Chapter 5

A merchandiser: Earns net income by buying and selling merchandise. Receives fees only in exchange for services. Earns profit from commissions only. Earns profit from fares only. Buys products from consumers.

Cost of goods sold: Is another term for merchandise sales. Is the term used for the expense of buying and preparing merchandise for sale. Is another term for revenue. Is also called gross margin. Is a term only used by service firms.

A company has sales of $375,000 and its gross profit is $157,500. Its cost of goods sold equals: $(217,000). $375,000. $157,500. $217,500. $532,500.

The following statements regarding gross profit are true except: Gross profit is also called gross margin. Gross profit less other operating expenses equals income from operations. Gross profit is not calculated on the multiple-step income statement. Gross profit must cover all operating expenses to yield a return for the owner of the business. Gross profit equals net sales less cost of goods sold.

The following statements regarding merchandise inventory are true except: Merchandise inventory is reported on the balance sheet as a current asset. Merchandise inventory refers to products a company owns and intends to sell. Merchandise inventory may include the costs of freight in and making them ready for sale. Merchandise inventory appears on the balance sheet of a service company. Purchasing merchandise inventory is part of the operating cycle for a business.

The following statements are true regarding the operating cycle of a merchandising company except: The operating cycle begins with the purchase of merchandise. The operating cycle is shortened by credit sales. The operating cycle ends with the collection of cash from the sale of merchandise. The operating cycle can vary in length among different merchandising companies. The operating cycle sometimes involves accounts receivable.

Merchandise inventory: Is a long-term asset. Is a current asset. Includes supplies the company will use in future periods. Is classified with investments on the balance sheet. Must be sold within one month.

Beginning inventory plus net purchases is: Selected Answer: Cost of goods sold. Merchandise (goods) available for sale. Ending inventory. Sales. Shown on the balance sheet.

The current period's ending inventory is: Selected Answer: The next period's beginning inventory. The current period's cost of goods sold. The prior period's beginning inventory. The current period's net purchases. The current period's beginning inventory.

The operating cycle for a merchandiser that sells only for cash moves from: Purchases of merchandise to inventory to cash sales. Purchases of merchandise to inventory to accounts receivable to cash sales. Inventory to purchases of merchandise to cash sales. Accounts receivable to purchases of merchandise to inventory to cash sales. Accounts receivable to inventory to cash sales.

A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 12, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the payment on July 12 is: Debit Merchandise Inventory $1,600; credit Cash $1,600. Debit Cash $1,600; credit Accounts Payable $1,600. Debit Accounts Payable $1,600; credit Merchandise Inventory $32; credit Cash $1,568. Debit Accounts Payable $1,800; credit Cash $1,800. Debit Accounts Payable $1,600; credit Cash $1,600

A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the merchandise return on July 7 is: Debit Merchandise Inventory $1,600; credit Cash $1,600. Debit Merchandise Inventory $200; credit Accounts Payable $200. Debit Merchandise Inventory $200; credit Sales Returns $200. Debit Accounts Payable $200; credit Merchandise Inventory $200. Debit Accounts Payable $1,800; credit Purchase Returns $200; credit Merchandise Inventory $1,600.

A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. The amount of the cash paid on July 28 equals: $200. $1,564. $1,568. $1,600. $1,800

Garza Company had sales of $135,000, sales discounts of $2,000, and sales returns of $3,200. Garza Company's net sales equals: $5,200. $129,800. $133,000. $135,000. $140,200.

Multiple-step income statements: Are required by the FASB and IASB. Correct Contain more detail than a simple listing of revenues and expenses. Are required for the periodic inventory system. List cost of goods sold as an operating expense. Are only used in perpetual inventory systems.

A company's current assets are $23,420, its quick assets are $13,890 and its current liabilities are $12,220. Its acid-test ratio equals: 0.88. 1.91. 1.14. .52. 1.41.

A company's net sales are $775,420, its costs of goods sold are $413,890, and its net income is $117,220. Its gross margin ratio equals: 46.6%. 53.4%. 28.3%. 31.5%. 40.5%.

A service company earns net income by buying and selling merchandise. True False

Gross profit is also called gross margin. True False

Cost of goods sold is also called cost of sales. True False

A wholesaler buys products from manufacturers or other wholesalers and sells them to consumers. True False

A retailer buys products from manufacturers and sells them to wholesalers. True False

Cost of goods sold represents the cost of buying and preparing merchandise for sale. True False

A perpetual inventory system continually updates accounting records for merchandising transactions. True False

A periodic inventory system requires updating of the inventory account only at the beginning of an accounting period. True False

Beginning inventory plus net purchases equals merchandise available for sale. True False

The acid-test ratio is also called the quick ratio. True False

Quick assets include cash and cash equivalents, inventory, and current receivables. True False

A common rule of thumb is that a company's acid-test ratio should have a value near or higher than 1 to conclude that a company is unlikely to face near-term liquidity problems. True False

Successful use of a just-in-time inventory system can narrow the gap between the acid-test and the current ratio. True False

FOB shipping point means that the buyer accepts ownership when the goods arrive at the buyer's place of business. True False

Credit terms of 2/10, n/30 imply that the seller offers the purchaser a 2% cash discount if the amount is paid within 10 days of the invoice date. Otherwise, the full amount is due in 30 days. True False

A single-step income statement includes cost of goods sold as another expense and shows only one subtotal for total expenses. True False

A merchandiser's classified balance sheet reports merchandise inventory as a current asset. True False