ACCT Chapter 7
Atom Company just began business and made the following four inventory purchases in June: June 1 150 units $ 990 June 10 200 units 1,344 June 15 200 units 1,368 June 28 150 units 1,062 $4,764 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is a. $1,326. b. $1,320. c. $1,404. d. $1,416.
a. $1,326. Solution: $990 + [($1,344 / 200) x (200 - 150)] = $1,326
A company just began business and made the following four inventory purchases in June: June 1 150 units $ 990 June 10 200 units 1,344 June 15 200 units 1,368 June 28 150 units 1,062 $4,764 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is a. $1,361. b. $1,416. c. $1,320. d. $1,344.
a. $1,361. Solution: [($4,764 / 700) x 200] = $1,361
Sassy Saxophones has the following inventory data: July 1 Beginning inventory 50 units at $120 5 Purchases 300 units at $112 14 Sale 200 units 21 Purchases 150 units at $115 30 Sale 140 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis? a. $18,320 b. $18,370 c. $38,480 d. $38,530
a. $18,320 Solution: (50 + 300 - 200 + 150 - 140) =160; (50 x $120) + (110 x $112) = $18,320
In reviewing the accounts receivable, the cash realizable value is $28,000 before the write-off of a $2,000 account. What is the cash receivable value after the write-off? a. $28,000 b. $2,000 c. $30,000 d. $26,000
a. $28,000 Solution: $28,000 before and after write-off
Peach Pink Inc. has the following inventory data: July 1 Beginning inventory 40 units at $20 $ 800 7 Purchases 140 units at $21 2,940 22 Purchases 20 units at $22 440 $4,180 A physical count of merchandise inventory on July 31 reveals that there are 50 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is a. $3,110. b. $3,170. c. $3,010. d. $3,080.
a. $3,110. Solution: $800 + [(200 - 50 - 40) x $21] = $3,110
Apple-A-Day Company has the following inventory data: July 1 Beginning inventory 40 units at $20 $ 800 7 Purchases 140 units at $21 2,940 22 Purchases 20 units at $22 440 $4,180 A physical count of merchandise inventory on July 31 reveals that there are 50 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is a. $3,170. b. $3,080. c. $3,110. d. $3,010.
a. $3,170. Solution: $440 + [(200 - 50 - 20) x $21] = $3,170
Automobile Audio has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under FIFO is a. $657 b. $1,269 c. $632 d. $1,295
a. $657 Solution: (90 x $6.60) + [(100 - 90) x $6.30] = $657
Radical Radials Company has the following inventory data: July 1 Beginning inventory 30 units at $19 $ 570 7 Purchases 105 units at $20 2,100 22 Purchases 15 units at $22 330 $3,000 A physical count of merchandise inventory on July 31 reveals that there are 48 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is a. $930 b. $912 c. $960 d. $1,056.
a. $930 Solution: $570 + [(48 - 30) x $20] = $930
Given equal circumstances and generally rising costs, which inventory method will increase the tax expense the most? a. FIFO b. LIFO c. Average cost d. Income tax expense for the period will be the same under all assumptions.
a. FIFO
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. LIFO method. c. average-cost method. d. tax method.
a. FIFO method.
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 in transit from another company shipped FOB shipping point. c. Goods shipped on consignment to another company. d. All of these answer choices should be included.
a. Goods held on consignment from another company.
The managers of Hong Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices? a. LIFO b. Average-Cost c. FIFO d. Physical inventory method
a. LIFO Last-in, First-out (LIFO): Under LIFO, the cost of goods sold is based upon the cost of material bought towards the end of the period, resulting in costs that closely approximate current costs. The inventory, however, is valued on the basis of the cost of materials bought earlier in the year. In periods of rising prices (Inflation) LIFO has higher cost of goods sold and lower value of Inventory/net income; in periods of declining prices (deflation) it has lower cost of goods sold and higher value of inventory. Last-in, First-out (LIFO): Under LIFO, the cost of goods sold is based upon the cost of material bought towards the end of the period, resulting in costs that closely approximate current costs. The inventory, however, is valued on the basis of the cost of materials bought earlier in the year. In periods of rising prices (Inflation) LIFO has higher cost of goods sold and lower value of Inventory/net income; in periods of declining prices (deflation) it has lower cost of goods sold and higher value of inventory.
Under the allowance method, writing off an uncollectible account a. affects only balance sheet accounts. b. affects both balance sheet and income statement accounts. c. affects only income statement accounts. d. is not acceptable practice.
a. affects only balance sheet accounts.
The net amount expected to be received in cash from receivables is termed the a. cash realizable value. b. cash-good value. c. gross cash value. d. cash-equivalent value.
a. cash realizable value.
The term "FOB" denotes a. free on board. b. freight on board. c. free only (to) buyer. d. freight charge on buyer.
a. free on board.
The balance of Allowance for Doubtful Accounts prior to making the adjustment to record Bad Debt Expense a. is relevant when using the percentage-of-receivables basis. b. is relevant when using the direct write-off method. c. is relevant to both the percentage-of-receivables basis and the direct write-off method. d. will never show a balance at this stage in the accounting cycle.
a. is relevant when using the percentage-of-receivables basis.
Goods held on consignment are a. never owned by the consignee. b. included in the consignee's ending inventory. c. kept for sale on the premises of the consignor. d. included as part of no one's ending inventory.
a. never owned by the consignee.
Echo Sound Company just began business and made the following four inventory purchases in June: June 1 150 units $ 1,040 June 10 200 units 1,560 June 15 200 units 1,680 June 28 150 units 1,320 $5,600 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. The inventory method which results in the highest gross profit for June is a. the FIFO method. b. the LIFO method. c. the average cost method. d.not determinable.
a. the FIFO method.
Selection of an inventory costing method by management does not usually depend on a. the fiscal year end. b. income statement effects. c. balance sheet effects. d. tax effects.
a. the fiscal year end.
If goods in transit are shipped FOB destination a. the seller has legal title to the goods until they are delivered. b. the buyer has legal title to the goods until they are delivered. c. the transportation company has legal title to the goods while the goods are in transit. d. no one has legal title to the goods until they are delivered.
a. the seller has legal title to the goods until they are delivered. FOB (Freight on Board) Destination is a shipping term which means that the seller retains the legal title to the goods until they reach the location of the buyer. FOB Shipping Point means the buyer accepts the title of the goods at the shipment point and assumes all risk once the seller ships the product. The buyer is responsible if the goods are damaged or lost while in transit.
Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts a. total assets decrease. b. total assets are unchanged. c. net income is unchanged. d. liabilities decrease.
a. total assets decrease.
Under the allowance method, when a specific account is written off a. total assets will be unchanged. b. net income will decrease. c. total assets will decrease. d. total assets will increase.
a. total assets will be unchanged.
The Allowance for Doubtful Accounts is necessary because a. when recording bad debt expense, it is not possible to know which specific accounts will not pay. b. uncollectible accounts that are written off must be accumulated in a separate account. c. a liability results when a credit sale is made. d. management needs to accumulate all the credit losses over the years.
a. when recording bad debt expense, it is not possible to know which specific accounts will not pay.
Manufactured inventory that has begun the production process but is not yet completed is a. work in process. b. raw materials. c. merchandise inventory. d. finished goods.
a. work in process.
Bonkers Bananas has the following inventory data: July 1 Beginning inventory 40 units at $20 $ 800 7 Purchases 140 units at $21 2,940 22 Purchases 20 units at $22 440 $4,180 A physical count of merchandise inventory on July 31 reveals that there are 50 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is a. $1,100. b. $1,010. c. $1,070. d. $1,000.
b. $1,010. Solution: $800 + [(50 - 40) x $21] = $1,010
Orange-Aide Company has the following inventory data: July 1 Beginning inventory 40 units at $20 $ 800 7 Purchases 140 units at $21 2,940 22 Purchases 20 units at $22 440 $4,180 A physical count of merchandise inventory on July 31 reveals that there are 50 units on hand. Using the average cost method, the value of ending inventory is a. $1,070 b. $1,045 c $1,050 d $1,100
b. $1,045 Solution: [($4,180 / 200) x 50] = $1,045
Serene Stereos has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under FIFO is a. $657 b. $1,269 c. $632 d. $1,295
b. $1,269 Solution: (30 x $6.00) + (120 x $6.45) + [(300 - 100 - 30 - 120) x $6.30] = $1,269
Laser Listening has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Assuming that the specific identification method is used and that ending inventory consists of 30 units from each of the three purchases and 10 units from the November 1 inventory, cost of goods sold is a. $640. b. $1,286 c. $1,281 d. $1,254
b. $1,286 Solution: (20 x $6.00) + (90 x $6.45) + (30 x $6.30) + (60 x $6.60) = $1,286
Alpha First Company just began business and made the following four inventory purchases in June: June 1 150 units $ 1,040 June 10 200 units 1,560 June 15 200 units 1,680 June 28 150 units 1,320 $5,600 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is a. $1,456 b. $1,508 c. $1,848 d. $1,824
b. $1,508 Solution: $1,040 + [($1,560 / 200) x (210 - 150)] = $1,508
Clear Clarinets has the following inventory data: July 1 Beginning inventory 50 units at $120 5 Purchases 300 units at $112 14 Sale 200 units 21 Purchases 150 units at $115 30 Sale 140 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis? a. $18,220 b. $18,370 c. $38,480 d. $38,530
b. $18,370 Solution: (50 + 300 - 200 + 150 - 140) = 160; (150 x $115) + (10 x $112) = $18,370
Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $45,000. If the balance of the Allowance for Doubtful Accounts is $6,000 balance before adjustment, what is the amount of bad debt expense for that period? a. $45,000 b. $39,000 c. $51,000 d. $6,000
b. $39,000 Solution: $45,000 - $6,000 = $39,000 (Est. uncoll. accts. − ADA bal.)
Using the allowance method, the uncollectible accounts for the year is estimated to be $50,000. If the balance for the Allowance for Doubtful Accounts is $9,000 before adjustment, what is the amount of bad debt expense for the period? a. $9,000 b. $41,000 c. $50,000 d. $59,000
b. $41,000 Solution: $50,000 - $9,000 = $41,000 (Est. uncoll. accts. − ADA bal.)
Delightful Discs has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO is a. $657 b. $632 c. $1,269 d. $1,295
b. $632 Solution: (30 x $6.00) + [(100 - 30) x $6.45] = $632
Noise Makers Inc. has the following inventory data: July 1 Beginning inventory 30 units at $19 $ 570 7 Purchases 105 units at $20 2,100 22 Purchases 15 units at $22 330 $3,000 A physical count of merchandise inventory on July 31 reveals that there are 48 units on hand. Using the average cost method, the value of ending inventory is a. $930. b. $960. c. $976. d. $990.
b. $960. Solution: [($3,000 / 150) x 48] = $960
Pop-up Party Favors Inc. has the following inventory data: July 1 Beginning inventory 30 units at $19 $ 570 7 Purchases 105 units at $20 2,100 22 Purchases 15 units at $22 330 $3,000 A physical count of merchandise inventory on July 31 reveals that there are 48 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is a. $930. b. $990. c. $960. d. $1,056.
b. $990. Solution: $330 + [(48 - 15) x $20] = $990
Tidwell Company's goods in transit at December 31 include sales made (1) FOB destination (2) FOB shipping point and purchases made (3) FOB destination (4) FOB shipping point. Which items should be included in Tidwell's inventory at December 31? a. (2) and (3) b. (1) and (4) c. (1) and (3) d. (2) and (4)
b. (1) and (4)
When an account becomes uncollectible and must be written off a. Allowance for Doubtful Accounts should be increased. b. Accounts Receivable should be decreased. c. Bad Debt Expense should be decreased. d. Sales Revenue should be decreased.
b. Accounts Receivable should be decreased.
Which of the following terms best describes the assumption made in applying the four inventory methods? a. Goods flow b. Cost flow c. Asset flow d. Physical flow
b. Cost flow
In periods of rising prices, which is an advantage of using the LIFO inventory costing method? a. Ending inventory will include latest (most recent) costs and thus be more realistic. b. Cost of goods sold will include the latest (most recent) costs and thus will be more realistic. c. Net income will be the highest and thus reflect the prosperity of the company. d. Phantom profits are reported.
b. Cost of goods sold will include the latest (most recent) costs and thus will be more realistic.
Which inventory method generally results in costs allocated to ending inventory that will approximate their current cost? a. LIFO b. FIFO c. Average cost method d. Whichever method that produces the highest ending inventory figure
b. FIFO
In periods of inflation, phantom or paper profits may be reported as a result of using the a. perpetual inventory method. b. FIFO costing assumption. c. LIFO costing assumption. d. periodic inventory method.
b. FIFO costing assumption.
In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense? a. FIFO b. LIFO c. Average cost method d. Income tax expense for the period will be the same under all assumptions.
b. LIFO The use of LIFO when prices increase (inflation) results in a lower taxable income because the last inventory purchased had a higher price and results in a larger deduction. Conversely, the use of FIFO when prices increase (inflation) results in a higher taxable income because the first inventory purchased will have the lowest price.
In a period of rising prices, which of the following inventory methods generally results in the lowest amount of net income? a. Average cost method b. LIFO method c. FIFO method d. Need more information to answer
b. LIFO method First-in, First-out (FIFO): Under FIFO, the cost of goods sold is based upon the cost of material bought earliest in the period, while the cost of inventory is based upon the cost of material bought later in the year. This results in inventory being valued close to current replacement cost. During periods of rising prices (Inflation) FIFO has higher value of inventory/net income and lower cost of goods sold; in periods of declining prices (deflation) FIFO has lower value of inventory and higher cost of goods sold.In periods of declining prices (deflation) it has lower value of inventory and higher cost of goods sold. First-in, First-out (FIFO): Under FIFO, the cost of goods sold is based upon the cost of material bought earliest in the period, while the cost of inventory is based upon the cost of material bought later in the year. This results in inventory being valued close to current replacement cost. During periods of rising prices (Inflation) FIFO has higher value of inventory/net income and lower cost of goods sold; in periods of declining prices (deflation) FIFO has lower value of inventory and higher cost of goods sold.In periods of declining prices (deflation) it has lower value of inventory and higher cost of goods sold.
Which of the following is not a common cost flow assumption used in costing inventory? a. First-in, first-out b. Middle-in, first-out c. Last-in, first-out d. Average-cost
b. Middle-in, first-out
Which of the following is an inventory costing method? a. Periodic b. Specific identification c. Perpetual d. Lower of cost or market
b. Specific identification The specific identification inventory valuation method is a system for tracking every single item in an inventory individually from the time it enters the inventory until the time it leaves it. Usually used by companies that deal with high-value items such as jewelry, handicrafts, etc.,
The allowance method of accounting for uncollectible accounts is required if a. the company makes any credit sales. b. bad debts are significant in amount. c. the company is a retailer. d. the company charges interest on accounts receivable.
b. bad debts are significant in amount.
If companies have identical inventoriable costs but use different inventory flow assumptions when the price of goods have not been constant, then the a. cost of goods sold of the companies will be identical. b. cost of goods purchased during the year will be identical. c. ending inventory of the companies will be identical. d. net income of the companies will be identical.
b. cost of goods purchased during the year will be identical.
Inventory costing methods place primary reliance on assumptions about the flow of a. good. b. costs. c. resale prices. d. values.
b. costs.
Inventory costing methods place primary reliance on assumptions about the flow of a. goods. b. costs. c. resale prices. d. values.
b. costs.
If a company fails to record estimated bad debt expense, a. cash realizable value is understated. b. expenses are understated. c. revenues are understated. d. receivables are understated.
b. expenses are understated.
When the allowance method of accounting for uncollectible accounts is used, Bad Debt Expense is recorded a. in the year after the credit sale is made. b. in the same year as the credit sale. c. as each credit sale is made. d. when an account is written off as uncollectible.
b. in the same year as the credit sale.
To record estimated uncollectible accounts using the allowance method, the adjustment would be a(n) a. increase to Accounts Receivable and an increase to Allowance for Doubtful Accounts. b. increase to Bad Debt Expense and an increase to Allowance for Doubtful Accounts. c. decrease to Allowance for Doubtful Accounts and a decrease to Accounts Receivable. d. increase to Loss on Credit Sales and a decrease to Accounts Receivable.
b. increase to Bad Debt Expense and an increase to Allowance for Doubtful Accounts.
The factor which determines whether or not goods should be included in a physical count of inventory is a. physical possession. b. legal title. c. management's judgment. d. whether or not the purchase price has been paid.
b. legal title.
A problem with the specific identification method is that a. inventories can be reported at actual costs. b. management can manipulate income. c. matching is not achieved. d. the lower of cost or market basis cannot be applied.
b. management can manipulate income.
The receivable that is usually evidenced by a formal instrument of credit is a(n) a. trade receivable. b. note receivable. c. accounts receivable. d. income tax receivable.
b. note receivable.
Grape Gratuities Company has the following inventory data: July 1 Beginning inventory 40 units at $20 $ 800 7 Purchases 140 units at $21 2,940 22 Purchases 20 units at $22 440 $4,180 A physical count of merchandise inventory on July 31 reveals that there are 50 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is a. $1,170. b. $1,010. c. $1,070. d. $1,100.
c. $1,070. Solution: $440 + [(50 - 20) x $21] = $1,070
Quark Inc. just began business and made the following four inventory purchases in June: June 1 150 units $ 990 June 10 200 units 1,344 June 15 200 units 1,368 June 28 150 units 1,062 $4,764 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is a. $1,326. b. $1,320. c. $1,404. d. $1,416.
c. $1,404. Solution: $1,062 + [($1,368 / 200) x (200 - 150)] = $1,404
Baker Bakery Company just began business and made the following four inventory purchases in June: June 1 150 units $ 1,040 June 10 200 units 1,560 June 15 200 units 1,680 June 28 150 units 1,320 $5.600 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is a. $1,456 b. $1,508 c. $1,824 d. $1,848
c. $1,824 Solution: $1,320 + [($1,680 / 200) x (210 - 150)] = $1,824
Olympus Climbers Company has the following inventory data: July 1 Beginning inventory 30 units at $19 $ 570 7 Purchases 105 units at $20 2,100 22 Purchases 15 units at $22 330 $3,000 A physical count of merchandise inventory on July 31 reveals that there are 48 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is a. $930. b. $990. c. $2,010. d. $2,070.
c. $2,010. Solution: $570 + [(150 - 48 - 30) x $20] = $2,010
Hogan Industries had the following inventory transactions occur during 2022: Units Cost/unit Feb. 1, 2022 Purchase 108 $45 Mar. 14, 2022 Purchase 186 $47 May 1, 2022 Purchase 132 $49 The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $1,800, what is the company's after-tax income using FIFO? (rounded to whole dollars) a. $2,832 b. $3,288 c. $2,302 d. $1,982
c. $2,302 Solution: (108 x $45) + (186 x $47) + [(306 - 294) x $49] = $14,190; [(306 x $63) - $14,190] = $5,088; ($5,088 - $1,800) x .70 = $2,302
Trumpeting Trumpets has the following inventory data: July 1 Beginning inventory 50 units at $120 5 Purchases 300 units at $112 14 Sale 200 units 21 Purchases 150 units at $115 30 Sale 140 units Assuming that a periodic inventory system is used, what is the cost of goods sold on a FIFO basis? a. $18,320 b. $18,370 c. $38,480 d. $38,530
c. $38,480 Solution: (50 x $120) + [(200 + 140 - 50) x $112] = $38,480
Hogan Industries had the following inventory transactions occur during 2022: Units Cost/unit Feb. 1, 2022 Purchase 108 $45 Mar. 14, 2022 Purchase 186 $47 May 1, 2022 Purchase 132 $49 The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company's gross profit using FIFO? (rounded to whole dollars) a. $14,646 b. $14,190 c. $5,088 d. $4,632
c. $5,088 Solution: (108 x $45) + (186 x $47) + [(306 - 294) x $49] = $14,190; [(306 x $63) - $14,190] = $5,088
Using the allowance method, the uncollectible accounts for the year are estimated to be $50,000. If the balance for the Allowance for Doubtful Accounts is $9,000 before adjustment, what is the balance after adjustment? a. $9,000 b. $41,000 c. $50,000 d. $59,000
c. $50,000 Solution: $50,000 estimated uncollectible accounts
A company purchased inventory as follows: 200 units at $6.00 300 units at $6.60 The average unit cost for inventory is a. $6.00. b. $6.30. c. $6.36. d. $6.60.
c. $6.36. Solution: [($200 x $6.00) + (300 x $6.60)] / (200 + 300) = $6.36
When is a physical inventory usually taken? a. When goods are not being sold or received. b. When the company has its greatest amount of inventory. c. At the end of the company's fiscal year. d. When the company has its greatest amount of inventory and at the end of the company's fiscal year.
c. At the end of the company's fiscal year.
In a period of declining prices, which of the following inventory methods generally results in the lowest balance sheet figure for inventory? a. Average cost method b. LIFO method c. FIFO method d. Need more information to answer
c. FIFO method First-in, First-out (FIFO): Under FIFO, the cost of goods sold is based upon the cost of material bought earliest in the period, while the cost of inventory is based upon the cost of material bought later in the year. This results in inventory being valued close to current replacement cost. During periods of rising prices (Inflation) FIFO has higher value of inventory/net income and lower cost of goods sold; in periods of declining prices (deflation) FIFO has lower value of inventory and higher cost of goods sold.In periods of declining prices (deflation) it has lower value of inventory and higher cost of goods sold. Last-in, First-out (LIFO): Under LIFO, the cost of goods sold is based upon the cost of material bought towards the end of the period, resulting in costs that closely approximate current costs. The inventory, however, is valued on the basis of the cost of materials bought earlier in the year. In periods of rising prices (Inflation) LIFO has higher cost of goods sold and lower value of Inventory/net income; in periods of declining prices (deflation) it has lower cost of goods sold and higher value of inventory. Good page (with videos) that explain more: https://www.diffen.com/difference/FIFO_vs_LIFO#:~:text=Converse%20to%20the%20inflation%20scenario,of%20unsold%20inventory%20being%20higher.
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. LIFO will have the highest ending inventory. b. FIFO will have the highest cost of goods sold. c. FIFO will have the highest ending inventory. d. LIFO will have the lowest cost of goods sold.
c. FIFO will have the highest ending inventory.
Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic cost of goods sold. Which inventory costing method should Ace consider using? a. Average-cost because all inventory costs will then represent an average amount. b. Specific identification is the most realistic method because it involves the actual costs. c. LIFO because the cost of goods sold represents the latest costs. d. FIFO because the cost of goods sold represents the earliest costs.
c. LIFO because the cost of goods sold represents the latest costs.
Which of the following receivables would not be classified as an "other receivable"? a. Advance to an employee b. Refundable income tax c. Notes receivable d. Interest receivable
c. Notes receivable
Which of the following statements is correct with respect to inventories? a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold. b. It is generally good business management to sell the most recently acquired goods first. c. Under FIFO, the ending inventory is based on the latest units purchased. d. FIFO seldom coincides with the actual physical flow of inventory.
c. Under FIFO, the ending inventory is based on the latest units purchased.
Bad Debt Expense is considered a. an avoidable cost in doing business on a credit basis. b. an internal control weakness. c. a necessary risk of doing business on a credit basis. d. avoidable unless there is a recession.
c. a necessary risk of doing business on a credit basis.
Bad Debt Expense is reported on the income statement as a. part of cost of goods sold. b. an expense subtracted from net sales to determine gross profit. c. an operating expense. d. a contra revenue account.
c. an operating expense.
Accounts receivable are valued and reported on the balance sheet a. in the investments section. b. at gross amounts less sales returns and allowances. c. at cash realizable value. d. only if they are not past due.
c. at cash realizable value.
When an account is written off using the allowance method, accounts receivable a. is unchanged and the allowance account increases. b. increases and the allowance account increases. c. decreases and the allowance account decreases. d. decreases and the allowance account increases.
c. decreases and the allowance account decreases.
The direct write-off method of accounting for bad debts a. uses an allowance account. b. uses a contra asset account. c. does not require estimates of bad debt losses. d. is the preferred method under generally accepted accounting principles.
c. does not require estimates of bad debt losses.
Under the allowance method, Bad Debt Expense is recorded a. when an individual account is written off. b. when the loss amount is known. c. for an amount that the company estimates it will not collect. d. several times during the accounting period.
c. for an amount that the company estimates it will not collect.
An aging of a company's accounts receivable indicates that $9,000 is estimated to be uncollectible. If Allowance for Doubtful Accounts has a $3,200 balance, the adjustment to record bad debts for the period will require a a. increase to Bad Debt Expense for $9,000. b. decrease to Allowance for Doubtful Accounts for $5,800. c. increase to Bad Debt Expense for $5,800. d. increase to Allowance for Doubtful Accounts for $9,000.
c. increase to Bad Debt Expense for $5,800.
An aging of a company's accounts receivable indicates that $9,000 is estimated to be uncollectible. If Allowance for Doubtful Accounts has a $2,400 balance, the adjustment to record bad debts for the period will require a(n) a. increase to Bad Debt Expense for $9,000. b. decrease to Allowance for Doubtful Accounts for $6,600. c. increase to Bad Debt Expense for $6,600. d. increase to Allowance for Doubtful Accounts for $9,000.
c. increase to Bad Debt Expense for $6,600.
When the allowance method is used to account for uncollectible accounts, Bad Debt Expense is increased when a. a sale is made. b. an account becomes bad and is written off. c. management estimates the amount of uncollectibles. d. a customer's account becomes past due.
c. management estimates the amount of uncollectibles.
Manufacturers usually classify inventory into all the following general categories except: a. work in process b. finished goods c. merchandise inventory d. raw materials
c. merchandise inventory 4 Types of Inventory MRO (Maintenance, Repair, and Operating Supplies) Work in process Finished goods Raw materials
The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is a. called the matching principle. b. called the consistency principle. c. nonexistent; that is, there is no such accounting requirement. d. called the physical flow assumption.
c. nonexistent; that is, there is no such accounting requirement.
Under the allowance method of accounting for uncollectible accounts, a. the cash realizable value of accounts receivable is greater before an account is written off than after it is written off. b. Bad Debt Expense is increased when a specific account is written off as uncollectible. c. the cash realizable value of accounts receivable in the balance sheet is the same before and after an account is written off. d. Allowance for Doubtful Accounts is closed each year to Income Summary.
c. the cash realizable value of accounts receivable in the balance sheet is the same before and after an account is written off.
The LIFO inventory method assumes that the cost of the latest units purchased is a. the last to be allocated to cost of goods sold. b. the first to be allocated to ending inventory. c. the first to be allocated to cost of goods sold. d. not allocated to cost of goods sold or ending inventory.
c. the first to be allocated to cost of goods sold. LIFO Key Takeaways: Last in, first out (LIFO) is a method used to account for inventory. Under LIFO, the costs of the most recent products purchased (or produced) are the first to be expensed. LIFO is used only in the United States and governed by the generally accepted accounting principles (GAAP). Using LIFO typically lowers net income but is tax advantageous when prices are rising.
Notes or accounts receivables that result from sales transactions are often called a. sales receivables. b. non-trade receivables. c. trade receivables. d. merchandise receivables.
c. trade receivables.
Carryable CDs has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under LIFO is a. $657 b. $1,269 c. $632 d. $1,295
d. $1,295 Solution: (90 x $6.60) + (60 x $6.30) + [(200 - 150) x $6.45] = $1,295
Charlene Cosmetics Company just began business and made the following four inventory purchases in June: June 1 150 units $ 1,040 June 10 200 units 1,560 June 15 200 units 1,680 June 28 150 units 1,320 $5,600 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the average cost method, the amount allocated to the ending inventory on June 30 is a. $1,639. b. $1,824. c. $1,764. d. $1,680.
d. $1,680. Solution: ($5,600 / 700) x 210 = $1,680
Hogan Industries had the following inventory transactions occur during 2022: Units Cost/unit Feb. 1, 2022 Purchase 108 $45 Mar. 14, 2022 Purchase 186 $47 May 1, 2022 Purchase 132 $49 The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $1,800, what is the company's after-tax income using LIFO? (rounded to whole dollars) a. $2,832 b. $3,288 c. $2,302 d. $1,982
d. $1,982 Solution: (132 x $49) + [(306 - 132) x $47] = $14,646; [(306 x $63) - $14,646] = $4,632; ($4,632 - $1,800) x .70 = $1,982
Quiet Phones Company has the following inventory data: July 1 Beginning inventory 30 units at $19 $ 570 7 Purchases 105 units at $20 2,100 22 Purchases 15 units at $22 330 $3,000 A physical count of merchandise inventory on July 31 reveals that there are 48 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is a. $930. b. $990. c. $2,010. d. $2,070.
d. $2,070. Solution: $330 + [(150 - 48 - 15) x $20] = $2,070
Dole Industries had the following inventory transactions occur during 2022: Units Cost/unit Feb. 1, 2022 Purchase 90 $90 Mar. 14, 2022 Purchase 155 $94 May 1, 2022 Purchase 110 $98 The company sold 255 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $2,500, what is the company's after-tax income using LIFO? (rounded to whole dollars) a. $5,220 b. $5,404 c. $4,186 d. $3,654
d. $3,654 Solution: (110 x $98) + [(255 - 110) x $94] = $24,410; [(255 x $126) - $24,410] = $7,720; ($7,720 - $2,500) x .70 = $3,654
Hogan Industries had the following inventory transactions occur during 2022: Units Cost/unit Feb. 1, 2022 Purchase 108 $45 Mar. 14, 2022 Purchase 186 $47 May 1, 2022 Purchase 132 $49 The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company's gross profit using LIFO? (rounded to whole dollars) a. $14,646 b. $14,190 c. $5,088 d. $4,632
d. $4,632 Solution: (132 ´ $49) + [(306 - 132) x $47] = $14,646; [(306 x $63) - $14,646] = $4,632
At December 31, 2022, Mohling Company's inventory records indicated a balance of $632,000. Upon further investigation it was determined that this amount included the following: · $112,000 in inventory purchases made by Mohling shipped from the seller 12/27/22 terms FOB destination, but not due to be received until January 2 · $74,000 in goods sold by Mohling with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6 · $6,000 of goods received on consignment from Dollywood Company What is Mohling's correct ending inventory balance at December 31, 2022? a. $520,000 b. $626,000 c. $440,000 d. $514,000
d. $514,000 Solution: $632,000 - $112,000 - $6,000 = $514,000 (Inv. bal. − inv. pur. − consign. goods)
Dole Industries had the following inventory transactions occur during 2022: Units Cost/unit Feb. 1, 2022 Purchase 90 $90 Mar. 14, 2022 Purchase 155 $94 May 1, 2022 Purchase 110 $98 The company sold 255 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company's gross profit using LIFO? (rounded to whole dollars) a. $24,410 b. $23,650 c. $8,480 d. $7,720
d. $7,720 Solution: (110 x $98) + [(255 - 110) x $94] = $24,410; [(255 x $126) - $24,410] = $7,720
At December 31, 2022, Howell Company's inventory records indicated a balance of $878,000. Upon further investigation it was determined that this amount included the following: · $168,000 in inventory purchases made by Howell shipped from the seller 12/27/22 terms FOB destination, but not due to be received until January 2 · $111,000 in goods sold by Howell with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6. · $9,000 of goods received on consignment from Westwood Company What is Howell's correct ending inventory balance at December 31, 2022? a. $710,000 b. $869,000 c. $590,000 d. $701,000
d. $701,000 Solution: $878,000 - $168,000 - $9,000 = $701,000 (Inv. bal. − inv. pur. − consign. goods)
Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic ending inventory. Which inventory costing method should Ace consider using? a. Average-cost because all inventory costs will then represent an average amount. b. Specific identification is the most realistic method because it involves the actual costs. c. LIFO because ending inventory represents the earliest costs. d. FIFO because ending inventory represents the latest costs.
d. FIFO because ending inventory represents the latest costs.
Reeves Company is taking a physical inventory on March 31, the last day of its fiscal year. Which of the following must be included in this inventory count? a. Goods in transit to Reeves, FOB destination b. Goods that Reeves is holding on consignment for Parker Company c. Goods in transit that Reeves has sold to Smith Company, FOB shipping point d. Goods that Reeves is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due
d. Goods that Reeves is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due
Of the following companies, which one would not likely employ the specific identification method for inventory costing? a. Music store specializing in organ sales b. Farm implement dealership c. Antique shop d. Hardware store
d. Hardware store Specific identification method is usually used by companies that deal with high-value items such as jewelry, handicrafts, etc.,
Given equal circumstances, which inventory method would probably be the most time-consuming? a. FIFO b. LIFO c. Average-cost d. Specific identification.
d. Specific identification.
Under the allowance method of accounting for bad debts, why must uncollectible accounts receivable be estimated at the end of the accounting period? a. To allow the collection department to schedule work for the next accounting period. b. To determine the gross realizable value of accounts receivable. c. The IRS rules require the company to make the estimate. d. To match bad debt expense to the period in which the revenues were earned.
d. To match bad debt expense to the period in which the revenues were earned.
An assumption about cost flow is used a. because it is required by the income tax regulation. b. even when there is no change in the purchase price of inventory. c. only when the flow of goods cannot be determined. d. because prices usually change, and tracking which units have been sold is difficult.
d. because prices usually change, and tracking which units have been sold is difficult.
The specific identification method of costing inventories is used when the a. physical flow of units cannot be determined. b. company sells large quantities of relatively low-cost homogeneous items. c. company sells large quantities of relatively low-cost heterogeneous items. d. company sells a limited quantity of high-unit cost items.
d. company sells a limited quantity of high-unit cost items.
The account Allowance for Doubtful Accounts is classified as a(n) a. liability. b. contra account of Bad Debt Expense. c. expense. d. contra account to Accounts Receivable.
d. contra account to Accounts Receivable.
Two methods of accounting for uncollectible accounts are the a. allowance method and the accrual method. b. allowance method and the net realizable method. c. direct write-off method and the accrual method. d. direct write-off method and the allowance method.
d. direct write-off method and the allowance method.
Allowance for Doubtful Accounts on the balance sheet a. is offset against total current assets. b. increases the cash realizable value of accounts receivable. c. appears under the heading "Other Assets." d. is deducted from accounts receivable.
d. is deducted from accounts receivable.
The direct write-off method of accounting for uncollectible accounts a. emphasizes the matching of expenses with revenues. b. emphasizes balance sheet relationships. c. emphasizes cash realizable value. d. is not generally accepted as a basis for estimating bad debts.
d. is not generally accepted as a basis for estimating bad debts.
The selection of an appropriate inventory cost flow assumption for an individual company is made by a. the external auditors. b. the SEC. c. the internal auditors. d. management.
d. management.
The specific identification method of inventory costing a. always maximizes a company's net income. b. always minimizes a company's net income. c. has no effect on a company's net income. d. may enable management to manipulate net income.
d. may enable management to manipulate net income.
When an account is written off using the allowance method, the a. cash realizable value of total accounts receivable will increase. b. net accounts receivable will decrease. c. allowance account will increase. d. net accounts receivable will stay the same.
d. net accounts receivable will stay the same.
Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is increased a. when a credit sale is past due. b. at the end of each accounting period. c. whenever a pre-determined amount of credit sales have been made. d. when an account is determined to be uncollectible.
d. when an account is determined to be uncollectible.
Piper Pipes has the following inventory data: July 1 Beginning inventory 50 units at $120 5 Purchases 300 units at $112 14 Sale 200 units 21 Purchases 150 units at $115 30 Sale 140 units Assuming that a periodic inventory system is used, what is the cost of goods sold on a LIFO basis? a. $18,320 b. $18,370 c. $34,480 d.$38,530
d.$38,530 Solution: (150 x $115) + [(200 + 140 - 150) x $112] = $38,530
