acc 311 chapter 8

Feine Co. accepted delivery of merchandise which it purchased on account. As of December 31, Feine had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on its financial statements for December 31 would be net income, current assets, and retained earnings were understated. net income was understated and current liabilities were overstated. net income was correct and current assets were understated. net income was overstated and current assets were understated.

A

Goods in transit which are shipped f.o.b. destination should be included in the inventory of the seller. included in the inventory of the buyer. included in the inventory of the shipping company. none of these answers are correct.

A

How is a significant amount of consignment inventory reported in the balance sheet? The inventory is reported separately on the consignor's balance sheet. The inventory is reported separately on the consignee's balance sheet. The inventory is combined with other inventory on the consignor's balance sheet. The inventory is combined with other inventory on the consignee's balance sheet.

A

If a company uses the periodic inventory system, what is the impact on net income of including goods in transit f.o.b. shipping point in purchases, but not ending inventory? Understate net income. Not sufficient information to determine effect on net income. No effect on net income. Overstate net income.

A

If a company uses the periodic inventory system, what is the impact on the current ratio of including goods in transit f.o.b. shipping point in purchases, but not ending inventory? Understate the current ratio. No effect on the current ratio. Not sufficient information to determine effect on the current ratio. Overstate the current ratio.

A

If the beginning inventory for 2020 is overstated, the effects of this error on cost of goods sold for 2020, net income for 2020, and assets at December 31, 2021, respectively, are overstatement, understatement, no effect. understatement, overstatement, no effect. understatement, overstatement, overstatement. overstatement, understatement, overstatement.

A

In the context of dollar-value LIFO, what is a LIFO layer? The LIFO value of an increase in the inventory for a given year. The LIFO value of the inventory for a given year. The difference between the LIFO inventory and the amount used for internal reporting purposes. The inventory in base year dollars.

A

On June 15, 2020, Wynne Corporation accepted delivery of merchandise which it purchased on account. As of June 30, Wynne had not recorded the transaction or included the merchandise in its inventory. The effect of this on its balance sheet for June 30, 2020 would be assets and liabilities were understated but stockholders' equity was not affected. stockholders' equity was the only item affected by the omission. assets, liabilities, and stockholders' equity were understated. assets and stockholders' equity were overstated but liabilities were not affected.

A

The approach employed by most companies that currently use the LIFO method is: dollar-value LIFO. specific goods LIFO. unit LIFO. specific goods pooled LIFO.

A Correct! Dollar-value LIFO is the method employed by most companies that use LIFO.

Which of the following accounts does not exist in a perpetual inventory system? Purchases. Cost of Goods Sold. Inventory. Sales Returns and Allowances.

A Correct! The Purchases account exists only in a periodic inventory system, not a perpetual inventory system.

The buyer would report the inventory in its balance sheet for items: purchased f.o.b. shipping point and in transit. purchased with a buyback agreement. shipped f.o.b. destination and in transit. received on consignment.

A Inventory purchased f.o.b. shipping point and in transit should be included in the buyer's balance sheet.

Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method? Prices remained unchanged. Prices decreased. Price trend cannot be determined from information given. Prices increased.

B

Goods in transit which are shipped f.o.b. shipping point should be included in the inventory of the seller. included in the inventory of the buyer. included in the inventory of the shipping company. None of these answer choices are correct.

B

In a period of rising prices which inventory method generally provides the greatest amount of net income? Specific identification. FIFO. Average cost. LIFO.

B

In a period of rising prices, the inventory method which tends to give the highest reported inventory is weighted-average. FIFO. LIFO. moving average.

B

In a period of rising prices, the inventory method which tends to give the highest reported net income is weighted-average. first-in, first-out. base stock. last-in, first-out.

B

Which of the following is a characteristic of a perpetual inventory system? Cost of goods sold is determined as the amount of purchases less the change in inventory. Cost of goods sold is recorded with each sale. Inventory purchases are debited to a Purchases account. Inventory records are not kept for every item.

B

An erosion of LIFO inventory layers is referred to as a LIFO effect. liquidation. reserve. allowance.

B A liquidation occurs when there is an erosion of LIFO.

A new layer is formed under dollar-value LIFO when the ending inventory at: end-of-year prices exceeds the beginning inventory at end-of-year prices. base-year prices exceeds the beginning inventory at base-year prices. end-of-year prices exceeds the beginning inventory at base-year prices. current cost exceeds the beginning inventory at base-year cost.

B Correct! Under dollar-value LIFO, a new layer is formed when the ending inventory exceeds at base-year prices the beginning inventory in base-year prices.

Under dollar-value LIFO each layer in ending inventory at LIFO cost is calculated by: dividing the layer at base-year prices by base-year price index. first expressing the year at base-year prices and then extending it to current LIFO cost by multiplying by the year's price index. dividing the layer at current-year prices by the current year price index. multiplying the layer at current-year prices by the current year price index.

B Correct! Under dollar-value LIFO, each year's layer is first expressed at base-year prices and then extended to current LIFO cost by multiplying by the year's price index.

Select the correct statement concerning LIFO liquidations from the following. LIFO liquidations often distort net income and do not result in substantial tax payments. LIFO liquidations often distort net income and may result in substantial tax payments. LIFO liquidations seldom distort nets income and may result in substantial tax payments. LIFO liquidations seldom distort net income and do not result in substantial tax payments.

B LIFO liquidations often distort net income and may result in substantial tax payments.

If ending inventory for 20x5 is understated because certain items were missed in the count, then: A. CGS for 20x5 will be understated. B. Net income for 20x5 will be understated and CGS for 20x6 will be understated. C. Net income for 20x5 will be understated, but net income for 20x6 will be unaffected. D. Net income for 20x5 will be overstated.

B. Use the equation BI + PUR = EI + CGS. When EI is understated, CGS must be overstated to maintain the equation. Net income, therefore, is understated (20x5). Then next year, BI is also understated because BI for 20x6 is EI for 20x5. Using the equation, if BI is understated, CGS is also understated to maintain the equation.

In a period of falling prices, which inventory method generally provides the greatest amount of net income? Specific identification. Average cost. LIFO. FIFO.

C

In a period of rising prices, the inventory method which tends to give the highest reported cost of goods sold is FIFO. average cost. LIFO. None of these choices are correct.

C

Tanner Corporation's inventory on its balance sheet was lower using first-in, first-out than it would have been using last-in, first-out. Assuming no beginning inventory, in what direction did the cost of purchases move during the period? Up Cannot be determined Down Steady

C

The failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results in an understatement of cost of goods sold and liabilities and an overstatement of assets. an understatement of assets and net income. an understatement of liabilities and an overstatement of owners' equity. an overstatement of assets and net income.

C

What is the effect of a $43000 overstatement of last year's inventory on current years ending retained earning balance? Need more information to determine. Understated by $43000. No effect. Overstated by $43000.

C

If the beginning inventory is overstated: cost of goods sold is understated working capital is understated. retained earnings is understated. the current ratio is overstated.

C Correct! If beginning inventory is overstated, cost of goods sold is overstated and net income and retained earnings are understated.

An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is weighted-average. LIFO. FIFO. base stock.

C. Correct! Since FIFO charges the oldest costs to cost of goods sold, they have the least effect on the ending inventory valuation.

Which of the following should be not included in a company's ending inventory? In-transit goods purchased and shipped FOB shipping point. In-transit goods sold and shipped FOB destination. Goods held on consignment. Goods out on consignment.

C. Correct! The company does not have legal title to goods held on consignment and therefore should not include them in ending inventory.

Under the dollar-value LIFO method, increases and decreases in an inventory pool are determined and measured in terms of: unit layers. physical quantity. total dollar value. dollar value per unit.

C. Correct! Increases and decreases in inventory pools are determined and measured in terms of total dollar value under the dollar-value LIFO method.

An inventory costing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is LIFO. weighted-average. base stock. FIFO.

D

Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would be net income, current assets, and current liabilities were overstated. net income and current liabilities were overstated. no effect. net income was correct and current assets and current liabilities were overstated.

D

Goods on consignment are included in the consignee's revenue. included in the consignee's inventory. included in both the consignee's and the consignor's inventory. included in the consignor's inventory.

D

Green Co. received merchandise on consignment. As of January 31, Green included the goods in inventory, but did not record the transaction. The effect of this on its financial statements for January 31 would be net income, current assets, and retained earnings were understated. net income was correct and current assets were understated. net income and current assets were overstated and current liabilities were understated. net income, current assets, and retained earnings were overstated.

D

What is consigned inventory? Goods that have been segregated for shipment to a customer. Goods that are shipped, but title transfers to the receiver. Goods that are sold, but payment is not required until the goods are sold. Goods that are shipped, but title remains with the consignor.

D

When using a perpetual inventory system, no Purchases account is used. a Cost of Goods Sold account is used. two entries are required to record a sale. All of these answer choices are correct.

D

Where should goods in transit that were recently purchased f.o.b. destination be included on the balance sheet? Inventory. Accounts payable. Equipment. Not on the balance sheet.

D

Which of the following is true regarding the use of LIFO for inventory valuation? If LIFO is used for external financial reporting, then it must also be used for internal reports. For purposes of external financial reporting, LIFO may not be used with the lower of cost or market approach. If LIFO is used for external financial reporting, then it cannot be used for tax purposes. None of these answers are correct.

D

Which of the following items should be included in a company's inventory at the balance sheet date? Goods in transit which were purchased f.o.b. destination. Goods received from another company for sale on consignment. Goods sold to a customer which are being held for the customer to call for at his or her convenience. None of these answer choices are correct.

D

In a period of rising prices, the inventory method that produces the lowest ending inventory is the: FIFO perpetual method. LIFO perpetual method. average cost method. LIFO periodic method.

D In a period of rising prices, the LIFO method always produces the lowest ending inventory and LIFO periodic results in a lower inventory than LIFO perpetual.

Which of the following items should be included in a company's inventory at the balance sheet date? Goods received from another company for sale on consignment. Goods sold to a customer that are being held for the customer to call for at his or her convenience. Goods sold to a customer, that were shipped f.o.b. shipping point. Goods in transit, which were purchased f.o.b. shipping point.

D Goods in transit, which were purchased f.o.b. shipping point should be included in the company's inventory. Goods sold to a customer that were shipped f.o.b shipping point should not be included in a company's inventory on the balance sheet date.

The method employed by most companies that use a LIFO system is: weighted-average LIFO. specific goods LIFO. specific goods pooled LIFO. dollar-value LIFO.

D The dollar-value LIFO method, not the specific goods pooled LIFO method, is the most commonly used LIFO method because it does the best job of protecting LIFO layers from erosion and is relatively simple to implement.

On December 30, Kessler Co. accepted delivery of merchandise which it purchased on account. As of December 31, Kessler had recorded the purchase, but did not include the merchandise in its physical count of ending inventory. The effect of this on its financial statements for December 31 would be net income was correct and current assets were understated. net income was understated and current liabilities were overstated. net income was overstated and current assets were understated. net income, current assets, and retained earnings were understated.

D. If ending inventory is understated, then cost of goods sold would be overstated. This results in net income and retained earnings being understated. Likewise, current assets (ending inventory) would be understated due to the omission of merchandise.

Under a perpetual inventory system which accounts should be debited the each time a sale on account is made? Inventory and Cost of Goods Sold. Accounts Receivable and Purchases. Accounts Payable and Purchases. Accounts Receivable and Cost of Goods Sold.

D. When a sale on account is made under a perpetual inventory system, Accounts Receivable, not Accounts Payable, is debited for the selling price of the goods and Cost of Goods Sold, not Purchases, is debited for the cost of the goods.

Freight charges on goods purchased are considered a period cost and therefore are not part of the cost of the inventory. True False

F

If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier delivers the goods to the common carrier. True False

F

LIFO liquidation often distorts net income, but usually leads to substantial tax savings. True False

F

The cost flow assumption adopted must be consistent with the physical movement of the goods. True False

F

The dollar-value LIFO method measures any increases and decreases in a pool in terms of total dollar value and physical quantity of the goods in the inventory pool. True False

F

In a period of rising prices, LIFO will result in a higher income tax expense than FIFO. True False

F LIFO will result in a lower net income and income tax expense because Cost of Goods Sold will be higher by including more recent costs.

LIFO liquidation can distort net income, but generally results in substantial tax savings. True False

F Incorrect. LIFO liquidation distorts net income and can result in substantial additional taxes, not substantial tax savings.

A physical inventory is only required at year-end if the company has a periodic inventory system. True False

F Regardless of the type of inventory system used, the company should take a physical count of inventory at the end of the fiscal year

If both purchases and ending inventory are overstated by the same amount, net income is not affected. True False

T

If ending inventory is understated, then net income is understated. True False

T

In all cases when FIFO is used, the cost of goods sold would be the same whether a perpetual or periodic system is used. True False

T

Goods shipped f.o.b. destination, which arrive to a customer, on January 2, 2017 should be included in the seller's December 31, 2016 inventory. True False

T Correct! For goods shipped f.o.b. destination, title does not pass to the customer until the goods are delivered, so the seller has title at year-end.

If ending inventory is overstated, net income, retained earnings and working capital are overstated in that period as well. True False

T Correct! If ending inventory is overstated, cost of goods sold will be understated and thus net income and retained earnings are overstated. If a current asset account balance is overstated, working capital is overstated.

When goods are shipped f.o.b. shipping point, title passes to the buyer when the seller delivers the goods to a common carrier. True False

T. For goods shipped f.o.b. shipping point, title passes to the buyer when the seller delivers the goods to a common carrier.