ACCT 504 Week 4, Midterm Exam 4 SOLVED

ACCT 504 Week 4, Midterm Exam 4 SOLVED


1.         Merchandising businesses that sell to retailers are known as:

a.    brokers

b.    companies

c.    wholesalers

d.    service firms.

 

Section "Merchandising operations" - Merchandising businesses that sell inventory to retailers are known as wholesalers.

 

2.           Which of the following companies would be most likely to use a perpetual inventory system?

a.    grain company

b.    supermarket

c.    clothing store

d.    jewellery dealer

 

Section "Inventory systems" – Perpetual inventory systems have traditionally been used by businesses that sell inventories with high unit values.

3.           A merchandiser that sells directly to consumers is a:

                     a.    retailer

                     b.    wholesaler

                     c.    broker

                     d.    service enterprise.

 

Section "Merchandising operations" - Merchandising businesses that sell inventory to consumers are known as retailers.

4.           Two categories of expenses in all merchandising companies are:

                     a.    cost of goods sold and financing expenses

                     b.    operating expenses and sales

                     c.    cost of goods sold and operating expenses

                     d.    sales and cost of goods sold.

 

Section "Merchandising operations" – All merchandising companies will have “cost of goods sold” and “operating expenses” categories.

5.           The primary source of revenue for a wholesaler is:

a.      investment income

b.      service revenue

c.      the sale of merchandise

d.      the sale of plant assets the company owns.

Section "Merchandising operations" – The main source of revenues for merchandising businesses if the sale of inventory (merchandise).

 

6.           The operating cycle of a merchandising company is:

a.    always one year in length

b.    ordinarily longer than that of a service company

c.    about the same as that of a service company

d.    ordinarily shorter than that of a service company.

 

Section "Operating cycles" – The operating cycle of a merchandising business ordinarily is longer than that of a service business.

 

7.            Sales revenue less cost of goods sold is called:

a.    gross profit

b.    net profit (loss)

c.    operating expense

d.    net sales.

 

Section "Merchandising operations" – Sales revenue less cost of goods sold is called gross profit.

8.            After gross profit is calculated, operating expenses are deducted to determine:

a.    gross margin

b.    net profit (loss)

c.    gross profit on sales

d.    sales margin.

 

Section "Merchandising operations" – Operating expenses are deducted from gross profit to determine net profit or loss.

9.            A perpetual inventory system would most likely be used by a:

a.    motor vehicle dealership

b.    hardware store

c.    juice bar

d.    supermarket.

 

Section "Inventory systems" – Perpetual inventory systems have traditionally been used by businesses that sell inventories with high unit values.

 

10.         The primary difference between a periodic and perpetual inventory system is that a periodic system:

a.    keeps a record showing the inventory on hand at all times

                     b.    provides better control over inventories

                     c.    records the cost of the sale on the date the sale is made

                     d.    determines the inventory on hand only at the end of the accounting period.

 

Section "Inventory systems" – In a periodic inventory system, detailed inventory records of the goods on hand are not kept throughout the period.  The cost of goods sold is determined only at the end of the accounting period.

11.         Under a perpetual inventory system, which of the following accounts would be used to record purchases?

                     a.    Sales

                     b.    Invoices

                     c.    Cost of Goods Sold

                     d.    Inventory

 

Section "Recording purchases of inventories" – In a perpetual inventory system, purchases of goods for resale are recorded in the Inventory account.

12.         Under a perpetual inventory system, acquisition of merchandise for resale is debited to:

a.    the Inventory account

b.    the Sales account

c.    the Supplies account

d.    the Cost of Goods Sold account.

 

Section "Recording purchases of inventories" – In a perpetual inventory system, purchases of goods for resale are recorded in the Inventory account.

13.         A company using a perpetual inventory system that returns goods previously purchased on credit would:

a.    debit Accounts Payable and credit Inventory

b.    debit Sales and credit Accounts Payable

c.    debit Cash and credit Accounts Payable

d.    debit Inventory and credit Accounts Payable.

 

Section "Recording purchases of inventories" – In a perpetual inventory system, purchases of goods on credit for resale that are returned would result in a debit to Accounts Payable and a credit to Inventory.

 

14.         Freight costs incurred by a seller on merchandise sold to customers will cause an increase:

a.    in the selling expenses of the buyer

b.    in operating expenses for the seller

c.    to the cost of goods sold of the seller

d.    to a discount received account of the seller.

 

Section "Recording purchases of inventories" – Freight costs incurred by the seller on outgoing inventory are an operating expense to the seller

15.         Hunter Company purchased inventory with an invoice price of $4,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Hunter Company pays within the discount period?

a.    $4,000

b.    $3,920

c.    $3,600

d.    $3,680

 

Section "Recording purchases of inventories" – Credit terms of 2/10, n/30 means that a 2%c ash discount may be taken on the invoice price if payment is made within 10 days of the invoice date; otherwise the invoice price is due 30 days from the invoice date ($4,000 x .98 = $3,920).

16.          Sales revenues are usually considered earned when:

                     a.    cash is received from credit sales

b.    an order is received

c.    goods are transferred from the seller to the buyer

d.    goods are invoiced to the customer.

 

Section "Recording sales of inventories" – Typically, revenue recognition occurs when the goods are transferred from the seller to the buyer.

17.          Sales revenue:

a.    may be recorded before cash is collected

b.    will always equal cash collections in a month

c.    only results from credit sales

d.    is only recorded after cash is collected.

 

Section "Recording sales of inventories" – Typically, revenue recognition occurs when the goods are transferred from the seller to the buyer.

 

 

18.          The journal entry to record a credit sale is:

a.    Cash

            Sales

b.    Cash

            Service Revenue

c.    Accounts Receivable

            Cost of goods sold

d.    Accounts Receivable

            Sales

 

Section "Recording sales of inventories" – To record a credit sale of inventory the journal entry is a debit to Accounts Receivable and a Credit to Sales.

19.         When sales of merchandise are made for cash, the transaction should be recorded by the following entry:

a.      debit Sales, credit Cash

b.      debit Cash, credit Sales

c.      debit Sales, credit Cash Discounts

d.      debit Sales, credit Sales Returns and Allowances.

 

Section "Recording sales of inventories" – To record a credit sale of inventory the journal entry is a debit to Accounts Receivable and a Credit to Sales.

20.          A sales invoice is prepared when goods:

a.    are sold for cash

b.    are sold on credit

c.    sold on credit are returned

d.    are faulty and written-down.

 

Section "Recording sales of inventories" – When goods are sold on credit a sales invoices is prepared.

21.          The Sales Returns and Allowances account is classified as a(n):

a.    asset account

b.    contra asset account

c.    expense account

d.    contra revenue account.

 

Section "Recording sales of inventories" – Sales returns and allowances is a contra revenue account to Sales.

 

22.         As an incentive for customers to pay their accounts promptly, a business may offer its customers:

a.    a cash discount

b.    a trade discount

c.    a sales allowance

d.    a sales return.

 

Section "Recording sales of inventories" – The seller may offer the customer a settlement discount for the prompt payment of the balance due.

23.         The credit terms offered to a customer by a business firm are 2/10, n/30, which means:

a.    the customer must pay the bill within 10 days

b.    the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date

c.    the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date

d.    two sales returns can be made within 10 days of the invoice date and no returns thereafter.

 

Section "Recording purchases of inventories" – Credit terms of 2/10, n/30 means that a 2% cash discount may be taken on the invoice price if payment is made within 10 days of the invoice date; otherwise the invoice price is due 30 days from the invoice date.

24.          Gross profit equals the difference between sales and:

                     a.    operating expenses

                     b.    cost of goods sold

                     c.    net profit

                     d.    cost of goods sold plus operating expenses.

Section "Income Statement Presentation" – Sales minus Cost of Goods Sold equals Gross Profit.

25.          Expenses that are associated with sales are classified as:

                     a.    financial expenses

                     b.    other expenses

                     c.    selling expenses

                     d.    administrative expenses.

 

Section "Income Statement Presentation" – Selling expenses are those associated with making sales.

26.          Interest expense would be classified on an income statement under the heading:

                     a.    Other expenses

                     b.    Financial expenses

                     c.    Selling expenses

                     d.    Cost of goods sold.

 

Section "Income Statement Presentation" – Financial expenses are those associated with the financing of the firm’s operations and debt collection.

Use the following information to answer questions 27 through 28

   Financial information is presented below:

Operating expenses                              $ 45,000

Sales returns and allowances                   13,000

Cash discount                                            6,000

Sales                                                      150,000

Costs of goods sold                                77,000

 

27.          The amount of net sales on the statement of financial performance would be:

a.    $131,000

b.    $137,000

c.    $144,000

d.    $150,000.

 

Section "Income Statement Presentation" – Sales returns and allowance, a contra revenue account, is deducted from sales in the income statement to arrive at net sales ($150,000 - $13,000 = $137,000).

28.          Gross profit would be:

a.    $60,000

b.    $54,000

c.    $76,000

d.    $73,000.

 

Section "Income Statement Presentation" – Cost of goods sold is deducted from net sales to arrive at gross profit ($150,000 - $13,000 - $77,000 = $60,000)

29.         The gross profit ratio is computed by dividing gross profit by:

a.    financial expenses

b.    cost of goods sold

c.    net sales

d.    operating expenses.

 

Section "Evaluating Profitability" – an entity’s gross profit may be expressed as a percentage by dividing the amount of gross profit by net sales; this is referred to as the gross profit ratio.

30.         The operating expenses to sales ratio is computed by dividing:

a.    operating expenses by gross profit

b.    operating expenses by selling expenses

c.    operating expenses by net sales

d.    sales by operating expenses.

 

Section "Evaluating Profitability" – The operating expenses to sales ratio is computed by dividing operating expenses by net sales.

31.         Z sold goods to X on credit at a price of $4,400 including GST. What is the correct accounting entry to record this transaction in Z’s books?

                        a.    Debit Accounts Receivable $4,400, credit Sales $4,400

                        b.    Debit Accounts Receivable $4,000, credit Sales $4,000

                 c.    Debit Accounts Receivable $4,000, debit GST Collections $400; credit Sales $4,400

                        d.    Debit Accounts Receivable $4,400; credit Sales $4,000, credit GST Collections $400

 

Section "Overview of the GST process" – The correct accounting entry is Debit Accounts Receivable $4,400; credit Sales $4,000, credit GST Collections $400.

32.         Under the perpetual inventory system what is the correct entry for the credit purchase of 10 electric guitars at $250 per guitar plus GST of $25 each.

                        a.    Debit Inventory $2,750; credit accounts payable $2,500, credit GST $250

                        b.    Debit Inventory $2,500, debit GST $250; credit Accounts Payable $2,750

                        c.    Debit Inventory $2,750; credit Accounts Payable $2,750

                        d.    Debit Accounts Payable $2,750; credit Inventory $2,500, credit GST $250

 

Section "Overview of the GST process" – The correct accounting entry is Debit Inventory $2,500, debit GST $250; credit Accounts Payable $2,750

33.          Consumers are not required to pay goods and services tax on the following item.

a.    luxury motor vehicles

b.    imported textiles

c.    commercial rents

d.    basic foods

 

Section "Overview of the GST process" – Basic foods are classified as GST-free supplies