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.
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