20 Jan Question 18 The collection

ACC556 Financial Accounting for Managers

CHAPTER 5 EXERCISE

Question 1 Which statement is in?

Answers:

The sales revenue account is used to record the sales of goods held for resale to customers.

Sales discounts are recorded as debits to the sales revenue account.

The sales revenue account is a revenue account.

The sales revenue account has a normal credit balance and is closed at the end of the accounting period.

Question 2 As the president of Harter Company, you notice that no discounts have been taken when settling accounts payables. What would be an acceptable explanation?

Answers:

All invoices have credit terms of n/30.

There is not sufficient cash to pay within the discount period.

Discounts are missed because no one knows how to enter them in the new accounting software.

The full amount of the invoice is being paid within the discount period and the treasurer is pocketing the discount amount.

Question 3 With the periodic inventory system, goods available for sale must be calculated before cost of goods sold.

Answers:

True

False

Question 4 Which of the following provides the best rationale regarding analysts’ views about the information value of the gross profit rate versus the gross profit amount?

Answers:

The gross profit amount is more informative than the gross profit rate because it is a dollar amount rather than a ratio.

The gross profit amount is less informative than the gross profit rate because the latter presents a meaningful relationship between gross profit and net sales.

The gross profit amount is more informative than the gross profit rate because the gross profit rate is only used to describe a few industries while the gross profit amount is universally used.

The gross profit amount is more informative than the gross profit rate because high volume operations are able to calculate the gross profit rate but not the gross profit amount.

Question 5 Which of the following items does not result in an adjustment in the merchandise inventory account under a perpetual system?

Answers:

A purchase of merchandise.

A return of merchandise inventory to the supplier

Payment of freight costs for goods shipped to a customer

Payment of freight costs for goods received from a supplier

Question 6 Freight-out appears as an operating expense in the income statement.

Answers:

True

False

Question 7 The terms 2/10, net/30 mean that a 2 percent discount is allowed on payments made within the 10 days discount period.

Answers:

True

False

Question 8 Which of the following is a true statement about inventory systems?

Answers:

Periodic inventory systems require more detailed inventory records.

Perpetual inventory systems require more detailed inventory records.

A periodic system requires cost of goods sold be determined after each sale.

A perpetual system determines cost of goods sold only at the end of the accounting period.

Question 9 Multiple-step income statements show

Answers:

gross profit but not income from operations.

neither gross profit nor income from operations.

both income from operations and gross profit.

income from operations but not gross profit.

Question 10 The Sales Returns and Allowances account does not provide information to management about

Answers:

possible inferior merchandise.

the percentage of credit sales versus cash sales.

inefficiencies in filling orders.

errors in filling customers.

Question 11 Match the items below by entering the appropriate code letter in the space provided.

Question

Selected Match

Net sales

Sales less sales returns and allowances and sales discounts.

Sales discount

A reduction given by the seller for prompt payment of a credit sale.

Credit terms

Specifies the amount of cash discount and time period during which it is offered.

Periodic inventory system

Requires a physical count of goods on hand to compute cost of goods sold.

Gross profit rate

Gross profit divided by net sales.

Contra revenue

An account that is offset against a revenue account on the income statement.

Freight-out

Freight cost to deliver goods to customers reported as an operating expense.

Gross profit

Net sales less cost of goods sold.

Sales invoice

Provides support for a credit sale.

Purchase discount

A cash discount claimed by a buyer for prompt payment of a balance due.

Question 12 A sales invoice is prepared when goods

Answers:

are sold for cash.

are sold on credit.

sold on credit are returned.

are sold on credit or for cash.

Question 13

Merchandising companies that sell to retailers are known as

Answers:

brokers.

corporations.

wholesalers.

service firms.

Question 14

What is an advantage of using the multiple-step income statement?

Answers:

It highlights the components of net income.

Gross profit is not a separate item.

It is easier to prepare than the single-step income statement.

Net income will be higher than net income computed using the single-step income statement.

Question 15

Financial information is presented below:

Operating expenses $ 28,000

Sales returns and allowances 7,000

Sales discounts 3,000

Sales revenue 150,000

Cost of goods sold 91,000

The gross profit rate would be: (Hint: Calculate net sales first)

Answers:

.33.

.35.

.65.

.27.

Question 16 The primary source of revenue for a wholesaler is

Answers:

investment income.

service revenue.

the sale of merchandise.

the sale of plant assets the company owns.

Question 17 Farwell Company purchased merchandise with an invoice price of $2,000 and credit terms of 1/10, n/30. Assuming a 365 day year, what is the implied annual interest rate inherent in the credit terms?

Answers:

2%

12.5%

18.25%

36%

Question 18 The collection of a $700 account beyond the 2 percent discount period will result in a

Answers:

debit to Cash for $686.

credit to Accounts Receivable for $700.

credit to Cash for $700.

debit to Sales Discounts for $14.