Accounting Ch 5 and 6

A company just starting business made the following purchases in August: August 1 300 units $1,560 August 12 400 units 2,340 August 24 400 units 2,520 August 30 300 units 1,980 1,400 units $8,400 A physical count of the inventory on August 31 reveals that there are 500 units on hand. Using the FIFO inventory method in a perpetual inventory system, how much is the value of the ending inventory on August 31?

(200 × $6.30) + (300 × $6.60) = $3,240

Kam Company has the following units and costs: Units Unit Cost Inventory, Jan. 1 8,000 $11 Purchase, June 19 13,000 $12 Purchase, Nov. 8 5,000 $13 If 9,000 units are on hand at December 31, what is the cost of the ending inventory under FIFO using a periodic inventory system?

(5,000 × $13) + (4,000 × $12) = $113,000.

Kam Company has the following units and costs: Units Unit Cost Inventory, Jan. 1 8,000 $11 Purchase, June 19 13,000 $12 Purchase, Nov. 8 5,000 $13 If 9,000 units are on hand at December 31, what is the cost of the ending inventory under LIFO using a periodic system?

(8,000 × $11) + (1,000 × $12) = $100,000

Carlos Company had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales of $475,000. How much is Carlos' days in inventory?

121.7 days

If a firm is using a perpetual inventory system and is using the average-cost method of valuation, when is a new average cost computed?

After each purchase

If the ending inventory is overstated, what occurs? =Assets are overstated and the cost of goods sold is overstated. =Assets are overstated and the net income is understated. =Assets are overstated and stockholders' equity is overstated. =Assets are overstated and the liabilities are understated.

Assets are overstated and stockholders' equity is overstated.

When is a physical inventory usually taken?

At the end of the company's fiscal year

At December 31, 2012, Sunrise Company's inventory records indicated a balance of $752,000. Upon further investigation it was determined that this amount included the following: • $112,000 in inventory purchases made by Sunrise shipped from the seller December 27, 2012 terms FOB destination, but not due to be received until January 2, 2013 • $74,000 in goods sold by Sunrise with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6, 2013 • $6,000 of goods received on consignment from Wallwood Company What is Sunrise's correct ending inventory balance at December 31, 2012?

Corrected balance = $752,000 - $412,000 - $6,000 = $634,000.

Which of these tranasctions would cause the inventory turnover ratio to increase the most? =Keeping the amount of inventory on hand constant but increasing sales =Increasing the amount of inventory on hand =Keeping the amount of inventory on hand constant but decreasing sales =Decreasing the amount of inventory on hand and increasing sales.

Decreasing the amount of inventory on hand and increasing sales.

Which statement is true in a perpetual inventory system? =LIFO cost of goods sold will be the same as in a periodic inventory system. =FIFO cost of goods sold will be the same as in a periodic inventory system. =A new average is computed under the average cost method after each sale. =Average costs are based entirely on unit-cost simple averages.

FIFO cost of goods sold will be the same as in a periodic inventory system.

Which of the following is true of the FIFO inventory method? =It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold. =It assumes that the cost of the earliest units purchased are the first to be allocated to the ending inventory. =It assumes that the cost of the earliest units purchased are the last to be allocated to the beginning inventory. =It assumes that the cost of the earliest units purchased are the last to be allocated to cost of goods sold.

It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold.

If there is an error in the ending inventory affecting the net income of the current period, what will happen to the net income of the next accounting period? =Cannot be determined from the information given. =It will have no effect on the net income of the next accounting period. =It will have the reverse effect on the net income during the next accounting period. =If net income was overstated in the current period, it will be overstated in the next period.

It will have the reverse effect on the net income during the next accounting period.

With the assumption of costs and prices generally rising, which of the following is correct? =FIFO provides the closest cost of goods sold to replacement cost. =LIFO provides the closest valuation of inventory on the balance sheet to replacement cost. =Specific identification method provides the closest cost of goods sold to replacement cost on the income statement. =LIFO provides the closest valuation of cost of goods sold to replacement cost of inventory sold.

LIFO provides the closest valuation of cost of goods sold to replacement cost of inventory sold.

Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods? -IFO reserve -Current replacement cost -FIFO reserve -Inventory turnover ratio

LIFO reserve

Which of the following not an acceptable inventory costing method? =Last-in, last-out =Average cost =Last-in, first-out =First-in, first-out

Last-in, last-out

Which is true if the ending inventory is overstated? =Net income will be overstated and the stockholders' equity will be understated. =Net income will be overstated and the stockholders' equity will be overstated. =Net income will be understated and the stockholders' equity will be understated. =Net income will be understated and the stockholders' equity will be overstated.

Net income will be overstated and the stockholders' equity will be overstated.

Which one of the following is not a consideration that affects the selection of an inventory costing method? =Balance sheet effects =Income statement effects =Perpetual versus periodic inventory system =Tax effects

Perpetual versus periodic inventory system

A company just starting business made the following inventory transactions in August: Purchase on August 1 300 units $1,560 Sale on August 8 200 units 3,400 Purchase on August 12 400 units 1,340 Sale on August 24 350 units 5,950 Using the LIFO inventory method, how much is cost of goods sold for August using a perpetual inventory system?

Sale on August 8: 200 × $5.20 - $1,040. Sale on August 24: 350 units ×$3.35 = $1,172.50 Total cost of goods sold = $2,212.50.

Which of the following statements is true? a. LIFO inventory valuation requires physical flow of goods to be representative of the cost flow. b. FIFO inventory valuation requires physical flow of goods to be representative of the cost flow. c. Specific identification method inventory valuation requires physical flow of goods to be representative of the cost flow. d. All of the above statements are correct.

Specific identification method inventory valuation requires physical flow of goods to be representative of the cost flow.

How do the results under FIFO in a perpetual system compare to the results using a periodic system?

They are the same.

A company just starting business made the following inventory transactions in August: Purchase on August 1 350 units $1,820 Sale on August 8 200 units 3,400 Purchase on August 12 400 units 1,340 Sale on August 24 350 units 5,950 Using the average cost perpetual inventory method, how much is the average cost of the units sold on August 24?

[(150 × $5.20) + (400 × $3.35)] / (150 + 400) = $3.85

Cost of goods purchased is $540,000, ending inventory is $20,000, and cost of goods sold is $560,000. How much is beginning inventory?

$20,000 + $540,000 -$520,000 = $40,000.

In 2012, a company shows inventory of $250,000 using LIFO. If the company had used FIFO, its inventories would have been higher by $40,000 and $30,000 in 2012 and 2011, respectively. How much is the company's LIFO reserve in 2012?

$40,000

Which one of the following statements is true? a) A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications. b) A merchandising company will normally have raw materials and merchandise inventory as inventory account classifications. c) A merchandising company will normally have raw materials, work in process, and finished goods as inventory account classifications. d) A manufacturing company will normally have raw materials, work in process, and merchandise inventory as inventory account classifications.

a) A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications.

Which of the following is not considered in computing net cost of purchases? a) Freight paid on goods shipped to customers b) Purchases returns and allowances c) Purchases d) Freight paid on purchased goods

a) Freight paid on goods shipped to customers

Which of the following statements is true regarding the profit margin ratio? a) If the profit margin ratio has a higher value, this suggests favorable return on each dollar of sales. b) The profit margin ratio can be improved by decreasing the gross profit rate and/or controlling operating expenses and other costs c) The profit margin ratio does not vary across industries. d) Discount stores with high merchandise turnover generally have higher profit margins.

a) If the profit margin ratio has a higher value, this suggests favorable return on each dollar of sales.

Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods? a) LIFO reserve b) Current replacement cost c) Inventory turnover ratio d) FIFO reserve

a) LIFO reserve

Which is true if the ending inventory is overstated? a) Net income will be overstated and the stockholders' equity will be overstated. b) Net income will be understated and the stockholders' equity will be understated. c) Net income will be understated and the stockholders' equity will be overstated. d) Net income will be overstated and the stockholders' equity will be understated.

a) Net income will be overstated and the stockholders' equity will be overstated.

When using a periodic inventory system, which statement concerning the computation of cost of goods sold is correct? a) The amount of ending inventory is determined on the last day of the accounting period. b) Cost of Goods Available for Sale includes net purchases plus the ending inventory. c) Purchases represent cash paid for purchases during the accounting period. d) Freight in is ignored.

a) The amount of ending inventory is determined on the last day of the accounting period.

What is the LIFO reserve? a) The difference between the value of the inventory under LIFO and the value under FIFO b) An amount used to adjust the LIFO inventory to historical cost c) An amount used to adjust inventory to the lower-of-cost-or-market d) The difference between cost of goods sold under LIFO compared to FIFO

a) The difference between the value of the inventory under LIFO and the value under FIFO

If a firm is using a perpetual inventory system and is using the average-cost method of valuation, when is a new average cost computed? a) After each purchase b) After each sale c) At the end of the accounting period d) At the end of the month

a) after each purchase

The amount of cost of good available for sale during the year depends on the amounts of a) beginning merchandise inventory and net costs of purchases. b) beginning merchandise inventory, net cost of purchases, and ending merchandise inventory. c) beginning merchandise inventory, cost of goods sold, and ending merchandise inventory. d) beginning merchandise inventory and cost of goods sold.

a) beginning merchandise inventory and net costs of purchases.

For a jewelry retailer, which is an example of Other Revenues and Gains? a) gain on sale of display cases b) repair revenue c) unearned revenue d) discount received for paying for merchandise inventory within the discount period

a) gain on sale of display cases

Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in which account? a) Inventory b) Freight-in c) Freight-out d) Freight Expense

a) inventory

A company just starting business made the following purchases in August: August 1 300 units $1,560 August 12 400 units 2,340 August 24 400 units 2,520 August 30 300 units 1,980 1,400 units $8,400 A physical count of the inventory on August 31 reveals that there are 500 units on hand. Using the FIFO inventory method in a perpetual inventory system, how much is the value of the ending inventory on August 31? a) $5,670 b) $3,240 c) $5,160 d) $2,730

b) $3,240

Hagger Sounds has accumulated the following cost and market data on March 31: Cost Data Market Data iPods $24,000 $20,400 Cell phones18,000 19,000 DVD's 28,000 25,600 Using the lower-of-cost-or-market , how much is the value of the ending inventory? a) $71,000 b) $64,000 c) $70,000. d) $65,000

b) $64,000

Carlos Company had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales of $475,000. How much is Carlos' days in inventory? a) 102.5 days b) 121.7 days c) 84.5 days d) 73 days

b) 121.7 days

As a result of a thorough physical inventory, Railway Company determined that it had inventory worth $180,000 at December 31, 2010. This count did not take into consideration the following transactions: • Rogers Consignment store currently has goods worth $35,000 on its sales floor that belong to Railway but are being sold on consignment by Rogers. The selling price of these goods is $50,000. • Railway purchased $13,000 of goods that were shipped on December 27, FOB destination, that will be received by Railway on January 3. Determine the correct amount of inventory that Railway should report. a) $228,000 b) $215,000 c) $193,000 d) $230,000

b) 215,000

What accounting concept is employed when using the lower-of-cost-or-market valuation? a) Matching b) Conservatism c) Revenue recognition d) Full disclosure

b) Conservatism

Which statement is true in a perpetual inventory system? a) A new average is computed under the average cost method after each sale. b) FIFO cost of goods sold will be the same as in a periodic inventory system. c) LIFO cost of goods sold will be the same as in a periodic inventory system. d) Average costs are based entirely on unit-cost simple averages.

b) FIFO cost of goods sold will be the same as in a periodic inventory system.

Which one of the following is not a consideration that affects the selection of an inventory costing method? a) Tax effects b) Perpetual versus periodic inventory system c) Balance sheet effects d) Income statement effects

b) Perpetual versus periodic inventory system

Adams Company is a retailer and uses a perpetual inventory system. Which statement is correct? a) Discounts taken by Adams Company's customers are credited to Inventory. b) Returns of merchandise inventory by Adams Company to a manufacturer are credited to Inventory. c) Freight paid to get merchandise inventory to Adams Company's store is debited to Freight Expense. d) A return of merchandise inventory by one of Adams Company's customers is credited to Inventory.

b) Returns of merchandise inventory by Adams Company to a manufacturer are credited to Inventory.

Which of the following provides the best rationale regarding analysts' views about the information value of the gross profit rate versus the gross profit amount? a) The gross profit amount is more informative than the gross profit rate because it is a dollar amount rather than a ratio. b) The gross profit amount is less informative than the gross profit rate because the latter presents a meaningful relationship between gross profit and net sales. c) The gross profit amount is more informative than the gross profit rate because high volume operations are able to calculate the gross profit rate but not the gross profit amount. d) The gross profit amount is more informative than the gross profit rate because the gross profit rate is only used to describe a few industries while the gross profit amount is universally used.

b) The gross profit amount is less informative than the gross profit rate because the latter presents a meaningful relationship between gross profit and net sales.

All of the following statements are true regarding the periodic inventory system except: a) Under the periodic inventory system, the balance in ending inventory is calculated at the end of the period. b) Using the periodic inventory system affects the balance sheet contents differently than when the perpetual system is used. c) Under the periodic system, a company uses separate accounts to record freight costs, returns, and discounts. d) Under the periodic inventory system, the balance of cost of goods sold is calculated at the end of the period.

b) Using the periodic inventory system affects the balance sheet contents differently than when the perpetual system is used.

The Sales Returns and Allowances account is classified as a(n) a) expense account. b) contra revenue account. c) asset account. d) contra asset account.

b) contra revenue account

When sales of merchandise are made for cash, the transaction may be recorded by the following entry a) debit Sales Revenue, credit Cash Discounts b) debit Cash, credit Sales c) debit Sales Revenue, credit Sales Returns and Allowances d) debit Sales Revenue, credit Cash

b) debit Cash, credit Sales

Merchandising firms usually classify their inventory into raw materials, work in process and finished goods. a) True b) False

b) false

What is an advantage of using the multiple-step income statement? a) Net income will be higher than net income computed using the single-step income statement. b) It highlights the components of net income. c) It is easier to prepare than the single-step income statement. d) Gross profit is not a separate item.

b) it highlights the components of net income

Under the perpetual inventory system, which of the following accounts would not be used? a) Inventory b) Purchases c) Sales Revenue d) Cost of Goods Sold

b) purchases

The primary source of revenue for a wholesaler is a) service revenue. b) the sale of merchandise. c) investment income. d) the sale of plant assets the company owns.

b) the sale of merchandise

How do the results under FIFO in a perpetual system compare to the results using a periodic system? a) FIFO cost of goods sold is higher using a periodic system b) They are the same. c) There is not enough information to determine the answer. d) FIFO cost of goods sold is higher using a perpetual system

b) they are the same

When using the periodic inventory system, which of the following is not a step in determining cost of goods purchased? a) Add freight in. b) Subtract purchase returns and allowances. c) Subtract cost of ending inventory. d) All of these are necessary steps.

c) Subtract cost of ending inventory.

The inventory turnover ratio is calculated by dividing cost of goods sold by a) ending inventory. b) beginning inventory. c) average inventory. d) 365 days.

c) average inventory

Which sales accounts normally have a debit balance? a) Sales discounts b) Sales returns and allowances. c) both A and B. d) Neither A and B.

c) both A and B

Sales revenue less cost of goods sold is called a) net income. b) marginal income. c) gross profit. d) net profit.

c) gross profit

The gross profit rate is computed by dividing gross profit by a) sales. b) cost of goods sold. c) net sales. d) operating expenses.

c) net sales

A company just starting business made the following inventory transactions in August: Purchase on August 1 350 units $1,820 Sale on August 8 200 units 3,400 Purchase on August 12 400 units 1,340 Sale on August 24 350 units 5,950 Using the average cost perpetual inventory method, how much is the average cost of the units sold on August 24? a) $6,450 b) $4.14 c) $4.28 d) $3.85

d) $3.85

Which of the following is not an inventory account? a) Finished goods b) Raw materials c) Work in process d) Equipment

d) Equipment

Which of the following would most likely employ the specific identification method of inventory costing? a) Grocery store b) Hardware store c) Gasoline station d) Jewelry store

d) Jewelry store

Two companies report the same cost of goods available for sale, but each employs a different inventory costing method. If the price of goods has increased during the period, which statement is true? The company using a) The company using LIFO will have the highest ending inventory. b) The company using FIFO will have the highest cost of good sold. c) The company using LIFO will have the lowest cost of goods sold. d) The company using FIFO will have the highest ending inventory.

d) The company using FIFO will have the highest ending inventory.

A perpetual inventory system would most likely be used by a(n) a) hardware store. b) drugstore. c) convenience store. d) automobile dealership

d) automobile dealership

When is a physical inventory usually taken? a) When the company has its greatest amount of inventory b) When goods are not being sold or received c) At the end of the company's fiscal year d) Both B and C

d) both B and C

What is the LIFO reserve?

the difference between the value of the inventory under LIFO and the value under FIFO