Chapter 6--Accounting for Merchandising Businesses
Student: ___________________________________________________________________________
1. One of the most important differences between a service business and a retail business is in what is sold.
True False

2. In a merchandise business, sales minus operating expenses equals net income.
True False

3. Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends
to sell.
True False

4. Service businesses provide services for income, while a merchandising business sells merchandise.
True False

5. In many retail businesses, inventory is the largest current asset.
True False

6. Under a periodic inventory system, the merchandise on hand at the end of the year is determined by a
physical count of the inventory.
True False

7. In the periodic inventory system, purchases of merchandise for resale are debited to the Purchases account.
True False

8. Under the periodic inventory system, the cost of merchandise sold is equal to the beginning merchandise
inventory plus the cost of merchandise purchased plus the ending merchandise inventory.
True False


9. In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the beginning



18. On the income statement in the single-step form, the total of all expenses is deducted from the total of all
revenues.
True False

19. The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and
income from operations are not readily available.
True False

20. Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is
listed as Other Income on the multiple-step income statement.
True False

21. Freight in is the amount paid by the company to deliver merchandise sold to a customer.
True False

22. In the merchandising income statement, sales will be reduced by sales discounts and sales returns and
allowances to arrive at net sales.
True False

23. Other income and expenses are items that are not related to the primary operating activity.
True False

24. Freight-in is considered a cost of purchasing inventory.
True False

25. The cost of merchandise inventory is limited to the purchase price less any purchase discounts.
True False


True False

35. Sales to customers who use nonbank credit cards, such as American Express, are generally treated as credit
sales.
True False


36. Retailers record all credit card sales as credit sales.
True False

37. The service fee that credit card companies charge retailers varies and is the primary reason why some
businesses do not accept all credit cards.
True False

38. A seller may grant a buyer a reduction in selling price and this is called a sales allowance.
True False

39. The effect of a sales return and allowance is a reduction in sales revenue and a decrease in cash or accounts
receivable.
True False

40. Merchandise Inventory normally has a debit balance.
True False

41. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30days after the invoice date to take
advantage of the cash discount.
True False

42. Discounts taken by the buyer for early payment of an invoice are credited to Sales Discounts by the buyer.
True False

50. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment,
the terms are stated as FOB destination.
True False

51. A sale of $750 on account, subject to a sales tax of 6%, would be recorded as an account receivable of
$750.
True False

52. When merchandise is sold for $600 plus 6% sales tax, the Sales account should be credited for $636.
True False

53. The abbreviation FOB stands for Free On Board.
True False


54. Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150. If
$500 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the
amount of the sales discount is $65.
True False

55. If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination.
True False

56. When the terms of sale are FOB shipping point, the buyer should pay the freight charges.
True False

57. If merchandise costing $3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of $125, is paid
within 10 days, the amount of the purchases discount is $70.
True False



67. Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped
FOB shipping point.
True False

68. Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the
buyer.
True False

69. If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in the
general ledger.
True False

70. The adjusting entry to record inventory shrinkage would generally include a debit to Cost of Merchandise
Sold.
True False

71. Closing entries for a merchandising business are not similar to those for a service business.
True False


72. The ratio of net sales to assets measures how effectively a business is using its assets to generate sales.
True False

73. Because many companies use computerized accounting systems, periodic inventory is widely used.
True False

74. Computerized systems can be used to capture accounting information such as accounts receivable, inventory
items, accounts payable, and sales.
True False

Trade Discount ____
Purchase Returns
and Allowances ____
Freight In ____
Sales Returns and
Allowances ____


77. Match each of the following terms with the correct definition below.
1. Shipping terms where the ownership of
merchandise passes to the buyer when the buyer
receives the merchandise.
2. Shipping terms where the ownership of
merchandise passes to the buyer when the seller
delivers the merchandise to the freight carrier.
3. Statement where net income is determined by
deducting all expenses from all revenues.
4. Statement that includes subtotals for net sales,
gross profit and net operating income in determining
net income.
5. Inventory system that updates the Merchandise
Inventory account only at the end of the accounting
period based on a physical count of merchandise on
hand.
6. Inventory system that updates the Merchandise
Inventory account for every purchase and sale
transaction.
7. Payment arrangements determined by the seller as
to when invoices are due and whether early payment
discount is offered.

C. net sales
D. gross profit

80. Generally, the revenue account for a merchandising business is entitled
A. Sales
B. Fees Earned
C. Gross Sales
D. Gross Profit


81. What is the term applied to the excess of net revenue from sales over the cost of merchandise sold?
A. gross profit
B. income from operations
C. net income
D. gross sales

82. The term "inventory" can indicate
A. merchandise held for sale in the normal course of business
B. equipment used to manufacture products
C. supplies
D. any asset

83. A company using the periodic inventory system has the following account balances: Merchandise Inventory
at the beginning of the year, $3,600; Freight-In, $650; Purchases, $10,700; Purchases Returns and Allowances,
$1,950; Purchases Discounts, $330. The cost of merchandise purchased is equal to
A. $12,670
B. $9,070
C. $8,420
D. $17,230


B. neither gross profit nor income from operations
C. both gross profit and income from operations
D. income from operations but not gross profit

89. When the three sections of a balance sheet are presented on a page in a downward sequence, it is called the
A. account form
B. comparative form
C. horizontal form
D. report form

90. The statement of owner's equity shows
A. only net income, beginning and ending capital
B. only total assets, beginning and ending capital
C. only net income, beginning capital, and withdrawals
D. all the changes in the owner's capital as a result of net income, net loss, additional investments, and
withdrawals

91. Merchandise inventory is classified on the balance sheet as a
A. Current Liability
B. Current Asset
C. Long-Term Asset
D. Long-Term Liability

92. Which account is not classified as a selling expense?
A. Sales Salaries
B. Freight-Out
C. Freight-In
D. Advertising Expense




98. Gross profit is equal to:
A. sales plus (sales discounts and sales returns and allowances) plus cost of merchandise sold
B. sales plus sales returns and allowances less sales discounts less cost of merchandise sold
C. sales plus sales discounts less sales returns and allowances less cost of merchandise sold
D. sales less (sales discounts and sales returns and allowances) less cost of merchandise sold


99. Using the following information, what is the amount of cost of merchandise sold?

Purchases
Merchandise inventory September 1

$32,000
5,700

Sales returns and allowances
Purchases returns and allowances

910
1,200

Purchases discounts
Merchandise inventory
September 30
Sales
Freight In

$960
6,370


Freight In

1,040

63,000

A. $34,870
B. $31,880
C. $27,460
D. $62,090
101. Using the following information, what is the amount of net sales?

Purchases
Merchandise inventory
September 1
Sales returns and
allowances
Purchases returns and
allowances

A. $28,970
B. $63,130
C. $63,000
D. $62,090

$32,000
5,700

$960


$960
6,370

910

Purchases discounts
Merchandise inventory
September 30
Sales

1,200

Freight In

1,040

63,000

A. $35,540
B. $36,580
C. $37,700
D. $34,500
103. Where are selling and administrative expenses found on the multiple-step income statement?
A. before gross profit
B. after sales and before gross profit
C. after net income before expenses
D. after gross profit

104. Dorman Co. sold merchandise to Smith Co. on account, $23,500, terms 2/15, net 45. The cost of the

108. Using a perpetual inventory system, the entry to record the return from a customer of merchandise sold on
account includes a
A. credit to Sales Returns and Allowances
B. debit to Merchandise Inventory
C. credit to Merchandise Inventory
D. debit to Cost of Merchandise Sold

109. If merchandise sold on account is returned to the seller, the seller may inform the customer of the details
by issuing a
A. sales invoice
B. purchase invoice
C. credit memo
D. debit memo

110. The arrangements between buyer and seller as to when payments for merchandise are to be made are
called
A. credit terms
B. net cash
C. cash on demand
D. gross cash

111. In credit terms of 3/15, n/45, the "3" represents the
A. number of days in the discount period
B. full amount of the invoice
C. number of days when the entire amount is due
D. percent of the cash discount


112. Merchandise with a sales price of $6,000 is sold on account with term 2/10, n/30. The journal entry to
record the sale would include a


117. Sales to customers who use bank credit cards, such as MasterCard and Visa, are generally treated as
A. sales on account
B. sales returns
C. cash sales
D. sales when the credit card company remits the cash


118. When a buyer returns merchandise purchased for cash, the buyer may record the transaction using the
following entry
A. debit Merchandise Inventory; credit Cash
B. debit Cash; credit Merchandise Inventory
C. debit Cash; credit Sales Returns and Allowances
D. debit Sales Returns and Allowances; credit Cash

119. When merchandise is returned under the perpetual inventory system, the buyer would credit
A. Merchandise Inventory
B. Purchases Returns and Allowances
C. Accounts Payable
D. Accounts Receivable

120. When purchases of merchandise are made for cash, the transaction may be recorded with the following
entry
A. debit Cash; credit Merchandise Inventory
B. debit Merchandise Inventory; credit Cash
C. debit Merchandise Inventory; credit Cash Discounts
D. debit Merchandise Inventory; credit Purchases

121. Using a perpetual inventory system, the entry to record the purchase of $30,000 of merchandise on account
would include a

A. $7,500
B. $17,500
C. $25,000
D. $17,250

126. A sales invoice included the following information: merchandise price, $10,000; freight, $900; terms 1/10,
n/eom, FOB shipping point. Assuming that a credit for merchandise returned of $500 is granted prior to
payment and that the invoice is paid within the discount period, what is the amount of cash that should be
received by the seller?
A. $10,305
B. $9,500
C. $9,306
D. $9,900

127. Which of the following accounts usually has a debit balance?
A. Purchase Discounts
B. Sales Tax Payable
C. Allowance for Doubtful Accounts
D. Freight-In


128. Merchandise is sold for cash. The selling price of the merchandise is $5,000 and the sale is subject to a
7% state sales tax. The journal entry to record the sale would include
A. A credit to Cash for $5,000.
B. A credit to Sales for $5,350.
C. A credit to Sales Tax Payable for $350.
D. None of these answers are correct.

129. If the buyer is to pay the freight costs of delivering merchandise, delivery terms are stated as
A. FOB shipping point



134. Anthony Company sold Madison Company merchandise on account FOB shipping point, 2/10, net 30, for
$10,000. Anthony prepaid the $300 shipping charge. Which of the following entries does Anthony make to
record this sale?
A. Accounts Receivable-Madison, debit $10,000; Sales, credit $10,000
B. Accounts Receivable-Madison, debit $10,000; Sales, credit $10,000, and
Accounts Receivable-Madison, debit $300; Cash, credit $300
C. Accounts Receivable-Madison, debit $10,300; Sales, credit $10,300
D. Accounts Receivable-Madison, debit $10,000; Sales, credit $10,000, and
Freight Out, debit $300; Cash, credit $300

135. Emma Co. sold Isabella Co. merchandise on account FOB shipping point,, 2/10, net 30, for
$15,000. Emma Co. prepaid the $750 shipping charge. Using the perpetual inventory method, which of the
following entries will Isabella Co. make to record payment of the merchandise if Isabella Co. pays within the
discount period?
A. Accounts Payable-Emma Co., debit $15,000; Freight In, credit $750; Cash, credit $14,250
B. Accounts Payable-Emma Co., debit $15,750; Merchandise Inventory, credit $300; Cash, credit $15,450
C. Accounts Payable-Emma Co., debit $15,000; Freight In, debit $750; Cash, credit $15,750
D. Accounts Payable-Emma Co., debit $15,750; Merchandise Inventory, debit $300; Cash, credit $16,050

136. A chart of accounts for a merchandising business
A. usually is the same as the chart of accounts for a service business
B. usually requires more accounts than does the chart of accounts for a service business
C. usually is standardized by the FASB for all merchandising businesses
D. always uses a three-digit numbering system

137. Cumberland Co. sells $2,000 of inventory to Hancock Co. for cash. Cumberland paid $1,250 for the
merchandise. Under a perpetual inventory system, which of the following journal entry(ies) would be
recorded?

141. Taking advantage of a 2/10, n/30 purchases discount is equal to a savings yearly rate of approximately
A. 2%
B. 24%
C. 20%
D. 36%

142. Who pays the freight costs when the terms are FOB shipping point?
A. the ultimate customer
B. the buyer
C. the seller
D. either the seller or the buyer

143. Who pays the freight cost when the terms are FOB destination?
A. the seller
B. the buyer
C. the customer
D. either the buyer or the seller

144. A retailer purchases merchandise with a catalog list price of $30,000. The retailer receives a 15% trade
discount and credit terms of 2/10, n/30. How much cash will be needed to pay this invoice within the discount
period?
A. $30,000
B. $24,900
C. $29,400
D. $24,990


145. What type of company would normally offer trade discounts to its customers?
A. Service companies
B. Retailers

order by the purchasing department costs $50, and the company receiving dock personnel cost $25, what is the
total cost charged to the merchandise?
A. $3,825
B. $3,850
C. $3,875
D. $3,500


151. Under the perpetual inventory system, all purchases of merchandise are debited to the account entitled
A. Merchandise Inventory
B. Cost of Merchandise Sold
C. Cost of Merchandise Available for Sale
D. Purchases

152. When the perpetual inventory system is used, the inventory sold is debited to
A. supplies expense
B. cost of merchandise sold
C. merchandise inventory
D. sales

153. Under a perpetual inventory system
A. accounting records continuously disclose the amount of inventory
B. increases in inventory resulting from purchases are debited to Purchases
C. there is no need for a year-end physical count
D. the purchase returns and allowances account is credited when goods are returned to vendors

154. The proper journal entry to record the receipt of inventory purchased on account in a perpetual inventory
system would be:
A. Jan 1 Merchandise Inventory 1,500
Accounts Payable

Sales

7,590

Cost of Merchandise Sold
Merchandise Inventory
C. Cash
Sales

7,590

Cost of Merchandise Sold
Merchandise Inventory
D. Cash
Sales

10,000

Cost of Merchandise Sold
Merchandise Inventory

7,590

7,590
10,000
10,000

7,590
10,000
10,000