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Exam 5: Accounting for Merchandising Operations

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Question 31

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The following statements regarding gross profit are true except:

A) Gross profit less other operating expenses equals income from operations.
B) Gross profit is not calculated on the multiple-step income statement.
C) Gross profit equals net sales less cost of goods sold.
D) Gross profit is also called gross margin.
E) Gross profit must cover all operating expenses to yield a return for the owner of the business.

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Question 32

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On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander uses the periodic inventory system and the gross method of accounting for sales. On September 14, Jepson returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. Jepson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Vander makes on September 18 is: A) $\begin{array}{|l|r|r|}\hline \text { Cash } & 5,194 & \\\hline \text { Sales discounts } & 106 & \\\hline \text { Accounts receivable } & & 5,300 \\\hline\end{array}$ B) $\begin{array}{|l|r|r|}\hline \text { Cash } & 5,684 & \\\hline \text { Sales discounts } & 116 & \\\hline \text { Accounts receivable } & & 5,800 \\\hline\end{array}$ C) $\begin{array}{|l|r|r|}\hline \text { Cash } & 5,684 & \\\hline \text { Accounts receivable } & & 5,684 \\\hline\end{array}$ D) $\begin{array}{|l|r|r|}\hline \text { Cash } & 4,000 & \\\hline \text { Accounts receivable } & & 4,000 \\\hline\end{array}$ E) $\begin{array}{|l|r|r|}\hline \text { Cash } & 5,800 & \\\hline \text { Accounts receivable } & & 5,800 \\\hline\end{array}$

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Question 33

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The periodic inventory system requires updating the inventory account only at the end of the period to reflect the quantity and cost of goods available for sale and the cost of goods sold.

What is gross margin ratio? How is it used as an indicator of profitability?

A company's net sales were $676,600, its cost of goods sold was $236,810 and its net income was $33,750. Its gross margin ratio equals:

On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Jepson uses the periodic inventory system and the gross method of accounting for purchases. The journal entry that Jepson will make on September 12 is: A) $\begin{array}{|l|r|r|}\hline \text { Purchases } & 5,800 & \\\hline \text { Accounts payable } & & 5,800 \\\hline\end{array}$ B) $\begin{array}{|l|r|r|}\hline \text { Purchases } & 5,800 & \\\hline \text { Accounts receivable } & & 5,800 \\\hline\end{array}$ C) $\begin{array}{|l|r|r|}\hline \text { Merchandise inventory } & 5,800 & \\\hline \text { Accounts payable } & & 5,800 \\\hline\end{array}$ D) $\begin{array}{|l|r|r|}\hline \text { Accounts payable } & 4,000 & \\\hline \text { Merchandise inventory } & & 4,000 \\\hline\end{array}$ E) $\begin{array}{|l|r|r|}\hline \text { Purchases } & 4,000 & \\\hline \text { Accounts receivable } & & 4,000 \\\hline\end{array}$

Cost of goods sold is also called cost of sales.

A debit to Sales Returns and Allowances and a credit to Accounts Receivable:

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

Which of the following accounts would be closed at the end of the accounting period with a debit?

The following statements are true regarding the operating cycle of a merchandising company except:

If a buyer does not take advantage of a supplier's credit terms of 2/10, n/30, and instead pays the invoice in full at the end of 30 days, by not taking the discount the buyer loses the equivalent of 18% annual interest on the amount of the purchase.

A buyer failed to take advantage of the vendor's credit terms of 2/15, n/45, but instead paid the invoice in full at the end of 45 days. By not taking advantage of the cash discount, the equivalent annual interest lost on the amount of the purchase is:

A merchandising company's operating cycle begins with the purchase of merchandise and ends with the collection of cash from the sale.

In a periodic inventory system, cost of goods sold is recorded as each sale occurs.

Frisco Company's Merchandise Inventory account at year-end has a balance of $62,115, but a physical count reveals that only $61,900 of inventory exists. The adjusting entry to record this $215 of inventory shrinkage is: A) $\begin{array}{|l|r|r|}\hline \text { Cost of goods sold } & 215 & \\\hline \text { Merchandise Inventory } & & 215 \\\hline\end{array}$ B) $\begin{array}{|l|r|r|}\hline \text { Merchandise Inventory } & 215 & \\\hline \text { Inventory shrinkage expense } & & 215 \\\hline\end{array}$ C) $\begin{array}{|l|r|r|}\hline \text { Cost of goods sold } & 215 & \\\hline \text { Purchases discounts } & & 215 \\\hline\end{array}$ D) $\begin{array}{|l|r|r|}\hline \text { Inventory shrinkage expense } & 215 & \\\hline \text { Cost of goods sold } & & 215 \\\hline\end{array}$ $\begin{array}{l}\text { E) }\\\begin{array} { | l | r | r | } \hline \text { Purchases discounts } & 215 & \\\hline \text { Cost of goods sold } & & 215 \\\hline\end{array}\end{array}$

Using the following year-end information for Bauman, LLC, calculate the current ratio and acid-test ratio: $\begin{array}{lr}\text { Cash } & \$ 48,000 \\\text { Short-term investments } & 12,000 \\\text { Accounts receivable } & 45,000 \\\text { Inventory } & 225,000 \\\text { Prepaid expenses } & 12,500 \\\text { Accounts payable } & 86,500 \\\text { Other current payables } & 22,000\end{array}$

Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.

Delivery expense is reported as part of general and administrative expense in the seller's income statement.

On July 1, Ferguson Company sold merchandise in the amount of $5,800 to Tracey Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ferguson uses the perpetual inventory system and the gross method table. On July 5, Tracey returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Ferguson must make on July 5 is: $\begin{array}{l}\text { A) }\\\begin{array} { | l | r | r | } \hline \text { Sales returns and allowances } & 350 & \\\hline \text { Accounts receivable } & & 350 \\\hline\end{array}\end{array}$ B) $\begin{array}{|l|r|r|}\hline \text { Accounts receivable } & 500 & \\\hline \text { Sales returns and allowances } & & 500 \\\hline\end{array}$ C) $\begin{array}{|l|r|r|}\hline \text { Accounts receivable } & 500 & \\\hline \text { Sales returns and allowances } & & 500 \\\hline \text { Cost of goods sold } & 350 & \\\hline \text { Merchandise inventory } & & 350 \\\hline\end{array}$ D) $\begin{array}{|l|r|r|}\hline \text { Sales returns and allowances } & 500 & \\\hline \text { Accounts receivable } & & 500 \\\hline \text { Merchandise inventory } & 350 & \\\hline \text { Cost of goods sold } & & 350 \\\hline\end{array}$ E) $\begin{array}{|l|r|r|}\hline \text { Sales returns and allowances } & 500 & \\\hline \text { Accounts receivable } & & 500 \\\hline\end{array}$