Accounting200 Test Bank Ch. 3

Assume the perpetual inventory method is used. 1) The company purchased $12,500 of merchandise on account under terms 2/10, n/30. 2) The company returned $1,200 of merchandise to the supplier before payment was made. 3) The liability was paid within the discount period. 4) All of the merchandise purchased was sold for $18,800 cash. The net cash flow from operating activities as a result of the four transactions is: A) $5,100. B) $7,726. C) $6,550. D) $11,074.

A) $5,100.

Gomez Co. had beginning inventory of $2,400 and ending inventory of $1,200. The cost of goods sold was $9,600. Based on this information, Gomez Co. must have purchased inventory amounting to: A) $8,400. B) $9,600. C) $10,800. D) $13,200.

A) $8,400.

Use the following account numbers and corresponding account titles to answer the following question. Account No. Account Title (1) Cash (2) Merchandise inventory (3) Cost of goods sold (4) Transportation-out (5) Dividends (6) Common stock (7) Selling expense (8) Loss on the sale of land (9) Sales Which accounts would appear on the income statement? A) Account numbers 3, 4, 7, 8, and 9. B) Account numbers 3, 4, 5, 7, and 9. C) Account numbers 2, 3, 7, 8, and 9. D) Account numbers 3, 5, 7, and 8.

A) Account numbers 3, 4, 7, 8, and 9.

The chief advantage of the periodic system is: A) efficiency and ease of recording. B) immediate feedback on the inventory on hand at any time during the period. C) timely discovery of losses due to theft. D) better control over inventory.

A) Efficiency and ease of recording

The term "FOB Shipping Point" means: A) The buyer pays the shipping cost. B) The seller pays the shipping cost. C) The buyer records transportation cost as an expense. D) The seller records transportation-out cost.

A) The buyer pays the shipping cost.

Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $42,000 of common stock for cash. 2) The company paid cash to purchase $26,400 of inventory. 3) The company sold inventory that cost $16,000 for $30,600 cash. 4) Operating expenses incurred and paid during the year, $14,000. Sanchez Company engaged in the following transactions during Year 2: 1) The company paid cash to purchase $35,200 of inventory. 2) The company sold inventory that cost $32,800 for $57,000 cash. 3) Operating expenses incurred and paid during the year, $18,000. Note: Sanchez uses the perpetual inventory system. The balance in the inventory account shown at December 31, Year 2 is: A) $2,400. B) $12,800. C) $61,600. D) $28,800.

B) $12,800.

allard Company uses the perpetual inventory system. The company purchased $16,000 of merchandise from Andes Company under the terms 2/10, net/30. Ballard paid for the merchandise within 10 days and also paid $500 freight to obtain the goods under terms FOB shipping point. All of the merchandise purchased was sold for $30,000 cash. The amount of gross margin for this merchandise is: A) $14,000. B) $13,820. C) $16,000. D) $13,500.

B) $13,820.

Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $42,000 of common stock for cash. 2) The company paid cash to purchase $26,400 of inventory. 3) The company sold inventory that cost $16,000 for $30,600 cash. 4) Operating expenses incurred and paid during the year, $14,000. Sanchez Company engaged in the following transactions during Year 2: 1) The company paid cash to purchase $35,200 of inventory. 2) The company sold inventory that cost $32,800 for $57,000 cash. 3) Operating expenses incurred and paid during the year, $18,000. Note: Sanchez uses the perpetual inventory system. Sanchez's gross margin for the Year 2 is: A) $6,200. B) $24,200. C) $21,800. D) $32,800.

B) $24,200.

Product costs are matched against sales revenue: A) in the period immediately following the purchase. B) in the period immediately following the sale. C) when the merchandise is purchased. D) when the merchandise is sold.

D) when the merchandise is sold

Assume the perpetual inventory method is used. 1) The company purchased $12,500 of merchandise on account under terms 2/10, n/30. 2) The company returned $1,200 of merchandise to the supplier before payment was made. 3) The liability was paid within the discount period. 4) All of the merchandise purchased was sold for $18,800 cash. The amount of gross margin from the four transactions is: A) $5,100. B) $7,726. C) $6,550. D) $11,074.

B) $7,726.

Use the following account numbers and corresponding account titles to answer the following question. Account No. Account Title (1) Cash (2) Merchandise inventory (3) Cost of goods sold (4) Transportation-out (5) Dividends (6) Common stock (7) Selling expense (8) Loss on the sale of land (9) Sales Which accounts would affect gross margin? A) Account numbers 2 and 9. B) Account numbers 3 and 9. C) Account numbers 3, 4, 7, and 9. D) Account numbers 3, 7, 8 and 9.

B) Account numbers 3 and 9.

Which of the following is considered a period cost? A) Transportation cost on goods received from suppliers. B) Advertising expense for the current month. C) Cost of merchandise purchased. D) None of these answer choices are considered a period cost.

B) Advertising expense for the current month

Which of the following would be considered as primarily a merchandising business? A) West Consulting B) Martin's Supermarket C) Sandridge and Associates Law Offices D) KPM Accounting and Tax Service

B) Martin's Supermarket

Assume the perpetual inventory method is used. 1) Green Company purchased merchandise inventory that cost $64,000 under terms of 2/10, n/30 and FOB shipping point. 2) The company paid freight cost of $2,400 to have the merchandise delivered. 3) Payment was made to the supplier within 10 days. 4) All of the merchandise was sold to customers for $94,000 cash and delivered under terms FOB shipping point with freight cost amounting to $1,600. The gross margin from these transactions of Green Company is: A) $31,280. B) $27,280. C) $28,880. D) $29,680.

C) $28,880.

Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $42,000 of common stock for cash. 2) The company paid cash to purchase $26,400 of inventory. 3) The company sold inventory that cost $16,000 for $30,600 cash. 4) Operating expenses incurred and paid during the year, $14,000. Sanchez Company engaged in the following transactions during Year 2: 1) The company paid cash to purchase $35,200 of inventory. 2) The company sold inventory that cost $32,800 for $57,000 cash. 3) Operating expenses incurred and paid during the year, $18,000. Note: Sanchez uses the perpetual inventory system. The amount of retained earnings at December 31, Year 2 is: A) $6,200. B) $26,000. C) $6,800. D) $38,800.

C) $6,800.

The following are the income statements for Ace and Diamond Companies. What are the net income percentages for the above companies? A) 6.09%; 4.25% B) 1.83%; 1.70% C) 16.4%; 23.6% D) 30%; 40%

C) 16.4%; 23.6%

Use the following account numbers and corresponding account titles to answer the following question. Account No. Account Title (1) Cash (2) Merchandise inventory (3) Cost of goods sold (4) Transportation-out (5) Dividends (6) Common stock (7) Selling expense (8) Loss on the sale of land (9) Sales Which accounts would appear on the balance sheet? A) Account numbers 1, 2, 4, and 5. B) Account numbers 1, 3, 7, and 8. C) Account numbers 1, 2, and 6. D) Account numbers 3, 4, 8, and 9.

C) Account numbers 1, 2, and 6.

Assume the perpetual inventory method is used. 1) The company purchased $12,500 of merchandise on account under terms 2/10, n/30. 2) The company returned $1,200 of merchandise to the supplier before payment was made. 3) The liability was paid within the discount period. 4) All of the merchandise purchased was sold for $18,800 cash. What effect will the return of merchandise to the supplier have on the accounting equation? A) Assets and equity are reduced by $1,176. B) Assets and liabilities are reduced by $1,176. C) Assets and liabilities are reduced by $1,200. D) None. It is an asset exchange transaction.

C) Assets and liabilities are reduced by $1,200.

Anchor Company sold merchandise with a cost of $560 to a customer for $890 on account. Due to an error, this sale was never recorded in the accounting records. What effects will the failure to make the necessary entries have on the company's accounting equation? A) Total assets and total equity will be overstated. B) Total assets will be overstated and total equity will be understated. C) Total assets and total equity will be understated. D) The accounting equation will not be affected.

C) Total assets and total equity will be understated.

Which of the following statements is true about period costs? A) Most period costs are expensed in the period the costs are incurred. B) Period costs are expensed when the products associated with these costs are sold. C) Period costs are usually recorded as assets. D) Period costs do not adhere to the matching principle.

A) Most period costs are expensed in the period the costs are incurred

Aaron Company uses the periodic inventory cost flow method. If Aaron's ending inventory is understated due to an accounting error, what is the effect on net income and the ending balance of retained earnings? A) Net Income = Understated; Retained Earnings = Understated B) Net Income = Understated; Retained Earnings = Overstated C) Net Income = Overstated; Retained Earnings = Understated D) Net Income = Overstated; Retained Earnings = Overstated

A) Net Income = Understated; Retained Earnings = Understated

Galaxy Company sold merchandise costing $1,700 for $2,600 cash. The merchandise was later returned by the customer for a refund. If the perpetual inventory method is used, what effect will the sales return have on the accounting equation? A) Total assets and total equity decrease by $900. B) Total assets decrease by $2,600 and total equity is decreased by $1,700. C) Total assets and total equity decrease by $2,600. D) Total assets and total equity increase by $900.

A) Total assets and total equity decrease by $900.

The Wilson Company purchased $44,000 of merchandise from the Poole Wholesale Company. Wilson also paid $3,000 for freight costs to have the goods shipped to its location. Which of the following statements regarding the necessary entries for the transactions is true? Wilson uses the perpetual inventory system. A) Total increases to the inventory account would be $47,000. B) Total increases to the inventory account would be $44,000. C) Transportation-in would be increased by $3,000. D) Total increases to the inventory account would be $41,000.

A) Total increases to the inventory account would be $47,000.

Which of the following items is not a product cost? A) Transportation cost on goods delivered to customers. B) Cost of merchandise purchased for resale. C) Transportation cost on merchandise purchased from suppliers. D) All of these answer choices are product costs.

A) Transportation cost on goods delivered to customers

A business firm that primarily sells merchandise to other businesses is known as a: A) Wholesale firm B) Service firm C) Retail firm D) Consulting firm

A) Wholesale firm

Under a periodic inventory system, the buyer does not use which of the following accounts in recording purchases and related transactions? A) Merchandise Inventory B) Purchase Returns and Allowances C) Purchase Discounts D) Purchases

A) merchandise inventory

Use the following account numbers and corresponding account titles to answer the following question. Account No. Account Title (1) Cash (2) Merchandise inventory (3) Cost of goods sold (4) Transportation-out (5) Dividends (6) Common stock (7) Selling expense (8) Loss on the sale of land (9) Sales Which accounts would affect operating income? A) Account numbers 2, 4, and 9. B) Account numbers 3, 5, 7, and 9. C) Account numbers 3, 4, 7, and 9. D) Account numbers 3, 4, 7, 8 and 9.

C) Account numbers 3, 4, 7, and 9.

Which of the following is considered a product cost? A) Utility expense for the current month. B) Salaries paid to employees of a retailer. C) Transportation cost on goods received from suppliers. D) Transportation cost on goods shipped to customers

C) Transportation cost on goods received from suppliers

A company using the perpetual inventory method paid $250 cash to have goods delivered from one of its suppliers. The payment of $250 for transportation-in is considered a(n): A) asset source transaction. B) asset use transaction. C) asset exchange transaction. D) claims exchange transaction.

C) asset exchange transaction

Faust Company uses the perpetual inventory method. Faust sold goods that cost $2,300 for $3,600. If the sale was made on account, the net effect of the sale will: A) increase total assets by $2,300. B) increase total equity by $3,600. C) increase total assets by $1,300. D) increase total assets by $3,600.

C) increase total assets by $1,300.

The credit terms, 2/15, n/30, indicate that a: A) fifteen percent discount can be deducted if the invoice is paid within two days following the date of sale. B) two percent discount can be deducted for a period up to thirty days following the date of sale. C) two percent discount can be deducted if the invoice is paid before the fifteenth day following the date of the sale. D) two percent discount can be deducted if the invoice is paid after the fifteenth day following the sale, but before the thirtieth day.

C) two percent discount can be deducted if the invoice is paid before the fifteenth day following the date of the sale.

The following are the income statements of the Hancock Company for two consecutive years. Increases in which expenses contributed to the net loss in Year 2? A) Cost of goods sold and selling expenses B) Selling expenses and administrative expenses C) Cost of goods sold and administrative expenses D) Administrative expenses

D) Administrative expenses

Which factor has removed most of the practical limitations associated with use of the perpetual inventory system? A) A more honest work force. B) Recent changes in GAAP. C) Recent changes in federal and state laws. D) Advancements in technology.

D) Advancements in technology.

On March 5, Gibbs Company purchases $5,000 of merchandise from a supplier for cash and records that transaction by increasing its inventory account. On March 30, the company records a $400 decrease in its inventory account. We can assume the company uses the: A) perpetual inventory method and $400 may represent a purchase return. B) perpetual inventory method and $400 may represent cost of goods sold. C) perpetual inventory method and $400 may represent a purchase allowance. D) All of these answer choices are correct.

D) All of these answer choices are correct.

Which of the following account titles is normally used in a periodic inventory system? A) Transportation-in B) Purchases C) Purchase Returns and Allowances D) All of these answer choices are normally used.

D) All of these answer choices are normally used.

The cost of goods sold account is classified as: A) a liability. B) an asset. C) a contra asset. D) an expense.

D) Expense

Which of the following would not be considered as primarily a merchandising business? A) Abercrombie and Fitch B) Sam's Clubs C) Amazon D) Regal Cinemas

D) Regal Cinemas

Hill Company uses the periodic inventory system. It records a transaction that increases the balances in its purchases and accounts payable accounts. Which of the following is true about Hill Company? A) When the related merchandise is sold, the purchases account will be decreased by the related cost of goods sold. B) The manner in which this transaction was recorded indicates that Hill returned $6,000 of merchandise to a supplier. C) The balance in the account will appear on the balance sheet at year end. D) The manner in which this transaction was recorded indicates that Hill purchased inventory on account.

D) The manner in which this transaction was recorded indicates that Hill purchased inventory on account.

The term "FOB Destination" means: A) The seller pays the shipping cost. B) The seller records transportation-out expense. C) The buyer pays the shipping cost. D) The seller pays the shipping cost and records transportation-out expense.

D) The seller pays the shipping cost and records transportation-out expense.

How does the purchase of inventory on account under the perpetual inventory method affect the financial statements? A) Total assets increase B) Total liabilities increase C) Total assets are unaffected D) Total assets and total liabilities both increase

D) Total assets and total liabilities both increase

Under a periodic system, the payment of shipping costs on goods received from the vendor will increase the: A) merchandise inventory account. B) cost of goods sold account. C) transportation-out account. D) transportation-in account.

D) Transportation- in account

A discount given to encourage prompt payment is called: A) a cash discount. B) a sales discount by the seller. C) a purchase discount by the buyer. D) all of these answer choices are correct.

D) all of these answer choices are correct.

Vargas Company sold a piece of land for $39,000 that had originally cost $32,500. This event would: A) increase cash flows from investing activities by $39,000. B) not affect operating income. C) increase net income by $6,500. D) all of these answer choices are correct.

D) all of these answer choices are correct.

The purpose of common size financial statements is to: A) compare the amount of common stock to other types of stock. B) make comparisons between firms of different sizes. C) make comparisons between different time periods. D) make comparisons between firms of different sizes and between different time periods.

D) make comparisons between firms of different sizes and between different time periods.

Assume the perpetual inventory method is used. 1) Green Company purchased merchandise inventory that cost $64,000 under terms of 2/10, n/30 and FOB shipping point. 2) The company paid freight cost of $2,400 to have the merchandise delivered. 3) Payment was made to the supplier within 10 days. 4) All of the merchandise was sold to customers for $94,000 cash and delivered under terms FOB shipping point with freight cost amounting to $1,600 paid by Green company. As a result of the above transactions of Green Company, the net cash flow from operating activities was: A) $94,000 inflow. B) $27,280 inflow. C) $66,720 outflow. D) $31,280 inflow.

B) $27,280 inflow.

Ashton Company uses the perpetual method. The company's inventory account had a $6,600 balance as of December 31, Year 1. A physical count of inventory shows only $5,900 of merchandise in stock at December 31, Year 1. How does the related adjusting entry affect the financial statements? A) Assets increase. B) Expenses increase. C) Cash flow from operating activities decreases. D) All of these answer choices are correct.

B) Expenses increase.

Abbott Company purchased $6,500 of merchandise inventory on account. Advent uses the perpetual inventory method. How does this transaction affect the financial statements? A) Decrease accounts payable and decrease purchases. B) Increase inventory and increase accounts payable. C) Increase cost of goods sold and increase accounts payable. D) Decrease accounts payable and decrease inventory.

B) Increase inventory and increase accounts payable

Net income percentage is equal to: A) Net Sales divided by Net Income B) Net Income divided by Net Sales C) Total Equity divided by Net Sales D) Net Income divided by Gross Margin

B) Net Income divided by Net Sales

When using a perpetual inventory system, which of the following events is an asset use transaction? A) Paid cash to purchase inventory. B) Paid cash for transportation-out costs. C) Purchased inventory on account. D) Paid cash for transportation-in costs.

B) Paid cash for transportation-out costs.

Middleton Company uses the perpetual inventory method. The company purchased an item of inventory for $130 and sold the item to a customer for $200. What effect will the sale have on the company's inventory account? A) The account will decrease by $200 B) The account will decrease by $130 C) The account will decrease by $70 D) No effect

B) The account will decrease by $130