CHAPTER 6 :

1. Operating income is: 

A. A measure of profitability after deducting cost of sales from net sales.
B. A measure of profitability after deducting cost of sales and all expenses incurred in operating
the business from net sales.
C. A measure of liquidity after deducting cost of sales from net sales.
D. The equivalent of net sales.

2. Sales discounts and allowances: 

A.  When properly recorded will reduce net profit.
B. When properly recorded will increase net profit.
C. Will not affect net profit.
D. Are always immaterial and need not be recorded.

3. Which account listed below is classified as a contra-revenue account? 

A. Cost of Goods Sold.
B. Gross profit.
C. Sales Discounts.
D. Purchases.

4. The Cost of Goods Sold account is closed by: 

A. Debiting Cost of Goods Sold and crediting Income Summary.
B. Debiting Cost of Goods Sold and crediting Retained Earnings.
C. Debiting Income Summary and crediting Cost of Goods Sold.
D. Debiting Retained Earnings and crediting Cost of Goods Sold.

5. Merchandising companies that are small and do not use a perpetual inventory system may
elect to use: 
A. A physical inventory system.
B. A periodic inventory system.
C. An inventory shrinkage method.
D. An inventory subsidiary ledger system.

6. Which of the following would not tend to make a manufacturer choose a perpetual inventory
system? 
A. Management wants information about quantities of specific products.
B. A low volume of sales transactions and a computerized accounting system.
C. A high volume of sales transactions and a manual accounting system.
D. Items in inventory with high per unit costs.

7. Which of the following factors would suggest the use of a perpetual inventory system? 
A. A small company.
B. A high volume of many different, low-cost items.
C. A desire to minimize record-keeping requirements.
D. Only annual reporting is required.

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8. Sales revenue is recognized in the period in which: 
A. Merchandise is delivered to the customer.
B. The customer orders the merchandise.
C. Cash payment is received by the seller.
D. Purchases are made to replace the merchandise sold.

9. Which of the following appears in the income statement of a merchandising business, but not
in the income statement of a business that renders only services? 
A. Interest revenue.
B. Gross profit.
C. Advertising expense.
D. Income tax expense.

10. Which of the following factors would suggest the use of a periodic inventory system? 
A. A small company.
B. A high volume of sales and a manual accounting system.
C. Neither a small company or a high volume of sales and a manual accounting system.
D. Both a small company and a high volume of sales and a manual accounting system.

11. Gross profit is the difference between: 

A. Net sales and the cost of goods sold.
B. The cost of merchandise purchased and the cost of merchandise sold.
C. Net sales and net income.
D. Net sales and all expenses.

12. The credit term 2/10, n/30 means: 

A. That after 10 days 2% interest is charged.
B. That there is a 10% discount if payment is received within 30 days.
C. That there is a 2% discount if payment is received within 10 days, otherwise, full payment is
due within 30 days.
D. There is a 10% discount if paid immediately and 2% if paid within 30 days.

13. Under the perpetual inventory system which journal entry would indicate a purchase of
merchandise? 
A. Debit, Inventory and credit, Cash.
B. Debit, Purchases and credit, Cash.
C. Debit, Costs of Goods Sold and credit, Inventory.
D. Debit, Inventory and credit, Cost of Goods Sold.

14. The purchasing agent of Superb Service Co. wants to know the dollar amount of inventory
purchased on account during the year from a particular supplier. This information can be found
most easily in Superb Service's: 
A. Inventory subsidiary ledger.
B. Accounts payable controlling account.

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C. Inventory controlling account.
D. Accounts payable subsidiary ledger.
 
15. Which of the following credit terms is the most advantageous to the purchaser of
merchandise? 
A. 1/10, n/30.
B. 5/10, n/60.
C. 2/10, n/30.
D. 5/10, n/20.

16. In a perpetual inventory system: 

A. Merchandising transactions are recorded as they occur.
B. No effort is made to record the Cost of Goods Sold until year-end.
C. Entries are made in the Cost of Goods Sold account whenever merchandise is purchased or
sold.
D. The need for ever taking physical inventory is eliminated.
 
17. Net sales is calculated by: 
A. Subtracting cost of sales from sales.
B. Subtracting sales returns and sales discounts from sales.
C. Subtracting sales returns, cost of sales, and sales discounts from sales.
D. Subtracting gross profit from sales.

18. In a perpetual inventory system, two entries usually are made to record each sales
transaction. The purposes of these entries are best described as follows: 
A. One entry recognizes the sales revenue, and the other recognizes the cost of goods sold.
B. One entry records the purchase of the merchandise, and the other records the sale.
C. One entry records the cost of goods sold, and the other reduces the balance in the Inventory
account.
D. One entry updates the general ledger, and the other updates the subsidiary ledgers.
 
19. In a periodic inventory system, which of the following accounts may be closed by debiting
Cost of Goods Sold? 
A. Sales, Inventory (beginning), and Gross Profit.
B. Inventory (beginning) and Purchases.
C. Purchases and Inventory (ending).
D. Sales, Inventory (beginning), and Cost of Goods Available for Sale.

20. Hicksville's Department Store uses a perpetual inventory system. At year-end, the balance in
the Inventory controlling account is $1,200,000. Assuming that the inventory records have been
maintained properly, a year-end physical inventory: 
A. Is unnecessary.
B. Is needed to establish the ending inventory, as the $1,200,000 balance in the Inventory
controlling account represents the beginning inventory.
C. Probably will indicate more than $1,200,000 in merchandise on hand.
D. Probably will indicate less than $1,200,000 in merchandise on hand.

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21. Jayson Products uses a perpetual inventory system. At year-end, the Inventory account had a
balance of $280,000, but a complete year-end physical inventory indicated goods on hand
costing only $273,000. Jayson should: 
A. Reduce its cost of goods sold by $7,000.
B. Record a $7,000 current liability.
C. Reduce the balance in its Inventory controlling account and inventory subsidiary ledger by
$7,000.
D. Reduce the balance in the Inventory controlling account and record a current liability, both in
the amount of $7,000.

22. The cost of delivering merchandise to the customer is: 

A. Part of cost of goods sold.
B. Used in the calculation of net sales.
C. An operating expense.
D. A reduction of gross profit.

23. In a periodic inventory system, the cost of goods sold is: 

A. Recorded as sales transactions occur.
B. Determined by a computation which is performed at year-end, after the taking of a complete
physical inventory.
C. Equal to the beginning inventory, plus purchases made during the period, less sales revenue
for the period.
D. Determined by subtracting the balance in the Gross Profit account from the amount of net
sales.

24. In a periodic inventory system, the formula used in computing the cost of goods sold may be
summarized as follows: 
A. Beginning inventory + purchases - ending inventory.
B. Beginning inventory + purchases - net sales.
C. Ending inventory + purchases - net sales.
D. Balance in the Cost of Goods Sold account, less the balance in the Inventory Shrinkage
account.

25. Periodic inventory systems are used primarily by: 

A. Small businesses with manual accounting systems.
B. Large manufacturing companies.
C. Small businesses that sell a low volume of high-priced items.
D. Companies that sell a high volume of low-priced items and record sales transactions on point-
of-sale terminals.

26. Which of the following statements about a periodic inventory system is not correct? 
A. These systems are used primarily by small businesses with manual accounting systems.
B. The system does not include an up-to-date inventory ledger.
C. The balance in the Inventory account remains unchanged until the end of the period.
D. The Cost of Goods Sold account is updated as sales transactions occur.

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27. The cost of the transportation of inventory purchased: 
A. Are expensed in the current period.
B. Increases income.
C. Becomes part of the cost of inventory.
D. Reduces the sales price.

28. A company's gross profit rate is computed by dividing: 

A. Net sales by gross profit.
B. Cost of goods sold by gross profit.
C. Gross profit by the cost of goods sold.
D. Gross profit by net sales.
 
29. As a retailer, which of the following percentages is the least attractive to you? 
A. Gross profit of 30%.
B. Cost of goods sold as a percentage of net sales equal to 70%.
C. Gross margin of 30%.
D. Sales markup of 30% over cost.
A sales markup of 30% over cost would be the same as a gross profit of 30%/130% = 23%.

 30. The Sales Returns and Allowances account is debited when: 

A. Merchandise is returned to a supplier.
B. Merchandise is returned by a customer.
C. Payment is made to a supplier within the discount period.
D. An account receivable is collected within the discount period.
 
31. All of the following accounts normally have debit balances except: 
A. Transportation-in.
B. Cost of Goods Sold.
C. Sales Returns & Allowances.
D. Purchase Returns & Allowances.

32. The basic purpose of offering customers cash discounts such as 2/10, n/30 is to: 
A. Increase sales.
B. Reduce net sales.
C. Speed up the collection of accounts receivable.
D. Focus management's attention upon customers that fail to take advantage of all available cash
discounts.

 33. When making sales, the sales taxes received are: 

A. Revenue.
B. A liability.
C. An expense if incurred.
D. A reduction in inventory value.

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34. Emerald Co. uses a perpetual inventory system and records purchases of merchandise at net
cost. The company recently purchased 200 compact discs at an invoice price of $6,000 and terms
of 2/10, n/30. Half of these discs had been mislabeled and were returned immediately to the
supplier. The journal entry to record payment of this invoice after the discount period has expired
will include a: 
A. Debit to Inventory for $3,000.
B. Credit to Cash for $3,000.
C. Debit to an expense account for $60.
D. Credit to Cash for $2,940.

35. Parkside Pool reports net sales of $625,000, gross profit of $275,000, and net income of
$15,000. The company's cost of goods sold is: 
A. $335,000.
B. $350,000.
C. $340,000.
D. $325,000.

36. The following information is available:

   
Calculate the gross profit: 
A. $0.
B. $1,500.
C. $450.
D. $900.

37. During the year 2010, the inventory of Debra's Gift Shop decreased by $50,000. If the
income statement for the year 2010 reported cost of goods sold of $350,000, purchases during
the year must have amounted to: 
A. $400,000.
B. $310,000.
C. $300,000.
D. $350,000.

38. If cost of goods sold is $480,000 and the gross profit rate is 40%, what is the gross profit? 
A. $320,000.
B. $288,000.
C. $480,000.
D. $1,200,000.

39. Sutton Supplies reports net sales of $3,750,000, net income of $375,000, and gross profit of
$900,000. The company's cost of goods sold is: 
A. $1,700,000.
B. $1,900,000.

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C. $3,375,000.
D. $2,850,000.

40. At the beginning of the year, Saratoga Dress Co. had an inventory of $300,000. During the
year, the company purchased merchandise costing $850,000. Net sales for the year totaled
$1,200,000, and the gross profit rate was 45%. The cost of goods sold and the ending inventory,
respectively, were: 
A. $1,150,000 and $660,000.
B. $540,000 and $610,000.
C. $660,000 and $490,000.
D. $1,150,000 and $490,000.

41. On July 1, the inventory of at Barnett Shoes was $60,000. Because of anticipated back-to-
school sales, the owner wants to have an inventory of $105,000 on hand at the beginning of
August. Net sales during July are expected to total $70,000, with a gross profit rate of 45%.
During July, the company should purchase merchandise costing: 
A. $38,500.
B. $143,500.
C. $83,500.
D. $105,000.

42. If Bartner Furniture, Inc. purchased inventory at $1,200 list price and the terms were 3/10
n/30, what would be the value associated with the inventory if payment was made after 20 days? 
A. $1,176.
B. $1,236.
C. $1,164.
D. $1,200.

43. If costs of goods sold is $560,000 and its gross profit rate is 20%, what is the gross profit? 
A. $140,000.
B. $70,000.
C. $120,000.
D. $112,000.

44. Refer to the information above. If Washington uses a perpetual inventory system, the journal
entry to record the purchase on January 18th would include which of the following? 
A. A debit to the Purchases account for $7,000.
B. A debit to the Cost of Goods Sold for $7,000.
C. A credit to Inventory for $7,000.
D. A debit to Inventory for $7,000.

45. Beacon Food Stores purchased canned goods at an invoice price of $4,000 and terms of 2/10,
n/30. Half of the goods had been mislabeled and were returned immediately to the supplier. If
Harvest Food pays the remaining amount of the invoice within the discount period, the amount
paid should be: 

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A. $1,920.
B. $1,960.
C. $3,920.
D. $4,000.

46. Berg Tooling reports net sales of $325,000, gross profit of $175,000, and net income of
$15,000. The company's cost of goods sold is: 
A. $135,000.
B. $150,000.
C. $140,000.
D. $125,000.

47. VanRoy Supplies reports net sales of $1,750,000, net income of $175,000, and gross profit of
$300,000. The company's cost of goods sold is: 
A. $1,400,000.
B. $475,000.
C. $1,575,000.
D. $1,450,000.

Bremmer uses a periodic inventory system and the following information is available:

   
 
48. What is the cost of goods sold? 
A. $96,800.
B. $133,600.
C. $132,200.
D. $230,400.

49. If Bounder Dog Supplies, Inc purchased inventory at $2,200 list price and the terms were
3/10 n/30, what would be the value associated with the inventory if payment was made within 10
days? 
A. $2,268.
B. $2,334.
C. $2,200.
D. $2,134.

50. If cost of goods sold is $360,000 and the gross profit rate is 40%, what is the gross profit? 
A. $240,000.
B. $360,000.
C. $600,000.
D. $900,000.