The document contains 15 multiple choice questions about merchandising businesses and inventory accounting. It asks about the differences between merchandising and service businesses, how various inventory costs affect the cost of goods sold, the differences between perpetual and periodic inventory systems, income statement presentation, inventory cost flow assumptions, and accounting for consignment inventory. It also includes an exercise about preparing closing entries for a furniture wholesaler.

1. Assignment 1
Eye openers
1. What distinguishes a merchandising business from a service
business?
2. Can a business earn a gross profit but incur a net loss?
Explain.
3. In computing the cost of merchandise sold, does each of the
following items increase or decrease that cost? (a) freight, (b)
beginning merchandise inventory,
(c) purchase discounts, (d) ending merchandise inventory
4. Describe how the periodic system differs from the perpetual
system of accounting for merchandise inventory.
5. Differentiate between the multiple-step and the single-step
forms of the income statement.
6. What are the major advantages and disadvantages of the
single-step form of income statement compared to the multiple-
step statement?
7. What type of revenue is reported in the Other income section
of the multiple-step income statement?
8. Name at least three accounts that would normally appear in
the chart of accounts
of a merchandising business but would not appear in the chart
of accounts of a service business.
9. How are sales to customers using MasterCard and VISA
recorded?
10. The credit period during which the buyer of merchandise is
allowed to pay usually begins with what date?
11. What is the meaning of (a) 1/15, n/60; (b) n/30; (c) n/eom?
12. What is the nature of (a) a credit memo issued by the seller
of merchandise, (b) a debit memo issued by the buyer of
merchandise?
13. Who bears the freight when the terms of sale are (a) FOB
shipping point, (b) FOB destination?
14. Business Outfitters Inc., which uses a perpetual inventory

2. system, experienced a normal inventory shrinkage of $9,175.
What accounts would be debited and credited to record the
adjustment for the inventory shrinkage at the end of the
accounting period?
15. Assume that Business Outfitters Inc. in Eye Opener 14
experienced an abnormal inventory shrinkage of $80,750.
Business Outfitters Inc. has decided to record the abnormal
inventory shrinkage so that it would be separately disclosed on
the income statement. What account would be debited for the
abnormal inventory shrinkage?
Complete the exercise
EX 5-32
Closing entries
On May 31, 2010, the balances of the accounts appearing in the
ledger of Champion
Interiors Company, a furniture wholesaler, are as follows:
Accumulated Depr.—Building $ 30,460 Retained Earnings
$116,155
Administrative Expenses 65,300 Salaries Payable 680
Building 55,680 Sales 313,540
Capital Stock 25,000 Sales Discounts 18,000
Cash 8,840 Sales Returns and Allow. 12,000
Cost of Merchandise Sold 188,000 Sales Tax Payable
4,900
Dividends 7,950 Selling Expenses 124,000
Interest Expense 1,920 Store Supplies 4,580
Merchandise Inventory 26,000 Store Supplies Expenses
2,465
Notes Payable 24,000
Prepare the May 31, 2010, closing entries for Champion
Interiors Company.
Wk3 Assignment 2.docx
Assignment 2
Eye openers

3. 1. Before inventory purchases are recorded, the receiving report
should be reconciled to what documents?
2. What security measures may be used by retailers to protect
merchandise inventory from customer theft?
3. Which inventory system provides the more effective means of
controlling inventories (perpetual or periodic)? Why?
4. Why is it important to periodically take a physical inventory
if the perpetual system is used?
5. Do the terms FIFO and LIFO refer to techniques used in
determining quantities of the various classes of merchandise on
hand? Explain.
6. Does the term last-in in the LIFO method mean that the items
in the inventory are assumed to be the most recent (last)
acquisitions? Explain.
7. If merchandise inventory is being valued at cost and the price
level is decreasing, which of the three methods of costing—
FIFO,LIFO, or average cost—will yield (a)
the highest inventory cost,(b) the lowest inventory cost,(c) the
highest gross profit, and (d) the lowest gross profit?
8. Which of the three methods of inventory costing—FIFO,
LIFO, or average cost will in general yield an inventory cost
most nearly approximating current replacement cost?
9. If inventory is being valued at cost and the price level is
steadily rising, which of the three methods of costing—FIFO,
LIFO, or average cost—will yield the lowest annual income tax
expense? Explain.
10. Can a company change its method of costing inventory?
Explain.
11. Because of imperfections, an item of merchandise cannot be
sold at its normal selling price. How should this item be valued
for financial statement purposes?
12. How is the method of determining the cost of the inventory
and the method of valuing it disclosed in the financial
statements?
13. The inventory at the end of the year was understated by
$12,750. (a) Did the error cause an overstatement or an

4. understatement of the gross profit for the year?
(b) Which items on the balance sheet at the end of the year were
overstated or understated as a result of the error?
14. Funtime Co. sold merchandise to Jaffe Company on
December 31, FOB shipping point. If the merchandise is in
transit on December 31, the end of the fiscal year, which
company would report it in its financial statements? Explain.
15. A manufacturer shipped merchandise to a retailer on a
consignment basis. If the merchandise is unsold at the end of
the period, in whose inventory should the merchandise be
included?
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