1. The Sales account and Purchases account should include:

a. only cash sales and cash purchases of merchandise.

b. only credit sales and credit purchases of merchandise.

c. both cash and credit sales and cash and credit purchases of merchandise.

d. not only merchandise transactions, but also purchases and sales of other assets used in the business.

Answerc. The Sales and Purchases accounts are used strictly for cash and credit sales and purchases of merchandise.

 

2. Purchasers of merchandise may be dissatisfied with the quality of goods purchased on account, and return the goods to the seller with an indication that payment will not be forthcoming. In such case, the document prepared by the purchaser is called:

a. a debit memorandum.

b. a credit memorandum.

c. a receiving report.

d. an invoice.

Answer a. The purchaser prepares a debit memorandum to indicate that they are "debiting" their Accounts Payable; this means that they don't intend to pay for the returned goods. Credit memorandums are prepared by sellers of merchandise; indicating that the seller does not expect payment for returned items (i.e., crediting Accounts Receivable). A receiving report is prepared by a purchaser to document the receipt of ordered goods and an invoice is a document prepared by a seller to inform the purchaser of the amount due for a particular transaction (i.e., a bill).

 

3. Bergstrom accepted the return of merchandise by a customer. The merchandise had been sold on account, and payment had not been received on the date of return. The returned goods retailed for $400, but cost Bergstrom only $300. The appropriate journal entry for Bergstrom is:

a.	Accounts Receivable			400
		Sales Returns & Allowances				400
b.	Sales Returns & Allowances			400
		Accounts Receivable				400
c.	Sales			400
		Purchases				300
		Accounts Receivable				100
d.	Sales Returns & Allowances			400
		Purchases				300
		Accounts Receivable				100

Answerb. To record the acceptance of returned goods requires an increase in Sales Returns and Allowances (a contra-revenue account which is increased with a debit) and a reduction of Accounts Receivable (credit). The Purchases account is not impacted.

 

4. Which of the following statements is true?

a. Cash discounts are used to reduce the invoice price below the stated list price.

b. The expression 2/30, n/60, means that a 2% cash discount is available if the invoice is paid within 30 to 60 days.

c. Cash discounts may not be used in conjunction with trade discounts.

d. Cash discounts normally apply to the invoice price of the merchandise, excluding freight charges.

Answerd. Cash discounts are generally not available on freight. Trade discounts are used to reduce the invoice price below the stated list price. The expression 2/30, n/60, means that a 2% discount is available if the invoice is paid within 30 days, otherwise the net amount is due within 60 days. A single transaction may involve both cash and trade discounts.

 

5. Lux had net purchases of $50,000, ending inventory of $25,000, net sales of $100,000, and gross profit of $32,000. How much was Lux's beginning inventory?

a. $7,000

b. $43,000

c. $93,000

d. $143,000

Answer

 

6. On February 1, Crown Company purchased $2,000 of merchandise, terms 2/10, n/30. Crown uses the gross method of recording purchases. Payment of the accounts payable was made on February 26. Which of the following journal entries is appropriate for the February 26 transaction?

a.	Purchases			2,000
		Accounts Payable				2,000
b.	Accounts Payable			1,960
		Cash				1,960
c.	Accounts Payable			1,960
	Purchases Discounts Lost			40
		Cash				2,000
d.	Accounts Payable			2,000
		Cash				2,000

Answer d. The payment of the invoice did not occur within the discount period. Therefore, $2,000 of cash was disbursed in settlement of the accounts payable. The accounts payable was originally established at its $2,000 gross amount. Choice "b" is the correct entry if payment had been made within the discount period and the net method was utilized. Choice "c" is the correct entry if payment had been made outside the discount period and the net method was utilized. Choice "a" is the correct entry to record the purchase on February 1 (using the gross method).

 

7. On March 1, Zekew Company purchased $1,000 of merchandise, terms 1/10, n/30. Zekew uses the net method of recording purchases. Payment of the accounts payable was made on March 4. Which of the following journal entries is appropriate for the March 4 transaction?

a.	Purchases			990
		Cash				990
b.	Accounts Payable			990
		Cash				990
c.	Accounts Payable			1,000
		Purchases Discounts				10
		Cash				990
d.	Accounts Payable			1,000
		Cash				1,000

Answerb. The payment of the invoice was within the discount period. Therefore, $990 of cash was disbursed in settlement of the accounts payable. The accounts payable was originally established at its $990 net amount. Choice "c" is the correct entry if payment had been made within the discount period and the gross method was utilized. Choice "d" is the correct entry if payment had been made outside the discount period and the gross method was utilized. Choice "a" is the correct entry if the purchase was a cash purchase with a 1% discount from invoice.

 

8. Dodd Company utilizes the periodic inventory accounting system. Dodd had beginning inventory of $59,000, ending inventory of $37,000, and net purchases of $123,000. Which of the following components should be included in the year-end closing entries prepared by Dodd?

a.	Purchases			123,000
		Inventory				123,000
b.	Income Summary			37,000
		Inventory				37,000
c.	Income Summary			59,000
		Inventory				59,000
d.	All of the above

Answerc. One component of the end-of-period entries is to close the Inventory account to Income Summary (for the beginning balance of the account); choice "c" is the appropriate entry to accomplish this objective. Choice "b" is backwards -- the ending inventory needs to be established in the accounts by debiting Inventory and crediting Income Summary. Purchases is closed by crediting the account, and debiting Income Summary; therefore, "a" is not correct.

 

9. Russell Merchandising uses the perpetual inventory system. Which of the following statements is correct?

a. When Russell records a sale, it should also debit inventory.

b. When Russell records a sale, it should also credit inventory.

c. When Russell records a sale, it should also credit cost of goods sold.

d. When Russell records a sale, it should also debit cost of goods available for sale.

Answerb. When a sale is recorded, the perpetual inventory system also necessitates an entry to record cost of goods sold. The appropriate entry debits Cost of Goods Sold, and credits Inventory.

 

10. A multiple-step income statement is thought to be more beneficial to financial users because of the revelation of important relationships. Which of the following is not separately identified on a multiple-step income statement?

a. Gross profit

b. Net income

c. Income taxes

d. Total costs and expenses

Answerd. Because of the reporting of expenses according to their nature (i.e., cost of goods sold, selling and administrative expenses, other expenses, etc.) a single total for all expenses cannot be separately identified (as might be the case with a single-step presentation). Gross profit, net income, and income taxes are each listed separately in a multiple-step presentation.