Chapter 5 & 6 Exam

When is a physical inventory usually taken? a. When the company has its greatest amount of inventory. b. When a limited number of goods are being sold or received. c. At the end of the company's fiscal year. d. Both (b) and (c).

D - A physical inventory is usually taken when a limited number of goods are being sold or received, and at the end of the company's fiscal year.

The multiple-step income statement for a merchandising company shows each of these features except: a. gross profit. b. cost of goods sold. c. a sales section. d. an investing activities section.

D - An investing activities section appears on the statement of cash flows, not on a multiple-step income statement. Choices (a) gross profit, (b) cost of goods sold, and (c) a sales section are all features of a multiple-step income statement.

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? a. $390,000. b. $370,000. c. $330,000. d. $420,000.

A - Beginning inventory ($60,000) + Cost of goods purchased ($380,000) − Ending inventory ($50,000) = Cost of goods sold ($390,000), not (b) $370,000, (c) $330,000, or (d) $420,000.

The lower-of-cost-or-net realizable value rule for inventory is an example of the application of: a. the conservatism convention. b. the historical cost principle. c. the materiality concept. d. the economic entity assumption.

A - Conservatism means that the best choice among accounting alternatives is the method that is least likely to overstate assets and net income. The other choices are incorrect because (b) historical cost means that companies value assets at the original cost, (c) materiality means that an amount is large enough to affect a decision-maker, and (d) economic entity means to keep the company's transactions separate from the transactions of other entities.

Which of the following should not be included in the physical inventory of a company? a. Goods held on consignment from another company. b. Goods shipped on consignment to another company. c. Goods in transit from another company shipped FOB shipping point. d. All of the above should be included.

A - Goods held on consignment should not be included because another company has title (ownership) to the goods.

The LIFO reserve is: a. the difference between the value of the inventory under LIFO and the value under FIFO. b. an amount used to adjust inventory to the lower-of-cost-or-net realizable value. c. the difference between the value of the inventory under LIFO and the value under average-cost. d. an amount used to adjust inventory to historical cost.

A - The LIFO reserve is the difference in ending inventory value under LIFO and FIFO

Under a perpetual inventory system, when goods are purchased for resale by a company: a. purchases on account are debited to Inventory. b. purchases on account are debited to Purchases. c. purchase returns are debited to Purchase Returns and Allowances. d. freight costs are debited to Freight-Out.

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

Which of the following statements about a periodic inventory system is true? a. Companies determine cost of goods sold only at the end of the accounting period. b. Companies continuously maintain detailed records of the cost of each inventory purchase and sale. c. The periodic system provides better control over inventories than a perpetual system. d. The increased use of computerized systems has increased the use of the periodic system.

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

A quality of earnings ratio: a. is computed as net income divided by net cash provided by operating activities. b. that is less than 1 indicates that a company might be using aggressive accounting tactics. c. that is greater than 1 indicates that a company might be using aggressive accounting tactics. d. is computed as net cash provided by operating activities divided by total assets.

B - A quality of earnings ratio that is less than 1 indicates that a company might be using aggressive accounting tactics. The other choices are incorrect because (a) Quality of earnings = Net cash provided by operating activities ÷ Net income, not vice versa; (c) a ratio that is significantly greater than 1 suggests that a company is using conservative accounting techniques, and (d) Quality of earnings = Net cash provided by operating activities ÷ Net income (not Total assets).

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: a. understated and overstated. b. overstated and understated. c. overstated and overstated. d. understated and understated.

B - 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)

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. a. $69,400. b. $74,100. c. $56,900. d. $197,700.

B - 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).

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: a. 73 days. b. 121.7 days. c. 102.5 days. d. 84.5 days.

B - Carlos's days in inventory = 365/Inventory turnover = 365/[$285,000/($80,000 + $110,000)/2)] = 121.7 days

Cost of goods available for sale consists of two elements: beginning inventory and: a. ending inventory. b. cost of goods purchased. c. cost of goods sold. d. All of the answer choices are correct.

B - Cost of goods available for sale consists of beginning inventory and cost of goods purchased, not (a) ending inventory or (c) cost of goods sold.

If net sales are $400,000, cost of goods sold is $310,000, and operating expenses are $60,000, what is the gross profit? a. $30,000. b. $90,000. c. $340,000. d. $400,000.

B - Gross profit = Net sales ($400,000) − Cost of goods sold ($310,000) = $90,000, not (a) $30,000, (c) $340,000, or (d) $400,000.

When goods are purchased for resale by a company using a periodic inventory system: a. purchases on account are debited to Inventory. b. purchases on account are debited to Purchases. c. purchase returns are debited to Purchase Returns and Allowances. d. freight costs are debited to Purchases.

B - Purchases for resale are debited to the Purchases account. The other choices are incorrect because (a) purchases on account are debited to Purchases, not Inventory; (c) Purchase Returns and Allowances are always credited; and (d) freight costs are debited to Freight-In, not Purchases.

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: a. overstated at December 31, 2021, and understated at December 31, 2022. b. overstated at December 31, 2021, and properly stated at December 31, 2022. c. understated at December 31, 2021, and understated at December 31, 2022. d. overstated at December 31, 2021, and overstated at December 31, 2022.

B - 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? a. $700. b. $686. c. $685. d. $650.

B - The full amount of $686 is paid within 10 days of the purchase {($750 − $50) − [($750 − $50) × 2%]}. The other choices are incorrect because (a) does not consider the discount of $14; (c) the amount of the discount is based upon the amount after the return is granted ($700 × 2%), not the amount before the return of merchandise ($750 × 2%); and (d) does not constitute payment in full on June 23.

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. a. $230,000. b. $215,000. c. $228,000. d. $193,000.

B - The inventory held on consignment by Rogers should be included in Railway's inventory balance at cost ($35,000). The purchased goods of $13,000 should not be included in inventory until January 3 because the goods are shipped FOB destination. Therefore, the correct amount of inventory is $215,000 ($180,000 + $35,000)

To record the sale of goods for cash in a perpetual inventory system: a. only one journal entry is necessary to record cost of goods sold and reduction of inventory. b. only one journal entry is necessary to record the receipt of cash and the sales revenue. c. 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. d. two journal entries are necessary: one to record the receipt of cash and reduction of inventory, and one to record the cost of goods sold and sales revenue.

C

Which sales accounts normally have a debit balance? a. Sales Discounts. b. Sales Returns and Allowances. c. Both (a) and (b). d. Neither (a) nor (b).

C - Both Sales Discounts and Sales Returns and Allowances normally have a debit balance. Choices (a) and (b) are both correct, but (c) is the better answer.

The gross profit rate is equal to: a. net income divided by sales. b. cost of goods sold divided by sales. c. net sales minus cost of goods sold, divided by net sales. d. sales minus cost of goods sold, divided by cost of goods sold.

C - Gross profit rate = Gross profit (Net sales − Cost of goods sold) ÷ Net sales. The other choices are therefore incorrect.

Which of the following would affect the gross profit rate? (Assume sales remains constant.) a. An increase in advertising expense. b. A decrease in depreciation expense. c. An increase in cost of goods sold. d. A decrease in insurance expense.

C - 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. Changes in (a) advertising expense, (b) depreciation expense, or (d) insurance expense will not affect the computation of the gross profit rate.

Gross profit will result if: a. operating expenses are less than net income. b. net sales are greater than operating expenses. c. net sales are greater than cost of goods sold. d. operating expenses are greater than cost of goods sold.

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

In periods of rising prices, LIFO will produce: a. higher net income than FIFO. b. the same net income as FIFO. c. lower net income than FIFO. d. higher net income than average-cost.

C - In periods of rising prices, LIFO will produce lower net income than FIFO, not (a) higher than FIFO or (b) the same as FIFO. Choice (d) is incorrect because in periods of rising prices, LIFO will produce lower net income than average-cost. LIFO therefore charges the highest inventory cost against revenues in a period of rising prices.

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? a. $99,000. b. $108,000. c. $113,000. d. $117,000.

C - Under FIFO, ending inventory will consist of 5,000 units from the Nov. 8 purchase and 4,000 units from the June 19 purchase. Therefore, ending inventory is (5,000 × $13) + (4,000 × $12) = $113,000

Which of these would cause inventory turnover to increase the most? a. Increasing the amount of inventory on hand. b. Keeping the amount of inventory on hand constant but increasing sales. c. Keeping the amount of inventory on hand constant but decreasing sales. d. Decreasing the amount of inventory on hand and increasing sales.

D - Decreasing the amount of inventory on hand will cause the denominator to decrease, causing inventory turnover to increase. Increasing sales will cause the numerator of the ratio to increase (higher sales means higher COGS), thus causing inventory turnover to increase even more.

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

D - FIFO cost of goods sold is the same under both a periodic and a perpetual inventory system

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? a. 40%. b. 60%. c. 20.5%. d. 34.6%.

D - Net income ($92,400) ÷ Net sales ($267,000) = Profit margin of 34.6%, not (a) 40%, (b) 60%, or (c) 20.5%.

Considerations that affect the selection of an inventory costing method do not include: a. tax effects. b. balance sheet effects. c. income statement effects. d. perpetual versus periodic inventory system.

D - Perpetual vs. periodic inventory system is not one of the factors that affect the selection of an inventory costing method. The other choices are incorrect because (a) tax effects, (b) balance sheet effects, and (c) income statement effects all affect the selection of an inventory costing method.

From the data in Question 4, what is the cost of the ending inventory under LIFO? a. $113,000. b. $108,000. c. $99,000. d. $100,000.

D - Under LIFO, ending inventory will consist of 8,000 units from the inventory at Jan. 1 and 1,000 units from the June 19 purchase. Therefore, ending inventory is (8,000 × $11) + (1,000 × $12) = $100,000

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: a. $91,000. b. $80,000. c. $18,200. d. $16,000.

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

Davidson Electronics has the following: Units Unit Cost 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: a. $84,000. b. $70,000. c. $56,000. d. $75,250.

D - Under the average-cost method, total cost of goods available for sale needs to be calculated in order to determine average cost per unit. The total cost of goods available is $430,000 = (5,000 × $8) + (15,000 × $10) + (20,000 × $12). The average cost per unit = ($430,000/40,000 total units available for sale) = $10.75. Therefore, ending inventory is ($10.75 × 7,000) = $75,250