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Chapter 06 Merchandising Activities 1) Inventory is a relatively liquid asset and usually appears above Accounts Receivable on the balance sheet. A) True B) False 2) The operating cycle of a merchandising company consists of (1) purchases of merchandise; (2) sales of the merchandise; and (3) collection of accounts receivable. A) True B) False 3) The operating cycle of a merchandiser is longer and more complex than the operating cycle of a manufacturer. A) True B) False 4) Wholesalers buy from retailers and sell to the general public. A) True B) False 5) Cost of goods sold is an expense shown separately from other expenses in an income statement. A) True B) False 6) If ending inventory and cost of goods sold are added together, they should equal gross profit. A) True B) False 7) If gross profit and cost of goods sold are added together, they should equal sales. A) True B) False 8) General ledgers contain information about specific control accounts in the company's subsidiary ledger. A) True B) False 9) If a company has 240 credit customers, there are 480 individual customer accounts in the accounts receivable subsidiary ledger (one for sales for each customer, one for receipts from each customer). A) True B) False 10) Inventory shrinkage refers to unrecorded decreases in inventory resulting from breakage, theft, and shoplifting. A) True B) False 11) In a perpetual inventory system, when merchandise is purchased, it is debited to an account called Purchases. A) True B) False

12) A perpetual inventory system requires the capability of recording the cost of the goods sold for individual sales transaction. A) True B) False 13) When using a perpetual inventory system, the Inventory account is credited when a sale is made. A) True B) False 14) In a perpetual inventory system, the Inventory and Cost of Goods Sold accounts are kept up-to-date throughout the accounting period. A) True B) False 15) When an adjusting entry is made to record inventory shrinkage, the Inventory account is debited and the Cost of Goods Sold account is credited. A) True B) False 16) In a periodic inventory system, the Inventory and Cost of Goods Sold accounts are kept up-to-date throughout the accounting period. A) True B) False 17) In a periodic inventory system, when a sale is made there is no entry made to record the cost of goods sold. A) True B) False 18) In a periodic inventory system, a complete physical inventory must be taken at year-end in order to compute the amount of purchases made during the period. A) True B) False 19) In a periodic inventory system, cost of goods sold is the cost of goods available for sale less ending inventory. A) True B) False 20) In a periodic inventory system, the Cost of Goods Sold account may be created during the closing process by debiting Cost of Goods Sold and crediting the Beginning Inventory and the Purchases account. A) True B) False 21) Under the periodic inventory system, no effort is made to keep up-to-date records of either Inventory or Cost of Goods Sold as transactions occur. A) True B) False 22) In a periodic inventory system, the ending inventory can be determined from the accounting records,

and a physical count of the merchandise on hand will confirm the amount. A) True B) False 23) In a periodic inventory system, the cost of goods sold is determined by the following end-of-period computation: Beginning Inventory + Purchases - Ending inventory = Cost of Goods Sold. A) True B) False 24) A large company with many different kinds of low-cost items would tend to use a perpetual inventory system. A) True B) False 25) Today, most large merchandising companies use a perpetual inventory system. A) True B) False 26) A factor that might suggest that a periodic inventory system is appropriate is that all merchandise is stored at the sales site. A) True B) False 27) A factor that might suggest that a perpetual inventory system is appropriate is that inventory includes many different kinds of low-cost items. A) True B) False 28) Net Sales is computed as total sales revenue less sales returns and allowances less sales discounts. A) True B) False 29) If a transaction takes place with terms 2/10, n/30, the "10" refers to the percent discount a purchaser can take if payment is made within 2 days. A) True B) False 30) The terms "sales discount," "purchase discount," and "cash discount" all refer to the same discount. A) True B) False 31) If a company records a purchase at net cost and then fails to take advantage of the discount, the discount not taken is recorded in the Interest Expense account. A) True B) False 32) If a company records a purchase at the gross invoice price and then takes advantage of the discount, the discount is treated as a reduction in the cost of goods sold. A) True B) False

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33) Sales returns and allowances is an expense account, and on the income statement it is added to cost of goods sold. A) True B) False 34) Instead of paying for merchandise purchased on account, Olympic Corp. returned this merchandise to the supplier. Olympic should record this transaction by debiting Accounts Payable and crediting Sales Returns and Allowances. A) True B) False 35) Purchase Discounts Lost is shown as a reduction of cost of goods sold in the income statement. A) True B) False 36) The contra-revenue accounts, Sales Returns and Allowances and Sales Discounts, should be closed by crediting these accounts and debiting Income Summary for each account. A) True B) False 37) In a retail department store with an efficient perpetual inventory system, the quantities of goods actually on hand are probably somewhat more than the quantities indicated in the accounting records. A) True B) False 38) In preparing monthly bills to be sent to individual credit customers, the billing department will use the accounts payable subsidiary ledger, rather than the general ledger. A) True B) False 39) Regardless of the number of special journals used, every business needs a general journal. A) True B) False 40) Gross profit margin is the dollar amount of gross profit expressed as a percentage of gross sales. A) True B) False 41) The average gross profit margin is a measure of relative profitability. A) True B) False 42) The operating cycle: A) Is repeated once per year for manufacturers and merchandisers. B) Has seven steps. C) Starts with using cash to purchase merchandise and ends with collecting the cash back from customers. D) Is longer for a retailer than for a manufacturer. 43) Which of the following businesses is likely to have the shortest operating cycle? A) A food store B) A department store C) An art store D) A car store

44) Merchandising companies: A) Include both wholesalers and retailers. B) Do not sell directly to the public. C) Manufacture their own products and then sell them to the public. D) Include companies such as General Motors, IBM, and Boeing Aircraft. 45) 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. 46) 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. 47) The basic purpose of a subsidiary ledger is to: A) Provide a chronological record of all business transactions. B) Provide details about the individual items comprising the balance of a general ledger account. C) Enable accountants to prepare financial statements. D) Provide persons outside of the organization with detailed information about the company's operations. 48) 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. 49) 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. 50) Which of the following should not be classified as inventory in the balance sheet of a large automobile dealership? A) Pickup trucks offered for sale. B) Used cars taken in trade and offered for sale on the company's used-car lot. C) Spark plugs, oil filters, and other parts that are intended for use by the service department in repairing and servicing customers' cars. D) "Company cars" provided to specific company executives for their personal use. 51) 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. C) Inventory controlling account. D) Accounts payable subsidiary ledger. 52) 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. C) $3,375,000. D) $2,850,000.

53) 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. 54) 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 55) Cumberland, Inc. has applied to its bank for a loan. The bank asks Cumberland's controller about the total amount of the company's accounts receivable. Assuming that all accounting records are up-to-date, the controller can best answer this question by referring to: A) The Income Statement. B) The Accounts Receivable control account. C) The Accounts Receivable subsidiary ledger. D) Last year's Balance Sheet. 56) 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. 57) 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. 58) 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 to take physical inventory is eliminated. 59) 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. 60) Hicksville's Department Store uses a perpetual inventory system. At year-end, the balance in the Inventory control 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 control 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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61) 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 control account and inventory subsidiary ledger by $7,000. D) Reduce the balance in the Inventory control account and record a current liability, both in the amount of $7,000. [ The following information applies to the questions displayed below. ] Washington Warehouse is a small retail business that specializes in the sale of top-of-the-line televisions. This year, the store has begun to carry the Flat TV manufactured by Bass Co. Thus far, Washington has recorded the following transactions involving the Flat TV: Ja n. 5 Purchased 8 Flat TVs at a unit cost of $1,400 Jan. 18 Purchased 5 additional Flat TVs at $1,400 each Feb. 12 Sold 9 Flat TVs to the Duke Hotel for $15,300 62) 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. 63) If Washington uses a perpetual inventory system, the gross profit on the Flat TVs as of February 12th is: A) $11,200. B) $2,700. C) $4,100. D) $15,300. 64) If Washington uses a perpetual inventory system, the journal entry to record the sale on February 12th would include all of the following except : A) A debit to the Cost of Goods Sold for $12,600. B) A credit to Sales Revenue for $15,300. C) A credit to Purchases for $15,300. D) A credit to Inventory for $15,300. 65) Washington maintains a subsidiary ledger account for each type of TV carried in the store. An examination of the account for the Flat TV model at the end of February would show: A) 4 units on hand with a total value of $1,400. B) 4 units on hand with a total value of $5,600. C) 13 units on hand with a total value of $18,200. D) The amount that Washington owes to Bass. [ The following information applies to the questions displayed below. ] World of Sound is a small retail business that specializes in the sale of top-of-the-line sound systems. This year, the store has begun to carry the Surround Sound manufactured by Carp Co. Thus far, World of Sound has recorded the following transactions involving the Surround Sound M 5 Purchased 18 units at a unit cost of $2,400

ay May 18 Purchased 15 additional units at $2,550 each June 12 Sold 19 units to the Davies Theater 66) If World of Sound uses a perpetual inventory system, the journal entry to record the purchase on May 18th would include which of the following? A) A debit to the Purchases account for $38,250. B) A debit to the Cost of Goods Sold for $38,250. C) A credit to Inventory for $38,250. D) A debit to Inventory for $38,250. 67) If World of Sound uses a perpetual inventory system, the journal entry to record the sale on February 12th would include which of the following? (Assume that World of Sound uses FIFO, meaning that the first goods purchased are the first ones to be sold.) A) A debit to the Cost of Goods Sold for $45,750. B) A credit to the Cost of Goods Sold for $45,750. C) A credit to Purchases for $45,750. D) A debit to Inventory for $45,750 68) Inventory shrinkage is not caused by: A) Shoplifting. B) Breakage. C) Price reductions by competitors. D) Spoilage. 69) 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. 70) 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. 71) 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. 72) 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.

73) The following information is available: Sales $ 2,850 Inventory-year-end $ 1,500 Purchases $ 1,950 Cost of Goods Sold $ 2,400 - Gross profit is: A) $0. B) $1,500. C) $450. D) $900. 74) During the year 2018, the inventory of Debra's Gift Shop decreased by $50,000. (Assume beginning inventory was zero.) If the income statement for the year 2018 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. [ The following information applies to the questions displayed below. ] Michael uses its periodic inventory system and the following information is available: Sales $ 43,400 Inventory-Beginning 11,200 Inventory-Ending 9,800 Purchases 32,200 - 75) What is the cost of goods sold? A) $ 9,800 B) $33,600 C) $32,200 D) $43,400 76) What is the gross profit? A) $ 9,800 B) $33,600 C) $32,200 D) $43,400 [ The following information applies to the questions displayed below. ] Bremmer uses a periodic inventory system and the following information is available: Sales $ 230,400 Inventory-Beginning 21,200 Inventory-Ending 19,800 Purchases 132,200 - 77) What is the cost of goods sold? A) $96,800 B) $133,600 C) $132,200 D) $230,400 78) What is the gross profit? A) $96,800 B) $133,600 C) $132,200 D) $230,400 79) 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.

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80) 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. 81) Which of the following factors would suggest the use of a perpetual inventory system? A) A small company. B) Inventory items with a high per-unit cost. C) A desire to minimize record-keeping requirements. D) Only annual reporting is required. 82) Which of the following companies would be most likely to use a periodic inventory system? A) IBM. B) First Bank of New York. C) Sears. D) A newspaper stand. 83) Which of the following companies would be most likely to use a perpetual inventory system? A) Corner deli. B) Home Depot. C) James Dean, CPA. D) A manufacturer of custom sailboats. 84) 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 nor 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. 85) In comparing a perpetual inventory system with a periodic inventory system, which of the following statements is not correct? A) Most large companies use perpetual inventory systems. B) A periodic system does not include an inventory subsidiary ledger. C) The perpetual method is easier to apply in a manual accounting system. D) Regardless of the system in use, most businesses take a physical inventory at least once a year. 86) Periodic inventory systems are used primarily by: A) Small businesses with manual accounting systems. B) Large manufacturing companies. C) Small businesses that sell a high volume of low-priced items. D) Companies that sell a high volume of low-priced items and record sales transactions on point-of-sale terminals. 87) Which account listed below is classified as a contra-revenue account? A) Cost of Goods Sold. B) Gross profit. C) Sales Discounts. D) Purchases. 88) 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.

89) Sales discounts and allowances: A) Will reduce net profit when properly recorded. B) Will increase net profit when properly recorded. C) Will not affect net profit. D) Are always immaterial and need not be recorded. 90) 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. 91) 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. 92) 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. 93) To arrive at net sales: A) Add sales discounts to sales. B) Subtract the cost of goods sold from the sales price. C) Subtract sales returns and sales discounts from sales. D) Subtract accounts receivable from sales. 94) 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. 95) 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. 96) If sales discounts are shown as a separate item in financial statements, they should be shown as a(n): A) Deduction from accounts receivable. B) Deduction from gross sales revenue. C) Operating expense. D) Current liability. 97) Regal Artworks Co. records purchases net of all available purchase discounts. If the company makes payment after the discount has expired, the entry to record the payment should include a: A) Debit to Purchase Discounts Lost. B) Credit to Purchase Discounts Lost. C) Debit to Sales Discounts. D) Credit to Sales Discounts. 98) Bernice Beverages is not satisfied with the quality of merchandise purchased from Reade Supplies. If Reade Supplies agrees to settle this matter by granting Bernice Beverages a sales allowance, Bernice Beverages will: A) Return the entire shipment to Reade Supplies and receive a full refund. B) Return only that portion of the merchandise that it is unable to sell within the discount period. C) Keep the merchandise, but pay a reduced purchase price. D) Keep the merchandise and sell it at a reduced sales price.

99) 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. 100) When making sales, the sales taxes received are: A) Revenue. B) A liability. C) An expense if incurred. D) A reduction in inventory value. 101) 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. 102) Bartner Furniture, Inc. purchased inventory at $1,200 list price and the terms were 3/10 n/30. If Bartner paid the full invoice price on the 10 th day, what amount of cash did Bartner pay to settle the account? A) $1,176. B) $1,236. C) $1,164. D) $1,200. 103) 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 Beacon Food pays the remaining amount of the invoice within the discount period, the amount paid should be: A) $1,920. B) $1,960. C) $3,920. D) $4,000. 104) 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. 105) Pet Foods Plus purchased bagged dog food at an invoice price of $6,000 and terms of 2/10, n/30. Half of the bags had been damaged in shipment and delivery was refused. If Pet Foods Plus pays the remaining amount of the invoice within the discount period, the amount paid should be: A) $2,940. B) $3,000. C) $5,880. D) $6,000. 106) The gross profit margin: A) Is the dollar amount of gross profit expressed as a percentage of cost of sales. B) May indicate popular products and successful marketing strategies. C) Must be computed for the business as a whole rather than for specific sales departments. D) Is equal to cost of goods sold plus gross operating expenses. 107) At the beginning of 2018, Midway Hardware has an inventory of $400,000. Because sales growth was strong during 2018, the owner wants to increase inventory on hand to $450,000 at December 31, 2018. If net sales for 2018 are expected to be $1,600,000, and the gross profit rate is expected to be 35%, compute the cost of the merchandise the owner should expect to purchase during 2018. A) $1,490,000. B) $1,040,000. C) $1,090,000. D) $1,600,000. 108) 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. 109) At the beginning of the year, Saratoga Dress Co. had an inventory of $300,000. During the year, the

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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. 110) At the beginning of 2018, England Dresses has an inventory of $140,000. However, management wants to reduce the amount of inventory on hand to $80,000 at December 31. If net sales for 2018 are forecast at $400,000 and the gross profit rate is expected to be 40%, compute the cost of the merchandise which management should expect to purchase during 2018. (Hint: First compute the expected cost of goods sold.) A) $240,000. B) $180,000. C) $320,000. D) $220,000. 111) 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. 112) 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) $112,000 113) At the beginning of 2018, Wilson Stores has an inventory of $300,000. Because sales growth was strong during 2018, the owner wants to increase inventory on hand to $450,000 at December 31, 2018. If net sales for 2018 are expected to be $2,600,000, and the gross profit rate is expected to be 35%, compute the cost of the merchandise the owner should expect to purchase during 2018. A) $750,000 B) $1,240,000 C) $1,690,000 D) $1,840,000 114) 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) $900,000 115) Accounting terminology Listed below are nine technical accounting terms introduced in this chapter: Gross profit Gross profit rate General ledger Cost of goods sold Physical inventory Subsidiary ledger Perpetual inventory system Periodic inventory system Inventory shrinkage Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. ________ a. An approach to accounting for inventories and the cost of goods sold used primarily in small businesses with manual accounting systems. ________ b. A reason why perpetual inventory records may not be entirely accurate. ________ c. The difference between the revenue earned by selling merchandise and the cost of goods sold. ________ d. Gross profit divided by average total stockholders' equity. ________ e. An accounting procedure used in both perpetual and periodic inventory systems. In a perpetual

system, this procedure brings to light the amount of inventory shrinkage. In a periodic system, it is the basis for computing the cost of goods sold. ________ f. An accounting record showing the individual items comprising the balance of a general ledger account. ________ g. The accounting record in which transactions initially are recorded. 116) Subsidiary ledgers Listed below are several merchandising transactions of Siegel's Garden Center, a garden supply store. (a) Purchased merchandise from Bayview Wholesale on account. (b) Sold merchandise for cash. (c) Sold merchandise on account to Dom's Landscaping Co. (d) Paid the account payable to Bayview Wholesale. (e) Collected the account receivable from Dom's Landscaping Co. Among the accounting records maintained by Siegel's are subsidiary ledgers for inventory, accounts receivable, and accounts payable. For each of the five transactions, you are to indicate any subsidiary ledger (or ledgers) to which the transaction would be posted. Use the code: Inv = Inventory subsidiary ledger AR = Accounts receivable subsidiary ledger AP = Accounts payable subsidiary ledger Also indicate whether each posting causes the balance in the subsidiary ledger account to increase or decrease. Organize your answer in tabular form as illustrated below. The answer for transaction a is provided as an example. 117) Gross profit The table below contains information from a recent annual report of Molloy, Inc. (Dollar amounts are stated in millions.) Fill in the missing amounts. 2017 2018 Net sales $28,800 $32,200 Cost of goods sold ? $ 16,600 Gross profit $ 12,200 ? 118) Subsidiary ledgers Explain the nature of subsidiary ledgers, and give two specific examples. For each of these examples, explain (1) the unit of organization within this ledger, and (2) the usefulness of this ledger in business operations. 119) Effects of transactions upon the accounting equation Listed below are selected transactions of Simon's, a retail store that uses a perpetual inventory system: (a) Purchased merchandise on account.

(b) Made an entry to recognize the revenue from a sale of merchandise on account. (Ignore the cost of goods sold.) (c) Recognized the cost of goods sold relating to the sale in Transaction b. (d) Collected in cash the account receivable from the customer in Transaction b. (e) Following the taking of a physical inventory at year-end, made an adjusting entry to record a normal amount of inventory shrinkage. Indicate the effects of each of these transactions upon the elements of the company's financial statements. Organize your answer in tabular form, using the column headings shown below. (Notice that the cost of goods sold is shown separately from all other expenses.) Use the code letters I for increase, D for decrease, and NE for no effect. The answer for Transaction a is provided as an example. 120) Perpetual inventory system: basic entries Renato Company uses a perpetual inventory system. A partial chart of accounts is shown below, followed by a series of merchandising transactions. Indicate the accounts that should be debited and credited in recording each transaction. (Ignore sales taxes.) 121) Perpetual inventory system: transactions and closing entries Danny's Wholesale Company uses a perpetual inventory system. A partial chart of accounts is shown below, followed by a series of merchandising transactions. Indicate the accounts that should be debited and credited in recording each transaction. (Ignore sales taxes.)

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Account(s ) Account (s) Transactions Debited Credited Example: Sold merchandise for cash 1,60 50,5 A Purchased merchandise on account B Sold merchandise on account C Paid the supplier of the merchandise in transaction A D Collected cash from the customer in transaction B E The physical inventory at year-end disclosed a normal amount of inventory shrinkage F Made an entry to close the Revenue account G Made an entry at year-end to close the Cost of Goods Sold account H Closed the Income Summary account at the end of an unprofitable year 122) A customer purchased merchandise for $400, which cost the seller $200. The customer was dissatisfied with some of the goods and thus returned $100 worth of merchandise and received a cash refund. (a) What journal entries should the seller make when the merchandise is sold and at the time of the return? Assume that the seller uses a perpetual inventory system. (b) If the seller uses a periodic inventory system, what entries would be made? 123) Periodic inventory system Soundview Centre uses a periodic inventory system. At the end of 2018, the accounting records include the following information: Inventory, December 31, 2017 $ 23,100 Inventory, December 31, 2018 $ 15,900 Net sales $318,000 Purchases $ 183,000 Compute the following for 2018: 124) Periodic inventory system Armstrong Creation uses a periodic inventory system. During the current year, the company purchased merchandise at a cost of $245,000. You are to compute the cost of goods sold under each of the following alternative assumptions:

125) Inventory systems Briefly distinguish between a perpetual inventory system and a periodic inventory system. 126) Inventory systems Indicate whether you would expect each of the following businesses to maintain a perpetual or a periodic inventory system. Explain the reasoning behind your answers: (a) A jewelry store. (b) A roadside vegetable stand. 127) Inventory systems Bookmarks, Inc. sells used books at its store in the resort community of Lake Bryn Mawr. The owner maintains a large inventory of used books purchased from estate sales, flea markets, and customers. During the tourist seasons of summer and winter, the store is exceptionally busy with customers. Each customer usually makes small purchases ranging in amount from one to twenty dollars. What type of inventory system would you recommend to the owner of Bookmarks, Inc.? Explain the reasoning behind your advice. 128) Journal entries for merchandising transactions Shown below is a partial chart of accounts for Main Street Markets, followed by a series of merchandising transactions. The company uses a perpetual inventory system, records purchases at net cost, and records sales at the full invoice price. Sales taxes are collected on all sales, and the sales tax liability is recorded immediately. Freight charges on inbound shipments are recorded in the Inventory account. Indicate the accounts that should be credited in recording each transaction by placing the appropriate account number(s) in the space provided.

129) Prepare journals entries for the following, assuming the company uses a perpetual inventory method and records purchases at their net amounts. 130) Net sales and gross profit Mayflower Supply House had gross sales revenue of $1,700,000, cost of goods sold of $950,000, sales returns and allowances of $52,500, and allowed sales discounts of $30,000. Compute for the year: 131) Using gross profit rates Explain how the gross profit rate for a particular product is determined. How would you expect the manager of a large department store to use these gross profit rates in deciding which products to feature in the store's window displays and in determining the location of various types of merchandise within the store? Explain.

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132) Gross profit rates — A practical application Note to instructor: The following exercise requires students to use gross profit rates in a manner not specifically illustrated in the chapter. We view this as an exercise in critical thinking and, as such, it is more challenging than the typical exercise. Part d requires an expository answer. Some instructors may choose to omit part d. Your store sells computers and software. The average computer sells for $1,350, but the customer buying a computer also buys an average of $750 in software. You earn only 10% gross profit rate on sales of computers, but you make a 40% gross profit rate on software. You currently are selling 150 computers per month. (A) What is the total amount of your monthly gross profit? $________ (B) To increase sales, you are thinking about selling computers at cost ($1,215.) This would be the "cheapest price in town," and should attract more customers. You expect each customer who buys a computer to also buy $750 worth of software. Under these assumptions, how many computers must you sell each month in order to earn the same amount of gross profit as you are earning now? (C) Assume that as a result of reducing the sales price of computers to cost ($1,215), you are able to sell 250 computers each month, and that each customer now buys $850 worth of software. What will be the total amount of your monthly gross profit? (D) Assume that you achieve the results specified in part c (250 sales transactions per month, including an average of $850 in software). Would you consider the policy of selling computers at cost successful or unsuccessful? Explain specifically why this strategy is working out favorably or unfavorably.

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