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Exam 3: Accounting for Merchandising Businesses

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Question 21

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A multistep income statement shows sales, cost of goods sold, and gross margin.

A) True
B) False

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Question 22

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The credit terms, 2/15, n/30, indicate that a:

A) fifteen percent discount can be deducted if the invoice is paid within two days following the date of sale.
B) two percent discount can be deducted for a period up to thirty days following the date of sale.
C) two percent discount can be deducted if the invoice is paid before the fifteenth day following the date of the sale.
D) two percent discount can be deducted if the invoice is paid after the fifteenth day following the sale, but before the thirtieth day.

E) A) and B)
F) C) and D)

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Question 23

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For a company that uses a perpetual inventory system, a physical count of the inventory can reveal the amount of inventory shrinkage the company has experienced.

Assume the perpetual inventory method is used. 1) The company purchased $12,500 of merchandise on account under terms 2/10, n/30. 2) The company returned $1,200 of merchandise to the supplier before payment was made. 3) The liability was paid within the discount period. "4) All of the merchandise purchased was sold for $18,800 cash. The net cash flow from operating activities as a result of the four transactions is:"

Indicate whether each of the following statements is true or false. (Assume a perpetual inventory system.) _____ a) In a perpetual inventory system, an employee theft is discovered immediately. _____ b) No adjusting entry is required for inventory losses under a perpetual inventory system. _____ c) Inventory shrinkage is calculated as the difference between the beginning and ending balances in the merchandise inventory account. _____ d) In a perpetual inventory system, adjustments for lost, damaged or stolen merchandise are recorded as expenses. _____ e) The adjusting entry to record inventory losses due to employee theft or shoplifting has a negative effect on the statement of cash flows.

Indicate whether each of the following statements is true or false. _____ a) A common size income statement facilitates comparison between two or more companies of different size and in the same industry. _____ b) A common size income statement is prepared by dividing the various amounts reported on the income statement by the amount of total assets. _____ c) A common size income statement is helpful in comparing the results of operations in different time periods.

Use the following account numbers and corresponding account titles to answer the following question. Which accounts would affect gross margin?

On March 5, Gibbs Company purchases $5,000 of merchandise from a supplier for cash and records that transaction by increasing its inventory account. On March 30, the company records a $400 decrease in its inventory account. We can assume the company uses the:

A company using the perpetual inventory method paid $250 cash to have goods delivered from one of its suppliers. The payment of $250 for transportation-in is considered a(n) :

Common size financial statements are prepared by converting dollar amounts to percentages.

Assume the perpetual inventory method is used. 1) Green Company purchased merchandise inventory that cost $64,000 under terms of 2/10, n/30 and FOB shipping point. 2) The company paid freight cost of $2,400 to have the merchandise delivered. 3) Payment was made to the supplier within 10 days. "4) All of the merchandise was sold to customers for $94,000 cash and delivered under terms FOB shipping point with freight cost amounting to $1,600. The gross margin from these transactions of Green Company is:"

Abbott Company purchased $6,500 of merchandise inventory on account. Advent uses the perpetual inventory method. How does this transaction affect the financial statements?

Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $42,000 of common stock for cash. 2) The company paid cash to purchase $26,400 of inventory. 3) The company sold inventory that cost $16,000 for $30,600 cash. "4) Operating expenses incurred and paid during the year, $14,000. Sanchez Company engaged in the following transactions during Year 2:" 1) The company paid cash to purchase $35,200 of inventory. 2) The company sold inventory that cost $32,800 for $57,000 cash. "3) Operating expenses incurred and paid during the year, $18,000. Note: Sanchez uses the perpetual inventory system. Sanchez's gross margin for the Year 2 is:"

The income statement is not affected by a purchase of merchandise.

Indicate whether each of the following statements is true or false. (Assume a perpetual inventory system.) _____ a) The freight terms FOB shipping point increase the cost of inventory to the buyer. _____ b) The term FOB means that goods are shipped free of charge to buyer and seller. _____ c) FOB shipping point means that purchaser's responsibility ends at shipping point. _____ d) FOB destination means that seller's responsibility ends at destination. _____ e) When the seller of merchandise records freight under the terms FOB shipping point, the seller records an expense.

The purpose of common size financial statements is to:

Sales discounts affect net sales, but purchase discounts do not.

Under a periodic system, the payment of shipping costs on goods received from the vendor will increase the:

Wholesale companies sell goods primarily to other businesses.

Consider the information: Based on common-sized income statements, which of the companies spent, relative to sales, the least on operating expenses?