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ACCT Practice quiz 3 Chapters 6&7

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The following information ($ in millions) comes from a recent annual report of Amazon.com, Inc.: Net sales $10,852 Total assets 4,377 End of year balance in cash 1,152 Total stockholders' equity 351 Gross profit (Sales - Cost of Sales) 2,627 Net increase in cash for the year 15 Operating expenses 2,059 Net operating cash flow 799 Other income (expense), net (13) Compute Amazon's cost of goods sold for the year. Answers: A.) $ 8,225 B.) $ 7,235 C.) $ 8,793 D.) $ 5,176 E.) None of the above.

A.) $ 8,225 Response Feedback: Gross profit = Net sales - Cost of goods sold Therefore, Cost of goods sold = Net sales - Gross profit= $10,852 - 2,627 = $8,225

Delta Diamonds uses a periodic inventory system. The company had five one-carat diamonds available for sale this year: one was purchased on June 1 for $450, two were purchased on July 9 for $550 each, and two were purchased on September 23 for $600 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using the specific identification method, its ending inventory (after the December 24 sale) equals: Answers: A.) $2200. B.) $1550. C.) $550. D.) $2300. E.) None of the above

A.) $2200. Response Feedback: Ending inventory = Cost of one purchased June 1 + Cost of one purchased July 9 + Cost of two purchased September 23 = ($450 × 1) + ($550 × 1) + ($600 × 2) = $2200

A.) $2200. Response Feedback: Ending inventory= Cost of one purchased June 1 + Cost of one purchased July 9 + Cost of two purchased September 23= ($450 × 1) + ($550 × 1) + ($600 × 2) = $2200

During the current year, Gomez Co. had beginning inventory of $1,300 and ending inventory of $900. The cost of goods sold was $3,700. What is the amount of inventory purchased during the year? Answers: A.) $3,300 B.) $4,600 C.) $5,900 D.) $3,700 E.) None of the above

A.) $3,300 Answer Feedback: Beginning inventory + Purchases − Cost of goods sold = Ending inventory$1,300 + Purchases − $3,700 = $900Purchases = $900 + $3,700 − $1,300 = $3,300

Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $13,900 of common stock for cash. 2) The company paid cash to purchase $8300 of inventory. 3) The company sold inventory that cost $5700 for $11,900 cash. 4) Operating expenses incurred and paid during the year, $5200. Sanchez Company engaged in the following transactions during Year 2: 1) The company paid cash to purchase $12,200 of inventory. 2) The company sold inventory that cost $9900 for $18,500 cash. 3) Operating expenses incurred and paid during the year, $6200. What is the amount of retained earnings that will be shown on the balance sheet at December 31, Year 2? Answers: A.) $3400 B.) $2400 C.) $8200 D.) $14,300 E.) None of the above.

A.) $3400 Response Feedback: Net income = Sales − Cost of goods sold − Operating expenses +/− Nonoperating items (which are zero here) Year 1 Net income = $11,900 − $5700 − $5200 = $1000 Year 2 Net income = $18,500 − $9900 − $6200 = $2400 Retained earnings at end of Year 2 = Retained earnings at beginning of Year 1 + Net income for Years 1 and 2 − Dividends (which are zero here) Retained earnings at end of Year 2 = $0 + $1000 + $2400 = $3400

During the current year, Gomez Co. had beginning inventory of $2800 and ending inventory of $2400. The cost of goods sold was $5200. What is the amount of inventory purchased during the year? Answers: A.) $4800 B.) $7600 C.) $5200 D.) $10,400 E.) None of the above

A.) $4800 Answer Feedback: Beginning inventory + Purchases − Cost of goods sold = Ending inventory $2800 + Purchases − $5200 = $2400 Purchases = $2400 + $5200 − $2800 = $4800

The inventory records for Radford Co. reflected the following: Beginning inventory @ May 1 | 900 units @ $3.40 First purchase @ May 7 | 1000 units @ $3.60 Second purchase @ May 17 | 1200 units @ $3.70 Third purchase @ May 23 | 800 units @ $3.80 Sales @ May 31 | 3000 units @ $5.30 What is the amount of gross margin assuming the weighted-average inventory cost flow method? (Round your intermediate calculations to two decimal places.) Answers: A.) $5010 B.) $4500 C.) $11,400 D.) $6600 E.) None of the above.

A.) $5010 Response Feedback: Average cost per unit = Total cost of the inventory available ÷ Total number of units available Average cost per unit = [(900 × $3.40) + (1000 × $3.60) + (1200 × $3.70) + (800 × $3.80)] ÷ 3900 units = $3.63 per unit Cost of goods sold = Average cost per unit × Number of units sold Cost of goods sold = 3000 units × $3.63 per unit = 10,890 Gross margin = Sales − Cost of goods sold Gross margin =(3000 × $5.30) − 10,890 = $5010

The inventory records for Radford Co. reflected the following: Beginning inventory @ May 1 | 500 units @ $2.60 First purchase @ May 7 | 600 units @ $2.80 Second purchase @ May 17 | 800 units @ $2.90 Third purchase @ May 23 | 400 units @ $3.00 Sales @ May 31 | 6300 units @ $4.50 What is the amount of cost of goods sold assuming the LIFO cost flow method? Answers: A.) $5200 B.) $5400 C.) $5040 D.) $4680 E.) None of the above

A.) $5200 Response Feedback: The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold.Cost of goods sold = (400 × $3.00) + (800 × $2.90) + (600 × $2.80) = $5200

Darlington Company entered into the following business events during its first month of operations. The company uses the perpetual inventory system. 1) The company purchased $13,100 of merchandise on account under terms 4/10, n/30. 2) The company returned $2600 of merchandise to the supplier before payment was made. 3) The liability was paid within the discount period. 4) All of the merchandise purchased was sold for $20,200 cash. What effect will the return of merchandise to the supplier in event (2) have on Darlington's financial statements? Answers: A.) Assets and liabilities decrease by $2600. B.) None. It is an asset exchange transaction. C.) Assets and stockholders' equity decrease by $2600. D.) Assets and liabilities decrease by $2496. E.) None of these are correct.

A.) Assets and liabilities decrease by $2600. Response Feedback: The return of merchandise before payment has been made decreases assets (merchandise inventory) and liabilities (accounts payable) by the full invoiced amount of the merchandise returned of $2600.

Darlington Company entered into the following business events during its first month of operations. The company uses the perpetual inventory system. 1) The company purchased $14,000 of merchandise on account under terms 2/10, n/30. 2) The company returned $3500 of merchandise to the supplier before payment was made. 3) The liability was paid within the discount period. 4) All of the merchandise purchased was sold for $22,000 cash. What effect will the return of merchandise to the supplier in event (2) have on Darlington's financial statements? Answers: A.) Assets and liabilities decrease by $3500. B.) Assets and stockholders' equity decrease by $3500. C.) Assets and liabilities decrease by $3430. D.) None. It is an asset exchange transaction. E.) None of these are correct.

A.) Assets and liabilities decrease by $3500. Response Feedback: The return of merchandise before payment has been made decreases assets (merchandise inventory) and liabilities (accounts payable) by the full invoiced amount of the merchandise returned of $3500.

Darlington Company entered into the following business events during its first month of operations. The company uses the perpetual inventory system. 1) The company purchased $14,000 of merchandise on account under terms 2/10, n/30. 2) The company returned $3500 of merchandise to the supplier before payment was made. 3) The liability was paid within the discount period. 4) All of the merchandise purchased was sold for $22,000 cash. What effect will the return of merchandise to the supplier in event (2) have on Darlington's financial statements? Answers: A.) Assets and liabilities decrease by $3500. B.) Assets and stockholders' equity decrease by $3500. C.) Assets and liabilities decrease by $3430. D.) None. It is an asset exchange transaction. E.) None of these are correct.

When prices are rising, which method of inventory, if any, will result in the lowest relative net cash outflow (including the effects of taxes, if any)? Answers: A.) LIFO B.) Weighted average C.) FIFO D.) None of these; the choice of inventory methods does not affect cash flows.

A.) LIFO Response Feedback: When prices are rising, LIFO will result in the highest cost of goods sold (most recent purchases), and therefore will result in the lowest income tax expense. Income tax expense is the only cash flow affected by the choice of an inventory cost flow method

How does an error that results in an overstatement of ending inventory affect the elements of the company's financial statements in the current year? | Assets | = | Liab. | + | Equity | Rev. | - | Exp. | = | Net Inc. | Cash Flow A.| + | | NA. | | + | NA | | - | | + | NA B. |. - | | NA | | - | NA |. | + | |. - |. NA C. | + | | NA | | + | NA | | NA |. |. NA | +OA D. | + | | + | | NA | NA |. | + | | - | +OA Answers: A.) Option A B.) Option B C.) Option C D.) Option D E.) None of the above

A.) Option A Response Feedback: Overstating ending inventory will increase assets (inventory) and decreases expenses (cost of goods sold), which will increase net income and stockholders' equity. It will not affect the statement of cash flows.

On December 31, Year 1, Owings Corporation overstates the ending inventory by $5,000. How will this affect the amount of retained earnings shown on the balance sheet at December 31, Year 2? Answers: A.) Retained Earnings will be correctly stated. B.) Retained Earnings will be overstated by $5,000. C.) Retained Earnings will be understated by $5,000. D.) Cannot be determined with the above information. E.) None of the above reflect the affect on the amount of retained earnings shown on the balance sheet at December 31, Year 2

A.) Retained Earnings will be correctly stated. Response Feedback: Overstating inventory at the end of Year 1 will cause cost of goods sold to be understated for Year 1, which causes net income to be overstated. Since the Year 1 ending inventory becomes the Year 2 beginning inventory, cost of goods sold will be overstated for Year 2, which will cause net income to be understated. The overstatement of Year 1 net income will be offset by the understatement of Year 2 net income and retained earnings will be correctly stated at the end of Year 2.

Hoover Company purchased two identical inventory items. The item purchased first cost $40.00. The item purchased second cost $44.75. Then Hoover sold one of the inventory items for $75. Based on this information, which of the following statements is true? Answers: A.) The gross margin is $32.63 if Hoover uses the weighted-average cost flow method. B.) The ending inventory is $44.75 if Hoover uses the LIFO cost flow method. C.) The cost of goods sold is $44.75 if Hoover uses the FIFO cost flow method. D.) The cost of goods sold is $40.00 if Hoover uses the LIFO cost flow method. E.) None of the above.

A.) The gross margin is $32.63 if Hoover uses the weighted-average cost flow method. Response Feedback: Using weighted average, cost of goods sold is calculated by multiplying the average cost per unit by the number of units sold. If Hoover uses weighted-average, the average cost per unit is $42.38. Therefore, gross margin will be $32.63 (or Sales of $75 − Cost of goods sold of $42.38).The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold. If Hoover uses FIFO, cost of goods sold will be $40.00 (earliest purchase) rather than $44.75.The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold. If Hoover uses LIFO, cost of goods sold will be $44.75 (most recent purchase) and ending inventory will be $40.00 rather than $44.75.

The following information ($ in millions) comes from a recent annual report of Amazon.com, Inc.: Net sales $10,801 Total assets 4,448 End of year balance in cash 1,103 Total stockholders' equity 448 Gross profit (Sales - Cost of Sales) 2,648 Net increase in cash for the year 9 Operating expenses 2,061 Net operating cash flow 667 Other income (expense), net (23) Compute Amazon's cost of goods sold for the year. Answers: A.) $ 7,176 B.) $ 8,153 C.) $ 5,115 D.) $ 8,740 E.) None of the above.

B.) $ 8,153 Response Feedback: Gross profit = Net sales - Cost of goods sold Therefore, Cost of goods sold = Net sales - Gross profit = $10,801 - 2,648 = $8,153

The inventory records for Radford Co. reflected the following: Beginning inventory @ May 1 | 2000 units @ $5.60 First purchase @ May 7 | 2100 units @ $5.80 Second purchase @ May 17 | 2300 units @ $5.90 Third purchase @ May 23 | 1900 units @ $6.00 Sales @ May 31 | 6300 units @ $7.50 What is the amount of gross margin assuming the weighted-average inventory cost flow method? (Round your intermediate calculations to two decimal places.) Answers: A.) $37,800 B.) $10,521 C.) $9450 D.) $27,720

B.) $10,521 Response Feedback: Average cost per unit = Total cost of the inventory available ÷ Total number of units available Average cost per unit = [(2000 × $5.60) + (2100 × $5.80) + (2300 × $5.90) + (1900 × $6.00)] ÷ 8300 units = $5.83 per unit Cost of goods sold = Average cost per unit × Number of units sold Cost of goods sold = 6300 units × $5.83 per unit = 36,729 Gross margin = Sales − Cost of goods sold Gross margin =(6300 × $7.50) − 36,729 = $10,521

B.) $13,130 Response Feedback: The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold.Cost of goods sold = (2200 × $5.70) + (100 × $5.90) = $13,130

Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $12,700 of common stock for cash. 2) The company paid cash to purchase $7700 of inventory. 3) The company sold inventory that cost $5100 for $10,400 cash. 4) Operating expenses incurred and paid during the year, $4600. Sanchez Company engaged in the following transactions during Year 2: 1) The company paid cash to purchase $11,000 of inventory. 2) The company sold inventory that cost $9300 for $17,000 cash. 3) Operating expenses incurred and paid during the year, $5600. What is the amount of retained earnings that will be shown on the balance sheet at December 31, Year 2? Answers: A.) $12,500 B.) $2800 C.) $2100 D.) $7600 E.) None of the above.

B.) $2800 Response Feedback: Net income = Sales − Cost of goods sold − Operating expenses +/− Nonoperating items (which are zero here) Year 1 Net income = $10,400 − $5100 − $4600 = $700 Year 2 Net income = $17,000 − $9300 − $5600 = $2100 Retained earnings at end of Year 2 = Retained earnings at beginning of Year 1 + Net income for Years 1 and 2 − Dividends (which are zero here) Retained earnings at end of Year 2 = $0 + $700 + $2100 = $2800

B.) $2800 Response Feedback: Net income = Sales − Cost of goods sold − Operating expenses +/− Nonoperating items (which are zero here) Year 1 Net income = $10,400 − $5100 − $4600 = $700 Year 2 Net income = $17,000 − $9300 − $5600 = $2100Retained earnings at end of Year 2 = Retained earnings at beginning of Year 1 + Net income for Years 1 and 2 − Dividends (which are zero here) Retained earnings at end of Year 2 = $0 + $700 + $2100 = $2800

Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $13,700 of common stock for cash. 2) The company paid cash to purchase $8,200 of inventory. 3) The company sold inventory that cost $5,600 for $11,650 cash. 4) Operating expenses incurred and paid during the year, $5,100. Sanchez Company engaged in the following transactions during Year 2: 1) The company paid cash to purchase $12,000 of inventory. 2) The company sold inventory that cost $9,800 for $18,250 cash. 3) Operating expenses incurred and paid during the year, $6,100 Note: Sanchez uses the perpetual inventory system. What is the amount of inventory that will be shown on the balance sheet at December 31, Year 2? Answers: A.) $22,000 B.) $4,800 C.) $2,200 D.) $10,400 E.) None of the above

B.) $4,800 Answer Feedback: Inventory at end of Year 2 = Inventory at beginning of Year 1 + Purchases during Years 1 and 2 − Cost of goods sold during Years 1 and 2 Inventory at end of Year 2 = $0 + ($8,200 + $12,000) − ($5,600 + $9,800) = $4,800

Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $13,700 of common stock for cash. 2) The company paid cash to purchase $8,200 of inventory. 3) The company sold inventory that cost $5,600 for $11,650 cash. 4) Operating expenses incurred and paid during the year, $5,100. Sanchez Company engaged in the following transactions during Year 2: 1) The company paid cash to purchase $12,000 of inventory. 2) The company sold inventory that cost $9,800 for $18,250 cash. 3) Operating expenses incurred and paid during the year, $6,100. Note: Sanchez uses the perpetual inventory system. What is the amount of inventory that will be shown on the balance sheet at December 31, Year 2? Answers: A.) $22,000 B.) $4,800 C.) $2,200 D.) $10,400 E.) None of the above

Darlington Company entered into the following business events during its first month of operations. The company uses the perpetual inventory system. 1) The company purchased $12,200 of merchandise on account under terms 2/10, n/30. 2) The company returned $1,700 of merchandise to the supplier before payment was made. 3) The liability was paid within the discount period. 4) All of the merchandise purchased was sold for $18,400 cash. What is the gross margin that results from these four transactions? Answers: A.) $8,144 B.) $8,110 C.) $6,200 D.) $6,076 E.) None of the above

B.) $8,110 Answer Feedback: Purchase discount = (List price of purchase − List price of return) × discount percentage Purchase discount = ($12,200 − $1,700) × 0.02 = $210 Cost of goods sold = List price of purchase − List price of return − Purchase discount Cost of goods sold = $12,200 − $1,700 − $210 = $10,290 Gross margin = Net sales − Cost of goods sold Gross margin = $18,400 − $10,290 = $8,110

B.) 31.0 Response Feedback: Inventory turnover = Cost of goods sold ÷ Inventory Inventory turnover = $9,022,500 ÷ $767,000 = 11.76 Average number of days to sell inventory = 365 ÷ Inventory turnover Average number of days to sell inventory = 365 ÷ 11.76 = 31.0 Days

Blake Company purchased two identical inventory items. The item purchased first cost $32.00, and the item purchased second cost $33.00. Blake sold one of the items for $60.00. Which of the following statements is true? Answers: A.) Gross margin will be higher if Blake uses LIFO rather than the FIFO inventory cost flow method. B.) Ending inventory will be lower if Blake uses the weighted-average rather than the FIFO inventory cost flow method. C.) The dollar amount assigned to ending inventory will be the same no matter which inventory cost flow method is used. D.) Cost of goods sold will be higher if Blake uses the FIFO rather than the weighted-average inventory cost flow method.

B.) Ending inventory will be lower if Blake uses the weighted-average rather than the FIFO inventory cost flow method. Response Feedback: If Blake uses the weighted-average inventory cost flow method, ending inventory will be $32.50. If the company uses FIFO, ending inventory will be $33.00.

Which of the following items is not a product cost? A.) Transportation cost on merchandise purchased from suppliers B.) Freight cost on goods delivered FOB destination to customers C.) Cost of merchandise purchased for resale D.) All of these answer choices are product costs

B.) Freight cost on goods delivered FOB destination to customers Response Feedback:Freight cost on goods delivered to customers FOB destination is a period cost (expense) called transportation-out

Faust Company uses the perpetual inventory system. Faust sold goods that cost $5,900 for $9,800. The sale was made on account. What is the net effect of the sale on the company's financial statements? (Consider the effects of both parts of this event.) Answers: A.) Increase total assets by $9,800 B.) Increase total assets by $3,900 C.) Increase total assets by $5,900 D.) Increase total stockholders' equity by $9,800 E.) None of the above

B.) Increase total assets by $3,900 Answer Feedback: Recording the sale increases assets (accounts receivable) and stockholders' equity (retained earnings) by $9,800. Sales revenue and net income increase. Recording the $5,900 cost of the merchandise decreases assets (merchandise inventory) and stockholders' equity (retained earnings). The expense (cost of goods sold) increases and net income decreases by that same amount. The net effect on assets and stockholders' equity is an increase to each of $3,900 (or selling price of $9,800 − cost of goods sold of $5,900).

At a time of declining prices, which inventory cost flow method will result in the highest ending inventory? Answers: A.) FIFO B.) LIFO C.) Weighted-average D.) Either weighted-average or FIFO E.) None of the above.

B.) LIFO Response Feedback: In a period of declining prices, LIFO will result in the lowest cost of goods sold (most recent purchases) and the highest ending inventory (earliest purchases).

What happens when merchandise is delivered FOB shipping point? Answers: A.) The seller records transportation-out expense. B.) The buyer pays the freight cost. C.) The seller pays the freight cost. D.) The buyer records transportation cost as an expense. E.) None of the above.

B.) The buyer pays the freight cost. Answer Feedback: If goods are delivered FOB shipping point, the buyer is responsible for the freight cost.

What is the effect of an entry to record the purchase of inventory on account under the perpetual inventory system? Answers: A.) Total liabilities increase B.) Total assets and total liabilities increase C.) Total assets are unaffected D.) Total assets increase E.) None of the above.

B.) Total assets and total liabilities increase Answer Feedback: The purchase of inventory on account increases assets (merchandise inventory) and liabilities (accounts payable).

Galaxy Company sold merchandise costing $2,900 for $4,800 cash. The merchandise was later returned by the customer for a refund. The company uses the perpetual inventory system. What effect will the sales return have on the financial statements? (Consider the effects of both parts of this event.) Answers: A.) Total assets and total stockholders' equity decrease by $4,800. B.) Total assets and total stockholders' equity decrease by $1,900. C.) Total assets and total stockholders' equity increase by $1,900. D.) Total assets decrease by $4,800 and total stockholders' equity decreases by $2,900. E.) None of the above.

B.) Total assets and total stockholders' equity decrease by $1,900. Answer Feedback: The sales return decreases assets (cash) and stockholders' equity (retained earnings) by $4,800. Sales and net income decrease by that same amount. Because the company got the inventory back, the sales return increases assets (merchandise inventory) and stockholders' equity (retained earnings) by $2,900. The expense (cost of goods sold) decreases and net income increases by that same amount. The net effect of both parts of this business event is a decrease to assets and stockholders' equity of $1,900 (or $4,800 − $2,900). Question 20

The Wilson Company purchased $44,000 of merchandise from the Poole Wholesale Company. Wilson also paid $3,000 for freight costs to have the goods shipped to its location. The company uses the perpetual inventory system. Which of the following summarizes the effects of the journal entries required to record these transactions for The Wilson Company? (Consider the effects of both business events.) Answers: A.) Total debits to the inventory account would be $41,000. B.) Total debits to the inventory account would be $47,000. C.) Transportation-in would be debited for $3,000. D.) Total debits to the inventory account would be $44,000. E.) None of the above.

B.) Total debits to the inventory account would be $47,000. Answer Feedback: The inventory account would be debited (increased) for $44,000 for the purchase of the merchandise and it would also be debited (increased) for $3,000 for the payment for freight costs (transportation-in). As a result, total debits to the inventory account would be $47,000.

The inventory records for Radford Co. reflected the following: Beginning inventory @ May 1 | 1000 units @ $3.60 First purchase @ May 7 | 1100 units @ $3.80 Second purchase @ May 17 | 1300 units @ $3.90 Third purchase @ May 23 | 900 units @ $4.00 Sales @ May 31 | 3300 units @ $5.50 What is the amount of cost of goods sold assuming the LIFO cost flow method? Answers: A.) $12,540 B.) $11,880 C.) $12,850 D.) $13,200

C.) $12,850 Response Feedback: The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold.Cost of goods sold = (900 × $4.00) + (1300 × $3.90) + (1100 × $3.80) = $12,850

Delta Diamonds uses a periodic inventory system. The company had five one-carat diamonds available for sale this year: one was purchased on June 1 for $850, two were purchased on July 9 for $950 each, and two were purchased on September 23 for $1000 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using the specific identification method, its ending inventory (after the December 24 sale) equals: Answers: A.) $3900. B.) None of the above C.) $3800. D.) $2750. E.) $950.

C.) $3800. Response Feedback: Ending inventory = Cost of one purchased June 1 + Cost of one purchased July 9 + Cost of two purchased September 23 = ($850 × 1) + ($950 × 1) + ($1000 × 2) = $3800

Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $12,500 of common stock for cash. 2) The company paid cash to purchase $7,600 of inventory. 3) The company sold inventory that cost $5,000 for $10,150 cash. 4) Operating expenses incurred and paid during the year, $4,500. Sanchez Company engaged in the following transactions during Year 2: 1) The company paid cash to purchase $10,800 of inventory. 2) The company sold inventory that cost $9,200 for $16,750 cash. 3) Operating expenses incurred and paid during the year, $5,500. Note: Sanchez uses the perpetual inventory system. What is the amount of inventory that will be shown on the balance sheet at December 31, Year 2? Answers: A.) $9,200 B.) $1,600 C.) $4,200 D.) $19,600 E.) None of the above

C.) $4,200 Answer Feedback: Inventory at end of Year 2 = Inventory at beginning of Year 1 + Purchases during Years 1 and 2 − Cost of goods sold during Years 1 and 2 Inventory at end of Year 2 = $0 + ($7,600 + $10,800) − ($5,000 + $9,200) = $4,200

Carson Company has an inventory turnover of 13.25, and its average inventory amounts to $5,100,000. What is the amount of cost of goods sold? Answers: A.) $76,500 B.) $384,905.66 C.) $67,575,000 D.) $38,490,566 E.) None of the above.

C.) $67,575,000 Response Feedback: Inventory turnover = Cost of goods sold ÷ Inventory13.25 = Cost of goods sold ÷ $5,100,000Cost of goods sold = 13.25 × $5,100,000 = $67,575,000

Faust Company uses the perpetual inventory system. Faust sold goods that cost $5,100 for $8,200. The sale was made on account. What is the net effect of the sale on the company's financial statements? (Consider the effects of both parts of this event.) Answers: A.) Increase total assets by $5,100 B.) Increase total stockholders' equity by $8,200 C.) Increase total assets by $3,100 D.) Increase total assets by $8,200 E.) None of the above

C.) Increase total assets by $3,100 Answer Feedback: Recording the sale increases assets (accounts receivable) and stockholders' equity (retained earnings) by $8,200. Sales revenue and net income increase. Recording the $5,100 cost of the merchandise decreases assets (merchandise inventory) and stockholders' equity (retained earnings). The expense (cost of goods sold) increases and net income decreases by that same amount. The net effect on assets and stockholders' equity is an increase to each of $3,100 (or selling price of $8,200 − cost of goods sold of $5,100).

What happens when a company is operating in an inflationary environment? Answers: A.) The company's cost of goods sold will be lower if it uses LIFO as opposed to FIFO. B.) The company's net income will be higher if it uses LIFO than if it uses FIFO. C.) The company's assets will be lower if it uses LIFO as opposed to FIFO cost flow. D.) The company's net income will be the same regardless of whether LIFO or FIFO is used. E.) None of the above happen when a company is operating in an inflationary environment.

C.) The company's assets will be lower if it uses LIFO as opposed to FIFO cost flow. Response Feedback: In an inflationary environment, prices are rising. LIFO will produce the lowest ending inventory (earliest purchases) compared with FIFO.

What happens when merchandise is delivered FOB Destination? Answers: A.) The buyer pays the freight cost. B.) The seller records transportation-out expense. C.) The seller pays the freight cost and records an expense. D.) The seller pays the freight cost. E.) None of the above.

C.) The seller pays the freight cost and records an expense. Answer Feedback: If goods are delivered FOB destination, the seller is responsible for the freight costs. The seller will record an expense (transportation-out).

Galaxy Company sold merchandise costing $3,200 for $5,400 cash. The merchandise was later returned by the customer for a refund. The company uses the perpetual inventory system. What effect will the sales return have on the financial statements? (Consider the effects of both parts of this event.) Answers: A.) Total assets and total stockholders' equity decrease by $5,400. B.) Total assets decrease by $5,400 and total stockholders' equity decreases by $3,200. C.) Total assets and total stockholders' equity decrease by $2,200. D.) Total assets and total stockholders' equity increase by $2,200. E.) None of the above.

C.) Total assets and total stockholders' equity decrease by $2,200. Answer Feedback: The sales return decreases assets (cash) and stockholders' equity (retained earnings) by $5,400. Sales and net income decrease by that same amount. Because the company got the inventory back, the sales return increases assets (merchandise inventory) and stockholders' equity (retained earnings) by $3,200. The expense (cost of goods sold) decreases and net income increases by that same amount. The net effect of both parts of this business event is a decrease to assets and stockholders' equity of $2,200 (or $5,400 − $3,200).

Galaxy Company sold merchandise costing $3700 for $6400 cash. The merchandise was later returned by the customer for a refund. The company uses the perpetual inventory system. What effect will the sales return have on the financial statements? (Consider the effects of both parts of this event.) Answers: A.) Total assets decrease by $6400 and total stockholders' equity decreases by $3700. B.) Total assets and total stockholders' equity decrease by $6400. C.) Total assets and total stockholders' equity decrease by $2700. D.) Total assets and total stockholders' equity increase by $2700.

C.) Total assets and total stockholders' equity decrease by $2700. Answer Feedback: The sales return decreases assets (cash) and stockholders' equity (retained earnings) by $6400. Sales and net income decrease by that same amount. Because the company got the inventory back, the sales return increases assets (merchandise inventory) and stockholders' equity (retained earnings) by $3700. The expense (cost of goods sold) decreases and net income increases by that same amount. The net effect of both parts of this business event is a decrease to assets and stockholders' equity of $2700 (or $6400 − $3700).

When are product costs matched directly with sales revenue? Answers: A.) In the period immediately following the purchase B.) In the period immediately following the sale C.) When the merchandise is sold D.) When the merchandise is purchased

C.) When the merchandise is sold Response Feedback: Because inventory items are referred to as products, inventory costs are frequently called product costs. Product costs are matched directly with sales revenue, (that is, expensed) when inventory is sold, regardless of when it was purchased.

The following information ($ in millions) comes from a recent annual report of Amazon.com, Inc.: Net sales $10,864 Total assets 4,420 End of year balance in cash 1,061 Total stockholders' equity 503 Gross profit (Sales - Cost of Sales) 2,551 Net increase in cash for the year 25 Operating expenses 2,059 Net operating cash flow 757 Other income (expense), net (16) Compute Amazon's cost of goods sold for the year. Answers: A.) $ 8,805 B.) $ 7,236 C.) $ 5,177 D.) $ 8,313 E.) None of the above.

D.) $ 8,313 Response Feedback:Gross profit = Net sales - Cost of goods sold Therefore, Cost of goods sold = Net sales - Gross profit = $10,864 - 2,551 = $8,313

Sparks Furniture Company carries three lines of sofas. Information about the sofa inventory as of the end of its most recent fiscal year follows. If LCM is applied to each separate product line, what is the amount of the adjustment that must be made to the company's inventory? Product Line | Cost per Unit | Market Value per Unit | Quantity Rustic $765 $855 320 Mediterranean 665 735 430 Contemporary 1000 700 340 Answers: A.) $43,100 B.) $58,900 C.) $14,300 D.) $102,000 E.) None of the above

D.) $102,000

Sparks Furniture Company carries three lines of sofas. Information about the sofa inventory as of the end of its most recent fiscal year follows. If LCM is applied to each separate product line, what is the amount of the adjustment that must be made to the company's inventory? Product Line | Cost per Unit | Market Value per Unit | Quantity Rustic | $710 | $745 | 210 Mediterranean | 610 | 625 | 320 Contemporary | 960 | 840 | 285 Answers: A.) None of the above B.) $22,050 C.) $12,150 D.) $34,200 E.) $14,700

D.) $34,200

Sparks Furniture Company carries three lines of sofas. Information about the sofa inventory as of the end of its most recent fiscal year follows. If LCM is applied to each separate product line, what is the amount of the adjustment that must be made to the company's inventory? Product Line | Cost per Unit | Market Value per Unit | Quantity Rustic. | $705 | $735 | 200 Mediterranean | 605 | 615 | 310 Contemporary | 955 | 830 | 280 Answers: A.) $9100 B.) $19,900 C.) None of the above D.) $35,000 E.) $25,900

D.) $35,000

D.) $3650 Response Feedback: The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold.Cost of goods sold = (1000 × $3.30) + (100 × $3.50) = $3650

During the current year, Gomez Co. had beginning inventory of $2,000 and ending inventory of $1,600. The cost of goods sold was $4,400. What is the amount of inventory purchased during the year? Answers: A.) $6,000 B.) $4,400 C.) $8,000 D.) $4,000 E.) None of the above

D.) $4,000 Answer Feedback: Beginning inventory + Purchases − Cost of goods sold = Ending inventory $2,000 + Purchases − $4,400 = $1,600 Purchases = $1,600 + $4,400 − $2,000 = $4,000

The inventory records for Radford Co. reflected the following: Beginning inventory @ May 1 | 800 units @ $3.20 First purchase @ May 7 | 900 units @ $3.40 Second purchase @ May 17 | 1100 units @ $3.50 Third purchase @ May 23 | 700 units @ $3.60 Sales @ May 31 | 2700 units @ $5.10 What is the amount of gross margin assuming the weighted-average inventory cost flow method? (Round your intermediate calculations to two decimal places.) Answers: A.) $5400 B.) $9720 C.) $4050 D.) $4509 E.) None of the above.

D.) $4509 Response Feedback: Average cost per unit = Total cost of the inventory available ÷ Total number of units available Average cost per unit = [(800 × $3.20) + (900 × $3.40) + (1100 × $3.50) + (700 × $3.60)] ÷ 3500 units = $3.43 per unit Cost of goods sold = Average cost per unit × Number of units sold Cost of goods sold = 2700 units × $3.43 per unit = 9261 Gross margin = Sales − Cost of goods sold Gross margin =(2700 × $5.10) − 9261 = $4509

Glasgow Enterprises started the period with 60 units in beginning inventory that cost $1.70 each. During the period, the company purchased inventory items as follows: Purchase | No. of Items | Cost 1 380 $2.20 2 110 $2.30 3 50 $2.70 Glasgow sold 255 units after purchase 3 for $7.20 each. What is Glasgow's cost of goods sold under FIFO? Answers: A.) $689 B.) $434 C.) $607 D.) $531 E.) None of the above.

D.) $531 Response Feedback: The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold. Cost of goods sold = (60 × $1.70) + (195 × $2.20) = $531

Carson Company has an inventory turnover of 12.75, and its average inventory amounts to $5,400,000. What is the amount of cost of goods sold? Answers: A.) $42,352,941.2 B.) $81,000 C.) $423,529.412 D.) $68,850,000 E.) None of the above.

D.) $68,850,000 Response Feedback: Inventory turnover = Cost of goods sold ÷ Inventory 12.75 = Cost of goods sold ÷ $5,400,000 Cost of goods sold = 12.75 × $5,400,000 = $68,850,000

D.) $6900 Response Feedback: The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold.Cost of goods sold = (1500 × $4.30) + (100 × $4.50) = $6900

Darlington Company entered into the following business events during its first month of operations. The company uses the perpetual inventory system. 1) The company purchased $12,300 of merchandise on account under terms 4/10, n/30. 2) The company returned $1,800 of merchandise to the supplier before payment was made. 3) The liability was paid within the discount period. 4) All of the merchandise purchased was sold for $18,600 cash. What is the gross margin that results from these four transactions? Answers: A.) $6,048 B.) $8,592 C.) $6,300 D.) $8,520 E.) None of the above

D.) $8,520 Answer Feedback: Purchase discount = (List price of purchase − List price of return) × discount percentage Purchase discount = ($12,300 − $1,800) × 0.04 = $420 Cost of goods sold = List price of purchase − List price of return − Purchase discount Cost of goods sold = $12,300 − $1,800 − $420 = $10,080 Gross margin = Net sales − Cost of goods sold Gross margin = $18,600 − $10,080 = $8,520

Darlington Company entered into the following business events during its first month of operations. The company uses the perpetual inventory system. 1) The company purchased $12,600 of merchandise on account under terms 2/10, n/30. 2) The company returned $2100 of merchandise to the supplier before payment was made. 3) The liability was paid within the discount period. 4) All of the merchandise purchased was sold for $19,200 cash. What is the gross margin that results from these four transactions? Answers: A.) $8952 B.) $6468 C.) $6600 D.) $8910 E.) None of the above

D.) $8910 Answer Feedback:Purchase discount = (List price of purchase − List price of return) × discount percentage Purchase discount = ($12,600 − $2100) × 0.02 = $210 Cost of goods sold = List price of purchase − List price of return − Purchase discount Cost of goods sold = $12,600 − $2100 − $210 = $10,290 Gross margin = Net sales − Cost of goods sold Gross margin = $19,200 − $10,290 = $8910

Blake Company purchased two identical inventory items. The item purchased first cost $18.00, and the item purchased second cost $19.00. Blake sold one of the items for $32.00. Which of the following statements is true? Answers: A.) Cost of goods sold will be higher if Blake uses the FIFO rather than the weighted-average inventory cost flow method. B.) The dollar amount assigned to ending inventory will be the same no matter which inventory cost flow method is used. C.) Gross margin will be higher if Blake uses LIFO rather than the FIFO inventory cost flow method. D.) Ending inventory will be lower if Blake uses the weighted-average rather than the FIFO inventory cost flow method.

D.) Ending inventory will be lower if Blake uses the weighted-average rather than the FIFO inventory cost flow method. Response Feedback: If Blake uses the weighted-average inventory cost flow method, ending inventory will be $18.50. If the company uses FIFO, ending inventory will be $19.00.

Faust Company uses the perpetual inventory system. Faust sold goods that cost $6,000 for $10,000. The sale was made on account. What is the net effect of the sale on the company's financial statements? (Consider the effects of both parts of this event.) Answers: A.) Increase total stockholders' equity by $10,000 B.) Increase total assets by $10,000 C.) Increase total assets by $6,000 D.) Increase total assets by $4,000 E.) None of the above

D.) Increase total assets by $4,000 Answer Feedback: Recording the sale increases assets (accounts receivable) and stockholders' equity (retained earnings) by $10,000. Sales revenue and net income increase. Recording the $6,000 cost of the merchandise decreases assets (merchandise inventory) and stockholders' equity (retained earnings). The expense (cost of goods sold) increases and net income decreases by that same amount. The net effect on assets and stockholders' equity is an increase to each of $4,000 (or selling price of $10,000 − cost of goods sold of $6,000).

West Corporation's Year 1 ending inventory was overstated by $20,000; however, ending inventory for Year 2 was correct. Which of the following statements is correct? Answers: A.) None of the above are correct. B.) Retained earnings at the end of Year 2 is overstated. C.) Cost of goods sold for Year 1 is overstated. D.) Net income for Year 1 is understated. E.) Cost of goods sold for Year 2 is overstated.

E.) Cost of goods sold for Year 2 is overstated. Response Feedback: Overstating inventory at the end of Year 1, but correctly reporting inventory at the end of Year 2 will cause cost of goods sold to be understated for Year 1 and overstated for Year 2. However, by the end of Year 2, retained earnings will be correctly stated.

Abbott Company purchased $6,800 of merchandise inventory on account. Abbott uses the perpetual inventory system. Which of the following entries would be required to record this transaction?

Inventory 6,800 Accounts Payable 6,800 Answer Feedback: The purchase of inventory on account is recorded with a debit to Inventory (to increase this asset account) and a credit to Accounts Payable (to increase this liability account).

Abbott Company purchased $7,200 of merchandise inventory on account. Abbott uses the perpetual inventory system. Which of the following entries would be required to record this transaction?

Inventory 7,200 Accounts Payable 7,200

Abbott Company purchased $7300 of merchandise inventory on account. Abbott uses the perpetual inventory system. Which of the following entries would be required to record this transaction?

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