PAGE 317-318

TRUE OR FALSE

1. The operating cycle involves the purchase and sale of inventory as well as the
subsequent payment for purchases and collection of cash.
ANSWER:FLASE
2. A business can shorten its operating cycle by increasing its percentage of cash
sales and reducing its percentage of credit sales.
ANSWER:TRUE
3. Merchandise inventory could include goods that are in transit.
ANSWER:TRUE

4. An advantage of using the periodic inventory system is that it requires less record
keeping than the perpetual inventory system
ANSWER:TRUE
5. The periodic inventory system relies on a physical count of merchandise for its
balance sheet amount.
ANSWER:TRUE
6. Under the periodic inventory system, cost of goods sold is treated as an account.
ANSWER:TRUE
7. The periodic inventory system provides an up-to date amount of inventory on
hand.
ANSWER:TRUE
8. Summing ending merchandise inventory and cost of goods sold gives the cost of
goods available for sale.
ANSWER:TRUE
9. A physical inventory is usually taken at the end of the accounting period.
ANSWER:TRUE
10. Under the periodic inventory system, purchases of merchandise are not recorded
in the merchandise Inventory account.
ANSWER:FALSE

11. An entity would be more likely to know the amount of inventory on hand if it used
the periodic inventory system rather than the perpetual inventory system.
ANSWER:FALSE

12. Taking a physical inventory refers to making a count of all merchandise on hand
at a particular time.
ANSWER:TRUE

13. When the periodic inventory system is used, a physical inventory should be taken
at the end of the fiscal year.
ANSWER:TRUE

14. The income statement of an entity that provides services only will not have cost
of goods sold.
ANSWER:TRUE

15. For a merchandising entity, the difference between net sales and operating
expenses is called gross margin.
ANSWER:TRUE

16. Sales returns and allowances is described as a contra-revenue account.

17. On the income statement of a merchandising concern, profit is the amount by
which net sales exceed operating expenses.
ANSWER:TRUE

18. Transportation Out is included in the cost of goods sold calculation.

ANSWER:TRUE

19. Advertising Expenses appears as a selling expense on the income statement.

ANSWER:FALSE

20. Transportation In is considered a cost of merchandise purchased.

ANSWER:FLASE

21. The difference between gross sales and net sales is equal to the sum of sales
discounts, and sales returns and allowances.
ANSWER:FALSE

22. When the terms of sales include a sales discount, it usually is advisable for the
buyer to pay within the discount period.
ANSWER:TRUE

23. The terms 2/10, n/30 mean that a 2% discount is allowed on payments made
over 10 but before 30 days after the invoice date.
ANSWER:TRUE

24. Terms of 2/10, n/30 is an example of a trade discount.

ANSWER:TRUE

25. Goods should be recorded at their list price less any trade discounts involved.
ANSWER:TRUE

26. FOB shipping point means that the seller incurs the shipping costs.
ANSWER:TRUE

27. Under the perpetual inventory system, the cost of merchandise is debited to
Merchandise Inventory at the time of purchase.
ANSWER:FALSE
28. The Merchandise Inventory accounts is not affected when a sales allowance is
granted.
ANSWER:TRUE

29. Ending merchandise inventory is included in the calculation of cost of goods

available for sale.
ANSWER:TRUE

30. Ending merchandise inventory for year 1 automatically becomes beginning

merchandise inventory for year 2.
ANSWER:TRUE

31. The calculation of cost of goods available for sale during the year is not affected
by the previous year’s ending inventory.
ANSWER:TRUE

32. The change in inventory level from beginning to the end of the year affects cost
of goods sold.
ANSWER:TRUE

33. Transportations In is treated as a deduction in the cost of goods sold section of

the income statement.
ANSWER:TRUE

34. Under the periodic inventory system, the purchases account is used to
accumulate all purchases of merchandise for resale.
ANSWER:TRUE
PAGE 340

PROBLEM 8
PURCHASE TRANSACTIONS

Several purchase transactions of the Joey Beringuela Pharmaccy are presented below.
The credit terms of the entity are 3/10, n/30.

Oct 6 Purchased merchandise for cash, P200,000; FOB Shipping point

12 Purchased merchandise on account, P700,000
15 Returned merchandise purchased on account, P50,000
17 Paid supplier the amount due
19 Paid freight charges of P7,000 on merchandise acquired last October 6

Required:

Prepare the journal entries.

date Account title Debit Credit

Oct.6 Merchandise inventory 200,000
Accounts payable 200,000
12 Accounts payable 700,000 700,000
Merchandise inventory
15 Return 50,000
Cash 50,000
 17 Supplier expense
Cash
19 Merchandise expense 193,000
Cash 193,000

PAGE 345

PROBLEM 14
JOURNALIZING MERCHANDISING TRANSACTIONS

Virginia Ruben Candles engaged in the following transactions in August 2020:

Aug 1 Sold Merchandise to O. Lacierda Trading on credit, terms n/30, FOB shipping
point, P21,000.
3 Purchased merchandise on credit from R. Cabellon Stores, terms n/30, FOB
shipping point P38,000.
5 Paid South Min Freight for freight charges on merchandise received, P290.
6 Purchase store supplies on credit from Ipil supplies, terms n/20, P6,360.
8 Purchased merchandise on credit from Pagadian Corp., terms n/30, FOB
shipping point, P36,000. Pagadian Corp. paid P200 for freight costs.
12 Returned some of the merchandise received on Aug 3 for credit, P6,000.
15 Sold merchandise on credit to columban stores, terms n/30, FOB shipping
point, P12,000
16 Returned some of the store supplies purchased on August 6 for credit,
P2,000
 17 Sold Merchandise for cash, P10,000
18 Accepted for full credit a return from O. Lacierda Trading, P2,000.
24 Paid accounts to R. Cabellon Stores.
25 Received full payment from O. Lacierda Trading

Required:

Prepare the journal entries.

Date Account title Debit Credit

Aug.1 Account receivable 21,000

Sales revenue 21,000

5 Purchase 38,000

cash 38,000

6 Freight in 290

cash 290

8 Purchase supplies 6,360

cash 6,360

12 Purchased return 6,000

cash 6,000

15 Account receivable 12,000

Notes receivable 12,000

16 Sales returned 2,000

 Cash

2,000

17 Account receivable 10,000

cash 10,000

18 Cash 2,000

cash 2,000

24 Expense 38,000

Cash 38,000

25 Revenue 21,000

cash 21,000
PAGE 351

PROBLEM 20
DETERMINING THE MISSING ELEMENTS OF THE INCOME STATEMENT

The partial income statements of five different companies are as follows:

1 2 3 4 5
Net Sales a d 250,000 290,000 400,000
Merchandise B 50,000 70,000 J 120,000
Inventory, 1/1/2020
Net Cost of Purchases 80,000 E G 160,000 390,000
Goods Available for 110,000 160,000 H K M
Sale
Merch, Inventory, 40,000 F 30,000 70,000 N
1/31/2020
Cost of Goods Sold C 140,000 230,000 L 380,000
Gross Profit 50,000 40,000 i 160,000 O
Required:

Replace the lettered blanks with the appropriate amounts.

1 2 3 4 5
Net Sales 175,000 150,000 250,000 290,000 400,000
Merchandise 40,000 50,000 70,000 90,000 120,000
Inventory, 1/1/2020
Net Cost of Purchases 80,000 95,000 110,000 160,000 390,000
Goods Available for 110,000 160,000 130,000 145,000 260,000
Sale
Merch, Inventory, 40,000 80,000 30,000 70,000 300,000
1/31/2020
Cost of Goods Sold 80,000 140,000 230,000 130,000 380,000
Gross Profit 50,000 40,000 320,000 160,000 380,000

PAGE 370-371
MULTIPLE CHOICE

1. Jan Cahilig Traders started operating in 2020. For the year ended 2020, the sales,
purchases and closing inventory are P500,000, P200,000 and P10,000 respectively.
What is the amount of cost of goods sold for the year ended 2020?

A. P 190,000
B. P 200,000
C. P 790,000
D. P 800,000

EXPLANATION:C

500,000+200,000-(10,000x12)

2. Refer to Question 1, what is the gross profit for the entity?

A. P 200,000
B. P 300,000
C. P 310,000
D. P 490,000
ANSWER:D-
790,000-200,000

An entity has the following accounting information for the year:

Sales 400,000
Purchases 90,000
Opening Inventory 30,000
Sales Returns 80,000
Purchases Returns 70,000
Transportation In 40,000
Transportation Out 10,000
Salaries 9,000
Other Revenues 4,000
 General Expenses 7,000
Gross Profit 250,000
EXPLANATION:

3. What is the amount of net sales of the entity?

A. P 260,000
B. P 280,000
C. P 320,000
D. P 330,000

EXPLANATION:C-

400,000-80,000

4. What is the amount of net purchase of the entity?

A. P20,000
B. P30,000
C. P50,000
D. P60,000

EXPLANATION:B-

70,000-40,000

5. What is the amount of closing inventory of the entity?

A. P 10,000
B. P 20,000
C. P 30,000
D. P 40,000

EXPLANATION:C-

30,000+90,000-90,000

6. What is the amount of profit for the year?

A. P 48,000
 B. P 188,000
C. P 198,000
D. P 228,000

EXPLANATION:C-

400,000-150,000=250,000-16,000-7,000

7. Which of the following is/are not relevant to the calculation of net sales?

1. Cash Sales

2. Sales Returns

3. Sales Discounts

A. (2) only
B. (3) only
C. (1) and (2) only
D. (2) and (3) only

EXPLANATION:C-
Net sales do not account for cost of goods sold, general expenses, and administrative
expenses which are analyzed with different effects on income statement margins. Net
sales is the result of gross sales minus returns, allowances, and discounts.
PAGE 381

PROBLEM 10

The accounts of Ramon Woo Milk Products follow:

Accounts Payable P16,950 Inventory, 6/30/2020 P65,520

Accounts Receivable 43,700 Long term Notes Payable 39,000
Accumulated Depreciation Office Equipment 58,680
– Office Equipment 22,450 Purchases 364,000
Accumulated Depreciation Purchases Discounts 1,990
– Store Equipment 16,000 Purchase Returns & Allows. 3,400
Cash 7,890 Salaries Payable 2,840
Woo, Capital 74,620 Sales Discounts 10,400
Cost of Goods Sold ? Sales Returns & Allows. 17,030
Woo Withdrawals 9,000 Sales 731,000
General Expenses 116,700 Selling Expenses 132,900
Interest Expense 5,400 Store Equipment 88,000
Interest Payable 1,100 Supplies 5,100
Inventory, 1/1/2020 69,350 Unearned Revenues 13,800

Required: Prepare the income statement using the function pf expense method. In a
separate schedule, show the computation of cost of goods sold.

Inventory, 1/1/2020 69,350

Purchase 364,000

Purchase returns and allows. (3,400)

Total goods available for sale 429,950

Inventory 6/20/2020 (65,520)

Cost of goods sold 364,450