Accounting CH. 5

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Which of the following types of inventory accounts would be used by a wholesaler or retailer?
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Merchandise Inventory
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The inventory account a manufacturer uses to record the cost of products completed and available for sale is called..
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Finished Goods Inventory
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Items should be reported as part of the company’s “inventory” at year end, if they are…
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purchased from a creditor, available for sale, and paid for the following year
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For what reason might retailers like Target select an accounting period that ends on or near the end of January?
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Business activity has reached a slow period that is suited to the preparation of its financial statements at the end of the year.
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Which one of the following accounts most likely would appear on the income statement of a merchandise company, nut not on the income statement of a service company?
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Cost of Goods Sold
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Which of the following ratios is a common analytical tool used by merchandise corporations, but not by service corporations?
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Gross Profit Ratio
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A customer returned damaged goods for credit. Which of the seller’s accounts decreases?
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Accounts Receivable
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Asago Co. sold merchandise to Health Co. on account, $18,000, terms 2/15, net 45. The cost of the merchandise sold is $15,500. Asago Co. issued a credit memo for $1,750 for merchandise returned that originally cost $1,400. The Health Co. paid the invoice within the discount period. What is amount of net sales from the above transactions?
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$15,925
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A company using the periodic inventory system has the following account balances: Merchandise Inventory at the beginning of the year, $3,600; Freight-In, $650; Purchases, $10,700; Purchases Returns and Allowances, $1,950; Purchases Discounts, $330. The cost of merchandise purchased is equal to
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$9,070
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Which of the following terms best describes “Cost of goods available for sale”?
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Cost of goods available for sale is allocated into cost of goods on hand and cost of goods sold at the end of the fiscal year.
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Ending inventory is equal to the cost of items on hand plus…
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Merchandise in transit sold to customers FOB destination.
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Klein’s Shoe Company uses a perpetual inventory system. The beginning balance in its inventory account is $1,500 and the ending balance is $1,000. Cost of goods is $6,500. What was the amount of inventory purchased during the year?
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$6,000
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What effects on a retail store’s accounting equation occur when merchandise returned by customers is recorded?
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Assets and stockholders’ equity decrease
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Baker Corp. sold merchandise to a customer on credit. The invoice amount was $1,000; the invoice date was June 10; credit terms were 1/10, n/30. Which one of the following statements is true?
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The customer should pay $1,000 if the invoice is paid on July 9.
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Blenham, Inc. sells merchandise on credit. If a customer pays its balance due within the discount period, what is the effect of the payment on Blenham’s accounting equation?
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Assets and Stockholders’ equity decrease.
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Blenham, Inc. sells merchandise on credit. If a customer pays its balance due after the discount period has passed, what its he effect of the payment on Blenham’s accounting equation?
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No net effect.
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Sales discounts is classified as what type of account?
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contra-revenue
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When an inventory system updates the inventory account at the time of each sale, this is known as…
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Perpetual System
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Cost of Goods sold is equal to:
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cost of merchandise + transportation-in costs + beginning inventory – purchase returns and allowances and purchase discounts – ending inventory
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The recognition of cost of goods sold expense in the same period that sales revenue is recognized from the sale of merchandise is a good example of the:
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matching principle
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In a periodic inventory system, the cost of purchases is recognized as:
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an integral part of the calculation of cost of goods sold
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The cost of goods sold is:
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Goods available for sale less ending inventory
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Slotkin Company buys designer clothing to sell in its retail stores. Since much of the merchandise comes from Dallas and Europe, Slotkin Company must pay freight charges to get the merchandise shipped in. Which statement is true?
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Transportation-in is added to net purchases to determine cost of goods purchased in a periodic system.
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In order to determine inventory for its balance sheet, it is bet for a company to count the inventory at the end of its accounting period for
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Both the periodic and perpetual inventory system
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Texas Inc. sold merchandise to Fagin Corp. on December 28, 2014, with shipping terms of FOB destination. Fagin Corp. received the merchandise on January 3, 2015. Which one of the following statements is true?
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Fagin Corp. should record a liability for the purchase on January 3, 2015.
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How are purchase discounts and purchases returns recorded by a company using the periodic inventory system?
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In contra accounts to the Purchases account
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Park, Inc. purchased merchandise from Jay Zee Music Company in June 5,2015. The goods were shipped the same day. The merchandise’s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Park received the merchandise on June 10, 2015. Park paid the amount due on June 13, 2015. Park uses perpetual inventory system. When will the cost of merchandise sold be recorded as an expense?
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The date the merchandise is sold.
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Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2015. The goods were shipped the same day. The merchandise’s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Park received the merchandise on June 10, 2015. Park paid the amount due on June 13, 2015. Park uses the periodic inventory system. What effect does recording the purchase of merchandise on June 5, 2015 have on Park’s accounting equation?
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Liabilities increase and stockholders’ equity decreases
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Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2015. The goods were shipped the same day. The merchandise’s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Park received the merchandise on June 10, 2015. Park paid the amount due on June 13, 2015. If Park uses the periodic inventory system, the effect of recording the payment on June 13, 2015, will include
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A decrease to Accounts Payable for $15,000.
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Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2015. The goods were shipped the same day. The merchandise’s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Park received the merchandise on June 10, 2015. Park paid the amount due on June 13, 2015. When did title to the merchandise transfer from Jay Zee Music Company to Park?
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June 5, 2015
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Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2015. The goods were shipped the same day. The merchandise’s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Park received the merchandise on June 10, 2015. Park paid the amount due on June 13, 2015. Who is responsible for payment of the transportation costs on the merchandise sold by Jay Zee Music to Park?
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Park, Inc.
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Herndon Corp. purchased merchandise on account from Likert Corp. on November 18, 2014. On November 21, 2014, Herndon returned damaged merchandise to Likert and was granted an adjustment on its account. Herndon uses the periodic inventory system. What effect does the merchandise return have on Herndon’s accounting equation?
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Liabilities decrease and stockholders’ equity increases
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Transportation-in is
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part of cost of goods purchased
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Which one of the following is not a contra account?
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Transportation-in
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At the year-end inventory count, if goods in transit are shipped FOB destination, they should be included in the inventory count of
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the seller
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At the year-end inventory count, if goods are shipped FOB shipping point, they should be included in the inventory count of
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the buyer
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Many companies assign only the net invoice price for merchandise to inventory and cost of goods sold. All other costs, including transportation and other cost of bringing merchandise to the place of business, are charged to expense of the period in which they are incurred. Which accounting principle or concept is applied in this example?
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Cost/Benefit
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In order to evaluate a company’s gross profit ratio,
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the ratio should be compared with those of prior years and competitors
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All of the following statements regarding the gross profit ratio are true except…
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the gross profit ratio alone is sufficient to determine a company’s profitability FALSE
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The ending inventory balance represents
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unexpired costs and is reported in the balance sheet as an asset
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Cost of goods sold represent
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expired costs during a period and is reported in the income statement
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The Ramien Store held inventory items at the end of 2014. Which items should Ramien include as part of its total inventory cost?
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Cost of storying inventory before it is sold
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Which method assigns the cost of the most recent items purchased to ending inventory?
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FIFO
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Which method assigns the cost of the most recent items purchased to cost of goods sold?
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LIFO
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For which type of inventory would a company most likely use the specific identification method?
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Custom designed diamond rings
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A major advantage of the weighted average method of inventory costing is that
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it is relatively easy to apply
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Which method of inventory costing is not acceptable for financial accounting purposes?
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Replacement Cost
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Which inventory costing method results in the highest inventory balance during the period of rising prices?
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FIFO
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Which method might allow a company to make significant inventory purchases at year end the purpose of manipulating income?
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LIFO
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Which inventory costing method results in the lowest income expense during a period of decreasing prices?
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FIFO
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Dunring a period of increasing cost prices, which inventory costing method will yield in the lowest cost of goods sold?
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FIFO
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Xu Corp. started business at the beginning of 2015. Xu selected the FIFO method for its inventory. In order to maximize its profits for 2015 under this method, prices must be
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increasing
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Summer Inc. has been in business for 20 years. During that time the company has consistently used the LIFO inventory costing method. Because of inflation, prices for merchandise have increased consistently over the 20 years. The company has maintained the same inventory quantities over the 20-year period. Which one of the following statements is true?
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The ending inventory figure reported on the balance sheet may be significantly lower than its current value.
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Which one of the following statements regarding changing inventory methods is true?
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Changing inventory methods affects consistency.
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If cost of goods sold under FIFO was $8000 and was $10,000 underLIFO, assuming a tax rate of 40%, how much tax savings resulted from using LIFO?
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$800
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When would LIFO liquidation occur?
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As a result of selling more units than are purchased during the period.
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Accountants should be aware that LIFO liquidations can potentially result in which of the following?
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all of the results
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Zebra Company overstated its December 31, 2014 inventory by $5,200. Which statement is true concerning Zebra’s financial statement amounts for 2014?
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The current ratio is overstated
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If the amount assigned to ending inventory is incorrect…
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Both the balance and the income statement are affected.
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A company fails to record one storeroom full of inventory in its year-end inventory records. As a result, this will cause:
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an overstatement of cost of goods sold for the current year
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Hawk Store counted some of its inventory twice. As a result, its operation expenses will be…
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correct since operating expenses are not affected by inventory costs
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If a company overstates its ending inventory for the current year, what are the effects on cost of goods sold and net income for the current year?
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Effect on Cost of Goods Sold: understated Effect on Net Income: Overstated
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If a company understates its ending inventory balance for 2015 by $15,000, what are the effects on its net income for 2015 and 2014?
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Effect on 2015 Net Income: Understated by $15,000 Effect on 2014 Net Income: No effect
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If a company overstates its ending inventory balance for 2015 by 10,000, and understates its ending inventory balance for 2014 by $5,000 what are the effects on its net income for 2015 and 2014?
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2015 Net Income: Overstated by $15,000 2014 Net Income: Understated by $5,000
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If a company overstates its ending inventory balance for 2015 by $10,000, and overstates its ending inventory balance for 2014 by $5,000 what are the effects on its net income for 2015 and 2014?
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2015 Net Income: Overstated by $5000 2014 Net Income: Overstated by $5,000
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When the market value of inventory items has declined below its cost, with method would be the most appropriate in complying with GAAP?
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Lower of Cost or Market
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When inventories are written down due to the application of the lower of cost or market (LCM) rule, the account that is usually increased is…
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Lost on Decline in Inventory Value
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Which one of the following statements regarding the application of the lower of cost or market method is true?
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The lower of cost or market method is an exception to the historical cost principle
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All of the following statements are true except:
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Write-downs of inventory can be reversed in later periods under U.S. GAAP
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Which of these is not an acceptable inventory costing method under IFRS?
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LIFO
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Caruso, Inc. has an inventory turnover rate of 8 times. If its cost of goods is 150,000, then…
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The company’s average inventory is $18,750.
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A company began the year with $150,000 in inventory and ended the year with 170,000 in inventory. Cost of goods sold for the year amounted to 960,000. Assuming 360 days in a year, how long, on average, does it take the company to sell its inventory (to the nearest day)?
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60 days
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Payment for the acquisition of inventories is shown on the statement of cash flows as
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An operating activity
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Which of the following statements is true when using the indirect method of preparing the operating activities section of the statement of cash flows?
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Inventory increases are subtracted from net income

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