Week 3

Which of the following formulas is used to calculate the inventory turnover ratio?

Cost of goods sold ÷ Inventory

Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. When the Company sold one of the items for $40, it expensed $30 to its cost of goods sold account. Based on this information which of the following cost flow methods is the company using?

FIFO

An adverse opinion is the most common type of opinion issued by independent auditors. This statement is

False

An unqualified audit opinion suggests that all aspects financial statements are in compliance with generally accepted accounting principles (GAAP). This statement is

False

McDonald's will recognize a gain if it generates an amount of revenue that is higher than its operating expenses. This statement is

False

Product costs are expensed when they are incurred. This statement is

False

The amount of net income shown on a multi-step income statement will differ from the amount of net income shown on a single-step income statement. This statement is

False

Which of the following events experienced by a department store would be presented in the operating section of a multistep income statement?

Inventory sold for less than its cost

Which of the following cost flow methods would provide the lowest amount of net income in an inflationary environment?

LIFO

When a merchandising company pays cash to purchase inventory

None of the answers is correct.

Beachwood Clothing Company operates a chain of high end men's clothing stores. Recently the Company closed one of its stores and sold the equipment that was used in the store. The equipment had cost $5,000 and was sold for $6,000. Which of the following shows how the recognition of this event would affect the Company's financial statements?

Option C

Which of the following shows the effects of purchasing inventory on account?

Option C

Edwards Shoe Store sold shoes that cost the company $5,700 for $8,200. Which of the following shows how the recognition of the cost of goods sold will affect the Company's financial statement? (Ignore the effects of the associated revenue recognition.)

Option D

Which of the following entities is responsible for establishing auditing standards?

The Public Company Accounting Oversight Board.

The following income statements were drawn from GreyCo's annual report: Year 1 Year 2 Sales revenue$1,000 $2,000 Cost of Goods Sold (600) (1,100) Operating Expense(220)(800)Net Income$180 $100 At the end of Year 1 GreyCo developed a plan based on a new business strategy. Specifically, the Company planned to move its store to a more expensive location and then to raise its prices to cover the additional cost. Which of the following best describes the results of implementing the plan?

The strategy was unsuccessful because the company was not able to raise its prices enough to cover the additional operating expenses.

An operating cycle is the length of time it takes to convert inventory to accounts receivable plus the time it takes to convert the account receivable back to cash. This statement is

True

Common size statements are presented as percentages to promote comparisons between different size companies. This statement is

True

Public companies under the jurisdiction of the Securities and Exchange Commission are required by law to hire a certified public accounting firm (independent auditor) to assess whether their published financial statements are in compliance with Generally Accepted Accounting Principles (GAAP). This statement is

True

The cash flow associated with buying and selling inventory is not affected by the inventory cost flow method. This statement is

True

While independent auditors are responsible to the public they receive compensation for their work from the companies they audit. This statement is

True

Underwood Company's gross margin percentage increased from 40% to 45%. Which of the following is not a possible explanation for this increase, assuming all other things being equal?

Underwood sold more products.

Which of the following opinions is the most favorable opinion issued by an external auditor?

Unqualified opinion

Which of the following industries is likely to have the highest number of days to sell inventory?

Wine producers

AmRon Company sold land that had cost $25,000 for $26,500. Based on this information, the company's year-end financial statements would show

a cash inflow from investing activities of $26,500 on the statement of cash flows.

All other things being equal, the profitability is maximized when a company sells inventory with

a high gross margin per unit and a high inventory turnover.

Inventory is

an asset account that appears on the balance sheet.

Paying cash to purchase inventory is

an asset exchange transaction

If an auditor has insufficient information to determine whether a company's statements are prepared in accordance with Generally Accepted Accounting Principles, the auditor should issue a(n)

disclaimer of opinion.

The accounts receivable turnover ratio is calculated by

dividing the amount of credit sales by the average balance of accounts receivable.

The gross margin percentage is determined by

dividing the gross margin by the net sales.

The following income statements were drawn from the annual report of The Western Sales Company. Year 2 Year 1 Sales40,000 40,000 Cost of Goods Sold(25,000) (25,000) Gross Margin15,000 15,000 Operating Expenses(7,000) (9,000) Operating Income8,000 6,000 Gain on the sale of land0 5,000 Net Income8,000 11,000 If the trends continue, investors can expect the company's net income for Year 3 to

increase

The gross margin appears on a

multistep income statement

When a merchandising company sells inventory it will

recognize revenue and expense.

Which of the following statements regarding the opportunity cost of lost income is true? All other things being equal

the higher the number of days to collect receivables, the higher the opportunity cost of lost income.

Zack's, Inc. sold land that cost $85,000 for $70,000 cash. As a result of this event

total assets decreased

Walter Company's multistep income statement shows cost of goods sold of $60,000, a gross margin of $42,000, operating income of $12,000 and a $20,000 loss on the sale of land. Based on this information the sales revenue amounted to

$102,000.

Escrow Company's multistep income statement shows cost of goods sold of $60,000, a gross margin of $42,000, operating income of $12,000 and a $20,000 loss on the sale of land. Based on this information, the net income or (net loss) amounted to

($8,000).

The following information was drawn from the annual reports of two companies. Company A Company B Sales revenue $1,000 $2,000 Cost of Goods Sold (600) (1,100) Gross Margin 400 900 Operating Expenses (220) (700) Operating Income 180 200 Gain on the sale of equipment 150 0 Net Income $330 $200 Based on this information, Company B's return on sales is

10%

Senath Company's annual report reveals net credit sales of $240,000 and average accounts receivable of $20,000. The report also shows an average inventory balance of $10,000 and cost of goods of $200,000. Based on this information,the accounts receivable turnover is

12 times per year

Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. The Company sold one of the items for $40. If the Company uses the LIFO cost flow method, the balance in the inventory account after the sales transaction will be

30$

Senath Company's annual report reveals net credit sales of $240,000 and average accounts receivable of $20,000. The report also shows an average inventory balance of $10,000 and cost of goods of $200,000. Based on this information, the number of days to collect accounts receivable is (treat any partial day as a whole day)

31 days

Which of the following formulas is used to calculate the number of days to sell inventory?

365 ÷ Inventory turnover

The following information was drawn from the inventory records of Alpha Company as of December, Year 2. Beginning inventory (purchased in Year 1)200 Units @ $5 eachPurchases made in Year 2800 Units @ $8 eachUnits Sold900 Units @ $12 each Which of the following is the amount of the gross margin shown on the Year 2 income statement assuming Alpha uses a LIFO cost flow method?

3900

The following information was drawn from the annual reports of two companies. Company A Company B Sales revenue $1,000 $2,000 Cost of Goods Sold (600) (1,100) Gross Margin 400 900 Operating Expenses (220) (700) Operating Income 180 200 Gain on the sale of equipment 150 0 Net Income $330 $200

40%

The following information was drawn from the inventory records of Alpha Company as of December, Year 2. Beginning inventory (purchased in Year 1)200 Units @ $5 eachPurchases made in Year 2800 Units @ $8 eachUnits Sold900 Units @ $12 each Which of the following is the amount of the gross margin shown on the Year 2 income statement assuming Alpha uses a weighted average cost flow method?

4140

The following information was drawn from the inventory records of Alpha Company as of December 31, Year 2. Beginning inventory (purchased in Year 1)200 Units @ $5 eachPurchases made in Year 2800 Units @ $8 eachUnits Sold900 Units @ $12 each Which of the following is the amount of the gross margin assuming Alpha uses a FIFO cost flow method?

4200

Keisha Dress Shops experienced the following events during its third accounting period. (1) Sold merchandise that cost $92,000 for $140,000 cash. (2) Paid $30,000 of operating expenses. (3) Paid a $4,000 cash dividend. Based on this information, the amount of the gross margin is

48,000

The following information was drawn from the accounting records of Kassouf Sales Company (KSF). Sales Revenue$124,000 Cost of Goods Sold 90,000 Gross Margin$34,000 The inventory account showed a $17,000 beginning balance and a $19,000 ending balance. Based on this information, the inventory turnover ratio is (if necessary round calculations to two decimal points)

5.00 times

The following information was drawn from the inventory records of Preston Company. Beginning inventory (purchased in Year 1)100 Units @ $10 each1st Purchase made in Year 2400 Units @ $12 each2nd Purchase made in Year 2500 Units @ $14 eachUnits Sold950 Units @ $15 each Based on this information, which of the following represents the amount of ending inventory appearing on the balance sheet assuming a LIFO cost flow?

500

The following information was drawn from the accounting records of Kassouf Sales Company (KSF). Sales Revenue$124,000 Cost of Goods Sold 90,000 Gross Margin$34,000 The inventory account showed a $17,000 beginning balance and a $19,000 ending balance. Based on this information, the number of days to sell inventory is (if necessary round calculations to two decimal points)

73 days

Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. The Company sold one of the items for $40. If the Company uses the weighted average cost flow method, the amount of gross margin shown on the income statement will be

9$

Which of the following statements is true?

A high inventory turnover ratio produces a low number of days to sell inventory.

Which of the following opinions is the least favorable opinion issued by an external auditor?

Adverse opinion

The following table shows the operating cycle of four companies. Company NameSmithJonesBrownGreenOperating Cycle48 days42 days51 days46 days All other things being equal, the cost of borrowing money to purchase and hold inventory will be greater for

Brown

he following information was drawn from the annual reports of two companies. Company A Company B Sales revenue $1,000 $2,000 Cost of Goods Sold (600) (1,100) Gross Margin 400 900 Operating Expenses (220) (700) Operating Income 180 200 Gain on the sale of equipment 150 0 Net Income $330 $200 Assume both companies receive a $1,000 increase in sales and the return on sales ratio does not change. Under these circumstances`

Company A's operating income would increase by $180.