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ACCT 1A&B: Fundamentals of Accounting

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Fundamentals of Accounting I
Accounting for Merchandising Business

I. CONCEPTUAL SKILLS
A. True or False.
Write A if the statement is true otherwise, write B.

1. When merchandise inventory is purchased with credit terms of 2/10, n/60, the credit period is 60
days from date of the invoice.
2. An inventory system in which the business has up-to-date data as to the quantity of goods on hand
is called a periodic inventory system.
3. A deduction allowed from the invoice price of goods if payment is made within a specified period
of time is called a trade discount.
4. When goods are shipped under freight terms of FOB shipping point, the buyer of the goods pays
the freight charges.
5. When a return of merchandise requires the buyer to notify the seller of the reduction in the invoice
due to the return, the memorandum sent by the buyer is called a debit memorandum.
6. The cost of goods sold is determined by adding the cost of purchases to the beginning merchandise
inventory and subtracting the ending merchandise inventory.
7. In a periodic inventory system, transportation charges for merchandise are added to net purchases
to determine the cost of goods purchased.
8. In a perpetual inventory system, transportation charges are recorded with a debit to the
merchandise inventory account.
9. Transportation-In, Freight-In, and Delivery Expense are all the same account.
10. Under a periodic system with inventory included in the closing entry procedure, the Credit column
of the Income Statement columns of the work sheet will likely contain more than revenue account
balances.
11. The purpose of including the Merchandise Inventory account in the closing procedure is to close
the beginning balance to the Income Summary account and enter the unsold balance in the
Merchandise Inventory account (periodic system).
12. The steps in the accounting cycle are different for a merchandising business than they are for a
service business.
13. Operating expenses include general expenses, administrative expenses, and cost of goods sold.
14. Merchandise is purchased FOB shipping point. The seller will pay the freight charges.
15. Merchandise purchased on June 8 with credit terms of 2/10, n/30, must be paid sooner than with
credit terms of n/10 EOM.

B. Multiple Choices. Select the letter of the best answer.

1. Gross profit from sales is the difference between

A. Net sales and operating expenses


B. Net sales and cost of goods sold
C. Net sales and the cost of goods sold plus all the expenses
D. Gross sales less the sales discounts and sales returns and allowances

2. Under the periodic inventory system, the Purchases account is used to record

A. Only cash purchases of merchandise inventory


B. Purchases of any asset on account or note payable
C. Only purchases of merchandise inventory on account
D. Purchases of merchandise inventory for cash or on account

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3. Which of the following is used to determine the cost of goods available for sale under periodic
inventory?

A. Beginning merchandise inventory + purchases + ending merchandise inventory


B. Ending merchandise inventory + purchases freight charges
C. Beginning merchandise inventory + purchases freight charges
D. Beginning merchandise inventory + purchases purchases discount + freight charges

4. Under a perpetual inventory system, merchandise is purchased on account. The correct journal
entry for this purchase will be a:

A. Debit to purchases and input tax ; a credit to cash


B. Debit to M. Inventory and input tax ; a credit to accounts payable
C. Debit to M. Inventory and input tax ; a credit to Cash
D. Debit to Purchase returns and input tax ; a credit to cost of goods sold

5. Under a perpetual inventory system part of the merchandise purchased on account at an earlier
time is now being returned. None of the goods have been paid for. The correct journal entry for
this return will be a

A. debit to Cash and a credit to Purchases and input tax


B. debit to Merchandise Inventory and input tax ; and a credit to Accounts Payable
C. debit to Accounts Payable and a credit to Merchandise Inventory and input tax
D. debit to Purchases Returns and input tax ; and a credit to Cost of Goods Sold

6. Under a perpetual inventory system supplies are purchased for cash. The correct journal entry for
this purchase will be a

A. debit to Purchases and input tax ; and a credit to Cash


B. debit to Merchandise Inventory and input tax ; and a credit to Cash
C. debit to Supplies and credit Cost of Goods Sold
D. debit to Supplies and a credit to Cash

7. Under the periodic inventory system, which of the following is a correct closing entry?

A. Income Summary, debit; Sales, credit


B. Income Summary, credit; Sales Returns and Allowances, debit
C. Income Summary, debit; Merchandise Inventory (beginning), credit
D. Purchases, debit; Income Summary, credit

8. When ________, the cost of goods sold will be the same as the cost of purchases.

A. there is no beginning merchandise inventory (first year of business)


B. there is no ending merchandise inventory
C. purchases are equal to net sales
D. the beginning and ending merchandise inventory values are the same

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9. In preparing a 10-column worksheet


A. The beginning inventory is extended as a credit in the income statement columns.
B. The beginning inventory is extended as a credit in the statement of financial position columns.
C. The ending inventory is extended as a debit in the income statement columns and as a credit
in the statement of financial position columns.
D. The ending inventory is extended as a credit in the income statement columns and as a debit
in the statement of financial position columns.

10. The use of purchase discount account implies that the recorded cost of a purchased inventory is
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

11. The use of discount lost account implies that cost of a purchased inventory is
A. Invoice price
B. List price
C. Invoice price less the purchase discount taken
D. Invoice price less the purchase discount allowable whether or not taken

12. Which of the following should be included in inventory at the end of reporting period?
A. Goods in transit which were purchased FOB shipping point
B. Goods in transit which were purchased FOB destination
C. Goods received from another entity on consignment
D. Goods in transit to a customer which were sold to the customer FOB shipping point

13. Goods shipped FOB shipping point at year-end should ordinarily be included in
A. The inventory of the buyer
B. The inventory of the seller
C. Neither the inventory of the buyer nor the inventory of seller
D. Both the inventory of buyer and of seller

14. Goods shipped FOB destination in transit at the end of the year should be included in the inventory
of
A. Seller
B. Common carrier
C. Buyer
D. Bank

15. What is the method of accounting for inventory in which the cost of goods sold is recorded each
time a sale is made?
A. Point of sale inventory system
B. Periodic inventory system
C. Perpetual inventory system
D. Just in time inventory system

16. Which of the following is incorrect about the perpetual inventory method?
A. Purchases are recorded as debit to the inventory account.
B. The entry to record a sale includes a debit to cost of goods sold and a credit to inventory.
C. After a physical inventory count, inventory is credited for any missing inventory.
D. Purchase returns are recorded by debiting accounts payable and crediting purchase returns
and allowances.

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17. An entry debiting inventory and crediting cost of goods sold would be made when
A. Merchandise is sold and the periodic inventory method is used.
B. Merchandise is sold and the perpetual inventory method is used.
C. Merchandise is returned and the perpetual inventory method is used.
D. Merchandise is returned and the periodic inventory method is used.

18. A discount given to a customer for purchasing a large volume of merchandise is typically referred
to as
A. Trade discount
B. Quantity discount
C. Size discount
D. Cash discount

19. Which of the following terms represents the deduction from the invoice price of purchased goods
granted by the supplier for early payment?
A. Sales discount
B. Purchase discount
C. Trade discount
D. Purchase return and allowance

20. In a periodic system, the beginning inventory is


A. Net purchases minus cost of goods sold
B. Net purchases minus ending inventory
C. Total goods available for sale minus net purchases
D. Total goods available for sale minus cost of goods sold

21. Why is inventory 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. Inventory is not included in the computation of net income

22. Entities must allocate the cost of all goods available for sale between
A. The cost of goods on hand at the beginning and the cost of goods purchased during the period.
B. The cost of goods on hand at the end and the cost of goods purchased during the period.
C. The income statement and the statement of financial position.
D. All of the choices are correct.

23. When inventory is misstated, the presentation lacks


A. Relevance
B. Faithful representation
C. Comparability
D. Understandability

24. When the current years ending inventory is overstated


A. The cost of goods sold of current year is overstated.
B. The total assets of current year is understated.
C. The net income of current year is overstated.
D. The net income next year is overstated.

25. If an entity ended a period with a larger inventory that it had at the beginning of the period, which
of the following statement is true?
A. The cost of goods sold was greater than net purchases.
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B. Net income was greater than gross profit.


C. The cost of goods available for sale was smaller than cost of goods sold.
D. The cost of goods sold as smaller than net purchases.

II. COMPUTATIONAL AND ANALYTICAL SKILLS


Supply the answer.

Problem 1: Vision Company occurred the following transactions during the month of May of the current
year:

May 6 Sold merchandise on account, list price P 500,000. Terms: 10; 5/15, n/30, FOB Destination,
freight collect, P 25,000.

May 8 Sold goods for cash, P 300,000. Transportation cost is P 3,000, FOB Shipping point, freight
collect.

May 10 Sold P 600,000. Terms: 20, 10; 5/10, n/30. FOB Destination, freight prepaid, P 60,000.
May 12 Sold P 400,000. Terms: 3/10, n/30; FOB Shipping point, freight prepaid, P 4,000.
May 21 Collected sales for May 6.

Disregard VAT.
Give the correct amount of the following items:
1. Total net sales.
2. Total accounts receivable.
3. Total freight out.
4. Total sales discount.
5. Cash collected from May 6 sale.

Problem 2: STM Co., a VAT registered company, engaged in the following transactions during September
2013: (The Co. is using the perpetual inventory system)

9 /3 Purchased merchandise on account, terms: FOB Shipping point, 5 / 10; 4 /15; 3/20 n/60. The
related invoice is priced at P31,320 (including a freight charge of P5,000).

9/11 Sold merchandise on account, terms: FOB Destination, 3 / 10 n/25. Goods costing P20,300
were sold at P28,000. Freight paid amounted to P900.

9/15 Received the payment for goods sold on 9/11.

9/17 Paid the goods purchased on 9/3.

Assuming no other transactions relevant to inventories

Required: Compute for the


6. Peso amount of inventory on hand as of Sept. 30.
7. Amount of VAT payable.
8. Purchase discount availed.
9. Amount of cash paid on September 17.
10. Gross profit.
11. Net income.

Problem 3: Bri Co. sold merchandise to An Co. on account, P95,760, terms 2/15, n/30 FOB Destination.
Bri prepaid the freight in the amount of P3,000. The cost of the merchandise sold is P57,900. Bri Co. issued
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a credit memorandum for P25,984 for merchandise returned and later received the amount due within the
discount period. The cost of the defective merchandise is P21,220.

Required: Compute for the


12. Amount received from the customer.
13. Net sales.
14. Gross profit.
15. Net profit.

Problem 4: X-Con Company regularly buys merchandise from Y-Con Company and is allowed trade
discounts of 15% and 10% from the list price. Ex-Con made a purchase on May 20, 2013 and received an
invoice with a list price of 150,000, a freight charge of P2,500, and payment terms of net 45 days.

Ignore VAT.
Required: Compute for the
16. Total trade discounts to be recorded in the books of Y-Con.
17. Purchases.

Problem 5: Xem Co. purchased an item of merchandise quoted and listed at P210,000 under the following
terms: trade discounts of 15%, 10%, 5%, 3/12 n/30.

Required: Compute for the


18. Purchases under net method.
19. Cash payment, if settlement is made within the discount period.
20. Purchase discounts lost under net method, if settlement is made outside the discount
period.

Problem 6: Psych Distributors, a computer store, specializes in the sale of IBM compatibles and software
packages and had the following transactions with one of its suppliers:

Purchases of IBM compatibles P3,280,000


Purchases of commercial software package 900,000
Returns and allowances 80,000
Purchase discounts taken 27,000

Purchases (VAT-exclusive) were made throughout the year on terms 3/11 n/30. All returns and allowances
took place within 5 days of purchase and prior to any payment of account.

Required: Compute for the


21. Input tax.
22. Purchase Discounts not taken.

Problem 7: Mort Inc. asks you to review its December 31, 2013, inventory values. The following
information is given to you:

Account balances prior to adjustments below:


Merchandise Inventory P704,670
Accounts Receivable P606,512
Accounts Payable P1,163,705.60
Input Tax P521,825.60
Sales P2,195,100
Output Tax P713,412

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A. Mort uses the periodic inventory system. 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 cost of merchandise purchased on
December 15 from Shendelzare suppliers. This merchandise was shipped FOB Shipping point on
December 29 and arrived in January. The invoice arrived and was recorded on December 31.

C. Included in inventory is merchandise sold to Arach on December 30, FOB Destination. The
merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale
on account for P38,400 (VAT exclusive) on December 31. The merchandise cost P22,050, and
Arach received it on January 3.

D. Included in inventory was merchandise received from Brood on December 31 with an invoice price
of P52,516.80. the merchandise was shipped FOB Destination. The invoice, which has not yet
arrived, has not been recorded.

E. Not included in inventory is P25,620 cost of merchandise purchased from Lich Co. 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 worth of inventory held by Mort on consignment from Jakiro
Corp.

G. Included in inventory is merchandise sold to Rylai FOB Shipping point. This merchandise was
shipped after it was counted. The invoice was prepared and recorded as a sale for P63,504 on
December 31. The cost of this merchandise was P34,560, and Rylai received the merchandise on
January 5.

H. Excluded from inventory was a carton labeled Please accept for credit. This carton contains
merchandise costing P4,500 which had been sold to a customer for P8,736. No entry had been
made to the books to reflect the return, but none of the returned merchandise seemed damaged.

Required: Compute for the correct balance of


23. Merchandise inventory, December 31.
24. Accounts receivable, December 31
25. Accounts payable, December 31
26. Sales
27. VAT payable

Problem 8: In testing the sales cut-off for the Insulto Corporation in connection with an audit for the year
ended October 31, 2013, you find the following information:

A physical inventory was taken as of the close of business on October 31, 2013. All customers are within a
3 day delivery area of the companys plant. The unadjusted balances of Sales, Output tax, and Inventories
are P7,500,000, P900,000 and P330,000 respectively. Sales and costs are VAT exclusive.

Invoice # FOB terms: Date Date Sales: Cost:


Shipped: recorded:
24601 Destination Oct. 20 Oct. 31 P 3,000 P 2,700
33702 Shipping pt. Oct. 31 Nov. 2 7,500 6,000
33706 Shipping pt. Oct. 25 Oct. 31 5,400 3,600
41706 Destination Oct. 31 Oct. 29 12,600 9,300
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42666 Destination Oct. 31 Nov. 2 27,600 24,000


45112 Shipping pt. Nov. 2 Oct. 23 19,500 15,300
45988 Shipping pt. Nov. 5 Nov. 6 22,500 17,400
57609 Destination Oct. 25 Nov. 3 11,700 6,000
73422 Shipping pt. Nov. 4 Oct. 31 25,800 24,600
92433 Destination Nov. 5 Nov. 2 15,000 12,000

Required: based on the following information, compute the October 31, 2013, adjusted
balances of the following accounts:
28. Sales
29. Output Tax
30. Inventories

Problem 9: KP Company prepares monthly income statements. A physical inventory is taken only at
year-end. All sales are made on account. The rate of markup on cost is 50%. The following information
relates to the month of June:

Accounts Receivable, June 1 P102,000


Accounts receivable, June 30 153,000
Collection of accounts receivable during June 255,000
Inventory, June 1 183,600
Purchases of inventory during June 163,200

Disregard the effect of VAT.


Required: compute for
31. Cost of sales
32. Gross margin
33. Inventory, June 30

Problem 10: On the eve of June 15, 2013, a fire destroyed the entire merchandise inventory of Epic
Merchandising. The merchandise was not insured with any insurance company. The following information
was gathered:

Inventory, January 1 P250,000


Purchases, January 1 June 15 1,500,000
Sales, January 1 June 15 2,000,000
Markup % on cost 25%

Disregard the effect of VAT.


Required: compute for
34. Cost of sales
35. Gross profit
36. Inventory loss

Problem 11: The balances of selected accounts taken from the December 31, 2012 statement of
financial position of Javert, Inc. are as follows:

Accounts Receivable P 337,000


Allowance for doubtful accounts 12,000

The following transactions affecting accounts receivable occurred during the year ended December 31,
2013: (Disregard the effect of VAT)

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Sales (all on account, terms 2/10, 1/15, n/45) P 1,500,000


Cash received from customers 1,600,000
From customers paying within the 10-day discount period 882,000
From customers paying within the 15-day discount period 495,000
From recovery of accounts written off 3,000
From customers paying beyond the discount period ?
Accounts receivable written off as worthless 11,000
Credit memoranda for sales returns 6,000

Based on assessment of collectability of the accounts, impairment loss recognized on accounts receivable
is P15,000.

Required: Compute for the


37. Total net sales.
38. Amortized cost of Accounts receivable.

Problem 12: Vojee Co. purchased goods from Jozax on credit for P772,800 terms: FOB Destination 4/10
n/30. Freight cost is P15,000 and Vojee advanced the payment of freight to the shipping company. After
3 days, Vojee received credit memo from Jozax for goods returned for P101,360. Vojee paid the balance
within the discount period.

Required: Compute for


39. The amount of cash paid by Vojee.

Problem 13: Repaa sold goods to Zigko for cash with a catalogue price of P302,000 and with trade
discount of 5%, 8%, 12%. Repaa Co. is a VAT-registered business. Sales is VAT exclusive.

Required: Compute for the


40. Amount due from Zigko.
41. Sales

Problem 14: The following information is available for Sazzu Company relating to 2013 operations:
(Disregard the effect of VAT)

Accounts Receivable, January 1 4,000,000


Accounts Receivable Collected 8,400,000
Cash Sales 2,000,000
Inventory, January 1 4,800,000
Inventory, December 31 4,400,000
Purchases 8,000,000
Gross Margin on Sales 4,200,000

Required:
42. What is the balance of accounts receivable on December 31, 2013?
43. Total sales?
44. Cost of goods sold?

Problem 15: Thrust Company reports operating expenses in two categories: distribution and general &
administrative. The adjusted trial balance on December 31, 2013 included the following expense and loss
accounts:

Accounting and Legal fees 1,200,000


Advertising 1,500,000
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Freight out 800,000


Interest 700,000
Loss on sale of Equipment 300,000
Officers salaries 2,250,000
Rent for office space 2,200,000
Sales salaries and commissions 1,400,000

of the rented premises is occupied by the sales department.

Required:
45. What amount should be reported as total distribution costs?

Problem 16: The following costs were incurred by Cohag Company during the current year:

Accounting and Legal fees 250,000


Freight in 1,750,000
Freight out 1,600,000
Officers salaries 1,500,000
Insurance 850,000
Sales representative salaries 2,150,000

Required:
46. What amount should be reported as general and administrative expenses?

Problem 17: The following information is available from Vast Cold Companys accounting records for the
current year:

Purchases 5,300,000
Purchase discounts 100,000
Beginning inventory 1,600,000
Ending inventory 2,150,000
Freight Out 400,000

Required:
47. What is the cost of sales for the current year?

Problem 18: The following information is available for Fohossi Company for the current year:

Disbursements for purchases 5,800,000


Increase in trade accounts payable 500,000
Decrease in inventory 200,000

Required:
48. What is the cost of sales for the current year?

Problem 19: The following information is available from the records of Bajux Company for the current
year:

Beginning Inventory 400,000


Freight in 300,000
Purchase Returns 900,000
Ending Inventory 500,000
Selling expenses 1,250,000
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Sales discounts 250,000

The cost of goods sold is six times the selling expenses.

Required:
49. What is the amount of Gross Purchases?
50. What is the amount of Cost of Goods Purchased?

Problem 20: Bliss Company is using the periodic inventory system. For the year, its total purchases
amounted to P 250,000. Its unsold merchandise at the end of the year has a cost of P 5,000 which is
80% of its beginning inventory.

51. Bliss cost of sales for the year is?

Problem 21: The following data pertain to the two-year operation of Faith Business

Year 1 Year 2
Sales P 200,000 P 250,000
Purchases 250,000 150,000
Ending inventory 90,000 40,000

52. What is the business gross profit on year 1?


53. What is the business gross profit on year 2?

Problem 22: The cost of sale is P 250,000. Total purchases amounted to P 300,000 which increased the
total goods available for sale to P 310,000.

54. How much is the ending inventory?

Problem 23: The gross profit is P 100,000; goods available for sale, P 1,100,000; beginning inventory, P
100,000; purchases, P 1,000,000 and sales, P 1,000,000.

55. How much is the ending inventory?

Believe in yourself! Have faith in your abilities! Without a humble but reasonable confidence in your own powers you cannot be
successful or happy.
~Norman Vincent Peale

Suggested Key
I. CONCEPTUAL SKILLS
A. True or False
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1. A 9. B
2. B 10. A
3. B 11. A
4. A 12. B
5. A 13. B
6. A 14. B
7. A 15. A
8. A

B. Multiple Choice
1. B 14. A
2. D 15. C
3. D 16. D
4. B 17. C
5. C 18. A
6. D 19. B
7. C 20. C
8. D 21. A
9. D 22. C
10. A 23. B
11. D 24. C
12. A 25. D
13. A

II. COMPUTATIONAL AND ANALYTICAL SKILLS


1. P 1,607,500 30. P363,300
2. P 884,000 31. P204,000
3. P 85,000 32. P102,000
4. P 22,500 33. P142,800
5. P 402,500 34. P1,600,000
6. P 7,260 35. P400,000
7. P 203 or P 180 36. P150,000
8. P 940 37. P 1,471,000
9. P 30,267 or P 30,380 38. P181,000
10. P 3,950 39. P629,582 or P 632,460
11. P 3,050 40. P260,147
12. P 68,380 or P 68,530 41. P232,274
13. P61,054 42. P6,200,000
14. P24,374 43. P12,600,000
15. P21,374 44. P8,400,000
16. 0 45. P4,800,000
17. P 114,750 46. P2,600,000
18. P 148,039 47. P4,650,000
19. P 165,804 48. P6,500,000
20. P 4,579 49. P8,500,000
21. P488,760 or 492,000 50. P7,600,000
22. P96,000 51. P 251,250
23. P700,176 52. P 40,000
24. P554,768 53. P 50,000
25. P1,216,222 54. P 60,000
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26. P2,156,700 55. P 200,000


27. P180,416 Some items have two answers. This is due to
28. P7,461,300 the VAT on Sales discounts. Based on your
29. P895,356 book, Sales discount can decrease Output
tax. Based on the tax code, Sales discounts
based on future events is not allowed to
reduce Output VAT. Ask your professors
whats their stand about this.

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