chapter 5

Contra Revenue Account

An account that is offset against a revenue account on the income statement

Cost of Goods Sold

The total cost of merchandise sold during the period.

Gross Profit

The excess of net sales revenue over cost of goods sold

Gross Profit Rate

Gross profit expressed as a percentage by dividing the amount of gross profit by net sales.

Net Sales

Sales less sales returns and allowances and sales discounts

Periodic Inventory System

An inventory system in which a company does not maintain detailed records of goods on hand and determines the cost of goods sold only at the end of an accounting period.

Perpetual Inventory System

A detailed inventory system in which a company maintains the cost of each inventory item and the records continuously show the inventory that should be on hand.

Profit Margin

Measures the percentage of each dollar of sales that results in net income, computed by dividing net income by net sales

Purchase Allowance

a deduction made to the selling price of merchandise, granted by the seller so that the buyer will keep the merchandise

Purchase Discount

A cash discount claimed by a buyer for prompt payment of a balance due.

Purchase Invoice

A document that provides support for each purchase

Purchase Return

a return of goods from the buyer to the seller for cash or credit

Quality of Earnings Ratio

A measure used to indicate the extent to which a company’s earnings provide a full and transparent depiction of its performance; computed as net cash provided by operating activities divided by net income.

Sales Discount

A reduction given by a seller for prompt payment of a credit sale

Sales Invoice

A document that provides support for each sale

Sales Returns and Allowances

transactions in which the seller either accepts goods back from the purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods

Sales Revenue

Primary source of revenue in a merchandising company.

F

T/F The operating cycle of a merchandising company is ordinarily shorter than that of a service company.

A

Which of the following is a merchandiser that sells directly to consumers? A. Retailer B. Wholesaler C. Customer D. Service enterprise

C

Which is true about a wholesaler? A. It is a company that sells to consumers at a discount. B. It conducts large sales for consumers on a recurring basis. C. It sells to another business, which will sell to a consuming customer. D. It sells only to manufacturing companies.

A

Which of the following statements about a periodic inventory system is true? A. Companies determine cost of goods sold only at the end of the accounting period. B. Companies continously maintain detailed records of the cost of each inventory purchase and sale. C. The periodic system provides better control over inventories than a perpetual system. D. The increased use of computerized systems has increased the use of the periodic system.

C

The operating cycle of a merchandising company is ordinarily ___________________ that of a service firm. A. the same as B. shorter than C. longer than D. has fewer steps than

B

Which of the following statements is correct? A. A periodic inventory system provides better control over inventories than does a perpetual inventory system. B. A perpetual inventory system provides better control over inventories than does a periodic inventory system. C. A periodic inventory system computes cost of goods sold each time a sale occurs. D. A perpetual inventory system computes cost of goods sold only at the end of the accounting period.

A

Which inventory system will likely be used by a company with merchandise that has a high unit value? A. Perpetual inventory system B. Double entry inventory system C. Periodic inventory system D. Single entry inventory system

F

T/F Discount term of 2/10, n/30 mean that a 10% cash discount is available if payment is made within 30 days.

D

Jax Company uses a perpetual inventory system and on November 30 purchased merchandise for which it must pay the shipping charges. Which of the following is one part of the required journal entry when Jax pays the shipping charges of $200? A. A debit to Delivery Expense for $200 B. A debit to Cash for $200 C. A debit to Freight-out for $200 D. A debit to Inventory for $200

B

When credit terms of 1/15, n/60 are offered, how long is the discount period? A. 1 day B. 15 days C. 45 days D. 60 days

C

Which of the following items does not result in an entry to the Inventory account under a perpetual system? A. A purchase of merchandise B. A return of Inventory to the supplier C. Payment of freight costs for goods shipped to a customer D. Payment of freight costs for goods received from a supplier

T

T/F Sales Returns and Allowances is a contra-revenue account.

F

T/F Sales Discounts is a contra asset account.

D

Marsh, Inc. paid for freight costs on merchandise it shipped to a customer. In what account will Marsh record this cost in a perpetual inventory system? A. Inventory B. Cost of goods sold account C. Freight-in account D. Freight-out account

D

On what amount is a sales discount based? A. Invoice price plus freight-in B. Invoice less discount C. Invoice price plus freight-out D. Invoice price less returns and allowances

B

In a perpetual inventory system, which accounts will the seller credit when merchandise is returned by a customer? A. Sales Returns and Allowances and Accounts Receivable B. Accounts Receivable and Cost of Goods Sold C. Inventory and Cost of Goods Sold D. Sales Returns and Allowances and Inventory

D

Which statement is true for the seller? A. The Sales Discounts account is credited for defective merchandise returned by a customer. B. The Sales Discounts account is debited for defective merchandise returned by a customer. C. The Sales Returns and Allowances account is credited for defective merchandise returned by a customer. D. The Sales Returns and Allowances account is debited for defective merchandise returned by a customer.

C

Which of these accounts normally have a debit balance? A. Sales Discounts only B. Sales Returns and Allowances only C. Both Sales Discounts and Sales Returns and Allowances D. Neither Sales Discount nor Sales Returns and Allowances

C

Which statement is true when recording the sale of goods for cash in a perpetual inventory system? A. Only one journal entry is necessary. It will record cost of goods sold and reduce of inventory. B. Only one journal entry is necessary. It will record the receipt of cash and sales revenue. C. Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and to reduce inventory. D. Two journal entries are ncessary: one to record the receipt of cash and reduction of inventory, and one to record the the cost of goods sold and sales revenue.

B

Which one of the following statements is correct? A. A company which uses a perpetual inventory system needs only one journal entry when it sells merchandise. B. A company which uses a perpetual inventory system needs two journal entries when it sells merchandise. C. A company which uses a perpetual inventory system debits inventory and credits cost of goods sold when it sells merchandise. D. None of the answer choices are correct.

C

What type of accounts are Sales Returns and Allowances and Sales Discounts? A. Contra asset accounts B. Expense accounts C. Contra revenue accounts D. Contra expense accounts

T

T/F Gross profit is the difference between net sales and cost of goods sold.

B

Which of the following is classified in an income statement as a nonoperating activity? A. Advertising expense B. Interest expense C. Freight-out D. Cost of goods sold

A

Which of the following is classified in an income statement as a nonoperating activity? A. Receiving dividend revenue from an investment B. Returning merchandise C. Receiving an allowance for merchandise damaged in shipment D. Paying for a purchase of inventory

C

Which of the following would appear on both a single-step and a multiple-step income statement? A. Gross profit B. Income from operations C. Cost of goods sold D. Other expenses and losses

C

Which one of the following will result in gross profit? A. Operating expenses less net income B. Sales revenue less operating expenses C. Sales revenue less cost of goods sold D. Operating expenses less cost of goods sold

D

Which of the following will be shown on the income statement for a merchandising company? A. Gross profit B. Cost of goods sold C. A sales revenue section D. All of the answer choices are correct.

B

Under what system is cost of goods sold determined at the end of an accounting period? A. Single entry inventory system B. Periodic inventory system C. Double entry inventory system D. Perpetual inventory system

C

Which of the following would affect the gross profit rate if sales remain constant? A. An increase in advertising expense B. A decrease in depreciation expense C. An increase in cost of goods sold D. A decrease in insurance expense

C

To what is the gross profit rate equal? A. Net income divided by net sales B. Cost of goods sold divided by net sales C. Net sales minus cost of goods sold, divided by net sales D. Sales minus cost of goods sold, divided by cost of goods sold

A

Which factor would not affect the gross profit rate? A. An increase in the cost of heating the store B. An increase in the sale of luxury items C. An increase in the use of "discount pricing" to sell merchandise D. An increase in the price of inventory items

C

Given the following quality of earnings ratios, which suggests the company may be using the most conservative accounting techniques? A. 0.6 B. 1.0 C. 1.8 D. 0.2

B

What quality of earnings ratio might a company have if it is using more aggressive accounting techniques in order to accelerate income recognition? A. Significantly more than 1 B. Significantly less than 1 C. Approximately equal 1 D. Close to 0

C

Which of the following determines the quality of earnings ratio? A. Operating income divided by the net income B. Net cash provided by operating activities divided by operating income C. Net cash provided by operating activities divided by net income D. Net cash flow increase divided by the net income

A

Which of the following statements is correct? A. A company which uses a periodic inventory system needs only one journal entry when it sells merchandise. B. A company which uses a periodic inventory system needs two journal entries when it sells merchandise. C. A company which uses a periodic inventory system debits Cost of Goods Sold and credits Inventory when it sells merchandise. D. None of the answer choices are correct.

D

When using a periodic inventory system and the purchaser directly incurs the freight costs, which account is debited? A. Purchases B. Freight-out C. Inventory D. Freight-In

B

In a periodic inventory system, when is the cost of the merchandise sold determined? A. At the time of the sale B. At the end of the period C. Periodically during the period D. Either at time of sale, end of period or periodically during the period.

B

Which statement is true when goods are purchased for resale by a company using a periodic inventory system? A. Purchases on account are debited to the Inventory account. B. Purchases on account are debited to the Purchases account. C. Purchase returns are debited to the Purchase Returns and Allowances account. D. Freight costs are debited to the Purchases account.

A

Under IFRS, a number of inventory options are available. Which one of the following is not allowed under IFRS? A. Last in-first out B. Periodic C. Perpetual D. Including amounts held-for-sale in the ordinary course of business in the inventory account

A

Under IFRS, income statement items can be classified as which of the following? A. Nature or function B. Function or classification C. Function D. Classification or nature

B

Under IFRS, how many years of comparative income statements must be presented for a complete set of financial statements? A. One year B. Two years C. Three years D. Four years

C

A key difference between GAAP and IFRS would include which of the following? A. Inventories can be maintained under either a periodic or perpetual system. B. Income statement items can be classified under function. C. Revaluation of land is permitted. D. Comprehensive income is used for both GAAP and IFRS.