Inventories T/F, Accounting for Retail Businesses T/F

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"Market," as used in the phrase "lower of cost or market" for valuing inventory, refers to the price at which the inventory is being offered for sale by its owner.

FALSE

1. The use of the lower-of-cost-or-market method of inventory valuation increases net income for the period in which the inventory replacement price declined.

FALSE

A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take a physical inventory.

FALSE

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.

FALSE

A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called cash discounts.

FALSE

A physical inventory should be taken at the end of every month.

FALSE

A purchase order establishes an initial record of the receipt of the

FALSE

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

FALSE

As we compare a merchandise business to a service business, the financial statement that changes the most is the Balance Sheet.

FALSE

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

FALSE

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

FALSE

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

FALSE

Direct disposal costs do not include special advertising or sales commissions.

FALSE

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

FALSE

During periods of decreasing costs the use of the LIFO method of costing inventory will result in a lower amount of net income than would result from the use of the FIFO method.

FALSE

During periods of rapidly rising costs, the use of the LIFO method results in illusory or inventory profits

FALSE

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

FALSE

Gross profit minus selling expenses equals net income.

FALSE

If ending inventory for the year is overstated, owner's equity reported on the balance sheet at the end of the year is understated.

FALSE

If ending inventory for the year is understated, net income for the year is overstated.

FALSE

If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30.

FALSE

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

FALSE

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

FALSE

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

FALSE

In a multiple-step income statement the dollar amount for income from operations is always the same as net income.

FALSE

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

FALSE

In a perpetual inventory system, when merchandise is returned to the seller, Cost of Merchandise Sold is debited as part of the transaction.

FALSE

In the retail inventory method, the cost to retail ratio is equal to the cost of goods sold divided by the retail price of the good sold.

FALSE

Inventory controls start when the merchandise is shelved in the store area.

FALSE

Inventory turnover measures the length of time is takes to acquire, sell and replace the inventory.

FALSE

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.

FALSE

Most companies will not take a purchases discount, because 1% or 2% discounts are insignificant.

FALSE

Most large companies will use only one inventory costing methods for all of its different segments.

FALSE

Net sales is equal to sales minus cost of merchandise sold.

FALSE

Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system.

FALSE

Retailers record all credit card sales as credit sales.

FALSE

Sales Discounts is a revenue account with a credit balance.

FALSE

Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales.

FALSE

Sellers and buyers are required to record trade discounts.

FALSE

The accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and Freight In are found on the balance sheet.

FALSE

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

FALSE

The selection of an inventory costing method has no significant impact on the financial statements.

FALSE

The seller records the sales tax as part of the sales amount.

FALSE

The specific identification inventory method should be used when the inventory consists of identical, low cost units that are purchased and sold frequently

FALSE

Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer's place of business.

FALSE

Under the LIFO inventory costing method, the most recent costs are assigned to ending inventory.

FALSE

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.

FALSE

Under the periodic inventory system, the cost of merchandise sold is recorded when sales are made.

FALSE

Under the periodic inventory system, the merchandise inventory account continuously discloses the amount of inventory on hand.

FALSE

Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. If payment is made within 10 days of the purchase, the entry to record the payment will include a credit to Cash and a credit to Purchase Discounts.

FALSE

Unsold consigned merchandise should be included in the consignee's inventory.

FALSE

Use of the retail inventory method requires taking a physical count of inventory.

FALSE

When companies use a perpetual inventory system, the recording of the purchase of inventory will include a debit to purchases.

FALSE

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

FALSE

When merchandise that was sold is returned, a credit to sales returns and allowances is made.

FALSE

When using the FIFO inventory costing method, the most recent costs are assigned to the cost of goods sold.

FALSE

A consignor who has goods out on consignment with an agent should include the goods in ending inventory even though they are not in the possession of the consignor.

TRUE

A perpetual inventory system is an effective means of control over inventory.

TRUE

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

TRUE

A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels.

TRUE

Average inventory is computed by adding the inventory at the beginning of the period to the inventory at the end of the period and dividing by two

TRUE

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

TRUE

Cost of Merchandise Sold is often the largest expense on a merchandising company income statement.

TRUE

During periods of increasing costs, an advantage of the LIFO inventory cost method is that it matches more recent costs against current revenues

TRUE

During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO cost method.

TRUE

During periods of increasing costs, the use of the FIFO method of costing inventory will yield an inventory amount for the balance sheet that is higher than LIFO would produce.

TRUE

FIFO is the inventory costing method that follows the physical flow of the goods.

TRUE

Freight-in is considered a cost of purchasing inventory.

TRUE

Generally, the lower the number of days' sales in inventory, the better.

TRUE

If a company uses the periodic inventory system to cost its inventory, the gross profit method is a method that can be used to check on theft when the actual inventory is taken by the company.

TRUE

If a fire destroys the merchandise inventory, the gross profit method can be used to estimate the cost of merchandise destroyed.

TRUE

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

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

TRUE

If the perpetual inventory system is used, the account entitled Merchandise Inventory is debited for purchases of merchandise.

TRUE

In a periodic inventory system, the cost of merchandise purchased includes the cost of freight-in.

TRUE

In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account.

TRUE

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

TRUE

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

TRUE

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

TRUE

In valuing damaged merchandise for inventory purposes, net realizable value is the estimated selling price less any direct costs of disposal.

TRUE

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

Inventory errors, if not discovered, will self-correct in two years.

TRUE

Merchandise Inventory normally has a debit balance

TRUE

Of the three widely used inventory costing methods (FIFO, LIFO, and average cost), the LIFO method of costing inventory assumes costs are charged based on the most recent purchases first.

TRUE

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

TRUE

One negative effect of carrying too much inventory is risk that customers will change their buying habits.

TRUE

One of the most important differences between a service business and a retail business is in what is sold.

TRUE

One of the two internal control procedures over inventory is to properly report inventory on the financial statements.

TRUE

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

TRUE

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

TRUE

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

TRUE

Safeguarding inventory and proper reporting of the inventory in the books are the reasons for controlling the inventory.

TRUE

Sales Returns and Allowances is a contra-revenue account.

TRUE

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

TRUE

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

TRUE

The abbreviation FOB stands for Free On Board

TRUE

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

TRUE

The average cost inventory method is the rarely used with a perpetual inventory system.

TRUE

The average cost method will always yield results between FIFO and LIFO.

TRUE

The buyer will include the sales tax as part of the cost of items purchased for use

TRUE

The chart of accounts for a merchandise business would include an account called Delivery Expense.

TRUE

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

TRUE

The ending merchandise inventory for 2010 is the same as the beginning merchandise inventory for 2011.

TRUE

The form of the balance sheet in which assets, liabilities, and owner's equity are presented in a downward sequence is called the report form.

TRUE

The lower of cost or market is a method of inventory valuation.

TRUE

The lower-of-cost-or-market method of determining the value of ending inventory can be applied on an item by item, by major classification of inventory, or by the total inventory.

TRUE

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

TRUE

The seller may prepay the freight costs even though the terms are FOB shipping point.

TRUE

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

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

The three inventory costing methods will normally each yield different amounts of net income.

TRUE

There is no difference between the recording of cash sales and the recording of MasterCard or VISA sales.

TRUE

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

Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of the merchandise sold.

TRUE

Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are recorded.

TRUE

When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount.

TRUE

When a merchandising business is compared to a service business, the financial statement that is not affected by that change is the Statement of Owner's Equity.

TRUE

When merchandise inventory is shown on the balance sheet, both the method of determining the cost of the inventory and the method of valuing the inventory should be shown.

TRUE

When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period.

TRUE

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

TRUE


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