TRUE or FALSE ______ 1. When using a perpetual inventory system, freight charges on goods purchased are debited to Freight-In.

______ 2. If ending inventory is understated, then net income is understated. ______ 3. If both purchases and ending inventory are overstated by the same amount, net income is not affected. ______ 4. Transportation Out is excluded in the cost of goods sold calculation. ______ 5. Under the periodic inventory method, net cost of purchases consists of gross purchases minus purchase discounts and purchase returns and allowances. ______ 6. Under the periodic inventory method, net cost of purchases consists of gross purchases minus purchase discounts and purchase returns and allowances plus transportation costs. ______ 7. Under the perpetual inventory system, the inventory account is continuously updated. ______ 8. Cash discounts are called purchase discounts from the buyers viewpoint and sales discount from the sellers viewpoint. ______ 9. Cost of Goods Sold less Merchandise Inventory, end equals Total Goods Available for Sale. ______ 10. Net Purchases plus Transportation In equals Total Goods Available for Sale. ______ 11. Trade discounts represent a discount offered to the purchasers for quick payment. ______ 12. When a company sells a P100 service with a 20% trade discount, P80 of revenue is recognized. ______ 13. A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time. ______ 14. A sale on account for P1,000 offered with terms 2/10, n/30 means that the customers will get a P2 discount if payment is made within 10 days; otherwise, full payment is due within 30 days. ______ 15. The Sales Discounts account is an expense account. ______ 16. A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances. ______ 17. The Sales Returns account is an expense account. ______ 18. 8. If a company has total revenues of P100,000, sales discounts of P3,000, sales returns of P4,000, and sales allowances of P2,000, the income statement will report net revenues of P91,000. ______ 19. Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported in the income statement. ______ 20. If a company has beginning inventory of P15,000, purchases during the year of P75,000, and ending inventory of P20,000, cost of goods sold equals P70,000. ______ 21. For inventory that is shipped FOB destination, title transfers from the seller to the buyer once the seller ships the inventory.

______ ______ ______ ______ ______ ______ ______ ______ ______ ______

22. 23. 24. 25. 26. 27. 28. 29. 30. 31.

For inventory that is shipped FOB shipping point, title transfers from the seller to the buyer once the seller ships the inventory. Freight-in is included in the cost of inventory. Gross profit equals net sales of inventory less cost of goods sold. Sales revenue minus cost of goods sold is referred to as operating income. When a company sells a P100 service with a 20% trade discount, P80 of revenue is recognized. Sales returns and allowances occur when the buyer returns the goods or the seller reduces the customer's balance owed. Inventory is usually reported as a long-term asset in the balance sheet. Merchandising companies purchase inventories that are primarily in finished form for resale to customers. Sales revenue minus cost of goods sold is referred to as operating income. Income before income taxes equals operating income plus non-operating revenues less non-operating expenses.

Multiple Choice Conceptual 1. Why are inventories included in the computation of net income? a. To determine cost of goods sold. b. To determine sales revenue. c. To determine merchandise returns. d. Inventories are not included in the computation of net income. 2. Which of the following is a characteristic of a perpetual inventory system? a. Inventory purchases are debited to a Purchases account. b. Inventory records are not kept for every item. c. Cost of goods sold is recorded with each sale. d. Cost of goods sold is determined as the amount of purchases less the change in inventory. If a company uses the periodic inventory system, what is the impact on net income of including goods in transit f.o.b. shipping point in purchases, but not ending inventory? a. Overstate net income. b. Understate net income. c. No effect on net income. d. Not sufficient information to determine effect on net income. When using a perpetual inventory system, a. no Purchases account is used. b. a Cost of Goods Sold account is used. c. two entries are required to record a sale. d. all of these. The accountant for the Warlocks Company is preparing the income statement for 2013 and the balance sheet at December 31, 2013. Pryor uses the periodic inventory system.

3.

4.

5.

The January 1, 2013 merchandise inventory balance will appear a. only as an asset on the balance sheet. b. only in the cost of goods sold section of the income statement. c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet. d. as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet. 6. If the beginning inventory for 2013 is overstated, the effects of this error on cost of goods sold for 2013, net income for 2013, and assets at December 31, 2014, respectively, are a. overstatement, understatement, overstatement. b. overstatement, understatement, no effect. c. understatement, overstatement, overstatement. d. understatement, overstatement, no effect. The failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results in a. an overstatement of assets and net income. b. an understatement of assets and net income. c. an understatement of cost of goods sold and liabilities and an overstatement of assets. d. an understatement of liabilities and an overstatement of owners' equity Abra Co. accepted delivery of merchandise which it purchased on account. As of December 31, Abra had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on its financial statements for December 31 would be a. net income, current assets, and retained earnings were understated. b. net income was correct and current assets were understated. c. net income was understated and current liabilities were overstated. d. net income was overstated and current assets were understated. The use of a Purchase Discounts account implies that the recorded cost of a purchased inventory item is its a. invoice price. b. invoice price plus any purchase discount lost. c. invoice price less the purchase discount taken. d. invoice price less the purchase discount allowable whether taken or not.

7.

8.

9.

10. When using the periodic inventory system, which of the following generally would not be separately accounted for in the computation of cost of goods sold? a. Trade discounts applicable to purchases during the period b. Cash (purchase) discounts taken during the period c. Purchase returns and allowances of merchandise during the period d. Cost of transportation-in for merchandise purchased during the period 11. The difference between net sales and cost of merchandise sold for a merchandising business is: a. Sales

b. c. d.

Net Sales Gross Profit Gross Sales

12. When purchases of merchandise are made on account, the transaction would be recorded with the following entry: a. Debit Accounts Payable, credit Merchandise Inventory b. Debit Merchandise Inventory, credit Accounts Payable c. Debit Merchandise Inventory, credit Cash d. Debit Cash, credit Merchandise Inventory 13. When a corporation sells merchandise and the terms are FOB shipping point and pays the shipping costs, the seller would record the transportation costs with the following entry: a. Debit Cash, credit Accounts Receivable b. Debit Accounts Receivable, credit Sales c. Debit Accounts Receivable, credit Cash d. Debit Merchandise Inventory, credit Accounts Payable 14. Multiple-step income statements: a. Show gross profit but not income from operations b. Show both gross profit and income from operations c. Show neither gross profit nor income from operations d. Show income from operations but not gross profit 15. Which of the following would be reported on the retained earnings statement for the current year? a. Dividends for the current year b. Sales c. Cost of merchandise sold d. Merchandise inventory 16. An acid-test ratio of 1.5 means a. Quick assets are 1.15 times as large as sales. b. That every P1.50 of quick assets generates P1.00 in sales. c. That every P1.50 of sales generates P1.00 of liabilities. d. Quick assets are 1.5 times as large as total liabilities. 17. Cost of a. b. c. d. Merchandise Sold would be classified as: Asset Expense Liability Revenue

18. The discount period for credit terms of 1/10, n/30 is: a. 1 day b. 10 days c. 20 days d. 30 days

19. Freight a. b. c. d.

costs incurred by the seller are recorded in the Sales account Cost of merchandise sold account Transportation In account Transportation Out account

20. Which of the following would be classified in an income statement as Other Income or Other Expense? a. a) Advertising Expense b. b) Interest Expense c. c) Transportation Out d. d) Cost of merchandise sold 21. The sales discount is based on a. Invoice price plus transportation costs b. Invoice price less discount c. Invoice price plus transportation costs less returns andallowances d. Invoice price less returns and allowances 22. Myers and Company sold P1,800 of merchandise on account to Oscar, Inc. on March 1 with credit terms of 2/10, n/30. Oscar returned P500 of the merchandise due to poor quality on March 3. If Oscar pays for the purchase on March 11, what entry does Myers make to record receipt of the payment? a. Debit Cash, P1,764; credit A/R, P1,764 b. Debit Cash, P1,800; credit Sales Returns and allowances, P500; credit A/R, P1,300 c. Debit Cash, P1,274; debit Sales Discounts P26; credit A/R, P1,300 d. Debit Cash, P1,800; credit Sales Discounts P36; credit A/R, P1,764 23. In a perpetual inventory system, what accounts are credited when a customer returns merchandise to the seller? a. Sales Returns and Allowances and Accounts Receivable b. Accounts Receivable and Cost of Merchandise Sold c. Merchandise Inventory and Cost of Merchandise Sold d. Sales Returns and Allowances and Merchandise Inventory 24. Which of the following accounts is credited by the seller when merchandise purchases are paid for within the discount period? a. Merchandise Inventory b. Accounts Payable c. Accounts Receivable d. Sales Discounts 25. A classified balance sheet reports merchandise inventory as: a. Plant asset b. Long-term asset c. Current asset

d.

Current liability

26. Gross Margin is calculated as: a. Sales less cost of merchandise sold b. Sales less merchandise inventory c. Sales less expenses d. Sales less operating expenses 27. Company As gross profit ratio has been steadily declining for 5 years while the net profit ratio has remained constant. The most likely reason for this pattern is: a. Cost of merchandise sold and operating expenses have both increased each year b. Selling price and operating expenses have both decreased each year c. Cost of merchandise sold and operating expenses have both decreased each year d. Selling price decreased and operating expenses increased each year Multiple Choice Computational 28. Omar Borkan Corporation uses the perpetual inventory method. On March 1, it purchased P10,000 of inventory, terms 2/10, n/30. On March 3, Omar Borkan returned goods that cost P1,000. On March 9, Omar Borkan paid the supplier. On March 9, Omar Borkan should credit a. purchase discounts for P200. b. inventory for P200. c. purchase discounts for P180. d. inventory for P180. 29. Prancis Inc. reported total assets of P1,200,000 and net income of P135,000 for the current year. Prancis determined that inventory was overstated by P10,000 at the beginning of the year (this was not corrected). What is the corrected amount for total assets and net income for the year? a. P1,200,000 and P135,000. b. P1,200,000 and P145,000. c. P1,190,000 and P125,000. d. P1,210,000 and P145,000. 30. Leonel Inc. reported total assets of P1,600,000 and net income of P85,000 for the current year. Leonel determined that inventory was understated by P23,000 at the beginning of the year and P10,000 at the end of the year. What is the corrected amount for total assets and net income for the year? a. P1,610,000 and P95,000. b. P1,590,000 and P98,000. c. P1,610,000 and P72,000. d. P1,600,000 and P85,000. 31. A sales invoice included the following information: merchandise price, P12,000; transportation, P500; terms 2/10, n/eom, FOB shipping point. Assuming that a credit for merchandise returned of P600 is granted prior to payment, that the transportation is prepaid by the seller, and that the invoice is paid within the discount period, what is the

amount a. b. c. d.

of cash received by the seller? P11,662 P11,672 P12,250 P11,172

32. Merchandise with an invoice price of P7,000 is purchased with terms of 2/10, n/30, FOB shipping point. Transportation costs paid by the seller were P125. What is the cost of the merchandise purchased if payment is made during the discount period? a. P6,860.00 b. P6,982.50 c. P7,000.00 d. P6,985.00 33. Assume that sales are P450,000, sales discounts are P10,000, net income is P35,000, and cost of merchandise sold is P320,000. Gross profit and operating expenses are, respectively a. P130,000 and P95,000 b. P120,000 and P95,000 c. P130,000 and P85,000 d. P120,000 and P85,000 Use the following information for questions 34 through 36. Tangerine Inc. is a calendar-year corporation. Its financial statements for the years 2014 and 2013 contained errors as follows: 2014 2013 Ending inventory P30,000 overstated P80,000 overstated Depreciation expense P20,000 understated P60,000 overstated 34. Assume that the proper correcting entries were made at December 31, 2013. By how much will 2014 income be overstated or understated? a. P10,000 understated b. P10,000 overstated c. P20,000 overstated d. P50,000 overstated Assume that no correcting entries were made at December 31, 2013. By how much will retained earnings at December 31, 2014 be overstated or understated? a. P10,000 understated b. P50,000 overstated c. P50,000 understated d. P90,000 understated Assume that no correcting entries were made at December 31, 2013, or December 31, 2014 and that no additional errors occurred in 2015. By how much will working capital at December 31, 2015 be overstated or understated? a. P0 b. P20,000 overstated

35.

36.

c. P20,000 understated d. P50,000 understated 37. The following information is available for Miley Cyrus Company for 2013: Freight-in P 30,000 Purchase returns 75,000 Selling expenses 150,000 Ending inventory 260,000 The cost of goods sold is equal to 400% of selling expenses. What is the cost of goods available for sale? a. P600,000. b. P890,000. c. P815,000. d. P860,000. Use the following information for questions 38 and 39. GwapaKaayo Co. records purchases at net amounts. On May 5 GwapaKaayo purchased merchandise on account, P16,000, terms 2/10, n/30. GwapaKaayo returned P1,200 of the May 5 purchase and received credit on account. At May 31 the balance had not been paid. 38. The amount to be recorded as a purchase return is a. P1,080. b. P1,224. c. P1,200. d. P1,176. By a. b. c. d. how much should the account payable be adjusted on May 31? P0. P344. P320. P296.

39.

40. Skype Retailers purchased merchandise with a list price of P50,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable. Skype should record the cost of this merchandise as a. P35,000. b. P36,000. c. P39,000. d. P50,000. 41. On June 1, 2013, Napoles Corp. sold merchandise with a list price of 20,000 to Porky on account. Napoles allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was made f.o.b. shipping point. Napoles prepaid 400 of delivery costs for Barrel as an accommodation. On June 12, 2013, Napoles received from Barrel a remittance in full payment amounting to a. 10,976.

b. c. d.

11,368. 11,376. 11,196.

Use the following information for questions 42 and 43. Beginning Inventory 96,000 Freight-In 30,000 Purchase returns 96,000 Ending Inventory 120,000 Selling Expenses 300,000 Sales Discount 18,000 The Cost of Goods Sold is six times the selling expenses 42. What is the total goods available for sale? a. 1,800,000 b. 1,860,000 c. 1,920,000 d. 1,980,000 43. What is the total purchases a. 1,824,000 b. 1,890,000 c. 1,920,000 d. 1,986,000

The cost of goods sold amounts to P420,000. The beginning inventory is P60,000 higher than the ending inventory, the latter being equivalent to 20% of purchases during the year. Gross profit of the company is 30% of net sales. Total operating expenses amounted to 60% of the gross profit. The company is subject to 30% income tax rate. 44. The net sales for the period amounted to a. 420,000 b. 492,000 c. 600,000 d. 612,000 45. The total purchases for the period amounted to a. 72,000 b. 132,000 c. 360,000 d. 492,000

Open-ended problems The following accounts were gathered from the accounting records of Kisser Company for the year ended December 31, 2013. Purchases 7,875,000 Purchase returns and allowances 225,000 Rental Income 375,000 Freight Out 262,500 Salesmens commission 975,000 Depreciation store equipment 187,500 Merchandise Inventory, Jan.1 1,500,000 Merchandise Inventory. Dec.31 2,250,000 Sales 11,775,000 Sales returns and allowances 210,000 Sales discounts 15,000 Officers salaries 750,000 Depreciation office equipment 450,000 Freight In 750,000 Income tax 375,000 Loss on sale of equipment 75,000 Purchase discounts 150,000 Dividend Revenue 225,000 Loss on sale of investment 75,000 Determine the following: 1. Net Sales 2. Cost of Sales 3. Other income 4. Selling expenses 5. Administrative expenses 6. Other expenses

PRACTICE PROBLEMS Practice Problem #1 Journalize the following purchase related transactions: a. Jingle Co. purchased P4,000 worth of merchandise on account, terms 2/10, n/30, FOB shipping point. Prepaid transportation charges of P200 were added to the invoice. b. Returned P500 of merchandise purchased in (a). c. Paid on account for purchases in (a), less return (b) and discount. Practice Problem #2 Journalize the following sales related transactions. a. Sold merchandise on account to Jangle Co., P5,000, terms FOB Shipping Point, 2/10, n/30. The cost of the merchandise sold was P3,000. Paid transportation charges of P200, which were added to the invoice. b. Sold merchandise on account to Comet Co., P10,000, terms FOB Destination, 1/10, n/30. The cost of the merchandise was P6,000. c. Paid transportation charges of P400 for delivery of merchandise sold to Comet Co. d. Issued credit memorandum for P2,000 to Comet Co. for merchandise returned from sale in (b). The cost of the merchandise was P1,200. e. Received amount due from Jangle Co. within the discount period. f. Received amount due, less return and discount from Comet Co. g. Sold merchandise on account to Jangle Co., P5,000, terms FOB Shipping Point, 2/10, n/30. The cost of the merchandise sold was P3,000. Paid transportation charges of P200, which were added to the invoice. h. Sold merchandise on account to Comet Co., P10,000, terms FOB Destination, 1/10, n/30. The cost of the merchandise was P6,000. i. Paid transportation charges of P400 for delivery of merchandise sold to Comet Co. j. Issued credit memorandum for P2,000 to Comet Co. for merchandise returned from sale in (b). The cost of the merchandise was P1,200. k. Received amount due from Jangle Co. within the discount period. l. Received amount due, less return and discount from Comet Co.

Practice Problem #3 WALLNUT Co. asks you to review its December 31, 2013, inventory values and prepare the necessary adjustments to the books. The following information is given to you. a. Walnut uses the periodic method of recording inventory. A physical count reveals P704,670 of inventory on hand at December 31, 2013. b. Not included in the physical count of inventory is P31,260 of merchandise purchased on December 15 from Benggay. This merchandise was shipped F.O.B Shipping Point in December 29 and arrived in January. The invoice arrived and was recorded on December 31. c. Included in inventory is merchandise sold to Bubbly on December 30, F.O.B Destination. This merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale on account for P38,400 on December 31. The merchandise cost P22,050, and Bubbly received it on January 3. d. Included in inventory was merchandise received from Doodle on December 31 with an invoice price of P46,890. The merchandise was shipped F.O.B Destination. The invoice, which has not yet arrived, has not been recorded. e. Not included in inventory is P25,620 of merchandise purchased from Maundy Company. This merchandise was received on December 31 after the inventory had been counted. The invoice was received and recorded on December 30. f. Included in inventory was P31,314 of inventory held by Wallnut on consignment from Jaka Corporation. g. Included in inventory is merchandise sold to Simson F.O.B Shipping Point. This merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale for P56,700 on December 31. The cost if this merchandise was P34,560, and Simson received the merchandise on January 5. h. Excluded from the inventory was a carton labeled Please accept for credit. This carton contains merchandise costing P4,500 which had been sold to a customer for P7,800. No entry had been made to the books to reflect the return, but none of the returned merchandise seemed damaged.
REQUIRED: 1. Compute the correct inventory balance for Walnut at December 31, 2013. 2. Prepare any correcting entries to adjust inventory and related accounts to their proper amounts at December 31, 2013. Assume the books have not been closed.

Practice Problem #4 Using the format for the multi-step income statement, compute the following: a. Calculate Net Sales and Gross Profit if, Sales are P375,000, Sales Returns and Allowances are P32,000, Sales Discounts are P12,000 and Cost of Merchandise Sold is P255,000. b. Calculate Sales Returns and Allowances and Cost of Merchandise Sold if, Sales are P750,000, Sales Discounts are P9,000, Net Sales are P736,000 and Gross Profit is P310,000. c. Calculate Sales and Net Sales if, Sales Returns and Allowances are P25,000, Sales Discounts are P15,000, Cost of Merchandise Sold is P620,000 and Gross Profit is P185,000. Practice Problem #5 Journalize the following related transactions. a) Purchased mdse on account from Blitzen Co., list price P20,000, trade discount 25%, terms FOB shipping point, 2/10, n/30, with prepaid transportation costs of P650 added to the invoice. b) Purchased merchandise on account from Cupid Co., P8,000, terms FOB destination, 1/10, n/30. c) Sold merchandise on account to Donner Co., P9,800, terms 2/10, n/30. The cost of the merchandise sold was P5,800. d) Returned P2,000 of merchandise purchased from Cupid Co. (b) e) Paid Blitzen Co. on account for purchase in (a) less discount. f) Received merchandise returned by Donner Co. from sale in (c), P1,800. The cost of the merchandise returned was P1,080. g) Paid Cupid Co. on account for purchase in (b) less return (d) and discount. h) Received cash on account from Donner Co. for sale in (c) less return (f) and discount. i) Perpetual inventory records indicate that P85,000 of merchandise should be on hand. The physical inventory indicates that P81,350 of merchandise is on hand.