Chapter 5 Merchandising Operations

1. The term "inventory," for a merchandiser, refers to ________.

A) raw materials that are used for production
B) equipment that are used in production process
C) the cost of goods sold
D) goods held for sale to customers

2. Which of the following line items will appear on the income statement of a
merchandiser but not of a service company?
A) Salaries Expense
B) Depreciation Expense
C) Cost of Goods Sold
D) Supplies Inventory

3. Gross profit is calculated as the difference between net sales revenue and
________.
A) purchases
B) cost of goods sold
C) cost of merchandise inventory
D) selling and administrative expenses

4. Best Value Company started its operations on January 1, 2017. It engages in

buying and selling different types of electronic gadgets. The first step in its
operating cycle would be to ________.
A) collect cash from customers
B) sell goods to customers
C) purchase inventory from vendors
D) record the sales in accounts

5. The main expense of a merchandiser is usually ________.

A) cost of goods sold
B) current assets
C) selling and administrative expenses
D) production overhead

6. If goods are sold on terms FOB shipping point, the ________.

A) seller normally pays the transportation costs
B) buyer normally pays the transportation costs
C) buyer and the seller split the transportation costs
D) shipping company bears the transportation cost

7. Under which of the following terms will the buyer be required to pay
transportation costs?
A) FOB destination
B) FOB shipping point
C) freight out
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D) freight in

8. FOB destination refers to a situation where title to goods while in transit

belongs to the ________.
A) buyer
B) seller
C) transport agency
D) insurance agency

9. On January 21, 2016, Bessant Company received merchandise from Mullies

Company. On that date, it found a few of these goods to be damaged. On
January 22, it returned the damaged goods to the seller. Such returns will be
treated as ________ by Bessant.
A) purchase returns
B) sales returns
C) purchase allowances
D) sales allowances

10. On a merchandising balance sheet, Merchandise Inventory is listed as a(n):

A) current asset.
B) current liability.
C) expense.
D) revenue.

11. Which of the following entries would be made to record the purchase of
inventory on account, if a company uses the perpetual inventory system?
A) a debit to Purchases and a credit to Accounts Payable
B) a debit to Accounts Payable and a credit to Purchases
C) a debit to Merchandise Inventory and a credit to Accounts Payable
D) a debit to Accounts Payable and a credit to Merchandise Inventory

12. Which of the following is the correct order of subtotals that appear on a
multi-step income statement?
A) Operating income, Gross profit, Net income
B) Gross profit, Net sales revenue, Net income
C) Net income, Operating income, Net income
D) Gross profit, Operating income, Net income

13. Which of the following is shown on a multi-step income statement but not
on a single-step income statement?
A) gross profit
B) net sales revenue
C) cost of goods sold
D) net income

14. Which of the following is subtracted from net sales revenue to arrive at
gross profit on a multi-step income statement?
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A) cost of goods available for sale
B) cost of goods sold
C) sales discounts and sales returns and allowances
D) operating expenses

15. On a multi-step income statement, the operating expenses are subtracted

from ________ to arrive at operating income.
A) net sales
B) cost of goods sold
C) net profit
D) gross profit

16. What does "2/10" mean, with respect to "credit terms of 2/10, n/30"?
A) A discount of 2 percent will be allowed if the invoice is paid within 10 days of the invoice date.
B) Interest of 2 percent will be charged if the invoice is paid after 10 days from the date on the
invoice.
C) A discount of 10 percent will be allowed if the invoice is paid within two days of the invoice
date.
D) Interest of 10 percent will be charged if invoice is paid after two days.

17. The terms of an invoice are 3/10, n/25. This means that a ________.
A) discount of 10 percent is allowed if the invoice is paid within three days
B) discount of 3 percent is allowed if the invoice is paid within 10 days
C) discount of 25 percent is allowed if the invoice is paid within 10 days
D) discount of 3 percent is allowed if the invoice is paid after 25 days

18. An invoice, with payment terms of 6/10, n/30, was issued on April 28 for $230.00. If the
payment was made on May 12, the amount of payment will be ________. (Round your answer
to the nearest cent.)
A) $230.00
B) $207.00
C) $216.20
D) $224.00

19. A company that uses the perpetual inventory system purchased inventory for $910,000 on
account with terms of 4/7, n/20. Which of the following correctly records the payment made
15 days after the date of invoice?

A)
Cash 910,000
Accounts Payable 910,000

B)
Accounts Payable 910,000
Merchandise Inventory 910,000

C)
Accounts Payable 910,000
Cash 910,000

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D)
Accounts Payable 910,000
Merchandise Inventory 36,400
Cash 873,600

20. Owens Jewelers uses the perpetual inventory system. On April 2, Owens sold merchandise
with a cost of $5,500 for $7,000 to a customer on account with terms of 1/15, n/30. Which of
the following journal entries correctly records the sales revenue?

A)
Sales Revenue 7,000
Accounts Receivable 7,000

B)
Sales Revenue 7,000
Cost of Goods Sold 7,000

C)
Accounts Receivable 5,500
Sales Revenue 5,500

D)
Accounts Receivable 7,000
Sales Revenue 7,000

21. Landon Jewelers uses the perpetual inventory system. On April 2, Landon sold
merchandise with a cost of $3,500 for $8,000 to a customer on account with terms of 1/15,
n/30. The journal entry to record the cost of goods sold would be:

A)
Cost of Goods Sold 3,500
Accounts Receivable 3,500

B)
Sales Revenue 3,500
Cost of Goods Sold 3,500

C)
Cost of Goods Sold 3,500
Merchandise
Inventory 3,500

D)
Merchandise Inventory 3,500
Cost of Goods Sold 3,500
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22. WAXS-D, merchandisers of musical instruments, has provided the following details:

Mar. 5Inventory purchased on account $725,000

Mar. 8Freight in 35,000
Mar. 13
Purchase returns 55,000
Mar. 14
Allowances by vendor 12,000
Payment made to vendor for purchases on
Mar. 20 March 5 ?

Credit terms are: 4/20, n/45, FOB shipping point. Calculate the net cost of inventory purchased
assuming that there are no other inventory-related transactions during the month.
A) $713,000
B) $665,280
C) $658,000
D) $666,680

23. From the following details, calculate net sales revenue.

Sales Revenue $400,000

Cost of Goods Sold 300,000
Operating Expenses 75,000
Sales Discounts 20,000
Sales Returns and
Allowances 8,000
Interest Revenue 6,000

A) $351,000
B) $359,000
C) $372,000
D) $392,000
Explanation: C)
Net Sales Revenue:
Sales Revenue $400,000
Less: Sales Discounts 20,000
Less: Sales Returns and Allowances 8,000
Net Sales Revenue $372,000

24. Up-to-date Merchandisers has the following transactions for the month of July.

Sales Revenue $420,000

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 Cost of Goods Sold 300,000
Operating Expenses 85,000
Sales Discounts 20,000
Sales Returns and
Allowances 18,000
Interest Revenue 5,000

Calculate Gross Profit.

A) $44,000
B) $82,000
C) $100,000
D) $120,000
Explanation: B)
Net Sales Revenue* $382,000
Less: Cost of Goods Sold 300,000
Gross Profit $82,000

*Calculation of Net Sales Revenue

Sales Revenue $420,000
Less: Sales Discounts 20,000
Less: Sales Returns and Allowances18,000
Net Sales Revenue $382,000

25. Fashion Jewelers uses the perpetual inventory system. On April 2, Fashion sold goods
with a cost of $5,500 for $14,000 with terms of 4/15, n/30. On April 4, the customer reported
damaged goods and Fashion granted a $2,000 sales allowance. On April 10, Fashion received
the payment for the sale. Give the journal entry that will be recorded on April 10 by Fashion.

A)
Cash 11,520
Sales Discount 480
Accounts Receivable 12,000
B)
Cash 12,000
Accounts Receivable 12,000
C)
Accounts Receivable 12,000
Sales 12,000
D)
Cash 12,000
Sales Discount 480
Accounts Receivable 11,520

26. Mason Lawn Equipment uses a perpetual inventory system. Journalize the following sales
transactions for this company. Explanations are not required.

Sold $26,000 of merchandise on account, credit terms are 1/10, n/30, FOB destination. Cost of
May 18 goods is $15,600.
May 22 Mason negotiated a $600 allowance on the goods sold on May 18.
May 24 Mason paid freight of $450.
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May 26 Mason receives payment for the customer for the amount due from the May 18 sale.

Answer:
Date Accounts and Explanation Debit Credit

May 18 Account receivable 26000

Cost of goods sold 15,600 26000

May 22 Sales return and allowance 600

Account receivable 600
May 24 Delivery expense 450
Cash 450
May 26 Cash 24,570 25,4000
Sale discount 420

27. An adjusted trial balance of Woods Company as of December 31, 2017 is given below.

1) Prepare a multi-step income statement for the year for the company.
2) Record the closing journal entries
Debit Credit
Cash $15,000
Accounts Receivable 42,000
Merchandise Inventory 60,000
Supplies 15,000
Land 300,000
Accounts Payable $3,000
Notes Payable 25,000
H. Woods, Capital 326,000

H. Woods, Withdrawals 3,000

Sales Revenue 480,000
Sales Returns and
Allowances 6,000
Sales Discounts 9,000
Cost of Goods Sold 240,000
Salaries Expense 15,000
Utilities Expense 69,000
Rent Expense 54,000
Interest Expense 6,000 _______
Totals $834,000 $834,000

Answer:
multi-step income statement

Sales Revenue $15,000

Less: Sales $3,000

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Returns and
Allowances

Less: Sales
Discounts $25,000

Net Sales $787,000

Cost of Goods Sold (COGS) | $134,000 |

| Gross Profit | $653,000| (Net Sales - COGS) |

| Operating Expenses | $90,000 |

| Operating Income | $563,000| (Gross Profit - Operating Expenses) |

| Other Expenses | |
| Salaries Expense | $15,000 |
| Utilities Expense | $6,000 |
| Rent Expense | $69,000 |
| Interest Expense | $6,000 |
| Total Other Expenses | $96,000 |
Net Income | $467,000| (Operating Income – Other Expenses) |

s: Sales Discounts (9,000)

Net Sales Revenue $465,000
Cost of Goods Sold (240,000)
Gross Profit 225,000
Operating Expenses:
Salaries Expense (15,000)
Utilities Expense (69,000)

Answer: Closing entries

Debit: Sales Revenue $15,000

Debit: Sales Returns and Allowances $3,000
Debit: Sales Discounts $25,000

Credit: Income Summary $37,000

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Debit: Income Summary $96,000

Credit: Salaries Expense $15,000

Credit: Utilities Expense $6,000
Credit: Rent Expense $69,000
Credit: Interest Expense $6,000

Debit: Income Summary $37,000

Credit: H. Woods, Capital $37,000