Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

ANALYSIS OF MULTIPLE-CHOICE TYPE QUESTIONS

1. Question

   (L.O. 1) Which of the following formulas will yield the net income figure for a merchandising firm?

   1. Gross profit minus cost of goods sold.
   2. Net sales minus cost of goods sold.
   3. Gross profit minus operating expenses.
   4. Net sales minus operating expenses.

   Approach and Explanation: Before you look at the alternative answers, write down the components in the net income computation. Abbreviations for these components will suffice.

   Net Sales
   -	Cost of Goods Sold
   =	Gross Profit
   -	Operating Expenses
   =	Income from Operations
   +/-	Other Revenues, Gains, Losses, & Expenses
   =	Net Income

   Then take each answer selection and see if it describes your model. (Solution = c.)

2. Question

   (L.O. 2) The following amounts relate to the current year for the Ira Company:

   Beginning inventory	$ 20,000
   Ending inventory	28,000
   Purchases	166,000
   Purchase returns	4,800
   Freight-out	6,000

   The amount of cost of goods sold for the period is:

   1. $169,200.
   2. $162,800.
   3. $153,200.
   4. $147,200.

   Approach and Explanation: Write down the components of the cost of goods sold. Enter the amounts given and solve for the unknown.

   

   Solving for Cost of Goods Sold: $181,200 - $28,000 = X; X = $153,200 (Solution = c.)

   TIP: Freight-out is classified as a selling expense, not a component of cost of goods sold.

3. Question

   (L.O. 1, 2) The following amounts relate ...