Question 1

A company's current ratio is 1.2 and its quick ratio is 0.25. This company is probably an excellent credit risk because the ratios reveal no indication of liquidity problems.

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Question 2

The profit margin ratio is the same as the gross profit ratio.

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Question 3

Successful use of a just-in-time inventory system can narrow the gap between the acid-test and the current ratio.

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Question 4

If goods are shipped FOB shipping point, the seller does not record revenue from the sale until the goods arrive at their destination because the transaction is not complete until that point.

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Question 5

If a company sells merchandise with credit terms 2/10 n/60, the credit period is 10 days and the discount period is 60 days.

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Question 6

Purchase discounts are the same as trade discounts.

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Question 7

Credit terms of 2/10, n/30 imply that the seller offers the purchaser a 2% cash discount if the amount is paid within 10 days of the invoice date. Otherwise, the full amount is due in 30 days.

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Question 8

Purchase returns refer to merchandise a buyer acquires but then returns to the seller.

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Question 9

Credit terms for a purchase include the amounts and timing of payments from a buyer to a seller.

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Question 10

Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.

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Question 11

The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit if goods are shipped FOB destination.

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Question 12

A common rule of thumb is that a company's acid-test ratio should have a value near or higher than 1 to conclude that a company is unlikely to face near-term liquidity problems.

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Question 13

Sellers always offer a discount to buyers for prompt payment toward purchases made on credit.

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Question 14

Under the perpetual inventory system, the cost of merchandise purchased is recorded in the Merchandise Inventory account.

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Question 15

Purchase allowances refer to a price reduction (allowance)granted to a buyer of defective or unacceptable merchandise.

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Question 16

If goods are shipped FOB destination, the seller does not record revenue from the sale until the goods arrive at their destination because the transaction is not complete until that point.

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Question 17

The Merchandise Inventory account balance at the beginning of the current period is equal to the amount of ending Merchandise Inventory from the previous period.

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Question 18

A company had net sales of $340,500, its cost of goods sold was $257,000, and its net income was $13,750. The company's gross margin ratio equals 24.5%.

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Question 19

A company's quick assets are $147,000 and its current liabilities are $143,000. This company's acid-test ratio is 1.03.

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Question 20

The gross margin ratio is defined as gross margin divided by net sales.

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Quiz 5: Accounting for Merchandising Operations