Merchandising Operations Chapter 5 1 Copyright © 2007 Prentice-Hall. All rights reserved The series of events that begins when the company purchases inventory, then sells the inventory, and lastly, collects cash from customers is called the 1. 2. 3. 4. Accounting period Operating cycle Accounting cycle Operating period 2 Copyright © 2007 Prentice-Hall. All rights reserved Answer: 2 3 Copyright © 2007 Prentice-Hall. All rights reserved The inventory system that keeps a running record of all inventory as it is bought and sold is called 1. 2. 3. 4. Periodic inventory system Computerized inventory system Perpetual inventory system Physical inventory system 4 Copyright © 2007 Prentice-Hall. All rights reserved Answer: 3 5 Copyright © 2007 Prentice-Hall. All rights reserved Clark Company uses a perpetual inventory system. The entry to record the purchase of inventory on account would include 1. 2. 3. 4. A credit to sales revenue A debit to inventory A debit to purchases A credit to inventory 6 Copyright © 2007 Prentice-Hall. All rights reserved Answer: 2 The entry is: GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT Inventory Accounts Payable 7 Copyright © 2007 Prentice-Hall. All rights reserved Harris Company purchased inventory for $600, credit terms 1/10, n/30. Under a perpetual inventory system, the entry to record a payment within the discount period includes a credit to 1. 2. 3. 4. Accounts Payable Purchase Discounts Inventory Sales Discounts 8 Copyright © 2007 Prentice-Hall. All rights reserved Answer: 3 The entry is GENERAL JOURNAL DATE DESCRIPTION Accounts Payable Inventory Cash REF DEBIT CREDIT 600 6 594 9 Copyright © 2007 Prentice-Hall. All rights reserved Harris Company purchased inventory for $600, credit terms 1/10, n/30. Under a perpetual inventory system, Harris would record a return of $100 of merchandise purchased by crediting 1. 2. 3. 4. Purchase Returns and Allowances Inventory Sales Returns and Allowances Accounts Payable 10 Copyright © 2007 Prentice-Hall. All rights reserved Answer: 2 The entry is GENERAL JOURNAL DATE DESCRIPTION Accounts Payable Inventory REF DEBIT CREDIT 100 100 11 Copyright © 2007 Prentice-Hall. All rights reserved Collins Company uses a perpetual inventory system. If Collins purchases inventory and the freight terms of FOB destination, then the 1. 2. 3. 4. Inventory account is not affected Delivery expense increases Inventory account increases Freight-in account increases 12 Copyright © 2007 Prentice-Hall. All rights reserved Answer: 1 FOB Destination means that the seller pays the shipping costs. 13 Copyright © 2007 Prentice-Hall. All rights reserved Sales revenue minus cost of goods sold is called 1. 2. 3. 4. Cost of goods sold Gross profit Net profit Net income 14 Copyright © 2007 Prentice-Hall. All rights reserved Answer: 2 15 Copyright © 2007 Prentice-Hall. All rights reserved Miller Company sold merchandise on account for $200. These goods cost Miller $160. The entry to record this transaction would include: 1. 2. 3. 4. Debit cost of goods sold; credit inventory, $200 Debit inventory; credit accounts receivable, $200 Debit sales revenue; credit cost of goods sold, $200 Debit accounts receivable; credit sales revenue, $200 16 Copyright © 2007 Prentice-Hall. All rights reserved Answer: 4 The entry is GENERAL JOURNAL DATE DESCRIPTION REF DEBIT Accounts Receivable Sales Revenue 200 Cost of Goods Sold Inventory 160 CREDIT 200 160 17 Copyright © 2007 Prentice-Hall. All rights reserved The Sales Returns and Allowances account is classified as a(n) 1. 2. 3. 4. Asset account Expense account Contra asset account Contra revenue account 18 Copyright © 2007 Prentice-Hall. All rights reserved Answer: 4 Sales Returns and Allowances and Sales Discounts are both contra revenue accounts. They are deducted from Sales Revenue to compute net sales. 19 Copyright © 2007 Prentice-Hall. All rights reserved Leake Co. sells merchandise on account for $500 to Sakers Co. (credit terms of 2/10, n/30). Sakers Co. returns $100 of damaged merchandise, along with a check to pay the invoice within the discount period. How much did Sakers Company pay? 20 Copyright © 2007 Prentice-Hall. All rights reserved Answer: Balance on account ($500 - $100) Less 2% discount ($400 x .02) Cash paid $400 8 $392 21 Copyright © 2007 Prentice-Hall. All rights reserved What is the normal balance of the Sales Discounts account? 1. Debit 2. Credit 22 Copyright © 2007 Prentice-Hall. All rights reserved Answer: Debit (It is a contra revenue) 23 Copyright © 2007 Prentice-Hall. All rights reserved At the end of the year, Jensen Company’s Inventory account shows an unadjusted balance of $7,000. A physical count of inventory comes to $6,500. The entry to adjust the account for inventory shrinkage would be 1. 2. 3. 4. Debit inventory; credit cost of goods sold Debit cost of goods sold; credit inventory Debit inventory; credit accounts payable Debit sales revenue; credit cost of goods sold 24 Copyright © 2007 Prentice-Hall. All rights reserved Inventory Balance $7,000 Answer: 2 $500 Desired balance $6,500 25 Copyright © 2007 Prentice-Hall. All rights reserved The following balances are in Baker Company’s accounts at the end of the year: Cost of goods sold………………….$300 Interest expense……………………. 100 Operating expenses……………….. 200 Sales discounts…………………….. 60 Sales returns and allowances…….. 40 Sales revenue………………………. 900 What is the dollar amount of net sales revenue? 26 Copyright © 2007 Prentice-Hall. All rights reserved Answer: Sales revenue Less Sales returns and allowances Sales discounts Net sales $900 $40 60 100 $800 27 Copyright © 2007 Prentice-Hall. All rights reserved The following balances are in Baker Company’s accounts at the end of the year: Cost of goods sold………………….$300 Interest expense……………………. 100 Operating expenses……………….. 200 Sales discounts…………………….. 60 Sales returns and allowances…….. 40 Sales revenue………………………. 900 How much is operating income? 28 Copyright © 2007 Prentice-Hall. All rights reserved Answer: Net Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Income $800 (300) $500 (200) $300 29 Copyright © 2007 Prentice-Hall. All rights reserved Which one of the following is found on a multi-step income statement but not on a single-step income statement? 1. 2. 3. 4. Net income Cost of goods sold Gross profit Net sales 30 Copyright © 2007 Prentice-Hall. All rights reserved Answer: 3 The single step income statement reports total revenues less total expenses. Cost of goods sold is part of the total expenses, so the subtotal, Gross Profit, is not reported. 31 Copyright © 2007 Prentice-Hall. All rights reserved The gross profit percentage is computed by dividing gross profit by 1. 2. 3. 4. Net sales revenue Operating income Cost of goods sold Net income 32 Copyright © 2007 Prentice-Hall. All rights reserved Answer: 1 33 Copyright © 2007 Prentice-Hall. All rights reserved The following information is available for Clarence Company, which uses a periodic inventory system: Beginning inventory Ending inventory Net purchases $200 300 800 What is the amount of the cost of goods sold? 34 Copyright © 2007 Prentice-Hall. All rights reserved Answer: Beginning inventory Net purchases Cost of goods available for sale Less: Ending inventory Cost of goods sold $200 800 $1,000 300 $700 35 Copyright © 2007 Prentice-Hall. All rights reserved 36 Copyright © 2007 Prentice-Hall. All rights reserved