chapter 6 & 7 T or F

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Most retailers record all credit card sales as credit sales.

F

The adjusting entry to record inventory shrinkage would generally include a debit to Cost of Merchandise Sold.

T

A customer discount encourages customers to pay accounts more quickly than if a discount were not available.

T

The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income from operations are not readily available.

T

Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150. The amount of the sales recorded is $3,528.

T

The abbreviation FOB stands for "free on board."

T

In a multiple-step income statement, the dollar amount for income from operations is always the same as net income.

F

Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the buyer.

T

Freight in is considered a cost of purchasing inventory.

T

If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in the general ledger.

T

There is no difference between the recording of cash sales and the recording of MasterCard or VISA sales.

T

When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period.

T

In a perpetual inventory system, when merchandise is returned to the supplier, Cost of Merchandise Sold is debited as part of the transaction.

F

Sellers and buyers are required to record trade discounts.

F

When merchandise that was sold is returned, a credit to sales returns and allowances is made.

F

When a merchandising business is compared to a service business, the financial statement that is not affected by that change is the statement of owner’s equity.

T

In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the beginning inventory.

F

The fees associated with credit card sales are periodically recorded as expenses.

T

Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped FOB shipping point.

T

When the terms of sale are FOB shipping point, the buyer should pay the freight charges.

T

When merchandise is sold for $600 plus 6% sales tax, the Sales account should be credited for $636.

F

Freight in is the amount paid by the company to deliver merchandise sold to a customer.

F

Closing entries for a merchandising business are not similar to those for a service business.

F

Large businesses that make sales to customers who use nonbank credit cards, such as American Express, generally treat these sales as credit sales.

T

In a merchandise business, sales minus operating expenses equals net income.

F

If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms are stated as FOB destination.

F

A sale of $750 on account, subject to a sales tax of 6%, would be recorded as an account receivable of $750.

F

Sales is equal to the cost of merchandise sold less the gross profit.

F

Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system.

F

Buyers and sellers do not normally record the list prices of merchandise and the trade discounts in accounts.

T

The cost of merchandise inventory is limited to the purchase price less any purchase discounts.

F

The account form of the balance sheet is presented in a downward sequence in three sections.

F

Merchandise Inventory normally has a debit balance.

T

The chart of accounts for a merchandising business would include an account called Delivery Expense.

T

A seller may grant a buyer a reduction in selling price and this is called a customer discount.

T

Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. The entry to record the purchase will include a debit to Cash and a credit to Sales.

F

Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer’s place of business.

F

Because many companies use computerized accounting systems, periodic inventory is widely used.

F

The most important differences between a service business and a retail business are reflected in their operating cycles and financial statements.

T

Estimated Returns Inventory is an account used when adjusting for expected merchandise sales in the next period.

F

Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales.

F

When companies use a perpetual inventory system, the recording of the purchase of inventory will include a debit to Purchases.

F

Gross profit minus selling expenses equals net income.

F

Customer Refunds Payable is an account used to record merchandise returns from customers.

T

A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called cash discounts.

F

If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination.

F

A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take a physical inventory.

F

Cost of merchandise sold is often the largest expense on a merchandising company income statement.

T

Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as Other Income on the multiple-step income statement.

T

The seller records the sales tax as part of the sales amount.

F

On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues.

T

As we compare a merchandise business to a service business, the financial statement that changes the most is the balance sheet.

F

Most companies will not take a purchase discount, because 1% or 2% discounts are insignificant.

F

Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are recorded.

T

Service businesses provide services for income, while a merchandising business sells merchandise.

T

In the merchandising income statement, sales will be reduced by administrative expenses to arrive at operating income.

F

The seller may prepay the freight costs even though the terms are FOB shipping point.

T

When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount.

T

Other income and expenses are items that are not related to the primary operating activity.

T

In retail businesses, inventory is reported as a current asset.

T

If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30.

F

Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends to sell.

F

A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take advantage of the sales discount.

F

If merchandise costing $3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of $125, is paid within 10 days, the amount of the purchases discount is $70.

T

In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account.

T

The form of the balance sheet in which assets, liabilities, and owner’s equity are presented in a downward sequence is called the report form.

T

Under the LIFO inventory costing method, the most recent costs are assigned to ending inventory.

F

The specific identification inventory method should be used when the inventory consists of identical, low-cost units that are purchased and sold frequently.

F

One of the two internal control procedures over inventory is to properly report inventory on the financial statements.

T

If the perpetual inventory system is used, the merchandise inventory account is debited for purchases of merchandise.

T

When using the FIFO inventory costing method, the most recent costs are assigned to the cost of merchandise sold.

F

Unsold consigned merchandise should be included in the consignee’s inventory.

F

FIFO is the inventory costing method that follows the physical flow of the goods.

T

It’s not unusual for large companies to use different inventory costing methods for different segments of its inventory.

T

One negative effect of carrying too much inventory is risk that customers will change their buying habits.

T

"Market" as used in the phrase "lower of cost or market" for valuing inventory, refers to the price at which the inventory is being offered for sale by its owner.

F

During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO cost method.

T

In valuing merchandise for inventory purposes, net realizable value is the estimated selling price less any direct costs of disposal.

T

The three inventory costing methods will normally each yield different amounts of net income.

T

A consignor who has goods out on consignment with an agent should include the goods in ending inventory even though they are not in the possession of the consignor.

T

Average inventory is computed by adding the inventory at the beginning of the period to the inventory at the end of the period and dividing by two.

T

Under the periodic inventory system, the merchandise inventory account continuously discloses the amount of inventory on hand.

F

Inventory errors, if not discovered, will self-correct within two years.

T

When merchandise inventory is shown on the balance sheet, both the method of determining the cost of the inventory and the method of valuing the inventory should be shown.

T

The lower-of-cost-or-market method of determining the value of ending inventory can be applied on an item by item, by major classification of inventory, or by the total inventory.

T

Of the three widely used inventory costing methods (FIFO, LIFO, and average cost), the LIFO method of costing inventory assumes costs are charged based on the most recent purchases first.

T

A perpetual inventory system is an effective means of control over inventory.

T

The average cost method will always yield results between FIFO and LIFO.

T

Safeguarding inventory and proper reporting of the inventory in the financial statements are the reasons for controlling the inventory.

T

A purchase order establishes an initial record of the receipt of the inventory.

F

Direct disposal costs do not include special advertising or sales commissions.

F

During periods of rapidly rising costs, the use of the LIFO method results in illusory or inventory profits.

F

If ending inventory for the year is overstated, owner’s equity reported on the balance sheet at the end of the year is understated.

F

A physical inventory should be taken at the end of every month.

F

The choice of an inventory costing method has no significant impact on the financial statements.

F

Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of the merchandise sold.

T

A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels.

T

Inventory controls start when the merchandise is shelved in the store area.

F

The use of the lower-of-cost-or-market method of inventory valuation increases net income for the period in which the inventory replacement price declined.

F

During periods of increasing costs, an advantage of the LIFO inventory cost method is that it matches more recent costs against current revenues.

T

During periods of decreasing costs, the use of the LIFO method of costing inventory will result in a lower amount of net income than would result from the use of the FIFO method.

F

If ending inventory for the year is understated, net income for the year is overstated.

F

The weighted average inventory cost flow method is the least used of the inventory costing methods.

T

During periods of increasing costs, the use of the FIFO method of costing inventory will yield an inventory amount for the balance sheet that is higher than LIFO would produce.

T

The lower of cost or market is a method of inventory valuation.

T

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