ACCT. Ch. 5 True or False
24. Cash register tapes provide evidence of credit sales.
F
43. The income statement for a merchandising company presents only two amounts not shown on a service company income statement.
F
8. Under the periodic inventory system, cost of goods sold is treated as an account.
F
4. Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.
T
15. Net sales minus cost of goods sold is called gross profit.
T
25. The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.
F
23. Sales revenues are only earned during the period cash is collected from the buyer.
F
13. Cost of Goods Sold is considered an expense of a merchandising firm.
T
18. The terms 2/10, net/30 mean that a 2 percent discount is allowed on payments made within the 10 days discount period.
T
46. If net sales are $750,000 and cost of goods sold is $600,000, the gross profit rate is 20%.
T
50. A quality of earnings ratio significantly less than 1 suggests that a company may be using more aggressive accounting techniques in order to accelerate income recognition.
T
6. The operating cycle involves the purchase and sale of merchandise inventory as well as the subsequent collection of cash from credit sales.
T
7. The purchase of inventory and its eventual sale lengthen the operating cycle of a merchandising company.
T
19. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 20 days after the invoice date to take advantage of the cash discount.
F
21. If merchandise costing $5,000, with terms 2/10, n/30, is paid within 10 days, the amount of the purchase discount is $100.
T
22. When an invoice is paid within the discount period, the amount of the discount decreases Inventory.
T
26. The revenue recognition principle applies to merchandising companies by recognizing sales revenues when the performance obligation is satisfied.
T
28. Sales Discounts is a contra revenue account to Sales Revenue.
T
20. Discounts taken by the buyer for early payment of an invoice are called sales discounts by the buyer.
F
27. Sales allowances and Sales discounts are both designed to encourage customers to pay their accounts promptly.
F
29. The normal balance of Sales Returns and Allowances is a credit.
F
3. Sales revenue minus operating expenses equals gross profit.
F
33. The terms 2/10, n/30 mean that a 2 percent discount is allowed on payments made over 10 but before 30 days after the invoice date.
F
38. Nonoperating activities include revenues and expenses that are related to the company's main line of operations.
F
39. Operating expenses include interest expense and income tax expense.
F
40. Income from operations appears on both the single-step and multiple-step forms of an income statement.
F
48. Gross profit rate is computed by dividing cost of goods sold by net sales.
F
5. A periodic inventory system does not require a detailed record of inventory items.
F
49. The quality of earnings ratio is calculated as net income divided by net cash provided by operating activities.
F
*51. Under the periodic system, when a customer returns goods, Purchases Returns and Allowances is debited.
F
10. The periodic inventory system provides an up to date amount of inventory on hand.
F
11. A very small business most likely would have to use the perpetual inventory system.
F
12. The computer has increased greatly the use of the periodic inventory system.
F
2. The operating cycle of a merchandising company ordinarily is shorter than that of a service company.
F
*52. Under the periodic inventory system, acquisitions of merchandise are not recorded in the Inventory account.
T
1. Retailers and wholesalers are both considered merchandising enterprises.
T
14. Operating expenses are subtracted from revenue for a service enterprise and from gross profit for a merchandising enterprise.
T
16. Under the perpetual inventory system, purchases of merchandise for sale are recorded in the Inventory account.
T
17. Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.
T
30. When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period.
T
31. Sales Discounts and Sales Returns and Allowances both have normal debit balances.
T
32. Merchandise is sold for $5,000 with terms 1/10, n/30. If $1,000 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $40.
T
35. In a single-step income only one step is required in determining net income.
T
41. A merchandising company's net income is determined by subtracting operating expenses from gross profit.
T
44. Under the periodic system, the purchases account is used to accumulate all purchases of merchandise for resale.
T
45. With the periodic inventory system, goods available for sale must be calculated before cost of goods sold.
T
9. An advantage of using the periodic inventory system is that it requires less record keeping than the perpetual inventory system.
T
37. Gross profit appears on both the single-step and multiple-step forms of an income statement.
F
47. The gross profit amount is generally considered to be more informative than the gross profit rate.
F
34. The multiple-step income statement is considered more useful than the single-step income statement because it highlights the components of net income.
T
36. Freight-out appears as an operating expense in the income statement.
T
42. Sales revenues, cost of goods sold, and gross profit are amounts on a merchandising company's income statement not commonly found on the income statement of a service company.
T
