True / False Questions
1. Inventory is a relatively liquid asset and usually appears above Accounts Receivable on the balance sheet.
2. The operating cycle of a merchandising company consists of (1) purchases of merchandise; (2) sales of the merchandise; and (3) collection of accounts receivable.
3. Inventory shrinkage refers to unrecorded decreases in inventory resulting from breakage, theft, and sales of inventory.
4. In a perpetual inventory system, when merchandise is purchased, it is debited to an account called Purchases.
5. In a periodic inventory system, the Cost of Goods Sold account may be created during the closing process by debiting Cost of Goods Sold and crediting the Beginning Inventory and the Purchases account.
6. Purchase Discounts Lost is shown as a reduction of cost of goods sold in the income statement.
7. Net Sales is computed as total sales revenue less sales returns and allowances less sales discounts.
8. The contra-revenue accounts, Sales Returns and Allowances and Sales Discounts, should be closed by crediting these accounts and debiting Income Summary for each account.
9. Gross profit margin is the dollar amount of gross profit expressed as a percentage of gross sales.
10. The accounting cycle of a merchandising business is the length of time covered by the company's income statement.
1.Inventory is a relatively liquid asset and usually appears above Accounts Receivable on the balance sheet - FALSE STATEMENT
A)Liquid assets are those assets which can be easily converted into cash within a shorter period of time. Examples of liquid assets are Cash, securities, marketable Instruments , Inventories, Account receivables etc.Through liquid ratio analysis the company can know their ability to pay off their current liabilities.
B)Accounts receivable is considered to be high liquid assest than Inventory. Even in the calculation of Quick ratio to find liquidity position of an organization Inventory is excluded.The operating cycle of business last process is collection of accounts receivables.The above given statement is false .
2. TRUE
The operating cycle of a merchandising company consists of :
(1) purchases of merchandise; (2) sales of the merchandise; and (3) collection of accounts receivable.
Every Merchandising company's first work is procurement of the merchandise. After procurement , Merchandise is sold to potential buyers either on credit or on cash basis . In case of cash transactions ,operating cycle ends on the date of sales but in case of credit sale the company will have to collect the amount from the Accounts receivables.
3.FALSE
Inventory Shrinkage refers to a situation where the number of stock recorded is actually higher than the stock available.This may arise due to Breakage , Theft , clerical errors etc.The above statement given is False.Inventory shrinkage is possible both when goods purchased and sold.
4.FALSE
In a perpetual inventory system, when merchandise is purchased, it is debited to an account called Inventory.
Journal entry for the purchase of Merchandise as per Perpetual Inventory system is
Account Debit credit
Inventory XXX
Accounts payable XXX
5.FALSE
In a perpetual Inventory System ,Inventory account is credited for sale of Merchandise to client and Cost of goods sold account is debited.
Account Debit credit
1) Cost of goods sold XXX
Inventory XXX
2) Sales XXX
Accounts Receivables XXX
6.FALSE
In a perpetual Inventory System,Purchase Discounts are recorded through Accounts payable and Inventory account. If the organization receives discount then the accounts payable is reduced and not cost of goods sold.
Account Debit credit
Accounts payable XXX
Inventory XXX
7. TRUE
Net Sales is computed as total sales revenue less sales returns and allowances less sales discounts.
NET SALES = Gross sales - sales returns - allowances - Discounts.
8. TRUE
contra revenue accounts are sales returns , Allowance , Sales discount .The contra-revenue accounts i.e.,Sales Returns and Allowances and Sales Discounts should be closed by crediting these accounts and debiting Income Summary for each account.
Contra revenue = Gross sales - Net sales
9.FAlSE
Gross profit is the profit of the company arised after deducting the cost of goods sold from net sales .Gross profit percentage is expressed by dividing the Gross profit with denominator Net sales.
Gross profit = Net sales - Cost of goods sold
10.TRUE
The accounting cycle of a merchandising business is the length of time covered by the company's income statement. Merchandising company closes its accounts at the end of the financial year.The Merchandise company balance sheet majorly contains low liquid assets in the form of Inventory.