Chapter 3 Smartbook

Question 1

Merchandising businesses generate revenue by

Answer 1

Selling goods to customers

Question 2

Product costs include

Answer 2

Shipping and handling costs
Price of goods purchased

Question 3

The beginning inventory balance plus inventory purchased during the period is equal to

Answer 3

cost of goods available for sale

Question 4

When a company purchases inventory using the perpetual inventory system, the balance in the inventory accoun

Answer 4

Increases

Question 5

Cash paid to purchase inventory appears in the ____ activities section of the statement of cash flows

Answer 5

Operating

Question 6

The products that merchandising companies sell to their customers are called merchandise

Answer 6

Inventory

Question 7

When merchandise inventory is purchased on account, total assets

Answer 7

Will increase because inventory increases as well as account payable

Question 8

Merchandise inventory is a(n) ______ account.

Answer 8

Asset

Question 9

Cost of goods available for sale is allocated between Merchandise Inventory and

Answer 9

Cost of goods sold

Question 10

The inventory system continually adjusts inventory throughout the accounting period is called the

Answer 10

Perpetual inventory system

Question 11

The allocation of cost of goods available for sale results in amounts that appear on

Answer 11

the balance sheet and income statement

Question 12

The purchase of merchandise on account affects

Answer 12

Total liabilities and total assets

Question 13

Inventory costs are also called

Answer 13

Product costs

Question 14

When a company purchases inventory using the perpetual inventory system, the balance in the inventory account

Question 15

When a company returns merchandise that was previously purchased on account, cash flow from operating activities

Answer 15

Is not affected

Question 16

When a company purchases inventory using the perpetual inventory system, the balance in the inventory account

Answer 16

Increases

Question 17

Smith Company received a purchase allowance for damaged inventory that was purchased on account. The purchases allowance

Answer 17

decreases assets and liabilities

Question 18

When merchandise inventory is purchased on account, total assets

Answer 18

will increase

Question 19

The terms 2/10, n/30 mean

Answer 19

the buyer receives a 2% discount if payment is made within 10 days with the full payment due in 30 days

Question 20

When a company returns merchandise inventory that was originally purchased on account, net income

Answer 20

is not affected

Question 21

A company purchased inventory under terms 4/10, n/30. What is the highest interest rate the company should pay to borrow money for the purpose of paying for the inventory within 10 days?

Answer 21

Discount rate × (365 ÷ term of the loan) = 4% × (365 ÷ 20) or 73.00%

Question 22

Under the perpetual inventory system, the inventory account is adjusted when

Answer 22

inventory is purchased

inventory is sold

Question 23

When land is sold for less than it cost, the difference is called a(n)

Answer 23

Loss

Question 24

Purchase allowances affect the financial statements the same way purchase returns do.

Answer 24

True

Question 25

Operating income includes the amount of income generated from normal recurring operations and gains or losses of a business.

Answer 25

False, Operating income only includes normal, recurring operations.

Question 26

Ron Company sold land that cost $150,000 for $160,000. The company also sold inventory that cost $60,000 for $85,000. Based on this information, the company will report

Answer 26

a gain of $10,000 and gross margin of $25,000

Question 27

Income statements that display a single comparison of all revenues minus all expenses are called ______ income statements

Answer 27

single-step

Question 28

For most companies, there is an inconsistency in the way interest expense is reported on the income statement versus the statement of cash flows.

Answer 28

True: SFAS 95 requires that interest expense be reported in the operating activities section of the statement of cash flows. Most companies report is as a nonoperating expense on the income statement.

Question 29

Amounts in common size statements are normally shown in

Answer 29

Percentages

Question 30

Income that is generated from the normal recurring activities of a business is called

Answer 30

Operating income

Question 31

Income statements that display additional relationships rather than a single comparison of all revenues minus all expenses are called

Answer 31

multistep income statements

Question 32

Most companies report interest as a(n) ____ item on the income statement and in ______ activities on the statement of cash flows.

Answer 32

nonoperating; operating