Needles Finman Irm Ch05

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CHAPTER 5
The Operating Cycle and
Merchandising Operations
PLANNING MATRIX
Enhancing Your
Building Your Basic Knowledge, Skills, and
Learning Objective Knowledge and Skills Critical Thinking
1. Identify the management issues SE 1, 2 E 1, 3, 4 P 1, 3, 6, 8 C1
related to merchandising C2
businesses. C4
C5
C6
C7
2. Describe the terms of sale related to SE 3, 4 E 1, 5, 6,
merchandising transactions. 7
3. Prepare an income statement and SE 5 E 2, 7, 8, 9, P 1, 2, 6, 7 C3
record merchandising transactions 10 C5
under the perpetual inventory
system.
4. Prepare an income statement and SE 6, 7, 8 E 2, 6, 11, P 3, 4, 8, 9 C5
record merchandising transactions 12, 13, 14
under the periodic inventory
system.
5. Describe the components of internal SE 9, 10 E 2, 15, 16, P 5, 10 C4
control, control activities, and 17 C5
limitations on internal control.
6. Apply internal control activities to SE 9 E 2, 16, 17 P 5, 10
common merchandising
transactions.
MEMORANDA:
SE: Short Exercises
E: Exercises
P: Problems (Each problem has a User Insight question.)
C: Cases
All questions are in the text with related Learning Objectives (Stop, Think, and Apply).
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 5: The Operating Cycle and Merchandising Operations 59
SUGGESTED INSTRUCTIONAL STRATEGY

Output Skills Developed:
Technical, Communication, Interpersonal, Personal/Self
Related Learning Objectives:

1, 2
Instructional Strategy
Learning activity: Group field trip or class project
Learning environment: Active, outside class
Learning tool: Textbook assignment Case 4
Steps to Implement
1. This research activity may be done individually, but is designed for teams of three. If teams are
used, they should contact the manager of a retail store and arrange for an interview. Emphasize
that the interview will take only a few minutes.
2. Go over the activity in class to make sure students understand what is required. Preparation is
essential so that the store manager’s time is not wasted. This briefing should include the
following:
a. Nature of acceptable business
b. Expected professional behavior
c. Nature of data to be gathered (See questions in Case 4)
d. Form of report
3. This activity should be debriefed in class. Take selected questions from Case 4 and as each group
gives its results, summarize on the board. Have in mind the summary points you would like to
make with regard to merchandising accounting and inventory systems.
Assessment
Technical skills: Grade team papers for content and technical accuracy.
Communication skills: Grade team papers for professional presentation.
Interpersonal skills: Assess indirectly the student’s or group’s ability to interview and communicate in
a business setting.
Personal/self skills: This activity is intended to build personal/self skills such as confidence and
planning. Each student could complete a short questionnaire with questions such as the following: What
did you find easiest about this assignment? What did you find most difficult? What would you do
differently next time?
60 Chapter 5: The Operating Cycle and Merchandising Operations
RESOURCE MATERIALS AND OUTLINES

OBJECTIVE 1: Identify the management issues related to merchandising businesses.
Summary Statement
While a service business earns income by providing a service for a fee, a merchandising business, such
as a wholesaler or retailer, buys goods and resells them. Although the two types of businesses use the
same basic accounting method, the process is more complex for the merchandiser.
The operating cycle of a merchandising business consists of purchasing merchandise inventory from
suppliers for cash or on credit, (2) paying for purchases made on credit, (3) selling merchandise to
customers for cash or on credit, and (4) collecting cash from customers for credit sales. To have
sufficient cash on hand to pay bills as they are due and to replenish merchandise inventory,
management must forecast its future cash needs and arrange for borrowing as needed during the
financing period, which is the period of time from the purchase of inventory until it is ultimately sold
and payment is collected, less the amount of time creditors give the company to pay for the inventory.
Another management decision regarding inventory is the choice of inventory system. There are two
basic systems of accounting for the items in the merchandising inventory: the perpetual inventory
system and the periodic inventory system.
The perpetual inventory system is used when management wants to have a current inventory balance.
Under this system, inventory records are continuously updated, providing management with up-to-date
information regarding inventory levels, information that is important to both inventory control and to
customer service. The Merchandise Inventory account is increased for the cost of goods purchased and
decreased for the cost of goods sold. The Cost of Goods Sold account is increased at the time of each
sale.
A merchandiser can determine the quantity and the cost of the inventory not sold or the goods on hand
by using the periodic inventory system. While simpler and less costly to maintain, the periodic
inventory system does not provide management with continuously updated current inventory balances.
Under the periodic inventory system, the inventory on hand is counted periodically, usually at the end
of the accounting period. No detailed records of inventory on hand are kept during the accounting
period—the inventory figure is accurate only on the balance sheet date. Small merchandisers, both
retailers and wholesalers, use periodic inventory systems because they can actually observe their
inventory or can control inventory by recording information on cards or computers, thus requiring
minimal clerical work. For larger businesses, however, the lack of detailed records can result in lost
sales or high operating costs.
Most large companies and many small companies engage in international transactions. When a
transaction involves two different currencies, one currency has to be stated in terms of the other. When
a company engages in a transaction in a foreign currency, an exchange gain or loss will occur if there is
a change in the exchange rate between the date of sale and the date of payment.
New Concepts and Terminology

merchandising business; merchandise inventory; operating cycle; financing period; perpetual
inventory system; periodic inventory system; exchange gain or loss
Related Text Illustrations

Figure 1: Cash Flows in the Operating Cycle
Figure 2: The Financing Period
Focus on Business Practice: How Have Bar Codes Influenced the Choice of Inventory Systems?
Lecture Outline
I. A service business provides a service (e.g., a dry cleaner, an accountant, or a car wash), whereas a
merchandising business sells goods (e.g., a department, drug, or grocery store).
II. Operating cycle
A. Purchase of merchandise inventory for cash or credit
B. Collection of cash from credit sales
C. Payment for purchases made on credit
D. Sales of merchandise inventory for cash or on credit
III. Choice of inventory system
A. Perpetual inventory system
1) Inventory records are updated with every purchase and every sale.
B. Periodic inventory system
1) Inventory records are updated only at the end of the period when a physical count is
taken.
IV. Foreign business transactions
A. Foreign business transactions involve two currencies.
B. Timing differences and related changes in the exchange rate may result in exchange gains or
losses.
Teaching Strategy
Ask students to give examples of service businesses and merchandising businesses. Use Figure 1 to
lead students through the operating cycle and Figure 2 to discuss the financing period. Contrast the
perpetual and periodic inventory systems. Short Exercise 1 and Exercise 3 will help students understand
the major issues presented in this objective.
This section of the chapter also introduces students to inventory maintenance. Ask students if anyone
has been involved in taking a physical inventory. Ask what type of merchandise they counted.
Examples of types of businesses that may use the different inventory systems are helpful. Give
examples of merchandise that a business owns that is not located on the premises and vice versa.
Explain why a physical inventory must be taken in a perpetual system. Explain how bar coding is used
in a perpetual system. Point out that many retailers keep perpetual inventory records in quantities only
and use the periodic system for costs and for accounting purposes.
Show how inventory losses are identified in a perpetual inventory system and why it is not possible to
do this in a periodic system. Mention some ways in which companies try to prevent and detect
inventory losses. This discussion will provide a lead-in to a discussion of management’s responsibilities
with respect to internal control.
Cases 1 and 2 address conceptual issues in this learning objective.
OBJECTIVE 2: Describe the terms of sale related to merchandising transactions.

Summary Statement
Terms of sale are negotiated by the buyer and seller and cover not only the selling price but also the
credit period, delivery charges, return policy, and so on. As a matter of convenience, manufacturers and
wholesalers frequently quote prices of merchandise based on a discount from the list or catalogue price
(called a trade discount). Trade discounts are never recorded in the accounting records.
Sellers sometimes offer a sales discount for timely payment, which is intended to accelerate cash receipts,
thereby improving liquidity. Terms of 2/10, n/30, for example, mean that a 2 percent discount will be given
if payment is made within 10 days of the invoice date; otherwise, the full amount is due within 30 days. It
is almost always advantageous for the buyer to pay within the discount period because of the high effective
annual rate implied in the terms. For example, terms of 1/10, n/30 represents an effective annual rate of 18
percent (1 percent for 20 days is equal to 18 percent for 365 days). Similarly, purchases discounts are
discounts that buyers take for paying early.
Freight charges are borne by the buyer or seller of the goods, depending upon the terms specified. FOB
shipping point means that title to the goods passes from seller to buyer at the origin and the buyer pays
freight charges. FOB destination means that title to the goods passes from seller to buyer at the
destination and the seller pays the freight charges. Freight-in is the transportation cost paid by the buyer
and is added to cost of goods sold. Delivery expenses, or freight-out, are transportation costs paid by
the seller and are considered operating expenses.
Companies that allow customers to use national debit or credit cards (such as MasterCard or Visa) must
follow special accounting procedures. The credit card company reimburses the merchant for the sale,
less a service charge. The credit card company levies this service charge because it is responsible for
establishing credit and collecting money from the customer. Assuming that the merchant deposits its
credit card sales invoices into a special bank account for immediate credit, it would debit the Cash and
Credit Card Discount Expense accounts and credit the Sales account.

trade discount; sales discount; purchases discount; FOB shipping point; FOB destination; freight-in;
delivery expense
Related Text Illustration

Focus on Business Practice: How Are We Becoming a Cashless Society?
Lecture Outline
I. Trade discounts are reductions from the list price and are not recorded in the accounts.
II. Sales discounts are offered by the seller for prompt payment.
A. 2/10, n/30 means that the buyer can take a 2 percent discount by paying within 10 days of
the invoice date or paying the full amount within 30 days.
B. Purchases discounts apply to the buyer.
III. Transportation costs
A. FOB shipping point means that title to the goods transfers at origin and freight charges are
paid by the buyer.
B. FOB destination means that title to the goods transfers at destination and freight charges are
paid by the seller.
C. Freight-in is the transportation cost paid by the buyer and added to cost of goods sold.
D. Delivery expense, or freight-out, is the transportation cost paid by the seller and is an
operating expense.
IV. Terms of debit and credit card sales
A. Debit cards deduct directly from a person’s bank account, whereas a credit card allows for
payment later.
B. In credit card transactions, the credit card company takes a discount of 2 to 6 percent of the
credit card sales, which is taken as a selling expense by the merchandiser.
Teaching Strategy
Show how trade discounts and cash discounts are computed to arrive at the amount to be paid. Explain
how to determine whether it is advantageous for a buyer to pay within the discount period.
OBJECTIVE 3: Prepare an income statement and record merchandising transactions

under the perpetual inventory system.
Summary Statement
Under the perpetual inventory system, the cost of goods sold and merchandise inventory are updated
whenever a purchase, sale, or other inventory transaction takes place. In addition, freight-in is usually
included in cost of goods sold.
Transactions are recorded under the perpetual inventory system as follows:
a. A purchase of merchandise on credit is debited to the Merchandise Inventory account and
credited to the Accounts Payable account.
b. Transportation costs for goods received are debited to the Freight-In account and credited to
either the Accounts Payable or Cash accounts.
c. A purchase return to the supplier (for credit) is debited to the Accounts Payable account and
credited to the Merchandise Inventory account.
d. A payment on account is debited to the Accounts Payable account and credited to the Cash
account.
e. Sales of merchandise on credit are debited to the Accounts Receivable account and credited
to the Sales account. However, an additional entry must be made, debiting the Cost of Goods
Sold account and crediting the Merchandise Inventory account.
f. The payment of delivery costs for goods sold is recorded as a debit to the Delivery Expense
account and a credit to either the Accounts Payable or Cash accounts.
g. Returns of merchandise by customers are debited to the Sales Returns and Allowances
account (a contra-revenue account) and credited to the Accounts Receivable account. The
Sales Returns and Allowances account is debited instead of the Sales account to provide
management with data about dissatisfied customers. Under the perpetual inventory system, a
second entry is needed to transfer the cost of the returned goods from the Cost of Goods
Sold account to the Merchandise Inventory account.
h. Receipts from customers on account are debited to the Cash account and credited to the
Accounts Receivable account.
The following journal entries are introduced in this learning objective for the perpetual inventory system:
Merchandise Inventory XX (purchase price)
Accounts Payable XX (amount due)
Purchased merchandise on credit
Accounts Payable XX (amount returned)

Merchandise Inventory XX (amount returned)
Returned merchandise from purchase
Accounts Payable XX (amount owed)

Cash XX (amount paid)
Made payment on account
Accounts Receivable XX (amount to be received)

Sales XX (sales price)
Sold merchandise to Gonzales Distributors
Merchandise Inventory XX (cost of goods sold)

Cost of Goods Sold XX (cost of goods sold)
Transferred cost of merchandise inventory sold to Cost of
Goods Sold
Sales Returns and Allowances XX (price of goods returned)

Accounts Receivable XX (amount credited to account)
Accepted return of merchandise
Merchandise Inventory XX (cost of units sold)

Cost of Goods Sold XX (cost of units sold)
Transferred cost of merchandise returned to Merchandise
Inventory
Cash XX (amount received)

Accounts Receivable XX (amount settled)
Received on account

Sales Returns and Allowances account

Exhibit 1: Income Statement Under the Perpetual Inventory System
Figure 3: Recording Purchase Transactions Under the Perpetual Inventory System
Figure 4: Recording Sales Transactions Under the Perpetual Inventory System
Focus on Business Practice: How Are Web Sales Doing?
Lecture Outline
I. With the perpetual inventory system, inventory records are updated with every purchase and every
sale.
II. Purchases of merchandise
A. Journalize a purchase of merchandise on account.
B. Journalize a return of merchandise purchased.
C. Journalize a payment on account.
III. Sales of Merchandise
A. Journalize a sale of merchandise on account.
B. Journalize a return of merchandise sold.
C. Journalize collection from a customer on account.
Teaching Strategy
Exercise 7 provides an excellent way to contrast the journal entries made for merchandise purchase and
sale transactions in the perpetual inventory system. Point out that all problems and examples in the text
assume that transportation is performed by a common carrier.
OBJECTIVE 4: Prepare an income statement and record merchandising transactions

under the periodic inventory system.
Summary Statement
The choice of an inventory system affects the way cost of goods sold is calculated for the income
statement. The income statement for a merchandising business that uses the periodic inventory system
will show the computation for cost of goods sold, including beginning and ending inventory, freight-in,
and net purchases. (The cost of goods sold = the cost of goods available for sale – ending inventory.)
Goods available for sale is the sum of the beginning inventory and the net cost of purchases during the
year. The ending inventory in one period becomes the beginning inventory of the next period. The net
cost of purchases includes purchases reduced by any discounts and returns and allowances (net
purchases), plus freight charges paid.
Transactions are recorded under the periodic inventory system as follows:
a. All purchases of merchandise on account are debited to the Purchases account and credited
to the Accounts Payable account. The purpose of the Purchases account is to accumulate the
cost of merchandise purchased for resale during the period.
b. Transportation costs for goods purchased are debited to the Freight-In account and credited
to either the Accounts Payable or Cash accounts.
c. A purchase return to the supplier (for credit) is debited to the Accounts Payable account and
credited to the Purchases Returns and Allowances account. The latter appears as a contra
account to Purchases on the income statement.
d. A payment on account is debited to the Accounts Payable account and credited to the Cash
account.
e. Cash sales of merchandise are debited to the Cash account and credited to the Sales account.
When a credit sale is made, Accounts Receivable is debited and Sales is credited. Generally,
a sale is recorded when the goods are delivered and title passes to the customer, regardless of
when payment is made.
f. The payment of delivery costs for goods sold is recorded as a debit to the Delivery Expense
account and a credit to either the Accounts Payable or Cash accounts.
g. Returns of merchandise by customers (for credit) are debited to the Sales Returns and
Allowances account and credited to the Accounts Receivable account.
h. Receipts from customers on account are debited to the Cash account and credited to the
Accounts Receivable account.
The following journal entries are introduced in this learning objective for the periodic inventory system:
Purchases XX (purchase price)
Accounts Payable XX (amount due)
Purchases on credit
Accounts Payable XX (amount returned)

Purchases Returns and Allowances XX (amount returned)
Returned merchandise from purchase
Accounts Payable XX (amount owed)

Cash XX (amount paid)
Made payment on account
Accounts Receivable XX (amount to be received)

Sales XX (sales price)
Sold merchandise on credit
Sales Returns and Allowances XX (price of goods returned)

Accounts Receivable XX (amount credited to account)
Accepted return of merchandise
Cash XX (amount received)

Accounts Receivable XX (amount settled)
Received on account

cost of goods available for sale; net cost of purchases; net purchases; Purchases account; Purchases
Returns and Allowances account

Exhibit 2: Income Statement Under the Periodic Inventory System
Figure 5: The Components of Cost of Goods Sold
Figure 6: Recording Purchase Transactions Under the Periodic Inventory System
Figure 7: Recording Sales Transactions Under the Periodic Inventory System
Focus on Business Practice: Are Sales Returns Worth Accounting For?
Lecture Outline
I. Merchandising income statement under the periodic system
A. Shows all the detailed computations of cost of goods sold
1. under the perpetual system, only the total cost of goods sold is disclosed.
B. With the periodic inventory system, inventory records are updated only at the end of the
period, when a physical count is taken.
C. Beginning inventory is the merchandise on hand at the beginning of the period.
D. Ending inventory is the merchandise on hand at the end of the period. The ending inventory
of one period becomes the beginning inventory of the next period.
E. Net purchases equals total purchases less purchases returns and allowances and purchases
discounts.
F. Net cost of purchases equals net purchases plus freight-in.
G. Cost of goods available for sale is the cost of merchandise available for sale during the
period. It equals beginning inventory plus net cost of purchases.
H. Cost of goods sold is the cost to the merchandiser of the goods sold that period. It equals
cost of goods available for sale less ending inventory.
II. Purchases of Merchandise
A. Journalize a purchase of merchandise on account.
B. Journalize a return of merchandise purchased.
C. Journalize a payment on account.
II. Sales of Merchandise
A. Journalize a sale of merchandise on account.
B. Journalize a return of merchandise sold.
C. Journalize collection from a customer on account.
Teaching Strategy
Short Exercises 6 through 8 provide an excellent way to contrast the journal entries made for
merchandise purchase and sale transactions in the periodic inventory system. Point out that all problems
and examples in the text assume that transportation is performed by a common carrier.
OBJECTIVE 5: Describe the components of internal control, control activities, and

limitations on internal control.
Summary Statement
Management must establish the following five interrelated components of internal control: the control
environment, risk assessment, information and communication, control activities, and monitoring.
1. The control environment reflects management’s philosophy and operating style, the company’s
organizational structure, methods of assigning authority and responsibility, and personnel policies
and practices.
2. Risk assessment entails identifying areas in which risk of asset loss or inaccuracy in accounting
records is especially high.
3. Information and communication relates to the accounting system established by management and
to the need for clear communication of each individual’s responsibility within that system.
4. Control activities are the specific procedures and policies established by management to ensure
that the objectives of internal control are met.
5. Monitoring involves management’s regular assessment of the quality of internal control.
Management must establish control activities to ensure the safeguarding of assets and the reliability of the
accounting records. Examples of control activities are (1) requiring authorization for all transactions; (2)
recording all transactions; (3) using well-designed documents; (4) implementing physical controls, as
over the accounting records; (5) establishing a system of periodic independent checks of records and
assets; (6) separating duties; and (7) using sound personnel procedures. Bonding an employee (an
example of a good control activity) reduces or eliminates the risk of theft by that individual against the
company.
To be effective, a system of internal control must rely on the people who implement it. Thus, the
effectiveness of internal control is limited by the people involved. Human error, collusion, changing
conditions—all can weaken a system of internal control.

control environment; risk assessment; information and communication; control activities; monitoring;
authorization; physical controls; periodic independent verification; separation of duties; bonding
Related Text Illustration

Focus on Business Practice: Which Frauds Are Most Common?
Focus on Business Practice: Shoplifters: Beware!
Lecture Outline
I. Internal control has five components:
A. Control environment
B. Risk assessment
C. Information and communication

D. Control activities
E. Monitoring
II. Control activities include the following:
A. Requiring authorization for all transactions
B. Recording all transactions
C. Using well-designed documents
D. Implementing physical controls, as over the accounting records
E. Establishing a system of independent periodic checks of records and assets
F. Separating duties
G. Using sound personnel procedures
1. Bonding is a valuable control procedure.
III. At least three factors can contribute to the weakening of a system of internal control:
A. Human error
B. Collusion
C. Changing conditions
Teaching Strategy
Internal accounting controls should be introduced as a driving force behind any accounting system.
Students are interested in anecdotes that illustrate the effectiveness of internal control. Students have
often had experience in work settings in which there was a lack of control. Ask also for examples of
experiences students have had in organizations in which controls were in place. Allow discussion and
storytelling. This brings the topic of internal control to a human level.
Internal control is one of the few topics in accounting where there is an allowance for human frailty.
Although this is a short segment of the text, students seem to enjoy a discussion of both human error
and collusion. This discussion reinforces the idea of internal control through a focus on its limitations.
As an alternative, it may help to describe a prepared case, asking students to identify problems in
internal control in the situation described.
The specific terminology used in the text is important. Terminology should be memorized.
Case 4 (Starbucks) provides an excellent real-world learning application for students.
OBJECTIVE 6: Apply internal control activities to common merchandising transactions.

Summary Statement
Accounting controls over merchandising transactions help prevent losses from theft or fraud. They also
help ensure accurate records of cash receipts, cash disbursements, and cash balances. Administrative
controls over merchandising transactions serve to maintain appropriate inventory levels; to ensure that
there is enough cash on hand to pay debts when due and, through timely payments, to take advantage of
purchases discounts; to avoid credit losses; and to earn a reasonable return on excess cash.
Several controls can be used to achieve effective internal control over sales and the exchange of cash.
One is the cash budget, which allows management to better predict future cash receipts and
disbursements. Another is the separation of duties that involve the handling of cash; many safeguards
can be implemented to prevent an individual from stealing or misusing cash.
Two or more employees should handle cash received by mail. Cash received from sales over the
counter should be controlled through the use of cash registers and prenumbered sales tickets. At the end
of each day, Cash is debited for cash receipts, and Sales is credited for the amount on the cash register
tape. If the two amounts do not agree, any differences must be explained.
All cash disbursements for purchases should be made by check. Before employees disburse cash, they
should obtain authorization in the form of signed documents. The system of authorization and the
documents used differ among companies. The most common documents are described below.
1. A purchase requisition is a formal request for a purchase that a department submits to the
company.
2. The department responsible for purchasing activities completes a purchase order and sends it to
the vendor.
3. An invoice is the bill that the vendor sends to the buyer.
4. A receiving report, completed by the receiving department, contains information about the
quantity and condition of goods received.
5. A check authorization is a document showing that the purchase order, invoice, and receiving
report are in agreement and that payment is therefore approved.
6. When payment is approved, a check is issued to the vendor for the amount of the invoice, less any
appropriate discount. A remittance advice should be attached to the check, describing what the
check is for.
7. When the vendor deposits the check, then the canceled check appears on the bank statement. IF
the check amount is incorrect or has been altered, it will show up here.

purchase requisition; purchase order; invoice; receiving report; check authorization

Focus on Business Practice: How Do Computers Promote Internal Control?
Figure 8: Internal Controls in a Large Company: Separation of Duties and Documentation
Figure 9: Internal Control Plan for Purchases and Cash Disbursements
Lecture Outline
I. Internal control activities help prevent theft and fraud and promote accuracy in cash records.
II. Internal controls also help management by
A. Keeping enough inventory on hand to sell to customers without overstocking merchandise
B. Keeping sufficient cash on hand to pay for purchases in time to receive discounts
C. Keeping credit losses as low as possible by making credit sales only to customers who are
likely to pay on time
III. Control of cash
A. Administrative controls such as a cash budget help maintain adequate inventory and cash
levels and minimize credit losses.
B. Generally, the following are necessary for good control of cash:
1. Separate the functions of authorization, recordkeeping, and custodianship of cash.
2. Limit the number of people who have access to cash, and designate who those people
are.
3. Bond all employees who have access to cash.
4. Keep the amount of cash on hand to a minimum by using banking facilities as much as
possible.
5. Physically protect cash on hand by using cash registers, cashiers’ cages, and safes.
6. Record and deposit all cash receipts promptly, and make payments by check rather
than by currency.
7.
Have a person who does not handle or record cash make unannounced audits of the
cash on hand.
8. Have a person who does not authorize, handle, or record cash transactions reconcile the
Cash account each month.
IIV. Control of cash receipts
A. Two or more persons should handle cash received by mail.
B. Cash received over the counter should be controlled with cash registers and prenumbered
sales tickets.
V. The following documents should be used when making a purchase:
A. Purchase requisition
B. Purchase order
C. Invoice
D. Receiving report
E. Check authorization
F. Check
G. Bank statement
Teaching Strategy
Point out which assets are most vulnerable to theft or fraud. Detail in presenting this topic gives
students an inside look at why businesses do what they do to protect themselves from theft and fraud by
employees as well as by outsiders. Refer to safety measures taken to protect inventory and cash.
Figures 8 and 9 are useful in clarifying the material in the text. Students should familiarize themselves
with these illustrations. Short Exercise 9 and Exercises 16 and 17 are good reviews of this subject
matter.
REVIEW QUIZ
True-False
1. T F A physical inventory need not be taken periodically in a perpetual inventory system.
2. T F The terms 1/10, n/60 mean that a 1 percent discount is allowed on payments made
more than ten days but less than 60 days after the invoice date.
3. T F A company is more likely to know the amount of inventory on hand at any time if it
uses the periodic system than if it uses the perpetual system.
4. T F A higher inventory turnover means that on average the company takes fewer days to
sell an item of inventory.
5. T F The ending inventory of one period automatically becomes the beginning inventory of
the following period.
6. T F FOB shipping point means that the buyer incurs the shipping costs.
7. T F The Sales Discounts account can be described as an expense account.
8. T F The use of prenumbered sales tickets can strengthen a store’s system of internal
control.
9. T F Collusion can overcome the advantage of separation of duties.
Multiple Choice
10. Which of the following transactions is not part of the operating cycle:
a. Purchase of equipment on credit
b. Purchase of merchandise inventory on credit
c. Payment for purchases made on credit
d. Sales of merchandise inventory for cash
e. Collection of cash from credit sales
11. Assuming that net purchases were $300,000 during the year and that ending inventory was $4,000
more than the beginning inventory of $60,000, how much was cost of goods sold?
a. $236,000
b. $244,000
c. $296,000
d. $304,000
e. $364,000
12. Ignoring income taxes, a net loss results when operating expenses exceed
a. cost of goods sold.
b. gross margin.
c. purchases.
d. cost of goods available for sale.
e. sales.
13. Which of the following is equal to a company’s financing period:

a. days’ payable
b. days’ payable plus days’ inventory on hand plus days receivable.
c. days’ inventory on hand minus days receivable minus days’ payable
d. days’ inventory on hand plus days receivable minus days’ payable.
e. days receivable minus days’ payable minus days’ inventory on hand
14. A sale on April 20 with terms of n/10 eom is due to be collected by

a. April 30.
b. May 1.
c. May 10.
d. May 20.
e. May 31.
15. Which of the following is true about FOB shipping point:

a. Title passes at destination.
b. Seller pays transportation costs.
c. Title pass at origin.
d. Buyer does not pay transportation costs
e. Seller owns good in transit
16. Which of the following accounts appears on both the balance sheet and the income statement?
a. Freight-In
b. Purchases
c. Dividend Income
d. Freight-Out Expense
e. Merchandise Inventory
17. When a merchandiser takes advantage of a discount available, the journal entry of the supplier
includes a
a. debit to Purchases Discounts.
b. credit to Sales Discounts.
c. credit to Cash.
d. credit to Accounts Receivable.
e. credit to Purchases Discounts.
18. If a company wanted to reduce it s financing cost of the operating cycle, it would seek to
a. Increase inventory turnover and receivables turnover
b. Decrease inventory turnover and receivables turnover
c. Increase the financing period
d. Increase its payables turnover
e. Increase its merchandise Inventory
19. A company whose customers have returned goods that were previously sold on credit
a. debits Sales Returns and Allowances and credits Accounts Receivable.
b. debits Accounts Payable and credits Purchases.
c. debits Sales and credits Accounts Receivable.
d. debits Accounts Receivable and credits Accounts Payable.
e. debits Purchases Returns and Allowances and credits Accounts Receivable.
20. Which of the following is least likely to lead to a breakdown in internal control?
a. Human errors and mistakes
b. Employees carrying out their duties as prescribed
c. Management taking full control of an operation
d. Two employees working together to steal assets
e. Few forms to support transactions
21. A company’s control environment includes all the following except the company’s
a. ethics, philosophy, and operating style
b. customer profile
c. organizational structure
d. method of assigning responsibilities
e. personnel policies and procedures
ANSWERS TO REVIEW QUIZ
True-False Multiple Choice

1. F 10. a
2. F 11. c
3. F 12. b
4. T 13. d
5. T 14. c
6. T 15. c
7. F 16. e
8. T 17. d
9. T 18. a
19. as
20. b
21. b

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ً ‫ صفحة الباحث العلوي هجانا‬Alaa.aliasrei@gmail.

com ‫@ عالء هحسن شحن‬Aliasrei ‫تلكرام‬

SUGGESTED INSTRUCTIONAL STRATEGY

Related Learning Objectives:

RESOURCE MATERIALS AND OUTLINES

New Concepts and Terminology

Related Text Illustrations

OBJECTIVE 2: Describe the terms of sale related to merchandising transactions.

New Concepts and Terminology

Related Text Illustration

OBJECTIVE 3: Prepare an income statement and record merchandising transactions

Accounts Payable XX (amount returned)

Accounts Payable XX (amount owed)

Accounts Receivable XX (amount to be received)

Merchandise Inventory XX (cost of goods sold)

Sales Returns and Allowances XX (price of goods returned)

Merchandise Inventory XX (cost of units sold)

Cash XX (amount received)

New Concepts and Terminology

Related Text Illustrations

OBJECTIVE 4: Prepare an income statement and record merchandising transactions

Accounts Payable XX (amount returned)

Accounts Payable XX (amount owed)

Accounts Receivable XX (amount to be received)

Sales Returns and Allowances XX (price of goods returned)

Cash XX (amount received)

New Concepts and Terminology

Related Text Illustrations

C. Journalize collection from a customer on account.

OBJECTIVE 5: Describe the components of internal control, control activities, and

New Concepts and Terminology

Related Text Illustration

C. Information and communication

OBJECTIVE 6: Apply internal control activities to common merchandising transactions.

New Concepts and Terminology

Related Text Illustrations

13. Which of the following is equal to a company’s financing period:

14. A sale on April 20 with terms of n/10 eom is due to be collected by

15. Which of the following is true about FOB shipping point:

ANSWERS TO REVIEW QUIZ

True-False Multiple Choice

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