Question

Mr. Etemadi has prepared the following list of statements about service companies and merchandisers. Identify each statement as true or false.

1.		Measuring net income for a merchandiser is conceptually the same as for a service company.		select an option                                                          FalseTrue
2.		For a merchandiser, sales less operating expenses is called gross profit.		select an option                                                          FalseTrue
3.		For a merchandiser, the primary source of revenues is the sale of inventory.		select an option                                                          FalseTrue
4.		Sales salaries and wages is an example of an operating expense.		select an option                                                          FalseTrue
5.		The operating cycle of a merchandiser is the same as that of a service company.		select an option                                                          FalseTrue
6.		In a perpetual inventory system, no detailed inventory records of goods on hand are maintained.		select an option                                                          TrueFalse
7.		In a periodic inventory system, the cost of goods sold is determined only at the end of the accounting period.		select an option                                                          FalseTrue
8.		A periodic inventory system provides better control over inventories than a perpetual system.		select an option                                                          FalseTrue

Answer 1

1. Measuring net income for a merchandiser is conceptually the same as for a service company.

TRUE  

The concept of computation of net income is same in all industries

2. For a merchandiser, sales less operating expenses is called gross profit.

FALSE  

Sales less cost of goods sold gives gross profit

3. For a merchandiser, the primary source of revenues is the sale of inventory.

TRUE  

Sale of inventory is the primary source of revenue

4. Sales salaries is an example of an operating expense.

TRUE  

Sales salaries and wages are directly connected with the sales. Therefore, opertaing in nature

5. The operating cycle of a merchandiser is the same as that of a service company.

FALSE  

Operating cycle of merchandiser: Cash - buy inventory - merchandise inventory - sell - receive cash

Operating cycle of Service company: Cash - perform service - receive cash

6. In a perpetual inventory system, no detailed inventory records of goods on hand are maintained.

FALSE  

Perpetual inventory system accurately reflects the details of goods on hand

7. In a periodic inventory system, the cost of goods sold is determined only at the end of the accounting period.

TRUE  

The formula used is = Opening Inventory + Purchases during the year - Closing Inventory. Hence it is clear that COGS is derived only after determining the closing inventory at the end of the period

8. A periodic inventory system provides better control over inventories than a perpetual system.

FALSE

"Perpetual inventory systems involve more record-keeping than periodic inventory systems, which takes place using specialized, automated software. Every inventory item is kept on a separate ledger. These inventory ledgers contain information on the item's cost of goods sold, purchases and inventory on hand." Therefore, higher control is achieved in Perpetual, and not periodic inventory system