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In a periodic inventory system, cost of goods sold is recorded as each sale occurs.

A) True
B) False

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All of the following statements regarding inventory shrinkage are true except:


A) Inventory shrinkage refers to the loss of inventory.
B) Inventory shrinkage is determined by comparing a physical count of inventory with recorded inventory amounts.
C) Inventory shrinkage is recognized by debiting an operating expense.
D) Inventory shrinkage is recognized by debiting Cost of Goods Sold.
E) Inventory shrinkage can be caused by theft or deterioration.

F) C) and D)
G) None of the above

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Juniper Company, Inc. uses a perpetual inventory system. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The correct journal entry to record the purchase on August 7 is:


A) Debit Merchandise Inventory $9,750; credit Cash $9,750.
B) Debit Accounts Payable $9,750; credit Merchandise Inventory $9,750.
C) Debit Merchandise Inventory $9,750; credit Sales Returns $1,500; credit Cash $8,250.
D) Debit Merchandise Inventory $9,750; credit Accounts Payable $9,750.
E) Debit Accounts Payable $8,250; debit Purchase Returns $1,500; credit Merchandise Inventory $9,750.

F) B) and D)
G) C) and D)

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How do closing entries for a merchandising company that uses the perpetual inventory system differ from the closing entries for a service company?

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Closing entries are similar for service ...

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Gross profit is also called gross margin.

A) True
B) False

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

A) True
B) False

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Farmen Company, Inc. had net sales of $600,000 and cost of goods sold of $450,000. Calculate Farmen's gross profit.

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Gross Profit = Sales...

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A company uses the perpetual inventory system and recorded the following entry:  Accounts Payable 2,500 Merchandise Irventory 50 Cash 2,450\begin{array} { | l | r | r | } \hline \text { Accounts Payable } & 2,500 & \\\hline \text { Merchandise Irventory } & & 50 \\\hline \text { Cash } & & 2,450 \\\hline\end{array} This entry reflects a:


A) Purchase of merchandise on credit.
B) Return of merchandise.
C) Sale of merchandise on credit.
D) Payment of the account payable less a 2% cash discount taken.
E) Payment of the account payable less a 1% cash discount taken.

F) C) and D)
G) All of the above

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The acid-test ratio is also called the quick ratio.

A) True
B) False

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If a company sells merchandise with credit terms 2/10 n/60, the credit period is 10 days and the discount period is 60 days.

A) True
B) False

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

A) True
B) False

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What is inventory shrinkage? How do managers account for shrinkage?

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Inventory shrinkage is the loss of merch...

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What is gross margin ratio? How is it used as an indicator of profitability?

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The gross margin ratio computes the rela...

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Merchandise inventory:


A) Is a long-term asset.
B) Is a current asset.
C) Includes supplies the company will use in future periods.
D) Is classified with investments on the balance sheet.
E) Must be sold within one month.

F) C) and D)
G) B) and C)

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On March 12, Klein Company, Inc. sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system. On March 15, Babson returns some of the merchandise. The selling price of the merchandise is $600 and the cost of the merchandise returned is $350. Babson pays the invoice on March 20, and takes the appropriate discount. The journal entry that Klein makes on March 20 is:


A)  Cash 7,800 Accounts  receivable 7,800\begin{array} { | l | l | l | } \hline \text { Cash } & 7,800 & \\\hline \begin{array} { r } \text { Accounts } \\\text { receivable }\end{array} & & 7,800 \\\hline\end{array}
B)  Cash 4,500 Accounts  receivable 4,500\begin{array} { | l | l | l | } \hline \text { Cash } & 4,500 & \\\hline \begin{array} { r } \text { Accounts } \\\text { receivable }\end{array} & & 4,500 \\\hline\end{array}
C)  Cash 7,056 Sales  discounts 144 Accounts  receivable 7,200\begin{array} { | l | r | l | } \hline \text { Cash } & 7,056 & \\\hline \begin{array} { l } \text { Sales } \\\text { discounts }\end{array} & 144 & \\\hline \begin{array} { r } \text { Accounts } \\\text { receivable }\end{array} & & 7,200 \\\hline\end{array}
D)  Cash 7,056 Accounts  receivable 7,056\begin{array} { | l | l | l | } \hline \text { Cash } & 7,056 & \\\hline \begin{array} { r } \text { Accounts } \\\text { receivable }\end{array} & & 7,056 \\\hline\end{array}
E)  Cash 7,644 Sales  discounts 156 Accounts  receivable 7,800\begin{array} { | l | c | l | } \hline \text { Cash } & 7,644 & \\\hline \begin{array} { l } \text { Sales } \\\text { discounts }\end{array} & 156 & \\\hline \begin{array} { r } \text { Accounts } \\\text { receivable }\end{array} & & 7,800 \\\hline\end{array}

F) C) and D)
G) A) and B)

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Sales Discounts is added to the Sales account when computing a company's net sales.

A) True
B) False

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Explain the difference between the single-step and multiple-step income statements.

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A single-step income statement format in...

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A debit memorandum is:


A) Required whenever a journal entry is recorded.
B) The source document for the purchase of merchandise inventory.
C) Required when a purchase discount is granted.
D) The document a buyer issues to inform the seller of a debit made to the seller's account in the buyer's records.
E) Not necessary in a perpetual inventory system.

F) B) and C)
G) C) and E)

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Purchase discounts are the same as trade discounts.

A) True
B) False

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Explain the way in which costs flow through the merchandise inventory account to a merchandiser's income statement.

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Beginning inventory plus the net cost of...

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