MULTIPLE CHOICE QUESTIONS:

1. Mark and Amanda Carter own an appliance store and a restaurant. The appliance store sells merchandise on a 12-month installment plan; the restaurant sells only for cash. Which of the following statements are true? (More than one answer may be correct.)

a. The appliance store has a longer operating cycle than the restaurant.

b. The appliance store probably uses a perpetual inventory system, whereas the restaurant probably uses a periodic system.

c. Both businesses require subsidiary ledgers for accounts receivable and inventory.

d. Both businesses probably have subsidiary ledgers for accounts payable.

2. Which of the following statements about merchandising activities is true? (More than one answer may be correct.)

a. As inventory is purchased, the Inventory Expense account is debited and Cash (or Accounts Payable) is credited.

b. Inventory is recorded as an asset when it is first purchased.

c. As inventory is sold, its cost is transferred from the balance sheet to the income statement.

d. As inventory is sold, its cost is transferred from the income statement to the balance sheet.

3. Marietta Corporation uses a perpetual inventory system. All of its sales are made on account. The company sells merchandise costing $3,000 at a sales price of $4,300. In recording this transaction, Marietta will make all of the following entries except:

a. Credit Sales, $4,300.

b. Credit Inventory, $4,300.

c. Debit Cost of Goods Sold, $3,000.

d. Debit Accounts Receivable, $4,300.

4. Fashion House uses a perpetual inventory system. At the beginning of the year, inventory amounted to $50,000. During the year, the company purchased merchandise for $230,000 and sold merchandise costing $245,000. A physical inventory taken at year-end indicated shrinkage losses of $4,000. Prior to recording these shrinkage losses, the year- end balance in the companys Inventory account was:

a. $31,000.

b. $35,000.

c. $50,000.

d. Some other amount.

5. Best Hardware uses a periodic inventory system. Its inventory was $38,000 at the beginning of the year and $40,000 at the end. During the year, Best made purchases of merchandise totaling $107,000. Identify all of the correct answers:

a. To use this system, Best must take a complete physical inventory twice each year.

b. Prior to making adjusting and closing entries at year- end, the balance in Bests Inventory account is $38,000.

c. The cost of goods sold for the year is $109,000.

d. As sales transactions occur, Best makes no entries to update its inventory records or to record the cost of goods sold.

6. The two basic approaches to accounting for inventory and the cost of goods sold are the perpetual inventory system and the periodic inventory system. Indicate which of the following statements are correct. (More than one answer may be correct.)

a. Most large merchandising companies and manufacturing businesses use periodic inventory systems.

b. As a practical matter, a grocery store or a large department store could not maintain a perpetual inventory system without the use of point-of-sale terminals.

c. In a periodic inventory system, the cost of goods sold is not determined until a complete physical inventory is taken.

d. In a perpetual inventory system, the Cost of Goods Sold account is debited promptly for the cost of merchandise sold.

7. Big Brother, a retail store, purchased 100 television sets from Krueger Electronics on account at a cost of $200 each. Krueger offers credit terms of 2/10, n/30. Big Brother uses a perpetual inventory system and records purchases at net cost. Big Brother determines that 10 of these television sets are defective and returns them to Krueger for full credit. In recording this return, Big Brother will:

a. Debit Sales Returns and Allowances, $1,960.

b. Debit Accounts Payable, $1,960.

c. Debit Cost of Goods Sold, $1,960.

d. Credit Inventory, $2,000.

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8. Two of the lawn mowers sold by Garden Products Co. are the LawnMaster and the Mark 5. LawnMasters sell for $250 apiece, which results in a 35 percent gross profit margin. Each Mark 5 costs Garden Products $300 and sells for $400. Indicate all correct answers.

a. The dollar amount of gross profit is greater on the sale of a Mark 5 than a LawnMaster.

b. The gross profit margin is higher on Mark 5 s than on LawnMasters.

c. Garden profits relatively more by selling one Mark 5 than by selling one LawnMaster.

d. Garden profits more by selling $2,000 worth of Mark 5s than $2,000 worth of LawnMasters.