Accounting Chapter 5D

Recall the formula for calculating a company's acid-test ratio.

(Cash and cash equivalents plus Short-term investments plus Current receivables) divided by Current liabilities

A merchandiser has four closing journal entries at the end of an accounting cycle. Select the correct entries below.

- Close revenue accounts. - Close expense accounts. - Close the income summary account. - Close the withdrawals account.

Identify the items or sub-headings that would appear on a multiple-step income statement.

- Cost of goods sold - Selling expenses - General and administrative expenses - Gross profit - Income from operations - Net sales

Sticky Company's merchandise inventory balance at year end is $15,050, but a physical count reveals that only $15,000 of inventory exists. The adjusting entry to record the shrinkage includes:

- Credit to Merchandise Inventory for $50 - Debit to Cost of Goods Sold for $50

Select the statements below that correctly describe the flow of costs in a merchandiser's accounting cycle.

- Merchandise that is sold becomes an expense reported on the income statement. - Merchandise that is purchased becomes an asset reported on the balance sheet. - Ending inventory + Cost of goods sold = Total merchandise available for sale. - Beginning inventory + net purchases = Merchandise available for sale.

Which of the following are the three main parts of a multiple-step income statement?

- Net income - Income from operations - Gross profit

Identify the statements below that are correct regarding the closing entries for a merchandiser using the perpetual inventory system.

- Sales is closed as a revenue account. - The Withdrawals account is closed to Owner, Capital. - Sales Discounts is closed with the expense accounts. - Sales Returns and Allowances is closed with the expense accounts. - Cost of goods sold is closed with the expense accounts.

Why is it important for a business's success to have a high gross margin?

A merchandiser must make a sufficient profit on the sale of its merchandise to cover the other expenses of its business.

True or false: Merchandise inventory is generally converted to cash more quickly than accounts receivable.

False

A single-step income statement can be identified by which of the following formats?

It shows only one total for all expenses

Which of the following equations correctly identify the cost flow of a merchandising company?

Net purchases plus beginning inventory equals merchandise available for sale

Which are the two classifications of operating expenses on a multiple-step income statement?

Selling; general and administrative

Identify the statement below that is the correct definition of "shrinkage".

Shrinkage is the term used to refer to the loss of inventory due to theft or deterioration.

Which of the statements below summarizes what the acid-test ratio measures?

The acid-test ratio measures a merchandiser's ability to pay its current liabilities.

True or false: A single-step income statement shows only one subtotal for expenses.

True

The formula for the acid-test ratio is computed as (____ + cash equivalents + short-term investments + current receivables)/current liabilities.

cash

The Merchandise Inventory account on a classified balance sheet is reported in the:

current assets section

The formula for the acid-test ratio is computed as (cash + short-term investments + current receivables)/__________.

current liabilities

A multiple-step income statement will have all of the following main parts except:

net sales

Demonstrate how to prepare a multiple-step income statement by ranking the items below in the order they would appear on a multiple-step income statement of a merchandiser.

- sales - costs of goods sold - gross profit - operating expenses - income from operations - other revenue and expenses