Exam 3: Accounting for Merchandising Businesses

Sullivan Company uses the periodic inventory method. The following balances were drawn from the accounts of Sullivan Company prior to the closing process: The amount of gross margin appearing on the income statement should be:

Which of the following statements is true about period costs?

The Garrett Company uses the perpetual inventory system. Although its inventory records indicated $18,000 in the inventory, a physical count showed only $16,250. Which of the following answers indicates the effect of the necessary adjusting entry?

Middleton Company uses the perpetual inventory method. The company purchased an item of inventory for $130 and sold the item to a customer for $200. What effect will the sale have on the company's inventory account?

Which of the following items is not a product cost?

Aaron Company uses the periodic inventory cost flow method. If Aaron's ending inventory is understated due to an accounting error, what is the effect on net income and the ending balance of retained earnings?

The following are the income statements for Ace and Diamond Companies. What are the net income percentages for the above companies?

A business firm that primarily sells merchandise to other businesses is known as a:

Which of the following is considered a product cost?

Sales discounts do not affect a company's gross margin.

The following are the income statements of the Hancock Company for two consecutive years. Increases in which expenses contributed to the net loss in Year 2?

Indicate whether each of the following statements is true or false. (Assume a perpetual inventory system) _____ a) The purchase of merchandise inventory is recorded as an expense. _____ b) Merchandise inventory is expensed in the period it is sold. _____ c) Merchandise Inventory is an account appearing on the balance sheet. _____ d) Cost of goods available for sale is allotted between cost of goods sold and selling expenses. _____ e) Cost of goods sold is a part of administrative and selling expenses.

Indicate whether each of the following statements is true or false. (Assume a perpetual inventory system.) _____ a) Transportation-out cost is a part of selling and administrative costs. _____ b) When transportation-out cost is incurred, the balance in the inventory account increases. _____ c) When transportation-in cost is incurred, the balance in the inventory account increases. _____ d) When the transportation-out cost is incurred, the balance in the cost of goods sold account increases. _____ e. Transportation-in cost is a part of selling and administrative costs.

The chief advantage of the periodic system is:

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. What effect will the return of merchandise to the supplier have on the accounting equation?"

Becker's Bookstore shipped merchandise FOB destination to a customer. If the transportation costs are paid in cash, which of the following choices reflects how this transaction will affect the company's financial statements?

Net sales is calculated by subtracting cost of goods sold from sales revenue.

Indicate whether each of the following statements is true or false. _____ a) A multistep income statement separates product from period costs. _____ b) A single-step income statement shows the computation of gross margin. _____ c) Interest is normally shown as a separate item on the multistep income statement. _____ d) The treatment of interest on the multistep income statement is consistent with the treatment of interest on the statement of cash flows. _____ e) Gains and losses are included in operating income on a multistep income statement.

A company that purchases merchandise treats a cash discount as a reduction to the cost of merchandise inventory.

The adjusting entry to record the amount of inventory shrinkage affects both the balance sheet and the income statement.