Lesson 6 Accounting for Merchandising Activities Self-Test I. True and False Questions The income statement of a wholesaler includes a deduction from revenue representing the cost of goods sold. In a perpetual inventory system, the Inventory and Cost of Goods Sold accounts are kept up-to-date throughout the accounting period. A perpetual inventory system requires the capability of recording the cost of goods sold relating to individual sales transactions. The collection of an account receivable from a credit customer is recorded by a debit to cash and a credit to a revenue account. In a retail department store with an efficient perpetual inventory system, the quantities of goods actually on hand are probably somewhat less than the quantities indicated in the accounting records. In a perpetual inventory system, the Costs of Goods Sold account is closed along with the expense accounts. In a periodic inventory system, the Inventory and Cost of Goods Sold accounts are kept up-to-date throughout the accounting period. In a periodic inventory system, the ending inventory cannot be determined from the accounting records; rather, it is determined by a physical count of the merchandise on hand. Instead of paying for merchandise purchased on account, Ipot Corp. returned this merchandise to the supplier. Ipot should record this transaction by debiting Accounts Payable and crediting Sales Returns and Allowances. The purpose of offering cash discounts, such as “2/10, n/30,” is to encourage customers to make early payments for purchases made on account. II. Multiple Choice Questions The primary economic function of a wholesaler is to: A. Supply merchandise to retailers. B. Sell merchandise to the public at “factory-direct” prices. C. Manufacture low-cost products. D. Sell merchandise on a “cash-and-carry” basis. Which of the following appears in the income statement of a merchandising business, but not in the income statement of a business that renders only services? A. Interest revenue. B. Gross profit. C. Advertising expense. D. Income taxes expense. Which of the following types of businesses is least likely to include cost of goods sold as a caption in its income statement? A. An automaker, such as Ford or GM. B. A local automobile dealership. C. A taxicab company. D. An auto repair shop that specializes in the installment of tires, mufflers, and brakes. Gross profit is the difference between: A. Net sales and the cost of goods sold. B. The cost of merchandise purchased and the cost of merchandise sold. C. Net sales and net income. D. Net sales and all expenses. In a perpetual inventory system: A. Merchandising transactions are recorded as they occur. B. No effort is made to record the cost of goods sold until year-end. C. Entries are made in the Cost of Goods Sold account whenever merchandise is purchased or sold. D. The need forever taking physical inventory is eliminated. In a perpetual inventory system, purchases of merchandise on account are recorded by debiting: A. Cost of Goods Sold. B. Accounts Payable. C. Purchases. D. Inventory. In a perpetual inventory system, two entries usually are made to record each sales transaction. The purposes of these entries are best described as follows: A. One entry recognizes the sales revenue, and the other recognizes the cost of goods sold. B. One entry records the purchase of the merchandise, and the other records the sale. C. One entry records the cost of goods sold, and the other reduces the balance in the Inventory account. D. One entry updates the general ledger, and the other updates the subsidiary ledgers. Emil Company utilizes a perpetual inventory system. The entries made to record the sale of an item at a price in excess of its cost will: A. Have no effect on the cost of goods sold until closing entries are made at the end of the accounting period. B. Not affect the current balance in the Inventory account. C. Result in an increase in total assets. D. Update the subsidiary ledger but have no impact on the general ledger accounts until end-of-period closing entries are posted. In a periodic inventory system, purchases of merchandise on account are recorded by debiting: A. Cost of Goods Sold. B. Accounts Payable. C. Purchases. D. Inventory. In a periodic inventory system, the entry to record the sale of merchandise on account will affect the balance of which of the following accounts? A. Cost of Goods Sold. B. Accounts Payable. C. Inventory. D. Sales. In a periodic inventory system, which of the following accounts may be closed by debiting the Cost of Goods Sold? A. Sales, Inventory (beginning), and gross profit. B. Inventory (beginning) and Purchases. C. Purchases and Inventory (ending). D. Sales, Inventory (beginning), and Cost of Goods Available for Sale. In comparing a perpetual inventory system with a periodic inventory system, which of the following statements is not correct? A. Most large companies use perpetual inventory systems. B. A periodic system does not include an inventory subsidiary ledger. C. The perpetual method is easier to apply in a manual accounting system. D. Regardless of the system in use, most businesses take a physical inventory at least once a year. In a periodic inventory system, the cost of goods sold is: A. Recorded as sales transactions occur. B. Determined by a computation which is performed at year-end, after the taking of a complete physical inventory. C. Equal to the beginning inventory, plus purchases made during the period, less sales revenue for the period. D. Determined by subtracting the balance in the Gross Profit account from the amount of net sales. In a periodic inventory system, the formula used in computing the cost of goods sold may be summarized as follows: A. Beginning inventory + purchases - ending inventory. B. Beginning inventory + purchases - net sales. C. Ending inventory + purchases - net sales. D. Balance in the Cost of Goods Sold account, less the balance in the Inventory Shrinkage account. Which of the following statements about a periodic inventory system is not correct? A. These systems are used primarily by small businesses with manual accounting systems. B. The system does not include an up-to-date inventory ledger. C. The balance in the Inventory account remains unchanged until the end of the period. D. The Cost of Goods Sold account is updated as sales transactions occur. Green Co. records purchases net of all available purchase discounts. If the company makes payment after the discount has expired, the entry to record the payment should include a: A. Debit to Purchase Discounts Lost. B. Credit to Purchase Discounts Lost. C. Debit to Sales Discounts. D. Credit to Sales Discounts. Ward Company discovered that merchandise purchased on account was defective and returned this merchandise to the supplier. The entry to record this return will reduce Ward’s: A. Sales revenue and the cost of goods sold. B. Inventory and liabilities. C. Inventory and cost of goods sold. D. Sales revenue and liabilities. The term net sales refers to total sales less: A. Sales discounts, and less sales returns and allowances. B. Cost of goods sold. C. Purchase returns, and less purchase discounts. D. 2%. The Sales Returns and Allowances account is debited when: A. Merchandise is returned to a supplier. B. Merchandise is returned by a customer. C. Payment is made to a supplier within the discount period. D. An account receivable is collected within the discount period. If sales discounts are shown as a separate item in financial statements, they should be shown as a(n): A. Deduction from accounts receivable. B. Deduction from gross sales revenue. C. Operating expense. D. Current liability. All of the following accounts normally have debit balances except: A. Transportationin. B. Cost of goods sold. C. Sales returns & allowances. D. All of the above accounts normally have debit balances. The basic purpose of offering customers cash discounts such as 2/10, n/30 is to: A. Increase sales. B. Reduce net sales. C. Speed up the collection of accounts receivable. D. Focus management’s attention upon customers that fail to take advantage of all available cash discounts.