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Write 'T' if the statement is true and 'F' if the statement is false.
1) A merchandiser earns net income by buying and selling merchandise. Answer: True False
2) A service company earns net income by buying and selling merchandise. Answer: True False
3) A wholesaler is a company that buys products from manufacturers and sells them to consumers. Answer: True False
4) A retailer is a middleman that buys products from manufacturers and sells them to wholesalers. Answer: True False
5) Gross profit is also called gross margin.
Answer: True False
6) Cost of goods sold represents the cost of buying and preparing merchandise for sale.
Answer: True False
7) Y-Mart had sales of $350,000. Its cost of goods sold was $200,000. Its gross profit was $550,000. Answer: True False
8) Y-Mart had net sales of $645,000. Its cost of goods was $445,000. Its gross margin was $200,000. Answer: True False
9) Z-Mart had a gross profit of $340,000 based on sales of $700,000. Its cost of goods sold was $350,000.
Answer: True False
10) Cost of goods sold is reported on both the income statement and the balance sheet. Answer: True False
11) Merchandise inventory refers to products a company owns for purposes of selling to customers. Answer: True False
12) A merchandising company's operating cycle begins with the sale of merchandise and ends with the collection of cash from the sale.
Answer: True False
13) Companies try to lengthen their operating cycles to increase net income. Answer: True False
14) Merchandise inventory is included in the Plant and Equipment section of the balance sheet. Answer: True False
15) Merchandise inventory includes merchandise and office supplies.
Answer: True False
16) Assets tied up in inventory are not productive assets.
Answer: True False
17) A company's cost of merchandise available for sale consists of beginning inventory plus the net cost of purchases minus ending inventory.
Answer: True False
18) A periodic inventory system requires updating the inventory account at the beginning of an accounting period.
Answer: True False
19) A perpetual inventory system gives a continuous record of the amount of inventory on hand.
Answer: True False
20) In a perpetual inventory system, the cost of inventory purchased is recorded in the Purchases account.
Answer: True False
21) In a perpetual inventory system, the net cost of purchases is accumulated in the Inventory account.
Answer: True False
22) Periodic inventory systems were historically used by companies that sold large quantities of low-value items.
Answer: True False
23) In a periodic inventory system, Purchases is a temporary account.
Answer: True False
24) In a periodic inventory system, cost of goods sold is not recorded as each sale occurs.
Answer: True False
25) The purchaser usually records a purchase return by a credit memorandum.
Answer: True False
26) Trade discounts are entered into the accounting system.
Answer: True False
27) Credit terms are the listing of the amounts and timing of payments between a buyer and a seller.
Answer: True False
28) The terms 2/10, n/30 means that the seller offers the purchaser a 2% cash discount if the amount is paid in full within 10 days. Otherwise, the full amount is due in 30 days.
Answer: True False
29) Sellers offer a purchase discount to buyers for prompt payment for purchases on account.
Answer: True False
30) Z-Mart did not take advantage of a supplier's offer of 2/10, n/30, and paid the invoice at the end of the month. By not taking the discount Z-Mart lost the equivalent of 18% annual interest on the amount of the purchase.
Answer: True False
31) FOB shipping or FOB factory means ownership of goods transfers to the buyer at the buyer's place of business.
Answer: True False
32) Each sales transaction for sellers using a perpetual inventory system involves recognizing revenue and cost of goods sold.
Answer: True False
33) A credit memorandum informs a customer of a credit to its Accounts Payable account from a sales return or allowance.
Answer: True False
34) A debit to Sales Returns and Allowances and a credit to Accounts Receivable mean that a customer may have returned merchandise.
Answer: True False
35) A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20, and a credit to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for early payment.
Answer: True False
36) Sales of $350,000 and net sales of $323,000 may reflect sales discounts of $27,000.
Answer: True False
37) A sales discount of 1/15 means the seller will receive 85% of the selling price.
Answer: True False
38) Transportation-in increases cost of goods purchased.
Answer: True False
39) The Merchandise Inventory account balance at the end of one period is the amount of beginning inventory in the next period.
Answer: True False
40) A perpetual inventory system is able to directly measure shrinkage.
Answer: True False
41) The adjustment to reflect shrinkage is a debit to Income Summary and a credit to Shrinkage Expense.
Answer: True False
42) The amount of gross profit for a merchandising business will be the same under both the accrual basis and the cash basis of accounting.
Answer: True False
43) Merchandising sales and costs reported on the income statement usually differ from cash receipts and payments for the period.
Answer: True False
44) A classified multiple-step income statement is a format that shows intermediate totals between sales and net income and detailed calculations of net sales and cost of goods sold.
Answer: True False
45) Operating expenses are classified into two categories: selling expenses and cost of goods sold.
Answer: True False
46) Generally accepted accounting principles require companies to use a specific format for financial statements.
Answer: True False
47) The cost of goods sold section of a multiple-step income statement includes beginning and ending inventories, goods available for sale and operating expenses.
Answer: True False
48) The periodic inventory system is superior to the perpetual inventory system in preventing shrinkage.
Answer: True False
49) Businesses normally get a full credit for the goods and services tax (GST) and/or Harmonized Sales Tax (HST) that they have paid.
Answer: True False
50) Businesses normally get a full credit for the provincial sales tax (PST) they have paid.
Answer: True False
51) Businesses normally get a full credit for both the goods and services tax (GST) and/or Harmonized Sales Tax (HST), and the provincial sales tax (PST) that they have paid.
Answer: True False
52) For a business, goods and services tax (GST) and/or Harmonized Sales Tax (HST) paid is included in the amount recorded as an asset or an expense when a purchase is made.
Answer: True False
53) For a business, provincial sales tax (PST) paid is included in the amount recorded as an asset or an expense when a purchase is made.
Answer: True False
54) Some businesses use only one account to keep track of the amount of goods and services tax (GST) and/or Harmonized Sales Tax (HST) owed or owing.
Answer: True False
55) When a single goods and services tax (GST) or Harmonized Sales Tax (HST) account is used, a credit balance in the account means that the government owes money to the business.
Answer: True False
56) When a single goods and services tax (GST) or Harmonized Sales Tax (HST) account is used, a debit balance in the account means the government owes money to the business.
Answer: True False
57) Provincial sales tax (PST) is normally calculated on the original purchase price plus the goods and services tax (GST) or Harmonized Sales Tax (HST).
Answer: True False
58) Goods and services tax (GST) or Harmonized Sales Tax (HST) is calculated on the original purchase price plus the provincial sales tax (PST).
Answer: True False
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
59) A merchandising company:
A) Earns net income from buying and selling merchandise.
B) Buys products from manufacturers and sells to retailers.
C) Reports cost of goods sold on the income statement.
D) Buys products from manufacturers and sells them to consumers.
E) All of these answers are correct.
Answer: E
60) Merchandisers:
A) Receive fees in exchange for services.
B) Earn net income from commissions.
C) Do not report gross profit.
D) Earn net income from buying and selling merchandise.
E) Earn net income from fares.
Answer: D