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Exam 5: Accounting for Merchandising Operations

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Question 31

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The gross margin ratio:

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

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Question 32

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The following statements regarding merchandise inventory are true except:

A) Merchandise inventory refers to products a company owns and intends to sell.
B) Merchandise inventory appears on the balance sheet of a service company.
C) Purchasing merchandise inventory is part of the operating cycle for a business.
D) Merchandise inventory is reported on the balance sheet as a current asset.
E) Merchandise inventory may include the costs of freight in and making them ready for sale.

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Question 33

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When preparing an unadjusted trial balance using a periodic inventory system, the amount shown for Merchandise Inventory is:

Beginning inventory plus net purchases equals merchandise available for sale.

Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. - On August 26, it paid the full amount due. The correct journal entry to record the merchandise return on August 11 is:

Prepare journal entries to record the following merchandising transactions of Margin Company, which applies the perpetual inventory system and the gross method of recording invoices. Margin Company offers all of its credit customers credit terms of 2/10, n/30. $\begin{array}{|l|l|}\hline \text { May 3 } & \begin{array}{l}\text { Sold merchandise to Sting Company for } \$ 5,600, \mathrm{FOB} \text { shipping point, } \\\text { invoice dated May 4. The merchandise had cost } \$ 3,000 .\end{array} \\\hline \text { May 8 } & \begin{array}{l}\text { Sold merchandise to Skeet Company for } \$ 3,300, \mathrm{FOB} \text { shipping point, } \\\text { invoice dated May 8. The merchandise had a cost of } \$ 1,500 .\end{array} \\\hline \text { May 13 } & \text { Received the balance due from Sting Company within the discount period. } \\\hline \text { May 14 } & \begin{array}{l}\text { Issued a credit } \$ 300 \text { credit memorandum to Skeet Company for an } \\\text { allowance on defective merchandise. }\end{array} \\\hline \text { May 17 } & \text { Received the balance due from Skeet Company within the discount period. } \\\hline\end{array}$

Purchase discounts are the same as trade discounts.

A company has net sales of $752,000 and cost of goods sold of $543,000. Its net income is $17,530. The company's gross margin and operating expenses, respectively, are:

A debit to Sales Returns and Allowances and a credit to Accounts Receivable:

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

Describe the difference between the periodic and perpetual inventory accounting systems.

Cash sales shorten the operating cycle for a merchandiser; credit sales lengthen operating cycles.

Sales Discounts is added to the Sales account when computing a company's net sales.

The credit terms 2/10, n/30 are interpreted as:

Products that a company owns and intends to sell are called ________.

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 merchandise return on July 7 is:

The gross method requires a period-end adjusting entry to estimate future sales discounts.

________ inventory system updates the accounting record for inventory only at the end of an accounting period.

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.

Distinguish between selling expenses and general and administrative expenses.