Chapter 5

Accounting for Merchandising Businesses

TRUE/FALSE

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

2. In many retail businesses, inventory is the largest current asset.

3. Under a periodic inventory system, the merchandise on hand at the end of the year is determined
by a physical count of the inventory.

4. In the periodic inventory system, purchases of merchandise for resale are debited to the Purchases
account.

5. Under the periodic inventory system, the cost of goods sold is equal to the beginning merchandise
inventory plus the cost of goods purchased plus the ending merchandise inventory.

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

7. In a periodic inventory system, the cost of goods purchased includes the cost of transportation-in.

8. As we compare a merchandise business to a service business, the financial statement that changes
the most is the Balance Sheet.
9. Gross profit minus selling expenses equals net income.

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

11. Transportation In is the amount paid by the company to deliver merchandise sold to a customer.

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

13. Transportation-in is considered a cost of purchasing inventory.

14. Under the perpetual inventory system, when a sale is made, both the retail and cost values are
recorded.

15. Under the perpetual inventory system, the cost of merchandise sold is recorded when sales are
made.

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

17. Sales Discounts is a revenue account with a credit balance.

18. Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. If
payment is made within 10 days of the purchase, the entry to record the payment will include a
credit to Cash and a credit to Purchase Discounts.
19. When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a
trade discount.

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

21. Merchandise is sold for $4,500, terms FOB destination, 2/10, n/30, with prepaid transportation
costs of $250. If $800 of the merchandise is returned prior to payment and the invoice is paid within
the discount period, the amount of the sales discount is $79.

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

23. If merchandise costing $2,500, terms FOB destination, 2/10, n/30, with prepaid transportation costs
of $100, is paid within 10 days, the amount of the purchases discount is $50.

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

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

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

27. Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory.

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

29. Closing entries for a merchandising business are not similar to those for a service business.
30. The ratio of net sales to assets measures how effectively a business is using its assets to generate
sales.

MULTIPLE CHOICE

1. Which one of the following is not a difference between a retail business and a service business?
a. in what is sold
b. the inclusion of gross profit in the income statement
c. accounting equation
d. merchandise inventory included in the balance sheet

2. Net income plus operating expenses is equal to

a. cost of merchandise sold
b. cost of goods available for sale
c. net sales
d. gross profit

3. Generally, the revenue account for a merchandising business is entitled

a. Sales
b. Net Sales
c. Gross Sales
 d. Gross Profit

4. The term "inventory" indicates

a. merchandise held for sale in the normal course of business
b. materials in the process of production or held for production
c. supplies
d. both (a) and (b)

5. The statement of retained earnings shows

a. only net income, beginning and ending retained earnings
b. only total assets, beginning and ending retained earnings
c. only net income, beginning Capital Stock, and dividends
d. only net income/net loss, dividends, and beginning and ending retained earnings

6. Which account is not classified as a selling expense?

a. Sales Salaries
b. Transportation-Out
c. Sales Discounts
d. Advertising Expense

7. The primary difference between a periodic and perpetual inventory system is that a
 a. periodic system determines the inventory on hand only at the end of the accounting period
b. periodic system keeps a record showing the inventory on hand at all times
c. periodic system provides an easy means to determine inventory shrinkage
d. periodic system records the cost of the sale on the date the sale is made

8. The inventory system employing accounting records that continuously disclose the amount of
inventory is called
a. retail
b. periodic
c. physical
d. perpetual

9. When comparing a retail business to a service business, the financial statement that changes the
most is the
a. Balance Sheet
b. Income Statement
c. Statement of Retained Earnings
d. Statement of Cash Flow

10. Gross profit is equal to:

a. sales plus (sales discounts and sales returns and allowances) plus cost of merchandise sold
b. sales plus sales returns and allowances less sales discounts less cost of merchandise sold
c. sales plus sales discounts less sales returns and allowances less cost of merchandise sold
 d. sales less (sales discounts and sales returns and allowances) less cost of merchandise sold

11. Where are selling and administrative expenses found on the multi-step income statement?
a. before gross profit
b. after sales and before gross profit
c. after net income before expenses
d. after gross profit

12. Which of the following accounts has a normal debit balance?

a. Accounts Payable
b. Sales Returns and Allowances
c. Sales
d. Interest Revenue

13. Merchandise is ordered on November 12; the merchandise is shipped by the seller and the invoice
is prepared, dated, and mailed by the seller on November 15; the merchandise is received by the
buyer on November 17; the entry is made in the buyer's accounts on November 18. The credit
period begins with what date?
a. November 12
b. November 15
c. November 17
d. November 18

14. If merchandise sold on account is returned to the seller, the seller may inform the customer of the
details by issuing a
 a. sales invoice
b. purchase invoice
c. credit memorandum
d. debit memorandum

15. Merchandise with a sales price of $500 is sold on account with term 2/10, n/30. The journal entry to
record the sale would include a
a. debit to Cash for $500
b. Debit to Sales Discounts for $10
c. Credit to Sales for $500
d. Debit to Accounts Receivable for $490

16. The entry to record the return of merchandise from a customer would include a
a. debit to Sales
b. credit to Sales
c. debit to Sales Returns and Allowances
d. credit to Sales returns and Allowances

17. Sales to customers who use bank credit cards, such as MasterCard and Visa, are generally treated as
a. sales on account
b. sales returns
c. cash sales
 d. sales when the credit card company remits the cash

18. When a buyer returns merchandise purchased for cash, the buyer may record the transaction using
the following entry
a. debit Merchandise Inventory; credit Cash
b. debit Cash; credit Merchandise Inventory
c. debit Cash; credit Sales Returns and Allowances
d. debit Sales Returns and Allowances; credit Cash

19. When merchandise is returned under the perpetual inventory system, the buyer would credit
a. Merchandise Inventory
b. Purchases Returns and Allowances
c. Accounts Payable
d. depending on the inventory system used.

20. When purchases of merchandise are made for cash, the transaction may be recorded with the
following entry
a. debit Cash; credit Merchandise Inventory
b. debit Merchandise Inventory; credit Cash
c. debit Merchandise Inventory; credit Cash Discounts
d. debit Merchandise Inventory; credit Purchases

21. In recording the cost of merchandise sold for cash, based on data available from perpetual
inventory records, the journal entry is
 a. debit Cost of Merchandise Sold; credit Sales
b. debit Cost of Merchandise Sold; credit Merchandise Inventory
c. debit Merchandise Inventory; credit Cost of Merchandise Sold
d. debit Accounts Receivable; credit Merchandise Inventory

22. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller,
the terms are
a. n/30
b. FOB shipping point
c. FOB destination
d. consigned

23. When goods are shipped FOB destination and the seller pays the transportation charges, the buyer
a. journalizes a reduction for the cost of the merchandise.
b. journalizes a reimbursement to the seller.
c. does not take a discount.
d. makes no journal entry for the transportation.

24. Black Company sold Red Company merchandise on account FOB shipping point, 2/10, net 30, for
$10,000. Black prepaid the $200 shipping charge. Which of the following entries does Black make to
record this sale?
a. Accounts Receivable-Red, debit $10,000; Sales, credit $10,000
b. Accounts Receivable-Red, debit $10,000; Sales, credit $10,000, and
Accounts Receivable-Red, debit $200; Cash, credit $200
 c. Accounts Receivable-Red, debit $10,400; Sales, credit $10,400
d. Accounts Receivable-Red, debit $10,000; Sales, credit $10,000, and
Transportation Out, debit $200; Cash, credit $200

25. Orange Co. sold Red Co. merchandise on account FOB shipping point, 2/10, net 30, for $10,000.
Orange Co. prepaid the $200 shipping charge. Using the perpetual inventory system, which of the
following entries will Red Co. make if Red Co. pays within the discount period?
a. Accounts Payable-Orange Co., debit $10,000; Transportation In, credit $200; Cash, credit $9,800
b. Accounts Payable-Orange Co., debit $10,200; Merchandise Inventory, credit $200; Cash, credit
$10,000
c. Accounts Payable-Orange Co., debit $10,000; Transportation In, debit $200; Cash, credit $10,200
d. Accounts Payable-Orange Co., debit $10,200; Merchandise Inventory, debit $200; Cash, credit
$10,400

26. A chart of accounts for a merchandising business usually

a. is the same as the chart of accounts for a service business
b. requires more accounts than does the chart of accounts for a service business
c. is standardized by the FASB for all merchandising businesses
d. does not have a Cost of Merchandise Sold account if a perpetual inventory system is used

27. Robles Co. sells $1,000 of inventory to Salas Co.for cash. Robles paid $650 for the merchandise.
Under a perpetual inventory system, the following journal entry(ies) would be recorded.
a. Cash 1,000 Dr, Merchandise Inventory 650 Cr
b. Cash 1,000 Dr, Sales 1,000 Cr, Cost of Merchandise Sold 650 Dr, Merchandise Inventory 650 Cr.
c. Cash 1,000 Dr, Sales 1,000 Cr
d. Accounts Receivable 1,000 Dr, Sales 1,000 Cr, Cost of Merchandise Sold 650 Dr, Merchandise
Inventory 650 Cr.
28. Apple Co sells merchandise on credit to Zea Co in the amount of $8,000. The invoice is dated on
September 15 with terms of 1/15, net 45. If Zea Co. chooses not to take the discount, by when
should the payment be made?
a. September 30
b. October 30
c. October 15
d. September 25

29. Taking advantage of a 2/10, n/30 purchases discount is equal to a savings yearly rate of
approximately
a. 2%
b. 24%
c. 20%
d. 36%

30. Who pays the freight costs when the terms are FOB shipping point?
a. the ultimate customer
b. the buyer
c. the seller
d. either the seller or the buyer

31. Which of the following items would affect the cost of merchandise inventory acquired during the
period?
a. quantity discounts
 b. cash discounts
c. transportation-in
d. all of the above

32. Under a perpetual inventory system

a. accounting records continuously disclose the amount of inventory
b. increases in inventory resulting from purchases are debited to Purchases
c. there is no need for a year-end physical count
d. the purchase returns and allowances account is credited when goods are returned to vendors

33. The Paula Corp. sold merchandise for cash, $6,900. The cost of the merchandise (COMS) sold was
$4,250. The journal entry(s) to record this transaction would be
a. Cash 6,900
Merchandise Inventory 6,900

COMS 4,250
Sales 4,250
b. Accounts Rec 6,900
Sales 6,900

COMS 4,250
 Merchandise Inv 4,250
c. Cash 6,900
Sales 6,900

COMS 6,900
Merchandise Inventory 6,900
d. Cash 4,250
Sales 4,250

COMS 4,250
Merchandise Inventory 4,250
e. Cash 6,900
Sales 6,900

COMS 4,250
Merchandise Inventory 4,250

34. Inventory shortage is recorded when

a. merchandise is returned by a buyer.
b. merchandise purchased from a seller is incomplete or short.
c. merchandise is returned to a seller.
 d. there is a difference between a physical count of inventory and inventory records.

35. What is the major difference between a periodic and perpetual inventory system?
a. Under the periodic inventory system, the purchase of inventory will be debited to the Purchases
account
b. Under the periodic inventory system, no journal entry is recorded at the time of the sale of
inventory.
c. Under the periodic inventory system, all adjustments such as purchases returns and allowances
and discounts are reconciled at the end of the month.
d. All are correct.

36. Under the periodic inventory system, the journal entry to record the cost of merchandise sold at the
point of sale will include the following account
a. No entry is made.
b. Cost of merchandise sold
c. Inventory
d. Purchases sold

37. Under a periodic inventory system, closing entries will include

a. Dr. Sales, Purchases Returns and Allowances, Purchases Discounts
b. Cr. Purchases, Sales Discounts, Sales Returns and Allowances
c. Adjust Merchandise Inventory Account to match physical inventory
d. All are correct

PROBLEMS:

1. A company using the periodic inventory system has the following account balances: Merchandise
Inventory at the beginning of the year, $4,000; Transportation-In, $450; Purchases, $12,000;
Purchases Returns and Allowances, $2,300; Purchases Discounts, $220. The cost of merchandise
purchased is equal to

2. A company, using the periodic inventory system, has merchandise inventory costing $140 on hand
at the beginning of the period. During the period, merchandise costing $400 is purchased. At year-
end, merchandise inventory costing $180 is on hand. The cost of merchandise sold for the year is

3. Using the following information, what is the amount of cost of merchandise sold?
Purchases $28,000 Purchases discounts $800
Merchandise inventory 6,500 Merchandise inventory 7,800
April 1 April 30
Sales returns and 750 Sales 57,000
allowances
Purchases returns and 1,000 Transportation In 880
allowances
4. Using the following information, what is the amount of gross profit?

5. Using the same information, what is the amount of net sales?

6. Using the same information, what is the amount of merchandise available for sale?

7. Silver Co. sold merchandise to Bronze Co. on account, $23,000, terms 2/15, net 45. The cost of the
merchandise sold is $18,500. Silver Co. issued a credit memorandum for $2,500 for merchandise
returned that originally cost $1,900. The Bronze Co. paid the invoice within the discount period.
What is amount of net sales from the above transactions?

8. Merchandise subject to terms 1/10, n/30, FOB shipping point, is sold on account to a customer for
$15,000. The seller paid transportation costs of $1,000 and issued a credit memorandum for $5,000
prior to payment. What is the amount of the cash discount allowable?

9. A retailer purchases merchandise with a catalog list price of $10,000. The retailer receives a 25%
trade discount and credit terms of 2/10, n/30. What amount should the retailer debit to the
Merchandise Inventory account?

10. A sales invoice included the following information: merchandise price, $4,000; transportation,
$300; terms 1/10, n/eom, FOB shipping point. Assuming that a credit for merchandise returned of $600
is granted prior to payment, that the transportation is prepaid by the seller, and that the invoice is paid
within the discount period, what is the amount of cash received by the seller?

11. Merchandise with an invoice price of $4,000 is purchased on June 2 subject to terms of 2/10,
n/30, FOB destination. Transportation costs paid by the seller totaled $150. What is the cost of the
merchandise if paid on June 12, assuming the discount is taken?

12. Apple Co sells merchandise on credit to Zea Co in the amount of $8,000. The invoice is dated on
September 15 with terms of 1/15, net 45. What is the amount of the discount and up to what date must
the invoice be paid in order for the buyer to take advantage of the discount?

13. Based on the following information, what would be recorded as purchases discount if the invoice is
paid within the discount period?
1. $5,000 of merchandise inventory was ordered on April 2, 2007
2. $2,000 of this merchandise was received on April 5, 2007
3. On April 6, 2007, an invoice dated April 4, 2007, with terms of 2/10, net 30 for $2,150
which included a $150 prepaid freight cost, was received.
4. On April 10, 2007, $500 of the merchandise was returned to the seller.
14. Based on the following information, what would be recorded as the cash payment if the invoice is
paid within the discount period?

15. Based on the same information above, what would be recorded as net purchases amount after all of
the transactions have been recorded?

16. Based on the same information above, by what date does the invoice need to be paid in order to
take the advantage of the discount?

17. Based on the same information above, what would be the cash payment if the company decides to
payment the invoice on April 30, 2007?

18. A retailer purchases merchandise with a catalog list price of $10,000. The retailer receives a 25%
trade discount and credit terms of 2/10, n/30. How much cash will be needed to pay this invoice
within the discount period?