Chapter 4 Multiple Choice and True False Questions

1.Which of the following would not be considered as primarily a merchandising business? A.Gold's Gym B.Sam's Clubs C.Amazon D.Sears Roebuck Department Store

2.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 are product costs.

3.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 sold. D.when the merchandise is purchased.

4.Which of the following items is a period costs?

A.Advertising Expense. B.Sales commission C.President Salaries D.All of the above are period costs

5.The Cost of Goods Sold account is classified as: A.an expense. B.an asset. C.a contra asset. D.a liability.

6.The term "FOB Destination" means A.The seller pays the shipping cost. B.The seller records an increase in inventory. C.The buyer pays the shipping cost. D.The buyer assumes responsibility at the shipping point.

7.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.Both "b" and "c" are correct 0.

Use the following account numbers and corresponding account titles to answer the questions 8 and 9.

Account NO. Account Title

Cash

Inventory

Cost of goods sold

Transportation-out

Dividends

Common Stock

Selling Expense

8.Which accounts would appear on the income statement?

A.Account numbers 3, 4, and 7. B.Account numbers 2, 4, and 5. C.Account numbers 1, 3, and 7. D.Account numbers 2, 5, and 7.

9.Which accounts would appear on the balance sheet?

A.Account numbers 2, 4, and 5. B.Account numbers 1, 3, and 7. C.Account numbers 1, 2, and 6. D.Account numbers 3, 4, and 7.

10.Flores Company purchased $4,000 of merchandise on account. Flores sold the merchandise to a customer

for $7,000 cash. What is the increase in gross margin and the net change in cash flow from operating

activities as a result of these transactions?

Cash Flow From

Gross Margin Operating Activities

A. $7,000$4,000 inflow

B. $3,000$7,000 inflow

C. $3,000$7,000 outflow

D. $4,000$7,000 inflow

11.Gray Supply received $38,000 in cash for the sale of land that originally cost $32,500. This event would:

A.increase cash flows from investing activities by $38,000. B.not affect operating income. C.increase net income by $5,500. D.all of these are correct.

12.Aramis Company uses the perpetual method. The company's inventory account had a $6,500 balance

as of December 31, 2017. A physical count of inventory shows $5,800 of merchandise in stock at

December 31, 2017. The entry to recognize the missing inventory will:

A.increase assets. B.increase expense. C.decrease cash flow from operating activities. D.all of these.

13.Selling and administrative costs are product costs.

TRUE FALSE

14.Omega Company sold merchandise that it had purchased with a list price of $6,500 and subject to

terms of 2/10, n/30. Assuming that Omega paid for the merchandise during the discount period, the

cost of good sold for this transaction would be $6,370.

TRUE FALSE

15.The income statement is not affected by a purchase of merchandise.

TRUE FALSE

16. A physical count of the inventory can reveal the amount of inventory shrinkage the company has

experienced from employee theft and/or accounting errors.

TRUE FALSE

17.The entry to record the amount of inventory shrinkage affects both the balance sheet, and

the income statement.

TRUEFALSE

Chapter 4 Problems

1. Determine whether each of the following is a product cost or a period costs. Circle either Period Costs

or Product costs or Neither as appropriate. The first one is done as an example.

a. Advertising cost Product Costs Period Costs Neither

e. Transportation Out Product CostsPeriod Costs Neither

c. Sales Commission Product CostsPeriod Costs Neither

d. Transportation In Product Costs Period CostsNeither

f. Cost of purchases

for resale (Inventory) Product Costs Period Costs Neither

g. Rent of office space Product Costs Period Costs Neither

2. Record the following events assume that Lazarus Company uses a perpetual inventory system.

For Part 1: Record the event in Journal Entry form.

For Part 2: Indicate how each event affects the elements of financial statements, and use the following

letters to record your answer in the box shown below each element.

Increase = IDecrease = DNo Effect = N

You do not need to enter amounts for Part 2.

The first one is done as an example

a.Lazarus Co. purchased $20,000 of merchandise inventory on account from their supplier HTP Company.

Part 1: Record the event in Journal Entry form

Account Name DebitCredit

Inventory $20,000

Accounts Payable $20,000

Part 2: Indicate how the event affects the elements of financial statements

Net

Assets Liabilities Equity Revenues Expenses Income Cash

N N N N N

Inventory Accounts Payable

b Lazarus Co. sold merchandise to a customer for $1,000 on account. Lazarus' cost of the merchandise was $800.

Part 1: Record the event in Journal Entry form

Account Name DebitCredit

Part 2: Indicate how the event affects the elements of financial statements

Net

Assets Liabilities Equity Revenues Expenses Income Cash

c. Lazarus Co. paid $40 of freight cost to have merchandise shipped to one of its customers under terms

FOB destination.

Part 1: Record the event in Journal Entry form

Account Name DebitCredit

Part 2: Indicate how the event affects the elements of financial statements

Net

Assets Liabilities Equity Revenues Expenses Income Cash

d. Lazarus Co. returned $450 of defective merchandise it had previously purchased on account from a

supplier, HTP Company. HTP Company agreed to credit Lazarus' account.

Part 1: Record the event in Journal Entry form

Account Name DebitCredit

Part 2: Indicate how the event affects the elements of financial statements

Net

Assets Liabilities Equity Revenues Expenses Income Cash

e.Lazarus Co. paid $19,550 to HTP Company, the amount owed related to a purchase of inventory on account

with terms of net 30.

Part 1: Record the event in Journal Entry form

Account Name DebitCredit

Part 2: Indicate how the event affects the elements of financial statements

Net

Assets Liabilities Equity Revenues Expenses Income Cash

f. After a physical count of its inventory, Lazarus Co. discovered that $5,000 of inventory is missing.

Part 1: Record the event in Journal Entry form

Account Name DebitCredit

Part 2: Indicate how the event affects the elements of financial statements

Net

Assets Liabilities Equity Revenues Expenses Income Cash

3.On June 1, 2017, merchandise subject to terms 2/10, n/30 was sold on account to a customer for $23,500.

On June 3, 2017 the seller issued a credit memorandum for $5,100, accepting merchandise returned by

the customer. This was prior to payment by the customer.

a) What amount of cash will be collected by the seller if the payment is made by the customer on June 8, 2017?

b) What is the amount of cash collected by the seller if payment is made by the customer on June 21, 2017?

4.The 2017 income statements for the Dent Company and the Blumer Company appear below: Requirement: a. What is the gross margin percentage for each company?

Dent Company __________

Blumer Company __________

b. What is the net income percentage for each company?

Dent Company ___________

Blumer Company ___________

5.The following is a partial list of account balances for the Grafton Company at December 31, 2017:

Cash 87,450 Retained Earnings78,250

Accounts Receivable24,800 Sales 490,350

Inventory 197,450Cost of goods sold 399,250

Supplies 3,600Salaries expense 36,250

Land 134,800Utilities expense 9,500

Accounts Payable47,500Advertising Expense 30,000

Common Stock 300,000Gain on sale of land 7,000

From the above information, (using proper form) prepare a multistep income statement. Multistep income statement:

Chapter 4 Multiple Choice and True False Questions 1. Which of the following would not be considered as primarily a merchandising business? A. Gold's Gym B. Sam's Clubs C. Amazon D. Sears Roebuck Department Store 2. 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 are product costs. 3. 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 sold. D. when the merchandise is purchased. 4. Which of the following items is a period costs? A. Advertising Expense. B. Sales commission C. President Salaries D. All of the above are period costs 5. The Cost of Goods Sold account is classified as: A. an expense. B. an asset. C. a contra asset. D. a liability. 6. The term "FOB Destination" means A. The seller pays the shipping cost. B. The seller records an increase in inventory. C. The buyer pays the shipping cost. D. The buyer assumes responsibility at the shipping point. 7. 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. Both "b" and "c" are correct 0. Use the following account numbers and corresponding account titles to answer the questions 8 and 9. Account NO. 1 2 3 Account Title Cash Inventory Cost of goods sold 4 5 6 7 Transportation-out Dividends Common Stock Selling Expense 8. Which accounts would appear on the income statement? A. Account numbers 3, 4, and 7. B. Account numbers 2, 4, and 5. C. Account numbers 1, 3, and 7. D. Account numbers 2, 5, and 7. 9. Which accounts would appear on the balance sheet? A. Account numbers 2, 4, and 5. B. Account numbers 1, 3, and 7. C. Account numbers 1, 2, and 6. D. Account numbers 3, 4, and 7. 10. Flores Company purchased $4,000 of merchandise on account. Flores sold the merchandise to a customer for $7,000 cash. What is the increase in gross margin and the net change in cash flow from operating activities as a result of these transactions? Gross Margin A. B. C. D. $7,000 $3,000 $3,000 $4,000 Cash Flow From Operating Activities $4,000 inflow $7,000 inflow $7,000 outflow $7,000 inflow 11. Gray Supply received $38,000 in cash for the sale of land that originally cost $32,500. This event would: A. increase cash flows from investing activities by $38,000. B. not affect operating income. C. increase net income by $5,500. D. all of these are correct. 12. Aramis Company uses the perpetual method. The company's inventory account had a $6,500 balance as of December 31, 2017. A physical count of inventory shows $5,800 of merchandise in stock at December 31, 2017. The entry to recognize the missing inventory will: A. increase assets. B. increase expense. C. decrease cash flow from operating activities. D. all of these. 13. Selling and administrative costs are product costs. TRUE FALSE 14. Omega Company sold merchandise that it had purchased with a list price of $6,500 and subject to terms of 2/10, n/30. Assuming that Omega paid for the merchandise during the discount period, the cost of good sold for this transaction would be $6,370. TRUE FALSE 15. The income statement is not affected by a purchase of merchandise. TRUE FALSE 16. A physical count of the inventory can reveal the amount of inventory shrinkage the company has experienced from employee theft and/or accounting errors. TRUE FALSE 17. The entry to record the amount of inventory shrinkage affects both the balance sheet, and the income statement. TRUE FALSE Chapter 4 Problems 1. Determine whether each of the following is a product cost or a period costs. Circle either Period Costs or Product costs or Neither as appropriate. The first one is done as an example. a. Advertising cost Product Costs Period Costs Neither e. Transportation Out Product Costs Period Costs Neither c. Sales Commission Product Costs Period Costs Neither d. Transportation In Product Costs Period Costs Neither f. Cost of purchases for resale (Inventory) Product Costs g. Rent of office space Product Costs Period Costs Neither Period Costs Neither 2. Record the following events assume that Lazarus Company uses a perpetual inventory system. For Part 1: Record the event in Journal Entry form. For Part 2: Indicate how each event affects the elements of financial statements, and use the following letters to record your answer in the box shown below each element. Increase = I Decrease = D No Effect = N You do not need to enter amounts for Part 2. The first one is done as an example a. Lazarus Co. purchased $20,000 of merchandise inventory on account from their supplier HTP Company. Part 1: Record the event in Journal Entry form Account Name Debit Inventory Accounts Payable Credit $20,000 $20,000 Part 2: Indicate how the event affects the elements of financial statements Net Assets Liabilities Equity Revenues Expenses Income N N N N N Inventory Cash Accounts Payable b Lazarus Co. sold merchandise to a customer for $1,000 on account. Lazarus' cost of the merchandise was $800. Part 1: Record the event in Journal Entry form Account Name Debit Credit Part 2: Indicate how the event affects the elements of financial statements Assets Liabilities Equity Revenues Net Expenses Income Cash c. Lazarus Co. paid $40 of freight cost to have merchandise shipped to one of its customers under terms FOB destination. Part 1: Record the event in Journal Entry form Account Name Debit Credit Part 2: Indicate how the event affects the elements of financial statements Assets Liabilities Equity Revenues Net Expenses Income Cash d. Lazarus Co. returned $450 of defective merchandise it had previously purchased on account from a supplier, HTP Company. HTP Company agreed to credit Lazarus' account. Part 1: Record the event in Journal Entry form Account Name Debit Credit Part 2: Indicate how the event affects the elements of financial statements Net Assets Liabilities Equity Revenues Expenses Income Cash e. Lazarus Co. paid $19,550 to HTP Company, the amount owed related to a purchase of inventory on account with terms of net 30. Part 1: Record the event in Journal Entry form Account Name Debit Credit Part 2: Indicate how the event affects the elements of financial statements Assets Liabilities Equity Revenues Net Expenses Income Cash f. After a physical count of its inventory, Lazarus Co. discovered that $5,000 of inventory is missing. Part 1: Record the event in Journal Entry form Account Name Debit Credit Part 2: Indicate how the event affects the elements of financial statements Assets Liabilities Equity Revenues Net Expenses Income Cash 3. On June 1, 2017, merchandise subject to terms 2/10, n/30 was sold on account to a customer for $23,500. On June 3, 2017 the seller issued a credit memorandum for $5,100, accepting merchandise returned by the customer. This was prior to payment by the customer. a) What amount of cash will be collected by the seller if the payment is made by the customer on June 8, 2017? b) What is the amount of cash collected by the seller if payment is made by the customer on June 21, 2017? 4. The 2017 income statements for the Dent Company and the Blumer Company appear below: Requirement: a. What is the gross margin percentage for each company? Dent Company __________ Blumer Company __________ b. What is the net income percentage for each company? Dent Company Blumer Company ___________ ___________ 5. The following is a partial list of account balances for the Grafton Company at December 31, 2017: Cash Accounts Receivable Inventory Supplies Land Accounts Payable Common Stock 87,450 Retained Earnings 78,250 24,800 Sales 490,350 197,450 Cost of goods sold 399,250 3,600 Salaries expense 36,250 134,800 Utilities expense 9,500 47,500 Advertising Expense 30,000 300,000 Gain on sale of land 7,000 From the above information, (using proper form) prepare a multistep income statement. Multistep income statement