Financial Accounting chapter 5

The LCM rule is an exception to which accounting principle? a. Cost b. Materiality c. The matching principle d. Conservatism

a

1. Failure to record the supplies used during the year would result in which of the following? a. Stockholders' equity being overstated. b. Net Income being understated. c. Total assets being understated. d. An overstatement of liabilities.

A

1. Which one of the following steps in the accounting cycle is optional rather than required? a. Adjustments are recorded. b. Business transactions are recorded. c. The accounts are closed. d. Work sheets are prepared.

D

A company that uses LIFO had the following inventory information available: Beginning inventory 100 units @ $20 = $2,000 Purchases 50 units @ $30 = $1,500 Cost of goods sold in units 75 units What amount of cost of goods sold represents LIFO liquidation? a. $500 b. $1,000 c. $1,500 d. $3,500

a

An inventory error is made and as a result, net income is overstated in the current year. What effect does this have on net income in the following year? a. Net income is understated in the following year. b. Net income is overstated in the following year. c. Net income is overstated in the current year only. There is no effect on the following year's income. d. Inventory errors do not affect net income.

a

Civic Co. valued its inventory using LIFO at $100,000. The replacement cost of this inventory was valued at $90,000. At what amount should Civic value inventory? a. $95,000 b. $100,000 c. $90,000 d. $190,000

a

Dark Co. uses a periodic inventory system. At the end of June, Dark had 20 units on hand. April 1 On hand, 10 units @ $2 each. $20 April 19 Purchased 90 units @ $3 each $270 Goods available for sale. $290 If Dark, Inc. uses LIFO inventory costing, how much is cost of goods sold for April? a. $240 b. $290 c. $230 d. $232

a

How is the gross profit ratio computed? a. Gross profit divided by net sales b. Gross profit divided by total assets c. Gross profit divided by net assets d. Net sales divided by gross profit

a

In the previous year, ending inventory is miscounted and understated by $20,000. Assume the current year inventory is counted correctly. What effect does this error have on the current year? a. Beginning inventory is understated by $20,000 b. Beginning inventory is overstated by $20,000 c. Net income is understated by $20,000 d. There is no effect on current year income.

a

The inventory of a retailer is limited to a single type of inventory. What are the types of inventory of a manufacturer? a. Direct materials, work in process, and finished goods b. Direct materials, direct labor, and manufacturing overhead c. Direct materials, direct labor, and work in process d. Direct labor, manufacturing overhead, and finished goods

a

The use of the lower-of-cost-or-market rule to value inventory is justified on the basis of what principle? a. Conservatism b. Reliability c. Cost d. Materiality

a

What is meant by the term 'Sales allowance'? a. A refund to a customer for spoiled or damaged merchandise as an alternative to returning the merchandise b. Marketing expenses such as the cost of advertising c. The theft of inventory by employees d. A refund to a customer for returned merchandise

a

What is the effect of understating ending inventory when the company uses a periodic inventory system? a. Profit is understated b. Profit is overstated c. Purchases are understated d. Purchases are overstated

a

Which of the following occurrences causes a LIFO inventory liquidation? a. A LIFO inventory liquidation occurs when a company that uses the LIFO inventory method sells more merchandise during the accounting period than it has purchased. b. A LIFO inventory liquidation occurs when a company that uses the LIFO inventory method changes its inventory method from FIFO to LIFO. c. A LIFO inventory liquidation occurs when a company that uses the LIFO inventory method buys more merchandise during the accounting period than it sells. d. A LIFO inventory liquidation occurs when a company that uses the LIFO inventory method cannot determine the ending inventory because it has been destroyed or stolen.

a

Which type of inventory costing system is going to have a higher ending inventory when costs are rising? a. FIFO b. LIFO c. Specific identification d. Weighted average cost

a

Given the following account balances, determine the amount of inventory on the balance sheet of a manufacturing company: Finished goods 15,000 Wages Expense 30,000 Raw materials 40,000 Work in process 20,000 a. $75,000 b. $105,000 c. $55,000 d. $60,000

a. (40000+20000+15000)

For which of the following products is a company most likely to use the specific identification method? a. Boxes of soap in a grocery store b. Automobiles at a car dealer c. Car batteries at an auto parts store The specific identification method cannot be used by any companies

b

What is the journal entry to record an inventory purchase under a perpetual inventory system? a. Debit Cost of goods sold; Credit Inventory b. Debit Inventory; Credit Cash c. Debit Purchases; Credit Sales d. Debit Purchases; Credit Cash

b

Which of the following companies would have direct materials as a component of inventory? a. Best Buy b. General Motors c. Walmart d. Macys

b

Which ratio measures the relationship between sales and inventory and provides a measure of how long it takes to sell inventory? a. Spoilage ratio b. Inventory turnover ratio c. Gross margin d. Profit margin

b

Which type of inventory of a manufacturer is similar to the merchandise inventory of a retailer? a. Work in progress b. Finished goods c. Raw materials d. Work in process

b

How is gross profit computed? a. Revenue less expenses b. Assets less liabilities c. Net sales less cost of goods sold d. Net sales plus cost of goods sold

c

Let's assume that a company has $900,000 for cost of goods available for sale. The accountant caught an error for the amount assigned to inventory in the previous year. The correct amount of inventory should have been $400,000 but the account was reported as $475,000. The books are closed for the previous year. Inventory is corrected in the current year. What affect does this error have on retained earnings at the end of the current year? a. Retained earnings will be overstated by $75,000. b. Retained earnings will be understated by $75,000. c. Retained earnings is correctly stated. d. Retained earnings will be understated by $475,000.

c

What is does the gross profit ratio or gross margin tell you about a company's ability to earn a profit? a. The gross profit ratio indicates how many times inventory turns over in a year. b. The gross profit ratio indicates how well cash is managed. c. The gross profit ratio is the percent of sales available to cover operating costs and profit. A positive gross profit ratio indicates that the company will earn a profit

c

What is the effect on current period profit when beginning and ending inventory are understated by $5,000 when the company uses a periodic inventory system? a. Profit is understated by $10,000 b. Profit is overstated by $5,000 c. There is no effect on profit d. Profit is understated by $5,000

c

What is the journal entry to record cost of goods sold under a perpetual inventory system? a. Debit Cost of goods sold; Credit Sales b. Debit Purchases; Credit Sales c. Debit Cost of goods sold; Credit Inventory d. Debit Inventory; Credit Cost of goods sold

c

Which inventory method assigns the most recent costs to ending inventory? a. Weighted average b. Specific identification c. FIFO d. LIFO

c

Jacob Co. had the following information available at year-end: Beginning Inventory, Jan. 1 $20,000 Purchases $50,000 Ending Inventory, Dec. 31 $9,000 What is the amount of cost of goods sold? a. $70,000 b. $79,000 c. $61,000 d. $50,000

c. (20,000+50000-9000) beginning inventory+purchases-ending inventory

What is the impact on the financial statements with the write down of inventory to its market value? a. Inventory, an asset, is decreased; Loss on Decline in Value of Inventory, an expense, is decreased b. Inventory, an asset, is decreased; Loss on Decline in Value of Inventory, a liability, is decreased c. Inventory, an asset, is increased; Loss on Decline in Value of Inventory, an expense, is increased d. Inventory, an asset, is decreased; Loss on Decline in Value of inventory, an expense, is increased.

d

Which inventory method results in the least amount of income before taxes, assuming a period of rising prices? a. Weighted average cost b. Specific identification c. FIFO d. LIFO

d

Which type of inventory system updates the Inventory account at the time of each sale? a. An accrual system b. A merchandise system c. A periodic system d. A perpetual system

d

Why is it important that the proper amount be assigned to inventory? a. Because the amount assigned to inventory will affect the amount eventually recorded as net sales. b. Because the amount assigned to inventory will affect the amount eventually recorded as cash. c. Because the amount assigned to inventory will affect the amount eventually recorded as selling and administrative expenses. d. Because the amount assigned to inventory will affect the amount eventually recorded as cost of goods sold.

d

Given the following account balances, determine Gross Profit: Net sales. 150,000 Cost of Goods Sold. 30000 Total assets. 400000 Total liabilities. 200000 a. $200,000 b. $150,000 c. $180,000 d. $120,000

d. (150,000-30000) net sales - cost good sold

The Cost of Goods Sold for Dalton Company for the year was $1,750,000. Inventory at the beginning of the year was $250,000 and inventory at the end of the year was $150,000. The inventory turnover for the year was a. 7 b. 11.67 c. 4.38 d. 8.75

d. (Inventory turnover = $1,750,000 / ($250,000 + $150,000)/2) = 8.75)

XYZ Co. had the following amounts available at year-end: Net sales $1,000,000 Cost of goods sold $400,000 Net income $150,000 What is the gross profit ratio for XYZ? a. 40% b. 10% c. 15% d. 60%

d. (Net sales - cost of goods sold = gross profit; gross profit / net sales = gross profit ratio; $1,000,000 - $400,000 = $600,000; $600,000 / $1,000,000 = .60 or 60%