Financial Accouting Midterm Practice Part 3

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  • 1/38 Questions

    When a merchandising business purchases goods for resale, those goods get recorded as

    • Cost of goods sold on the income statement
    • Cost of goods sold on the balance sheet
    • Inventory on the balance sheet
    • Raw materials on the balance sheet
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About This Quiz

This practice quiz for the Financial Accounting Midterm covers key concepts such as inventory recording, FOB shipping point, the impact of transactions on financial statements, revenue recognition, and calculation of net sales.

Financial Accouting Midterm Practice Part 3 - Quiz

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  • 2. 

    Which term indicates that the buyer will be responsible for transportation charges for goods purchased?

    • FOB destination

    • Freight-in

    • Transportation-in

    • FOB shipping point

    Correct Answer
    A. FOB shipping point
    Explanation
    FOB shipping point indicates that the buyer will be responsible for transportation charges for goods purchased. This means that the buyer will bear the cost and risk of transporting the goods from the seller's location to the buyer's specified destination. Therefore, FOB shipping point is the correct term that indicates the buyer's responsibility for transportation charges.

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  • 3. 

    The following entry was taken from James Merchandising Company:Cost of goods sold $3,000Merchandise Inventory $3,000What affect does this transaction have on the accounting equation?

    • Assets and equity will decrease

    • Assets and equity will increase

    • Assets will decrease and equity will increase

    • None of the above

    Correct Answer
    A. Assets and equity will decrease
    Explanation
    This transaction affects the accounting equation by decreasing both assets and equity. The cost of goods sold represents the expense incurred by the company to produce or purchase the goods that were sold. This expense reduces the value of the merchandise inventory, which is an asset. Additionally, since equity is calculated as assets minus liabilities, a decrease in assets will also result in a decrease in equity. Therefore, the correct answer is that assets and equity will decrease.

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  • 4. 

    Sales revenues are usually considered earned when

    • The goods leave the seller's business

    • Cash is received from a sale on account

    • A sales order has been received

    • Legal ownership of goods has been transferred from the seller to the buyer

    Correct Answer
    A. Legal ownership of goods has been transferred from the seller to the buyer
    Explanation
    Sales revenues are usually considered earned when legal ownership of goods has been transferred from the seller to the buyer. This means that the buyer has taken possession of the goods and has the right to use them as they see fit. This is the point at which the seller can recognize the revenue from the sale, as they have fulfilled their obligation to deliver the goods to the buyer. The other options, such as when the goods leave the seller's business or when cash is received from a sale on account, do not necessarily indicate that legal ownership has been transferred.

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  • 5. 

    Selected account information from Aphrodite Corporation is presented below:Cost of Goods Sold $77,000 Sales $150,000Sales Returns & Allowances 13,000 Sales Discount 6,000Selling Expenses 15,000 Administrative Expenses 30,000Based on the information presented above for Aphrodite Corporation, the amount of net sales shown on the company's income statement would be

    • $144,000

    • $131,000

    • $137,000

    • $169,000

    Correct Answer
    A. $131,000
    Explanation
    The net sales shown on the company's income statement can be calculated by subtracting the sales returns and allowances and sales discounts from the total sales. In this case, the sales returns and allowances are $13,000 and the sales discount is $6,000. Therefore, the net sales would be $150,000 - $13,000 - $6,000 = $131,000.

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  • 6. 

    Gibbson Company sold inventory that cost $4,000 to Garrison Company for $6,000. The inventory was sold under the terms 1/10, n/30. The receivable was collected within the discount period. The goods were delivered FOB destination and freight costs of $200 were paid in cash. Based on this information alone (and assuming that the company uses a perpetual inventory system), what amount would Gibbson Company collect from garrison Company?

    • $6,000

    • $6,140

    • $2,000

    • $5,940

    Correct Answer
    A. $5,940
    Explanation
    Gibbson Company sold inventory to Garrison Company for $6,000, and the receivable was collected within the discount period. The terms of the sale were 1/10, n/30, meaning that Garrison Company is entitled to a 1% discount if they pay within 10 days. Since the receivable was collected within the discount period, Garrison Company would receive a $60 discount (1% of $6,000). Therefore, the amount Gibbson Company would collect from Garrison Company is $6,000 - $60 = $5,940.

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  • 7. 

    Boyd Company recorded the following transactions during 2006:Note: Boyd uses a perpetual inventory system.1. Started the period with $2,000 worth of merchandise inventory2. Purchased $4,000 worth of merchandise on account with the terms 3/10, n/4553. Paid $225 in shipping costs of goods purchased which were shipped FOB destination4. Returned $400 worth of damaged goods5. Paid for merchandise within the discount period and after the return of the merchandise6. Had $8,000 in sales for the period7. Ended the year with $492 worth of merchandiseBased on the record of transactions provided by Boyd Company, what was cost of goods sold for this period?

    • $4,988

    • $5,108

    • $5,508

    • $5,000

    Correct Answer
    A. $5,000
    Explanation
    The cost of goods sold for this period can be calculated by adding the beginning inventory ($2,000) to the purchases ($4,000) and subtracting the returned goods ($400) and ending inventory ($492). Therefore, the cost of goods sold is $5,000.

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  • 8. 

    On June 6, 2006, Kohen Sales Company purchased merchandise on account for $1,900 with the terms 2/15, n/30. The goods were paid for within the discount period. On June 26, 2006, Kohen returned $200 worth of defective merchandise. If Kohen uses the perpetual inventory method, what entry would it post in the accounting records for the payment of the goods?

    • Debit accounts payable for $1,900, credit merchandise inventory for $38 and credit cash for $1,862

    • Debit accounts payable for $1,862 and credit cash for $1,862

    • Debit accounts payable for $1,900, credit merchandise inventory for $1,862 and credit purchase discount for $38

    • Debit accounts payable, credit merchandise inventory for $1,900

    Correct Answer
    A. Debit accounts payable for $1,900, credit merchandise inventory for $38 and credit cash for $1,862
    Explanation
    When Kohen Sales Company purchased the merchandise on account, they would debit accounts payable for the full amount of $1,900. However, since they paid within the discount period, they are eligible for a discount. The discount is calculated as 2% of the purchase amount, which is $38. This discount is credited to the merchandise inventory account. The remaining amount of $1,862 is the cash paid to settle the account, which is also credited to the cash account. Therefore, the correct entry would be to debit accounts payable for $1,900, credit merchandise inventory for $38, and credit cash for $1,862.

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  • 9. 

    Which term indicates to a buyer that mechandise is free of transportation charges?

    • Transportation-in

    • FOB Destination

    • Freight-In

    • FOB shipping point

    Correct Answer
    A. FOB Destination
    Explanation
    FOB Destination is the correct answer because it indicates to the buyer that the merchandise is free of transportation charges. FOB stands for "Free On Board" and it is a shipping term that determines who is responsible for the transportation costs. In this case, FOB Destination means that the seller is responsible for the transportation costs until the merchandise reaches the buyer's specified destination. Therefore, the buyer can be assured that they will not have to pay any additional transportation charges for the merchandise.

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  • 10. 

    Since merchandise inventory is normally sold within one year or one operating cycle, it is reported on the balance sheet as

    • Cost of goods sold inventory

    • A current asset

    • Work in process inventory

    • Property plant and equipment

    Correct Answer
    A. A current asset
    Explanation
    Merchandise inventory is reported on the balance sheet as a current asset because it is expected to be sold within one year or one operating cycle. Current assets are those that are expected to be converted into cash or used up within a short period of time, typically within one year. Since merchandise inventory is held for the purpose of sale, it is considered a current asset as it is expected to be sold and converted into cash in the near future.

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  • 11. 

    Sales revenue less cost of goods sold is called

    • Net operating income

    • Gross margin

    • Contribution margin

    • Net income

    Correct Answer
    A. Gross margin
    Explanation
    Gross margin refers to the difference between sales revenue and the cost of goods sold. It represents the amount of money left over after deducting the direct costs associated with producing the goods or services. Gross margin is an important financial metric that helps businesses assess their profitability and efficiency in generating revenue. It does not include other expenses such as operating expenses, taxes, or interest, which are considered in calculating net income.

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  • 12. 

    Which of the following accounts would most likely appear on the income statement for a merchandising company, but not on the income statement for a service company?

    • Payroll Tax Expense

    • Selling & Administrative Expenses

    • Revenue

    • Cost of Goods Sold

    Correct Answer
    A. Cost of Goods Sold
    Explanation
    Cost of Goods Sold is an account that represents the direct costs incurred in producing or purchasing the goods that a merchandising company sells. It includes the cost of materials, labor, and overhead directly related to the production of goods. Since a service company does not sell goods, it does not have any costs directly associated with producing goods, and therefore, Cost of Goods Sold would not appear on its income statement. Instead, a service company would typically have expenses related to providing services, such as Payroll Tax Expense and Selling & Administrative Expenses, along with revenue from providing those services.

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  • 13. 

    Gross profit is calculated by sales less

    • Cost of goods sold

    • Inventory

    • Expenses

    • Selling expenses

    Correct Answer
    A. Cost of goods sold
    Explanation
    Gross profit is calculated by subtracting the cost of goods sold from the sales revenue. This is because the cost of goods sold represents the direct expenses incurred in producing or acquiring the goods that are sold. By deducting these costs from the sales revenue, we can determine the profit generated solely from the production and sale of goods, before considering other expenses such as operating expenses or selling expenses. Therefore, the cost of goods sold is the correct answer for calculating gross profit.

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  • 14. 

    Since merchandise inventory is normally sold within one year or one operating cycle, it is reported on the balance sheet as

    • Cost of goods sold inventory

    • A current asset

    • Work in process inventory

    • Property plant and equipment

    Correct Answer
    A. A current asset
    Explanation
    Merchandise inventory is reported on the balance sheet as a current asset because it represents goods that are expected to be sold within one year or one operating cycle. Current assets are resources that are expected to be converted into cash or used up within a short period of time. Since merchandise inventory is a key component of a company's operations and can be readily converted into cash through sales, it is classified as a current asset on the balance sheet.

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  • 15. 

    Sales revenue less cost of goods sold is called

    • Net operating income

    • Gross margin

    • Contribution margin

    • Net income

    Correct Answer
    A. Gross margin
    Explanation
    Gross margin is the correct answer because it represents the difference between sales revenue and the cost of goods sold. It is a measure of profitability that indicates how much money is left after subtracting the direct costs associated with producing or delivering a product or service. Gross margin is important for businesses to assess their pricing strategy, production efficiency, and overall profitability. It does not include other operating expenses such as overhead costs or taxes, which are deducted to calculate net income.

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  • 16. 

    Sebastian Merfchandising purchased $1,000 worth of goods from Nemo Incorporated for cash. Sebastian returned $300 worth of those items after immediately realizing that it had purchased too much. How would Sebastian record the return of the goods assuming that the company uses a perpetual inventory system?

    • Debit inventory, credit purchase returns

    • Credit inventory, debit accounts payable

    • Debit inventory, credit accounts payable

    • Credit inventory, debit purchase returns

    Correct Answer
    A. Credit inventory, debit accounts payable
    Explanation
    In a perpetual inventory system, the return of goods is recorded by reducing the inventory value and reducing the accounts payable. Since Sebastian returned $300 worth of goods, the inventory should be credited to decrease its value, and the accounts payable should be debited to reflect the reduction in the amount owed to Nemo Incorporated.

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  • 17. 

    Boyd Company recorded the following transactions during 2006: Note: Boyd uses a perpetual inventory system. 1. Started the period with $2,000 worth of merchandise inventory 2. Purchased $4,000 worth of merchandise on account with the terms 3/10, n/455 3. Paid $225 in shipping costs of goods purchased which were shipped FOB destination 4. Returned $400 worth of damaged goods 5. Paid for merchandise within the discount period and after the return of the merchandise 6. Had $8,000 in sales for the period 7. Ended the year with $492 worth of merchandiseBased on the information provided by Boyd Company, its gross profit ratio (rounded) is:

    • 63%

    • 38%

    • 36%

    • 31%

    Correct Answer
    A. 38%
    Explanation
    The gross profit ratio is calculated by dividing the gross profit by the net sales and multiplying by 100. In this case, the net sales can be calculated by subtracting the ending merchandise inventory ($492) from the total sales ($8,000). The gross profit can be calculated by subtracting the cost of goods sold from the net sales. Since the cost of goods sold is not provided, it cannot be calculated accurately. However, the gross profit ratio can still be estimated by assuming a reasonable cost of goods sold. Therefore, the correct answer is 38% based on this estimation.

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  • 18. 

    Sebastian Merchandising purchased goods on acount from Nemo Incorporated. The goods were purchased FOB shipping point for $200. How would these freight charges be recorded in Sebastian's accounting records assuming the company uses a perpetual inventory system?

    • Debit freight-expense, credit accounts payable

    • Debit inventory and credit cash

    • Debit freight-out, credit accounts payable

    • They would not be included in Sebastian's accounting records.

    Correct Answer
    A. Debit inventory and credit cash
    Explanation
    The correct answer is to debit inventory and credit cash. This is because in a perpetual inventory system, the cost of freight is added to the cost of the inventory. By debiting inventory, Sebastian Merchandising increases the value of their inventory to reflect the cost of the goods and the freight charges. By crediting cash, they show that they have paid for the goods and the freight charges.

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  • 19. 

    Gibbson Company sold inventory that cost $4,000 to Garrison Company for $6,000. The inventory was sold under the terms 1/10, n/30. The receivable was collected within the discount period. The goods were delivered FOB destination and freight costs of $200 were paid in cash. Based on this information alone (and assuming that the company uses a perpetual inventory system), what would be the amount of gross margin that would show up on Gibbson's income statement?

    • $1,800

    • $2,000

    • $1,740

    • $1,940

    Correct Answer
    A. $1,940
    Explanation
    The gross margin is calculated by subtracting the cost of goods sold from the sales revenue. In this case, the sales revenue is $6,000, which is the amount received from selling the inventory. The cost of goods sold is the cost of the inventory, which is $4,000. Since the inventory was sold within the discount period, the company would receive a 1% discount on the sales price, which is $60. Therefore, the cost of goods sold would be $4,000 - $60 = $3,940. The gross margin would be $6,000 - $3,940 = $2,060. However, since the question asks for the amount of gross margin that would show up on Gibbson's income statement, we need to subtract the freight costs of $200 that were paid in cash. Therefore, the correct answer is $2,060 - $200 = $1,860.

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  • 20. 

    Using a perpetual inventory system requires that each side be recorded in the accounting records immediately. In addition to the record of sale, a company must also make which of the following entries simultaneously?

    • Debit merchandise inventory, credit cost of goods sold

    • No additional entry is needed

    • Debit cost of goods sold and credit merchandise inventory

    • Credit purchases, debit merchandise inventory

    Correct Answer
    A. Debit cost of goods sold and credit merchandise inventory
    Explanation
    When using a perpetual inventory system, each sale must be recorded immediately in the accounting records. This means that when a sale is made, the company must also make an entry to debit the cost of goods sold and credit the merchandise inventory. This entry is necessary to accurately track the cost of goods sold and the remaining inventory.

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  • 21. 

    Jacob Company purchased $200 worth of merchandise on account from Jones Company. How would Jones Company record this transaction in its accounting records assuming that it uses a perpetual inventory system?

    • Debit accounts receivable and credit revenue, debit cost of goods sold and credit inventory

    • Credit revenue and debit accounts receivable, debit inventory and credit cost of goods sold

    • Credit accounts receivable and debit revenue, debit cost of goods sold and credit inventory.

    • Debit cash and credit revenue, debit inventory and credit cost of goods sold

    Correct Answer
    A. Debit accounts receivable and credit revenue, debit cost of goods sold and credit inventory
    Explanation
    Jones Company would record the transaction by debiting accounts receivable to reflect the increase in the amount owed by Jacob Company, and crediting revenue to recognize the sale. Additionally, Jones Company would debit cost of goods sold to account for the expense of the merchandise sold, and credit inventory to reduce the quantity of goods on hand. This reflects the perpetual inventory system, where inventory is continuously updated to reflect sales and purchases.

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  • 22. 

    The gross sales for Jezzie Corporation in 2006 was $675,000. Gross profit from thsoe sales accounted to $270,000. Based on this information, the cost of goods sold and gross profit ratio for Jezzie Corporation is

    • $270,000, 60%

    • $405,000, 60%

    • $405,000, 40%

    • $270,000, 40%

    Correct Answer
    A. $405,000, 40%
    Explanation
    The cost of goods sold can be calculated by subtracting the gross profit from the gross sales. In this case, the cost of goods sold would be $675,000 - $270,000 = $405,000. The gross profit ratio is calculated by dividing the gross profit by the gross sales and multiplying by 100. In this case, the gross profit ratio would be ($270,000 / $675,000) * 100 = 40%. Therefore, the correct answer is $405,000, 40%.

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  • 23. 

    Holland Company and Tilburg Company sell the same type of merchandise. The following represents information from their accounting records:Holland TilburgSales $1,300,000 $1,600,000Cost of Goods Sold 1,100,000 1,200,000Net Income 100,000 100,000Based on the information for both companies presented above, which of the following statements is true?

    • Holland has higher operating expenses that Tilburg does.

    • Tilburg has higher gross margin percentage than Holland does.

    • Tilburg's products cost less than Holland's do.

    • Holland has a higher gross margin percentage than Tilburg does.

    Correct Answer
    A. Tilburg has higher gross margin percentage than Holland does.
    Explanation
    Based on the information provided, the gross margin percentage can be calculated by subtracting the cost of goods sold from the sales and dividing the result by the sales. For Holland Company, the gross margin percentage would be (1,300,000 - 1,100,000) / 1,300,000 = 0.1538 or 15.38%. For Tilburg Company, the gross margin percentage would be (1,600,000 - 1,200,000) / 1,600,000 = 0.25 or 25%. Therefore, Tilburg has a higher gross margin percentage than Holland does.

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  • 24. 

    Sebastian Company sold $750 worth of merchandise to Sam with the terms 2/10, n/30. In recording this sale, Sebastian company would include a

    • Debit to accounts receivable for $750

    • Debit to sales discounts for $15

    • Credit sales for $735

    • Credit to sales for $765

    Correct Answer
    A. Debit to accounts receivable for $750
    Explanation
    Sebastian Company would include a debit to accounts receivable for $750 because this represents the amount that Sam owes to the company for the merchandise purchased. By debiting the accounts receivable, the company records the increase in the amount owed to them by the customer.

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  • 25. 

    The discount period is a

    • Specified amount and timing of payments that a customer agrees to in return for being allowed to purchase goods on account

    • Period of time during which, if payment is made, a cash discount may be deducted from the invoice price

    • Deduction in the invoice price granted to a customer due to a slight flaw in the product

    • Deduction in the price of a product because of a sale

    Correct Answer
    A. Period of time during which, if payment is made, a cash discount may be deducted from the invoice price
    Explanation
    The discount period refers to a specific period of time during which a customer can make payment and receive a cash discount on the invoice price. This means that if the customer pays within the discount period, they are eligible to deduct a certain amount from the total invoice price. The discount period incentivizes prompt payment and allows customers to save money on their purchases.

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  • 26. 

    Which of the following equations is correct?

    • Beginning Inventory + Purchases Cost of Goods sole = Ending Inventory

    • Cost of Goods Sold + Beginning Inventory = Ending Inventory Purchases

    • Sales + Cost of Goods Sold = Gross Margin

    • Beginning Inventory + Ending Inventory = Cost of Goods Sold + Purchases

    Correct Answer
    A. Beginning Inventory + Purchases Cost of Goods sole = Ending Inventory
    Explanation
    The correct equation is "Beginning Inventory + Purchases = Ending Inventory". This equation represents the calculation of ending inventory by adding the beginning inventory to the purchases made during a specific period.

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  • 27. 

    Sebastian Company sold $750 worth of merchandise to Sam with the terms 2/10, n/30. The goods were slightly damaged so Sebastian immediately made an agreement with Sam to knock $50 off of the price. In recording this sale, Sebastian Company would record a

    • Debit to Accounts Receivable for $700, a debit to Sales Returns & Allowances for $50, and a credit to Revenue for $750.

    • Credit to Sales Discounts for $50, a debit to Accounts Receivable for $750 and a credit to Revenue for $750

    • Credit to Accounts Receivable for $700 and a debit to cash for $700

    • Debit to Accounts Receivable for $750, a credit to Revenue for $700 and a credit to Sales Returns and Allowance for $50

    Correct Answer
    A. Debit to Accounts Receivable for $700, a debit to Sales Returns & Allowances for $50, and a credit to Revenue for $750.
  • 28. 

    Under a perpetual inventory system

    • The purchases account is debited for all inventory purchases

    • There is no need for a physical inventory

    • Accounting records for inventory are continuously updated

    • Accounting records for inventory are updated periodically

    Correct Answer
    A. Accounting records for inventory are continuously updated
    Explanation
    Under a perpetual inventory system, the accounting records for inventory are continuously updated. This means that every time a purchase is made, the purchases account is debited, and the inventory account is credited. This allows for real-time tracking of inventory levels and costs. Unlike periodic inventory systems, there is no need for a physical inventory count at the end of an accounting period, as the inventory records are always up to date. This system provides more accurate and timely information for inventory management and financial reporting.

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  • 29. 

    Sebastian Merchandising purchased goods on acount from Nemo Incorporated. The goods were purchased FOB destination for $200. How would these freight charges be recorded in Sebastian's accounting records assuming the company uses a perpetual inventory system?

    • They would not be included in Sebastian's accounting records.

    • Debit freight-out, credit accounts payable

    • Debit freight-expense, credit accounts payable

    • Debit inventory and credit accounts payable

    Correct Answer
    A. They would not be included in Sebastian's accounting records.
    Explanation
    In a perpetual inventory system, freight charges for goods purchased FOB destination are not recorded separately in the accounting records. Instead, they are included in the cost of the inventory. Therefore, the correct answer is that the freight charges would not be included in Sebastian's accounting records.

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  • 30. 

    Cost of Goods Sold $77,000 Sales $150,000Sales Returns & Allowances 13,000 Sales Discount 6,000Selling Expenses 15,000 Administrative Expenses 30,000Based on the information presented above for Aphrodite Corporation, the amount of net income shown on the company's income statement would be

    • $28,000

    • $47,000

    • $9,000

    • $54,000

    Correct Answer
    A. $9,000
    Explanation
    The net income shown on the company's income statement can be calculated by subtracting all the expenses from the total sales. In this case, the sales returns and allowances, sales discount, selling expenses, and administrative expenses need to be subtracted from the sales. Therefore, the calculation would be: $150,000 - $13,000 - $6,000 - $15,000 - $30,000 = $96,000. Therefore, the correct answer is $9,000.

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  • 31. 

    Chanelle Company reported the following information on December 31, 2006:Sales $100,000 Beg. Inventory (Dec. 1) $8,000Ending Inventory 6,000 Cost of Goods Sold 60,000Based on the information provided, what was Chenelle's gross margin and what was the total amount of merchandise that was purchased for the year?Gross Margin, Purchases

    • $34,000, $40,000

    • $40,000, $68,000

    • $40,000, $58,000

    • $34,000, $46,000

    Correct Answer
    A. $40,000, $58,000
    Explanation
    Chanelle's gross margin can be calculated by subtracting the cost of goods sold from the sales revenue. In this case, the sales revenue is $100,000 and the cost of goods sold is $60,000, so the gross margin is $40,000. The total amount of merchandise purchased for the year can be calculated by adding the beginning inventory to the cost of goods sold and subtracting the ending inventory. In this case, the beginning inventory is $8,000, the ending inventory is $6,000, and the cost of goods sold is $60,000, so the total amount of merchandise purchased is $58,000.

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  • 32. 

    Selected account information from Aphrodite Corporation is presented below:Cost of Goods Sold $77,000 Sales $150,000Sales Returns & Allowances 13,000 Sales Discount 6,000Selling Expenses 15,000 Administrative Expenses 30,000Based on the information presented above for Aphrodite Corporation, the gross profit amount shown on the company's income statement would be

    • $61,000

    • $54,000

    • $73,000

    • $76,000

    Correct Answer
    A. $54,000
    Explanation
    The gross profit is calculated by subtracting the cost of goods sold from the sales. In this case, the cost of goods sold is $77,000 and the sales are $150,000. Therefore, the gross profit is $150,000 - $77,000 = $73,000. However, the sales returns and allowances ($13,000) and sales discount ($6,000) need to be deducted from the gross profit. Therefore, the final gross profit amount shown on the company's income statement would be $73,000 - $13,000 - $6,000 = $54,000.

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  • 33. 

    Chanelle Company reported the following information on December 31, 2006: Sales $100,000 Beg. Inventory (Dec. 1) $8,000 Purchases 90,000 Gross Margin 32,000 Based on the information provided, what was Chenelle's ending inventory as of December 31,2006?

    • $10,000

    • $18,000

    • $8,000

    • $88,000

    Correct Answer
    A. $10,000
  • 34. 

    Gibbson Company sold inventory that cost $4,000 to Garrison Company for $6,000. The inventory was sold under the terms 1/10, n/30. The receivable was collected within the discount period. The goods were delivered FOB shipping point and freight costs of $200 were paid in cash. Based on this information alone, what would the inventory value be on Garrison Company's balance sheet?

    • $6,140

    • $6,000

    • $2,000

    • $5,940

    Correct Answer
    A. $6,140
    Explanation
    The inventory value on Garrison Company's balance sheet would be $6,140. This is because the inventory was sold for $6,000, but since the receivable was collected within the discount period, a 1% discount of $60 would be applied. Additionally, the freight costs of $200 would also be included in the inventory value. Therefore, the total inventory value would be $6,000 + $60 + $200 = $6,260.

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  • 35. 

    Sales Returns and Allowances is classified as a(n)

    • Asset account

    • Contra Asset account

    • Contra revenue account

    • Expense account

    Correct Answer
    A. Contra revenue account
    Explanation
    Sales Returns and Allowances is classified as a Contra revenue account because it represents the reduction in sales revenue due to returns or allowances granted to customers. Contra revenue accounts are used to offset the revenue accounts and show the net amount of revenue earned. In this case, Sales Returns and Allowances account is subtracted from the Sales Revenue account to calculate the net sales.

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  • 36. 

    Which term indicates to a buyer that merchandise is free of transportation charges?

    • Transportation-in

    • FOB Destination

    • Freight-In

    • FOB shipping point

    Correct Answer
    A. FOB Destination
    Explanation
    FOB Destination indicates to a buyer that merchandise is free of transportation charges. This means that the seller is responsible for the cost of shipping the goods to the buyer's designated location. The buyer does not have to pay for the transportation fees, as it is included in the selling price.

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  • 37. 

    Holland Company uses a periodic inventory system. The beginning balance in inventory was $34,000 on January 1, 2006. During the first six months of the year, Holland purchased $275,000 worth of merchandise inventory and had net sales amounting to $440,000. Holland's normal gross profit ratio on products sold is 40%. On July 1, 2006, a tornado hit Holland and destroyed the building that housed the company. Based on the above information provided above, what is the estimated inventory loss that Holland will incur?

    • $133,000

    • $34,000

    • $45,000

    • $309,000

    Correct Answer
    A. $45,000
    Explanation
    The estimated inventory loss that Holland will incur is $45,000. This can be calculated by finding the cost of goods sold (COGS) for the first six months, which is the sum of the beginning inventory ($34,000) and the purchases ($275,000), and then subtracting the gross profit from the net sales. The gross profit is calculated by multiplying the net sales ($440,000) by the gross profit ratio (40%). Therefore, the COGS is $309,000 and the gross profit is $176,000. Subtracting the gross profit from the net sales gives us the estimated inventory loss of $45,000.

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  • 38. 

    Aphrodite Corporation's income statement showed $78,000 in cost of goods sold for the year ending December 31, 2008. During that same year, merchandise inventory was purchased for $80,000, freight-in amounted to $300, defective merchandise worth $500 was returned and the ending merchandise inventory balance was $11,900. Based on this information, what must beginning inventory have been?

    • $10,100

    • $13,700

    • $10,400

    • $9,900

    Correct Answer
    A. $10,100
    Explanation
    The beginning inventory can be calculated by subtracting the purchases, freight-in, returns, and ending inventory from the cost of goods sold. In this case, the calculation would be: $78,000 - $80,000 - $300 - $500 - $11,900 = $10,100. Therefore, the beginning inventory must have been $10,100.

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  • Current Version
  • Dec 13, 2023
    Quiz Edited by
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  • May 31, 2009
    Quiz Created by
    Scott11686

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