Chapter 6

Chapter 6—Accounting for Merchandising Businesses
TRUE/FALSE
1. Operating expenses are subtracted from fees earned for a service business and from gross profit
for a merchandising business.
ANS: T DIF: 1 OBJ: 01
2. Net income or loss may appear on the income statement of both a service business and a
merchandising business.
3. Cost of merchandise sold is the same as operating expenses.
ANS: F DIF: 1 OBJ: 01
4. It is usual for the credit period to begin with the date the merchandise is received by the buyer.
ANS: F DIF: 1 OBJ: 02a
5. Purchases of merchandise are typically credited to the merchandise inventory account under the
perpetual inventory system.
6. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice
date to take advantage of the cash discount.
7. Discounts taken by the buyer for early payment of an invoice are called purchases discounts by
the buyer.
ANS: T DIF: 1 OBJ: 02a
8. If payment is due by the end of the month in which the sale is made, the invoice terms are
expressed as n/30.
9. Merchandise Inventory normally has a debit balance.
10. In a perpetual inventory system, merchandise returned to vendors reduces the merchandise
inventory account.

11. Using a perpetual inventory system, the cost of merchandise sold is accumulated directly in a cost
of merchandise sold account.
12. Under a periodic inventory system, the merchandise on hand at the end of the year is determined
by a physical count of the inventory.
13. Under a periodic inventory system, both the sales amount and the cost of merchandise sold
amount are recorded when each item of merchandise is sold.
14. Under a periodic inventory system, the inventory listing is used to determine the cost of
merchandise sold for the period as well as the cost of inventory on hand at the end of the period.
15. Purchases discounts are discounts given to the seller.
16. Under the perpetual inventory system, the cost of merchandise sold is recorded when sales are
made.
ANS: T DIF: 1 OBJ: 02b
17. Sales Discounts normally has a debit balance.
18. Sales Discounts is used in accounting for transactions with customers.
19. A sale of $600 on account, subject to a sales tax of 5%, would be recorded as an account
receivable of $600.
ANS: F DIF: 5 OBJ: 02b
20. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally
treated as credit sales.
ANS: F DIF: 1 OBJ: 02b
21. Sales to customers who use nonbank credit cards, such as American Express, are generally
treated as credit sales.

22. The document issued by the seller that informs the buyer of the details of sales returns is called a
credit memorandum.
23. The effect of a sales return and allowance is a reduction in sales revenue and a decrease in cash or
accounts receivable.
24. Available discounts taken by the customer for early payment of an invoice are termed purchases
discounts by the buyer.
25. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for
shipment, the terms are stated as FOB destination.
ANS: F DIF: 1 OBJ: 02c
26. Merchandise is sold for $2,500, terms FOB destination, 2/10, n/30, with prepaid transportation
costs of $150. If $500 of the merchandise is returned prior to payment and the invoice is paid
within the discount period, the amount of the sales discount is $40.
ANS: T DIF: 5 OBJ: 02c
27. If the buyer is to absorb the transportation costs related to a purchase, the terms are said to be
FOB destination.
28. If merchandise costing $2,500, terms FOB destination, 2/10, n/30, with prepaid transportation
costs of $100, is paid within 10 days, the amount of the purchases discount is $52.
29. The transportation out account is used by sellers in accounting for transactions with buyers.
ANS: T DIF: 1 OBJ: 02d
30. Cost of Merchandise Sold is used in accounting for transactions by sellers of merchandise.
31. Sales Returns and Allowances is used in accounting for transactions with customers.
32. The chart of accounts for a merchandising business would include an account called Merchandise
Inventory.

33. Operating expenses of a business are usually grouped into two categories: selling expenses and
administrative expenses.
34. Operating expenses of relatively small amounts that cannot be identified with principal accounts
are usually accumulated in accounts entitled Miscellaneous Selling Expense and Miscellaneous
Administrative Expense.
35. Income that cannot be associated definitely with operations, such as a gain from the sale of a
fixed asset, is listed as Other Income on the multiple-step income statement.
36. On the multiple-step income statement, the total of all expenses is deducted from the total of all
revenues.
37. On a multiple-step income statement, losses on sales of fixed assets would be listed as a liability
item.
38. Expenses that cannot be associated definitely with operations, such as interest expense, are listed
as administrative expenses on the multiple-step income statement.
39. On the income statement, sales returns and allowances and sales discounts are added to gross
sales to yield net sales.
40. On the income statement, sales discounts are normally deducted from merchandise inventory to
yield the cost of merchandise sold.
41. Selling expenses are divided into general and operating expenses.
42. Other income is added to and other expense is subtracted from income from operations on the
multiple-step income statement.
43. On the income statement, the merchandise inventory at the beginning of the period is added to
sales to yield the cost of merchandise sold during the period.
44. On the income statement in the single-step form, the total of all expenses is deducted from the
total of all revenues.
45. A criticism of the single-step income statement is that gross profit and income from operations
are not readily available for analysis.
46. Merchandise Inventory is classified as a plant asset.
47. The amount of the net income for a period appears on both the income statement and the
statement of owner's equity for that period.
48. The adjusting entry to record inventory shrinkage would include a debit to Cost of Merchandise
Sold.
49. The adjusting entry to record inventory shrinkage would include a debit to Merchandise
Inventory.
50. The form of the balance sheet in which assets, liabilities, and owner's equity are presented in a
downward sequence is called the report form.
51. The ratio of net sales to assets measures how effectively a business is using its assets to generate
sales.
52. A low ratio of net sales to assets indicates an effective use of assets.
53. In a manual accounting system, a sales journal for a merchandise business is similar to a revenue
journal for a service business.
ANS: T DIF: 1 OBJ: Ap1
54. In a computerized accounting system, special journals may be replaced by electronic forms that
capture the necessary information.
ANS: T DIF: 1 OBJ: Ap1
55. The balance sheet accounts of a work sheet provide the information to prepare the closing entries.
ANS: F DIF: 1 OBJ: Ap2
MULTIPLE CHOICE
1. Generally, the revenue account for a merchandising business is entitled:

a. Sales
b. Net Sales
c. Gross Sales
d. Gross Profit
ANS: A DIF: 1 OBJ: 01
2. The difference between sales and cost of merchandise sold for a merchandising business is:
a. Sales
b. Net Sales
c. Gross Sales
d. Gross Profit
ANS: D DIF: 1 OBJ: 01
3. Merchandise inventory is classified on the balance sheet as a:

a. Current Liability
b. Current Asset
c. Long-Term Asset
d. Long-Term Liability
ANS: B DIF: 1 OBJ: 01
4. When purchases of merchandise are made for cash, the transaction may be recorded with the
following entry:
a. debit Cash; credit Merchandise Inventory
b. debit Merchandise Inventory; credit Cash
c. debit Merchandise Inventory; credit Cash Discounts
d. debit Merchandise Inventory; credit Purchases
ANS: B DIF: 5 OBJ: 02a
5. Merchandise is ordered on November 12; the merchandise is shipped by the seller and the invoice
is prepared, dated, and mailed by the seller on November 15; the merchandise is received by the
buyer on November 17; the entry is made in the buyer's accounts on November 18. The credit
period begins with what date?
a. November 12
b. November 15
c. November 17
d. November 18
6. The primary difference between a periodic and perpetual inventory system is that a:
a. periodic system determines the inventory on hand only at the end of the accounting period
b. periodic system keeps a record showing the inventory on hand at all times
c. periodic system provides an easy means to determine inventory shrinkage
d. periodic system records the cost of the sale on the date the sale is made
ANS: A DIF: 1 OBJ: 02a
7. When a buyer returns merchandise purchased for cash, the buyer may record the transaction
using the following entry:
a. debit Merchandise Inventory; credit Cash
b. debit Cash; credit Merchandise Inventory
c. debit Cash; credit Sales Returns and Allowances
d. debit Sales Returns and Allowances; credit Cash
8. When merchandise is purchased to resell to customers, it is recorded in the account entitled:

a. Supplies
b. Capital
c. Merchandise Inventory
d. Sales
ANS: C DIF: 1 OBJ: 02a
9. Using a perpetual inventory system, the entry to record the purchase of $30,000 of merchandise
on account would include a:
a. debit to Sales
b. debit to Merchandise Inventory
c. credit to Merchandise Inventory
d. credit to Sales
10. Using a perpetual inventory system, the entry to record the return of merchandise purchased on
account includes a:
a. debit to Sales
d. credit to Sales
ANS: C DIF: 1 OBJ: 02a
11. Merchandise is ordered on November 12; the merchandise is shipped by the seller and the invoice
is prepared, dated, and mailed by the seller on November 15; the merchandise is received by the
buyer on November 17; the entry is made in the seller's accounts on November 15. If the credit
terms are 1/10, n/30, the credit period begins with what date?
a. November 12
b. November 15
c. November 17
d. November 22
12. The inventory system employing accounting records that continuously disclose the amount of
inventory is called:
a. retail
b. periodic
c. physical
d. perpetual
ANS: D DIF: 1 OBJ: 02a
13. Under the perpetual inventory system, all purchases of merchandise are debited to the account
entitled:
a. Merchandise Inventory
b. Cost of Merchandise Sold
c. Sales
d. Purchases
ANS: A DIF: 1 OBJ: 02a
14. The arrangements between buyer and seller as to when payments for merchandise are to be made
are called:
a. credit terms
b. net cash
c. cash on demand
d. gross cash
ANS: A DIF: 1 OBJ: 02b
15. In credit terms of 1/10, n/30, the "1" represents the:

a. number of days in the discount period
b. full amount of the invoice
c. number of days when the entire amount is due
d. percent of the cash discount
ANS: D DIF: 1 OBJ: 02a
16. Sales to customers who use bank credit cards such as MasterCard and Visa are usually recorded
by a:
a. debit to Bank Credit Card Sales, debit to Credit Card Expense, and a credit to Sales
b. debit to Cash and a credit to Sales
c. debit to Cash, credit to Credit Card Expense, and a credit to Sales
d. debit to Sales, debit to Credit Card Expense, and a credit to Cash
ANS: B DIF: 1 OBJ: 02b
17. The amount of the total cash paid to the seller for merchandise purchased would normally
include:
a. only the list price
b. only the sales tax
c. the list price plus the sales tax
d. the list price less the sales tax
ANS: C DIF: 1 OBJ: 02b
18. In recording the cost of merchandise sold for cash, based on data available from perpetual
inventory records, the journal entry is:
a. debit Cost of Merchandise Sold; credit Sales
b. debit Cost of Merchandise Sold; credit Merchandise Inventory
c. debit Merchandise Inventory; credit Cost of Merchandise Sold
d. debit Accounts Receivable; credit Merchandise Inventory
19. Under a perpetual inventory system, the costs of all sales of merchandise are credited to the
account entitled:
a. Sales Discounts
b. Cost of Merchandise Sold
c. Sales Returns and Allowances
d. Merchandise Inventory
ANS: D DIF: 1 OBJ: 02b
20. When the perpetual inventory system is used, the inventory sold is shown on the income
statement as:
a. cost of merchandise sold
b. purchases
c. purchases returns and allowances
d. net purchases
ANS: A DIF: 1 OBJ: 02b
21. Using a perpetual inventory system, the entry to record the sale of merchandise on account
includes a:
a. debit to Sales
d. credit to Accounts Receivable
22. Which of the following accounts has a normal debit balance?

a. Accounts Payable
b. Sales Returns and Allowances
c. Sales
d. Interest Revenue
23. A sales invoice included the following information: merchandise price, $5,000; transportation,
$300; terms 1/10, n/eom, FOB shipping point. Assuming that a credit for merchandise returned
of $600 is granted prior to payment, that the transportation is prepaid by the seller, and that the
invoice is paid within the discount period, what is the amount of cash received by the seller?
a. $4,356
b. $4,400
c. $4,656
d. $4,950
24. Using a perpetual inventory system, the entry to record the return from a customer of
merchandise sold on account includes a:
a. credit to Sales Returns and Allowances
d. debit to Cost of Merchandise Sold
25. Using a perpetual inventory system, the entry to record the return from a customer of
merchandise sold on account includes a:
a. credit to Sales Returns and Allowances
b. credit to Merchandise Inventory
c. credit to Cost of Merchandise Sold
d. debit to Cost of Merchandise Sold
26. If merchandise sold on account is returned to the seller, the seller may inform the customer of the
details by issuing a:
a. sales invoice
b. purchase invoice
c. credit memorandum
d. debit memorandum
27. A sales invoice included the following information: merchandise price, $8,000; transportation,
$400; terms 2/10, n/eom, FOB shipping point. Assuming that a credit for merchandise returned
of $800 is granted prior to payment, that the transportation is prepaid by the seller, and that the
invoice is paid within the discount period, what is the amount of cash received by the seller?
a. $7,200
b. $7,456
c. $7,600
d. $7,056
28. Sales to customers who use bank credit cards, such as MasterCard and Visa, are generally treated
as:
a. sales on account
b. sales returns
c. cash sales
d. sales when the credit card company remits the cash
29. If the buyer is to pay the transportation costs of delivering merchandise, delivery terms are stated
as:
a. FOB shipping point
b. FOB destination
c. FOB n/30
d. FOB buyer
ANS: A DIF: 1 OBJ: 02c
30. Which of the following accounts has a normal credit balance?

a. Sales Returns and Allowances
b. Sales
c. Merchandise Inventory
d. Transportation Out
ANS: B DIF: 1 OBJ: 02c
31. Merchandise subject to terms 1/10, n/30, FOB shipping point, is sold on account to a customer
for $18,000. The seller paid transportation costs of $1,000 and issued a credit memorandum for
$5,000 prior to payment. What is the amount of the cash discount allowable?
a. $190
b. $180
c. $170
d. $130
ANS: D DIF: 3 OBJ: 02c
32. If the seller is to pay the transportation costs of delivering merchandise, the delivery terms are
stated as:
a. FOB shipping point
b. FOB destination
c. FOB n/30
d. FOB seller
33. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller,
the terms are:
a. n/30
b. FOB shipping point
c. FOB destination
d. consigned
34. If title to merchandise purchases passes to the buyer when the goods are delivered to the buyer,
the terms are:
a. consigned
b. n/30
c. FOB shipping point
d. FOB destination
35. Merchandise with an invoice price of $5,000 is purchased subject to terms of 2/10, n/30, FOB
shipping point. Transportation costs paid by the seller totaled $150. What is the cost of the
merchandise purchased?
a. $5,150
b. $4,900
c. $5,025
d. $5,050
36. Merchandise with an invoice price of $5,000 is purchased subject to terms of 2/10, n/30, FOB
destination. Transportation costs paid by the seller totaled $125. What is the cost of the
merchandise?
a. $5,150
b. $5,050
c. $5,000
d. $4,900
37. When goods are shipped FOB destination and the seller pays the transportation charges, the buyer
a. journalizes a reduction for the cost of the merchandise.
b. journalizes a reimbursement to the seller.
c. does not take a discount.
d. makes no journal entry for the transportation.
ANS: D DIF: 2 OBJ: 02d
38. X sold Y merchandise on account FOB shipping point, 2/10, net 30, for $10,000. X prepaid the
$200 shipping charge. Which of the following entries does X make to record this sale?
a. Accounts Receivable-Y, debit $10,000; Sales, credit $10,000
b. Accounts Receivable-Y, debit $10,000; Sales, credit $10,000, and
Accounts Receivable-Y, debit $200; Cash, credit $200
c. Accounts Receivable-Y, debit $10,400; Sales, credit $10,400
d. Accounts Receivable-Y, debit $10,000; Sales, credit $10,000, and Transportation Out,
debit $200; Cash, credit $200
ANS: B DIF: 3 OBJ: 02d
39. X sold Y merchandise on account FOB shipping point, 2/10, net 30, for $10,000. X prepaid the
$200 shipping charge. Which of the following entries will Y make if Y pays within the discount
period?
a. Accounts Payable-X, debit $10,000; Transportation In, credit $200; Cash, credit $9,800
b. Accounts Payable-X, debit $10,200; Merchandise Inventory, credit $200; Cash, credit
$10,000
c. Accounts Payable-X, debit $10,000; Transportation In, debit $200; Cash, credit $10,200
d. Accounts Payable-X, debit $10,200; Merchandise Inventory, debit $200; Cash, credit
$10,400
ANS: B DIF: 3 OBJ: 02d
40. A chart of accounts for a merchandising business usually:

a. is the same as the chart of accounts for a service business
b. requires more accounts than does the chart of accounts for a service business
c. is standardized by the FASB for all merchandising businesses
d. does not have a Cost of Goods Sold account if a perpetual inventory system is used
41. What is the term applied to the excess of net revenue from sales over the cost of merchandise
sold?
a. gross profit
b. income from operations
c. net income
d. gross sales
42. Expenses that are incurred directly or entirely in connection with the sale of merchandise are
classified as:
a. selling expenses
b. general expenses
c. other expenses
d. administrative expenses
43. Office salaries, depreciation of office equipment, and office supplies are examples of what type
of expense?
a. selling expense
b. miscellaneous expense
c. administrative expense
d. other expense
ANS: C DIF: 1 OBJ: 054
44. The form of income statement that derives its name from the fact that the total of all expenses is
deducted from the total of all revenues is called a:
a. multiple-step statement
b. revenue statement
c. report-form statement
d. single-step statement
45. Multiple-step income statements show:

a. gross profit but not income from operations
b. neither gross profit nor income from operations
c. both gross profit and income from operations
d. income from operations but not gross profit
ANS: C DIF: 1 OBJ: 04
46. When the three sections of a balance sheet are presented on a page in a downward sequence, it is
called the:
a. account form
b. comparative form
c. horizontal form
d. report form
47. The statement of owner's equity shows:

a. only net income, beginning and ending capital
b. only total assets, beginning and ending capital
c. only net income, beginning capital, and withdrawals
d. all the changes in the owner's capital as a result of net income, net loss, additional
investments, and withdrawals
48. The form of balance sheet that lists assets on the left side of the statement and the liabilities and
owner's equity on the right side is referred to as the:
a. comparative form
b. report form
c. horizontal form
d. account form
49. Which of the following would be reported on the statement of owner's equity for the current
year?
a. sales
b. withdrawals for the current year
c. cost of merchandise sold
d. merchandise inventory
50. A net sales to asset ratio of 1.5 means:

a. assets are one and one-half times as large as sales
b. that for every $1.50 of sales, there is $1.00 in assets
c. that for every $1.50 of assets, there is $1.00 of sales
d. assets are being poorly utilized
51. The net sales to assets ratio measures a company's:

a. working capital
b. net worth
c. effective use of sales to support the purchase of new assets
d. effective use of assets to generate sales
52. A merchandising business:

a. that uses a manual accounting system usually uses only two special journals
b. that uses a computerized accounting system usually uses only five special journals
c. is required to use a computerized accounting system because of the volume of journal
entries
d. that uses a computerized accounting system usually uses no special journals
ANS: D DIF: 2 OBJ: Ap1
53. Which of the following accounts should be closed to Income Summary at the end of the fiscal
year?
a. Merchandise Inventory
b. Accumulated Depreciation
c. Drawing
d. Cost of Merchandise Sold
ANS: D DIF: 1 OBJ: Ap2
PROBLEM
1. Details of a purchase invoice and related credit memorandum are summarized as follows:
Invoice: Cost of merchandise listed on purchase invoice $8,500

Prepaid transportation charge added to invoice 200
Terms, FOB shipping point, 1/10, n/eom
Credit memo: Cost of merchandise returned $2,500
Assume that the credit memorandum was received prior to payment and that the invoice is paid
within the discount period. Determine the following:
(a) Amount of the cash discount allowed.
(b) Amount to be paid by the purchaser if the discount is taken.
(c) Cost of the merchandise to the purchase if the discount is NOT taken.
ANS:
(a) $60
(b) $6,140
(c) $6,200
DIF: 1 OBJ: 02a
2. Forrester Company purchased $700 of merchandise on account and payment was made within the
discount period. The credit terms were 2/10,n/30. Journalize Forrester's purchase and payment.
ANS:
(a) Merchandise Inventory 700

Accounts Payable 700
(b) Accounts Payable 700

Merchandise Inventory 14
Cash 686
DIF: 1 OBJ: 02a
3. Merchandise with a list price of $7,500 is purchased on account, terms FOB shipping point, 1/10,
n/30. The seller prepaid transportation costs of $300. Prior to payment, $2,000 of the
merchandise is returned. The correct amount is paid within the discount period.
Record the foregoing transactions of the buyer in the sequence indicated below.
(a) Purchased the merchandise.

(b) Recorded receipt of the credit memorandum for merchandise returned.
(c) Paid the amount owed.
ANS:
(a) Merchandise Inventory 7,800

Accounts Payable 7,800
(b) Accounts Payable 2,000

Merchandise Inventory 2,000
(c) Accounts Payable 5,800

Cash 5,745
DIF: 3 OBJ: 02c
4. Details of invoices for purchases of merchandise are as follows:
Returns and
Merchandis Transportation Terms Allowances
e
a. $1,000 $50 FOB shipping point, $100
1/10, n/30
b. 5,000 --- FOB destination, 400
n/30
c. 4,000 25 FOB shipping point, 150
2/10, n/30
d. 5,000 --- FOB destination,
1/10, n/30
Determine the amount to be paid in full settlement of each of the invoices, assuming that credit
for returns and allowances was received prior to payment and that all invoices were paid within
the discount period.
ANS:
(a) $941 ($1,000 + $50 - $100 - $9)

(b) $4,600 ($5,000 - $400)
(c) $3,798 ($4,000 - $150 - $77 + $25)
(d) $4,950 ($5,000 - $50)
DIF: 3 OBJ: 02a,02c
5. Journalize the entries to record the following selected transactions:
(a) Sold $500 of merchandise on account, subject to 6% sales tax. The cost of the
merchandise sold was $195.
(b) Paid $935 to the state sales tax department for taxes collected.
ANS:
(a) Accounts Receivable 530

Sales 500
Sales Tax Payable 30
Cost of Merchandise Sold 195

(b) Sales Tax Payable 935

Cash 935
DIF: 1 OBJ: 02b
6. Journalize the entries for the following selected transactions:
(a) Sold merchandise on account, for $12,000. The cost of the merchandise sold was
$6,000.
(b) Sold merchandise to customers who used MasterCard and VISA, $10,000. The
cost of the merchandise sold was $3,950.
(c) Sold merchandise to customers who used American Express, $4,200. The cost of
the merchandise sold was $3,100.
(d) Paid an invoice from First National Bank for $610, representing a service fee for
processing MasterCard and VISA sales.
(e) Received $3,950 from American Express Company after a $250 collection fee had
been deducted.
ANS:
(a) Accounts Receivable 12,000

Sales 12,000
Cost of Merchandise Sold 6,000

(b) Cash 10,000

Sales 10,000

(c) Accounts Receivable 4,200

Sales 4,200

(d) Credit Card Expense 610

Cash 610
(e) Cash 3,950

Credit Card Expense 250
Accounts Receivable 4,200
DIF: 3 OBJ: 02b)
7. Merchandise with a list price of $3,800 and costing $2,000 is sold on account, subject to the
following terms: FOB destination, 2/10, n/30. The seller prepays the transportation costs of $50
(debit Transportation Out for the transportation costs). Prior to payment for the goods, the seller
issues a credit memorandum for $800 to the customer for merchandise costing $500 that is
returned. The correct amount is received within the discount period.
Record the foregoing transactions of the seller in the sequence indicated below.
(a) Sold the merchandise, recognizing the sale and cost of merchandise sold.
(b) Paid the transportation charges.
(c) Issued the credit memorandum.
(d) Received payment from the customer.
ANS:
(a) Accounts Receivable 3,800

Sales 3,800

(b) Transportation Out 50

Cash 50
(c) Sales Returns and Allowances 800

Accounts Receivable 800

Cost of Merchandise Sold 500
(d) Cash 2,940

Sales Discounts 60
DIF: 3 OBJ: 02b 02c
8. Based on the information below, journalize the entries for the Seller and the Buyer. Both use a
perpetual inventory system.
(a) Seller sells Buyer on account merchandise costing $300 for $500, terms 2/10, net
30, FOB destination. The transportation charge is $50.
(b) Buyer returns as defective $200 worth of the $500 merchandise received. The
seller's cost is $120.
(c) Buyer pays within the discount period.
ANS:
(a)
Seller Buyer
Accounts Receivable 500 Merchandise 500
Inventory
Sales 500 Accounts Payable 500
Cost of Merchandise
Sold 300 NA
Merchandise
Inventory 300
Transportation Out 50 NA
Cash 50
(b)
Sales Returns & Accounts Payable 200

Allow. 200
Accounts Merchandise 200
Receivable 200 Inventory
Merchandise
Inventory 120
Cost of Merchandise
Sold 120
(c)
Cash 294 Accounts Payable 300
Sales 6 Merchandise 6
Discounts Inventory
Accounts 300 Cash 294
Receivable
DIF: 3 OBJ: 02d
9. Using the letter preceding each account, arrange the following selected accounts in the order they
would normally appear in a chart of accounts of a company that uses a multiple-step income
statement.
(a) Accounts Payable

(b) Accounts Receivable
(c) Merchandise Inventory
(d) Miscellaneous Selling Expense
(e) Sales Discounts
(f) Interest Expense
(g) Income Summary
(h) Misc. Admin. Expense
(i) Transportation Out
(j) Sales Returns and Allowances
ANS:
(b) (c) (a) (g) (j) (e) (i) (d) (h) (f)
DIF: 3 OBJ: 03
10. The following data for the current year ended June 30 were extracted from the accounting records
of Franks Co.:
Cost of merchandise sold $325,000

Operating expenses 85,000
Sales 475,000
Prepare a multiple-step income statement for the current year ended June 30.
ANS:
Franks Co.
Income Statement
For the Year Ended June 30, 20--
Sales $475,000
Cost of merchandise sold 325,000
Gross profit $150,000
Net income $ 65,000
========
DIF: 1 OBJ: 04
11. The following data for the current year ended December 31 were extracted from the accounting
records of Candy Co.:
Sales 925,000
Prepare a multiple-step income statement for the year ended December 31.
ANS:
Candy Co.
Income Statement
For the Year Ended December 31, 20--
Sales $925,000
Net loss $(35,000)
========
DIF: 1 OBJ: 04
12. Prepare a multiple-step income statement for Sun Set Co. from the following data for the year
ended December 31.
Sales, $925,000; cost of merchandise sold, $660,000; administrative expenses, $30,000; interest
expense, $10,000; rent revenue, $20,000; sales returns and allowances, $55,000; selling expenses,
$110,000.
ANS:
Sun Set Co.

Income Statement
Revenue from sales:

Sales $925,000
Less: Sales returns and allowances 55,000
Net sales $870,000
Operating expenses:
Selling expenses $110,000
Administrative expenses 30,000
Total operating expenses 140,000
Income from operations $ 70,000
Other income:
Rent revenue $ 20,000
Other expense:
Interest expense 10,000 10,000
Net income $ 80,000
========
DIF: 3 OBJ: 04
13. Selected data from the ledger of Kwik Co. after adjustment at June 30, the end of the fiscal year,
are listed as follows:
Accounts Receivable $ 39,120 Office Equipment $ 82,700

Accumulated 60,540 Prepaid Insurance 4,680
Depreciation
Administrative 90,000 Note Payable 77,750
Expenses
Ann Dobbs, Capital 75,000 Salaries Payable 3,060
Cost of Merchandise 655,000 Sales (net) 900,000
Sold
Ann Dobbs, Drawing 40,000 Selling Expenses 110,000
Interest Revenue 10,000 Supplies 3,125
Prepare an income statement, using the single-step form, and a statement of owner's equity.
ANS:
Kwik Co.
Income Statement
Revenues:
Net sales $900,000
Interest revenue 10,000
Total revenues $910,000
Expenses:
Selling expenses 110,000
Total expenses 855,000
Net income $ 55,000
========
Kwik Co.
Statement of Owner's Equity
Ann Dobbs, capital, July 1, 20-- $75,000

Net income for the year $55,000
Less withdrawals 40,000
Increase in owner's equity 15,000
Ann Dobbs, capital, June 30, 20-- $90,000
=======
DIF: 3 OBJ: 04,05
14. Prepare (a) a single-step income statement, (b) a statement of owner's equity, and (c) a balance
sheet in report form from the following data for Swifty Co., taken from the ledger after
adjustment on December 31, the end of the fiscal year.
Accounts Payable $ 47,200

Accumulated Depreciation - Office Equipment 22,750
Accumulated Depreciation - Store Equipment 62,100
Administrative Expenses 75,500
C. Swifty, Capital 141,750
Cash 39,700
C. Swifty, Drawing 42,000
Interest Expense 9,000
Note Payable, Due 2006 50,000
Office Equipment 49,750
Prepaid Insurance 6,500
Rent Revenue 7,500
Salaries Payable 3,700
Sales (net) 820,500
Selling Expenses 101,500
Store Equipment 125,000
Supplies 4,000
ANS:
(a)
Swifty Co.
Income Statement
Revenues:
Net sales $820,500
Rent revenue 7,500
Total revenues $828,000
Expenses:
Selling expenses 101,500
Interest expense 9,000
Total expenses 731,000
Net income $ 97,000
========
(b)
Swifty Co.
Statement of Owner's Equity
C. Swifty, capital, January 1, 20-- $141,750

Net income for year $97,000
Less withdrawals 42,000
Increase in owner's equity 55,000
C. Swifty, capital, December 31, 20-- $196,750
========
(c)
Swifty Co.
Balance Sheet
December 31, 20--
Assets
Current assets:
Cash $39,700
Accounts receivable 64,300
Merchandise inventory 93,250
Prepaid insurance 6,500
Supplies 4,000
Total current assets $207,750
Property, plant, and equipment:
Store equipment $125,000
Less Accumulated depreciation 62,100 $62,900
Office equipment $ 49,750
Less Accumulated depreciation 22,750 27,000
Total property, plant, and 89,900
equipment
Total assets $297,650
========
Liabilities
Current liabilities:
Accounts payable $47,200
Salaries payable 3,700
Total current liabilities $ 50,900
Long-term liabilities:
Note payable (due 2006) 50,000
Total liabilities $100,900
Owner's Equity
C. Swifty, capital 196,750

Total liabilities and owner's $297,650
equity
========
DIF: 3 OBJ: 04,05
15. Compute the net sales to asset ratio for 2004 for the following two companies and tell which
outperforms the other. Use average assets in your computation.
Merchandiser Janus
Partial Balance Sheet
December 31, 2003 and 2004
2003 2004
Total assets $8,000 $10,000

====== =======
Merchandiser Janus
Partial Income Statement
For the Year Ended December 31, 2004
Net sales $12,000

=======
Merchandiser Strong
Partial Balance Sheet
December 31, 2003 and 2004
2003 2004
Total assets $6,000 $10,000
====== =======
Merchandiser Strong
Partial Income Statement
For the Year Ended December 31, 2004
Net sales $12,000

=======
ANS:
Janus: $12,000/[($8,000 + $10,000)/2] = 1.3333

Strong: $12,000/[($6,000 + $10,000)/2] = 1.5
Strong has $1.50 worth of sales for every dollar of assets.

Janus uses $1.33 worth of sales for every dollar of assets.
Strong is more efficient.
DIF: 3 OBJ: 06
16. Selected accounts and amounts appear below. Journalize the closing entry, assuming a perpetual
inventory system.
Merchandise Inventory $ 55,500

ANS:
Income Summary 612,500

DIF: 1 OBJ: Ap2

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Chapter 6

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Chapter 6—Accounting for Merchandising Businesses

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3. Cost of merchandise sold is the same as operating expenses.

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9. Merchandise Inventory normally has a debit balance.

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15. Purchases discounts are discounts given to the seller.

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17. Sales Discounts normally has a debit balance.

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18. Sales Discounts is used in accounting for transactions with customers.

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46. Merchandise Inventory is classified as a plant asset.

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1. Generally, the revenue account for a merchandising business is entitled:

3. Merchandise inventory is classified on the balance sheet as a:

8. When merchandise is purchased to resell to customers, it is recorded in the account entitled:

15. In credit terms of 1/10, n/30, the "1" represents the: