Question 1

The amount of costs transferred from the Inventory account to the Cost of Goods Sold account during January was:

Accepted Answer

A)  $0. 
B)  $35,000. 
C)  $55,000. 
D)  Some other answer.

Question 2

Mark and Amanda Carter own an appliance store and a restaurant. The appliance store sells merchandise on a 12-month installment plan; the restaurant sells only for cash. (More than one of the following answers may be correct.)

Accepted Answer

A)  The appliance store has a longer operating cycle than the restaurant. 
B)  The appliance store probably uses a perpetual inventory system, whereas the restaurant probably uses a periodic system. 
C)  Both businesses require subsidiary ledgers for accounts receivable and inventory. 
D)  Both businesses probably have subsidiary ledgers for accounts payable.

Question 3

Phillips Co. is an office supply store. The company uses a perpetual inventory system, records purchases at net cost, and records sales revenue at full invoice price.
Record the following transactions in the company's general journal. To conserve space, you may omit the written explanations which normally should accompany the entries.
July 1 Purchased four Lorac copying machines on account from Lorac Corp. Total invoice price was $2,500 per machine ($10,000 total); terms of 2/10, n/30. These machines are intended for resale.
3 Found one of the Lorac copiers to be defective and returned it to Lorac, thus reducing the amount owed.
9 Sold one of the Lorac copiers to Morris Realty. The sales price was $3,500, terms 5/10, n/60.
10 Paid the remaining amount owned to Lorac Corp., less the allowable discount.
19 Received full payment from Morris, less the allowable discount.

Accepted Answer

The answer of Phillips Co. is an office supply store....

Question 4

At the beginning of 2012, Wilson Stores has an inventory of $300,000. Because sales growth was strong during 2012, the owner wants to increase inventory on hand to $450,000 at December 31, 2012. If net sales for 2012 are expected to be $2,600,000, and the gross profit rate is expected to be 35%, compute the cost of the merchandise the owner should expect to purchase during 2012.

Accepted Answer

A)  $750,000. 
B)  $1,240,000. 
C)  $1,690,000. 
D)  $1,840,000.

Question 5

Cumberland, Inc. has applied to its bank for a loan. The bank asks Cumberland's controller about the total amount of the company's accounts receivable. Assuming that all accounting records are up-to-date, the controller can best answer this question by referring to:

Accepted Answer

A)  The Income Statement. 
B)  The Accounts Receivable controlling account. 
C)  The Accounts Receivable subsidiary ledger. 
D)  Last year's Balance Sheet.

Question 6

Under the perpetual inventory system, two entries are required when goods are sold.

Accepted Answer

A) True 
 B)False

Question 7

A company's gross profit rate is computed by dividing:

Accepted Answer

A)  Net sales by gross profit. 
B)  Cost of goods sold by gross profit. 
C)  Gross profit by the cost of goods sold. 
D)  Gross profit by net sales.

Question 8

The two basic approaches to accounting for inventory and the cost of goods sold are the perpetual inventory system and the periodic inventory system. (More than one of the following statements may be correct.)

Accepted Answer

A)  Most large merchandising companies and manufacturing businesses use periodic inventory systems. 
B)  As a practical matter, a grocery store or a large department store could not maintain a perpetual inventory system without the use of point-of-sale terminals. 
C)  In a periodic inventory system the cost of goods sold cannot be determined until a complete physical inventory is taken. 
D)  In a perpetual inventory system, the Cost of Goods Sold account is debited promptly for the cost of merchandise sold.

Question 9

Hicksville's Department Store uses a perpetual inventory system. At year-end, the balance in the Inventory controlling account is $1,200,000. Assuming that the inventory records have been maintained properly, a year-end physical inventory:

Accepted Answer

A)  Is unnecessary. 
B)  Is needed to establish the ending inventory, as the $1,200,000 balance in the Inventory controlling account represents the beginning inventory. 
C)  Probably will indicate more than $1,200,000 in merchandise on hand. 
D)  Probably will indicate less than $1,200,000 in merchandise on hand.

Question 10

When using a perpetual inventory system, the Purchases account is debited when merchandise is acquired.

Accepted Answer

A) True 
 B)False

Question 11

A large company with many different kinds of low-cost items would tend to use a perpetual inventory system.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following factors would suggest the use of a perpetual inventory system?

Accepted Answer

A)  A small company. 
B)  A high volume of many different, low-cost items. 
C)  A desire to minimize record-keeping requirements. 
D)  Only annual reporting is required.

Question 13

Inventory shrinkage is not caused by:

Accepted Answer

A)  Shoplifting. 
B)  Breakage. 
C)  Price reductions by competitors. 
D)  Spoilage.

Question 14

Inventory systems
Indicate whether you would expect each of the following businesses to maintain a perpetual or a periodic inventory system. Explain the reasoning behind your answers:
(a) A jewelry store.
(b) A roadside vegetable stand.

Accepted Answer

The answer of Inventory systems
Indicate whether you would expect each...

Question 15

The operating cycle of a merchandising company consists of (1) purchases of merchandise; (2) sales of the merchandise; and (3) collection of accounts receivable.

Accepted Answer

A) True 
 B)False

Question 16

At the beginning of the year, Saratoga Dress Co. had an inventory of $300,000. During the year, the company purchased merchandise costing $850,000. Net sales for the year totaled $1,200,000, and the gross profit rate was 45%. The cost of goods sold and the ending inventory, respectively, were:

Accepted Answer

A)  $1,150,000 and $660,000. 
B)  $540,000 and $610,000. 
C)  $660,000 and $490,000. 
D)  $1,150,000 and $490,000.

Question 17

Gross profit rates a practical application
Note to instructor: The following exercise requires students to use gross profit rates in a manner not specifically illustrated in the chapter. We view this as an exercise in critical thinking and, as such, it is more challenging than the typical exercise. Part d requires an expository answer. Some instructors may choose to omit part d.
Your store sells computers and software. The average computer sells for $1,350, but the customer buying a computer also buys an average of $750 in software. You earn only 10% gross profit rate on sales of computers, but you make a 40% gross profit rate on software. You currently are selling 150 computers per month.
(a) What is the total amount of your monthly gross profit? $________________
(b) To increase sales, you are thinking about selling computers at cost ($1,215.) This would be the "cheapest price in town," and should attract more customers. You expect each customer who buys a computer to also buy $750 worth of software. Under these assumptions, how many computers must you sell each month in order to earn the same amount of gross profit as you are earning now?
(c) Assume that as a result of reducing the sales price of computers to cost ($1,215), you are able to sell 250 computers each month, and that each customer now buys $850 worth of software. What will be the total amount of your monthly gross profit?
(d) Assume that you achieve the results specified in part c (250 sales transactions per month, including an average of $850 in software). Would you consider the policy of selling computers at cost successful or unsuccessful? Explain specifically why this strategy is working out favorably or unfavorably.

Accepted Answer

The answer of Gross profit rates a practical application
Note to...

Question 18

Purchase Discounts Lost is shown as a reduction of cost of goods sold in the income statement.

Accepted Answer

A) True 
 B)False

Question 19

The total debited to the Inventory account during January was:

Accepted Answer

A)  $0. 
B)  $35,000. 
C)  $55,000. 
D)  Some other answer.

Question 20

Refer to the information above. If Washington uses a perpetual inventory system, the journal entry to record the purchase on January 18th would include which of the following?

Accepted Answer

A)  A debit to the Purchases account for $7,000. 
B)  A debit to the Cost of Goods Sold for $7,000. 
C)  A credit to Inventory for $7,000. 
D)  A debit to Inventory for $7,000.

Exam 6: Merchandising Activities

The amount of costs transferred from the Inventory account to the Cost of Goods Sold account during January was:

Mark and Amanda Carter own an appliance store and a restaurant. The appliance store sells merchandise on a 12-month installment plan; the restaurant sells only for cash. (More than one of the following answers may be correct.)

Cumberland, Inc. has applied to its bank for a loan. The bank asks Cumberland's controller about the total amount of the company's accounts receivable. Assuming that all accounting records are up-to-date, the controller can best answer this question by referring to:

Under the perpetual inventory system, two entries are required when goods are sold.

A company's gross profit rate is computed by dividing:

The two basic approaches to accounting for inventory and the cost of goods sold are the perpetual inventory system and the periodic inventory system. (More than one of the following statements may be correct.)

Hicksville's Department Store uses a perpetual inventory system. At year-end, the balance in the Inventory controlling account is $1,200,000. Assuming that the inventory records have been maintained properly, a year-end physical inventory:

When using a perpetual inventory system, the Purchases account is debited when merchandise is acquired.

A large company with many different kinds of low-cost items would tend to use a perpetual inventory system.

Which of the following factors would suggest the use of a perpetual inventory system?

Inventory shrinkage is not caused by:

Inventory systems Indicate whether you would expect each of the following businesses to maintain a perpetual or a periodic inventory system. Explain the reasoning behind your answers: (a) A jewelry store. (b) A roadside vegetable stand.

The operating cycle of a merchandising company consists of (1) purchases of merchandise; (2) sales of the merchandise; and (3) collection of accounts receivable.

At the beginning of the year, Saratoga Dress Co. had an inventory of $300,000. During the year, the company purchased merchandise costing $850,000. Net sales for the year totaled $1,200,000, and the gross profit rate was 45%. The cost of goods sold and the ending inventory, respectively, were:

Purchase Discounts Lost is shown as a reduction of cost of goods sold in the income statement.

The total debited to the Inventory account during January was:

Refer to the information above. If Washington uses a perpetual inventory system, the journal entry to record the purchase on January 18th would include which of the following?