TRUE-FALSE STATEMENTS

8. Closing entries are not needed if the business plans to continue operating in the future and
issue financial statements each year.

9. The dividends account is closed to the Income Summary account in order to properly
determine net income (or loss) for the period.

10. After closing entries have been journalized and posted, all temporary accounts in the ledger
should have zero balances.

11. Closing revenue and expense accounts to the Income Summary account is an optional
bookkeeping procedure.

12. Closing the dividends account to Retained Earnings is not necessary if net income is
greater than dividends during the period.

13. The dividends account is a permanent account whose balance is carried forward to the next
accounting period.

14. Closing entries are journalized after adjusting entries have been journalized.

15. The amounts appearing on an income statement should agree with the amounts appearing
on the post-closing trial balance.

17. A business entity has only one accounting cycle over its economic existence.

18. The accounting cycle begins at the start of a new accounting period.

19. Both correcting entries and adjusting entries always affect at least one balance sheet
account and one income statement account.

20. Correcting entries are made any time an error is discovered even though it may not be at
the end of an accounting period.

21. An incorrect debit to Accounts Receivable instead of the correct account Notes Receivable
does not require a correcting entry because total assets will not be misstated.
 22. In a corporation, Retained Earnings is a part of owners' equity.

23. A company's operating cycle and fiscal year are usually the same length of time.

24. Cash and office supplies are both classified as current assets.

25. Long-term investments would appear in the property, plant, and equipment section of the
balance sheet.

26. A liability is classified as a current liability if the company is to pay it within the forthcoming
year.

27. A company's liquidity is concerned with the relationship between long-term investments and
long-term debt.

28. Current assets are customarily the first items listed on a classified balance sheet.

29. The operating cycle of a company is determined by the number of years the company has
been operating.

30. Adjusting entries are an optional bookkeeping procedure.

Additional True-False Questions

32. To close net income to Retained Earnings, Income Summary is debited and Retained
Earnings is credited.

33. In one closing entry, Dividends is credited and Income Summary is debited.

34. The post-closing trial balance will contain only stockholders’ equity statement accounts and
balance sheet accounts.

35. The operating cycle of a company is the average time required to collect the receivables
resulting from producing revenues.

36. Current assets are listed in the order of liquidity.

37. Current liabilities are obligations that the company is to pay within the coming year.
Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 7. T 13. F 19. F 25. F 31. T 37. T
2. T 8. F 14. T 20. T 26. T 32. T
3. T 9. F 15. F 21. F 27. F 33. F
4. F 10. T 16. F 22. T 28. T 34. F
5. F 11. F 17. F 23. F 29. F 35. F
6. F 12. F 18. T 24. T 30. F 36. T

MULTIPLE CHOICE QUESTIONS

41. After the adjusting entries are journalized and posted to the accounts in the general ledger,
the balance of each account should agree with the balance shown on the
a. adjusted trial balance.
b. post-closing trial balance.
c. the general journal.
d. adjustments columns of the worksheet.

56. Closing entries are necessary for

a. permanent accounts only.
b. temporary accounts only.
c. both permanent and temporary accounts.
d. permanent or real accounts only.

57. Each of the following accounts is closed to Income Summary except

a. Expenses.
b. Dividends.
c. Revenues.
d. All of these are closed to Income Summary.

58. Closing entries are made

a. in order to terminate the business as an operating entity.
 b. so that all assets, liabilities, and Stockholders' equity accounts will have zero balances
when the next accounting period starts.
c. in order to transfer net income (or loss) and dividends to the retained earnings account.
d. so that financial statements can be prepared.

60. The income summary account

a. is a permanent account.
b. appears on the balance sheet.
c. appears on the income statement.
d. is a temporary account.

61. If Income Summary has a credit balance after revenues and expenses have been closed
into it, the closing entry for Income Summary will include a
a. debit to the retained earnings account.
b. debit to the owner’s dividends account.
c. credit to the retained earnings account.
d. credit to the owner’s dividends account.

62. Closing entries are journalized and posted

a. before the financial statements are prepared.
b. after the financial statements are prepared.
c. at management's discretion.
d. at the end of each interim accounting period.

63. Closing entries

a. are prepared before the financial statements.
b. reduce the number of permanent accounts.
c. cause the revenue and expense accounts to have zero balances.
d. summarize the activity in every account.

64. Which of the following is a true statement about closing the books of a corporation?
a. Expenses are closed to the Expense Summary account.
b. Only revenues are closed to the Income Summary account.
c. Revenues and expenses are closed to the Income Summary account.
d. Revenues, expenses, and the dividends account are closed to the Income Summary
account.

66. In order to close the dividends account, the

 a. income summary account should be debited.
b. income summary account should be credited.
c. retained earnings account should be credited.
d. retained earnings account should be debited.

67. In preparing closing entries

a. each revenue account will be credited.
b. each expense account will be credited.
c. the retained earnings account will be debited if there is net income for the period.
d. the dividends account will be debited.

69. The closing entry process consists of closing

a. all asset and liability accounts.
b. out the retained earnings account.
c. all permanent accounts.
d. all temporary accounts.

70. The final closing entry to be journalized is typically the entry that closes the
a. revenue accounts.
b. dividends account.
c. retained earnings account.
d. expense accounts.

73. The balance in the income summary account before it is closed will be equal to
a. the net income or loss on the income statement.
b. the beginning balance in the retained earnings account.
c. the ending balance in the retained earnings account.
d. zero.

74. After closing entries are posted, the balance in the retained earnings account in the ledger
will be equal to
a. the beginning retained earnings reported on the retained earnings statement.
b. the amount of retained earnings reported on the balance sheet.
c. zero.
d. the net income for the period.

88. All of the following statements about the post-closing trial balance are correct except it
a. shows that the accounting equation is in balance.
 b. provides evidence that the journalizing and posting of closing entries have been
properly completed.
c. contains only permanent accounts.
d. proves that all transactions have been recorded.

89. A post-closing trial balance will show

a. only permanent account balances.
b. only temporary account balances.
c. zero balances for all accounts.
d. the amount of net income (or loss) for the period.

90. A post-closing trial balance should be prepared

a. before closing entries are posted to the ledger accounts.
b. after closing entries are posted to the ledger accounts.
c. before adjusting entries are posted to the ledger accounts.
d. only if an error in the accounts is detected.

91. A post-closing trial balance will show

a. zero balances for all accounts.
b. zero balances for balance sheet accounts.
c. only balance sheet accounts.
d. only income statement accounts.

92. The purpose of the post-closing trial balance is to

a. prove that no mistakes were made.
b. prove the equality of the balance sheet account balances that are carried forward into
the next accounting period.
c. prove the equality of the income statement account balances that are carried forward
into the next accounting period.
d. list all the balance sheet accounts in alphabetical order for easy reference.

93. The balances that appear on the post-closing trial balance will match the
a. income statement account balances after adjustments.
b. balance sheet account balances after closing entries.
c. income statement account balances after closing entries.
d. balance sheet account balances after adjustments.
94. Which account listed below would be double ruled in the ledger as part of the closing
process?
a. Cash
b. Retained Earnings
c. Dividends
d. Accumulated Depreciation

95. A double rule applied to accounts in the ledger during the closing process implies that
a. the account is an income statement account.
b. the account is a balance sheet account.
c. the account balance is not zero.
d. a mistake has been made, since double ruling is prescribed.

96. The heading for a post-closing trial balance has a date line that is similar to the one found on
a. a balance sheet.
b. an income statement.
c. an stockholders' equity statement.
d. the worksheet.

97. Which one of the following is usually prepared only at the end of a company's annual
accounting period?
a. Preparing financial statements
b. Journalizing and posting adjusting entries
c. Journalizing and posting closing entries
d. Preparing an adjusted trial balance

98. The step in the accounting cycle that is performed on a periodic basis (i.e., monthly,
quarterly) is
a. analyzing transactions.
b. journalizing and posting adjusting entries.
c. preparing a post-closing trial balance.
d. posting to ledger accounts.
99. Which one of the following is an optional step in the accounting cycle of a business
enterprise?
a. Analyze business transactions
b. Prepare a worksheet
c. Prepare a trial balance
d. Post to the ledger accounts
100. The final step in the accounting cycle is to prepare
a. closing entries.
b. financial statements.
c. a post-closing trial balance.
d. adjusting entries.

101. Which of the following steps in the accounting cycle would not generally be performed
daily?
a. Journalize transactions
b. Post to ledger accounts
c. Prepare adjusting entries
d. Analyze business transactions

102. Which of the following steps in the accounting cycle may be performed more frequently
than annually?
a. Prepare a post-closing trial balance
b. Journalize closing entries
c. Post closing entries
d. Prepare a trial balance

103. Which of the following depicts the proper sequence of steps in the accounting cycle?
a. Journalize the transactions, analyze business transactions, prepare a trial balance
b. Prepare a trial balance, prepare financial statements, prepare adjusting entries
c. Prepare a trial balance, prepare adjusting entries, prepare financial statements
d. Prepare a trial balance, post to ledger accounts, post adjusting entries

104. The two optional steps in the accounting cycle are preparing
a. a post-closing trial balance and reversing entries.
b. a worksheet and post-closing trial balances.
c. reversing entries and a worksheet.
d. an adjusted trial balance and a post-closing trial balance.

105. The first required step in the accounting cycle is

a. reversing entries.
b. journalizing transactions in the book of original entry.
c. analyzing transactions.
d. posting transactions.
106. Correcting entries
a. always affect at least one balance sheet account and one income statement account.
b. affect income statement accounts only.
c. affect balance sheet accounts only.
d. may involve any combination of accounts in need of correction.

107. Speedy Bike Company received a $940 check from a customer for the balance due. The
transaction was erroneously recorded as a debit to Cash $490 and a credit to Service
Revenue $490. The correcting entry is
a. debit Cash, $940; credit Accounts Receivable, $940.
b. debit Cash, $450 and Accounts Receivable, $490; credit Service Revenue, $940.
c. debit Cash, $450 and Service Revenue, $490; credit Accounts Receivable, $940.
d. debit Accounts Receivable, $940; credit Cash, $450 and Service Revenue, $490.

108. If errors occur in the recording process, they

a. should be corrected as adjustments at the end of the period.
b. should be corrected as soon as they are discovered.
c. should be corrected when preparing closing entries.
d. cannot be corrected until the next accounting period.

109. A correcting entry

a. must involve one balance sheet account and one income statement account.
b. is another name for a closing entry.
c. may involve any combination of accounts.
d. is a required step in the accounting cycle.

110. An unacceptable way to make a correcting entry is to

a. reverse the incorrect entry.
b. erase the incorrect entry.
c. compare the incorrect entry with the correct entry and make a correcting entry to correct
the accounts.
d. correct it immediately upon discovery.

111. Cole Company paid the weekly payroll on January 2 by debiting Wages Expense for
$45,000. The accountant preparing the payroll entry overlooked the fact that Wages
Expense of $27,000 had been accrued at year end on December 31. The correcting entry
is
 a. Wages Payable.................................................................... 27,000
Cash......................................................................... 27,000
b. Cash.................................................................................... 18,000
Wages Expense....................................................... 18,000
c. Wages Payable.................................................................... 27,000
Wages Expense....................................................... 27,000
d. Cash.................................................................................... 27,000
Wages Expense....................................................... 27,000

112. Tyler Company paid $530 on account to a creditor. The transaction was erroneously
recorded as a debit to Cash of $350 and a credit to Accounts Receivable, $350. The
correcting entry is
a. Accounts Payable................................................................ 530
Cash......................................................................... 530
b. Accounts Receivable........................................................... 350
Cash......................................................................... 350
c. Accounts Receivable........................................................... 350
Accounts Payable.................................................... 350
d. Accounts Receivable........................................................... 350
Accounts Payable................................................................ 530
Cash......................................................................... 880
113. Elko Inc. collected $830 of fees in advance. The Company erroneously debited Cash for
$380 and credited Accounts Receivable for $380. The correcting entry is
a. Cash.................................................................................... 380
Accounts Receivable........................................................... 450
Unearned Revenue.................................................. 830
b. Cash.................................................................................... 830
Service Revenue...................................................... 830
c. Cash.................................................................................... 450
Accounts Receivable........................................................... 380
Unearned Revenue.................................................. 830
d. Cash.................................................................................... 450
Accounts Receivable................................................ 450

114. All of the following are property, plant, and equipment except
a. supplies.
b. machinery.
c. land.
 d. buildings.

115. The first item listed under current liabilities is usually

a. accounts payable.
b. notes payable.
c. salaries payable.
d. taxes payable.

116. Office Equipment is classified in the balance sheet as

a. a current asset.
b. property, plant, and equipment.
c. an intangible asset.
d. a long-term investment.

117. A current asset is

a. the last asset purchased by a business.
b. an asset which is currently being used to produce a product or service.
c. usually found as a separate classification in the income statement.
d. an asset that a company expects to convert to cash or use up within one year.

118. An intangible asset

a. does not have physical substance, yet often is very valuable.
b. is worthless because it has no physical substance.
c. is converted into a tangible asset during the operating cycle.
d. cannot be classified on the balance sheet because it lacks physical substance.

119. Liabilities are generally classified on a balance sheet as

a. small liabilities and large liabilities.
b. present liabilities and future liabilities.
c. tangible liabilities and intangible liabilities.
d. current liabilities and long-term liabilities.

120. Which of the following would not be classified a long-term liability?

a. Current maturities of long-term debt
b. Bonds payable
c. Mortgage payable
d. Lease liabilities
121. Which of the following liabilities are not related to the operating cycle?
a. Wages payable
b. Accounts payable
c. Utilities payable
d. Bonds payable

122. Intangible assets include each of the following except

a. copyrights.
b. goodwill.
c. land improvements.
d. patents.

123. It is not true that current assets are assets that a company expects to
a. realize in cash within one year.
b. sell within one year.
c. use up within one year.
d. acquire within one year.

124. The operating cycle of a company is the average time that is required to go from cash to
a. sales in producing revenues.
b. cash in producing revenues.
c. inventory in producing revenues.
d. accounts receivable in producing revenues.

125. On a classified balance sheet, current assets are customarily listed

a. in alphabetical order.
b. with the largest dollar amounts first.
c. in the order of liquidity.
d. in the order of acquisition.

126. Intangible assets are

a. listed under current assets on the balance sheet.
b. not listed on the balance sheet because they do not have physical substance.
c. noncurrent resources.
d. listed as a long-term investment on the balance sheet.

127. The relationship between current assets and current liabilities is important in evaluating a
company's
 a. profitability.
b. liquidity.
c. market value.
d. accounting cycle.

128. The most important information needed to determine if companies can pay their current
obligations is the
a. net income for this year.
b. projected net income for next year.
c. relationship between current assets and current liabilities.
d. relationship between short-term and long-term liabilities.

Use the following information for questions 129–137.

The following items are taken from the financial statements of Cerner Company for the year ending
December 31, 2008:

Accounts payable $ 18,000

Accounts receivable 11,000
Accumulated depreciation – equipment 28,000
Advertising expense 21,000
Cash 15,000
Retained Earnings (1/1/08) 80,000
Common Stock 22,000
Dividends 14,000
Depreciation expense 12,000
Insurance expense 3,000
Note payable, due 6/30/09 70,000
Prepaid insurance (12-month policy) 6,000
Rent expense 17,000
Salaries expense 32,000
Service revenue 133,000
Supplies 4,000
Supplies expense 6,000
Equipment 210,000

129. What is the company’s net income for the year ending December 31, 2008?
a. $133,000
 b. $42,000
c. $28,000
d. $12,000

130. What is the total that would be reported for stockholders' equity at December 31, 2008?
a. $102,000
b. $130,000
c. $144,000
d. $158,000

131. What are total current assets at December 31, 2008?

a. $26,000
b. $32,000
c. $36,000
d. $218,000

132. What is the book value of the equipment at December 31, 2008?
a. $238,000
b. $210,000
c. $182,000
d. $170,000
133. What are total current liabililites at December 31, 2008?
a. $18,000
b. $70,000
c. $88,000
d. $0

134. What are total long-term liabilities at December 31, 2008?

a. $0
b. $70,000
c. $88,000
d. $90,000

135. What is total liabilities and stockholders' equity at December 31, 2008?
a. $176,000
b. $190,000
c. $218,000
d. $232,000
136. The sub-classifications on the company’s classified balance sheet would include all of the
following except:
a. Current Assets.
b. Property, Plant, and Equipment.
c. Current liabilities.
d. Long-term Assets.

137. The current assets should be listed on Cerner’s balance sheet in the following order:
a. cash, accounts receivable, prepaid insurance, equipment.
b. cash, prepaid insurance, supplies, accounts receivable.
c. cash, accounts receivable, prepaid insurance, supplies.
d. equipment, supplies, prepaid insurance, accounts receivable, cash.

138. Which statement about long-term investments is not true?

a. They will be held for more than one year.
b. They are not currently used in the operation of the business.
c. They include investments in stock of other companies and land held for future use.
d. They can never include cash accounts.

139. What is the order in which assets are generally listed on a classified balance sheet?
a. Current and long-term
b. Current; property, plant, and equipment; long-term investments; intangible assets
c. Current; property, plant, and equipment; intangible assets; long-term investments
d. Current; long-term investments; property, plant, and equipment; intangible assets

140. These are selected account balances on December 31, 2008.

Land (location of the corporation’s office building) $100,000

Land (held for future use) 150,000
Corporate Office Building 600,000
Inventory 200,000
Equipment 450,000
Office Furniture 100,000
Accumulated Depreciation 300,000
What is the net amount of property, plant, and equipment that will appear on the balance
sheet?
a. $1,300,000
 b. $1,100,000
c. $1,600,000
d. $950,000

141. The following selected account balances appear on the December 31, 2008 balance sheet
of Ming Co.

Land (location of the corporation’s office building) $150,000

Land (held for future use) 225,000
Corporate Office Building 900,000
Inventory 300,000
Equipment 675,000
Office Furniture 150,000
Accumulated Depreciation 450,000

What is the net amount of property, plant, and equipment that will be reported on the
balance sheet?
a. $1,950,000
b. $1,650,000
c. $2,400,000
d. $1,425,000

142. At the beginning of April, Logan Enterprises had a $400 balance in the Supplies account.
During the month, Logan purhchased additional supplies for $500. At April 30, the
company had $350 of supplies on hand. The balance in the supplies expense account that
will be closed to Income Summary is
a. $350.
b. $400.
c. .$500.
d. $550.

143. Land held for future use will be reported in the ____________ section of a classified
balance sheet.
a. Long-term assets.
b. Longt-term investments.
c. Property, Plant and Equipment.
d. Current assets..

Additional Multiple Choice Questions

144. The steps in the preparation of a worksheet do not include
a. analyzing documentary evidence.
b. preparing a trial balance on the worksheet.
c. entering the adjustments in the adjustment columns.
d. entering adjusted balances in the adjusted trial balance columns.

145. Balance sheet accounts are considered to be

a. temporary stockholders’ accounts.
b. permanent accounts.
c. capital accounts.
d. nominal accounts.

146. Income Summary has a credit balance of $12,000 in J. Sawyer Co. after closing revenues
and expenses. The entry to close Income Summary is
a. credit Income Summary $12,000, debit Retained Earnings $12,000.
b. credit Income Summary $12,000, debit Dividends $12,000.
c. debit Income Summary $12,000, credit Dividends $12,000.
d. debit Income Summary $12,000, credit Retained Earnings $12,000.

147. The post-closing trial balance contains only

a. income statement accounts.
b. balance sheet accounts.
c. balance sheet and income statement accounts.
d. income statement, balance sheet, and retained earnings statement accounts.

148. Which of the following is an optional step in the accounting cycle?

a. Adjusting entries
b. Closing entries
c. Correcting entries
d. Reversing entries

149. Which one of the following statements concerning the accounting cycle is incorrect?
a. The accounting cycle includes journalizing transactions and posting to ledger accounts.
b. The accounting cycle includes only one optional step.
c. The steps in the accounting cycle are performed in sequence.
d. The steps in the accounting cycle are repeated in each accounting period.
150. Correcting entries are made
a. at the beginning of an accounting period.
b. at the end of an accounting period.
c. whenever an error is discovered.
d. after closing entries.

151. On September 23, Pitts Company received a $350 check from Mike Moluf for services to be
performed in the future. The bookkeeper for Pitts Company incorrectly debited Cash for
$350 and credited Accounts Receivable for $350. The amounts have been posted to the
ledger. To correct this entry, the bookkeeper should
a. debit Cash $350 and credit Unearned Service Revenue $350.
b. debit Accounts Receivable $350 and credit Unearned Service Revenue $350.
c. debit Accounts Receivable $350 and credit Cash $350.
d. debit Accounts Receivable $350 and credit Service Revenue $350.

152. All of the following are stockholders’ equity accounts except

a. Common Stock.
b. Capital Stock.
c. Investment in Stock.
d. Retained Earnings.

153. Current liabilities

a. are obligations that the company is to pay within the forthcoming year.
b. are listed in the balance sheet in order of their expected maturity.
c. are listed in the balance sheet, starting with accounts payable.
d. should not include long-term debt that is expected to be paid within the next year.

154. Goodwill would be reported in the ______________ section of a classified balance sheet.
a. Current assets.
b. Long-term liabilities.
c. Long-term investments.
d. Intangible assets.
Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
38. d 55. b 72. c 89. a 106. d 123. d 140. d
39. c 56. b 73. a 90. b 107. c 124. b 141. d
40. b 57. b 74. b 91. c 108. b 125. c 142. d
41. a 58. c 75. d 92. b 109. c 126. c 143. b
42. c 59. d 76. b 93. b 110. b 127. b 144. a
43. c 60. d 77. c 94. c 111. c 128. c 145. b
44. d 61. c 78. d 95. a 112. d 129. b 146. d
45. b 62. b 79. c 96. a 113. c 130. b 147. b
46. d 63. c 80. c 97. c 114. a 131. c 148. d
47. c 64. c 81. c 98. b 115. b 132. c 149. b
48. c 65. c 82. b 99. b 116. b 133. c 150. c
49. a 66. d 83. c 100. c 117. d 134. a 151. b
50. b 67. b 84. b 101. c 118. a 135. c 152. c
51. c 68. d 85. a 102. d 119. d 136. d 153. a
52. c 69. d 86. a 103. c 120. a 137. c 154. d
53. a 70. b 87. a 104. c 121. d 138. d
54. c 71. d 88. d 105. c 122. c 139. d
 TRUE-FALSE STATEMENTS
1. Retailers and wholesalers are both considered merchandisers.

2. The steps in the accounting cycle are different for a merchandising company than for a
service company.

3. Sales minus operating expenses equals gross profit.

4. Under a perpetual inventory system, the cost of goods sold is determined each time a sale
occurs.

5. A periodic inventory system requires a detailed inventory record of inventory items.

6. Freight terms of FOB Destination means that the seller pays the freight costs.

7. Freight costs incurred by the seller on outgoing merchandise are an operating expense to
the seller.

8. Sales revenues are earned during the period cash is collected from the buyer.

9. The Sales Returns and Allowances account and the Sales Discount account are both
classified as expense accounts.

10. The revenue recognition principle applies to merchandisers by recognizing sales revenues
when they are earned.

11. Sales Allowances and Sales Discounts are both designed to encourage customers to pay
their accounts promptly.

12. To grant a customer a sales return, the seller credits Sales Returns and Allowances.

13. A company's unadjusted balance in Merchandise Inventory will usually not agree with the
actual amount of inventory on hand at year-end.

14. For a merchandising company, all accounts that affect the determination of income are
closed to the Income Summary account.
15. A merchandising company has different types of adjusting entries than a service company.

16. Nonoperating activities exclude revenues and expenses that result from secondary or
auxiliary operations.

17. Selling expenses relate to general operating activities such as personnel management.

18. Net sales appears on both the multiple-step and single-step forms of an income statement.

19. A multiple-step income statement provides users with more information about a company’s
income performance.

20. The multiple-step form of income statement is easier to read than the single-step form.

21. Merchandise inventory is classified as a current asset in a classified balance sheet.

22. Gain on sale of equipment and interest expense are reported under other revenues and
gains in a multiple-step income statement.

23. The gross profit section for a merchandising company appears on both the multiple-step
and single-step forms of an income statement.

24. In a multiple-step income statement, income from operations excludes other revenues and
gains and other expenses and losses.

25. A single-step income statement reports all revenues, both operating and other revenues
and gains, at the top of the statement.

26. If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.

27. Gross profit represents the merchandising profit of a company.

28. Gross profit is a measure of the overall profitability of a company.

29. Gross profit rate is computed by dividing cost of goods sold by net sales.

30. Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases
to produce net purchases.
 31. Freight-in is an account that is subtracted from the Purchases account to arrive at cost of
goods purchased.

32. Net sales less cost of sales equals gross profit.

33. Gross profit is a measure of the overall liquidity of the company.

34. Net sales less operating expenses equals gross profit.

Additional True-False Questions

35. Merchandise inventory is reported as a long-term asset on the balance sheet.

36. Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more
readily determined.

37. The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the
first 10 days of the next month.

38. Sales should be recorded in accordance with the matching principle.

39. Sales returns and allowances and sales discounts are subtracted from sales in reporting
net sales in the income statement.

40. A merchandising company using a perpetual inventory system will usually need to make an
adjusting entry to ensure that the recorded inventory agrees with physical inventory count.

41. If a merchandising company sells land at more than its cost, the gain should be reported in
the sales revenue section of the income statement.

42. The major difference between the balance sheets of a service company and a
merchandising company is inventory.

Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
 1. T 7. T 13. T 19. T 25. T 31. F 37. F
2. F 8. F 14. T 20. F 26. T 32. T 38. F
3. F 9. F 15. F 21. T 27. T 33. F 39. T
4. T 10. T 16. F 22. F 28. F 34. F 40. T
5. F 11. F 17. F 23. F 29. F 35. F 41. F
6. T 12. F 18. T 24. T 30. T 36. T 42. T

MULTIPLE CHOICE QUESTIONS

43. Income from operations is gross profit less
a. administrative expenses.
b. operating expenses.
c. other expenses and losses.
d. selling expenses.

44. An enterprise which sells goods to customers is known as a

a. proprietorship.
b. corporation.
c. retailer.
d. service firm.

45. Which of the following would not be considered a merchandising company?

a. Retailer
b. Wholesaler
c. Service firm
d. Dot Com firm

46. A merchandising company that sells directly to consumers is a

a. retailer.
b. wholesaler.
c. broker.
d. service company.
47. Two categories of expenses for merchandising companies are
a. cost of goods sold and financing expenses.
b. operating expenses and financing expenses.
c. cost of goods sold and operating expenses.
d. sales and cost of goods sold.

48. The primary source of revenue for a wholesaler is

a. investment income.
b. service fees.
c. the sale of merchandise.
d. the sale of fixed assets the company owns.

49. Sales revenue less cost of goods sold is called

a. gross profit.
b. net profit.
c. net income.
d. marginal income.

50. After gross profit is calculated, operating expenses are deducted to determine
a. gross margin.
b. operating income.
c. gross profit on sales.
d. net margin.

51. Cost of goods sold is determined only at the end of the accounting period in
a. a perpetual inventory system.
b. a periodic inventory system.
c. both a perpetual and a periodic inventory system.
d. neither a perpetual nor a periodic inventory system.

52. Which of the following expressions is incorrect?

a. Gross profit – operating expenses = operating income
b. Sales – cost of goods sold – operating expenses = operating income
c. Operating income + operating expenses = gross profit
d. Operating expenses – cost of goods sold = gross profit

53. Detailed records of goods held for resale are not maintained under a
a. perpetual inventory system.
 b. periodic inventory system.
c. double entry accounting system.
d. single entry accounting system.

54. A perpetual inventory system would likely be used by a(n)

a. automobile dealership.
b. hardware store.
c. drugstore.
d. convenience store.

55. Which of the following is a true statement about inventory systems?

a. Periodic inventory systems require more detailed inventory records.
b. Perpetual inventory systems require more detailed inventory records.
c. A periodic system requires cost of goods sold be determined after each sale.
d. A perpetual system determines cost of goods sold only at the end of the accounting
period.

56. In a perpetual inventory system, cost of goods sold is recorded

a. on a daily basis.
b. on a monthly basis.
c. on an annual basis.
d. with each sale.

57. If a company determines cost of goods sold each time a sale occurs, it
a. must have a computer accounting system.
b. uses a combination of the perpetual and periodic inventory systems.
c. uses a periodic inventory system.
d. uses a perpetual inventory system.

58. Under a perpetual inventory system, acquisition of merchandise for resale is debited to the
a. Merchandise Inventory account.
b. Purchases account.
c. Supplies account.
d. Cost of Goods Sold account.

59. The journal entry to record a return of merchandise purchased on account under a
perpetual inventory system would credit
a. Accounts Payable.
 b. Purchase Returns and Allowances.
c. Sales.
d. Merchandise Inventory.

60. The Merchandise Inventory account is used in each of the following except the entry to
record
a. goods purchased on account.
b. the return of goods purchased.
c. payment of freight on goods sold.
d. payment within the discount period.

61. A buyer would record a payment within the discount period under a perpetual inventory
system by crediting
a. Accounts Payable.
b. Merchandise Inventory.
c. Purchase Discounts.
d. Sales Discounts.

62. If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then
the
a. Merchandise Inventory account will be increased.
b. Merchandise Inventory account will not be affected.
c. seller will bear the freight cost.
d. carrier will bear the freight cost.
63. Freight costs paid by a seller on merchandise sold to customers will cause an increase
a. in the selling expense of the buyer.
b. in operating expenses for the seller.
c. to the cost of goods sold of the seller.
d. to a contra-revenue account of the seller.

64. Bryan Company purchased merchandise from Cates Company with freight terms of FOB
shipping point. The freight costs will be paid by the
a. seller.
b. buyer.
c. transportation company.
d. buyer and the seller.
65. Flynn Company purchased merchandise inventory with an invoice price of $5,000 and
credit terms of 2/10, n/30. What is the net cost of the goods if Flynn Company pays within
the discount period?
a. $5,000
b. $4,900
c. $4,500
d. $4,600

66. Stine Company purchased merchandise with an invoice price of $2,000 and credit terms of
2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the
credit terms?
a. 20%
b. 24%
c. 36%
d. 72%

67. If a company is given credit terms of 2/10, n/30, it should

a. hold off paying the bill until the end of the credit period, while investing the money at
10% annual interest during this time.
b. pay within the discount period and recognize a savings.
c. pay within the credit period but don't take the trouble to invest the cash while waiting to
pay the bill.
d. recognize that the supplier is desperate for cash and withhold payment until the end of
the credit period while negotiating a lower sales price.

68. In a perpetual inventory system, the amount of the discount allowed for paying for
merchandise purchased within the discount period is credited to
a. Merchandise Inventory.
b. Purchase Discounts.
c. Purchase Allowance.
d. Sales Discounts.
69. Zach’s Market recorded the following events involving a recent purchase of merchandise:

Received goods for $50,000, terms 2/10, n/30.

Returned $1,000 of the shipment for credit.
Paid $250 freight on the shipment.
Paid the invoice within the discount period.

As a result of these events, the company’s merchandise inventory

 a. increased by $48,020.
b. increased by $49,250.
c. increased by $48,265.
d. increased by $48,270.

70. Jake’s Market recorded the following events involving a recent purchase of merchandise:
Received goods for $20,000, terms 2/10, n/30.
Returned $400 of the shipment for credit.
Paid $100 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s merchandise inventory
a. increased by $19,208.
b. increased by $19,700.
c. increased by $19,306.
d. increased by $19,308.

71. A credit sale of $800 is made on April 25, terms 2/10, n/30, on which a return of $50 is
granted on April 28. What amount is received as payment in full on May 4?
a. $735
b. $784
c. $800
d $750

72. The entry to record the receipt of payment within the discount period on a sale of $750 with
terms of 2/10, n/30 will include a credit to
a. Sales Discounts for $15.
b. Cash for $735.
c. Accounts Receivable for $750.
d. Sales for $750.

73. The collection of a $600 account within the 2 percent discount period will result in a
a. debit to Sales Discounts for $12.
b. debit to Accounts Receivable for $588.
c. credit to Cash for $588.
d. credit to Accounts Receivable for $588.
74. Company X sells $400 of merchandise on account to Company Y with credit terms of 2/10,
n/30. If Company Y remits a check taking advantage of the discount offered, what is the
amount of Company Y's check?
a. $280
b. $392
c. $360
d. $320

75. Holt Company sells merchandise on account for $2,000 to Jones Company with credit
terms of 2/10, n/30. Jones Company returns $400 of merchandise that was damaged,
along with a check to settle the account within the discount period. What is the amount of
the check?
a. $1,960
b. $1,968
c. $1,600
d. $1,568

76. The collection of a $900 account after the 2 percent discount period will result in a
a. debit to Cash for $882.
b. debit to Accounts Receivable for $900.
c. debit to Cash for $900.
d. debit to Sales Discounts for $18.

77. The collection of a $600 account after the 2 percent discount period will result in a
a. debit to Cash for $588.
b. credit to Accounts Receivable for $600.
c. credit to Cash for $600.
d. debit to Sales Discounts for $12.

78. In a perpetual inventory system, the Cost of Goods Sold account is used
a. only when a cash sale of merchandise occurs.
b. only when a credit sale of merchandise occurs.
c. only when a sale of merchandise occurs.
d. whenever there is a sale of merchandise or a return of merchandise sold.

79. Sales revenues are usually considered earned when

a. cash is received from credit sales.
b. an order is received.
 c. goods have been transferred from the seller to the buyer.
d. adjusting entries are made.

80. A sales invoice is a source document that

a. provides support for goods purchased for resale.
b. provides evidence of incurred operating expenses.
c. provides evidence of credit sales.
d. serves only as a customer receipt.

81. 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.

82. The journal entry to record a credit sale is

a. Cash
Sales

b. Cash

Service Revenue

c. Accounts Receivable

Service Revenue

d. Accounts Receivable

Sales

83. A credit memorandum is prepared when

a. an employee does a good job.
b. goods are sold on credit.
c. goods that were sold on credit are returned.
d. customers refuse to pay their accounts.

84. 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.

85. A credit memorandum is used as documentation for a journal entry that requires a debit to
 a. Sales and a credit to Cash.
b. Sales Returns and Allowances and a credit to Accounts Receivable.
c. Accounts Receivable and a credit to a contra-revenue account.
d. Cash and a credit to Sales Returns and Allowances.

86. If a customer agrees to retain merchandise that is defective because the seller is willing to
reduce the selling price, this transaction is known as a sales
a. discount.
b. return.
c. contra asset.
d. allowance.

87. A credit sale of $900 is made on July 15, terms 2/10, n/30, on which a return of $50 is
granted on July 18. What amount is received as payment in full on July 24?
a. $900
b. $833
c. $850
d $882

88. When goods are returned that relate to a prior cash sale,
a. the Sales Returns and Allowances account should not be used.
b. the cash account will be credited.
c. Sales Returns and Allowances will be credited.
d. Accounts Receivable will be credited.

89. The Sales Returns and Allowances account does not provide information to management
about
a. possible inferior merchandise.
b. the percentage of credit sales versus cash sales.
c. inefficiencies in filling orders.
d. errors in overbilling customers.

90. A Sales Returns and Allowances account is not debited if a customer

a. returns defective merchandise.
b. receives a credit for merchandise of inferior quality.
c. utilizes a prompt payment incentive.
d. returns goods that are not in accordance with specifications.
91. As an incentive for customers to pay their accounts promptly, a business may offer its
customers
a. a sales discount.
b. free delivery.
c. a sales allowance.
d. a sales return.

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

93. A sales discount does not

a. provide the purchaser with a cash saving.
b. reduce the amount of cash received from a credit sale.
c. increase a contra-revenue account.
d. increase an operating expense account.

94. Company A sells $500 of merchandise on account to Company B with credit terms of 2/10,
n/30. If Company B remits a check taking advantage of the discount offered, what is the
amount of Company B's check?
a. $350
b. $490
c. $450
d. $400

95. Hale Company sells merchandise on account for $1,500 to Kear Company with credit terms
of 2/10, n/30. Kear Company returns $300 of merchandise that was damaged, along with a
check to settle the account within the discount period. What is the amount of the check?
a. $1,470
b. $1,476
c. $1,200
d. $1,176
 96. Feine Company sells merchandise on account for $2,000 to Tang Company with credit
terms of 2/10, n/30. Tang Company returns $300 of merchandise that was damaged, along
with a check to settle the account within the discount period. What entry does Feine
Company make upon receipt of the check?
a. Cash.................................................................................... 1,700
Accounts Receivable................................................... 1,700

b. Cash.................................................................................... 1,666
Sales Returns and Allowances............................................ 334
Accounts Receivable................................................... 2,000

c. Cash.................................................................................... 1,666
Sales Returns and Allowances............................................ 300
Sales Discounts................................................................... 34
Accounts Receivable................................................... 2,000

d. Cash.................................................................................... 1,960
Sales Discounts................................................................... 40
Sales Returns and Allowances.................................... 300
Accounts Receivable................................................... 1,700

97. Which of the following would not be classified as a contra account?

a. Sales
b. Sales Returns and Allowances
c. Accumulated Depreciation
d. Sales Discounts

98. Which of the following accounts has a normal credit balance?

a. Sales Returns and Allowances
b. Sales Discounts
c. Sales
d. Selling Expense

99. With respect to the income statement,

a. contra-revenue accounts do not appear on the income statement.
b. sales discounts increase the amount of sales.
c. contra-revenue accounts increase the amount of operating expenses.
d. sales discounts are included in the calculation of gross profit.

100. When a seller grants credit for returned goods, the account that is credited is
 a. Sales.
b. Sales Returns and Allowances.
c. Merchandise Inventory.
d. Accounts Receivable.

101. The respective normal account balances of Sales, Sales Returns and Allowances, and
Sales Discounts are
a. credit, credit, credit.
b. debit, credit, debit.
c. credit, debit, debit.
d. credit, debit, credit.

102. All of the following are contra revenue accounts except

a. sales.
b. sales allowances.
c. sales discounts.
d. sales returns.

103. A merchandising company using a perpetual system will make

a. the same number of adjusting entries as a service company does.
b. one more adjusting entry than a service company does.
c. one less adjusting entry than a service company does.
d. different types of adjusting entries compared to a service company.

104. In preparing closing entries for a merchandising company, the Income Summary account
will be credited for the balance of
a. sales.
b. merchandise inventory.
c. sales discounts.
d. freight-out.
105. A merchandising company using a perpetual system may record an adjusting entry by
a. debiting Income Summary.
b. crediting Income Summary.
c. debiting Cost of Goods Sold.
d. debiting Sales.

106. The operating cycle of a merchandiser is

a. always one year in length.
b. generally longer than it is for a service company.
c. about the same as for a service company.
d. generally shorter than it is for a service company.

107. The sales revenue section of an income statement for a retailer would not include
a. Sales discounts.
b. Sales.
c. Net sales.
d. Cost of goods sold.

108. The operating expense section of an income statement for a wholesaler would not include
a. freight-out.
b. utilities expense.
c. cost of goods sold.
d. insurance expense.

109. Income from operations will always result if

a. the cost of goods sold exceeds operating expenses.
b. revenues exceed cost of goods sold.
c. revenues exceed operating expenses.
d. gross profit exceeds operating expenses.

110. Indicate which one of the following would appear on the income statement of both a
merchandising company and a service company.
a. Gross profit
b. Operating expenses
c. Sales revenues
d. Cost of goods sold

111. Thelman Company reported the following balances at June 30, 2008:
 Sales $10,800
Sales Returns and Allowances 400
Sales Discounts 200
Cost of Goods Sold 5,000

Net sales for the month is

a. $10,800.
b. $10,400.
c. $10,200.
d. $5,200.

112. Income from operations appears on

a. both a multiple-step and a single-step income statement.
b. neither a multiple-step nor a single-step income statement.
c. a single-step income statement.
d. a multiple-step income statement.

113. Gross profit does not appear

a. on a multiple-step income statement.
b. on a single-step income statement.
c. to be relevant in analyzing the operation of a merchandiser.
d. on the income statement if the periodic inventory system is used because it cannot be
calculated.

114. Which of the following is not a true statement about a multiple-step income statement?
a. Operating expenses are often classified as selling and administrative expenses.
b. There may be a section for nonoperating activities.
c. There may be a section for operating assets.
d. There is a section for cost of goods sold.

115. Which one of the following is shown on a multiple-step but not on a single-step income
statement?
a. Net sales
b. Net income
c. Gross profit
d. Cost of goods sold

116. All of the following items would be reported as other expenses and losses except
 a. freight-out.
b. casualty losses.
c. interest expense.
d. loss from employees' strikes.

117. If a company has net sales of $500,000 and cost of goods sold of $350,000, the gross profit
percentage is
a. 70%.
b. 30%.
c. 15%.
d. 100%.

118. A company shows the following balances:

Sales $1,000,000
Sales Returns and Allowances 180,000
Sales Discounts 20,000
Cost of Goods Sold 560,000

What is the gross profit percentage?

a. 56%
b. 70%
c. 44%
d. 30%

119. The gross profit rate is computed by dividing gross profit by

a. cost of goods sold.
b. net income.
c. net sales.
d. sales.

120. In terms of liquidity, merchandise inventory is

a. more liquid than cash.
b. more liquid than accounts receivable.
c. more liquid than prepaid expenses.
d. less liquid than store equipment.

121. On a classified balance sheet, merchandise inventory is classified as

a. an intangible asset.
 b. property, plant, and equipment.
c. a current asset.
d. a long-term investment.

122. Gross profit for a merchandiser is net sales minus

a. operating expenses.
b. cost of goods sold.
c. sales discounts.
d. cost of goods available for sale.

Use the following information for questions 123–125.

During 2008, Salon Enterprises generated revenues of $60,000. The company’s expenses were as
follows: cost of goods sold of $30,000, operating expenses of $12,000 and a loss on the sale of
equipment of $2,000.

123. Salon’s gross profit is

a. $60,000.
b. $30,000.
c. $18,000.
d. $16,000.

124. Salon’s income from operations is

a. $60,000.
b. $30,000.
c. $18,000.
d. $12,000.

125. Salon’s net income is

a. $60,000.
b. $30,000.
c. $18,000.
d. $16,000.

Use the following information for questions 126–127.

Financial information is presented below:

Operating Expenses $ 45,000
 Sales 150,000
Cost of Goods Sold 77,000

126. Gross profit would be

a. $105,000.
b. $28,000.
c. $73,000.
d. $150,000.

127. The gross profit rate would be

a. .700.
b. .187.
c. .300.
d. .487.

Use the following information for questions 128–129.

Financial information is presented below:

Operating Expenses $ 45,000
Sales Returns and Allowances 13,000
Sales Discounts 6,000
Sales 150,000
Cost of Goods Sold 67,000

128. Gross profit would be

a. $77,000.
b. $64,000.
c. $70,000.
d. $83,000.

129. The gross profit rate would be

a. .535.
b. .489.
c. .511.
d. .553.

Use the following information for questions 130–132.

Financial information is presented below:
Operating Expenses $ 45,000
Sales Returns and Allowances 13,000
Sales Discounts 6,000
Sales 160,000
Cost of Goods Sold 77,000

130. The amount of net sales on the income statement would be

a. $154,000.
b. $141,000.
c. $160,000.
d. $166,000.

131. Gross profit would be

a. $77,000.
b. $70,000.
c. $64,000.
d. $83,000.

132. The gross profit rate would be

a. .454.
b. .546.
c. .500.
d. .538.

133. If a company has sales of $420,000, net sales of $400,000, and cost of goods sold of
$260,000, the gross profit rate is
a. 67%.
b. 65%
c. 35%.
d. 33%.

134. Ingrid’s Fashions sold merchandise for $38,000 cash during the month of July. Returns
that month totaled $800. If the company’s gross profit rate is 40%, Ingrid’s will report
monthly net sales revenue and cost of goods sold of
a. $38,000 and $22,800.
b. $37,200 and $14,880.
c. $37,200 and $22,320.
 d. $38,000 and $22,320.

Use the following information for questions 135–138.

During August, 2008, Sal’s Supply Store generated revenues of $30,000. The company’s
expenses were as follows: cost of goods sold of $12,000 and operating expenses of $2,000. The
company also had rent revenue of $500 and a gain on the sale of a delivery truck of $1,000.

135. Sal’s gross profit for August, 2008 is

a. $30,000.
b. $19,000.
c. $18,000.
d. $16,000.

136. Sal’s nonoperating income (loss) for the month of August, 2008 is
a. $0.
b. $500.
c. $1,000.
d. $1,500.

137. Sal’s operating income for the month of August, 2008 is

a. $30,000.
b. $19,500.
c. $18,500.
d. $16,000.

138. Sal’s net income for August, 2008 is

a. $18,000.
b. $17,500.
c. $16,500.
d. $16,000.

139. At the beginning of September, 2008, RFI Company reported Merchandise Inventory of
$4,000. During the month, the company made purchases of $7,800. At September 31,
2008, a physical count of inventory reported $3,200 on hand. Cost of goods sold for the
month is
a. $600.
 b. $7,800.
c. $8,600.
d. $11,800.

140. At the beginning of the year, Midtown Athletic had an inventory of $400,000. During the
year, the company purchased goods costing $1,600,000. If Midtown Athletic reported
ending inventory of $600,000 and sales of $2,000,000, the company’s cost of goods sold
and gross profit rate must be
a. $1,000,000 and 50%.
b. $1,400,000 and 30%.
c. $1,000,000 and 30%.
d. $1,400,000 and 70%.

141. During the year, Darla’s Pet Shop’s merchandise inventory decreased by $20,000. If the
company’s cost of goods sold for the year was $300,000, purchases must have been
a. $320,000.
b. $280,000.
c. $260,000.
d. Unable to determine.

142. Cost of goods available for sale is computed by adding

a. beginning inventory to net purchases.
b. beginning inventory to the cost of goods purchased.
c. net purchases and freight-in.
d. purchases to beginning inventory.

143. The Freight-in account

a. increases the cost of merchandise purchased.
b. is contra to the Purchases account.
c. is a permanent account.
d. has a normal credit balance.

144. Net purchases plus freight-in determines

a. cost of goods sold.
b. cost of goods available for sale.
c. cost of goods purchased.
d. total goods available for sale.
145. West Company has the following account balances:
Purchases $48,000
Sales Returns and Allowances 6,400
Purchase Discounts 4,000
Freight-in 3,000
Delivery Expense 4,000
The cost of goods purchased for the period is
a. $52,000.
b. $47,000.
c. $51,000.
d. $44,600.

146. Baden Shoe Store has a beginning merchandise inventory of $30,000. During the period,
purchases were $140,000; purchase returns, $4,000; and freight-in $10,000. A physical
count of inventory at the end of the period revealed that $20,000 was still on hand. The cost
of goods available for sale was
a. $164,000.
b. $156,000.
c. $176,000.
d. $184,000.

147. In a perpetual inventory system, a return of defective merchandise by a cash customer is

recorded by crediting
a. Accounts Payable and Cash.
b. Merchandise Inventory and Cost of Goods Sold
c. Purchases Returns and Allowances and Merchandise Inventory.
d. .Cash and Cost of Goods Sold.

148. A physical count of inventory is taken at the end of an accounting period under a perpetual
system in order to
a. verify the accuracy of the accounting records.
b. determine cost of goods sold for the period.
c. determine the amount of inventory purchased during the period.
d. calculate property taxes.

149. The journal entry to record a return of merchandise purchased on account under a
perpetual inventory system would include
a. Accounts Payable
 Sales Returns and Allowances
b. Purchase Returns and Allowances
Accounts Payable
c. Accounts Payable
Inventory
d. Merchandise Inventory
Cost of Goods Sold
150. Under a perpetual inventory system, acquisition of merchandise is debited to the
a. Merchandise Inventory account.
b. Cost of Goods Sold account.
c. Purchases account.
d. Accounts Payable account.

151. Which of the following accounts has a normal debit balance?

a. Merchandise Inventory
b. Sales Returns and Allowances
c. Cost of goods sold
d. Sales

152. Gross profit is calculated by subtracting ________ from _________,

a. operating expenses, net income
b. sales discounts from sales revenue
c. cost of goods sold, net sales revenue
d. merchandise inventory, cost of goods sold

153. A physical count of inventory is taken at the end of an accounting period under a periodic
system in order to
a. verify the accuracy of the accounting records.
b. determine cost of goods sold for the period.
c. determine the amount of inventory purchased during the period.
d. calculate property taxes.

154. When a periodic inventory system is used, cost of goods sold is calculated as follows:
a. Ending inventory plus purchases less beginning inventory.
b. Beginning inventory plus purchases less ending inventory
c. Cost of merchandise purchased less ending inventory.
d. Cost of merchandise sold plus beginning inventory.
Additional Multiple Choice Questions

155. Cole Company has sales revenue of $39,000, cost of goods sold of $24,000 and operating
expenses of $9,000 for the year ended December 31. Cole's gross profit is
a. $30,000.
b. $15,000.
c. $6,000.
d. $0.

156. Logan Company made a purchase of merchandise on credit from Claude Corporation on
August 3, for $6,000, terms 2/10, n/45. On August 10, Logan makes the appropriate
payment to Claude. Logan uses a perpetual inventory system. The entry on August 10 for
Logan Company is
a. Accounts Payable................................................................ 6,000
Cash............................................................................. 6,000
b. Accounts Payable................................................................ 5,880
Cash............................................................................. 5,880
c. Accounts Payable................................................................ 6,000
Purchase Returns and Allowances............................... 120
Cash............................................................................. 5,880
d. Accounts Payable................................................................ 6,000
Merchandise Inventory................................................. 120
Cash............................................................................. 5,880

157. Cartier Company purchased inventory from Pissaro Company. The shipping costs were
$400 and the terms of the shipment were FOB shipping point. Cartier uses a perpetual
inventory system. Cartier would have the following entry regarding the shipping charges:
a. There is no entry on Cartier's books for this transaction.
b. Freight Expense................................................................... 400
Cash........................................................................... 400
c. Freight-out........................................................................... 400
Cash........................................................................... 400
d. Merchandise Inventory......................................................... 400
Cash........................................................................... 400

158. In a perpetual inventory system, a return of defective merchandise by a purchaser is

recorded by crediting
 a. Purchases.
b. Purchase Returns.
c. Purchase Allowance.
d. Merchandise Inventory.

159. On October 4, 2008, Terry Corporation had credit sales transactions of $2,800 from
merchandise having cost $1,900. The entries to record the day's credit transactions include
a
a. debit of $2,800 to Merchandise Inventory.
b. credit of $2,800 to Sales.
c. debit of $1,900 to Merchandise Inventory.
d. credit of $1,900 to Cost of Goods Sold.

160. Which of the following accounts is not closed to Income Summary?

a. Cost of Goods Sold
b. Merchandise Inventory
c. Sales
d. Sales Discounts
161. In the Clark Company, sales were $480,000, sales returns and allowances were $30,000,
and cost of goods sold was $288,000. The gross profit rate was
a. 64%.
b. 36%.
c. 40%.
d. 60%.

162. Net sales is sales less

a. sales discounts.
b. sales returns.
c. sales returns and allowances.
d. sales discounts and sales returns and allowances.

163. In the balance sheet, ending merchandise inventory is reported

a. in current assets immediately following accounts receivable.
b. in current assets immediately following prepaid expenses.
c. in current assets immediately following cash.
d. under property, plant, and equipment.

164. Cost of goods available for sale is computed by adding

a. freight-in to net purchases.
b. beginning inventory to net purchases.
c. beginning inventory to purchases and freight-in.
d. beginning inventory to cost of goods purchased.

Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans
43. b 61. b 79. c 97. a 115. c 133. c 151. d
44. c 62. a 80. c 98. c 116. a 134. c 152. c
45. c 63. b 81. a 99. d 117. b 135. c 153. b
46. a 64. b 82. d 100. d 118. d 136. d 154. b
47. c 65. b 83. c 101. c 119. c 137. d 155. b
48. c 66. c 84. d 102. a 120. c 138. b 156. d
49. a 67. b 85. b 103. b 121. c 139. c 157. d
50. b 68. a 86. d 104. a 122. b 140. b 158. d
51. b 69. d 87. b 105. c 123. b 141. b 159. b
52. d 70. d 88. b 106. b 124. c 142. b 160. b
53. b 71. a 89. b 107. d 125. d 143. a 161. b
54. a 72. c 90. c 108. c 126. c 144. c 162. d
55. b 73. a 91. a 109. d 127. d 145. b 163. a
56. d 74. b 92. c 110. b 128. b 146. c 164. d
57. d 75. d 93. d 111. c 129. b 147. d
58. a 76. c 94. b 112. d 130. b 148. a
59. d 77. b 95. d 113. b 131. c 149. d
60. c 78. d 96. c 114. c 132. a 150. a