Accounting Midterm 2

Cost of goods sold is determined only at the end of the accounting period in a. a perpetual inventory system. b. a periodic inventory system. c. both a perpetual and a periodic inventory system. d. neither a perpetual nor a periodic inventory system.

B. A periodic inventory system

Two categories of expenses for merchandising companies are a. sales and cost of goods sold. b. cost of goods sold and financing expenses. c. operating expenses and financing expenses. d. cost of goods sold and operating expenses.

D. Costs of goods sold and operating expenses

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

D. Gross Profit

During August, 2018, Sheffield's Supply Store generated revenues of $60100. The company's expenses were as follows: cost of goods sold of $35600 and operating expenses of $3600. The company also had rent revenue of $1100 and a gain on the sale of a delivery truck of $1900. Sheffield's non-operating income (loss) for the month of August, 2018 is a. $3000 b. $0 c. $800 d. $1700

a. $3000

In a period of inflation, which cost flow method produces the highest net income? a. FIFO method b. Average-cost method c. Gross profit method d. LIFO method

a. FIFO Method Correct! The FIFO method reports the highest net income in a period of rising prices.

In a perpetual inventory system, a. FIFO cost of goods sold will be the same as in a periodic inventory system. b. a new average is computed under the moving-average method after each sale. 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 averages.

a. FIFO cost of goods sold will be the same as in a periodic inventory system. Correct! FIFO cost of goods sold is the same under both a periodic and a perpetual inventory system.

In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the a. FIFO method. b. tax method. c. LIFO method. d. average-cost method

a. FIFO method Correct! Under the FIFO method, the last goods acquired are shown on the balance sheet and would be closest to current cost on balance sheet date.

Companies may be motivated to overstate closing inventories in order a. all of these. b. to maintain or boost its stock price. c. for managers to earn higher bonuses. d. to prevent lenders from finding out the company's financial weakness.

a. all of these

Gross profit does NOT appear a. on a single-step income statement. b. on a multiple-step income statement. c. to be relevant in analyzing the operation of a merchandiser. d. on the income statement if the periodic inventory system is used because it cannot be calculated.

a. on a single-step income statement.

Waterway Company has sales revenue of $61500, cost of goods sold of $36400 and operating expenses of $14700 for the year ended December 31. Waterway's gross profit is a. $0 b. $25,100 c. $46,800 d. $10,400

b. $25,100

A company determines the cost of goods sold each time a sale occurs in a. a periodic inventory system only. b. a perpetual inventory system only. c. both a periodic and perpetual inventory system. d. neither a periodic nor perpetual inventory system.

b. a perpetual inventory system only.

The collection of a $2000 account after the 2 percent discount period will result in a a. credit to Cash for $2000. b. credit to Accounts Receivable for $2000. c. debit to Sales Discounts for $40. d. debit to Cash for $1960.

b. credit to Accounts Receivable for $2000.

In order to faithfully and accurately report revenue and income, a retailer should a. reduce revenues by estimated sales returns and reduce cash as the offsetting entry. b. estimate sales returns based on past experience and adjust annual revenues. c. only record actual sales returns during an accounting period. d. decrease revenues and increase cost of goods sold.

b. estimate sales returns based on past experience and adjust annual revenues.

Atlantis Company's ending inventory is understated $4,000. The effects of this error on the current year's cost of goods sold and net income, respectively, are a. understated, understated. b. overstated, understated. c. understated, overstated. d. overstated, overstated.

b. overstated, understated. Correct! Because ending inventory is too low, cost of goods sold will be too high (overstated) and since cost of goods sold (an expense) is too high, net income will be too low (understated).

In a perpetual inventory system, cost of goods sold is recorded a. on a monthly basis. b. with each sale. c. on a daily basis. d. on an annual basis.

b. with each sale

During 2018, Bonita Enterprises generated revenues of $99000. The company's expenses were as follows: cost of goods sold of $43000, operating expenses of $25000 and a loss on the sale of equipment of $2600. Bonita's gross profit is a. $99000. b. $31000. c. $56000. d. $28400.

c. $56,000

Coronado Company purchased merchandise inventory with an invoice price of $9400 and credit terms of 5/10, n/30. What is the net cost of the goods if Coronado Company pays within the discount period? a, $7520 b. $9400 c. $8930 d. $8460

c. $8930

If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the a. carrier will bear the freight cost. b. Inventory account will not be affected. c. Inventory account will be increased. d. seller will bear the freight cost.

c. Inventory account will be increased.

Income from operations appears on a. a single-step income statement. b. neither a multiple-step nor a single-step income statement. c. a multiple-step income statement. d. both a multiple-step and a single-step income statement.

c. a multiple-step income statement.

The lower-of-cost-or-market basis of valuing inventories is an example of a. the historical cost principle. b. consistency. c. conservatism. d. comparability.

c. conservatism.

The term "FOB" denotes a. freight on board. b. freight charge on buyer. c. free on board. d. free only (to) buyer.

c. free on board

The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit a. Purchase Returns and Allowances. b. Sales Revenue. c. Inventory. d. Accounts Payable.

c. inventory

If goods in transit are shipped FOB destination a. the transportation company has legal title to the goods while the goods are in transit. b. no one has legal title to the goods until they are delivered. c. the seller has legal title to the goods until they are delivered. d. the buyer has legal title to the goods until they are delivered.

c. the seller has legal title to the goods until they are delivered.

Rickety Company purchased 1,000 widgets and has 200 widgets in its ending inventory at a cost of $91 each and a current replacement cost of $80 each. The ending inventory under lower-of-cost-or-market is a. $18,200. b. $80,000. c. $91,000. d. $16,000.

d. $16,000 Correct! When the value of inventory is lower than its cost, the inventory is written down to its market value. Therefore, market would be 200 widgets x $80 each, or $16,000.

In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the a. LIFO method. b. average-cost method. c. tax method. d. FIFO method.

d. FIFO method

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, then the company using a. FIFO will have the highest cost of goods sold. b. LIFO will have the highest ending inventory. c. LIFO will have the lowest cost of goods sold. d. FIFO will have the highest ending inventory.

d. FIFO will have the highest ending inventory.

Beginning inventory plus the cost of goods purchased equals a. net purchases. b. total goods purchased. c. cost of goods sold. d. cost of goods available for sale.

d. cost of goods available for sale.

If a company overstates its closing inventory, it will a. overstate income but the balance sheet will appear weaker. b. understate income but the balance sheet will appear stronger. c. understate income and the balance sheet will appear weaker. d. overstate income and the balance sheet will appear stronger.

d. overstate income and the balance sheet will appear stronger.