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Exam 5: Accounting for Merchandising Operations

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Question 41

Multiple Choice

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Expenses that support the overall operations of a business and include the expenses relating to accounting, human resource management, and financial management are called:

A) Cost of goods sold.
B) Selling expenses.
C) Purchasing expenses.
D) General and administrative expenses.
E) Nonoperating activities.

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

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Question 42

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A common rule of thumb is that a company's acid-test ratio should be at least 2 or a company may face near-term liquidity problems.

A) True
B) False

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Question 43

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A company's current assets were $17,980, its quick assets were $11,420 and its current liabilities were $12,190. Its quick ratio equals:

A trade discount is:

If goods are shipped FOB shipping point, the seller does not record revenue from the sale until the goods arrive at their destination because the transaction is not complete until that point.

Cost of goods sold:

When a credit customer returns merchandise to the seller, under a perpetual inventory system, the seller would debit Sales Returns and Allowances and credit Accounts Receivable and also debit Merchandise Inventory and credit Cost of Goods Sold.

A credit memorandum from a seller informs a buyer of the seller's credit to its Accounts Payable account arising from a sales return or allowance.

A single-step income statement includes cost of goods sold as another expense, and shows only one subtotal for total expenses.

Under the ___________ system, each purchase, purchase return and allowance, purchase discount, and transportation-in transaction is recorded in a separate temporary account.

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

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

Sellers always offer a discount to buyers for prompt payment toward purchases made on credit.

Quick assets include cash, inventory, and current receivables.

A company reported the following year-end information: Required: 1. Explain the purpose of the acid-test ratio. 2. Calculate the acid-test ratio for this company. 3. What does the acid-test ratio reveal about this company?

Beginning merchandise inventory plus the net cost of purchases is the merchandise available for sale.

A company purchased $4,000 worth of merchandise. Transportation costs were an additional $350. The company later returned $275 worth of merchandise and paid the invoice within the 2% cash discount period. The total amount paid for this merchandise is:

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

Cost of goods sold represents the cost of buying and preparing merchandise for sale.

Describe the recording process (including costs) for sales of merchandise inventory using a perpetual inventory system.