Chapter 6: Accounting for retailing

1. The average length of time it takes for a retail business to acquire inventory, sell it to its
customers and collect the cash owing is called the:

a. accounting cycle.
*b. operating cycle.
c. inventory turnover.
d. accounting period.
2. The main difference between a service and a retail business is that service businesses:
a. sell directly to consumers.
b. buy and sell in bulk.
c. convert raw materials into finished goods.
*d. sell services rather than goods.
3. Which statement relating to inventory is not correct?
a. Another name for inventory is stock-in-trade.
b. It makes up a significant portion of a retailer’s assets.
c. It is a very active asset, continually being acquired, sold and replaced.
*d. It is classified as a non-current asset in the balance sheet.
4. Inventory is reported on the balance sheet as:
*a. a current asset.
b. a non-current asset.
c. an investment.
d. property, plant and equipment.
5. Goods held for sale by a retailer in the normal course of business are known as:
a. merchandise, inventory.
b. inventory, stock, raw materials.
*c. stock, inventory, stock-in-trade.
d. stock, inventory work-in-process.
6. Which of these is usually a retailer’s largest expense?
a. Rent
*b. Cost of sales
c. Telephone
d. Insurance
7. Assuming a retailer buys and sells on 30 days credit and from the date of purchase it
takes, on average, 14 days to sell inventory. What is the correct order for the steps in
the operating cycle?
I Sell goods to customer
II Collect cash from customer
III Pay supplier
IV Buy goods for resale from supplier

a. I, II, III, IV
b. IV, III, II, I
*c. IV, I, III, II
d. I, IV, II, III
8. What is the correct layout for a retailer’s income statement?

a. Sales revenue – cost of sales = gross profit

b. Sales revenue – expenses = profit
*c. Sales revenue – cost of sales = gross profit – expenses = profit
d. Sales revenue – cost of sales – expenses = gross profit
9. Which of these should be classified as an administrative expense in the income statement
of a retailer?
a. Depreciation on the sales manager’s motor vehicle
*b. Depreciation on office furniture and equipment
c. Discount allowed
d. Interest on bank overdraft
10. If the invoice price for services rendered to a client is $4246, including GST, how
much GST is to be collected from the client?
a. $424.60
b. $467.06
*c. $386.00
d. Nil
11. Sales Returns and Allowances is what type of account?
*a. Contra to sales revenue
b. Liability
c. Contra to an asset
d. Expense
12. The primary purpose of (cash) settlement discounts is to:
a. convince the customer to buy the goods on credit.
b. provide discounts to customers who purchase large volumes of goods.
c. to encourage customers to pay for purchases in cash.
*d. encourage the customer to settle their account early.
13. B sold goods to A for $2000. A paid his account one month later. What is the correct
entry in B’s books to record the payment by A? Ignore GST.
a. Debit accounts receivable $2000; credit sales $2000
*b. Debit bank $2000; credit accounts receivable $2000
c. Debit accounts receivable $2000; credit equity $2000
d. Debit bank $2000; credit sales $2000
14. Simon sold goods to Lauren for $3300 including GST. Lauren paid her account within
the discount period and received a settlement discount of 2%. Using the gross method,
what is the entry in Simon’s books to record the payment from Lauren?
*a. Debit bank $3234; debit discount allowed $60; debit GST collections $6;
credit accounts receivable $3300
b. Debit bank $3234; debit discount allowed $66; credit accounts receivable
$3300
c. Debit bank $3240; debit discount allowed $60; credit accounts receivable
$3300
d. Debit bank $3234, debit discount allowed $66; debit GST collections $6;
credit accounts receivable $3306
15. The specific term used by a retailer for income is:
a. revenue.
b. service income.
*c. sales.
d. fees.
16. B sold goods to A on credit for $2 000. What is the correct accounting entry to record
this transaction in B’s books? Ignore GST and cost of sales.
a. Debit bank $2000; credit sales $2000
*b. Debit accounts receivable $2000; credit sales $2000
c. Debit sales $2000; credit accounts receivable $2000
d. Debit sales $2000; credit cost of sales $2000
17. B sold goods to A on credit at a price of $2200 including GST. What is the correct
accounting entry to record this transaction in B’s books?
a. Debit accounts receivable $2200, credit sales $2200
b. Debit accounts receivable $2000, credit sales $2000
c. Debit accounts receivable $2000, debit GST collections $200; credit sales
$2200
*d. Debit accounts receivable $2200; credit sales $2000, credit GST collections
$200
18. In relation to discount terms, what does 2/10, n/30 mean?
a. Invoice due on 2nd October or 30 November
b. 2 10ths = 20% discount, not 30%
c. 20% discount, November 30th
*d. 2% discount to be deducted from the invoice price if payment is made within
10 days or the full amount is due within 30 days of the invoice date
19. To obtain the maximum possible benefit from a cash discount of 2/10, n/30, the buyer
should pay the invoice:
a. immediately.
*b. on the last day of the discount period, i.e. in 10 days.
c. at the end of the month.
d. when the seller threatens legal action.
20. Freight outward paid by the seller is classified as a/an ____________ expense in the
seller’s income statement.
a. cost of sales
*b. selling
c. administrative
d. financial
21. Jan sold goods to John for $3300 including GST. John paid his account within the
discount period and received a settlement discount of 2%. Using the gross method,
which of the following is the correct entry in Jan’s books to record the payment by John?
*a. Debit bank $3234; debit discount allowed $60; debit GST collections $6;
credit accounts receivable $3300
b. Debit bank $3234; debit discount allowed $66; credit accounts receivable
$3300
c. Debit bank $3240; debit discount allowed $60; credit accounts receivable
$3300
d. Debit bank $3234; debit discount allowed $66; debit GST collections $6;
credit accounts receivable $3306
22. Under the perpetual inventory system what is the correct entry to record the cost of
the sale of 2 reclining chairs sold to a customer at $1100 per chair including GST?
The items were originally purchased on credit at $500 each plus GST of $50 per chair.
a. Debit cost of sales $2200; credit sales $2200
b. Debit cost of sales $1000; debit GST outlays $100; credit inventory $1100
c. Debit cost of sales $2000; credit inventory $2000
*d. Debit cost of sales $1000; credit inventory $1000
23. Under the perpetual inventory system inventory purchased is debited to which
account?
a. Prepaid expenses
b. Cost of sales
c. Purchases
*d. Inventory
24. Under the periodic inventory system inventory purchased is debited to which
account?
a. Cost of sales
*b. Purchases
c. Inventory
d. Selling expenses
25. Under the perpetual inventory system, what is the entry for the credit purchase of 10
electric guitars at $250 per guitar plus GST of $25 each?
a. Debit inventory $2750; credit accounts payable $2500; credit GST outlays
$250
*b. Debit inventory $2500; debit GST outlays $250; credit accounts payable
$2750
c. Debit inventory $2750; credit accounts payable $2750
d. Credit accounts payable $2750; debit inventory $2500; credit GST collections
$250
26. Which of the following is not true of the periodic inventory system?
a. Cost of sales can be calculated only after a physical stocktake
b. It uses a purchases account
*c. It allows inventory variances to be identified
d. It is the simplest system
27. Under the perpetual inventory system an inventory variance can be calculated as the
difference between:
a. the periods purchases and ending inventory balance.
*b. the ledger balance of the inventory account and the total of the physical
stocktake.
c. inventory at start less inventory at end.
d. an inventory loss cannot be calculated using the perpetual inventory system.
28. If beginning inventory was $25 000, purchases during the period totalled $50 000,
freight-in was $1000 and ending inventory was $19 000, calculate the cost of sales?
a. $55 000
b. $50 000
*c. $57 000
d. $56 000
29. The system of accounting for inventory that involves keeping a current and
continuous record of the movement in each item of inventory is known as the
____________ inventory system.
a. accrual
b. periodic
*c. perpetual
d. physical
30. The account that measures the expense of the inventory sold during the period is
called:
*a. cost of sales.
b. gross profit.
 c. purchases.
d. cost of completed goods.
31. Under the perpetual inventory system, the number of accounting entries required to
record a credit sale is:
a. 0.
b. 1.
*c. 2.
d. 3.
32. Using the periodic approach to record inventory, inventory at start, plus purchases,
minus inventory at end as valued in a physical stocktake, is assumed to equal:
*a. cost of sales.
b. inventory turnover.
c. gross profit.
d. inventory at end.
33. With a periodic inventory system if inventory at start is $25 000, purchases $123 000
and inventory at end as per physical stocktake is $20 000, what is the estimated cost
of sales?
a. $148 000
b. $123 000
c. $168 000
*d. $128 000
34. Cost of goods available for sale is equal to which of the following?
a. Beginning inventory – ending inventory
*b. Beginning inventory + net purchases
c. Beginning inventory + net purchases – ending inventory
d. Net purchases – ending inventory
35. Assume that the net price method of recording purchases is used and the business uses
the perpetual method of inventory recording. Record the purchase of goods for $5000
on credit, on terms of 3/10, n/30. Ignore GST.
a. Debit inventory $5000; credit accounts payable $5000
b. Debit inventory $4850; debit discount allowed $150: credit accounts payable
$5000
*c. Debit inventory $4850; credit accounts payable $4850
d. Debit purchases $5000; credit accounts payable $4850; credit discount allowed
$150