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The gross margin ratio is defined as gross margin divided by net sales.

A) True
B) False

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Beginning inventory plus the net cost of purchases is the ________.

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merchandis...

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The acid-test ratio is defined as current assets divided by current liabilities.

A) True
B) False

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The adjusting entry to reflect inventory shrinkage is a debit to Income Summary and a credit to Inventory Shrinkage Expense.

A) True
B) False

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On March 12,Klein Company sold merchandise in the amount of $7,800 to Babson Company,with credit terms of 2/10,n/30.The cost of the items sold is $4,500.Klein uses the perpetual inventory system and the gross method of accounting for sales. -On March 15,Babson returns some of the merchandise.The selling price of the merchandise is $600 and the cost of the merchandise returned is $350.Babson pays the invoice on March 20,and takes the appropriate discount.The journal entry that Klein makes on March 20 is:


A)  Cash 7,800 Accounts receivable 7,800\begin{array} { | l | r | r | } \hline \text { Cash } & 7,800 & \\\hline \text { Accounts receivable } & & 7,800 \\\hline\end{array}
B)  Cash 4,500 Accounts receivable 4,500\begin{array} { | l | r | r | } \hline \text { Cash } & 4,500 & \\\hline \text { Accounts receivable } & & 4,500 \\\hline\end{array}
C)  Cash 7,059 Sales discounts 144 Accounts receivable 7,200\begin{array} { | l | r | r | } \hline \text { Cash } & 7,059 \\\hline \text { Sales discounts } & 144 & \\\hline \text { Accounts receivable } & & 7,200 \\\hline\end{array}
D)  Cash 7,056 Accounts receivable 7,056\begin{array} { | l | r | r | } \hline \text { Cash } & 7,056 & \\\hline \text { Accounts receivable } & & 7,056 \\\hline\end{array}
E)  Cash 7,644 Sales discounts 156 Accounts receivable 7,800\begin{array} { | l | r | r | } \hline \text { Cash } & 7,644 & \\\hline \text { Sales discounts } & 156 & \\\hline \text { Accounts receivable } & & 7,800 \\\hline\end{array}

F) B) and C)
G) C) and E)

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Fill in the blanks (a)through (g)for the Morrison Company for each of the income statements for years 1,2,and 3.  Morrison Company Income Statements For the vears ended December 31 Year 2  Year 2  Year 3  Sales $7,500$10,000 (f)  Cost of goods sold  Merchandise inventory (beginning)  (a) 375750 Total cost of merchandise purchases 2,4003,6254,875 Merchandise inventory (ending) (b)750625 Cost of goods sold 2,770( d)5,000 Gross profit (c)6,7505,200 Operating expenses 3,7503,750( g) Net income $980(e)$2,500\begin{array}{c}\text { Morrison Company}\\\text { Income Statements}\\\text { For the vears ended December 31}\\\begin{array}{|l|r|r|r|}\hline &\text { Year 2 } & \text { Year 2 } & \text { Year 3 } \\\hline \text { Sales } & \$ 7,500 & \$ 10,000 & \text { (f) } \\\hline \text { Cost of goods sold } & & & \\\hline \text { Merchandise inventory (beginning) } & \text { (a) } & 375 & 750 \\\hline \text { Total cost of merchandise purchases } & 2,400 & 3,625 & 4,875 \\\hline \text { Merchandise inventory (ending) } & (\mathrm{b}) & 750 & 625 \\\hline \text { Cost of goods sold } & 2,770 & (\mathrm{~d}) & 5,000 \\\hline \text { Gross profit } & (\mathrm{c}) & 6,750 & 5,200 \\\hline \text { Operating expenses } & 3,750 & 3,750 & (\mathrm{~g}) \\\hline \text { Net income } & \$ 980 & (\mathrm{e}) & \$ 2,500 \\\hline\end{array}\end{array}

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(a)2,770 + 375 - 2400 = 745
(b)375,the b...

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Merchandise that customers return to the seller after a sale is referred to as________.

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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.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:


A)  Sales returns and allowances 500 Accounts receivable 500 Merchandise inventory 350 Cost of goods sold 350\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}
B)  Sales returns and allowances 500 Accounts receivable 500\begin{array} { | l | r | r | } \hline \text { Sales returns and allowances } & 500& \\\hline \text { Accounts receivable } & & 500 \\\hline\end{array}
C)  Accounts receivable  500  Sales returns and allowances 500\begin{array} { | l | r | r | } \hline \text { Accounts receivable } & \text { 500 } & \\\hline \text { Sales returns and allowances } & & 500 \\\hline\end{array}
D)  Accounts receivable 500 Sales returns and allowanes 500 Cost of goods sold 350 Merchandise inventory 350\begin{array} { | l | r | r | } \hline \text { Accounts receivable } & 500 & \\\hline \text { Sales returns and allowanes } & & 500 \\\hline \text { Cost of goods sold } & 350 & \\\hline \text { Merchandise inventory } & & 350 \\\hline\end{array}
E)  Sales returns and allowances 350 Accounts receivable 350\begin{array} { | l | r | r | } \hline \text { Sales returns and allowances } & 350 & \\\hline \text { Accounts receivable } & & 350 \\\hline\end{array}

F) D) and E)
G) A) and B)

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A company purchased $1,800 of merchandise on July 5 with terms 2/10,n/30.On July 7,it returned $200 worth of merchandise.On July 28,it paid the full amount due.Assuming the company uses a perpetual inventory system,and records purchases using the gross method,the correct journal entry to record the payment on July 28 is:


A) Debit Merchandise Inventory $1,600; credit Cash $1,600.
B) Debit Cash $1,600; credit Accounts Payable $1,600.
C) Debit Accounts Payable $1,600; credit Merchandise Inventory $32; credit Cash $1,568.
D) Debit Accounts Payable $1,800; credit Cash $1,800.
E) Debit Accounts Payable $1,600; credit Cash $1,600.

F) All of the above
G) None of the above

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Vincent Company purchased merchandise from Liu Company with an invoice price of $300,000 and credit terms of 2/10,n/30.Liu Company's cost for the merchandise was $200,000.Vincent Company paid within the discount period.Assume that both buyer and seller use a perpetual inventory system and the gross method of recording invoices. 1.Prepare entries that Vincent should record for (a)the purchase and (b)the cash payment. 2.Prepare entries that Liu should record for (a)the sale and (b)the cash collection. 3.Assume that the buyer borrowed enough cash to pay the balance on the last day of the discount period at an annual interest rate of 9% and paid it back on the last day of the credit period.Compute how much the buyer saved by following this strategy.(Assume a 365-day year and round dollar amounts to the nearest cent.)

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blured image 3.By borrowing the money on the last da...

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How do closing entries for a merchandising company that uses the perpetual inventory system differ from the closing entries for a service company?

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Closing entries are similar for service ...

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On February 3,Smart Company sold merchandise in the amount of $5,800 to Truman Company,with credit terms of 2/10,n/30.The cost of the items sold is $4,000.Smart uses the perpetual inventory system and the gross method.Truman pays the invoice on February 8,and takes the appropriate discount.The journal entry that Smart makes on February 8 is:


A)  Cash 5,800 Accounts receivable 5,800\begin{array} { | l | r | r | } \hline \text { Cash } & 5,800 & \\\hline \text { Accounts receivable } & & 5,800 \\\hline\end{array}
B)  Cash 4,000 Accounts receivable 4,000\begin{array} { | l | r | r | } \hline \text { Cash } & 4,000 & \\\hline \text { Accounts receivable } & & 4,000 \\\hline\end{array}
C)  Cash 3,920 Sales discounts 80 Accounts receivable 4,000\begin{array} { | l | r | l | } \hline \text { Cash } & 3,920 & \\\hline \text { Sales discounts } & 80 & \\\hline \text { Accounts receivable } & & 4,000 \\\hline\end{array}
D)  Cash 5,684 Accounts receivable 5,684\begin{array} { | l | r | r | } \hline \text { Cash } & 5,684 & \\\hline \text { Accounts receivable } & & 5,684 \\\hline\end{array}
E)  Cash 5,684 Sales discounts 116 Accounts receivable 5,806\begin{array} { | l | r | r | } \hline \text { Cash } & 5,684 & \\\hline \text { Sales discounts } & 116 & \\\hline \text { Accounts receivable } & & 5,806 \\\hline\end{array}

F) A) and E)
G) A) and D)

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Sales Discounts and Sales Returns and Allowances are contra revenue accounts that are debited to close the accounts during the closing process.

A) True
B) False

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Under a periodic inventory system,purchases,purchases returns and allowances,purchase discounts,and transportation in transactions are recorded in the Merchandise Inventory account.

A) True
B) False

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The gross margin ratio:


A) Is also called the net profit ratio.
B) Indicates the percent of sales revenue remaining after covering the cost of the goods sold.
C) Is also called the profit margin.
D) Is a measure of liquidity and should exceed 2.0 to be acceptable.
E) Should be greater than 1 for merchandising companies.

F) All of the above
G) A) and D)

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Netherland Corporation has the following unadjusted balances: Accounts Receivable,$80,000 (debit) ,and Allowance for Sales Discounts $300 (credit) .Of the receivables,$50,000 of them are within the 2% discount period,and Netherland expects buyers to take $1,000 in future-period discounts ($50,000 × 2%) arising from this period's sales.The adjusting entry to estimate sales discounts is (are) :


A)  Accounts Receivable 80,000 Sales 80,00C\begin{array} { | l | r | l | } \hline \text { Accounts Receivable } & 80,000 & \\\hline \text { Sales } & & 80,00 \mathrm { C } \\\hline\end{array}
B)  Sales Discounts 50,000 Sales 50,000 Cost of Goods Sold 1,000 Inventory Returns Estimated 1,000\begin{array} { | l | r | r | } \hline \text { Sales Discounts } & 50,000 & \\\hline \text { Sales } & & 50,000 \\\hline \text { Cost of Goods Sold } & 1,000 & \\\hline \text { Inventory Returns Estimated } & & 1,000 \\\hline\end{array}
C)  Sales Discounts 700 Allowance for Sales Discounts 700\begin{array} { | l | r | r | } \hline \text { Sales Discounts } & 700 & \\\hline \text { Allowance for Sales Discounts } & & 700 \\\hline\end{array}
D)  Sales Discounts 1,000 Accounts receivable 1,000\begin{array} { | l | r | r | } \hline \text { Sales Discounts } & 1,000 & \\\hline \text { Accounts receivable } & & 1,000 \\\hline\end{array}
E)  Sales Discounts 1,000 Allowance for Sales Discounts 1,000\begin{array} { | l | r | l | } \hline \text { Sales Discounts } & 1,000 & \\\hline \text { Allowance for Sales Discounts } & & 1,000 \\\hline\end{array}

F) B) and E)
G) All of the above

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Sales returns:


A) Refer to merchandise that customers return to the seller after the sale.
B) Refer to reductions in the selling price of merchandise sold to customers.
C) Represent cash discounts.
D) Represent trade discounts.
E) Are not recorded under the perpetual inventory system until the end of each accounting period.

F) D) and E)
G) B) and C)

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


A) The operating cycle begins with the purchase of merchandise.
B) The operating cycle is shortened by credit sales.
C) The operating cycle ends with the collection of cash from the sale of merchandise.
D) The operating cycle can vary in length among different merchandising companies.
E) The operating cycle sometimes involves accounts receivable.

F) A) and D)
G) B) and E)

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Operating expenses are classified into two categories: selling expenses and cost of goods sold.

A) True
B) False

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A company had net sales of $545,000 and cost of goods sold of $345,000.Its gross margin equals $890,000.

A) True
B) False

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