M1 M2 Self Check/Practice Tests

Gross profit method of estimating inventory

Estimated inventory by using the previous year's percentage of gross profit on operations

Depreciation of office equipment should be included in the cost of work in process inventory. a. True b. False

False

FOB (Free on Board)

Goods are part of seller's inventory while in transit

In a period of rising prices, the inventory cost allocation method that tends to result in the lowest reported net income is a. LIFO. b. FIFO. c. moving average. d. weighted average.

LIFO

If the ending inventory balance is understated, net income of the same period will be understated. a. True b. False

True

Repair and maintenance cost on a building would ordinarily be treated as a revenue expenditure instead of a capital expenditure. a. True b. False

True

When is goodwill recorded?

When a company acquires another company

Under generally accepted accounting principles, the lower-of-cost-or-market procedure for assigning a value to inventory can be assigned to a. total inventory. b. groups of similar inventory items. c. individual inventory items. d. all of these.

all of these

Merchandise shipped FOB shipping point on the last day of the year should ordinarily be included in a. the buyer's inventory balance. b. the seller's inventory balance. c. neither the buyer's nor seller's inventory balance. d. both the buyer's and the seller's inventory balances.

the buyer's inventory balance

If the ending inventory balance is understated, net income of the same period a. will be overstated. b. will be understated. c. will be unaffected. d. cannot be determined from the information.

will be understated

The costs of purchased buildings includes any reconditioning cost necessary before occupancy. a. True b. False

True

The current method of accounting for research and development costs is immediate recognition as an expense. a. True b. False

True

Donated equipment for which the fair value is known should be recorded as a debit to the appropriate equipment account and a credit to retained earnings. a. True b. False

False

Goods on consignment should be included in the inventory of the consignee. a. True b. False

False

Goodwill should only be recorded in the accounting records when purchased from another company. a. True b. False

False

If a company acquires a new asset by exchanging existing non-monetary assets, the new asset generally should be valued at the cost of the asset being traded for it. a. True b. False

False

The flow of product costs through the inventory account is raw materials, goods in process, factory overhead, finished goods. a. True b. False

False

When valuing raw materials at lower of cost or market, the general meaning of the term "market" means net realizable value. a. True b. False

False

The specific identification method of inventory costing a. eliminates all opportunity for profit manipulation. b. matches the flow of recorded costs with the physical flow of goods. c. can be used only with a perpetual inventory system. d. is a violation of generally accepted accounting principles.

matches the flow of recorded costs with the physical flow of goods

Goods on consignment are a. recorded in a consignment out account which is an inventory account. b. included in the consignee's inventory. c. recorded in a consignment in account which is an inventory account. d. all of these.

recorded in a consignment out account which is an inventory account.

Specific identification method of inventory costing

requires a detailed physical count

If goods shipped FOB destination are in transit at the end of the year, they should be included in the inventory balance of the a. seller. b. common carrier. c. buyer. d. bank.

seller

Net realizable value can be defined as a. selling price. b. selling price less costs to complete and sell. c. selling price plus costs to complete and sell. d. acquisition cost plus costs to complete and sell.

selling price less costs to complete and sell

Goods on consignment should be included in the inventory of a. the consignor but not the consignee. b. the consignee but not the consignor. c. both the consignor and the consignee. d. neither the consignor nor the consignee.

the consignor but not the consignee.

Cost of goods sold is equal to a. the cost of inventory on hand at the end of a period plus net purchases minus the cost of inventory on hand at the beginning of a period. b. the cost of inventory on hand at the beginning of a period minus net purchases plus the cost of inventory on hand at the end of a period. c. the cost of inventory on hand at the beginning of a period plus net sales minus the cost of inventory on hand at the end of a period. d. the cost of inventory on hand at the beginning of a period plus net purchases minus the cost of inventory on hand at the end of a period.

the cost of inventory on hand at the beginning of a period plus net purchases minus the cost of inventory on hand at the end of a period.

The use of the gross profit method assumes a. the amount of gross profit is the same as in prior years. b. sales and cost of goods sold have not changed from previous years. c. inventory values have not increased from previous years. d. the relationship between selling price and cost of goods sold is similar to prior years.

the relationship between selling price and cost of goods sold is similar to prior years

When valuing raw materials inventory at lower of cost or market, what is the general meaning of the term "market"? a. Net realizable value b. Net realizable value less a normal profit margin Incorrect c. Current replacement cost d. Discounted present value

Current replacement cost

Which of the following will occur when inventory costs are decreasing? a. LIFO will result in lower net income and lower ending inventory than will FIFO. b. FIFO will result in lower net income and lower ending inventory than will LIFO. c. LIFO will result in a lower net income, but a higher ending inventory, than will FIFO. d. FIFO will result in a lower net income, but a higher ending inventory, than will LIFO.

FIFO will result in lower net income and lower ending inventory than will LIFO

In a period of falling prices, the use of which of the following inventory cost flow methods would typically result in the highest cost of goods sold? a. Weighted average cost b. Specific identification c. LIFO d. FIFO

FIFO

Which of the following inventory costing methods reports most closely the current cost of inventory on the balance sheet? a. FIFO b. Specific identification c. Weighted average d. LIFO

FIFO

If an asset being constructed for an enterprise's own use has been financed with a specific new borrowing the interest cost should be expensed instead of becoming part of the historical cost of the asset. a. True b. False

False

If goods shipped FOB destination are in transit at the end of the year, they should be included in the inventory balance of the buyer. a. True b. False

False

If the estimated useful life of an asset changes the previous years depreciation expense has to be restated. a. True b. False

False

In a "basket" or "lump-sum" purchase of assets, the historical cost of the various assets acquired should be determined by recording the individual assets at their current value with recognition of a gain or loss for the difference between the price paid and the current value of the assets. a. True b. False

False

The depreciation of noncurrent operating assets is an accounting process for the purpose of reporting declining asset values on the balance sheet. a. True b. False

False

The productive-output method ignores salvage value in the early years of the asset's life in calculating depreciation expense. a. True b. False

False

The sum-of-the-years' digit depreciation method applies a uniform depreciation rate each period to an asset's book value. a. True b. False

False

Which of the following describes the flow of product costs through the inventory accounts of a manufacturer? a. Raw materials, goods in process, factory overhead, finished goods b. Raw materials, goods in process, finished goods c. Raw materials, direct labor, factory overhead, finished goods d. Raw materials, direct labor, factory overhead

Raw materials, goods in process, finished goods

If a company purchases land with a building on it and tears the building down so the land can be used for construction of a new plant, the cost of razing the building should be added to the cost of the land. a. True b. False

True

In a period of rising prices, the inventory cost allocation method that tends to result in the lowest reported net income is LIFO. a. True b. False

True

In accordance with GAAP, the straight-line method of amortization is normally recommended for intangible assets. a. True b. False

True

Properties without physical characteristics that have long-term effects on a business are called intangible assets. a. True b. False

True

Straight-line depreciation is based on the assumption that service value declines as a function of time. a. True b. False

True

The FIFO inventory costing method most closely reports the current cost of inventory on the balance sheet. a. True b. False

True

The acquisition cost, estimated salvage value, and estimated life of an asset are needed to calculate the depreciation expense of an asset. a. True b. False

True

The composite depreciation method does not recognize gain or loss on the retirement of specific assets in the group. a. True b. False

True

The double-declining-balance method will have higher depreciation expense in the first year compared to the third year. a. True b. False

True

The specific identification method of inventory costing matches the flow of recorded costs with the physical flow of goods. a. True b. False

True

The use of the gross profit method assumes the relationship between selling price and cost of goods sold is similar to prior years. a. True b. False

True

When using the sum-of-the-years' digit method of depreciation, the fraction applied to the cost to be depreciated would be 4/15 in the second year. a. True b. False

True

Which of the following would NOT be included in the cost of work in process inventory? a. Cost of electricity to operate factory equipment b. Maintenance costs of factory equipment c. Depreciation on office equipment in the sales manager's office d. Depreciation on factory equipment

Depreciation on office equipment in the sales manager's office

Which of the following would NOT be reported as inventory? a. Land acquired for resale by a real estate firm b. Stocks and bonds held for resale by a brokerage firm c. Partially completed goods held by a manufacturing company d. Machinery acquired by a manufacturing company for use in the production process

Machinery acquired by a manufacturing company for use in the production process