Chapter 5 and 6 Practice Review Questions

The multiple-step income statement for a merchandising company shows each of these features except:

An investing activities section appears on the statement of cash flows, not on a multiple-step income statement

Bufford Corporation had reported the following amounts at December 31, 2022: sales revenue $184,000, ending inventory $11,600, beginning inventory $17,200, purchases $60,400, purchase discounts $3,000, purchase returns and allowances $1,100, freight-in $600, and freight-out $900. Calculate the cost of goods available for sale.

Beginning inventory ($17,200) + Purchases ($60,400) − Purchases discounts ($3,000) − Purchase returns and allowances ($1,100) + Freight-in ($600) = Cost of goods available for sale ($74,100)

If beginning inventory is $60,000, cost of goods purchased is $380,000, and ending inventory is $50,000, what is cost of goods sold under a periodic system?

Beginning inventory ($60,000) + Cost of goods purchased ($380,000) − Ending inventory ($50,000) = Cost of goods sold ($390,000)

Which sales accounts normally have a debit balance?

Both Sales Discounts and Sales Returns and Allowances normally have a debit balance.

In a perpetual inventory system:

FIFO cost of goods sold is the same both in a perpetual and periodic system.COGD

Gross profit will result if:

Gross profit will result if net sales are greater than cost of goods sold.

When goods are purchased for resale by a company using a periodic inventory system:

Purchases for resale are debited to the Purchases account

To record the sale of goods for cash in a perpetual inventory system:

Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and reduction of inventory

Under a perpetual inventory system, when goods are purchased for resale by a company:

Under a perpetual inventory system, purchases on account are debited to the Inventory account.

Norton Company purchased 1,000 widgets and has 200 widgets in its ending inventory at a cost of $91 each and a net realizable value of $80 each. The ending inventory under lower-of-cost-or-net realizable value is:

Under the LCNRV basis, net realizable value is defined as the estimated selling price in the normal course of business - estimated costs to complete and sell. Therefore, ending inventory would be valued at 200 widgets × $80 each = $16,000 (didnt have estimated costs to complete the product?)

In periods of rising prices, LIFO will produce:

a lower net income than that of FIFO.

The lower-of-cost-or-net realizable value rule for inventory is an example of the application of:

conservatism because it is the method that is least likely to overstate assets and net income.

Cost of goods available for sale consists of two elements: beginning inventory and:

cost of goods purchased

Which of these would cause inventory turnover to increase the most?

decreasing the amount of inventory on hand causes the denominator to decrease and causes inventory to increase. increase in sales will cause the numerator of ratio to increase which also means a higher COGS. and therefore, causes inventory turnover to increase even more.

Which of the following should not be included in the physical inventory of a company?

goods on consignment should not be included because another company still has title or (ownership) of the goods.

Considerations that affect the selection of an inventory costing method do not include:

perpetual v periodic inventory systems are not one of the factors that affect the selection of an inventory costing method.

The LIFO reserve is:

the difference between in ending inventory value under LIFO and FIFO.

From the data in the previous question, what is the cost of the ending inventory under LIFO?

under LIFO inventory system, it means last in first out. therefore the 9000 units from december 31 are taken from the inventory at Jan 1. so its (9000-8000)= 1000 units are only taken from the June 19 purchase. so then you add the inventory from the beginning and the first purchase inventory (after calculating the desired amt of units given dec 31 amt) to get ending inventory. under the LIFO system ending inventory is: (8000 x $11) + (1000 x $12) = 100,000

When is a physical inventory usually taken?

when a limited number of goods are being sold or received and at the end of the company's fiscal year.

As a result of a thorough physical inventory, Railway Company determined that it had inventory worth $180,000 at December 31, 2022. This count did not take into consideration the following facts. 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.

the $35,000 from Rogers should be included in Railways inventory and the $13,000 purchased goods should not be included in inventory until after January 3 bc they were shipped FOB destination. The inventory for Dec 27 is: 180,000 + 35,000 = $215,000

Davidson Electronics has the following: Inventory, Jan. 1 5,000 @ $ 8 Purchase, April 2 15,000 @ $10 Purchase, Aug. 28 20,000 @ $12 If Davidson has 7,000 units on hand at December 31, the cost of ending inventory under the average-cost method is:

under avg cost method you have to determine cost of goods avail. for sale to determine avg cost/unit. cost of goods avail. for sale: (5000 x 8)+(15000 x 10)+(20000 x 12)= $430,000. The number of units is 40,000 units. Therefore the avg cost/ unit is: $430,000/$40,000 = $10.75/unit. ending inventory using avg cost method is: $10.75 x 7000 units = $75,250

A quality of earnings ratio:

A quality of earnings ratio that is less than 1 indicates that a company might be using aggressive accounting tactics

Fran Company's ending inventory is understated by $4,000. The effects of this error on the current year's cost of goods sold and net income, respectively, are:

COGS will be overstated, and since theyre an expense and overstated, net income will be too low/ understated.

Kam Company has the following units and costs. 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?

FIFO means first in first out, therefore the 9000 units from december 31 are taken from the first inventory purchase. SO its 13000-9000= 4000 units for the June 19 purchase. Then you take the last inventory purchase and add it to the first inventory purchase to get the ending inventory. under FIFO the inventory is: (5000 x 13) + (4000 x 12) = 113,000

During the year ended December 31, 2022, Bjornstad Corporation had the following results: net sales $267,000, cost of goods sold $107,000, net income $92,400, operating expenses $55,400, and net cash provided by operating activities $108,950. What was the company's profit margin?

Net income ($92,400) ÷ Net sales ($267,000) = Profit margin of 34.6%

f net sales are $400,000, cost of goods sold is $310,000, and operating expenses are $60,000, what is the gross profit?

Net sales ($400,000) − Cost of goods sold ($310,000) = $90,000

Harold Company overstated its inventory by $15,000 at December 31, 2021. It did not correct the error in 2021 or 2022. As a result, Harold's stockholders' equity was:

Stockholders' equity is overstated by $15,000 at December 31, 2021, and is properly stated at December 31, 2022. An ending inventory error in one period will have an equal and opposite effect on cost of goods sold and net income in the next period; after two years, the errors have offset each other.

A company makes a credit sale of $750 on June 13, terms 2/10, n/30, on which it grants a return of $50 on June 16. What amount is received as payment in full on June 23?

The full amount of $686 is paid within 10 days of the purchase {($750 − $50) − [($750 − $50) × 2%]}

Which of the following statements about a periodic inventory system is true?

Under the periodic inventory system, cost of goods sold is determined only at the end of the accounting period

The gross profit rate is equal to:

Gross profit rate = Gross profit (Net sales − Cost of goods sold) ÷ Net sales.

Which of the following would affect the gross profit rate? (Assume sales remains constant.)

Gross profit rate = Gross profit ÷ Net sales. Therefore, any changes in sale revenue, sales returns and allowances, sales discounts, or cost of goods sold will affect the ratio.

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. Carlos's days in inventory is:

days in inventory = 365/inventory turnover therefore Carlos' inventory is : 285,000/ ((80,000+110,000)/2))= 121.7 days

On March 12, Robertson Company paid the balance due to Melky Company.

debit: Accounts Payable ($800,000 − $100,000)700,000 credit: Inventory ($700,000 × 2%)14,000 and Cash ($700,000 − $14,000)686,000

On March 2, Wendel Company sold $700,000 of merchandise to Krista Company, terms 2/10, n/30. The cost of the merchandise sold was $460,000.

debit: Accounts Receivable700,000 credit: Sales Revenue 700,000

On March 12, Wendel Company received the balance due from Krista Company.

debit: Cash ($620,000 − $12,400)607,600 and Sales Discounts ($620,000 × 2%)12,400 credit: Accounts Receivable ($700,000 − $80,000)620,000

On March 2, Melky Company sold $800,000 of merchandise to Robertson Company, terms 2/10, n/30.

debit: Inventory800,000 credit:Accounts Payable 800,000

On March 6, Krista Company returned $80,000 of the merchandise purchased on March 2. The cost of the merchandise returned was $54,000.

debit:Sales Returns and Allowances80,000 credit: Accounts Receivable80,000 debit: Inventory54,000