Management 200 Exam 2

Using LIFO, the amount reported for ending inventory does not differ depending on whether a company uses a periodic system or a perpetual system. A. True B. False

B. False

Using the weighted‐average cost method, the average cost of inventory is calculated as the average unit cost of inventory purchased during the year. A. True B. False

B. False

When the value of inventory falls below its cost, companies other than those that use LIFO have the option of recording the inventory at cost or the lower net realizable value A. True B. False

B. False

One of the major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for: A. Current assets B. Inventory C. Selling expenses D. Deferred revenue

B. Inventory

During a period of rising prices, which inventory cost flow assumption would result in the highest cost of goods sold, and thereby the lowest net income? A. FIFO B. LIFO C. Weighted‐average D. Simple LIFO average

B. LIFO

The inventory cost flow assumption that is least likely to match the physical flow of inventory for most companies is: A. FIFO B. LIFO C. Weighted‐average D. Specific identification

B. LIFO

Which inventory cost flow assumption more realistically matches the current cost of inventory with current sales revenue? A. FIFO B. LIFO C. Weighted‐Average D. LIFO ‐ Simplified

B. LIFO

Cochrane, Inc. accounts for bad debts using the allowance method. On June 1, Cochrane wrote off $2,500 customer account. Based on Cochrane's estimation, the customer will never pay any portion of the balance in his account. What effect will this write‐off have on Cochrane's balance sheet at the time of the write‐off? A. An increase to stockholders' equity and a decrease to liabilities B. No effect C. An increase to assets and an increase to stockholders' equity D. A decrease to assets and a decrease to stockholders' equity

B. No effect

Beginning inventory is $30,000. Purchases of inventory during the year are $50,000. Cost of goods sold is $60,000. What is ending inventory? A. $20,000 B. $30,000 C. $10,000 D. $50,000

A. $20,000

Sandburg Veterinarian reports the following information for the year: Net credit sales $120,000 Average accounts receivable 20,000 Cash collections on credit sales 100,000 What is Sandburg's receivables turnover ratio? A. 6.0 B. 5.0 C. 1.2 D. 0.2

A. 6.0

Identify the likely disadvantage(s) of extending credit to customers A. Delay or failure to collect cash B. Lower profitability C. Lower revenues D. All of the other answers are disadvantages of extending credit to customers

A. Delay or failure to collect cash

Which of the following statements is true with respect to the percentage‐of‐credit‐sales method for estimating uncollectible accounts? A. The amount recorded for bad debt expense does not depend on the balance of the allowance for uncollectible accounts B. This method is referred to as the balance sheet approach C. This method does not allow for future uncollectible accounts D. Under this method, bad debt expense is recorded at the time of an actual bad debt

A. The amount recorded for bad debt expense does not depend on the balance of the allowance for uncollectible accounts

A business may use the periodic or perpetual inventory systems for different types of inventory. A. True B. False

A. True

Davis Hardware Company uses a perpetual inventory system. How should Davis record the return of inventory previously purchased on account for $200? A. Inventory 200 Accounts Payable 200 B. Accounts Payable 200 Inventory 200 C. Purchase Returns 200 Accounts Payable 200 D. Accounts Payable 200 Purchase Returns 200

B. Accounts Payable 200 Inventory 200

If a company has ending inventory of $25,000, purchases during the year of $95,000, and beginning inventory of $30,000, cost of goods sold equals $90,000. A. True B. False

B. False

If prices were to never change, there would still be a need for alternative inventory cost methods A. True B. False

B. False

In accounting for inventory, the assumed cost flow must match the physical goods flow. A. True B. False

B. False

Inventory methods such as LIFO and FIFO deal more with goods flow than with cost flow. A. True B. False

B. False

Sales revenue less cost of goods sold is referred to as operating income A. True B. False

B. False

A perpetual inventory system measures cost of goods sold by: A. Estimating the amount of inventory sold. B. Making entries to the inventory account for each purchase and sale. C. Counting inventory at the end of the period. D. Debiting cost of goods sold for all purchases of inventory.

B. Making entries to the inventory account for each purchase and sale.

The primary distinction between operating activities and nonoperating activities in a multiple‐step income statement is whether the activity is: A. A large or small dollar amount B. Part of primary business operations C. Related to current versus long‐term assets D. Reported as a revenue or an expense

B. Part of primary business operations

When customers purchase products on account, Knomark, Inc. offers them a 2% reduction in the amount owed if they pay within 10 days. This is an example of a: A. Bad debt B. Sales discount C. Sales return D. Sales allowances

B. Sales discount

During the year, Bears Inc. recorded credit sales of $500,000. Before adjustments at year‐end, Bears has accounts receivable of $300,000, of which $50,000 is past due, and the allowance account had a credit balance of $2,500. Using the aging of receivables approach, what would be the adjustment assuming Bears expects it will not collect 5% of the amount not yet past due and 20% of the amount past due? A. Bad Debt Expense 22,500 Allowance for Uncollected Accounts 22,500 B. Bad Debt Expense 25,000 Allowance for Uncollected Accounts 25,000 C. Bad Debt Expense 20,000 Allowance for Uncollected Accounts 20,000 D. Allowance for Uncollected Accounts 20,000 Bad Debt Expense 20,000

Bad Debt Expense 20,000 Allowance for Uncollected Accounts 20,000

LePage's Inc. shipped the wrong color of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. The price reduction is an example of a: A. Trade discount B. Sales discount C. Sales allowance D. Sales return

C. Sales allowance

Credit sales are recorded as A. Debit Cash, credit Deferred Revenue B. Debit Service Revenue, credit Accounts Receivable C. Debit Cash, credit Service Revenue D. Debit Accounts Receivable, credit Service Revenue

D. Debit Accounts Receivable, credit Service Revenue

Under the allowance method, when a company writes off an account receivable as an actual bad debt, it records an expense A. True B. False

B. False

At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollected accounts of $600 (credit) before any adjustments. An analysis of accounts receivable suggests that the allowance for uncollected accounts should be 3% of accounts receivable. The amount of the adjustment for uncollected accounts would be A. $6,540 B. $7,800 C. $7,140 D. $7,740

A. $6,540

The cost of unsold inventory at the end of the year is classified as a(n) ______ in the ______. A. Asset; Balance sheet B. Expense; Income statement C. Liability; Balance sheet D. Revenue; Income statement

A. Asset; Balance sheet

A company's ratio of net sales (cash and credit sales) to average accounts receivable can be interpreted as management's ability to: A. Collect cash from all sales to customers B. Effectively market its products and services C. Generate profits for investors D. Reduce costs of selling products and services to customers

A. Collect cash from all sales to customers

The inventory turnover ratio is measured as: A. Cost of goods sold divided by average inventory B. Average inventory divided by gross profit C. Gross profit divided by net sales D. Net sales divided by average inventory

A. Cost of goods sold divided by average inventory

The inventory method that will always produce the same amount for cost of goods sold in a periodic inventory system as in a perpetual inventory system would be: A. FIFO B. LIFO C. Weighted average D. Each method always produces a different amount

A. FIFO

If A sells to B, and B obtains title while goods are in transit, the goods were shipped _______. If C sells to D, and C maintains title until the goods arrive at D's door then the goods were shipped _______. A. FOB shipping point; FOB destination B. FOB destination; FOB shipping point C. FOB destination; FOB destination D. FOB shipping point; FOB shipping point

A. FOB shipping point; FOB destination

Knomark Inc., sold inventory for $1,200 that was purchased for $700. Knomark records which of the following when it sells inventory using a periodic inventory system? A. No entry is required for cost of goods sold and inventory. B. Debit Cost of Goods Sold $700; credit Inventory $700. C. Debit Cost of Goods Sold $1,200; credit Inventory $1,200. D. Debit Inventory $700; credit Cost of Goods Sold $700.

A. No entry is required for cost of goods sold and inventory.

Ace Bonding Company purchased inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should Ace record the purchase using a periodic inventory system? A. Purchases 2,000 Accounts Payable 2,000 B. Cost of Goods Sold 2,000 Deferred Revenue 1,000 Sales Revenue 3,000 C. Inventory 2,000 Accounts Payable 2,000 D. Cost of Goods Sold 2,000 Gain 1,000 Accounts Payable 3,000

A. Purchases 2,000 Accounts Payable 2,000

Cost of goods sold is: A. Reported in the income statement B. Reported in the balance sheet C. A current asset D. The cost of inventory on hand at the end of the period

A. Reported in the income statement

If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000, and sales allowances of $2,000, the income statement will report net revenues of $91,000. A. True B. False

A. True

The LIFO difference (reserve) is the additional amount of inventory a company would report if it used FIFO instead of LIFO. A. True B. False

A. True

The Sales Discounts account is an example of a contra revenue account. A. True B. False

A. True

The adjustment to write down inventory from cost to its lower net realizable value includes a debit to Cost of Goods Sold and a credit to Inventory. A. True B. False

A. True

The portion of cost of goods available for sale that is not assigned to ending inventory is assigned to cost of goods sold. A. True B. False

A. True

Under GAAP, a company is permitted to apply the lower of cost or net realizable value rule to total inventory as compared to item by item analysis. A. True B. False

A. True

When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized. A. True B. False

A. True

The Sales Returns account is an expense account A. True B. False

B. False

The net realizable value of accounts receivable is the full amount owed by customers A. True B. False

B. False

A company has the following inventory transactions: Jan. 1 Beginning inventory 100 units @ $4 each Jan. 15 Purchase 100 units @ $5 each Jan. 31 Purchase 100 units @ $6 each What would be the cost of goods sold under the FIFO method if 120 units were sold in January? A. $ 600 B. $ 500 C. $ 620 D. $ 720

B. $ 500

The following information pertains to Royce, Inc., at the end of the year: Credit Sales $60,000 Accounts Receivable 7,000 Allowance for Uncollected Accounts 400 Cash Sales 20,000 Royce uses the percentage‐of‐credit‐sales method and estimates 1% of sales are uncollected. What is the ending balance of the allowance account after the year‐end adjustment? A. $600 B. $1,000 C. $200 D. $1,200

B. $1,000

On September 1, 2018, Middleton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp. report during 2018? A. $20 B. $40 C. $30 D. $60

B. $40

Davis Hardware Company uses a periodic inventory system. How should Davis record the sale of inventory costing $620 for $960 on account? A. Cost of Goods Sold 620 Purchases 620 Accounts Receivable 960 Sales Revenue 960 B. Accounts Receivable 960 Sales Revenue 960 C. Purchases 620 Income 340 Sales Revenue 960 D. Accounts Receivable 960 Sales Revenues 620 Income 340

B. Accounts Receivable 960 Sales Revenue 960

Which of the following transactions would increase the balance of the inventory account for a company using the perpetual inventory system? A. A return of damaged inventory to the vendor B. Costs of incoming freight charges on merchandise inventory C. A purchase discount taken for prompt payment D. Shipping charges for outgoing inventory

B. Costs of incoming freight charges on merchandise inventory

At the end of the year, Mark Inc. estimates future bad debts to be $6,500. The Allowance for Uncollected Accounts has a credit balance of $2,500 before any year‐end adjustment. What adjustment should Mark Inc. record for the estimated bad debts at the end of the year? A. Debit Bad Debt Expense, $6,500; credit Allowance for Uncollected Accounts, $6,500 B. Debit Bad Debt Expense, $4,000; credit Allowance for Uncollected Accounts $4,000 C. Debit Allowance for Uncollected Accounts, $9,000; credit Bad Debt Expense, $9,000 D. Debit Bad Debt Expense, $9,000; credit Allowance for Uncollected Accounts, $9,000

B. Debit Bad Debt Expense, $4,000; credit Allowance for Uncollectible Accounts $4,000

A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its older accounts to be uncollectible. If the company has $40,000 of newer accounts and $5,000 of older accounts, the total estimate of uncollectible accounts is $2,000. A. True B. False

B. False

A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances. A. True B. False

B. False

Companies are not allowed to report inventory costs by assuming which units of inventory are sold and which units still remain on hand. A. True B. False

B. False

During periods of consistently falling prices, the FIFO inventory method will produce the highest possible amount of net income A. True B. False

B. False

During periods of rising costs, FIFO generally results in a higher cost of goods sold. A. True B. False

B. False

During periods of rising costs, LIFO generally results in a higher ending inventory balance. A. True B. False

B. False

Even though the percentage‐of‐receivables method and the percentage‐of‐credit‐sales method use different accounts to estimate future uncollectible accounts, the amount of bad debt expense reported in the income statement will always be the same under the two methods. A. True B. False

B. False

For inventory that is shipped FOB destination, title transfers from the seller to the buyer once the seller ships the inventory.

B. False

For most companies, actual physical flow of their inventory follows LIFO. A. True B. False

B. False

Goods in transit shipped FOB shipping point should be included in the seller's ending inventory. A. True B. False

B. False

Which level of profitability is considered profit from normal operations? A. Gross profit B. Operating income C. Income before taxes D. Net income

B. Operating income

An overstatement of ending inventory in one period results in A. an overstatement of the ending inventory of the next period. B. an understatement of gross margin of the next period. C. an overstatement of gross margin of the next period. D. no effect on gross margin of the next period.

B. an understatement of gross margin of the next period.

A company has the following inventory transactions: Jan. 1 Beginning inventory 100 units @ $4 each Jan. 15 Purchase 100 units @ $5 each Jan. 31 Purchase 100 units @ $6 each What would be the cost of goods sold under the LIFO method if 120 units were sold in January? A. $ 600 B. $ 500 C. $ 700 D. $ 720

C. $ 700

The following information relates to inventory for LePage's, Inc. March 1 Beginning Inventory: 20 $2 March 7 Purchase: 15 $3 March 11 Sale: (25) $7 March 12 Purchase: 20 $4 Ending inventory: 30 At what amount would LePage's report ending inventory using FIFO cost flow assumptions? A. $55 B. $170 C. $110 D. $70

C. $110

The direct write‐off method is not normally an acceptable method for GAAP because it fails to report: A. Revenue from the sale of goods or services to customers B. Cash collected from customers C. Accounts receivable for their net realizable value D. The amounts receivable from customers

C. Accounts receivable for their net realizable value

A note receivable is reported in the balance sheet A. Always as a current asset B. Always as a long‐term asset C. As either a current asset or long‐term asset depending on the expected collection date D. As a contra asset

C. As either a current asset or long‐term asset depending on the expected collection date

LIFO is considered an income statement approach for reporting inventory because it: A. Always results in a higher amount of net income being reported. B. Better approximates the value of ending inventory C. Better approximates inventory cost necessary to generate revenue. D. Always results in a lower amount of net income being reported

C. Better approximates inventory cost necessary to generate revenue.

Gross profit is calculated as net sales minus A. Nonoperating expenses and income tax expense. B. Operating expenses. C. Cost of goods sold. D. All of the other answers are subtracted from net sales.

C. Cost of goods sold.

Inventory does not include A. Materials used in the production of goods to be sold. B. Assets intended to be sold in the normal course of business. C. Equipment used in the manufacturing of assets for sale. D. Assets currently in production for normal sales.

C. Equipment used in the manufacturing of assets for sale.

An increase in a company's receivables turnover ratio typically means the company is A. Having trouble paying debts as they become due. B. Less profitable. C. More effectively granting and collecting credit to customers. D. Losing customers to its competitors.

C. More effectively granting and collecting credit to customers.

The purpose of recording an allowance for uncollectible accounts is to: A. Record the sales returns and allowances B. Report net sales conservatively C. Report accounts receivable at net realizable value D. Report accounts receivable for the total amount of sales in the period

C. Report accounts receivable at net realizable value

Which of the following computations would be used to compute Net Revenue? A. Total Revenue + Accounts Receivable - Sales Discounts - Sales Allowances B. Net Revenue + Sales Allowances - Sales Discounts C. Total Revenue - Sales Discounts - Sales Allowances D. Net Income - Change in Accounts Receivable

C. Total Revenue - Sales Discounts - Sales Allowances

All of the following are inventory costing methods except A. last‐in, last‐out. B. average‐cost C. perpetual. D. specific identification.

C. perpetual.

At the end of the year, a company reports the following inventory amounts ($ per unit): Item # of Units Cost Net Realizable Value Item: A Units: 100 Cost: $4 NRV: $8 Item: B Units: 150 Cost: $8 NRV: $6 The amount to report for ending inventory using the lower of cost and net realizable value is: A. $1,600 B. $1,700 C. $2,000 D. $1,300

D. $1,300

Given the information in the table below, what is the company's gross profit? Sales revenue $350,000 Accounts receivable $280,000 Ending inventory $230,000 Cost of goods sold $180,000 Sales returns $50,000 Sales discount $20,000 A. $280,000 B. $170,000 C. $50,000 D. $100,000

D. $100,000

At December 31, Tremble Music had account balances in Accounts Receivable of $300,000 and in Allowance for Uncollected Accounts of $1,000 (debit) before any adjustments. An analysis of Tremble's December 31 accounts receivable suggests that 5% of the account balances are not expected to be collected. The balance of Allowance for Uncollected Accounts after adjustment will be: A. $1,000 B. $16,000 C. $14,000 D. $15,000

D. $15,000

Consider the following year‐end information for Amalgamated Corporation: Cost of goods sold $500,000 Sales revenue 1,000,000 Nonoperating expenses 100,000 Operating expenses 300,000 Income tax expense 100,000 What amount will Amalgamated report for operating income? A. $100,000 B. $300,000 C. $500,000 D. $200,000

D. $200,000

Crimson Inc. recorded credit sales of $750,000, of which $600,000 is not yet due, $100,000 is past due for up to 180 days, and $50,000 is past due for more than 180 days. Under the aging of receivables approach, Crimson Inc. expects it will not collect 1% of the amount not yet due, 10% of the amount past due for up to 180 days, and 20% of the amount past due for more than 180 days. The allowance account had a debit balance of $1,000 before adjustment. After adjusting for bad debt expense, what is the ending balance of the allowance account? A. $29,000 B. $28,000 C. $27,000 D. $26,000

D. $26,000

Amalgamated Company has the following information: Total Revenues- $860,000 Sales returns and allowances- $50,000 Sales discounts- $30,000 Ending inventory- $100,000 What is the amount of net revenues for Amalgamated? A. $330,000 B. $230,000 C. $680,000 D. $780,000

D. $780,000

The choice of inventory cost flow assumptions affects which of the following amounts? A. Inventory. B. Cost of goods sold. C. Gross profit. D. All of the other answers are affected by the inventory cost flow assumption.

D. All of the other answers are affected by the inventory cost flow assumption.

Which of the following items are classified as receivables? A. Tax refund claims B. Amounts owed by customers C. Amounts loaned and expected to be collected D. All of the other answers are classified as receivables

D. All of the other answers are classified as receivables

The practice of using the lower of cost and net realizable value to evaluate inventory reflects which of the following accounting principles? A. Matching principle B. Materiality C. Conservatism D. Answers A and C

D. Answers A and C

Suppose Company A places an order with Company B on May 12. On May 14, Company B ships the ordered goods to Company A with terms FOB destination. The goods arrive at Company A on May 17. Company A begins selling the goods to customers on May 19 and pays Company B on May 20. When would Company A record the cost of inventory? A. May 12 B. May C. May 19 D. May 17

D. May 17

Costs that are expensed when incurred are called? A. Product costs B. Direct costs C. Inventoriable costs D. Period costs E. Indirect costs

D. Period costs

Identify the condition(s) that must exist for a sale and the related receivable to be recognized. A. Collection of cash is probable B. The company must have collected cash from at least one previous sale to the customer C. Goods or services have been provided to the customer D. Two of the other answers are conditions that must exist

D. Two of the other answers are conditions that must exist

Which of the following is not a period cost? A. Legal costs B. Public relations costs C. Sales commissions D. Wages of assembly‐line workers E. The salary of a company's chief financial officer (CFO).

D. Wages of assembly‐line workers

Which of the following statements is true? A. Product costs affect only the balance sheet B. Product costs affect only the income statement C. Period costs affect only the balance sheet D. Neither product costs nor period costs affect the Statement of Retained Earnings. This can also be a true statement if the period costs were prepaid (i.e., prepaid advertising, depreciation) E. Product costs eventually affect both the balance sheet and the income statement.

E. Product costs eventually affect both the balance sheet and the income statement.