Chapter 05

Chapter 005 Accounting for Merchandising Operations
Summary of Questions by Difficulty Level (DL) and Learning Objective (LO)

True/False
Item DL LO Item DL LO Item DL LO
1. Easy C1 26. Easy A2 51. Med P2
2. Easy C1 27. Med A2 52. Med P2
3. Easy C1 28. Hard A2 53. Med P2
5. Med C1 30. Easy P1 55. Hard P2
6. Med C1 31. Easy P3 56. Easy P3
7. Med C1 32. Easy P1 57. Easy P3
8. Med C1 33. Easy P1 58. Med P3
9. Med C1 34. Easy P1 59. Med P3
10. Med C1 35. Easy P1 60. Med P3
11. Easy C1 36. Med P1 61. Hard P3
12. Med C2 37. Med P1 62. Easy P4
13. Med C1 38. Med P1 63. Easy P4
14. Hard C2 39. Med P1 64. Easy P4
15. Easy C3 40. Med P1 65. Med P4
16. Easy C3 41. Med P1 66. Med P4
17. Easy C4 42. Med P1 67. Med P4
18. Easy A1 43. Med P1 68. Med P4
19. Easy A1 44. Med P1 69. Easy P5
20. Med A1 45. Med P1 70. Easy P5
21. Med A1 46. Hard P1 71. Easy P5
22. Med A1 47. Hard P1 72. Med P5
23. Med A1 48. Easy P2 73. Med P5
24. Hard A1 49. Easy P2 74. Hard P5
25. Easy A2 50. Easy P2
5-1
Multiple Choice
76. Easy C1 95. Easy A2 114. Med P2
77. Med C1 96. Easy A2 115. Med P2
78. Med C1 97. Hard A2 116. Med P2
79. Med C1 98. Hard A2 117. Hard P2
80. Hard C1 99. Hard A2 118. Med P3
81. Easy C2 100. Easy P1 119. Med P3
82. Easy C2 101. Easy P1 120. Easy P4
83. Med C2 102. Med P1 121. Easy P4
84. Hard C2 103. Med P1 122. Med P4
85. Med C4 104. Med P1 123. Med P4
86. Med C4 105. Med P1 124. Med P4
87. Easy A1 106. Hard P1 125. Hard P4
88. Easy A1 107. Hard P1 126. Easy P5
89. Med A1 108. Easy P2 127. Med P5

90. Med A1 109. Easy P2 128. Med P5
91. Hard A1 110. Med P2 129. Med P5
92. Hard A1 111. Med P2 130. Med P5
93. Hard A1 112. Med P2 131. Hard P5
Matching
132. Med C2,P1,P3 133. Med C1,C3,P1,
P4,A1 P2,P4
Short Essay
134. Easy C1 140. Med A1 146. Med P3
135. Med C1 141. Med A2 147. Med P4
136. Med C2 142. Med P1 148. Med P4
137. Med C2 143. Hard P1 149. Hard P5
138. Med C3 144. Hard P2 150. Med
139. Med C4 145. Easy P3
5-2
Problems
151. Easy C1 158. Med A2 165. Med P3
152. Easy C1 159. Hard A2 166. Hard P3
153. Hard C1 160. Easy P1 167. Med P4
154. Med A1 161. Med P1 168. Med P4
155. Med A1 162. Hard P1,P2 169. Med P5
156. Med A1 163. Med P2 170. Med P5
157. Easy A2 164. Med P2 171. Med P5
Completion Problems
172. Easy C1 181. Easy A2 190. Med P2
173. Med C1 182. Med P1 191. Easy P3
174. Easy C2 183. Med P1 192. Easy P4
175. Easy C2 184. Med P1 193. Med P4
176. Easy C3 185. Med P1 194. Med P4
177. Easy C3 186. Med P1 195. Med P4
178. Easy C4 187. Easy P2 196. Med P4
179. Easy C4 188. Easy P2 197. Med P4
180. Easy A1 189. Easy P2 198. Med P5
Problems
199. Easy C1 201. Med P3 203. Hard P4
200. Easy C1 202. Hard P1,P2
5-3
True / False Questions
1. Merchandise inventory consists of products that a company acquires to resell to customers.

TRUE
AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: C1
2. A service company earns net income by buying and selling merchandise.

FALSE
AICPA BB: Industry
Difficulty: Easy
3. Gross profit is also called gross margin.

TRUE
AICPA BB: Industry
Difficulty: Easy
4. Cost of goods sold is also called cost of sales.

TRUE
AICPA BB: Industry
Difficulty: Easy
5-4
5. A wholesaler is an intermediary that buys products from manufacturers or other

wholesalers and sells them to consumers.
FALSE
AICPA BB: Industry
Difficulty: Medium
6. A retailer is an intermediary that buys products from manufacturers and sells them to
wholesalers.
FALSE
AICPA BB: Industry
Difficulty: Medium
7. Cost of goods sold represents the cost of buying and preparing merchandise for sale.
TRUE
AICPA BB: Industry
Difficulty: Medium
8. A company had sales and cost of goods sold of $350,000 and $200,000, respectively. Its
gross profit equals $150,000.
TRUE
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
5-5
9. A company had net sales and cost of goods of $545,000 and $345,000, respectively. Its
gross margin equals $890,000.
FALSE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
10. A company had a gross profit of $300,000 based on sales of $400,000. Its cost of goods
sold equals $700,000.
FALSE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
11. A merchandising company's operating cycle begins with the sale of merchandise and ends
with the collection of cash from the sale.
FALSE
AICPA BB: Industry
Difficulty: Easy
12. Merchandise inventory is reported in the long-term assets section of the balance sheet.
FALSE
AICPA BB: Industry
Difficulty: Medium
5-6
13. Cash sales shorten the operating cycle for a merchandiser; credit purchases lengthen
operating cycles.
TRUE
AICPA BB: Industry
Difficulty: Medium
14. Assets tied up in inventory are not productive assets.

TRUE
AICPA BB: Industry
Difficulty: Hard
15. A perpetual inventory system requires updating of the inventory account only at the
beginning of an accounting period.
FALSE
AICPA BB: Industry
Difficulty: Easy
16. A perpetual inventory system continually updates accounting records for inventory
transactions.
TRUE
AICPA BB: Industry
Difficulty: Easy
5-7
17. Beginning merchandise inventory plus the net cost of purchases is the merchandise
available for sale.
TRUE
AICPA BB: Industry
Difficulty: Easy
18. The acid-test ratio is also called the quick ratio.

TRUE
AICPA BB: Industry
AICPA FN: Risk Analysis
Difficulty: Easy
Learning Objective: A1
19. Quick assets include cash, inventory, and current receivables.

FALSE
AICPA BB: Industry
Difficulty: Easy
20. The acid-test ratio is defined as current assets divided by current liabilities.
FALSE
AICPA BB: Industry
Difficulty: Medium
5-8
21. A common rule of thumb is that a company's acid-test ratio should be at least 2 or a
company may face near-term liquidity problems.
FALSE
AICPA BB: Industry
Difficulty: Medium
22. Successful use of a just-in-time inventory system can narrow the gap between the acid-test
and the current ratio.
TRUE
AICPA BB: Industry
Difficulty: Medium
23. A company's quick assets are $147,000 and its current liabilities are $143,000. This
company's acid-test ratio is 1.03.
TRUE
$147,000/$143,000 = 1.03
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
24. A company's current ratio is 1.2 and its quick ratio is 0.25. This company is probably an
excellent credit risk because the ratios reveal no indication of liquidity problems.
FALSE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
5-9
25. The gross margin ratio is defined as gross margin divided by net sales.
TRUE
AICPA BB: Industry
Difficulty: Easy
26. The profit margin ratio is gross margin divided by total assets.
FALSE
AICPA BB: Industry
Difficulty: Easy
27. The gross margin ratio reflects the relation between sales and cost of goods sold.
TRUE
AICPA BB: Industry
Difficulty: Medium
28. A company had net sales of $340,500, its cost of goods sold was $257,000, and its net
income was $13,750. The company's gross margin ratio equals 24.5%.
TRUE
($340,500 - $257,000)/$340,500 = 24.5%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
5-10
29. J.C. Penney had net sales of $24,750 million, cost of goods sold of $16,150 million, and
net income of $837 million. Its gross margin ratio equals 3.4%.
FALSE
($24,750 - $16,150)/$24,750 = 34.7%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
30. The Merchandise Inventory account balance at the end of the current period is equal to the
amount of beginning merchandise inventory for the next period.
TRUE
AICPA BB: Industry
Difficulty: Easy
Learning Objective: P1
31. Cost of goods sold is reported on both the income statement and the balance sheet.
FALSE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
32. Trade discounts are recorded in a Trade Discounts account in the accounting system.
FALSE
AICPA BB: Industry
Difficulty: Easy
5-11
33. Credit terms for a purchase include the amounts and timing of payments from a buyer to a
seller.
TRUE
AICPA BB: Industry
Difficulty: Easy
34. Purchase returns refer to merchandise a buyer acquires but then returns to the seller.
TRUE
AICPA BB: Industry
Difficulty: Easy
35. Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.
FALSE
AICPA BB: Industry
Difficulty: Easy
36. Under the perpetual inventory system, the cost of merchandise purchased is recorded in
the Purchases account.
FALSE
AICPA BB: Industry
Difficulty: Medium
5-12
37. Under the perpetual inventory system, the cost of merchandise purchased is recorded in
the Merchandise Inventory account.
TRUE
AICPA BB: Industry
Difficulty: Medium
38. Credit terms of 2/10, n/30 imply that the seller offers the purchaser a 2% cash discount if
the amount is paid within 10 days of the invoice date. Otherwise, the full amount is due in 30
days.
TRUE
AICPA BB: Industry
Difficulty: Medium
39. Sellers always offer a discount to buyers for prompt payment toward purchases made on
credit.
FALSE
AICPA BB: Industry
Difficulty: Medium
40. In a perpetual inventory system, the Merchandise Inventory account reflects the cost of
goods available for sale.
TRUE
AICPA BB: Industry
Difficulty: Medium
5-13
41. Purchase discounts are the same as trade discounts.

FALSE
AICPA BB: Industry
Difficulty: Medium
42. If a company sells merchandise with credit terms 2/10 n/60, the credit period is 10 days
and the discount period is 60 days.
FALSE
AICPA BB: Industry
Difficulty: Medium
43. The seller is responsible for paying shipping charges and bears the risk of damage or loss
in transit if goods are shipped FOB destination.
TRUE
AICPA BB: Industry
Difficulty: Medium
44. If goods are shipped FOB shipping point, the seller does not record revenue from the sale
until the goods arrive at their destination because the transaction is not complete until that
point.
FALSE
AICPA BB: Industry
Difficulty: Medium
5-14
45. A buyer records the costs of shipping goods in a Delivery Expense, or transportation-out
account when the buyer is responsible for these costs.
FALSE
AICPA BB: Industry
Difficulty: Medium
46. A buyer did not take advantage of a supplier's credit terms of 2/10, n/30, and instead paid
the invoice in full at the end of 30 days. By not taking the discount the buyer lost the
equivalent of 18% annual interest on the amount of the purchase.
FALSE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
47. FOB shipping point (or FOB factory) implies that ownership of goods transfers to the
buyer at the buyer's place of business.
FALSE
AICPA BB: Industry
Difficulty: Hard
48. Each sales transaction for a seller that uses a perpetual inventory system involves
recognizing both revenue and cost of merchandise sold.
TRUE
AICPA BB: Industry
Difficulty: Easy
5-15
49. Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving
cash and reducing future collections efforts.
TRUE
AICPA BB: Industry
Difficulty: Easy
50. Sales discounts is a contra revenue account, meaning that the Sales Discounts account is
added to the Sales account when computing a company's net sales.
FALSE
AICPA BB: Industry
Difficulty: Easy
51. A credit memorandum from a seller informs a buyer of the seller's credit to its Accounts
Payable account arising from a sales return or allowance.
FALSE
AICPA BB: Industry
Difficulty: Medium
52. When a credit customer returns merchandise to the seller, under a perpetual inventory
system, the seller would debit Sales Returns and Allowances and credit Accounts Receivable
and also debit Merchandise Inventory and credit Cost of Goods Sold.
TRUE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-16
53. Because sellers assume that their customers will pay within the discount period, the seller
usually records the discount at the time of the sale.
FALSE
AICPA BB: Industry
Difficulty: Medium
54. A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20, and a credit
to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for
early payment.
FALSE
$20/$1,000 = 2% discount
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
55. Sales of $350,000 and net sales of $323,000 could reflect sales discounts of $27,000.
TRUE
$350,000 - $323,000 = $27,000
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
5-17
56. A perpetual inventory system is able to directly measure and monitor inventory shrinkage
and there is no need for a physical count of inventory.
FALSE
AICPA BB: Industry
Difficulty: Easy
57. Sales Discounts are closed to the Income Summary account.

TRUE
AICPA BB: Industry
Difficulty: Easy
58. Accounts unique to merchandising companies (versus service companies) include

Merchandising Inventory, Sales, Sales Discounts, Sales Returns and Allowances, and Cost of
Goods Sold.
TRUE
AICPA BB: Industry
Difficulty: Medium
59. Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold are all closed to
the Income Summary account with debits.
FALSE
AICPA BB: Industry
Difficulty: Medium
5-18
60. In a perpetual inventory system, the merchandise inventory account must be closed at the
end of the accounting period.
FALSE
AICPA BB: Industry
Difficulty: Medium
61. The adjusting entry to reflect inventory shrinkage is a debit to Income Summary and a
credit to Inventory Shrinkage Expense.
FALSE
AICPA BB: Industry
Difficulty: Hard
62. A multiple-step income statement format shows detailed computations of net sales and
other costs and expenses, and reports subtotals for various classes of items.
TRUE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
63. Operating expenses are classified into two categories: selling expenses and cost of goods
sold.
FALSE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
5-19
64. A merchandiser's classified balance sheet reports merchandise inventory as a current

asset.
TRUE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
65. Generally accepted accounting principles require companies to use one specific format for
the financial statements.
FALSE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
66. Selling expenses support a company's overall operations and include expenses related to
accounting, human resource management, and financial management.
FALSE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
67. When a company has no reportable nonoperating activities, its income from operations is
simply labeled net income.
TRUE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
5-20
68. A single-step income statement includes cost of goods sold as another expense, and shows
only one subtotal for total expenses.
TRUE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
69. The periodic inventory system uses a temporary account called Purchases.
TRUE
AICPA BB: Industry
Difficulty: Easy
70. The periodic inventory system is superior to the perpetual inventory system in preventing
inventory shrinkage.
FALSE
AICPA BB: Industry
Difficulty: Easy
71. The periodic inventory system requires updating the inventory account only at the end of
the period to reflect the quantity and cost of both the goods available and the goods sold.
TRUE
AICPA BB: Industry
Difficulty: Easy
5-21
72. In a periodic inventory system, cost of goods sold is recorded as each sale occurs.
FALSE
AICPA BB: Industry
Difficulty: Medium
73. Under both the periodic and perpetual inventory systems, the temporary account
Purchases Returns and Allowances is used to accumulate the cost of all returns and
allowances for a period.
FALSE
AICPA BB: Industry
Difficulty: Medium
74. When preparing the unadjusted trial balance in a periodic inventory system, the amount
that appears as Merchandise Inventory is the ending inventory amount.
FALSE
AICPA BB: Industry
Difficulty: Hard
5-22
Multiple Choice Questions
75. A merchandising company:

A. Earns net income by buying and selling merchandise.
B. Can buy products from manufacturers and sell to retailers.
C. Can buy products from manufacturers and sell them to consumers.
D. Can be a wholesaler or a retailer.
E. All of these.
AICPA BB: Industry
Difficulty: Easy
76. A merchandising company:

A. Earns net income by buying and selling merchandise.
B. Receives fees only in exchange for services.
C. Earns profit from commissions only.
D. Earns profit from fares only.
E. Buys products from consumers.
AICPA BB: Industry
Difficulty: Easy
77. Cost of goods sold:

A. Is another term for merchandise sales.
B. Is the term used for the cost of buying and preparing merchandise for sale.
C. Is another term for revenue.
D. Is also called gross margin.
E. Is a term only used by service firms.
AICPA BB: Industry
Difficulty: Medium
5-23
78. A company had sales of $695,000 and cost of goods sold of $278,000. Its gross margin
equals:
A. $(417,000).
B. $695,000.
C. $278,000.
D. $417,000.
E. $973,000.
$695,000 - $278,000 = $417,000
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
79. A company had sales of $375,000 and its gross profit was $157,500. Its cost of goods sold
equals:
A. $(217,000).
B. $375,000.
C. $157,500.
D. $217,500.
E. $532,500.
$375,000 - $157,500 = $217,500
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-24
80. Gross profit:

A. Is also called gross margin.
B. Less other operating expenses equals income from operations.
C. Equals net sales less cost of goods sold.
D. Must cover all operating expenses to yield a return for the owner of the business.
E. All of these.
AICPA BB: Industry
Difficulty: Hard
81. Merchandise inventory:

A. Is reported on the balance sheet as a current asset.
B. Refers to products a company owns and intends to sell.
C. Can include the cost of shipping the goods to the store and making them ready for sale.
D. Does not appear on the balance sheet of a service company.
E. All of these.
AICPA BB: Industry
Difficulty: Easy
82. The operating cycle of a merchandising company:

A. Begins with the purchase of merchandise.
B. Ends with the collection of cash from the sale of merchandise.
C. Can vary in length among different merchandising companies.
D. Sometimes involves accounts receivable.
E. All of these.
AICPA BB: Industry
Difficulty: Easy
5-25
83. Merchandise inventory:

A. Is a long-term asset.
B. Is a current asset.
C. Includes supplies.
D. Is classified with investments on the balance sheet.
E. Must be sold within one month.
AICPA BB: Industry
Difficulty: Medium
84. The operating cycle for a merchandiser that sells only for cash moves from:
A. Purchases of merchandise to inventory to cash sales.
B. Purchases of merchandise to inventory to accounts receivable to cash sales.
C. Inventory to purchases of merchandise to cash sales.
D. Accounts receivable to purchases of merchandise to inventory to cash sales.
E. Accounts receivable to inventory to cash sales.
AICPA BB: Industry
Difficulty: Hard
85. The current period's ending inventory is:

A. The next period's beginning inventory.
B. The current period's cost of goods sold.
C. The prior period's beginning inventory.
D. The current period's net purchases.
E. The current period's beginning inventory.
AICPA BB: Industry
Difficulty: Medium
5-26
86. Beginning inventory plus net purchases is:

A. Cost of goods sold.
B. Merchandise available for sale.
C. Ending inventory.
D. Sales.
E. Shown on the balance sheet.
AICPA BB: Industry
Difficulty: Medium
87. The acid-test ratio:

A. Is also called the quick ratio.
B. Measures profitability.
C. Measures inventory turnover.
D. Is generally greater than the current ratio.
E. All of these.
AICPA BB: Industry
Difficulty: Easy
88. The quick assets are defined as:

A. Cash, short-term investments, and inventory.
B. Cash, short-term investments, and current receivables.
C. Cash, inventory, and current receivables.
D. Cash, noncurrent receivables, and prepaid expenses.
E. Accounts receivable, inventory, and prepaid expenses.
AICPA BB: Industry
Difficulty: Easy
5-27
89. ABC Corporation's total quick assets were $5,888,000, its current assets were $11,700,000
and its current liabilities were $8,000,000. Its acid-test ratio equals:
A. 0.50.
B. 0.68.
C. 0.74.
D. 1.50.
E. 2.20.
$5,888,000/$8,000,000 = 0.74
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
90. A company's current assets were $17,980, its quick assets were $11,420 and its current
liabilities were $12,190. Its quick ratio equals:
A. 0.94.
B. 1.07.
C. 1.48.
D. 1.57.
E. 2.40.
$11,420/$12,190 = 0.94
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-28
91. Liquidity problems are likely to exist when a company's acid-test ratio:
A. Is less than the current ratio.
B. Is 1 to 1.
C. Is higher than 1 to 1.
D. Is substantially lower than 1 to 1.
E. Is higher than the current ratio.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
92. The acid-test ratio differs from the current ratio in that:
A. Liabilities are divided by current assets.
B. Prepaid expenses and inventory are excluded from the calculation of the acid-test ratio.
C. The acid-test ratio measures profitability and the current ratio does not.
D. The acid-test ratio excludes short-term investments from the calculation.
E. The acid-test ratio is a measure of liquidity but the current ratio is not.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
5-29
Breanna Boutique reported the following year-end information:
93. The current ratio and acid-test ratio for the boutique are _________ and ________,
respectively:
A. 1.8 and 1
B. 1.97 and 1.52
C. 2.73 and 1.52
D. 3.50 and 0.90
E. None of these
Current ratio = $460,500/$131,500 = 3.50

Acid-test ratio = $118,000/$131,500 = 0.90
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
94. Based on the ratios and analysis of the account balances for Breanna Boutique, the
company is:
A. likely to face near-term liquidity problems.
B. unlikely to face near-term liquidity problems.
C. likely raising liquidity concerns unless cash can be generated from inventory sales.
D. unlikely raising liquidity concerns.
E. Both A and C.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
5-30
95. The gross margin ratio:

A. Is also called the net profit ratio.
B. Measures a merchandising firm's ability to earn a profit from the sale of inventory.
C. Is also called the profit margin.
D. Is a measure of liquidity.
E. Should be greater than 1.
AICPA BB: Industry
Difficulty: Easy
96. A company's gross profit was $83,750 and its net sales were $347,800. Its gross margin
ratio equals:
A. 4.2%.
B. 24.1%.
C. 75.9%.
D. $83,750.
E. $264,050.
$83,750/$347,800 = 24.1%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
5-31
97. A company's net sales were $676,600, its cost of good sold was $236,810 and its net
income was $33,750. Its gross margin ratio equals:
A. 5%.
B. 9.6%.
C. 35%.
D. 65%.
E. 285.7%.
($676,600 - $236,810)/$676,600 = 65%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
98. A company had net sales and cost of goods sold of $752,000 and $543,000, respectively.
Its net income was $17,530. The company's gross margin ratio equals:
A. 18.9%
B. 24.5%
C. 27.8%
D. 34.7%
E. 35.2%
($752,000 - $543,000)/$752,000 = 27.8%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
5-32
99. J.C. Penny had net sales of $28,496 million, its cost of goods sold was $19,092 million,
and its net income was $997 million. Its gross margin ratio equals:
A. 3.5%.
B. 5.2%.
C. 33%.
D. 67%.
E. 149.3%.
($28,496 - $19,092)/$28,496 = 33%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
100. The credit terms 2/10, n/30 are interpreted as:

A. 2% cash discount if the amount is paid within 10 days, or the balance due in 30 days.
B. 10% cash discount if the amount is paid within 2 days, or the balance due in 30 days.
C. 30% discount if paid within 2 days.
D. 30% discount if paid within 10 days.
E. 2% discount if paid within 30 days.
AICPA BB: Industry
Difficulty: Easy
5-33
101. A trade discount is:

A. A term used by a purchaser to describe a cash discount given to customers for prompt
payment.
B. A reduction in price below the list price.
C. A term used by a seller to describe a cash discount granted to customers for prompt
payment.
D. A reduction in price for prompt payment.
E. Also called a rebate.
AICPA BB: Industry
Difficulty: Easy
102. The amount recorded for merchandise inventory includes:

A. Any purchase discounts.
B. Any returns and allowances.
C. Any necessary freight costs.
D. Any trade discounts.
E. All of these.
AICPA BB: Industry
Difficulty: Medium
5-34
103. A company uses the perpetual inventory system and recorded the following entry:
This entry reflects a:

A. Purchase.
B. Return.
C. Sale.
D. Payment of the account payable and recognition of a cash discount taken.
E. Purchase and recognition of a cash discount taken.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
104. A debit memorandum is:

A. Required whenever a journal entry is recorded.
B. The source document for the purchase of merchandise inventory.
C. Required when a purchase discount is granted.
D. The document a buyer issues to inform the seller of a debit made to the seller's account in
the buyer's records.
E. Not necessary in a perpetual inventory system.
AICPA BB: Industry
Difficulty: Medium
5-35
105. A company purchased $1,800 of merchandise on December 5. On December 7, it

returned $200 worth of merchandise. On December 8, it paid the balance in full, taking a 2%
discount. The amount of the cash paid on December 8 equals:
A. $200.
B. $1,564.
C. $1,568.
D. $1,600.
E. $1,800.
($1,800 - $200) x .98 = $1,568
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
106. A company purchased $4,000 worth of merchandise. Transportation costs were an

additional $350. The company later returned $275 worth of merchandise and paid the invoice
within the 2% cash discount period. The total amount paid for this merchandise is:
A. $3,725.00.
B. $3,925.00.
C. $3,995.00.
D. $4,000.50.
E. $4,075.00.
[($4,000 - $275) x .98] + $350 = $4,000.50
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
5-36
107. A buyer failed to take advantage of the vendor's credit terms of 2/15, n/45, but instead
paid the invoice in full at the end of 60 days. By not taking advantage of the cash discount, the
buyer lost the equivalent of ____________ annual interest on the amount of the purchase.
A. 12.2%
B. 16.2%
C. 18.9%
D. 24.3%
E. 24.5%
(365 / [45-15]) x .02 = 24.3%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
108. Merchandising companies must account for:

A. Sales.
B. Sales discounts.
C. Sales returns and allowances.
D. Cost of merchandise sold.
E. All of these.
AICPA BB: Industry
Difficulty: Easy
5-37
109. Sales returns:

A. Refer to merchandise that customers return to the seller after the sale.
B. Refer to reductions in the selling price of merchandise sold to customers.
C. Represent cash discounts.
D. Represent trade discounts.
E. Are not recorded under the perpetual inventory system until the end of each accounting
period.
AICPA BB: Industry
Difficulty: Easy
110. Sales returns and allowances:

A. Can provide useful information about dissatisfied customers and the possibility of lost
future sales.
B. Are recorded in a separate contra-revenue account.
C. Are rarely disclosed in published financial statements.
D. Are closed to the Income Summary account.
E. All of these.
AICPA BB: Industry
Difficulty: Medium
111. A debit to Sales Returns and Allowances and a credit to Accounts Receivable:
A. Reflects an increase in amount due from a customer.
B. Recognizes that a customer returned merchandise and/or received an allowance.
C. Requires a debit memorandum to recognize the customer's return.
D. Is recorded when a customer takes a discount.
E. All of these.
AICPA BB: Industry
Difficulty: Medium
5-38
112. Sales less sales discounts less sales returns and allowances equals:
A. Net purchases.
B. Cost of goods sold.
C. Net sales.
D. Gross profit.
E. Net income.
AICPA BB: Industry
Difficulty: Medium
113. Herald Company had sales of $135,000, sales discounts of $2,000, and sales returns of
$3,200. Herald Company's net sales equals:
A. $5,200.
B. $129,800.
C. $133,000.
D. $135,000.
E. $140,200.
$135,000 - $2,000 - $3,200 = $129,800
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-39
114. On October 1, Robinson Company sold merchandise in the amount of $5,800 to Rosser,
with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robinson uses the
perpetual inventory system. The journal entry or entries that Robinson will make on October 1
is:
A.
B.
C.
D.
E.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-40
115. On October 1, Whaley Company sold merchandise in the amount of $5,800 to Lee
Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Whaley uses
the perpetual inventory system. Lee pays the invoice on October 8, and takes the appropriate
discount. The journal entry that Whaley makes on October 8 is:
A.
B.
C.
D.
E.
$5,800 x .02 = $116

$5,800 - $116 = $5,684
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-41
116. On October 1, Mutch Company sold merchandise in the amount of $5,800 to Carr
Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Mutch uses the
perpetual inventory system. On October 4, Carr returns some of the merchandise. The selling
price of the merchandise is $500 and the cost of the merchandise returned is $350. The entry
or entries that Mutch must make on October 4 is:
A.
B.
C.
D.
E.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-42
117. A company records the following journal entry: debit Cash $1,470, debit Sales Discounts
$30, and credit Accounts Receivable $1,500. This means that a customer has taken a ___ cash
discount for early payment.
A. 1%
B. 2%
C. 5%
D. 10%
E. 15%
$30/$1,500 = 2% discount
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
118. Inventory shrinkage:

A. Refers to the loss of inventory.
B. Is determined by comparing a physical count of inventory with recorded inventory
amounts.
C. Is recognized by debiting Cost of Goods Sold.
D. Can be caused by theft or deterioration.
E. All of these.
AICPA BB: Industry
Difficulty: Medium
5-43
119. Which of the following accounts would be closed with a credit?

A. Sales Discounts.
B. Sales Returns and Allowances.
C. Cost of Goods Sold.
D. Operating Expenses.
E. All of these.
AICPA BB: Industry
Difficulty: Medium
120. An income statement that includes cost of goods sold as another expense and shows only
one subtotal for total expenses is a:
A. Balanced income statement.
B. Single-step income statement.
C. Multiple-step income statement.
D. Combined income statement.
E. Simplified income statement.
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
121. Expenses that support the overall operations of a business and include the expenses
relating to accounting, human resource management, and financial management are called:
A. Cost of goods sold.
B. Selling expenses.
C. Purchasing expenses.
D. General and administrative expenses.
E. Nonoperating activities.
AICPA BB: Industry
Difficulty: Easy
5-44
122. Benson Company had cash sales of $94,275, credit sales of $83,450, sales returns and
allowances of $1,700, and sales discounts of $3,475. Benson's net sales for this period equal:
A. $94,275.
B. $172,550.
C. $174,250.
D. $176,025.
E. $177,725.
$94,275 + $83,450 - $1,700 - $3,475 = $172,550
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
123. Multiple-step income statements:

A. Are required by the FASB.
B. Contain more detail than a simple listing of revenues and expenses.
C. Are required for the perpetual inventory system.
D. List cost of goods sold as an operating expense.
E. Can only be used in perpetual inventory systems.
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
124. Expenses of promoting sales by displaying and advertising merchandise, making sales,
and delivering goods to customers are:
A. General and administrative expenses.
B. Cost of goods sold.
C. Selling expenses.
D. Purchasing expenses.
E. Nonoperating activities.
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
5-45
125. A company has net sales and cost of goods sold of $752,000 and $543,000, respectively.
Its net income is $17,530. The company's gross margin and operating expenses are ________
and ____________, respectively.
A. $209,000; $191,470
B. $191,470; $209,000
C. $525,470; $227,000
D. $227,000; $525,470
E. $734,000; $191,470
$752,000 - $543,000 = $209,000; $209,000 - $17,530 = $191,470
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
126. An account used in the periodic inventory system that is not used in the perpetual
inventory system is
A. Merchandise Inventory
B. Sales
C. Sales Returns and Allowances
D. Accounts Payable
E. Purchases
AICPA BB: Industry
Difficulty: Easy
5-46
127. When preparing an unadjusted trial balance using a periodic inventory system, the
amount shown for Merchandise Inventory is:
A. The ending inventory amount.
B. The beginning inventory amount.
C. Equal to the cost of goods sold.
D. Equal to the cost of goods purchased.
E. Equal to the gross profit.
AICPA BB: Industry
Difficulty: Medium
128. On October 1, Courtland Company sold merchandise in the amount of $5,800 to Carter
Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Courtland uses
the periodic inventory system. The journal entry or entries that Courtland will make on
October 1 is:
A.
B.
C.
D.
E.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-47
the periodic inventory system. Carter pays the invoice on October 8, and takes the appropriate
discount. The journal entry that Courtland makes on October 8 is:
A.
B.
C.
D.
E.
$5,800 x .02 = $116

$5,800 - $116 = $5,684
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-48
the periodic inventory system. On October 4, Carter returns some of the merchandise. The
selling price of the merchandise is $500 and the cost of the merchandise returned is $350. The
entry or entries that Courtland must make on October 4 is:
A.
B.
C.
D.
E.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-49
the periodic inventory system. On October 4, Carter returns some of the merchandise. The
selling price of the merchandise is $500 and the cost of the merchandise returned is $350.
Carter pays the invoice on October 8, and takes the appropriate discount. The journal entry
that Courtland makes on October 8 is:
A.
B.
C.
D.
E.
$5,800 - $500 = $5,300 x .02 = $106

$5,300 - $106 = $5,194
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
5-50
Matching Questions
132. Match the following definitions and terms by placing the letter for the terms a through j
in the blank space next to the best definition.
a. List price
b. Merchandise inventory
c. EOM
d. Single-step income statement
e. FOB
f. Acid-test ratio
g. Inventory shrinkage
h. Selling expenses
i. Multiple-step income statement
j. General and administrative expenses
1. Expenses that support overall operations and includes expenses

related to accounting, human resource management and financial
management. f 10
2. The catalog price of an item before any trade discount is deducted. d 9
3. Products a company owns and intends to sell. e 8
4. Inventory losses that can occur as a result of theft or deterioration. b 3
5. An income statement format that shows detailed computations of net
sales and other costs and expenses, and reports subtotals for various
classes of items. j 1
6. The expenses of promoting sales by displaying and advertising
merchandise, making sales, and delivering goods to customers. c 7
7. The abbreviation for end-of-month; used to describe credit terms for
some transactions. g 4
8. The abbreviation for free on board; refers to the point when ownership
of goods passes to the buyer. i 5
9. An income statement format that shows only one subtotal for total
expenses. a 2
10. A ratio used to assess a company's ability to pay its current liabilities;
defined as quick assets divided by current liabilities. h 6
AICPA BB: Industry
Difficulty: Medium
5-51
133. Match the following terms with the appropriate definition.
1. Periodic A notification that the sender has credited the

inventory system recipient's account kept by the sender. 6
2. Debit The amount of time allowed before full payment is
memorandum due. 4
3. Perpetual The description of the amounts and timing of
inventory system payments from a buyer to a seller. 9
A notification that the sender has debited the
4. Credit period recipient's account kept by the sender. 2
The time period in which a cash discount is available
5. Selling expenses and a reduced payment can be made by the buyer. 10
6. Credit
memorandum Net sales less cost of goods sold. 8
An accounting method that updates the accounting
records for merchandise transactions only at the end of a
7. Sales discount period. 1
An accounting method that continually updates
8. Gross profit accounting records for merchandise transactions. 3
A cash discount granted to customers for paying
9. Credit terms within the discount period. 7
The expenses of promoting sales, by displaying and
advertising merchandise, making sales, and delivering
10. Discount period goods to customers. 5
AICPA BB: Industry
Difficulty: Medium
5-52
Short Answer Questions
134. Identify and explain the key components of income for a merchandising company.
The basic components of income begin with net sales. Cost of goods sold is subtracted from
net sales to get gross profit (also called gross margin). Operating expenses are then subtracted
from gross margin to determine net income.
AICPA BB: Industry
Difficulty: Easy
135. Describe the difference between wholesalers and retailers.
A wholesaler is an intermediary that buys products from manufacturers and sells to retailers or
other wholesalers. A retailer is an intermediary that buys products from manufacturers or
wholesalers and sells them to consumers.
AICPA BB: Industry
Difficulty: Medium
136. Describe the key attributes of inventory for a merchandising company.
Merchandise inventory is a current asset that represents products a company owns and intends
to sell. Its costs include all necessary expenses to buy the inventory, ship it to the store, and
make it ready for sale.
AICPA BB: Industry
Difficulty: Medium
5-53
137. List the steps of the operating cycle for a merchandiser with credit sales.
The steps are: (1) cash purchases of merchandise; (2) inventory for sale; (3) credit sales (4)
accounts receivable; (5) cash collection.
AICPA BB: Industry
Difficulty: Medium
138. What is the difference between the periodic and perpetual inventory systems?
A periodic inventory system updates the inventory account only at the end of a period. A
perpetual inventory system continually updates accounting records for merchandise
transactions. The perpetual inventory system is increasing in popularity due to technological
advances and competitive pressures.
AICPA BB: Industry
Difficulty: Medium
139. Explain the cost flows and operating activities of a merchandising company.
Beginning inventory plus the net cost of purchases is the merchandise available for sale. As
inventory is sold, its cost is recorded in cost of goods sold on the income statement. What
remains is the ending inventory on the balance sheet. A period's ending inventory becomes the
next period's beginning inventory.
AICPA BB: Industry
Difficulty: Medium
5-54
140. What is the acid-test ratio? How does it measure a company's liquidity?
The acid-test ratio is calculated by dividing quick assets (cash, current receivables, and short-
term investments) by current liabilities. The acid-test measures the ability of a firm to pay its
current liabilities. As a rule of thumb an acid test ratio less than 1 means that current liabilities
exceed quick assets and the company is likely to face near-term liquidity problems.
AICPA BB: Industry
Difficulty: Medium
141. What is gross margin ratio? How is it used as an indicator of profitability?
The gross margin ratio is calculated by dividing gross margin (or net sales less cost of goods
sold) by net sales. The gross margin ratio measures a firm's profitability in selling its
inventory. The gross margin must be large enough to cover operating expenses and provide
sufficient net income to the owner(s).
AICPA BB: Industry
Difficulty: Medium
5-55
142. What does FOB stand for? Differentiate between FOB shipping point (or FOB factory)
and FOB destination.
FOB stands for free on board. If goods are shipped FOB shipping point, ownership transfers
to the buyer when the goods depart the seller's place of business, and the seller records
revenue at that time. The buyer is then responsible for paying shipping costs and bearing the
risk of damage or loss when goods are in transit.
If goods are shipped FOB destination, ownership transfers to the buyer when the goods arrive
at the buyer's place of business. The seller is responsible for paying shipping costs and bears
the risk of damage or loss in transit. The seller does not record revenue until the goods arrive
at the destination because the transaction is not complete before that point.
AICPA BB: Industry
Difficulty: Medium
143. Describe the recording process (including costs) for purchasing merchandise inventory
using a perpetual inventory system.
Purchases, net of trade discounts, are added (debited) to the Merchandise Inventory account.
Purchases discounts and purchases returns and allowances are subtracted (credited) from
Merchandise Inventory. Transportation-in costs are added (debited) to Merchandise Inventory.
The accounting procedures are recorded each time merchandise purchases occur. In this way,
merchandise inventory reflects all net purchases on a timely basis.
AICPA BB: Industry
Difficulty: Hard
5-56
144. Describe the recording process (including costs) for sales of merchandise inventory using
a perpetual inventory system.
Sales are recorded at list price less any trade discounts. The cost of items sold is transferred
from Merchandise Inventory to Cost of Goods Sold. Refunds or credits for returned
merchandise are recorded (debited) to Sales Returns and Allowances. When cash discounts
from the sales price are taken, the seller records (debits) the amount of the discounts to Sales
Discounts. These accounting processes are recorded each time sales transactions occur. In this
way, merchandise inventory, cost of sales, sales and receivables (or cash) reflect sales
transactions on a timely basis.
AICPA BB: Industry
Difficulty: Hard
145. What is inventory shrinkage? How do managers account for shrinkage?
Inventory shrinkage is the loss of merchandise inventory due to theft or deterioration or

similar phenomena. Inventory shrinkage is typically added (debited) to the cost of goods sold
and Merchandise Inventory is reduced (credited) for the amount of the shrinkage.
AICPA BB: Industry
Difficulty: Easy
5-57
146. How do closing entries for a merchandising company that uses the perpetual inventory
system differ from the closing entries for a service company?
Merchandising companies have some accounts that must be closed that service companies do
not have. Generally, the revenue account for merchandising companies is called Sales rather
than Fees Earned. It is closed with a debit, as are other revenues. Service companies do not
have Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold that all appear
in the accounts of merchandising companies. Each of these accounts must be closed with a
credit. The remaining closing entries – closing Income Summary to Owner's Capital, and
closing Withdrawals to Owner's Capital – are identical whether the firm is a merchandising
firm or a service firm.
AICPA BB: Industry
Difficulty: Medium
147. Explain the difference between the single-step and multiple-step income statements.
A single-step income statement format includes cost of goods sold as another expense, and
shows only one subtotal for total expenses. A multiple-step income statement format shows
detailed computation of net sales and other costs and expenses, and reports subtotals for
various classes of items.
AICPA BB: Industry
AICPA FN: Reportng
Difficulty: Medium
5-58
148. Distinguish between selling expenses and general and administrative expenses.
Selling expenses include the expenses of promoting sales by displaying and advertising
merchandise, making sales, and delivering goods to customers. General and administrative
expenses support a company's overall operations and include expenses related to accounting,
human resource management, and financial management. Some expenses can relate to both
areas and are allocated between them.
AICPA BB: Industry
Difficulty: Medium
149. What are the difference(s) between the periodic and the perpetual inventory systems?
Under a perpetual system each purchase, purchase return and allowance, purchase discount,
and transportation-in is recorded in the merchandise inventory account. Under a periodic
system, a separate temporary account is set up for each of these items. The perpetual
inventory system yields more timely information for managers to better monitor and control
inventory costs and levels.
AICPA BB: Industry
Difficulty: Hard
5-59
150. In order to be successful, Joel Boblit of BigBadToyStore knew that he had to effectively
track merchandising activities. Describe how using an inventory management system
improved control over inventory and management of the business.
Tracking merchandise activities was necessary to set prices and to mange discounts,
allowances and returns of both sales and purchases. A perpetual inventory system enabled Joel
to order the right type and amounts of inventory to meet customer demand and use space
more efficiently. By ordering and stocking the correct amount of inventory, this reduces the
costs of out-of-stock and excess inventory.
AICPA BB: Industry
Difficulty: Medium
Problems
151. Nichole Company had net sales of $500,000 and cost of goods sold of $350,000.
Calculate Nichole's gross profit.
$500,000 - $350,000 = $150,000
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
152. Harriet's Toy Shop had net sales of $852,000. The gross profit was $230,000. Calculate
Harriet's cost of goods sold.
$852,000 - $230,000 = $622,000
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
5-60
153. Fill in the blanks (a) through (g) for the Hendricks Company for each of the income
statements for 2008, 2009, and 2010.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
5-61
154. The following information is available for Trico and its two main competitors in the
industry (Duco and Unico):
The industry standard for the current ratio is 1.8 and the industry standard for the acid-test
ratio is 1.
Required:
1. Calculate the current ratio and acid-test ratio for each firm.
2. Rank the firms in decreasing order of liquidity.
3. Comment on Trico's relative liquidity position.
5-62
Part 1
Part 2: Rank order:
Part 3: Trico's current ratio lags behind Duco's but is ahead of both Unico and the industry
average. Trico's acid test ratio is behind both Unico and Duco but is ahead of the industry
average. Overall, Trico appears reasonably strong on liquidity.
5-63
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
155. The following information refers to Annie's Attic and its competitors in the antiques
business.
Required:
Comment on the relative liquidity positions of these companies.
Both Chisolm's Collectibles and Bart's Basement have acceptable levels of liquidity.
However, even though Annie's Attic and Martin's Marbles have acceptable current ratios, their
quick ratios indicate a potential liquidity problem. We should attempt to collect additional
information to support or refute the evidence of a potential liquidity problem.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-64
156. A company reported the following year-end information:
Required:
1. Explain the purpose of the acid-test ratio.
2. Calculate the acid-test ratio for this company.
3. What does the acid-test ratio reveal about this company?
1. The acid-test ratio measures the ability of a firm to pay its current liabilities. It is a more
stringent test of liquidity as compared to the current ratio.
2.
3. This company does not have enough quick assets to be considered in a strong
liquidity position. The company may have too much money tied up in inventory or
other less liquid current (or noncurrent) assets. Additional analyses should be
undertaken to verify or refute this apparent liquidity concern.
AACSB: Analytic
AICPA BB: Critical Thinking
Difficulty: Medium
5-65
157. Calculate the gross margin ratio for each of the following separate cases A through D:
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
5-66
158. A company reported the following information for the month of November:
Required: Calculate this company's gross margin ratio.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-67
159. The following information is for Trico and its competitor Unico.
Required:
1. Calculate the dollar amount of gross margin and the gross margin ratio to the nearest
percent, for each company for both years.
2. Which company had the more favorable ratio for each year?
3. Which company had the more favorable change in the gross margin ratio over this 2-year
period?
1.
2. Trico had the more favorable ratio for each year.

3. Unico's gross margin ratio is increasing, while Trico's is decreasing. Moreover, these
changes appear significant and warrant further analysis.
AACSB: Analytic
AICPA BB: Critical Thinking
Difficulty: Hard
5-68
160. A company that uses the perpetual inventory system purchased $8,500 on September 25.
Terms of the purchase were 2/10, n/30. The invoice was paid in full on October 4. Prepare the
journal entries to record these merchandise transactions.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
161. Roller Blade Company uses the perpetual inventory system and had the following
transactions during October:
Prepare journal entries to record each of the preceding transactions.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-69
162. Ceres Computer Sales uses the perpetual inventory system and had the following
transactions during December.
Required:
Prepare the general journal entries to record these transactions.
5-70
5-71
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
163. Steve's Skateboards uses the perpetual inventory system and had the following sales
transactions during April:
Prepare the journal entries that Steve's Skateboards must make to record these transactions.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-72
164. Maia's Bike Shop uses the perpetual inventory system and had the following transactions
during the month of May:
Prepare the required journal entries that Maia's Bike Shop must make to record these
transactions.
5-73
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-74
165. Following is the year-end adjusted trial balance for Yakima's Sporting Goods for the
current year:
Prepare the closing entries at December 31 for the current year.
5-75
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-76
166. The year-end adjusted trial balance of ABC Supply for the current year, is shown below:
Prepare closing entries at December 31 for the current year.
5-77
Closing entries:
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
5-78
5-79
167. From the above adjusted trial balance for the Worker Products Company, prepare a
multiple-step income statement in good form.
AACSB: Analytic, Communications

AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
5-80
168. From the above adjusted trial balance for Worker Products, prepare the necessary closing
entries.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-81
169. Neutron uses a periodic inventory system. Prepare general journal entries to record the
following transactions for Neutron:
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-82
170. Steve's Skateboards uses the periodic inventory system and had the following sales
transactions during April:
Prepare the journal entries that Steve's Skateboards must make to record these transactions.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-83
171. Maia's Bike Shop uses the periodic inventory system and had the following transactions
during the month of May:
Prepare the required journal entries that Maia's Bike Shop must make to record these
transactions.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-84
Fill in the Blank Questions
172. A company had net sales of $741,800. Its cost of goods sold must have been _________
to yield a gross profit of $282,884.
$741,800 - $282,884 = $458,916
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
173. A ___________ is an intermediary that buys products from manufacturers and sells to
retailers.
Wholesaler
AICPA BB: Industry
Difficulty: Medium
174. A merchandising company's ___________ begins with the purchase of merchandise and
ends with the collection of cash from merchandise sales.
Operating cycle
AICPA BB: Industry
Difficulty: Easy
175. ________________________ refers to products that a company owns and intends to

sell.
Merchandise inventory
AICPA BB: Industry
Difficulty: Easy
5-85
176. A ___________ inventory system updates the accounting record for inventory only at the
end of a period.
Periodic
AICPA BB: Industry
Difficulty: Easy
177. The __________________ inventory system continually updates accounting records for
merchandise transactions for the amounts of inventory available for sale and inventory sold.
Perpetual
AICPA BB: Industry
Difficulty: Easy
178. Beginning inventory plus the net cost of purchases is the _____________________.
Merchandise available for sale.
AICPA BB: Industry
Difficulty: Easy
179. A period's ___________________ becomes the next period's beginning inventory.

Ending inventory
AICPA BB: Industry
Difficulty: Easy
5-86
180. The acid-test ratio reflects the ___________ of a company.

Liquidity
AICPA BB: Industry
Difficulty: Easy
181. The gross margin ratio equals net sales less ___________ divided by net sales.
Cost of goods sold
AICPA BB: Industry
Difficulty: Easy
182. A company purchased $8,750 worth of merchandise, with terms of 2/10, n/30. The
invoice was paid within the cash discount period. Accordingly, the company received a cash
discount of _______________.
$175
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
183. The amounts and timing of payment from a buyer to a seller are the
____________________.
Credit terms
AICPA BB: Industry
Difficulty: Medium
5-87
184. A _______________________ is a document the buyer issues to inform the seller of a

debit made to the seller's account in the buyer's records.
Debit memorandum
AICPA BB: Industry
Difficulty: Medium
185. FOB _________________ means the buyer accepts ownership when the goods depart
the seller's place of business. The buyer is responsible for paying shipping costs and bears the
risk of damage or loss when goods are in transit.
Shipping point, or factory
AICPA BB: Industry
Difficulty: Medium
186. FOB _________________ means ownership of goods transfers to the buyer when the
goods arrive at the buyer's place of business. The seller is responsible for paying shipping
charges and bears the risk of damage or loss in transit.
Destination
AICPA BB: Industry
Difficulty: Medium
187. ____________________ refer to merchandise that customers return to the seller after a
sale.
Sales returns
AICPA BB: Industry
Difficulty: Easy
5-88
188. ___________________ refer to reductions in the selling price of merchandise sold to

customers, often involving damaged or defective merchandise that a customer is willing to
purchase with a decrease in the selling price.
Sales allowances
AICPA BB: Industry
Difficulty: Easy
189. A seller usually prepares a ____________________ to confirm a buyer's return or

allowance, and informs the buyer of the seller's credit to the buyer's Account Receivable on
the seller's books.
Credit memorandum
AICPA BB: Industry
Difficulty: Easy
190. Sales discounts can benefit a seller by decreasing the delay in receiving cash, and
___________.
Reducing future collection efforts
AICPA BB: Industry
Difficulty: Medium
191. Inventory shrinkage can be computed by comparing the ___________ of inventory with
recorded quantities and amounts.
Physical count (or count)
AICPA BB: Industry
Difficulty: Easy
5-89
192. ___________ expenses are those expenses that support a company's overall operations
and include expenses related to accounting, human resource management, and financial
management.
General and administrative
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
193. A _____________________ income statement format shows detailed computations of

net sales and other costs and expenses, and reports subtotals for various classes of items.
Multiple-step
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
194. A ______________________ income statement includes cost of goods sold as another

expense and shows only one subtotal for total expenses.
Single-step
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
195. _______________________ are nonoperating activities that include interest, dividend,

and rent revenues, and gains from asset disposals.
Other revenues and gains
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
5-90
196. ______________________ are nonoperating activities that include interest expense,

losses from asset disposals, and casualty losses.
Other expenses and losses
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
197. When a company has no reportable nonoperating activities, its income from operations is
reported as ___________________
Net income
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
198. Under the ___________ system, each purchase, purchase return and allowance, purchase
discount, and transportation-in transaction is recorded in a separate temporary account.
Periodic
AICPA BB: Industry
Difficulty: Medium
True / False Questions
199. Delivery expense can also be called transportation-out or freight-out.

TRUE
AICPA BB: Industry
Difficulty: Easy
5-91
200. Delivery expense is reported as part of general and administrative expense in the seller's
income statement.
FALSE
AICPA BB: Industry
Difficulty: Easy
Problems
201. Sam's Wholesale shows the following account balances in its ledger on June 30, its fiscal
year-end. Sam's Wholesale uses the perpetual inventory system.
A physical count of its June 30 year-end inventory discloses that the cost of the merchandise
inventory still available is $57,160. Prepare the entry to record any inventory shrinkage.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
5-92
202. Prepare journal entries to record the following merchandising transactions of Dean
Company, which applies the perpetual inventory system. Dean Company offers all of its credit
customers credit terms of 2/10, n/30.
5-93
5-94
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
5-95
203. From the adjusted trial balance given below for the Mirror Company, prepare a multiple-
step income statement in good form. Salaries expense and depreciation expense on the
building are equally divided between selling activities and the general and administrative
activities.
5-96
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Hard
5-97

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Chapter 005 Accounting for Merchandising Operations

Summary of Questions by Difficulty Level (DL) and Learning Objective (LO)

89. Med A1 108. Easy P2 127. Med P5

True / False Questions

1. Merchandise inventory consists of products that a company acquires to resell to customers.

2. A service company earns net income by buying and selling merchandise.

3. Gross profit is also called gross margin.

4. Cost of goods sold is also called cost of sales.

5. A wholesaler is an intermediary that buys products from manufacturers or other

14. Assets tied up in inventory are not productive assets.

18. The acid-test ratio is also called the quick ratio.

19. Quick assets include cash, inventory, and current receivables.

($340,500 - $257,000)/$340,500 = 24.5%

($24,750 - $16,150)/$24,750 = 34.7%

41. Purchase discounts are the same as trade discounts.

$350,000 - $323,000 = $27,000

57. Sales Discounts are closed to the Income Summary account.

58. Accounts unique to merchandising companies (versus service companies) include

64. A merchandiser's classified balance sheet reports merchandise inventory as a current

Multiple Choice Questions

75. A merchandising company:

76. A merchandising company:

77. Cost of goods sold:

$695,000 - $278,000 = $417,000

$375,000 - $157,500 = $217,500

80. Gross profit:

81. Merchandise inventory:

82. The operating cycle of a merchandising company:

83. Merchandise inventory:

85. The current period's ending inventory is:

86. Beginning inventory plus net purchases is:

87. The acid-test ratio:

88. The quick assets are defined as:

Breanna Boutique reported the following year-end information:

Current ratio = $460,500/$131,500 = 3.50

95. The gross margin ratio:

($676,600 - $236,810)/$676,600 = 65%

($752,000 - $543,000)/$752,000 = 27.8%

($28,496 - $19,092)/$28,496 = 33%

100. The credit terms 2/10, n/30 are interpreted as:

101. A trade discount is:

102. The amount recorded for merchandise inventory includes:

This entry reflects a:

104. A debit memorandum is:

105. A company purchased $1,800 of merchandise on December 5. On December 7, it

($1,800 - $200) x .98 = $1,568

106. A company purchased $4,000 worth of merchandise. Transportation costs were an

[($4,000 - $275) x .98] + $350 = $4,000.50

(365 / [45-15]) x .02 = 24.3%

108. Merchandising companies must account for:

109. Sales returns:

110. Sales returns and allowances:

$135,000 - $2,000 - $3,200 = $129,800

$5,800 x .02 = $116

118. Inventory shrinkage:

119. Which of the following accounts would be closed with a credit?

$94,275 + $83,450 - $1,700 - $3,475 = $172,550

123. Multiple-step income statements:

$752,000 - $543,000 = $209,000; $209,000 - $17,530 = $191,470

$5,800 x .02 = $116

$5,800 - $500 = $5,300 x .02 = $106

1. Expenses that support overall operations and includes expenses

133. Match the following terms with the appropriate definition.

1. Periodic A notification that the sender has credited the