Merchandising Operations – Answer Key
Basic Financial Accounting and Reporting 2026 by Win Ballada
■ Page 7-26 – Fill in the Blanks (with Explanations)
1. Purchases — Recorded in the Purchases account under the periodic system.
2. Perpetual inventory — Continuous record of inventory updates each transaction.
3. Merchandise Inventory account — Remains unchanged until period-end adjustment.
4. Unearned revenue — A liability for cash received before service or delivery.
5. Added — Freight-in increases total cost of goods purchased.
6. Gross Profit — Net Sales – Cost of Goods Sold = Gross Profit.
7. Net Sales — Gross Sales – (Returns + Discounts) = Net Sales.
8. Purchase Returns and Allowances; Purchase Discounts — These reduce total purchases.
9. Deducted — Ending inventory is subtracted from goods available for sale.
10. Added — Net Purchases are added to Beginning Inventory.
11. Operating Expenses — Profit = Gross Profit – Operating Expenses.
12. Reduce — Purchase discounts decrease total merchandise cost.
13. Sold; Expense — Beginning inventory is assumed sold and treated as an expense.
14. Beginning Inventory — Ending inventory becomes beginning of next period.
15. Sold — Ending inventory = goods not sold.
16. Adjusted — Inventory is updated to actual count at period-end.
17. Debit — Purchases increase with a debit entry.
18. Net Sales — Sales returns and allowances reduce gross sales to net sales.
19. Cost of Goods Available for Sale — Beginning inventory + net purchases.
20. Extended — Beginning and ending inventory are not extended on worksheet.
■ Page 7-27 – True or False (Set 1 with Explanations)
1. True — Merchandising entities have accounts like Sales, Purchases, Inventory unlike
service firms.
2. False — Sales – COGS = Gross Profit, not Operating Income.
3. False — Cash sales skip Accounts Receivable.
4. True — Bill of lading is prepared by seller with delivery details.
5. True — Validated deposit slip confirms deposit.
6. False — These are cash discounts, not trade discounts.
7. True — From buyer’s view, cash discounts are Purchase Discounts.
8. True — Sales Discounts is a contra-income account with debit balance.
9. False — 2/10, n/30 means discount within 10 days from invoice date.
10. True — Purchase Returns & Allowances reduce total purchases.
11. False — Freight-in is added, not deducted, from purchases.
12. False — Equipment purchases are recorded as assets, not purchases.
13. True — FOB Destination means seller pays freight.
14. True — Freight prepaid/collect indicates who pays shipping.
15. True — Inventory systems are either periodic or perpetual.
16. True — Perpetual updates cost of sales immediately.
17. False — Physical count is still needed for verification.
18. False — Under periodic, trial balance shows beginning inventory.
19. True — Ending inventory becomes beginning inventory next year.
20. True — Beginning inventory = cost of goods on hand at start.
■ Pages 7-28–7-29 – True or False (Set 2 with Explanations)
1. True — Operating cycle covers purchase, sale, payment, and collection.
2. True — Cash sales shorten the cycle.
3. True — Goods in transit included if ownership passed.
4. True — Periodic system has less recordkeeping.
5. True — Periodic uses physical count for ending inventory.
6. False — COGS is computed, not an account.
7. False — Perpetual, not periodic, gives up-to-date inventory.
8. False — Correct formula is Beg Inv + Purchases = Goods Available.
9. True — Physical count taken at period end.
10. True — Purchases are not recorded in Inventory under periodic.
11. False — Perpetual gives more accurate data.
12. True — Physical inventory counts all goods on hand.
13. True — Physical count required under periodic system.
14. True — Service businesses have no COGS.
15. False — Gross margin = Net Sales – COGS.
16. True — Sales Returns and Allowances is contra-revenue.
17. False — Profit = Net Sales – (COGS + Operating Expenses).
18. False — Transportation Out is selling expense, not COGS.
19. True — Advertising is a selling expense.
20. True — Transportation In is part of merchandise cost.
21. True — Gross – Net sales difference = discounts + returns + allowances.
22. True — Paying early to get discount is advisable.
23. False — 2/10, n/30 = discount within 10 days, not after.
24. False — It’s a cash discount, not trade discount.
25. True — Goods recorded at list price less trade discounts.
26. False — Buyer pays freight under FOB shipping point.
27. True — Perpetual debits inventory for merchandise cost.
28. True — Sales allowance doesn’t affect inventory.
29. True — Ending inventory included in goods available.
30. True — Ending inventory becomes next year’s beginning.
31. False — Prior year’s ending affects current beginning.
32. True — Change in inventory affects COGS.
33. False — Transportation In is added, not deducted.
34. True — Purchases account accumulates all merchandise bought under periodic.
