For the last several years Monte Cristo Corp. has operated with a gross profit rate of 30%. On January 1 of the
current year, the company had on hand inventory with a cost of $150,000. Purchases of merchandise
during January amounted to $48,000 and revenues for the month were $90,000. With the gross profit
method, estimated inventory at January 31 is:
1. $45000
2. $108000
3. $63000
4. $135000
When a perpetual inventory system is in use, the sale of merchandise may require an entry as follows:
1. Debit A/R; debit inventory
2. Debit COGS; credit inventory
3. Debit A/R; credit COGS
4. Debit inventory; credit COGS
During the current year, Callaway Stores had net sales of
$120 million, cost of goods sold of $72 million average A/R of 20 million and average inventory of
$18 million. Callaway’s inventory turnover rate is:
1. 6.7
2. 4
3. 1.1
4. some other amount
Mark Co. and Miller Corp. purchased identical assets and both companies estimated the useful life at 10 years
with no salvage value. Mark uses straight line depreciation in its financial statements, while Miller
uses an accelerated method.
1. Miller will show greater income during the first few years of using the new equipment
2. Mark will show greater income during the first few years of using the new equipment
3. The depreciation method will have no effect on the net income of either company
4. None of the above are true
Midas Company which has an adequate amount in its allowance for doubtful accounts and writes off as uncollectible an account receivable from a bankrupt
customer. This action will:
1. have no effect on total current assets
2. reduce total current assets
3. reduce net income for the period
4. reduce the amount of owner’s equity
Which of the following is NOT descriptive or apply to the lower of cost and market rule?
1. It is often used to write down the value of old inventory
2. the lower of cost and market rule can be applied to the total of the entire inventory or categories of
inventory
3. Inventory can be shown at an amount lower than what the company paid for the inventory
4. market is the amount the merchandising company would have to pay to replace its inventory including transportation in charges
Use the following information for the next two questions:
At the end of January, the unadjusted trial balance of Butler Ltd.
included the following accounts:
DR CR
Sales (80% represent credit sales) $300,000 Accounts receivable $220,000
Allowance for doubtful accounts $1,760 If Butler Ltd. use the balance sheet approach (% of AR) in estimating
uncollectible accounts expense, and aging the accounts
receivable indicates the estimated uncollectible portion to be
$5600. The net realizable value of Butler Ltd.s A/R in the January 31 balance sheet is:
1. $218240 2. $216160 3. $212640 4. $214400
Use the following information for the next two questions:
At the end of January, the unadjusted trial balance of Butler Ltd.
included the following accounts:
DR CR
Sales (80% represent credit sales) $300,000 Accounts receivable $220,000
Allowance for doubtful accounts $1,760
If Butler Ltd. uses the income statement approach (% of revenue) in estimating uncollectible accounts expense and uncollectible accounts is estimated to be 2% of credit sales. What is the amount of uncollectible accounts expense recognized in Butler Ltd’s income statement for January?
1. $4800 2. $3040 3. $4400 4. $6000
Two categories of expenses in merchandising
companies are
1. cost of goods sold and financing expenses.
2. operating expenses and financing expenses.
3. cost of goods sold and operating expenses.
4. sales and cost of goods sold.
Which of the following expressions is incorrect?
1. Gross profit - operating expenses = net
income
2. Sales - cost of goods sold - operating
expenses = net income
3. Net income + operating expenses = gross
profit
4. Operating expenses - cost of goods sold =
gross profit
Under a perpetual inventory system, the following entry would be made to record the purchase of inventory on
account:
Merchandise Inventory ... 500
Accounts Payable ... 500
Purchases ... 500
Accounts Payable ... 500
Cost of Goods Sold ... 500
Accounts Payable ... 500
Merchandise Inventory ... 500
Cost of Goods Sold ... 500
Kristi Company purchased merchandise from Jennifer Company with freight terms of FOB shipping point. The
freight costs will be paid by the
1. seller
2. transportation company
3. buyer
4. buyer and the seller
Sales revenues are usually considered
earned when
1. cash is received from credit sales.
2. an order is received.
3. goods have been transferred from the seller
to the buyer.
4. adjusting entries are made
Merchandise inventory is
1. reported under the classification of Capital
Assets on the balance sheet.
2. often reported as a miscellaneous expense
on the income statement.
3. reported as a current asset on the balance
sheet.
4. generally valued at the price for which the
goods can be sold.
Tokyo Company sells merchandise on account for $1,200 to Thomas Company. Thomas Company returns $400 (cost $250) of merchandise
that was damaged, along with a cheque to settle the account. What entry does Tokyo Company make upon receipt of the cheque?
Cash 800
Accounts Receivable 800
Cash 784
Sales Returns and Allowances 416
Accounts Receivable 1,200
Cash 800
Sales Returns & Allowances 400 Inventory 250
Accounts Receivable 1,200
Cost of Goods Sold 250 Cash 800
Sales Returns & Allowances 400 Damaged Inventory expense 250
Accounts Receivable 1,200
Cost of Goods Sold 250
In a perpetual inventory system, the cost of goods
sold is recorded
1. on a monthly basis
2. on an annual basis
3. on a daily basis
4. with each sale
If a company fails to record estimated
bad debts expense…
1. net realizable value is understated.
2. expenses are understated.
3. revenues are understated.
4. receivables are understated.
The Sales Returns and Allowances account
is classified as a(n)
1. asset account.
2. contra asset account.
3. expense account.
4. contra revenue account.
Benedict Shoe Store had a beginning merchandise inventory of $18,000. During the period, Purchases were
$70,000; Purchase Returns, $3,000; and Freight in $6,000.
A physical count of inventory at the end of the period revealed that $12,000 was still on hand. Using a perpetual
inventory system, the cost of goods sold was
