Question

17. Which of the following credit terms is the most advantageous to the purchaser of merchandise?

a. 1/10, n30.

b. 4/40, n120.

c. 2/10, n30.

d. 2/5, n15.

18. Which of the following is always included in the current assets section of the classified balance sheet of a merchandiser?

a. Cash

b. Trade Accounts Receivable

c. Prepaid Rent

d. All of the above

19. Which of the following is not one of the transactions that comprise the operating cycle of a merchandiser?

a. purchase inventory

b. pay for store labor

c. pay for inventory

d. sale inventory to customers

20. Which of the intermediate levels of income is not reported by a service type company?

a. gross profit

b. income before income taxes

c. income from operations

d. net income

Answer 1

17. Option b. 4/40, n120 is the correct answer.

Explanation:

Term 4/40, n/120 means that if the payment is made within 40 days, 4% discount will be allowed otherwise payment will need to be made in 120 days without any discount.

From the purchaser point of view, they will want an extended credit period and the maximum discount at possible which they will get when the terms are 4/40, n/120. In all the other options both the discount and the credit period is less. Hence, option b is the correcr answer.

18. Option d. All of the above is the correct answer.

Explanation:

Current assets are those asset which are in the form of cash or are expected to be converted in cash within a year and hence, all the cash, trade receivables and prepaid rent are considered as current answer.

19. Option b. pay for store labor is the correct answer.

Explanation:

Operating cycle of merchandising business involves purchase and payment of inventory, sale of merchandise on account and collection of receivables and does not involve the pay for store labor as they are part of operating cycle of manufacturing business and hence is the correct answer.

20. Option a. gross profit is the correct answer.

Explanation:

Gross Profit becomes the part of Income statement only in case of Financials of a Manufacturing Business but does not become the part of Income Statement of Service Industry. All the other options i.e.income before income taxes, income from operations and net income will be seen in the financials of all type of company. Hence, Option a. gross profit is the correct answer.