Chapter 10—Supplementary Questions
K/U
True and False
1. A merchandising business does not make the goods it sells.
_________
2. The Merchandise Inventory account is debited when supplies are purchased.
_________
3. The periodic inventory method gives the business owner a daily updated figure
for merchandise on hand.
_________
4. The Merchandise Inventory account is a fixed asset.
_________
5. When the periodic inventory system is in use, the dollar value of the ending
inventory is determined by taking a physical count.
_________
6. The Cost of Goods Sold appears on the balance sheet.
_________
7. Gross profit can never be less than net income.
_________
8. Under the periodic method, goods purchased for resale during the fiscal period
are debited to the Purchases account.
_________
9. The retailer’s cost for having merchandise delivered from a supplier is debited
to the Delivery Expense account.
_________
10. On the worksheet, the Purchases figure is extended to the debit side of the
income statement columns.
_________
11. On the worksheet, the opening inventory figure is extended to the debit side of
the balance sheet columns.
_________
12. The opening inventory figure is closed by debiting the Income Summary
account.
_________
13. The Freight-in account is closed by debiting the Income Summary account.
_________
14. The source document for a sales return is a credit invoice.
_________
15. When a purchaser returns merchandise purchased on account, the purchaser
debits Purchase Returns and Allowance (periodic method).
_________
16. The note 2/10;n/30 on an invoice means that a 10% discount may be taken if
payment is made within 30 days.
_________
17. The Discounts Allowed figure is found in the Cost of Merchandise Sold section
of the income statement.
_________
18. When the perpetual inventory method is used, a sale of merchandise results in a
credit to the Merchandise Inventory account.
_________
19. When the perpetual inventory method is used, a sale of merchandise results in a
debit to Cost of Goods Sold.
_________
20. When the perpetual inventory method is used, the purchase of merchandise is
recorded as a debit to the Merchandise Inventory account.
_________
K/U
Multiple Choice
21. Which of the following statements concerning merchandise inventory is not true?
A. It is a fixed asset.
B. The merchandise is counted at least once a year.
C. The cost of the merchandise sold appears on the income statement.
D. The ending inventory of one fiscal period becomes the beginning inventory of the next fiscal period.
22. Using the numbers below, calculate the value of the ending inventory.
Beginning inventory
$1 000
Merchandise purchased
$ 700
Merchandise sold
$ 900
A. $2 600
B. $800
C. $900
D. $200
23. Using the numbers below, calculate the Cost of Goods Sold.
Beginning inventory
$2 800
Cost of merchandise purchased
$1 700
Cost of ending inventory
$2 200
A. $6 700
B. $2 300
C. $1 100
D. $600
24. Select the incorrect statement.
A. Revenue – Cost of Goods Sold = Gross Profit
B. Gross Profit – Operating Expenses = Net Income
C. Revenue – Operating Expenses = Cost of Goods Sold
D. Gross Profit + Cost of Goods Sold = Revenue
25. Select the incorrect statement. On the worksheet,
A. the ending inventory is extended to the income statement credit column.
B. the ending inventory is extended to the balance sheet debit column.
C. the opening inventory is extended to the income statement debit column.
D. the opening inventory is extended to the balance sheet credit column.
26. Which of the following is a correct closing entry?
A. debit Merchandise Inventory (ending inventory), credit Income Summary
B. debit Income Summary, credit Purchases
C. debit Income Summary, credit Merchandise Inventory (beginning inventory)
D. All of the above.
27. What happens when merchandise is returned by a customer?
A. A credit invoice is issued.
B. Sales is credited.
C. Accounts Receivable is debited.
D. All of the above.
28. If a business allows a cash discount, the discount
A. is a percentage of the total bill.
B. is a percentage of the value of the merchandise before taxes are added.
C. is tax deductible.
D. Either A or C.
29. A business uses the perpetual inventory system. Which of the following would not be part of a journal entry
to record a cash sale?
A. a debit to Bank
B. a credit to Sales
C. a debit to Cost of Goods Sold
D. a debit to Merchandise Inventory
30. If the ending inventory is understated,
A. the Cost of Goods Sold and gross profit are overstated.
B. the Cost of Goods Sold is understated and net income is overstated.
C. the Cost of Goods Sold and net income are overstated.
D. the Cost of Goods Sold is overstated and the gross profit is understated.
31. Which of the following statements concerning the perpetual inventory system is false?
A. It provides an up-to-date value of inventory on hand.
B. When a business sells inexpensive merchandise and does not use computers, it is an easier system to use
than the periodic system.
C. With the increasing popularity of computers, more businesses are using the perpetual inventory system.
D. It is still necessary to take a physical count at certain times during the year.
32. When the perpetual inventory system is used, and merchandise is stolen, which account would likely be
debited?
A. Cost of Goods Sold
B. Inventory Shrinkage
C. Purchase Returns and Allowances
D. Merchandise Inventory
33. Which of the following accounts would not appear in the ledger of a business that uses the perpetual
inventory system?
A. Cost of Goods Sold
B. Inventory Shrinkage
C. Purchases
D. Freight-in
Figure 1
Opening inventory
Purchases
Ending inventory
Cost of Goods Sold
Gross profit
Operating expenses
Net income
$24 000
?
5 000
74 000
26 000
21 000
?
34. In Figure 1, the value of Purchases is
A. $19 000.
B. $29 000.
C. $45 000.
D. $55 000.
35. In Figure 1, the amount of net income is
A. $48 000.
B. $26 000.
C. $11 000.
D. $5 000.
36. The main expense that a merchandising firm has that a service business does not is
A. cost of goods sold.
B. freight-in.
C. merchandise inventory.
D. purchases.
37. A manufacturing firm has an item on its financial statements called Cost of Goods Manufactured. The best
match to this item on the statements of a merchandising firm is
A. Cost of Goods Sold.
B. Cost of Goods Available for Sale.
C. Cost of Delivered Goods.
D. Purchases.
38. A cost accountant would likely be employed by
A. a manufacturing business.
B. a merchandising business.
C. a service business.
D. the tax department.
39. How many different types of inventory appear on the balance sheet of a manufacturing firm?
A. one
B. two
C. three
D. four
40. The formula for markup percentage is
A. Cost of Goods Sold ÷ Margin.
B. Cost of Goods Sold ÷ Sales.
C. Margin ÷ Cost of Goods Sold.
D. Sales ÷ Margin.