ACCT 2810 - Chapter 4 - Multiple Choice

c. if the sum of its operating income and other revenue is less than its other expenses

Under which of the following situations does a business earn a gross profit but incur a net loss? a.If the sum of its gross profit and net income is less than its operating income b.If its sales is less than its cost of goods sold c.If the sum of its operating income and other revenue is less than its other expenses d.If the sum of its operating income and other revenue is more than its other expenses

c. decreases the cash account and the customer refunds payable account

Water Source Inc. pays David and Co. a refund of $225 for merchandise damaged in shipment. David and Co. agrees to keep the merchandise. To account for this event, Water Source Inc.: a.decreases the cash account and increases the customer refunds payable account. b.increases the cash account and decreases the customer refunds payable account. c.decreases the cash account and the customer refunds payable account. d.increases the cash account and the customer refunds payable account.

a. there is no effect on liquidity, but there is a decrease in the profitability

Identify the effect on the liquidity and profitability metrics of a seller, when the seller records receipt of the returned inventory and issues a credit memo to the buyer? a.There is no effect on liquidity, but there is a decrease in the profitability of the seller. b.There is no effect on liquidity and profitability. c.There is a decrease in liquidity, but there is no effect on the profitability of the seller. d.There is a decrease in liquidity, and there is an increase in the profitability of the seller.

b. 11.1 percent

If Daisy Inc.'s gross profit percent is 10 percent, selling price of its product is $500, and the cost of the product is $350, then Daisy's markup percent is _____. a.10.0 percent b.11.1 percent c.13.3 percent d.6.7 percent

d. both liquidity and profitability remain unchanged

If a company issues a credit memo of $600 to a customer, what is its effect on the company's liquidity and profitability? a.The liquidity decreases whereas profitability increases. b.The liquidity increases whereas profitability decreases. c.Both liquidity and profitability increase. d.Both liquidity and profitability remain unchanged.

b. added to the cost of the inventory

If buyer pays the freight costs, in the buyer's books of accounts, such costs are: a.written off against the customer refunds payable account. b.added to the cost of the inventory. c.credited to the accounts payable account. d.reported on the income statement as an expense.

d. reported on the income statement as an expense

If seller pays the freight costs, in the seller's books of accounts, such costs are: a.written off against the customer refunds payable account. b.added to the cost of the inventory. c.added to the retained earnings. d.reported on the income statement as an expense.

a. the buyer pays the freight charges from the shipping point to the final destination

If the terms of invoice are FOB (free on board) shipping point, it means that _____. a.the buyer pays the freight charges from the shipping point to the final destination b.the buyer does not have to pay any sales tax on that invoice c.the seller delivers the merchandise to the buyer's final destination, free of freight charges to the buyer d.the seller and the buyer divide the freight charges equally among themselves

a. $24,500

Leto Inc. purchased merchandise on account from Metis Inc. for $25,000, credit terms being 2/10, n/30. If Leto pays the invoice within the discount period, what amount will Metis receive as payment? a.$24,500 b.$25,500 c.$22,000 d.$22,500

a. its liquidity as well as profitability remains unchanged

Magenta Inc. buys merchandise worth $1,000 from Zeus Inc. on account, terms FOB (free on board) shipping point and pays the freight cost of $100. Based on this scenario, which of the following is the effect on the liquidity and profitability of Magenta Inc.? a.Its liquidity as well as profitability remains unchanged. b.Its liquidity increases and profitability decreases. c.Its liquidity as well as profitability decrease. d.Its liquidity decreases and profitability increases.

c. there is a 1.5% decrease in the gross profit percent

Maroon Inc. made sales of $100,000 during 20Y7. The cost of goods sold was $75,000. The company calculated its gross profit ratio, but later its inventory records indicated an inventory shrinkage of $1,500. Identify the effect of inventory shrinkage on the gross profit percent. a.There is a 23.5% decrease in the gross profit percent. b.There is a 2.5% increase in the gross profit percent. c.There is a 1.5% decrease in the gross profit percent. d.There is no effect on the gross profit percent.

a. $3,945,000

On January 1, 20Y6, Setasilk Inc. had $150,000 of inventory on hand, and it purchased $4,000,000 of merchandise during the year. On December 31, 2016, Setasilk Inc. took count of its physical inventory and determined that $205,000 of inventory was on hand. Setasilk Inc.'s cost of goods sold for 20Y6 is _____. a.$3,945,000 b.$3,645,000 c.$4,055,000 d.$4,205,000

a. in the books of Tango Co. there is an increase of $12,000 in the accounts receivable account, and in the books of Salsa Co. there is an increase of $12,000 in the accounts payable account.

On July 1, Tango Co. sold merchandise on account to Salsa Co. for $12,000. Which of the following is the adjustment in the books of Tango Co. and Salsa Co.? a.In the books of Tango Co. there is an increase of $12,000 in the accounts receivable account, and in the books of Salsa Co. there is an increase of $12,000 in the accounts payable account. b.In the books of Tango Co. there is an increase of $12,000 in the accounts receivable account, and in the books of Salsa Co. there is a decrease of $12,000 in the accounts payable account. c.In the books of Tango Co. there is a decrease of $12,000 in the accounts receivable account, and in the books of Salsa Co. there is a decrease of $12,000 in the accounts payable account. d.In the books of Tango Co. there is an increase of $12,000 in the accounts payable account, and in the books of Salsa Co. there is a decrease of $12,000 in the accounts receivable account.

b. operating expenses from gross profit

Operating income is determined by subtracting _____. a.other expenses from gross profit b.operating expenses from gross profit c.operating expenses from net profit d.operating expenses and other expenses from gross profit

a. fees earned

The revenues from services are reported on the income statement of a service business as _____. a.fees earned b.sales c.non-recurring income d.gross profit

b. the working capital decreases by $2,500

Azure Inc's inventory records indicate an inventory shrinkage of $2,500. What is the effect of inventory shrinkage on Azure's working capital? a.There is no effect on the working capital. b.The working capital decreases by $2,500. c.The working capital increases by $2,500. d.The working capital decreases by $5,000.

b. in the books of Citron Inc. the retained earnings decrease by $200, and in the books of Megaton Co. there is no effect.

Citron Inc. pays transportation charges of $200 for delivery of the merchandise sold to Megaton Co. Identify the effect of this transaction in the books of Citron and Megaton. a.In the books of Citron Inc. the retained earnings decrease by $200, and in the books of Megaton Co. the operating expenses decrease by $200. b.In the books of Citron Inc. the retained earnings decrease by $200, and in the books of Megaton Co. there is no effect. c.In the books of Citron Inc. the retained earnings increase by $200, and in the books of Megaton Co. the operating expenses increase by $200. d.In the books of Citron Inc. the retained earnings increase by $200, and in the books of Megaton Co. there is no effect.

c. inventory shrinkage

For retailers, the physical inventory on hand at the end of an accounting period is usually less than the balance of the inventory account. This difference is referred to as _____. a.customer allowance b.customer refunds payable c.inventory shrinkage d.estimated returns inventory

c. operating activities

The indirect method of preparation of cash flow statement reconciles net income with net cash flows from _____. a.financing activities b.non-recurring activities c.operating activities d.investing activities

b. there is no effect on the working capital of Aries Inc.

Aries Inc. buys merchandise from Andy Co. on account, $1,900, terms free on board (FOB) shipping point and pays the freight cost of $50. Identify the transaction's effect on the working capital of Aries Inc. a.There is a decrease in the working capital of Aries Inc. by $1,950. b.There is no effect on the working capital of Aries Inc. c.There is a decrease in the working capital of Aries Inc. by $50. d.There is an increase in the working capital of Aries Inc. by $1,850.

a. $1,500

Aztec Inc's inventory records indicate the following on December 31, 20Y7: Account balance of Inventory $70,500 Physical merchandise inventory on hand $69,000 Estimated customer refund $2,500 Aztec's inventory shrinkage is equal to _____. a.$1,500 b.$2,500 c.$1,000 d.$500

c. accounts receivable

In a retailer's books of accounts, which of the following account balances increases when it sells merchandise on credit? a.Cash b.Fees earned c.Accounts receivable d.Accounts payable

b. perpetual inventory system

In the _____, inventory records consist of the inventory account, called the controlling account, and a subsidiary record of each item of inventory, called a subsidiary ledger. a.controlling inventory system b.perpetual inventory system c.periodic inventory system d.just-in-time inventory system

a. $400,000

Slateblue and Co. is a retail company. In 20Y5, it reported a gross profit of $1,000,000. If 60 % of the gross profit were operating expenses, calculate the operating income of Slateblue and Co. for 20Y5. a.$400,000 b.$600,000 c.$1,400,000 d.$1,600,000

b. operating cycle

The _____ of a business is the process it takes for the business to spend cash to generate revenue, earn revenues, and receive cash from customers. a.accounting cycle b.operating cycle c.inventory cycle d.purchase cycle

a. as a current asset

The balance of the estimated returns inventory account is reported on a company's balance sheet _____. a.as a current asset b.as a long-term asset c.as a long-term liability d.as a current liability

c. $1,050,000

The following data relates to Dory Inc. for the year ending December 31, 20Y6. Sales $5,000,000 Cost of goods sold $3,700,000 Selling expenses $100,000 Administrative expenses 150,000 Dory Inc.'s operating income is _____. a.$8,950,000 b.$1,200,000 c.$1,050,000 d.$250,000

a. sales minus cost of goods sold

The gross profit of a retail business is determined as: a.sales minus cost of goods sold. b.sales minus cost of goods sold minus operating expenses. c.fees earned minus cost of goods sold minus operating expenses. d.fees earned minus cost of goods sold.

a. the accounts receivable account decreases by $700, and the customer refunds payable account decreases by $700.

The seller issues a credit memo for $700 for damaged merchandise to the buyer, and the merchandise was not returned by the buyer. Which of the following is the effect on the financial statements of the selling company? a.The accounts receivable account decreases by $700, and the customer refunds payable account decreases by $700. b.The accounts receivable account decreases by $700, and the inventories account increases by $700. c.The accounts payable account decreases by $700, and the inventories account decreases by $700. d.The accounts payable account decreases by $700, and the customer refunds payable account increases by $700.

b. increase the customer refunds payable account by $8,000 and decrease the sales account by $8,000

Turquoise Inc. expects that customers of 20Y6 sales will be issued refunds or allowances of $8,000 in 20Y7. To make an adjustment for the expected refunds and allowances, Turquoise Inc. will _____. a.increase the estimated returns inventory account by $8,000 and decrease the cost of goods sold by $8,000 b.increase the customer refunds payable account by $8,000 and decrease the sales account by $8,000 c.decrease the customer refunds payable account by $8,000 and increase the sales account by $8,000 d.decrease the estimated returns inventory account by $8,000 and increase the cost of goods sold by $8,000

b. the inventory account is increased by the cost of the goods returned, and the estimated returns inventory account is decreased by the same amount.

When a customer returns merchandise for a cash refund or allowance, which of the following is the correct way to record receipt of the returned inventory? a.The estimated returns inventory account is increased by the cost of the goods returned and the inventory account is decreased by the same amount. b.The inventory account is increased by the cost of the goods returned, and the estimated returns inventory account is decreased by the same amount. c.The inventory account is increased by the selling price of the goods returned and the cash account is decreased by the same account. d.The cash account is increased by the cost of the goods returned and the inventory account is decreased by the same account.

b. credit memo

When a seller decreases a customer's accounts receivable balance to account for a refund to the customer, the seller sends the customer a _____ indicating the seller's intent to decrease the account receivable balance. a.debit memo b.credit memo c.invoice d.purchase order

b. merchandise inventory

Which of the following accounts is reported on the balance sheet of a retail business but not on the balance sheet of a service business? a.Accounts payable b.Merchandise inventory c.Accounts receivable d.Prepaid insurance

d. markup percent = gross profit percent x (selling price / cost)

Which of the following equations shows the relationship between markup percent and gross profit percent? a.Markup Percent = Gross Profit Percent × (Gross Profit / Cost) b.Markup Percent = Gross Profit Percent × (Cost / Selling Price) c.Markup Percent = Gross Profit Percent × (Gross Profit / Selling Price) d.Markup Percent = Gross Profit Percent × (Selling Price / Cost)

d. cost of goods sold

Which of the following increases as a result of inventory shrinkage? a.Gross profit b.Interest expense c.Working capital d.Cost of goods sold

c. loss from disposing of fixed assets

Which of the following is an example of other expense? a.Freight cost b.Depreciation of plant and equipment c.Loss from disposing of fixed assets d.Advertising expense

a. fees earned

Which of the following is reported on the income statement of a service business but not on that of a retail business? a.Fees earned b.Salaries expense c.Operating expense d.Non-operating income

b. operating income = sales - cost of goods sold - operating expenses

Which of the following is the correct equation for computing the operating income of a retail business? a.Operating income = Fees earned - Operating expenses b.Operating income = Sales - Cost of goods sold - Operating expenses c.Operating income = Fees earned + Non-operating income d.Operating income = Sales - Cost of goods sold + Non-operating income

d. the multiple-step form reports gross profit operating income, as well as net income

Which of the following is the correct statement regarding a multiple-step income statement? a.The multiple-step form does not report gross profit and operating income. b.The multiple-step form emphasizes total revenues and total expenses in determining net income. c.The multiple-step form reports only net income. d.The multiple-step form reports gross profit operating income, as well as net income.

c. a single-step income statement does not report gross profit and operating income

Which of the following is the correct statement regarding a single-step income statement? a.A single-step income statement does not report selling and administrative expenses. b.A single-step income statement contains several sections and subtotals. c.A single-step income statement does not report gross profit and operating income. d.A single-step income statement is prepared after the statement of stockholders' equity.

b. working capital = current assets - current liabilities

Which of the following is the equation for calculating a firm's working capital? a.Working Capital = Total Liabilities - Current Liabilities b.Working Capital = Current Assets - Current Liabilities c.Working Capital = Current Liabilities - Current Assets d.Working Capital = Total Assets - Non-Current Liabilities

b. markup percent = gross profit / cost of goods sold

Which of the following is the equation for calculating markup percent? a.Markup Percent = Net Income / Cost of Goods Sold b.Markup Percent = Gross Profit / Cost of Goods Sold c.Markup Percent = Operating Income / Sales d.Markup Percent = Cost of Goods Sold / Sales

c. (sales - cost of goods sold) / sales

Which of the following is the formula for gross profit percent? a.(Cost of Goods Sold - Operating Expenses) / Cost of Goods Sold b.(Sales - Gross Profit) / Sales c.(Sales - Cost of Goods Sold) / Sales d.(Operating Income - Non-Operating Income) / Sales

b. other revenue is revenue from sources apart from the primary operating activity of a business

Which of the following statements is true about other revenue? a.Other revenue is included in the cost of goods sold. b.Other revenue is revenue from sources apart from the primary operating activity of a business. c.Other revenue is the difference between the actual customer refunds and the estimated customer refunds during a year. d.Other revenue is also known as gross profit.

d. any processing fees charged to a retailer for a use of credit cards are recorded as an expense by the retailer.

Which of the following statements is true about sales made to customers using credit cards? a.Any processing fees charged to the retailer for use of credit cards decreases the retailer's gross profit. b.When sales are made to customers using credit cards, the balance of the accounts receivable account in retailer's books increases. c.Sales made to customers using credit cards are treated as credit sales. d.Any processing fees charged to a retailer for use of credit cards are recorded as an expense by the retailer.

a. at the time of sale, the seller increases the sales account for the amount of the sale and increases the sales tax payable account for the amount of the tax.

Which of the following statements is true about sales tax? a.At the time of sale, the seller increases the sales account for the amount of the sale and increases the sales tax payable account for the amount of the tax. b.When a sale is made on account, the seller charges the buyer for the sales tax payable by increasing the accounts payable account. c.At the time of payment of sales tax, the seller records the tax payment by increasing the sales tax payable account and decreasing the cash account. d.The liability for sales tax is incurred only when the sale is made in cash.

c. the seller charges the buyer for sales tax by increasing the account receivable account

Which of the following statements is true of sales tax, if a sale is made on account? a.The seller does not charge the buyer for sales tax. b.The amount of sales tax has to be paid in cash by the buyer at the time of sale. c.The seller charges the buyer for sales tax by increasing the accounts receivable account. d.The buyer has to directly pay the sales tax to the tax authorities.