1. Which of the following would not be classified as a contra account?

a. Sales
b. Sales Returns and Allowances
c. Accumulated Depreciation
d. Sales Discounts

2. Which of the following accounts has a normal credit balance?

a. Sales Returns and Allowances
b. Sales Discounts
c. Sales
d. Selling Expense

3. With respect to the income statement,

a. contra-revenue accounts do not appear on the income statement.
b. sales discounts increase the amount of sales.
c. contra-revenue accounts increase the amount of operating expenses.
d. sales discounts are included in the calculation of gross profit.

4. When a seller grants credit for returned goods, the account that is credited is
a. Sales.
b. Sales Returns and Allowances.
c. Merchandise Inventory.
d. Accounts Receivable.

5. The respective normal account balances of Sales, Sales Returns and Allowances, and Sales
Discounts are
a. credit, credit, credit.
b. debit, credit, debit.
c. credit, debit, debit.
d. credit, debit, credit.

6. All of the following are contra revenue accounts except

a. sales.
b. sales allowances.
c. sales discounts.
d. sales returns.

7. A merchandising company using a perpetual system will make

a. the same number of adjusting entries as a service company does.
b. one more adjusting entry than a service company does.
c. one less adjusting entry than a service company does.
d. different types of adjusting entries compared to a service company.

8. In preparing closing entries for a merchandising company, the Income Summary account will be
credited for the balance of
a. sales.
b. merchandise inventory.
c. sales discounts.
d. freight-out.
9. A merchandising company using a perpetual system may record an adjusting entry by
a. debiting Income Summary.
b. crediting Income Summary.
c. debiting Cost of Goods Sold.
d. debiting Sales.

10. The operating cycle of a merchandiser is

a. always one year in length.
b. generally longer than it is for a service company.
c. about the same as for a service company.
d. generally shorter than it is for a service company.

11. The sales revenue section of an income statement for a retailer would not include
a. Sales discounts.
b. Sales.
c. Net sales.
d. Cost of goods sold.

12. The operating expense section of an income statement for a wholesaler would not include
a. freight-out.
b. utilities expense.
c. cost of goods sold.
d. insurance expense.

13. Income from operations will always result if

a. the cost of goods sold exceeds operating expenses.
b. revenues exceed cost of goods sold.
c. revenues exceed operating expenses.
d. gross profit exceeds operating expenses.

14. Indicate which one of the following would appear on the income statement of both a
merchandising company and a service company.
a. Gross profit
b. Operating expenses
c. Sales revenues
d. Cost of goods sold

15. Thelman Company reported the following balances at June 30, 2008:

Sales $10,800
Sales Returns and Allowances 400
Sales Discounts 200
Cost of Goods Sold 5,000
Net sales for the month is a.
$10,800.
b. $10,400.
c. $10,200.
d. $5,200.
16. Income from operations appears on
a. both a multiple-step and a single-step income statement.
b. neither a multiple-step nor a single-step income statement.
c. a single-step income statement.
d. a multiple-step income statement.

17. Gross profit does not appear

a. on a multiple-step income statement.
b. on a single-step income statement.
c. to be relevant in analyzing the operation of a merchandiser.
d. on the income statement if the periodic inventory system is used because it cannot be
calculated.

18. Which of the following is not a true statement about a multiple-step income statement?
a. Operating expenses are often classified as selling and administrative expenses.
b. There may be a section for nonoperating activities.
c. There may be a section for operating assets.
d. There is a section for cost of goods sold.

19. Which one of the following is shown on a multiple-step but not on a single-step income
statement?
a. Net sales
b. Net income
c. Gross profit
d. Cost of goods sold

20. All of the following items would be reported as other expenses and losses except
a. freight-out.
b. casualty losses.
c. interest expense.
d. loss from employees' strikes.

21. If a company has net sales of $500,000 and cost of goods sold of $350,000, the gross profit
percentage is
a. 70%.
b. 30%.
c. 15%.
d. 100%.

22. A company shows the following balances:

Sales $1,000,000
Sales Returns and Allowances 180,000
Sales Discounts 20,000
Cost of Goods Sold 560,000
What is the gross profit percentage? a.
56%
b. 70%
c. 44%
d. 30%
23. The gross profit rate is computed by dividing gross profit by
a. cost of goods sold.
b. net income.
c. net sales.
d. sales.

24. In terms of liquidity, merchandise inventory is

a. more liquid than cash.
b. more liquid than accounts receivable.
c. more liquid than prepaid expenses.
d. less liquid than store equipment.

25. On a classified balance sheet, merchandise inventory is classified as

a. an intangible asset.
b. property, plant, and equipment.
c. a current asset.
d. a long-term investment.

26. Gross profit for a merchandiser is net sales minus

a. operating expenses.
b. cost of goods sold.
c. sales discounts.
d. cost of goods available for sale.

Use the following information for questions 27-29.

During 2008, Salon Enterprises generated revenues of $60,000. The company’s expenses were as follows:
cost of goods sold of $30,000, operating expenses of $12,000 and a loss on the sale of equipment of
$2,000.

27. Salon’s gross profit is a.

$60,000.
b. $30,000.
c. $18,000.
d. $16,000.

28. Salon’s income from operations is a.

$60,000.
b. $30,000.
c. $18,000.
d. $12,000.

29. Salon’s net income is

a. $60,000.
b. $30,000.
c. $18,000.
d. $16,000.
Use the following information for questions 30-31 Financial
information is presented below:
Operating Expenses $ 45,000
Sales 150,000
Cost of Goods Sold 77,000

30. Gross profit would be

a. $105,000.
b. $28,000.
c. $73,000.
d. $150,000.

31. The gross profit rate would be a.

.700.
b. .187.
c. .300.
d. .487.

Use the following information for questions 32-33 Financial

information is presented below:
Operating Expenses $ 45,000
Sales Returns and Allowances 13,000
Sales Discounts 6,000
Sales 150,000
Cost of Goods Sold 67,000

32. Gross profit would be

a. $77,000.
b. $64,000.
c. $70,000.
d. $83,000.

33. The gross profit rate would be a.

.535.
b. .489.
c. .511.
d. .553.

Use the following information for questions 34-36 Financial

information is presented below:
Operating Expenses $ 45,000
Sales Returns and Allowances 13,000
Sales Discounts 6,000
Sales 160,000
Cost of Goods Sold 77,000
 34. The amount of net sales on the income statement would be a.
$154,000.
b. $141,000.
c. $160,000.
d. $166,000.

35. Gross profit would be

a. $77,000.
b. $70,000.
c. $64,000.
d. $83,000.

36. The gross profit rate would be a.

.454.
b. .546.
c. .500.
d. .538.

37. If a company has sales of $420,000, net sales of $400,000, and cost of goods sold of
$260,000, the gross profit rate is a.
67%.
b. 65%
c. 35%.
d. 33%.

38. Ingrid’s Fashions sold merchandise for $38,000 cash during the month of July. Returns that month
totaled $800. If the company’s gross profit rate is 40%, Ingrid’s will report monthly net sales
revenue and cost of goods sold of
a. $38,000 and $22,800.
b. $37,200 and $14,880.
c. $37,200 and $22,320.
d. $38,000 and $22,320.

Use the following information for questions 39-42

During August, 2008, Sal’s Supply Store generated revenues of $30,000. The company’s expenses were as
follows: cost of goods sold of $12,000 and operating expenses of $2,000. The company also had rent
revenue of $500 and a gain on the sale of a delivery truck of $1,000.

39. Sal’s gross profit for August, 2008 is a.

$30,000.
b. $19,000.
c. $18,000.
d. $16,000.
40. Sal’s nonoperating income (loss) for the month of August, 2008 is
a. $0.
b. $500.
c. $1,000.
d. $1,500.
41. Sal’s operating income for the month of August, 2008 is a.
$30,000.
b. $19,500.
c. $18,500.
d. $16,000.

42. Sal’s net income for August, 2008 is a.

$18,000.
b. $17,500.
c. $16,500.
d. $16,000.

43. At the beginning of September, 2008, RFI Company reported Merchandise Inventory of
$4,000. During the month, the company made purchases of $7,800. At September 31, 2008, a
physical count of inventory reported $3,200 on hand. Cost of goods sold for the month is
a. $600.
b. $7,800.
c. $8,600.
d. $11,800.

44. At the beginning of the year, Midtown Athletic had an inventory of $400,000. During the year, the
company purchased goods costing $1,600,000. If Midtown Athletic reported ending inventory of
$600,000 and sales of $2,000,000, the company’s cost of goods sold and gross profit rate must be
a. $1,000,000 and 50%.
b. $1,400,000 and 30%.
c. $1,000,000 and 30%.
d. $1,400,000 and 70%.

45. During the year, Darla’s Pet Shop’s merchandise inventory decreased by $20,000. If the
company’s cost of goods sold for the year was $300,000, purchases must have been
a. $320,000.
b. $280,000.
c. $260,000.
d. Unable to determine.

46. Cost of goods available for sale is computed by adding

a. beginning inventory to net purchases.
b. beginning inventory to the cost of goods purchased.
c. net purchases and freight-in.
d. purchases to beginning inventory.

47. The Freight-in account

a. increases the cost of merchandise purchased.
b. is contra to the Purchases account.
c. is a permanent account.
d. has a normal credit balance.
48. Net purchases plus freight-in determines
a. cost of goods sold.
b. cost of goods available for sale.
c. cost of goods purchased.
d. total goods available for sale.

49. West Company has the following account balances:

Purchases $48,000
Sales Returns and Allowances 6,400
Purchase Discounts 4,000
Freight-in 3,000
Delivery Expense 4,000
The cost of goods purchased for the period is a.
$52,000.
b. $47,000.
c. $51,000.
d. $44,600.

50. Baden Shoe Store has a beginning merchandise inventory of $30,000. During the period,
purchases were $140,000; purchase returns, $4,000; and freight-in $10,000. A physical count of
inventory at the end of the period revealed that $20,000 was still on hand. The cost of goods
available for sale was
a. $164,000.
b. $156,000.
c. $176,000.
d. $184,000.

.51 In a periodic inventory system, a return of defective merchandise by a customer is recorded by

crediting
a. Accounts Payable.
b. Merchandise Inventory.
c. Purchases.
d. Purchase Returns and Allowances.

.52 Which one of the following transactions is recorded with the same entry in a perpetual and a
periodic inventory system?
a. Cash received on account with a discount
b. Payment of freight costs on a purchase
c. Return of merchandise sold
d. Sale of merchandise on credit

a
53. The journal entry to record a return of merchandise purchased on account under a
periodic inventory system would be
a. Accounts Payable
 Purchase Returns and Allowances
b. Purchase Returns and Allowances
Accounts Payable
c. Accounts Payable
Inventory
d. Inventory
Accounts Payable
a
54. Under a periodic inventory system, acquisition of merchandise is debited to the
a. Merchandise Inventory account.
b. Cost of Goods Sold account.
c. Purchases account.
d. Accounts Payable account.
a
55. Which of the following accounts has a normal credit balance?
a. Purchases
b. Sales Returns and Allowances
c. Freight-in
d. Purchase Discounts
a
56. The respective normal account balances of Purchases, Purchase Discounts, and Freight- in are
a. credit, credit, debit.
b. debit, credit, credit.
c. debit, credit, debit.
d. debit, debit, debit.
a
57. In a worksheet for a merchandising company, Merchandise Inventory would appear in the
a. trial balance and adjusted trial balance columns only.
b. trial balance and balance sheet columns only.
c. trial balance, adjusted trial balance, and balance sheet columns.
d. trial balance, adjusted trial balance, and income statement columns.
a
58. The Merchandise Inventory account balance appearing in a worksheet represents the
a. ending inventory.
b. beginning inventory.
c. cost of merchandise purchased.
d. cost of merchandise sold.

Additional Multiple Choice Questions

59. Cole Company has sales revenue of $39,000, cost of goods sold of $24,000 and operating expenses
of $9,000 for the year ended December 31. Cole's gross profit is
a. $30,000.
b. $15,000.
c. $6,000.
d. $0.

60. Logan Company made a purchase of merchandise on credit from Claude Corporation on August 3,
for $6,000, terms 2/10, n/45. On August 10, Logan makes the appropriate payment to Claude. The
entry on August 10 for Logan Company is
a. Accounts Payable................................................................. 6,000
Cash.............................................................................. 6,000
b. Accounts Payable................................................................. 5,880
Cash.............................................................................. 5,880
c. Accounts Payable................................................................. 6,000
Purchase Returns and Allowances ............................... 120
 Cash.............................................................................. 5,880
d. Accounts Payable................................................................. 6,000
Merchandise Inventory.................................................. 120
Cash.............................................................................. 5,880
61. Cartier Company purchased inventory from Pissaro Company. The shipping costs were
$400 and the terms of the shipment were FOB shipping point. Cartier would have the following
entry regarding the shipping charges:
a. There is no entry on Cartier's books for this transaction.
b. Freight Expense................................................................... 400
Cash ........................................................................... 400
c. Freight-out ........................................................................... 400
Cash ........................................................................... 400
d. Merchandise Inventory ........................................................ 400
Cash ........................................................................... 400

62. In a perpetual inventory system, a return of defective merchandise by a purchaser is

recorded by crediting
a. Purchases.
b. Purchase Returns.
c. Purchase Allowance.
d. Merchandise Inventory.

63. On October 4, 2008, Terry Corporation had credit sales transactions of $2,800 from merchandise
having cost $1,900. The entries to record the day's credit transactions include a
a. debit of $2,800 to Merchandise Inventory.
b. credit of $2,800 to Sales.
c. debit of $1,900 to Merchandise Inventory.
d. credit of $1,900 to Cost of Goods Sold.

64. Which of the following accounts is not closed to Income Summary?

a. Cost of Goods Sold
b. Merchandise Inventory
c. Sales
d. Sales Discounts

65. In the Clark Company, sales were $480,000, sales returns and allowances were $30,000, and cost
of goods sold was $288,000. The gross profit rate was
a. 64%.
b. 36%.
c. 40%.
d. 60%.

66. Net sales is sales less

a. sales discounts.
b. sales returns.
c. sales returns and allowances.
d. sales discounts and sales returns and allowances.
 67. In the balance sheet, ending merchandise inventory is reported
a. in current assets immediately following accounts receivable.
b. in current assets immediately following prepaid expenses.
c. in current assets immediately following cash.
d. under property, plant, and equipment.
 68. Cost of goods available for sale is computed by adding
a. freight-in to net purchases.
b. beginning inventory to net purchases.
c. beginning inventory to purchases and freight-in.
d. beginning inventory to cost of goods purchased.

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