29th, before Almeida. Its former
garrison had entered the French service, yet immediately deserted to
their countrymen, and Silveira then blockaded the place closely, and
made an attempt to surprise a French post at San Felices, but failed.
In November, however, the head of the ninth corps reached
Ciudad Rodrigo, bringing a large convoy of provisions, collected in
Castile, for Massena. Lord Wellington, anxious to prevent this from
reaching its destination, directed Silveira to intercept it if possible,
and ordered Miller on the 16th to Viseu, in support. On the 13th,
general Gardanne, with four thousand infantry and three squadrons
of cavalry, raised the blockade of Almeida, took possession of
Pinhel, and, supported by the ninth corps, conducted the convoy
towards Sabugal and Penamacor. The 16th, he was between
Valverde and Pereiro Gavillos, but Silveira falling upon him killed
some of his men, took many prisoners, and then retiring to Trancoso
on the 17th, united with Miller, the latter taking post at Guarda.
Nevertheless, Gardanne pursued his march, but finally, as we have
seen, retreated from Cardigos in a panic.
Drouet had not yet received the orders to put himself under
Massena’s command, but, at the representation of Foy, moved
forward into Portugal, and to hide his object, spread the report,
already noticed, of his intention to penetrate the Tras os Montes; the
17th December, however he passed the Coa with fourteen thousand
infantry and two thousand cavalry, and crossing the Mondego the
18th, encamped near Gouvea, the 22d. Thence the cavalry and one
division under general Claparede, marched against Silveira, and
after a skirmish occupied Trancoso; meanwhile, Drouet with eleven
battalions, and the troops under Gardanne, made for the Alva and
reached Ponte Murcella the 24th.
Hitherto lord Wellington’s communications with Baccellar, had
been carried on, through Trant on the side of Coimbra, and through
Wilson on that of Espinhal and Abrantes. But this sudden advance of
the ninth corps obliged Wilson to cross the Mondego to avoid being
enclosed, and Drouet effecting his junction with Massena by
Espinhal, established his division at Leiria; and then spreading
towards the sea cut off all communication between the allies and the
northern provinces. On the 2d of January, however, Trant intercepted
a letter from Drouet to Claparede, giving an account of his own
arrival, and of the state of Massena’s army; intimating also, that a
great operation was in contemplation, and that the fifth corps was
daily expected in the Alemtejo: Claparede was desired to seize
Guarda, to forage the neighbouring villages, and to watch the road of
Belmonte; and if Silveira should be troublesome, to defeat him.
Silveira, an insufficient man, naturally vain, and inflated with his
former successes, had indeed, already attacked Claparede, and was
defeated with the loss of two hundred men at Ponte Abad, on the
side of Trancoso. Baccellar, alarmed for the safety of Oporto, then
recalled Miller and Wilson. The first moved upon Viseu; the last who
had already repassed the Mondego and taken a hundred stragglers
of Drouet’s division, marched hastily towards the same point.
Meanwhile, Silveira again provoked Claparede, who pressed him so
closely, from the 10th to the 13th of January, that he drove him with
loss over the Douro at Pezo de Ragoa, seized Lamego, and
menaced Oporto before any troops could concentrate to oppose him.
Yet when Baccellar brought up his reserve to the Pavia, and Miller’s
and Wilson’s corps reached Castro d’Airo, Claparede returned to
Moimenta de Beira, being followed by Wilson. Meanwhile, the arrival
of the ninth corps having relieved the French troops in Leon, the
latter again menaced Tras os Montes, and Silveira marched to
Braganza. Miller died at Viseu, but Wilson and Trant continued to
harass the enemy’s parties.
Claparede taking post at Guarda, according to his instructions,
seized Covilhao; while Foy, who in returning from France had
collected about three thousand infantry and cavalry convalescents,
was marching by the road of Belmonte. Foy had escaped
innumerable perils. At Pancorbo he was fain to fly from the Partidas,
with the loss of his despatches and half his escort, and now at
Enxabarda entering the Estrada Nova, he was harassed by colonel
Grant with a corps of ordenança from the Lower Beira; and although
he suffered nothing here by the sword, three hundred of his men
died on the mountain from cold. On the 2d of February he reached
Santarem, where affairs were working to a crisis.
During December and January, the country being always more or
less flooded, the armies continued in observation; but Massena’s
positions were much strengthened, his out posts were reinforced,
and his marauding excursions extended in proportion to his
increasing necessities. The weak point on either side was towards
Rio Mayor, any movement there created great jealousy, especially as
the season advanced and the roads became firmer. Hence, on the
19th of January (some reinforcements having landed at Lisbon a few
days before) a fear lest the allies should be concentrating at
Alcoentre, induced Junot to drive the out posts from Rio Mayor to
probe the state of affairs, and a general attack was expected; but
after a skirmish he returned with a wound which disabled him for the
rest of the campaign.
Early in February, a column of six thousand French again scouring
all the country beyond the Zezere, got much concealed food near
Pedragoa; while other detachments arriving on the Mondego below
Coimbra, even passed that river, and carried off four hundred oxen
and two thousand sheep intended for the allies. These excursions
gave rise to horrible excesses, which broke down the discipline of
the French army, and were not always executed with impunity; the
British cavalry at various times redeemed many cattle and brought in
a considerable number of prisoners, amongst them an aide-de-camp
of general Clausel’s.
Meanwhile, Massena, organized a secret communication with
Lisbon, through the Portuguese general Pamplona, who effected it
by the help of the fidalgos in that capital: their agents, under the
pretence of selling sugar to the inhabitants of Thomar and Torres
Novas, passed by the road of Caldas and thence through the
mountains of Pedragoa. Lord Wellington, on the other hand, was
understood to have gained a French officer of rank, and it is certain
that both generals had excellent information.
In this manner hostilities were carried on, each commander
impatiently waiting for reinforcements which should enable him to act
offensively. How both were disappointed, and how other events
hitherto unnoticed, bore upon the plans of each, must be the subject
of another book.
O B S E RVAT I O N S .
1º. “War is not a conjectural art.” Massena forgetting this, assumed

that the allies would not make a stand in front of Lisbon, and that the
militia would not venture to attack Coimbra, but the battle of Busaco
and the capture of his hospitals evinced the soundness of the
maxim. Again, he conjectured that the English would re-embark if
pressed; the Lines put an end to his dream; yet once awake, he
made war like a great man, proving more formidable with reduced
means and in difficulties, than he had been when opportunity was
rife and his numbers untouched. His stay at Santarem shews what
thirty thousand additional men acting on the left bank of the Tagus
could have done, had they arrived on the heights of Almada before
admiral Berkeley’s error was discovered: the supply of provisions
from Alemtejo and from Spain would then have been transferred
from Lisbon to the French armies, and the fleet would have been
driven from the Tagus; when, the misery of the inhabitants, the fears
of the British cabinet, the machinations of the Patriarch, and the little
chance of final success would probably have induced the British
general to embark.
2º. It has been observed, that Massena, in the first week might
have easily passed the Tagus, secured the resources of the
Alemtejo, and sent the British fleet out of the port. This was not so
practicable as it might at first sight appear. The rains were heavy; the
fords impassable; the French had not boats sufficient for a bridge; a
weak detachment would have been useless, a strong detachment
would have been dangerous: to collect boats, cast a bridge, and
raise the entrenchments necessary to defend it, in the face of the
allied forces, would have been neither a safe nor certain operation;
moreover, Massena would then have relinquished the certain aid of
the ninth for the uncertain assistance of the fifth corps.
3º. Lord Wellington conjecturing the French to be in full retreat,
had like to have received a severe check at Santarem; he recovered
himself in time, and with this exception, it would be difficult to support
essential objections to his operations: yet, many have been urged,
as that, he might have straightened the enemy’s quarters more
effectually at Santarem; and that Hill’s corps, passing through
Abrantes, could have destroyed the bridges at Punhete, and lining
the Zezere cut off Massena’s reinforcements, and obliged him to
abandon his positions or even to capitulate. This last idea, advanced
at the time by colonel Squires, an engineer of great zeal and ability,
perfectly acquainted with the localities, merits examination.
As a simple operation it was feasible, but the results were not so
certain; the Lines of Almada being unfinished, the rashness of
leaving the Tagus unguarded, before an enemy who possessed
eighty large boats, exclusive of those forming the bridges on the
Zezere, is apparent; Hill’s corps must then have been replaced, and
the army before Santarem would have been so weak as to invite a
concentrated attack, to the great danger of the Torres Vedras Lines.
Nor was the forcing of the French works at Punhete a matter of
certainty; the ground was strong, there were two bridges over the
Zezere, and the sixth corps, being within a short march, might, by
passing at Martinchel, have taken Hill in flank.
4º. The same officer, at a later period, miscalculating the enemy’s
numbers at thirty thousand men, and the allies at more than seventy
thousand regulars, proposed that Beresford should cross the Tagus
at Azingha, behind the Almonda, and march upon Golegao, while
lord Wellington, concentrating at Rio Mayor, pushed upon Torres
Novas. It was no common head that conceived this project, by which
seventy thousand men would, in a single march, have been placed
in the midst of the enemy’s extended quarters; but the hand of
Napoleon could scarcely have launched such a thunder-bolt.
Massena had still fifty thousand fighting-men; the boats from
Abrantes must have been brought down, to pass the Tagus; the
concentration of troops at Rio Mayor could scarcely have escaped
the enemy’s notice; exact concert, in point of time, was essential, yet
the eighth corps could have held the allies in check on the Alviella,
while Reynier, from Santarem, and Ney, from Thomar, crushed
Beresford between the Almonda and the Tagus: moreover the roads
about Tremes were nearly impassable from rain during December; in
January, Soult, of whose operations I shall speak in the next book,
was menacing the Alemtejo, and a disaster happening to the allies
would have relieved the enemy’s difficulties, when nothing else
could. A campaign is like other works of art; accessaries, however
splendid, must be rejected when not conducive to the main object.
That judgement, which duly classes the value of every feasible
operation, is the best quality of a general, and lord Wellington
possessed it in a remarkable degree; to it, his genius and his
courage were both subservient; without it he might have performed
many brilliant exploits in the Peninsula, but could never have
conducted the war to a successful end.
BOOK XII.
CHAPTER I.
In the preceding book, Spanish affairs have been little noticed,
although lord Wellington’s combinations were deeply affected by
them. The general position of the allies, extending from Coruña to
Cadiz, presented a great crescent, in the convex of which the French
armies were operating, and it was clear that, when checked at
Lisbon, the most important point, their wings, could reinforce the
centre, unless the allied forces, at the horns of the crescent, acted
vigorously on a system which the harbours and fortresses, at either
extremity, pointed out as suitable to those who possessed the
absolute command of the sea. A British army and fleet were
therefore established at Cadiz, and a squadron of frigates at Coruña;
and how far this warfare relieved the pressure on lord Wellington I
shall now show.
The Gallician troops, under Mahi, usually hanging on the borders
of Leon, were always reported to be above twenty thousand men
when arms or stores were demanded from England; but there were
never more than ten or twelve thousand in line, and, although
Serras’ division, of only eight thousand, was spread over the plains,
from Benevente to the Agueda, during Massena’s advance, no
stroke of importance was effected against it; the arrival of the ninth
corps, in October, put an end to all hopes from the Gallicians in that
quarter, although the Partidas often surprised both posts and
convoys. Behind Mahi there was, however, a second army, from four
to six thousand strong, embodied to defend the coast line towards
the Asturias; and, in the latter province, about eight thousand men,
including the irregular bands of Porlier and other chiefs, constantly
watched Bonet’s movements.
That general frequently mastered the Asturias, but could never
maintain himself there; because the country is a long defile, lying
between the great mountains and the sea, and being crossed by a
succession of parallel ridges and rivers, is admirably calculated for
partizan warfare in connexion with a fleet. Thus, if he penetrated
towards Gallicia, British and Spanish frigates, from Coruña, landing
troops at the ports of Gihon, Santander, or Santona, could always
form a junction with the great bands of Longa, Mina, and Amor, and
excite insurrections on his rear.
In this manner Porlier, as before related, forced him to withdraw
from Castropol, after he had defeated general Ponte at Sales, about
the period of Almeida being invested; and the advantages of such
operations being evident, the British government sent sir Home
Popham to direct the naval, and general Walker the military affairs at
Coruña. Preparations were then made to embark a considerable
force, under Renovales, to renew the attack at Santona and
Santander; the Partidas of the interior were to move at the same
time; a battalion of marines was assembled, in England, to garrison
Santona, when taken; and Mahi promised to co-operate by an
incursion. Serras, however, threatened the frontier of Mr. Stuart’s Papers.
Gallicia, and Mahi remained in suspense, and this, MSS.
together with the usual procrastination of the Spaniards, and the late
arrival of sir Home Popham, delayed the expedition until October.
Meanwhile, Porlier, Escadron, and other chiefs commenced an
isolated attack in the beginning of September. Serras returned to
Zamora, Mahi sent a division into Leon, and Bonet, aware of the
preparations at Coruña, first concentrated at Oviedo, and then fell
back towards Santander, leaving a post at Gihon.
On the 16th of October Renovales sailed but with only thirteen
hundred men; accompanied, however, by general Walker, who
carried ten thousand stand of arms and ammunition. The 19th,
entering the harbour of Gihon, they captured some French vessels;
and Porlier, coming up on the land side, took some treasure and
eighty prisoners. The next day, Renovales proceeded to Santona,
but tempests impeded his landing, and he returned to Coruña the 2d
of November, with only eight hundred and fifty men: a frigate and a
brig had foundered, with the remainder of his troops, in a dreadful
gale, which destroyed all the Spanish naval force along the coast,
twelve vessels being wrecked even in the harbour of Coruña.
Meanwhile, Mahi, leaving Toboado Gil’s division to watch Serras,
entered the Asturias with the rest of the Gallicians, and being joined
first by the troops of that province, and soon after by Renovales, was
very superior to the French; yet he effected nothing, and Bonet
maintained his line from Gihon, through Oviedo, to the borders of
Leon.
In this manner hostilities wore feebly on; the Junta of the Asturias
continued, as from the first, distinguished by their venality and
indifference to the public good; their province was in a miserable and
exhausted state; and the powers of the British naval officers on the
coast not being defined, occasioned some dispute between them
and general Walker; and gave opportunity to the Junta Abstract of General
to interfere improperly with the distribution of the Walker’s Military
Reports from
English stores. Gallicia was comparatively rich, but its Gallicia. MSS.
Junta culpably inactive in the discharge of duties and
oppressive in government, disgusted the whole province, and a
general desire to end their power was prevalent. In the course of the
winter a combination of the clergy was formed to oppose both the
Local Junta and the General Cortes, and assumed so threatening an
aspect that Mahi, who was then on the coast, applied to be taken in
an English vessel to Coruña, to ensure his personal safety; one
Acuña was soon after arrested at Ponferrada, the discontent spread,
and the army was more employed to overawe these factions than to
oppose the enemy. Little advantage, therefore, was derived from the
Spanish operations in the north, and general Walker, despairing to
effect any thing useful, desired either that a British force should be
placed at his disposal or that he might join the army in Portugal.
These expeditions from Coruña naturally encreased the audacity
of the inland partidas, who could only become really dangerous, by
having a sea-port where they could receive supplies and
reinforcements, or embarking save themselves in extremity, and
change the theatre of operations. To prevent this, the emperor
employed considerable numbers of men in the military governments
touching on the Bay of Biscay, and directed, as we have seen, the
corps d’armée, in their progress towards Portugal, to scour all the
disturbed countries to the right and left. The ninth corps was thus
employed during the months of August and September, but when it
passed onward, the partidas resumed their activity. Mina, Longa,
Campillo, and Amor, frequently united about Villar Caya and
Espinosa in numbers sufficient to attack large French detachments
with success; and to aid them, general Walker repeatedly
recommended the taking possession of Santona with a corps of
British troops. That town, having the best winter harbour along the
coast, and being built on a mountain promontory joined to the main
by a narrow sandy neck, could have been made very strong; it would
have cut off Bonet’s communication with France by sea, have given
the British squadron a secure post from whence to vex the French
coasts; and it offered a point of connexion with the partidas of the
Rioja, Biscay, and Navarre.
Lord Liverpool, swayed by these considerations, desired to employ
a corps of four thousand men to secure it; but, having first demanded
lord Wellington’s opinion, the latter “earnestly Letter to Lord
recommended that no such maritime operations Liverpool. 7th May,
1811. MSS.
should be undertaken. For,” said he, “unless a very
large force was sent, it would scarcely be able to effect a landing,
and maintain the situation of which it might take possession. Then
that large force would be unable to move or effect any object at all
adequate to the expense, or to the expectations which would be
formed from its strength, owing to the want of those equipments and
supplies in which an army landed from its ships must be deficient. It
was vain to hope for any assistance, even in this way, much less
military assistance from the Spaniards; the first thing they would
require uniformly would be money; then arms, ammunition, clothing
of all descriptions, provisions, forage, horses, means of transport,
and every thing which the expedition would have a right to require
from them; and, after all, this extraordinary and perverse people
would scarcely allow the commander of the expedition to have a
voice in the plan of operations, to be followed when the whole should
be ready to undertake any, if indeed they ever should be ready.”
Meanwhile Napoleon caused Caffarelli’s reserve to enter Spain,
ordered Santona to be fortified, directed other reinforcements from
France upon the northern provinces, and finally sent marshal
Bessieres to command the young guard, the third and fourth
governments, and that of the Asturias, including Bonet’s division, the
whole forming a distinct force, called the army of the north.
The 1st of January, 1811, this army exceeded Appendix, No. I.
seventy thousand, of which fifty-nine thousand men Section 6.
and eight thousand horses, were present under arms; and
Bessieres, who had received unusual powers, was especially
ordered to support and furnish all necessary assistance to the army
of Portugal. This was the state of the northern parts of Spain.
In the middle parts, the army of the centre, or that immediately
under the king, at first about twenty thousand, was, before the end of
the year, carried up to twenty-seven thousand, exclusive of French
and Spanish guards and juramentados, or native troops, who had
taken the oath of allegiance: with this power he protected his court,
watched the movements of the Valencians, and chased the Guerillas
of the interior.
The summer and autumn of 1810 were, however, for reasons
before-mentioned, the period of greatest activity with these
irregulars; numerous petty actions were constantly fought around the
capital, many small French posts, and numbers of isolated men and
officers, were cut off, and few despatches reached their destinations
without a considerable escort. To remedy this, the lines of
correspondence were maintained by small fortified posts which run
from Madrid; through Guadarama and Segovia to the provinces of
Valladolid and Salamanca; through Buitrago and Somosierra to the
army of the north; through Guadalaxara and Calatayud to the army
of Aragon; through La Mancha to the army of the south; and by the
valley of the Tagus, Arzobispo, and Truxillo, to the fifth corps during
its incursions into Estremadura; a brigade of cavalry, was also
generally stationed at Truxillo.
As the warfare of the Partidas was merely a succession of
surprises and massacres, little instruction, and no pleasure, can be
derived from the details; but in the course of the summer and
autumn, not less than twelve considerable, and an infinite number of
trifling affairs, took place between the moveable columns and these
bands: and the latter being almost always beaten; at the close of the
year, only the Empecinado, Sanchez, Longa, Campillo, Porlier, and
Mina retained any reputation, and the country people were so
harassed, that counter Partidas, in many places assisted the French.
The situation of the army of the centre enabled the king to aid
Massena, either by an advance upon the Elga, or by reinforcing, or,
at least, supporting the fifth corps in Estremadura. But Joseph,
troubled by the Partidas, and having many convoys to protect, was
also averse to join any of the marshals, with all of whom, except
Massena, he was on ill terms; neither were his relations with
Napoleon such as to induce him to take an interest in Appendix, No. IV.
any military operations, save those which affected the Section 4.
immediate security of his court. His poverty was extreme; he was
surrounded by French and Spanish intriguers; his plan of organizing
a national party was thwarted by his brother’s regulations; plots were
formed, or supposed to be formed, against his person, and, in this
uneasy posture, the secondary part he was forced to sustain,
combined with his natural gentleness which shrunk from the terrible
scenes of bloodshed and devastation continually before his eyes,
rendered his situation so irksome, that he resolved to vacate the
throne and retire to France, a resolution which he soon afterwards
partially executed. Such being the course of affairs in the northern
and central provinces, it remains to trace the more important military
operations at the southern horn of the crescent, where the allies
were most favourably situated to press the left flank of the invaders.
Sebastiani was peculiarly exposed to a harassing warfare,
because of the city of Grenada and other towns in the interior, which
he was obliged to hold at the same time with those on the coast,
although the two districts were completely separated by the
mountains. Hence a large body of troops were necessarily kept in
the strip of country bordering the Mediterranean, although menaced,
on the one flank by Gibraltar and the Spanish troops at San Roque,
on the other by the Murcian army, and, in front by continual descents
from the sea; yet, from the shallowness and length of their position,
unable to concentrate in time to avoid being cut off in detail. Now the
Murcian army, nominally twenty thousand, was based upon the cities
of Murcia and Carthagena, and menaced alike the coast-line and
that of Grenada by the route of Baza and Guadix; and any
movement towards the latter was sure to attract the French, while
troops landing from Cadiz or Gibraltar fell upon their disseminated
posts along the coast.
To meet this system, Sebastiani, keeping his reserves about
Grenada, where he had entrenched a permanent camp, made
sudden incursions, sometimes against the Murcians, sometimes
against the Spanish forces on the side of Gibraltar; but that fortress
afforded a refuge to the patriots on one side, and Carthagena,
surrounded by arid lands, where, for two marches, no water is to be
found, always offered a sure retreat on the other. Meanwhile the
French general endeavoured to gain the important castles on the
coast, and to put them into a state of defence; yet Estipona and
Marbella were defended by the Spaniards, and the latter sustained
many attacks, nor was it finally reduced until the 9th of December,
when the garrison, of one hundred men, took refuge on board the
Topaze frigate. But Sebastiani’s hold of these towns, and even the
security of the French troops along the coast, depended upon the
communications across the mountains with Grenada, Chiclana, and
Seville, and to impede these, general Campbell sent British officers
into the Ronda, who successfully directed the wild mountaineers of
that district, until their operations were marred by Lascy’s
misconduct.
The various movements and insurrections in Grenada during the
summer of 1810 have been already noted, but, in October, general
Campbell and admiral Penrose, conjointly with the governor of
Ceuta, renewed the design of surprising Malaga, where were many
privateers and a flotilla of gun-boats, supposed to be destined
against the islands near Ceuta. The French depôt for the siege of
Marbella was at Fuengirola, which is only thirty miles from Malaga,
and it was judged that an attack there would draw the troops from
the latter place; and the more surely, as general Valdemoro,
commanding the Spanish force at San Roque, engaged to co-
operate on the side of Ronda.
EXPEDITION OF FUENGIROLA.
On the 13th of October, captain Hope, in the General C.

Topaze, sailed from Ceuta, with a division of gun- Campbell’s
Correspondence.
boats and a convoy, containing a brigade of twelve- MSS.
pounders, sixty-five gunners, a battalion of the eighty-
ninth regiment, a detachment of foreign deserters, and the Spanish
imperial regiment of Toledo, in all fifteen hundred men, including
serjeants. Lord Blayney, commanding this force, was directed to
make a false attack on Fuengirola, and should the enemy come out
from Malaga, he was to sail against that place. A landing was
effected the same day, and Sebastiani instantly marched, leaving
only three hundred men in Malaga: lord Blayney was as instantly
apprised of the success of the demonstration, yet he remained two
days cannonading the castle with twelve-pounders, although the
heavier metal of the gun-boats and of the frigate, had failed to make
any impression on the walls; and during this time his dispositions
betrayed the utmost contempt of military rules. On the Appendix, No. XI.
second day, while he was on board a gun-boat
himself, the garrison, which did not exceed two hundred men, having
first descried Sebastiani’s column, made a sally, took the battery, and
drove the British part of the investing force headlong towards the
boats. Lord Blayney landed, rallied his men, and retook the artillery;
but at this moment two squadrons of French cavalry came up, and
his lordship, mistaking them for Spaniards, ordered the firing to
cease. He was immediately made prisoner; his troops again fled to
the beach, and would have been sabred but for the opportune arrival
of the Rodney with the eighty-second regiment, the flank companies
of which were immediately disembarked and first checked the
enemy. The Spanish regiment, untouched by the panic, regained the
ships regularly and without loss; but, of the British, two officers and
thirty men were killed or wounded, and one general, seven inferior
officers, and nearly two hundred serjeants and privates taken. Thus
an expedition, well contrived and adequate to its object, was ruined
by misconduct, and terminated in disaster and disgrace.
Scarcely was this affair finished, when Valdemoro and the marquis
of Portasgo appeared in the Ronda, an insurrection commenced at
Velez Malaga and in the neighbouring villages; and Blake, who had
returned from Cadiz to the army in Murcia, advanced, with eight
thousand men, towards Cullar on the side of Baza. General
Campbell immediately furnished money to Portasgo, General Campbell’s
and embarked a thousand stand of arms for the Correspondence.
MSS.
people of Velez Malaga. An English frigate was also
sent to cruize along the coast, yet Sebastiani, relieved from the fear
of a descent, soon quelled this insurrection; and then sending
Milhaud on before with some cavalry, followed himself with
reinforcements for general Rey, who was opposed to Blake. The
latter, retiring behind the Almanzora river, was overtaken by Milhaud,
and, being defeated on the 4th of November, his army dispersed: at
the same time, a contagious fever, breaking out at Carthagena,
spread along the coast to Gibraltar and Cadiz, and the Spanish
operations on the side of Murcia ceased.
In the kingdom of Seville, the war turned chiefly upon the blockade
of the Isla, and the movements of the Spanish armies in
Estremadura. Provisions for Cadiz were principally drawn from the
Condado de Neibla, and it has been seen that Copons, aided by
descents from the ocean, endeavoured to secure this important
resource; but neither his efforts, nor the descents, would have
availed, if Ballasteros had not co-operated by constantly menacing
Seville from Araceña and the Aroche mountains. Neither could
Ballasteros have maintained the war there, were it not for the
support of Badajos and Olivenza; under cover of which, Romana’s
army protected his line of operation, and sent military supplies and
reinforcements. On the possession of Badajos, therefore, the supply
of Cadiz chiefly depended.
Seville was the French point of defence; Cadiz Estremadura and
the Condado de Neibla their points of offence. The want of
provisions, or the desire to cut off the Spanish convoys, or the
sudden irruption of troops from Cadiz, threatening their posts at
Moguer and Huelva, always drew them towards the coast; the
enterprises of Ballasteros brought them towards Araceña; and, in
like manner, the advance of Romana towards the mountains brought
them to Estremadura; but Romana had wasted the greater part of
the latter province, and as the fifth corps alone was disposable either
for offensive movements, or for the defence of the country around
Seville, Soult contented himself with such advantages as could be
gained by sudden strokes; frequently, however, crossing the
mountains to prevent the Spaniards from permanently establishing
themselves on the frontier of Andalusia.
In October, Romana entered the Lines of Torres Vedras, and
Mendizabal, who remained with two divisions, finding that Mortier,
unconscious of Romana’s absence, had retired across the
mountains, occupied Merida. He would also have established
himself in the yet unwasted country about Llerena; but the
appearance of a moveable column on the frontier of La Mancha,
sent him back to Badajos, and, on the 20th of November, he united
with Ballasteros. The French then fortified Gibraleon and other posts
in the Condado de Neibla; Girard’s division re-appeared at
Guadalcanal, and being joined by the column from La Mancha,
foraged the country towards Llerena: whereupon Mendizabel took
post at Zafra with nine thousand infantry and two thousand cavalry,
including Madden’s Portuguese brigade. Meanwhile, Copons, who
had four thousand men, was totally defeated at Castillejos by
D’Aremberg, and retired to Puebla de Gusman.
At Cadiz, no change or military event had occurred after the affair
of Matagorda, save the expeditions against Moguer already noticed,
and a slight attempt of the Spaniards against the Chiclana works in
September; but all men’s hopes and expectations had been
wonderfully raised by political events which it was fondly hoped
would secure both independence and a good constitution to Spain.
After two years of intrigues and delay, the National Cortes was
assembled, and the long suppressed voice of the people was at last
to be heard. Nevertheless the members of the Cortes could not be
duly and legally chosen in the provinces possessed by the enemy;
and as some members were captured by the French on their journey
to Cadiz, many persons unknown, even by name, to their supposed
constituents, were chosen: a new principle of election, unknown to
former Cortes, was also adopted; for all persons twenty-five years
old, not holding office or pension under the government, nor
incapacitated by crime, nor by debts to the state, nor by bodily
infirmity, were eligible to sit if chosen. A supplement of sixty-eight
members was likewise provided to supply accidental vacancies; and
it was agreed that twenty-six persons then in Spain, natives of the
colonies, should represent those dependencies.
Towards the latter end of September this great assembly met, and
immediately took the title of Majesty: it afterwards declared the press
free in respect of political, but not of religious matters, abolished
some of the provincial juntas, re-appointed captains-general, and
proceeded to form a constitution worded in the spirit of republican
freedom. These things, aided by a vehement eloquence, drew much
attention to the proceedings of the Cortes, and a fresh impulse
seemed given to the war: but men brought up under despotism do
not readily attain the fashions of freedom. The Provincial Junta, the
Central Junta, the Junta of Cadiz, the Regency, had all been, in
succession, violent and tyrannical in act, while claiming only to be
popular leaders, and this spirit did not desert the Cortes. Abstract
principles of liberty were freely promulgated, yet tyrannical and
partial proceedings were of common occurrence; and the
reformations, by outstripping the feelings and understandings of the
nation, weakened the main springs of its resistance to the French. It
was not for liberty, but for national pride and from religious influence,
that the people struck. Freedom had no attractions for the nobles,
nor for the monastics, nor even for the merchants; and the Cortes, in
suppressing old establishments and violating old forms and customs,
wounded powerful interests, created active enemies, and shocked
those very prejudices which had produced resistance to Napoleon.
In the administration of the armies, in the conduct of the war, in the
execution of the laws, and the treatment of the colonies, there was
as much of vanity, of intrigue, of procrastination, negligence, folly,
and violence as before. Hence the people were soon discontented;

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5) Generally, a physical count of inventory is performed annually in both a perpetual inventory

22) Which of the following is an activity common to the operations of merchandising,

30) ________ sell their inventory to ________ for resale to consumers.

32) Which of the following is inventory?

34) Sales Revenue reports the:

42) Beginning inventory plus purchases equals:

43) Beginning inventory plus purchases minus ending inventory equals:

53) Which of the following statements regarding shrinkage is not correct?

59) Companies using a perpetual inventory system:

61) Goods available for sale can:

November 6—Purchased $8,700 of inventory on account, terms 2/10, n/30.

What journal entry will be recorded by Polk Company on November 6?

November 6—Purchased $8,700 of inventory on account, terms 2/10, n/30.

What journal entry will be recorded by Polk Company on November 8?

November 6—Purchased $8,700 of inventory on account, terms 2/10, n/30.

What journal entry will be recorded by Polk Company on November 15?

91) Inventory cost consists of purchase price:

99) In a perpetual system, when inventory is sold on account:

101) The five-step revenue model requires:

135) Sales discounts should appear in the financial statements as a(n):

138) Sales Returns and Allowances are reported on the:

150) The gross profit equation is:

152) The gross profit percentage is an indication of how:

Cost of Goods Sold $ 140,000

What is the gross profit?

Cost of Goods Sold $ 200,000

What is the amount of gross profit?

Cost of Goods Sold $ 200,000

What is the amount of income before income taxes?

157) Which of the following statements about gross profit is correct?

163) Gross profit equals:

Accounts Payable $ 30,000

Net sales would be:

Accounts Payable $ 30,000

Gross profit would be:

Accounts Payable $ 30,000

Income from operations would be:

Accounts Payable $ 30,000

Net income would be:

Accounts Payable $ 30,000

The gross profit percentage would be closest to:

185) Which of the following statements is incorrect regarding sales discounts?

Beginning inventory (75 units @ $50/unit) $ 3,750

What is the amount of cost of goods available for sale?

Beginning inventory (75 units @ $50/unit) $ 3,750

Beginning inventory (75 units @ $50/unit) $ 3,750

Calculation of purchase discount:

Purchase discount = Invoice price × Discount percentage

a. Calculate the gross profit for the month.

Gross profit = Net sales − Cost of goods sold

30) sell their inventory to for resale to consumers.