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Exam 5: Accounting for Merchandising Operations

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Question 31

True/False

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A company's current ratio is 1.2 and its quick ratio is 0.25. This company is probably an excellent credit risk because the ratios reveal no indication of liquidity problems.

A) True
B) False

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Question 32

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The acid-test ratio differs from the current ratio in that:

A) Liabilities are divided by current assets.
B) Prepaid expenses and inventory are excluded from the calculation of the acid-test ratio.
C) The acid-test ratio measures profitability and the current ratio does not.
D) The acid-test ratio excludes short-term investments from the calculation.
E) The acid-test ratio is a measure of liquidity but the current ratio is not.

F) C) and E)
G) A) and D)

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Question 33

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Sales of $350,000 and net sales of $323,000 could reflect sales discounts of $27,000. $350,000 - $323,000 = $27,000

Describe the difference between wholesalers and retailers.

On October 1, Courtland Company sold merchandise in the amount of $5,800 to Carter Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Courtland uses the periodic inventory system. On October 4, Carter returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Courtland must make on October 4 is:

Cost of goods sold is also called cost of sales.

Beginning inventory plus the net cost of purchases is the ____________________.

A merchandising company's operating cycle begins with the sale of merchandise and ends with the collection of cash from the sale.

The amounts and timing of payment from a buyer to a seller are the ___________________.

Liquidity problems are likely to exist when a company's acid-test ratio:

A ___________ inventory system updates the accounting record for inventory only at the end of a period.

When preparing an unadjusted trial balance using a periodic inventory system, the amount shown for Merchandise Inventory is:

Gross profit is also called gross margin.

Purchase returns refer to merchandise a buyer acquires but then returns to the seller.

A company has net sales and cost of goods sold of $825,000 and $547,000, respectively. Its net income is $98,500. The company's gross margin and operating expenses are ________ and ___________, respectively.

FOB shipping point (or FOB factory) implies that ownership of goods transfers to the buyer at the buyer's place of business.

The following statements regarding gross profit are true except:

When a company has no reportable nonoperating activities, its income from operations is reported as ___________________.

A company had sales of $375,000 and its gross profit was $157,500. Its cost of goods sold equals:

A company purchased $1,800 of merchandise on December 5. On December 7, it returned $200 worth of merchandise. On December 8, it paid the balance in full, taking a 2% discount. The amount of the cash paid on December 8 equals: