Mr. Etemadi has prepared the following list of statements about service companies and merchandisers.

Identify each statement as true or false:

1. Measuring net income for a merchandiser is conceptually the same as for a service company.

2. For a merchandiser, sales less operating expenses is called gross profit.

3. For a merchandiser, the primary source of revenues is the sale of inventory.

4. Sales salaries and wages is an example of an operating expense.

5. The operating cycle of a merchandiser is the same as that of a service company.

6. In a perpetual inventory system, no detailed inventory records of goods on hand are maintained.

7. In a periodic inventory system, the cost of goods sold is determined only at the end of the accounting period.

8. A periodic inventory system provides better control over inventories than a perpetual system.

1. True

2. False

3. True

4. True

5. False

6. False

7. True

8. False

Explanation:

1. Measuring net income for a merchandiser is conceptually the same as for a service company.

Net Income = Sales - Expenses

2. For a merchandiser, sales less operating expenses is called gross profit.

Gross Profit = Sales less Cost of Sales

3. For a merchandiser, the primary source of revenues is the sale of inventory.

Merchandiser purchases inventory for resale.

4. Sales salaries and wages is an example of an operating expense.

Operating Expenses are expenses incurred to derive income in primary activities of a company

5. The operating cycle of a merchandiser is the same as that of a service company.

The service company can have client work outstanding at end of year but this differs from that of a merchandiser

6. In a perpetual inventory system, no detailed inventory records of goods on hand are maintained.

Detailed records are kept after every sale

7. In a periodic inventory system, the cost of goods sold is determined only at the end of the accounting period.

After a given period cost of sales and inventory balances are determined - opposite of perpetual

8. A periodic inventory system provides better control over inventories than a perpetual system.

Perpetual is even better as it keeps track of both inventory and cost of goods sold after every sale