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Testbank

to accompany

Accounting
8th Edition

by
John Hoggett, Lew Edwards,
John Medlin, Matthew Tilling
& Evelyn Hogg

Prepared by
Barbara Burns

John Wiley & Sons Australia, Ltd 2012


Testbank to accompany Accounting 8e

Chapter 6: Accounting for retailing

Multiple Choice

1. The average length of time it takes for a retail business to acquire inventory, sell it to
its customers and collect the cash owing is called the:
a. Inventory turnover
b. Operating cycle
c. Cost of sales
d. Gross profit

ANSWER B
Section 6.1

2. The main difference between a service and a retail business is that service
businesses:
a. Sell directly to consumers
b. Buy and sell in bulk
c. Convert raw materials into finished goods
d. Sell services rather than goods

ANSWER D
Section 6.1

3. Which statement relating to inventory is not correct?


a. It is classified as a non-current asset in the balance sheet
b. It makes up a significant portion of a retailers assets
c. It is a very active asset, continually being acquired, sold and replaced
d. Another name for inventory is stock-in-trade

ANSWER A
Section 6.1

4. What is the correct layout for a retailers income statement?


a. Sales revenue - cost of sales = gross profit,
b. Sales revenue - expenses = profit
c. Sales revenue - cost of sales = gross profit - expenses = profit
d. Sales revenue - cost of sales expenses = gross profit

ANSWER C
Section 6.2

John Wiley and Sons Australia, Ltd 2012


6.2
Chapter 6: Accounting for retailing

5. Which of the following need not appear on a tax invoice?


a. The words tax invoice
b. The ABN of the issuing entity
c. The date of issue of the invoice
d. The signature of the person authorising the invoice

ANSWER D
Section 6.3

6. Under GST (Goods and Services Tax) legislation in Australia a tax invoice must
be issued for all sales in excess of:
a. $75
b. $20
c. $10
d. $100

ANSWER A
Section 6.3

7. Sales Returns and Allowances is what type of account?


a. Contra to sales revenue
b. Liability
c. Contra to an asset
d. Expense

ANSWER A
Section 6.4

8. The primary purpose of (cash) settlement discounts is to:


a. Convince the customer to buy the goods on credit
b. Facilitate the quoting of prices to different customer groups
c. Reduce the invoice price of the goods
d. Encourage the customer to settle their account early

ANSWER D
Section 6.4

9. B sold goods to A for $2 000. A paid his account one month later. What is the correct
entry in Bs books to record the payment by A? Ignore GST.
a. Debit bank $2 000; credit sales $2 000
b. Debit accounts receivable $2 000; credit equity $2 000
c. Debit bank $2 000; credit accounts receivable $2 000
d. Debit accounts receivable $2 000; credit sales $2000

ANSWER C

6.3 John Wiley and Sons Australia, Ltd 2012


Testbank to accompany Accounting 8e

Section 6.4

10. Simon sold goods to Lauren for $3,300 including GST. Lauren paid her account
within the discount period and received a settlement discount of 2%. Using the gross
method the entry in Simons books to record the payment from Lauren is:
a. Debit bank $3,234, debit discount allowed $60, debit GST collections $6;
credit accounts receivable $3,300
b. Debit bank $3,234, debit discount allowed $66; credit accounts receivable
$3,300
c. Debit bank $3,240, debit discount allowed $60; credit accounts receivable
$3,300
d. Debit bank $3,234, debit discount allowed $66, debit GST collections $6;
credit accounts receivable $3,306

ANSWER A
Section 6.4

11. The specific term used by a retailer for income is:


a. Interest received
b. Service income
c. Sales
d. Fees

ANSWER C
Section 6.4

12. GST is credited to the GST collections account when a sale occurs. If goods are
returned or a discount allowed the _______________ account must be debited
with an adjustment for GST.
a. GST collections
b. GST outlays
c. Purchases
d. Discount received

ANSWER A
Section 6.4

13. Which of these is not an advantage of the perpetual inventory system?


a. Allows stock losses to be identified
b. Provides reordering information
c. Allows cost of sales to be calculated at any time
d. A stock-take never has to be carried out

ANSWER D
Section 6.5

John Wiley and Sons Australia, Ltd 2012


6.4
Chapter 6: Accounting for retailing

14. Under the perpetual inventory system what is the correct entry to record the cost
of the sale of 2 electric guitars sold to a customer at $550 per guitar including
GST? The guitars were originally purchased on credit at $250 each plus GST of
$25 per guitar.
a. Debit cost of sales $1 100; credit sales $1 100
b. Debit cost of sales $500; credit inventory $500
c. Debit cost of sales $1 000; credit inventory $1 000
d. Debit cost of sales $500, debit GST outlays $50; credit inventory $550

ANSWER B
Section 6.5

15. Under the periodic inventory system a income statement cannot be prepared
without a/an ____________. It is only after a/an ___________ that the cost of
sales can be estimated.
a. Error check
b. Virus scan
c. Stocktake
d. Audit

ANSWER C
Section 6.5

16. In Australia, where most accounting is computerised, the use of the periodic
inventory system is declining. Which of the following businesses is still most
likely to use the periodic approach to accounting for inventory?
a. Chemist shop
b. Supermarket
c. Fruit and vegetable shop
d. Service station

ANSWER C
Section 6.5

17. Under the perpetual inventory system inventory purchased is debited to which
account?
a. Prepaid expenses
b. Current assets
c. Purchases
d. Inventory

ANSWER D
Section 6.5

6.5 John Wiley and Sons Australia, Ltd 2012


Testbank to accompany Accounting 8e

18. Under the periodic inventory system inventory purchased is debited to which
account?
a. Prepaid expenses
b. Selling expenses
c. Purchases
d. Inventory

ANSWER C
Section 6.5

19. Under the perpetual inventory system the entry for the credit purchase of 10
electric guitars at $250 per guitar plus GST of $25 each. Is:
a. Debit inventory $2,750; credit accounts payable $2,500, credit GST outlays
$250
b. Debit inventory $2,500, debit GST outlays $250; credit accounts payable
$2,750
c. Debit inventory $2,750; credit accounts payable $2,750
d. Credit accounts payable $2,750; debit inventory $2,500, credit GST
collections $250

ANSWER B
Section 6.5

20. The entry to record the return of goods to a supplier under the perpetual inventory
system, including GST, is:
a. Debit Inventory, credit Purchases Returns, credit GST outlays
b. Debit Accounts Payable, credit Purchases, credit GST outlays
c. Debit Inventory, debit GST outlays, credit Accounts Payable
d. Debit Accounts Payable, credit Inventory, credit GST outlays

ANSWER D
Section 6.5

21. Under the perpetual inventory system the entry to record the cost price of goods sold
on credit is:
a. Debit Inventory, credit Cost of sales
b. Debit Cost of sales, credit Inventory, credit GST Outlays
c. Debit Cost of sales, credit Inventory
d. Debit Cost of sales, credit Purchases

ANSWER C
Section 6.5

John Wiley and Sons Australia, Ltd 2012


6.6
Chapter 6: Accounting for retailing

22. Z, sold goods to X on credit at a price of $4,400 including GST. The entry to record
this transaction in Zs books under either the perpetual or periodic inventory
system is (ignore the transfer to COS required under the perpetual system):
a. Debit accounts receivable $4,400, credit sales $4,400
b. Debit accounts receivable $4,000, credit sales $4,000
c. Debit accounts receivable $4,000, debit GST collections $400; credit sales
$4,400
d. Debit accounts receivable $4,400; credit sales $4,000, credit GST collections
$400

ANSWER D
Section 6.5

23. Which of the following is not true of the periodic inventory system?
a. Cost of sales can be calculated only after a physical stocktake
b. It uses a Purchases account
c. It is the system employed by most businesses in Australia
d. It is the simplest system

ANSWER C
Section 6.5

24. Under the periodic inventory system the entry for the credit purchase of 10 electric
guitars at $250 per guitar, plus GST of 10% is:
a. Debit purchases $2,750; credit accounts payable $2,500, credit GST outlays
$250
b. Debit purchases $2,500, debit GST outlays $250; credit accounts payable
$2,750
c. Debit purchases $2,750; credit accounts payable $2,750
d. Debit accounts payable $2,750; credit purchases $2,500, credit GST outlays
$250

ANSWER B
Section 6.5

25. Calculate purchases for 2011:


Inventory 31/12/2010 $32 500
Inventory 31/12/2011 34 000
Cost of sales during 2011 $128 000

a. $126 500
b. $123 500
c. $129 500
d. $132 500

ANSWER C
Section 6.5

6.7 John Wiley and Sons Australia, Ltd 2012


Testbank to accompany Accounting 8e

26. Under the perpetual inventory system an inventory loss can be calculated as the
difference between:
a. The ledger balance of the inventory account and the total of the physical stocktake
b. Sales less cost of sales
c. Inventory at start less inventory at end
d. A inventory loss cannot be calculated using the perpetual inventory system

ANSWER A
Section 6.5

27. The periodic inventory system is a shortcut system that does not record the
______________ of each sale.
a. Cost price
b. Selling price
c. Date
d. Dollar value

ANSWER A
Section 6.5

28. Cost of goods available for sale is equal to:


a. Net purchases - ending inventory
b. Beginning inventory - ending inventory
c. Beginning inventory + net purchases
d. Beginning inventory + net purchases - ending inventory

ANSWER C
Section 6.7

29. With the periodic inventory system what does the opening balance in the
inventory account represent?
a. Inventory on hand at the end of the previous period as determined by a physical
stocktake
b. Inventory on hand at the end of the current period as determined by a physical
stocktake
c. The book figure for current inventory adjusted for all purchases and sales
d. Inventory loss

ANSWER A
Section 6.5

John Wiley and Sons Australia, Ltd 2012


6.8
Chapter 6: Accounting for retailing

30. If beginning inventory was $10 000, purchases during the period totalled $25 000,
freight-in was $1,000 and ending inventory was $11 000, calculate the cost of
sales?
a. $26 000
b. $25 000
c. $24 000
d. $15 000

ANSWER B
Section 6.5

31. Assuming the use of the perpetual inventory method which of these entries would be
a closing entry at the end of the accounting period?
a. Debit Inventory; credit Profit and Loss Summary
b. Debit Profit and Loss Summary; credit Inventory
c. Debit Profit and Loss Summary; credit Purchases
d. Debit Profit and Loss Summary; credit Cost of Sales

ANSWER D
Section 6.6

32. The entry to close-off beginning inventory using the periodic inventory system is:
a. Dr Sales
Cr Inventory
b. Dr Inventory
Cr Profit and Loss Summary
c. Dr Purchases
Cr Inventory
d. Dr Profit and Loss Summary
Cr Inventory

ANSWER D
Section 6.6

33. If closing inventory were understated profit for the current period would be:
a. Overstated
b. Understated
c. Unaffected
d. A loss

ANSWER B
Cost of sales would be overstated and profit would be understated.
Section 6.6

6.9 John Wiley and Sons Australia, Ltd 2012


Testbank to accompany Accounting 8e

34. The formula for calculating the gross profit ratio is:
a. Gross profit after tax/sales
b. Cost of sales/sales
c. Gross profit /sales
d. Sales/gross profit

ANSWER C
Section 6.9

35. Which statement concerning the gross profit ratio is not true?
a. A decline in the ratio represents an unfavourable trend
b. It is calculated as gross profit divided by net sales
c. It can be compared with ratios for similar businesses
d. A decline in the ratio can be caused by decreases in the cost of sales

ANSWER D
Section 6.9

36. In the Income Statement for a retailer it is true that:


a. The cost of sales section is identical no matter whether the periodic or perpetual
system of inventory recording is used
b. Rent revenue is added to sales revenue to calculate gross profit
c. Under the periodic system freight inwards is added to the cost of purchases
d. Expenses are classified into the groupings Selling Expenses; Distribution Expenses
and Administrative and Finance expenses.

ANSWER C
Section 6.7

37. Assume that the net price method of recording purchases is used and the business
uses the perpetual method of inventory recording. Record the purchase of goods for
$4,000 on credit, on terms of 2/10, n/30. Ignore GST.
a. Debit Inventory $4,000; credit Accounts payable $4,000
b. Debit Inventory $3,920; Debit Discount Allowed $80: credit Accounts payable
$4,000
c. Debit Inventory $3,920; credit Accounts payable $3,920
d. Debit Purchases $4,000; credit Accounts payable $3,920; credit discount allowed
$80.

ANSWER C
Section 6.8

John Wiley and Sons Australia, Ltd 2012


6.10
Chapter 6: Accounting for retailing

Fill-in the blanks

1. I __________ consists of goods acquired for resale in the normal course of


business.

ANSWER Inventory
Section 6.1

2. For sales over $50 a retail business must issue a tax __________.

ANSWER invoice
Section 6.3

3. ABN stands for A__________ B__________ N__________

ANSWER Australian Business Number


Section 6.3

4. Counting all inventory units on hand is known as a s__________.

ANSWER stocktake
Section 6.5

5. The __________ account is an expense account used in a periodic inventory


system to accumulate the cost of inventory acquired for resale.

ANSWER purchases
Section 6.5

6. The purchases returns and allowances account is described as a c__________


expense account as it is always deducted from purchases in the financial reports.

ANSWER contra
Section 6.5

7. Expenses resulting from the marketing and sale of inventory including,


advertising, salespersons salaries, sales commissions and delivery expenses can
be classified as S__________ and D__________ expenses in the income
statement of a retailer.

ANSWER Selling, Distribution


Section 6.2

6.11 John Wiley and Sons Australia, Ltd 2012


Testbank to accompany Accounting 8e

8. The p__________ inventory system provides a continuous and detailed record of


the goods on hand and the cost of sales.

ANSWER perpetual
Section 6.5

9. The p___________ inventory system is a shortcut system that determines cost of


sales by taking a physical count of inventory and assuming any goods not on
hand have been sold.

ANSWER periodic
Section 6.5

10. The __________ __________ ratio measures the proportion of sales which
represents gross profit.

ANSWER gross profit


Section 6.9

John Wiley and Sons Australia, Ltd 2012


6.12
Chapter 6: Accounting for retailing

Exam Type Questions

QUESTION 6.1

Japan Outdoor Adventures uses the perpetual inventory system to account for its
inventory. The following transactions relate to July 2011. The beginning inventory
on 1 July consisted of 240, two person tents which cost $25 each (net of GST).

2011
July 4 Purchased 40 tents for $25 each on credit from TR Co, plus 10% GST.
8 Returned 6 tents from the 4 July purchase to TR Co.
10 Paid TR Co for 34 tents and was granted a discount of 3.5%.
12 Sold 52 tents for $50 each on credit to XX Ltd plus 10% GST.
20 XX Ltd returned 2 of the tents sold on the 12th and was granted a
credit. After inspection the tents were placed back in stock.
28 XX Ltd paid the full amount owing for 50 tents.

REQUIRED:

Prepare general journal entries to record the above information for July.

QUESTION 6.2

Partial Trial Balance City Discount Traders for the year ended 30 June 2011
Dr $ Cr $
Cash at bank 48,200
Fixed assets 50,000
Inventory 16,500
Accounts payable 3,600
GST collections 21,800
Sales revenue 190,000
Cost of sales 113,700
Discount expense 1,600
Selling and distribution Expenses 21,900
Sales returns and allowances 1,350
Finance expenses 11,100

REQUIRED:

Prepare the gross profit section of the income statement for City Discount Traders for
the year ended 30th June 2011. (Perpetual inventory)

6.13 John Wiley and Sons Australia, Ltd 2012


Testbank to accompany Accounting 8e

QUESTION 6.3

Partial Trial Balance City Discount Traders for the year ended 30 June 2011

Cash at Bank 48,200


Fixed assets 50,000
Inventory 1 July 2010 13,000
Purchases 118,400
Accounts payable 3,600
GST collection 21,800
Sales revenue 190,000
Purchases returns and allowances 1,200
Discount expense 1,600
Selling and distribution Expenses 21,900
Sales returns and allowances 1,350
Finance expenses 11,100

Adjustment:
Inventory at 30 June 2011 is $16,500 as per stocktake

REQUIRED:

Prepare the gross profit section of the income statement for City Discount Traders for
the year ended 30th June 2011. (Periodic inventory)

John Wiley and Sons Australia, Ltd 2012


6.14
Chapter 6: Accounting for retailing

Solutions Exam Type Questions

SOLUTION QUESTION 6.1

JAPAN OUTDOOR ADVENTURES


General journal
2011 $ $
July 4 Inventory 1,000
GST outlays 100
TR Co 1,100
Purchase 40 x $25 + 10% GST.

8 TR Co 165
Inventory 150
GST outlays 15
Purchase return 6 x $25 + 10% GST.

10 TR Co 935
Bank 902
Discount received 30
GST outlays 3
Paid TR Co 34 x $27.50 (3.5% discount)

12 XX Ltd 2,860
Sales 2,600
GST collections 260
Sold 52 x $50 + 10% GST.

Cost of sales 1,300


Inventory 1,300
52 x $25.

20 Sales returns and allowances 100


GST collections 10
XX Ltd 110
Sales returns 2 x $50 + 10% GST.

Inventory 50
Cost of sales 50
Sales returns 2 x $25.

28 Bank 2,750
XX Ltd 2,750
Customer paid account 50 x $50 + 10% GST.

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Testbank to accompany Accounting 8e

SOLUTION QUESTION 6.2

(Perpetual Inventory) CITY DISCOUNT TRADERS


Income Statement
for the year ended 30 June 2011
$
Sales revenue 190,000
Less: Sales returns and allowances 1,350
188,650
Less: Cost of Sales 113,700
GROSS PROFIT $74,950

SOLUTION QUESTION 6.3

(Periodic Inventory) CITY DISCOUNT TRADERS


Income Statement
for the year ended 30 June 2011
$ $ $
Sales revenue 190,000
Less: Sales returns and allowances 1,350
188,650
Less: Cost of Sales
Stock 1/7/10 13,000
Purchases 118,400
Less Purchases returns 1,200 117,200
130,200
Less Stock at end 30/6/11 16,500
Cost of sales 113,700
GROSS PROFIT $74,950

John Wiley and Sons Australia, Ltd 2012


6.16