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Chapter 6--Accounting for Merchandising Businesses Key 1. One of the most important differences between a service business and a retail business is in what is sold. TRUE 2. In a merchandise business, sales minus operating expenses equals net income. FALSE 3. Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends to sell. FALSE 4. Service businesses provide services for income, while a merchandising business sells merchandise. TRUE 5. In many retail businesses, inventory is the largest current asset. TRUE 6. Under a periodic inventory system, the merchandise on hand at the end of the year is determined by a physical count of the inventory. TRUE 7. In the periodic inventory system, purchases of merchandise for resale are debited to the Purchases account. TRUE 8. Under the periodic inventory system, the cost of merchandise sold is equal to the beginning merchandise inventory plus the cost of merchandise purchased plus the ending merchandise inventory. FALSE 13.A consignor who has goods out on consignment with an agent should include the goodsin ending inventory even though they are not in the possession of the consignor.DIF:2OBJ: 01 Get answer to your question and much more 14.Unsold consigned merchandise should be included in the consignee's inventory.DIF:2OBJ: 01 Get answer to your question and much more 15.If ending inventory for the year is understated, net income for the year is overstated.DIF:3OBJ: 02 Get answer to your question and much more 16.If ending inventory for the year is overstated, owner's equity reported on the balancesheet at the end of the year is understated.DIF:3OBJ: 02 Get answer to your question and much more 17.The specific identification inventory method should be used when the inventory consistsof identical, low cost units that are purchased and sold frequently.DIF:2OBJ: 03 Get answer to your question and much more 18.Of the three widely used inventory costing methods (FIFO, LIFO, and average), the LIFOmethod of costing inventory is based on the assumption that costs are charged againstrevenues in the reverse order in which they were incurred.DIF:2OBJ: 03 Get answer to your question and much more 19.When using the FIFO inventory costing method, the most recent costs are assigned to thecost of goods sold.DIF:2OBJ: 03 Get answer to your question and much more 20.FIFO is the inventory costing method that follows the physical flow of the goods.DIF:2OBJ: 04 Get answer to your question and much more 21.If the perpetual inventory system is used and a physical count disclosed a shortage, thecost of merchandise sold should be debited and the merchandise inventory accountcredited.DIF:2OBJ: 04 Get answer to your question and much more 22.If the perpetual inventory system is used, the account entitled Merchandise Inventory isdebited for purchases of merchandise.10 Which of the following is true of goods in transit that are shipped FOB destination?If goods are shipped FOB destination, transportation costs are paid by the seller and title does not pass until the carrier delivers the goods to the buyer. These goods are part of the seller's inventory while in transit.
Where should goods in transit FOB Destination be included in the balance sheet?Where should goods in transit that were recently purchased f.o.b. destination be included on the balance sheet? Not on the balance sheet. If a company uses the periodic inventory system, what is the impact on net income of including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
Does merchandise inventory include goods that are in transit?Merchandise inventory includes all goods the company has purchased, from items in warehouses and retail stores to goods that are still in transit from suppliers.
Which of the following items should not be included in the cost of ending merchandise inventory?Answer and Explanation: The correct answer is option b) purchased units in transit, shipped FOB destination. The computation of ending inventory is computed using the following formula. Accordingly, the purchased units in transit, shipped FOB destination must not be included in the total cost of ending inventory.
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Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory
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