Pepperdine University - ACCT 591Chp 5&6 TestbankCHAPTER 5 - STATEMENTS & ANSWERS

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1. Retailers and wholesalers are both considered merchandising enterprises. 2. The operating cycle of a merchandising company ordinarily is shorter than that of a service company. 3. Sales revenu... e minus operating expenses equals gross profit. 4. Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs. 5. A periodic inventory system does not require a detailed record of inventory items. 6. The operating cycle involves the purchase and sale of merchandise inventory as well as the subsequent collection of cash from credit sales. 7. The purchase of inventory and its eventual sale lengthen the operating cycle of a merchandising company. 8. Under the periodic inventory system, cost of goods sold is treated as an account. 9. An advantage of using the periodic inventory system is that it requires less record keeping than the perpetual inventory system. 10. The periodic inventory system provides an up to date amount of inventory on hand. 11. A very small business most likely would have to use the perpetual inventory system. 12. The computer has increased greatly the use of the periodic inventory system. 13. Cost of Goods Sold is considered an expense of a merchandising firm. 14. Operating expenses are subtracted from revenue for a service enterprise and from gross profit for a merchandising enterprise. 15. Net sales minus cost of goods sold is called gross profit. 16. Under the perpetual inventory system, purchases of merchandise for sale are recorded in the Inventory account. 17. Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller. 18. The terms 2/10, net/30 mean that a 2 percent discount is allowed on payments made within the 10 days discount period. 19. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 20 days after the invoice date to take advantage of the cash discount. 20. Discounts taken by the buyer for early payment of an invoice are called sales discounts by the buyer. 21. If merchandise costing $5,000, with terms 2/10, n/30, is paid within 10 days, the amount of the purchase discount is $100. 22. When an invoice is paid within the discount period, the amount of the discount decreases Inventory. 23. Sales revenues are only earned during the period cash is collected from the buyer. 24. Cash register tapes provide evidence of credit sales. 25. The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts. 26. The revenue recognition principle applies to merchandising companies by recognizing sales revenues when the performance obligation is satisfied. 27. Sales allowances and Sales discounts are both designed to encourage customers to pay their accounts promptly. 28. Sales Discounts is a contra revenue account to Sales Revenue. 29. The normal balance of Sales Returns and Allowances is a credit. 30. When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period. 31. Sales Discounts and Sales Returns and Allowances both have normal debit balances. 5-2 Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition 32. Merchandise is sold for $5,000 with terms 1/10, n/30. If $1,000 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $40. 33. The terms 2/10, n/30 mean that a 2 percent discount is allowed on payments made over 10 but before 30 days after the invoice date. 34. The multiple-step income statement is considered more useful than the single-step income statement because it highlights the components of net income. 35. In a single-step income only one step is required in determining net income. 36. Freight-out appears as an operating expense in the income statement. 37. Gross profit appears on both the single-step and multiple-step forms of an income statement. 38. Nonoperating activities include revenues and expenses that are related to the company’s main line of operations. 39. Operating expenses include interest expense and income tax expense. 40. Income from operations appears on both the single-step and multiple-step forms of an income statement. 41. A merchandising company’s net income is determined by subtracting operating expenses from gross profit. 42. Sales revenues, cost of goods sold, and gross profit are amounts on a merchandising company's income statement not commonly found on the income statement of a service company. 43. The income statement for a merchandising company presents only two amounts not shown on a service company income statement. 44. Under the periodic system, the purchases account is used to accumulate all purchases of merchandise for resale. 45. With the periodic inventory system, goods available for sale must be calculated before cost of goods sold. 46. If net sales are $750,000 and cost of goods sold is $600,000, the gross profit rate is 20%. 47. The gross profit amount is generally considered to be more informative than the gross profit rate. 48. Gross profit rate is computed by dividing cost of goods sold by net sales. 49. The quality of earnings ratio is calculated as net income divided by net cash provided by operating activities. 50. A quality of earnings ratio significantly less than 1 suggests that a company may be using more aggressive accounting techniques in order to accelerate income recognition. Under the periodic system, when a customer returns goods, Purchases Returns and Allowances is debited. Under the periodic inventory system, acquisitions of merchandise are not recorded in the Inventory account. *51. *52. Answers to - Statements Merchandising Operations FOR INSTRUCTOR USE ONLY 5-3 MULTIPLE CHOICE QUESTIONS 53. Merchandising companies that sell to retailers are known as 54. Which of the following would not be considered a merchandising operation? 55.Which of the following activities is not a component of the operating cycle? 56. Which of the following companies would be most likely to use a perpetual inventory system? 57. Gross profit equals the difference between 58. Each of the following companies is a merchandising company except a 59. Net income will result if gross profit exceeds 60. A merchandiser will earn an operating income of exactly $0 when. 61. A merchandiser that sells directly to consumers is a 62. Two categories of expenses in merchandising companies are 63. The primary source of revenue for a wholesaler is 64. Generally, the revenue account for a merchandising enterprise is called 65. Under a perpetual inventory system 66. The operating cycle of a merchandising company is 67. Sales revenue less cost of goods sold is called 68. After gross profit is calculated, operating expenses are deducted to determine 69. Which of the following expressions is incorrect? 70. Detailed records of goods held for resale are not maintained under a 71. A perpetual inventory system would most likely be used by a(n) 72. Which of the following is a statement about inventory systems? 73. The figure for which of the following items is determined at a different time under the 74. In a perpetual inventory system, cost of goods sold is recorded 75. The primary difference between a periodic and perpetual inventory system is that a periodic system 76. When using the periodic system the physical inventory count is used to determine 77. Inventory becomes part of cost of goods sold when a company 5-4 Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition 78. Which statement is incorrect? 79. If a company determines cost of goods sold each time a sale occurs, it 80. The periodic inventory system is used most commonly by companies that sell 81. What is a difference between merchandising companies and service enterprises? 82. Under the perpetual inventory system, which of the following accounts would not be used? 84. The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit d. Inventory. 85. Which of the following items does not result in an adjustment in the merchandise inventory account under a perpetual system? c. Payment of freight costs for goods shipped to a customer 86. A company using a perpetual inventory system that returns goods previously purchased on credit would a. debit Accounts Payable and credit Inventory. 87. If a purchaser using a perpetual inventory system pays the transportation costs, then the a. Inventory account is increased. 88. Freight costs incurred by a seller on merchandise sold to customers will cause an increase b. in operating expenses for the seller. 89. Conway Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Conway Company pays within the discount period? b. $8,820 90. A buyer borrows money at 6% interest to pay a $6,000 invoice with terms 1/10, n/30 on the 10th day of the discount period. The loan is repaid on the 30th day of the invoice. What is the buyer’s net savings for this total event? b. $40.00 91. In the credit terms of 1/10, n/30, the “1” represents the d. percent of the cash discount 92. Farwell Company purchased merchandise with an invoice price of $2,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms? c. 18% 93. Davies Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Davies Company pays within the discount period? c. $8,820 94. A credit sale of $1,900 is made on April 25, terms 2/10, net/30, on which a return of $100 is granted on April 28. What amount is received as payment in full on May 4? a. $1,764 95. Grayson Company purchased merchandise with an invoice price of $2,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms? Merchandising Operations FOR INSTRUCTOR USE ONLY 5-5 d 36% 96. A credit sale of $700 is made on July 15, terms 2/10, net/30, on which a return of $50 is granted on July 18. What amount is received as payment in full on July 24? b. $637 97. If a company is given credit terms of 2/10, n/30, it should b. pay within the discount period and recognize a savings. 98. A purchase invoice is a document that c. provides evidence of credit purchases. 99. Adams Company is a retailer and uses a perpetual inventory system. Which statement is correct? a. Returns of merchandise by Adams Company to a manufacturer are credited to Inventory. 100. As the president of Harter Company, you notice that no discounts have been taken when settling accounts payables. What would be an acceptable explanation? a. All invoices have credit terms of n/30. 101. When using a perpetual inventory system, why are discounts credited to Inventory? b. The discounts reduce the cost of the inventory. 102. Tony’s Market recorded the following events involving a recent purchase of inventory: Received goods for $40,000, terms 2/10, n/30. Returned $800 of the shipment for credit. Paid $200 freight on the shipment. Paid the invoice within the discount period. As a result of these events, the company’s inventory d. increased by $38,616. 103. Stan’s Market recorded the following events involving a recent purchase of inventory: Received goods for $90,000, terms 2/10, n/30. Returned $1,800 of the shipment for credit. Paid $450 freight on the shipment. Paid the invoice within the discount period. As a result of these events, the company’s inventory d. increased by $86,886. 104. Assets purchased for resale are recorded in which of the following accounts? b. Inventory 105. Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in which account? c. Inventory 106. Which of the following accounts is classified as a contra revenue account? c. Sales Returns and Allowances 107. Sales revenues are usually considered earned when c. goods have been transferred from the seller to the buyer. 108. Sales revenue a. may be recorded before cash is collected. 109. The journal entry to record a credit sale ignoring cost of goods sold is d. Accounts Receivable Sales Revenue 110. Under the perpetual inventory system, in addition to making the entry to record a sale, a company would c. debit Cost of Goods sold and credit Inventory. 111. When sales of merchandise are made for cash, the transaction may be recorded by the following entry: b. Debit Cash, credit Sales Revenue 112. The entry to record a sale of $1,200 with terms of 2/10, n/30 will include a 5-6 Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition d. credit to Sales Revenue for $1,200. 113. A sales invoice is prepared when goods b. are sold on credit. 114. The Sales Returns and Allowances account is classified as a(n) d. contra revenue account. 115. The entry to record the return of goods from a customer would include a c. debit to Sales Returns and Allowances. 116. The entry to record the receipt of payment within the discount period on a sale of $700 with terms of 2/10, n/30 will include a c. credit to Accounts Receivable for $700. 117. The entry to record a sale of $700 with terms of 2/10, n/30 will include a d. credit to Sales Revenue for $700. 118. The collection of an $900 account within the 2 percent discount period will result in a a. debit to Sales Discounts for $18. 119. A sales invoice is used as documentation for a journal entry that requires a debit to c. Accounts Receivable and a credit to Sales Revenue. 120. If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales d. allowance. 121. When goods are returned that relate to a prior cash sale b. the Cash account will be credited. 122. The Sales Returns and Allowances account does not provide information to management about b. the percentage of credit sales versus cash sales. 123. A Sales Returns and Allowances account is not debited if a customer c. utilizes a prompt payment incentive. 124. As an incentive for customers to pay their accounts promptly, a business may offer its customers a. a sales discount. 125. The credit terms offered to a customer by a business firm were 2/10, n/30, which means c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date. 126. A sales discount does not d. increase an operating expense account. 127. Anderson Inc. sells $900 of merchandise on account to Baltic Company with credit terms of 2/10, n/30. If Baltic Company remits a check taking advantage of the discount offered, what is the amount of Baltic Company's check? a. $882 128. Aber Company sells merchandise on account for $1,800 to Borth Company with credit terms of 2/10, n/30. Borth Company returns $300 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check? c. $1,470 129. Casin Company sells $700 of merchandise on account to Delta Exploration with credit terms of 2/10, n/30. If Delta Exploration remits a check taking advantage of the discount offered, what is the amount of Delta Exploration's check? b. $686 130. Which sales accounts normally have a debit balance? c. Both Sales Discounts and Sales Returns and Allowances have debit balances. 131. Fehr Company sells merchandise on account for $5,000 to Kelly Company with credit terms of 2/10, n/30. Kelly Company returns $1,000 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check? d. $3,920 Merchandising Operations FOR INSTRUCTOR USE ONLY 5-7 132. Piper Company sells merchandise on account for $1,500 to Morton Company with credit terms of 2/10, n/30. Morton Company returns $500 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Piper Company make upon receipt of the check? c. Cash 980 Sales Returns and Allowances 500 Sales Discounts 20 Accounts Receivable 1,500 133. The collection of a $600 account beyond the 2 percent discount period will result in a c. debit to Cash for $600. 134. The collection of a $700 account beyond the 2 percent discount period will result in a b. credit to Accounts Receivable for $700. .Which of the following would not be classified as a contra account? a. Sales Revenue 136. Which of the following accounts has a normal credit balance? c. Sales Revenue 137. With respect to the income statement d. sales discounts are included in the calculation of gross profit. 138. When a seller records a return of goods, the account that is credited is d. Accounts Receivable. 139. The respective normal account balances of Sales, Sales Returns and Allowances, and Sales Discounts are c. credit, debit, debit. 140. Rains Company is a furniture retailer. On January 14, 2014, Rains purchased merchandise inventory at a cost of $48,000. Credit terms were 2/10, n/30. The inventory was sold on account for $80,000 on January 21, 2014. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2014 and the accounts receivables were settled on January 30, 2014. Which statement is correct? c. On January 30, 2014, customers should remit cash in the amount of $79,200. 141. Which statement is incorrect? b. Sales discounts are recorded as debits to the sales revenue account. 142. Indicate which one of the following would not appear on both a single-step income statement and a multiple-step income statement. a. Gross profit 143. The form of income statement that derives its name from the fact that the total of all expenses is deducted from the total of all revenues is called a d. single-step statement. 144. Gross profit does not appear b. on a single-step income statement. 145. Gross profit equals the difference between net sales and b. cost of goods sold. 146. Positive operating income will result if gross profit exceeds d. operating expenses. 147. What is the term applied to the excess of net sales over the cost of goods sold? d. Gross profit 148. Operating expenses would include c. freight-out. 149. Which of the following is not a statement about a multiple-step income statement? c. There may be a section for operating assets. 150. An advantage of the single-step income statement over the multiple-step form is c. its simplicity. 151. Income from operations appears on 5-8 Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition d. a multiple-step income statement. 152. Income from operations is gross profit less 1. operating expenses and other expenses and losses. 2. operating expenses plus other revenues and gains. 3. operating expenses. c. 3 153. Multiple-step income statements show c. both income from operations and gross profit. 154. Interest expense would be classified on a multiple-step income statement under the heading a. Other expenses and losses. 155. Gross profit for a merchandising company is net sales minus b. cost of goods sold. 156. The sales section of an income statement for a retailer would not include d. Cost of goods sold. 157. The operating expenses section of an income statement for a merchandising company would not include c. Cost of goods sold. 158. Indicate which one of the following would appear on the income statement of both a merchandising company and a service company. b. Operating expenses 159. Gross profit does not appear b. on a service company income statement. 160. Financial information is presented below: Operating expenses Sales revenue $ 36,000 150,000 Cost of goods sold Gross profit would be c. $ 45,000. Financial information is presented below: 105,000 161. Operating expenses Sales revenue $ 36,000 150,000 Cost of goods sold The gross profit rate would be d. .30. Financial information is presented below: 105,000 162. Operating expenses Sales revenue $ 36,000 150,000 Cost of goods sold The profit margin would be b. .06. Financial information is presented below: 105,000 163. Operating expenses Sales returns and allowances $ 28,000 7,000 Sales discounts 3,000 Sales revenue 150,000 Cost of goods sold Gross profit would be b. $49,000. Financial information is presented below: Operating expenses Sales returns and allowances 91,000 $ 28,000 7,000 Sales discounts 3,000 164. Merchandising Operations FOR INSTRUCTOR USE ONLY 5-9 Sales revenue 150,000 Cost of goods sold The gross profit rate would be b. .35. Financial information is presented below: Operating expenses Sales returns and allowances 91,000 $ 28,000 7,000 165. Sales discounts 3,000 Sales revenue 150,000 Cost of goods sold The profit margin would be d. .15. Financial information is presented below: 91,000 166. Operating expenses Sales returns and allowances $ 45,000 4,000 Sales discounts 6,000 Sales revenue 160,000 Cost of goods sold 90,000 The amount of net sales on the income statement would be b. $150,000. Financial information is presented below: Operating expenses Sales returns and allowances $ 45,000 14,000 Sales discounts 6,000 Sales revenue 160,000 167. Cost of goods sold Gross profit would be c. $60,000. Financial information is presented below: Operating expenses Sales returns and allowances 90,000 $ 45,000 4,000 168. Sales discounts 6,000 Sales revenue 160,000 Cost of goods sold The gross profit rate would be a. .40. Financial information is presented below: 90,000 169. Operating expenses Sales returns and allowances $ 45,000 4,000 Sales discounts 6,000 Sales revenue 160,000 Cost of goods sold The profit margin would be d. .10. Financial information is presented below: Operating expenses Sales returns and allowances 90,000 $ 35,000 12,000 Sales discounts 3,000 Sales revenue 140,000 Cost of goods sold 85,000 170. The amount of net sales on the income statement would be b. $125,000. Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition 5-10 171. Financial information is presented below: Operating expenses Sales returns and allowances $ 35,000 12,000 Sales discounts 3,000 Sales revenue 140,000 Cost of goods sold Gross profit would be a. $40,000. Financial information is presented below: Operating expenses Sales returns and allowances 85,000 $ 35,000 12,000 Sales discounts 3,000 Sales revenue 140,000 Cost of goods sold The gross profit rate would be 85,000 172. c. .32. Financial information is presented below: Operating expenses Sales returns and allowances $ 35,000 12,000 Sales discounts 3,000 Sales revenue 140,000 Cost of goods sold 85,000 173. The profit margin would be d. .04. 174. What is an advantage of using the multiple-step income statement? a. It highlights the components of net income. 175. For a jewelry retailer, which is an example of Other Revenues and Gains? c. Gain on sale of display cases 176. When using a periodic inventory system, which statement concerning the computation of cost of goods sold is correct? a. The amount of ending inventory is determined on the last day of the accounting period. 177. When using the periodic inventory system, which of the following is not a step in determining cost of goods purchased? c. Subtract cost of ending inventory 178. At the beginning of the year, Uptown Athletic had an inventory of $400,000. During the year, the company purchased goods costing $1,500,000. If Uptown Athletic reported ending inventory of $500,000 and sales of $2,000,000, their cost of goods sold and gross profit rate would be b. $1,400,000 and 30%. 179. At the beginning of the year, Wildcat Athletic had an inventory of $200,000. During the year, the company purchased goods costing $800,000. If Wildcat Athletic reported ending inventory of $300,000 and sales of $1,000,000, their cost of goods sold and gross profit rate would be b. $700,000 and 30%. 180. During the year, Megan’s Pet Shop’s merchandise inventory decreased by $60,000. If the company’s cost of goods sold for the year was $900,000, purchases would have been b. $840,000. 181. During the year, Sarah’s Pet Shop’s merchandise inventory decreased by $40,000. If the company’s cost of goods sold for the year was $600,000, purchases would have been b. $560,000. 182. The amount of cost of good available for sale during the year depends on the amounts of Merchandising Operations FOR INSTRUCTOR USE ONLY 5-11 d. beginning merchandise inventory and net costs of purchases. 183. Which of the following is not considered in computing net cost of purchases? d. Freight paid on goods shipped to customers 184. Assume Grammar Company uses the periodic inventory system and has a beginning inventory balance of $5,000, purchases of $75,000, and sales of $125,000. Grammar closes its records once a year on December 31. In the accounting records, the inventory account would be expected to have a balance on December 31 prior to adjusting and closing entries that was a. equal to $5,000. 185. All of the following statements are regarding the periodic inventory system except c. Using the periodic inventory system affects the balance sheet contents differently than when the perpetual system is used. 186. Sampson Company's accounting records show the following for the year ending on December 31, 2014. Purchase Discounts Freight-In $ 5,600 7,800 Purchases 350,010 Beginning Inventory 23,500 Ending Inventory 28,800 Purchase Returns and Allowances 6,400 Using the periodic system, the cost of goods purchased is d. $345,810. 187. Sampson Company's accounting records show the following at the year ending on December 31, 2014. Purchase Discounts Freight-In $ 5,600 7,800 Purchases 350,010 Beginning Inventory 23,500 Ending Inventory 28,800 Purchase Returns and Allowances 6,400 Using the periodic system, the cost of goods sold is c. $340,510. 188. Which of the following provides the best rationale regarding analysts' views about the information value of the gross profit rate versus the gross profit amount? b. The gross profit amount is less informative than the gross profit rate because the latter presents a meaningful relationship between gross profit and net sales. 189. Bolton Company's gross profit rate last year was 32.0% and this year it is 28.4%. Which of the following would not be a possible cause for this decline in the gross profit rate? b. Bolton may have begun selling products with a higher markup. 190. Haverty Industries increased its gross profit rate from 18.4% in 2013 to 23.7% in 2014. Which of the following would be a possible explanation for this change? a. Haverty's global sourcing efforts at the beginning of 2014 resulted in a lower cost of merchandise sold. 191. Which of the following statements is regarding profit margin? d. If the profit margin has a higher value, this suggests favorable return on each dollar of sales. 192. The gross profit rate is computed by dividing gross profit by c. net sales. 193. A decline in a company’s gross profit could be caused by all of the following except c. paying lower prices to its suppliers. Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition 5-12 194. If Hostell Company has net sales of $500,000 and cost of goods sold of $325,000, Hostell’s gross profit rate is b. 35%. 195. If Indiana Ink, Inc. has net sales of $400,000 and cost of goods sold of $300,000, Indiana Ink’s gross profit rate is c. 25%. 196. A company shows the following balances: Sales Revenue Sales Returns and Allowances $1,000,000 175,000 Sales Discounts 25,000 Cost of Goods Sold 560,000 What is the gross profit rate? d. 30% 197. A company shows the following balances: Sales Revenue Sales Returns and Allowances $ 800,000 75,000 Sales Discounts 25,000 Cost of Goods Sold What is the gross profit rate? c. 40% 420,000 198. What is a difference between the profit margin and the gross profit rate? c. The gross profit rate will normally be higher than the profit margin ratio. 199. Andrea’s Fashions sold merchandise for $95,000 cash during the month of July. Returns that month totaled $2,000. If the company’s gross profit rate is 40%, Andrea’s will report monthly net sales revenue and cost of goods sold of c. $93,000 and $55,800. 200. Betty’s Fabrics sold merchandise for $114,000 cash during the month of July. Returns that month totaled $2,400. If the company’s gross profit rate is 40%, Betty will report monthly net sales revenue and cost of goods sold of c. $111,600 and $66,960. 201. American Importers reports net income of $50,000 and cost of goods sold of $450,000. If the company’s gross profit rate was 40%, net sales were a. $750,000. 202. United Services and Supplies reports net income of $60,000 and cost of goods sold of $360,000. US&S’s gross profit rate was 40%, net sales were a. $600,000. *203. Erin Corporation purchases $500 of merchandise on credit. Using the periodic inventory approach, Erin would record this transaction as: c. Purchases 500 Accounts Payable 500 *204. Crowder Corporation recorded the return of $200 of goods originally sold on credit to Discount Industries. Using the periodic inventory approach, Crowder would record this transaction as: 200 b. Sales Returns and Allowances 200 Accounts Receivable 200 Industries. Using the periodic Inventory approach, Turner would record this transaction as: 150 d. Accounts Payable 150 Purchase Returns and Allowances 150 Merchandising Operations FOR INSTRUCTOR USE ONLY 5-13 *206. Ramos Company receives a payment on account from Martinez Industries. Based on the original sale of $8,000 using the periodic inventory approach, Ramos honors the 3% cash discount and records the payment. Which of the following is the correct entry for Ramos to record? c. Cash 7,760 Sales Discounts 240 Accounts Receivable 8,000 Answers to Multiple Choice Questions 53. c 73. b 93. c 113. b 133. c 153. c 173. d 193. c 54. c 74. d 94. a 114. d 134. b 154. a 174. a 194. b 55. b 75. d 95. d 115. c 135. a 155. b 175. c 195. c 56. d 76. c 96. b 116. c 136. c 156. d 176. a 196. d 57. b 77. c 97. b 117. d 137. d 157. c 177. c 197. c 58. c 78. a 98. c 118. a 138. d 158. b 178. b 198. c 59. b 79. d 99. a 119. c 139. c 159. b 179. b 199. c 60. d 80. a 100. a 120. d 140. c 160. c 180. b 200. c 61. a 81. b 101. b 121. b 141. b 161. d 181. b 201. a 62. c 82. b 102. d 122. b 142. a 162. b 182. d 202. a 63. c 83. a 103. d 123. c 143. d 163. b 183. d *203. c 64. a 84. d 104. b 124. a 144. b 164. b 184. a *204. b 65. a 85. c 105. c 125. c 145. b 165. d 185. c *205. d 66. b 86. a 106. c 126. d 146. d 166. b 186. d *206. c 67. a 87. a 107. c 127. a 147. d 167. c 187. c 68. b 88. b 108. a 128. c 148. c 168. a 188. b 69. d 89. b 109. d 129. b 149. c 169. d 189. b 70. b 90. b 110. c 130. c 150. c 170. b 190. a 71. a 91. d 111. b 131. d 151. d 171. a 191. d 72. b 92. c 112. d 132. c 152. c 172. c 192. c IFRS QUESTIONS 1. The Income statement is d. required under IFRS with some differences as compared to GAAP 2. The basic accounting entries for merchandising are a. the same under GAAP and under IFRS. 3. Under GAAP, companies can choose which inventory system? Perpetual Periodic b. Yes Yes 4. Under IFRS, companies can choose which inventory system? Perpetual Periodic b. Yes Yes 5. Companies cannot use the d. None of these answer choices are correct. 6. Inventories are defined by IFRS as d. All of these answer choices are correct. 7. Under GAAP, companies generally classify income statement items by a. function. 8. Under IFRS, companies must classify income statement items by c. nature or function 9. Under GAAP, income statement items are generally described as a. administration, distribution, manufacturing, etc. 10. Under IFRS, income statement items classified by nature are generally described as Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition 5-14 b. salaries, depreciation, utilities, etc. 11. For the income statement, IFRS requires d. no specific income statement approach. 12. Under IFRS, companies can apply revaluation to a. land, buildings, and intangible assets. 13. The use of IFRS results in more transactions affecting b. other comprehensive income, but not net income. 14. Comprehensive income under IFRS b. includes unrealized gains and losses included in net income, similar to GAAP. 15. The number of years of income statement information to be presented is d. 3 years under GAAP and 2 years under IFRS. CHAPTER 6 REPORTING AND ANALYZING INVENTORY - STATEMENTS 1. Raw materials inventories are the goods that a manufacturing company has completed and are ready to be sold to customers. 2. A manufacturer’s inventory consists of raw materials, work in process, and finished goods. 3. When the terms of sale are FOB shipping point, legal title to the goods remains with the seller until the goods reach the buyer. 4. Goods in transit shipped FOB shipping point should be included in the buyer’s ending inventory. 5. Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods by the buyer. 6. If the ownership of merchandise passes to the buyer when the seller ships the merchandise, the terms are stated as FOB destination. 7. Under the periodic inventory system, both the sales amount and the cost of goods sold amount are recorded when each item of merchandise is sold. 8. Under a periodic inventory system, the merchandise on hand at the end of the period is determined by a physical count of the inventory. 9. Consigned goods are held for sale by one party although ownership of the goods is retained by another party. 10. Goods held on consignment should be included in the consignor’s ending inventory. 11. In accounting for inventory, the assumed flow of costs must match the physical flow of goods. 12. Inventory methods such as FIFO and LIFO deal more with flow of costs than with flow of goods. 13. The average cost inventory method relies on a simple average calculation. 14. If prices never changed there would be no need for alternative inventory methods. 15. The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale. 16. Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company. 17. The First-in, First-out (FIFO) inventory method results in an ending inventory valued at the most recent cost. 18. The expense recognition principle requires that the cost of goods sold be matched against Merchandising Operations FOR INSTRUCTOR USE ONLY 5-15 the ending merchandise inventory in order to determine income. 19. The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items. 20. If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions. 21. If the unit price of inventory is increasing during a period, a company using the LIFO inventory method will show less gross profit for the period, than if it had used the FIFO inventory method. 22. If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods. 23. A company may use more than one inventory cost flow method at the same time. 24. Use of the LIFO inventory valuation method enables a company to report paper or phantom profits. 25. The LIFO inventory method agrees with the actual physical movement of goods in most businesses. 26. In periods of falling prices, LIFO will result in a higher ending inventory valuation than FIFO. 27. In periods of falling prices, FIFO will result in a larger net income than the LIFO method. 28. If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements. 29. A major criticism of the FIFO inventory method is that it magnifies the effects of the business cycle on business income. 30. The LIFO method is rarely used because most companies do not sell the last goods they purchase first. 31. The LIFO inventory method tends to smooth out the peaks and valleys of a business cycle. 32. Computers has made the periodic inventory system more popular and easier to apply. 33. When the market value of inventory is lower than its cost, the inventory is written down to its market value. 34. The lower-of-cost-or-market rule implies that it is unrealistic to carry inventory at a cost that is in excess of its market value. 35. Accountants believe that the write down from cost to market should not be made in the period in which the price decline occurs. 36. Under the LCM basis, market is defined as selling price, not current replacement cost. 37. The inventory turnover is calculated as cost of goods sold divided by ending inventory. 38. An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages. 39. The LIFO reserve is the difference between ending inventory using LIFO and ending inventory if FIFO were used instead. 40. *41. The FIFO reserve is a required disclosure for companies that use FIFO. When the average cost method is applied in a perpetual inventory system, the sale of goods will change the unit cost that remains in inventory. When the average cost method is applied to a perpetual inventory system, a moving average cost per unit is computed with each purchase. An error in the ending inventory of the current period will have a similar effect on net income of the next accounting period. *42. *43. Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition 5-16 *44. An error that overstates the ending inventory will also cause net income for the period to be overstated. Answers to - Statements 1. F 9. T 17. T 25. F 33. T *41. F 2. T 10. T 18. F 26. T 34. T *42. T 3. F 11. F 19. F 27. F 35. F *43. F 4. T 12. T 20. T 28. T 36. F *44. T 5. T 13. F 21. T 29. T 37. F 6. F 14. T 22. T 30. F 38. T 7. F 15. T 23. T 31. T 39. T 8. T 16. F 24. F 32. F 40. F MULTIPLE CHOICE QUESTIONS 45. Manufactured inventory that has begun the production process but is not yet completed is a. work in process. 46. The factor which determines whether or not goods should be included in a physical count of inventory is b. legal title. 47. If goods in transit are shipped FOB destination a. the seller has legal title to the goods until they are delivered. 48. Independent internal verification of the physical inventory process occurs when c. a second employee counts the inventory and compares the result to the count made by the first employee. 49. An employee assigned to counting computer monitors in boxes should c. determine that the box contains a monitor. 50. After the physical inventory is completed, a. quantities are listed on inventory summary sheets. 51. When is a physical inventory usually taken? c. At the end of the company’s fiscal year. 52. Which of the following should not be included in the physical inventory of a company? a. Goods held on consignment from another company. 53. 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? b. (1) and (4) 54. The term "FOB" denotes a. free on board. 55. Goods held on consignment are a. never owned by the consignee. 56. Many companies use just-in-time inventory methods. Which of the following is not an advantage of this method? b. Companies may not have quantities to meet customer demand. Merchandising Operations FOR INSTRUCTOR USE ONLY 5-17 57. When a perpetual inventory system is used, which of the following is a purpose of taking a physical inventory? a. To check the accuracy of the perpetual inventory records 58. Which statement is ? d. Companies that use a perpetual inventory system must take a physical inventory to determine inventory on hand on the balance sheet date and to determine cost of goods sold for the accounting period. 59. 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? d. Goods that Reeves is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due 60. At December 31, 2014 Mohling Company’s inventory records indicated a balance of $602,000. Upon further investigation it was determined that this amount included the following: • $112,000 in inventory purchases made by Mohling shipped from the seller 12/27/14 terms FOB destination, but not due to be received until January 2nd • $74,000 in goods sold by Mohling with terms FOB destination on December 27th. The goods are not expected to reach their destination until January 6th. • $6,000 of goods received on consignment from Dollywood Company What is Mohling’s correct ending inventory balance at December 31, 2014? d. $484,000 61. At December 31, 2014 Howell Company’s inventory records indicated a balance of $858,000. Upon further investigation it was determined that this amount included the following: • $168,000 in inventory purchases made by Howell shipped from the seller 12/27/14 terms FOB destination, but not due to be received until January 2nd • $111,000 in goods sold by Howell with terms FOB destination on December 27th. The goods are not expected to reach their destination until January 6th. • $9,000 of goods received on consignment from Westwood Company What is Howell’s correct ending inventory balance at December 31, 2014? d. $681,000 62. Manufacturers usually classify inventory into all the following general categories except: c. merchandise inventory 63. For companies that use a perpetual inventory system, all of the following are purposes for taking a physical inventory except to: d. determine ownership of the goods. 64. Inventory costing methods place primary reliance on assumptions about the flow of b. costs. 65. The LIFO inventory method assumes that the cost of the latest units purchased are c. the first to be allocated to cost of goods sold. 66. Alpha First Company just began business and made the following four inventory purchases in June: June June June 1 10 15 150 units 200 units 200 units 150 units $ 780 1,170 1,260 June 28 990 $4,200 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 b. $1,131 Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition 5-18 67. Baker Bakery Company just began business and made the following four inventory purchases in June: June June June 1 10 15 150 units 200 units 200 units 150 units $ 780 1,170 1,260 June 28 990 $4,200 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 c. $1,368 68. Charlene Cosmetics Company just began business and made the following four inventory purchases in June: June June June 1 10 15 150 units 200 units 200 units 150 units $ 780 1,170 1,260 June 28 990 $4,200 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 d. $1,260. 69. Echo Sound Company just began business and made the following four inventory purchases in June: June June June 1 10 15 150 units 200 units 200 units 150 units $ 780 1,170 1,260 June 28 990 $4,200 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. 70.Atom Company just began business and made the following four inventory purchases in June: June 1 150 units $ 825 June June 10 15 200 units 200 units 150 units 1,120 1,140 June 28 885 $3,970 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. $1,105. 71. Quark Inc. just began business and made the following four inventory purchases in June: June June June 1 10 15 150 units 200 units 200 units 150 units $ 825 1,120 1,140 June 28 885 $3,970 A physical count of merchandise inventory on June 30 reveals that there are 200 units on Merchandising Operations FOR INSTRUCTOR USE ONLY 5-19 hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is c. $1,170. 72. A company just began business and made the following four inventory purchases in June: June 1 150 units $ 825 June June 10 15 200 units 200 units 150 units 1,120 1,140 June 28 885 $3,970 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. $1,134. 73. A company purchased inventory as follows: 200 units at $5.00 300 units at $5.50 The average unit cost for inventory is c. $5.30. 74. Noise Makers Inc has the following inventory data: July 1 Beginning inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the average cost method, the value of ending inventory is b. $640. 75. Olympus Climbers Company has the following inventory data: July 1 Beginning inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is c. $1,340. 76. Pop-up Party Favors Inc has the following inventory data: July 1 Beginning inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is b. $660. 77. Quiet Phones Company has the following inventory data: July 1 Beginning inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition 5-20 is d. $1,380. 78. Radical Radials Company has the following inventory data: July 1 Beginning inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is a. $620 79. Orange-Aide Company has the following inventory data: July 1 Beginning inventory 20 units at $20 $ 400 7 Purchases 70 units at $21 1,470 22 Purchases 10 units at $22 220 $2,090 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the average cost method, the value of ending inventory is b. $523 80. Peach Pink Inc. has the following inventory data: July 1 Beginning inventory 20 units at $20 $ 400 7 Purchases 70 units at $21 1,470 22 Purchases 10 units at $22 220 $2,090 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is a. $1,555 81. Grape Gratuities Company has the following inventory data: July 1 Beginning inventory 20 units at $20 $ 400 7 Purchases 70 units at $21 1,470 22 Purchases 10 units at $22 220 $2,090 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is c. $535. 82. Apple-A-Day Company has the following inventory data: July 1 Beginning inventory 20 units at $20 $ 400 7 Purchases 70 units at $21 1,470 22 Purchases 10 units at $22 220 $2,090 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is a. $1,585 83. Bonkers Bananas has the following inventory data: July 1 Beginning inventory 20 units at $20 $ 400 7 Purchases 70 units at $21 1,470 22 Purchases 10 units at $22 220 $2,090 Merchandising Operations FOR INSTRUCTOR USE ONLY 5-21 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is b. $505 84. Which of the following is an inventory costing method? b. Specific identification 85. Inventory costing methods place primary reliance on assumptions about the flow of b. costs. 86. Which of the following terms best describes the assumption made in applying the four inventory methods? b. Cost flow 87. An assumption about cost flow is necessary d. because prices usually change, and tracking which units have been sold is difficult. 88. Piper Pipes has the following inventory data: July 1 5 Beginning inventory Purchases 30 units at $120 180 units at $112 14 Sale 120 units 21 Purchases 90 units at $115 30 Sale 84 units Assuming that a periodic inventory system is used, what is the cost of goods sold on a LIFO basis. d. $23,118 89. Trumpeting Trumpets has the following inventory data: July 1 5 Beginning inventory Purchases 30 units at $120 180 units at $112 14 Sale 120 units 21 Purchases 90 units at $115 30 Sale 84 units Assuming that a periodic inventory system is used, what is the cost of goods sold on a FIFO basis. c. $23,088. 90. Sassy Saxophones has the following inventory data: July 1 5 Beginning inventory Purchases 30 units at $120 180 units at $112 14 Sale 120 units 21 Purchases 90 units at $115 30 Sale 84 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis. a. $10,992 91. Clear Clarinets has the following inventory data: July 1 5 Beginning inventory Purchases 30 units at $120 180 units at $112 14 Sale 120 units 21 Purchases 90 units at $115 30 Sale 84 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis. Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition 5-22 b. $11,022 92. Which of the following items will increase inventoriable costs for the buyer of goods? d. Freight charges paid by the purchaser 93. Of the following companies, which one would not likely employ the specific identification method for inventory costing? d. Hardware store 94. A problem with the specific identification method is that b. management can manipulate income. 95. The selection of an appropriate inventory cost flow assumption for an individual company is made by d. management. 96. Which of the following is not a common cost flow assumption used in costing inventory? b. Middle-in, first-out 97. The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is c. nonexistent; that is, there is no such accounting requirement. 98. Which of the following statements is regarding inventory cost flow assumptions? a. A company may use more than one costing method concurrently. 99. Which of the following statements is correct with respect to inventories? c. Under FIFO, the ending inventory is based on the latest units purchased. 100. Given equal circumstances, which inventory method would probably be the most time consuming? d. Specific identification. 101. Serene Stereos has the following inventory data: Nov. 1 8 Inventory Purchase 30 units @ $4.00 each 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 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 b. $846 102. Automobile Audio has the following inventory data: Nov. 1 8 Inventory Purchase 30 units @ $4.00 each 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under FIFO is a. $438 103. Carryable CDs has the following inventory data: Nov. 1 8 Inventory Purchase 30 units @ $4.00 each 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 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 d. $863 104. Delightful Discs has the following inventory data: Nov. 1 8 Inventory Purchase 30 units @ $4.00 each 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each Merchandising Operations FOR INSTRUCTOR USE ONLY 5-23 25 Purchase 90 units @ $4.40 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO is b. $421 105. Laser Listening has the following inventory data: Nov. 1 8 Inventory Purchase 30 units @ $4.00 each 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 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 b. $857. 106. Which inventory costing method should a gasoline retailer use? d. Either LIFO or FIFO. 107. In periods of rising prices, which is an advantage of using the LIFO inventory costing method? b. Cost of goods sold will include latest (most recent) costs and thus will be more realistic. 108. Hogan Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 36 $45 Mar. 14, 2014 Purchase 62 $47 May 1, 2014 Purchase 44 $49 The company sold 102 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) d. $1,544 109. Hogan Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 36 $45 Mar. 14, 2014 Purchase 62 $47 May 1, 2014 Purchase 44 $49 The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $600, what is the company’s after-tax income using LIFO? (rounded to whole dollars) d. $661 110. Hogan Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 36 $45 Mar. 14, 2014 Purchase 62 $47 May 1, 2014 Purchase 44 $49 The company sold 102 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) c. $1,696 111. Hogan Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 36 $45 Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition 5-24 Mar. 14, 2014 Purchase 62 $47 May 1, 2014 Purchase 44 $49 The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $600, what is the company’s after-tax income using FIFO? (rounded to whole dollars) c. $767 112. Dole Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 72 $90 Mar. 14, 2014 Purchase 124 $94 May 1, 2014 Purchase 88 $98 The company sold 204 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) d. $6,176 113. Dole Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 72 $90 Mar. 14, 2014 Purchase 124 $94 May 1, 2014 Purchase 88 $98 The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $2,000, what is the company’s after-tax income using LIFO? (rounded to whole dollars) d. $2,923 114. Dole Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 72 $90 Mar. 14, 2014 Purchase 124 $94 May 1, 2014 Purchase 88 $98 The company sold 204 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 FIFO? (rounded to whole dollars) c. $6,784 115 Dole Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 72 $90 Mar. 14, 2014 Purchase 124 $94 May 1, 2014 Purchase 88 $98 The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $2,000, what is the company’s after-tax income using FIFO? (rounded to whole dollars) c. $3,349 116. Hoover Company had beginning inventory of $15,000 at March 1, 2014. During the month, the company made purchases of $55,000. The inventory at the end of the month is $17,300. What is cost of goods sold for the month of March? a. $52,700 Merchandising Operations FOR INSTRUCTOR USE ONLY 5-25 117. A company just starting in business purchased three merchandise inventory items at the following prices. First purchase $80; Second purchase $95; Third purchase $85. If the company sold two units for a total of $290 and used FIFO costing, the gross profit for the period would be a. $115. 118. At May 1, 2014, Heineken Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows: 400 units at $7 600 units at $8 The company sold 1,000 units during the month for $12 per unit. Heineken uses the average cost method. The average cost per unit for May is b. $7.50. 119. At May 1, 2014, Heineken Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows: 400 units at $7 600 units at $8 The company sold 1,000 units during the month for $12 per unit. Heineken uses the average cost method. Heineken's gross profit for the month of May is a. $4,500 120. At May 1, 2014, Heineken Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows: 400 units at $7 600 units at $8 The company sold 1,000 units during the month for $12 per unit. Heineken uses the average cost method. The value of Heineken's inventory at May 31, 2014 is b. $1,500 121. Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows: Units Per unit price Total Balance, 1/1/2014 Purchase, 1/15/2014 200 100 $5.00 5.30 $1,000 530 Purchase, 1/28/2014 100 5.50 550 An end of the month (1/31/2014) inventory showed that 160 units were on hand. How many units did the company sell during January 2014? d. 240 122. Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows: Units Per unit price Total Balance, 1/1/2014 Purchase, 1/15/2014 200 100 $5.00 5.30 $1,000 530 Purchase, 1/28/2014 100 5.50 550 An end of the month (1/31/2014) inventory showed that 160 units were on hand. If the company uses FIFO, what is the value of the ending inventory? c. $868 123. Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows: Units Per unit price Total Balance, 1/1/2014 Purchase, 1/15/2014 200 100 $5.00 5.30 $1,000 530 Purchase, 1/28/2014 100 5.50 550 Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition 5-26 An end of the month (1/31/2014) inventory showed that 160 units were on hand. If the company uses LIFO, what is the value of the ending inventory? b. $800 124. Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows: Units Per unit price Total Balance, 1/1/2014 Purchase, 1/15/2014 200 100 $5.00 5.30 $1,000 530 Purchase, 1/28/2014 100 5.50 550 An end of the month (1/31/2014) inventory showed that 160 units were on hand. If the company uses FIFO and sells the units for $10 each, what is the gross profit for the month? a. $1,188 125. 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. 126. In a period of declining prices, which of the following inventory methods generally results in the lowest balance sheet figure for inventory? c. FIFO method 127. In a period of rising prices, which of the following inventory methods generally results in the lowest net income figure? b. LIFO method 128. Which inventory method generally results in costs allocated to ending inventory that will approximate their current cost? b. FIFO 129. 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 c. FIFO will have the highest ending inventory. 130. If companies have identical inventoriable costs but use different inventory flow assumptions when the price of goods have not been constant, then the b. cost of goods purchased during the year will be identical. 131. In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense? b. LIFO 132. Given equal circumstances and generally rising costs, which inventory method will increase the tax expense the most? a. FIFO 133. The specific identification method of costing inventories is used when the d. company sells a limited quantity of high-unit cost items. 134. The specific identification method of inventory costing d. may enable management to manipulate net income. 135. 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 136. In periods of inflation, phantom or paper profits may be reported as a result of using the b. FIFO costing assumption. 137. Selection of an inventory costing method by management does not usually depend on Merchandising Operations FOR INSTRUCTOR USE ONLY 5-27 a. the fiscal year end. 138. The accountant at Landry Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The tax rate is 30% and the FIFO method will result in income before taxes of $8,740. The LIFO method will result in income before taxes of $8,100. What is the difference in tax that would be paid between the two methods? c. $192 139. The accountant at Patton Company has determined that income before income taxes amounted to $11,000 using the FIFO costing assumption. If the income tax rate is 30% and the amount of income taxes paid would be $600 greater if the LIFO assumption were used, what would be the amount of income before taxes under the LIFO assumption? b. $13,000 140. The manager of Weiser is given a bonus based on net income before taxes. The net income after taxes is $35,700 for FIFO and $29,400 for LIFO. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager's bonus if FIFO is adopted instead of LIFO? c. $1,800 141. The consistent application of an inventory costing method enhances c. comparability. 142. Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants to maintain a high current ratio. Which inventory costing method should Ace consider using? c. FIFO 143. 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? c. LIFO because cost of goods sold represents the latest costs. 144. 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? d. FIFO because ending inventory represents the latest costs. 145. The lower of cost or market basis of valuing inventories is an example of c. conservatism. 146. When applying the lower of cost or market rule to inventory valuation, market generally means a. current replacement cost. 147. The situation that requires a departure from the cost basis of accounting to the lower of cost or market basis in valuing inventory is necessitated by a. a decline in the value of the inventory. 148. Which statement concerning lower of cost or market (LCM) is incorrect? b. Under the LCM basis, market does not apply because assets are always recorded and maintained at cost. 149. Jenks Company developed the following information about its inventories in applying the lower of cost or market (LCM) basis in valuing inventories: Product Cost Market A B $57,000 40,000 $60,000 38,000 C 80,000 81,000 If Jenks applies the LCM basis, the value of the inventory reported on the balance sheet would be c. $175,000. 150. Nelson Corporation sells three different products. The following information is available on Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition 5-28 December 31: Inventory Item Units Cost per unit Market value per unit X 150 $4.00 $3.50 Y 300 $2.00 $1.50 Z 750 $3.00 $4.00 When applying the lower of cost or market rule to each item, what will Nelson's total ending inventory balance be? b. $3,225 151. Whitman Corporation sells six different products. The following information is available on December 31: Inventory Item Units Cost per unit Market value per unit Estimated Selling Price Tin 30 $ 500 $ 505 $ 515 Titanium 10 5,000 4,950 5,100 Stainless Steel 40 2,000 1,910 1,985 Aluminum 40 350 285 290 Iron 20 400 410 425 Fiberglass 20 300 295 310 When applying the lower of cost or market rule to each item, what will Whitman's total ending inventory balance be? b. $166,200 152. Johnson Company has a high inventory turnover that has increased over the last year. All of the following statements are regarding this situation except Johnson County: b. is increasing the amount of inventory on hand relative to sales. 153. Use the following information regarding Black Company and Red Company to answer the question “Which amount is equal to Black Company's "days in inventory" for 2014 (to the closest decimal place)?” Year Inventory Turnover Ending Inventory Black Company 2012 $26,340 2013 10.7 $29,890 2014 10.4 $30,100 Red Company 2012 $25,860 2013 9.0 $24,750 2014 9.5 $22,530 a. 35.1 days 154. Use the following information regarding Black Company and Red Company to answer the question “Which amount is equal to Red Company's "days in inventory" for 2013 (to the closest decimal place)?” Year Inventory Turnover Ending Inventory Black Company 2012 $26,340 2013 10.7 $29,890 Merchandising Operations FOR INSTRUCTOR USE ONLY 5-29 2014 10.4 $30,100 Red Company 2012 $25,860 2013 9.0 $24,750 2014 9.5 $22,530 d. 40.6 days 155. Use the following information regarding Black Company and Red Company to answer the question “Which of the following is Black Company's "cost of goods sold" for 2013 (to the closest dollar)?” Year Inventory Turnover Ending Inventory Black Company 2012 $26,340 2013 10.7 $29,890 2014 10.4 $30,100 Red Company 2012 $25,860 2013 8.8 $24,750 2014 9.5 $22,530 c. $319,823 156. Use the following information regarding Black Company and Red Company to answer the question “Which of the following is Red Company's "cost of goods sold" for 2014 (to the closest dollar)?” Year Inventory Turnover Ratio Ending Inventory Black Company 2012 $26,340 2013 10.7 $29,890 2014 10.2 $30,100 Red Company 2012 $25,860 2013 9.0 $24,750 2014 9.5 $22,530 d. $214,035 157. Which of the following companies would most likely have the highest inventory turnover? d. A bakery. 158. An aircraft company would most likely have a d. low inventory turnover. 159. The inventory turnover is calculated by dividing cost of goods sold by c. average inventory. 160. Days in inventory is calculated by dividing 365 days by d. the inventory turnover. 161. Which of these would cause the inventory turnover ratio to increase the most? d. Decreasing the amount of inventory on hand and increasing sales. 162. The following information was available for Camara Company at December 31, 2014: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000; and sales $800,000. Camara’s inventory turnover in 2014 was c. 5.6 times. 163. The following information was available for Camara Company at December 31, 2014: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000; and sales $800,000. Camara’s days in inventory in 2014 was Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition 5-30 c. 65.2 days. 164. The following information was available for Bowyer Company at December 31, 2014: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and sales $1,200,000. Bowyer’s inventory turnover in 2014 was b. 11.0 times. 165. The following information was available for Bowyer Company at December 31, 2014: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and sales $1,200,000. Bowyer’s days in inventory in 2014 was b. 33.2 days. 166. A low number of days in inventory may indicate all of the following except a. Sales opportunities may be lost because of inventory shortages. 167. Redeker Company had the following records: 2014 $34,580 182,000 2013 $32,650 178,000 2012 $30,490 174,200 Ending inventory Cost of goods sold What is Redeker’s inventory turnover for 2013? (rounded) 168. Redeker Company had the following records: 2014 $34,580 182,000 2013 $32,650 163,500 2012 $30,490 174,200 Ending inventory Cost of goods sold What is Redeker’s average days in inventory for 2014? (rounded) a. 67.6 days 169. Barnett Company had the following records: 2014 $34,580 273,000 2013 $32,650 255,250 2012 $30,490 261,300 Ending inventory Cost of goods sold What is Barnett’s inventory turnover for 2013? (rounded) b. 8.1 times 170. Barnett Company had the following records: 2014 $34,580 273,000 2013 $37,650 255,250 2012 $30,490 261,300 Ending inventory Cost of goods sold What is Barnett’s average days in inventory for 2013? (rounded) a. 45.1 days 171. The difference between ending inventory using LIFO and ending inventory using FIFO is referred to as the a. the difference between the value of the inventory under LIFO and the value under FIFO. 173. Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods? c. LIFO reserve 174. Butler Company reported ending inventory at December 31, 2014 of $1,200,000 under LIFO. It also reported a LIFO reserve of $210,000 at January 1, 2014, and $300,000 at Merchandising Operations FOR INSTRUCTOR USE ONLY 5-31 December 31, 2014. Cost of goods sold for 2014 was $4,600,000. If Butler Company had used FIFO during 2014, its cost of goods sold for 2014 would have been c. $4,510,000. 175. To adjust a company’s LIFO cost of goods sold to FIFO cost of goods sold d. a decrease in the LIFO reserve is subtracted from LIFO cost of goods sold. 176. All of the following statements are regarding the LIFO reserve except: b. The equation (LIFO inventory – LIFO reserve = FIFO inventory) adjusts the inventory balance from LIFO to FIFO. 177. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “What is Danforth's LIFO reserve for 2013?” (amounts in $ millions) Boxter Clifford Danforth Evans Inventory Method for 2013 & 2014 LIFO FIFO LIFO FIFO 2013 Ending inventory assuming LIFO $324 N/A $225 N/A 2013 Ending inventory assuming FIFO $427 $535 $310 $663 2014 Ending inventory assuming LIFO $436 N/A $167 N/A 2014 Ending inventory assuming FIFO $578 $612 $209 $542 2013 Current assets (reported on balance sheet) $1,677 $2,031 $1,308 $2,748 2013 Current liabilities $987 $1,209 $545 $1,200 2014 Current assets (reported on balance sheet) $2,225 $2,605 $1,100 $2,390 2014 Current liabilities $1,306 $1,410 $465 $1,000 2014 Cost of goods sold $4,678 $5,042 $3,000 $7,000 b. $85 178. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using the LIFO reserve adjustment, which company would has the strongest liquidity position for 2014 as expressed by the current ratio?” (amounts in $ millions) Boxter Clifford Danforth Evans Inventory Method for 2013 & 2014 LIFO FIFO LIFO FIFO 2013 Ending inventory assuming LIFO $324 N/A $225 N/A 2013 Ending inventory assuming FIFO $427 $535 $310 $663 2014 Ending inventory assuming LIFO $436 N/A $167 N/A 2014 Ending inventory assuming FIFO $578 $612 $209 $542 2013 Current assets (reported on balance sheet) $1,677 $2,031 $1,308 $2,748 2013 Current liabilities $987 $1,209 $545 $1,200 2014 Current assets (reported on balance sheet) $2,225 $2,605 $1,100 $2,390 2014 Current liabilities $1,306 $1,410 $465 $1,000 2014 Cost of goods sold $4,678 $5,042 $3,000 $7,000 c. Danforth 179. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using the LIFO adjustment, what is Boxter's inventory turnover ratio for 2014 (to the closest decimal place)?” (amounts in $ millions) Boxter Clifford Danforth Evans Inventory Method for 2013 & 2014 LIFO FIFO LIFO FIFO 2013 Ending inventory assuming LIFO $324 N/A $225 N/A Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition 5-32 2013 Ending inventory assuming FIFO $427 $535 $310 $663 2014 Ending inventory assuming LIFO $436 N/A $167 N/A 2014 Ending inventory assuming FIFO $578 $612 $209 $542 2013 Current assets (reported on balance sheet) $1,677 $2,031 $1,308 $2,748 2013 Current liabilities $987 $1,209 $545 $1,200 2014 Current assets (reported on balance sheet) $2,225 $2,605 $1,100 $2,390 2014 Current liabilities $1,306 $1,410 $465 $1,000 2014 Cost of goods sold $4,678 $5,042 $3,000 $7,000 a. 12.3 times 180. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using the LIFO adjustment, which company shows the greatest improvement in its current ratio from 2013 to 2014?” (amounts in $ millions) Boxter Clifford Danforth Evans Inventory Method for 2013 & 2014 LIFO FIFO LIFO FIFO 2013 Ending inventory assuming LIFO $324 N/A $225 N/A 2013 Ending inventory assuming FIFO $427 $535 $310 $663 2014 Ending inventory assuming LIFO $436 N/A $167 N/A 2014 Ending inventory assuming FIFO $578 $612 $209 $542 2013 Current assets (reported on balance sheet) $1,677 $2,031 $1,308 $2,748 2013 Current liabilities $987 $1,209 $545 $1,200 2014 Current assets (reported on balance sheet) $2,225 $2,605 $1,100 $2,390 2014 Current liabilities $1,306 $1,410 $465 $1,000 2014 Cost of goods sold $4,678 $5,042 $3,000 $7,000 b. Clifford *181. In a perpetual inventory system, d. FIFO cost of goods sold will be the same as in a periodic inventory system. *182. Classic Floors has the following inventory data: July 1 5 Beginning inventory Purchases 15 units at $6.00 60 units at $6.60 14 Sale 40 units 21 Purchases 30 units at $7.20 30 Sale 28 units Assuming that a perpetual inventory system is used, what is the cost of goods sold on a *183. Classic Floors has the following inventory data: July 1 5 Beginning inventory Purchases 15 units at $6.00 60 units at $6.60 14 Sale 40 units 21 Purchases 30 units at $7.20 30 Sale 28 units Assuming that a perpetual inventory system is used, what is the value of ending inventory Merchandising Operations FOR INSTRUCTOR USE ONLY 5-33 *184. Snug-As-A-Bug Blankets has the following inventory data: July 1 Beginning inventory 15 units at $60 5 Purchases 90 units at $56 14 Sale 60 units 21 Purchases 45 units at $58 30 Sale 42 units Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for July? c. $5,796. *185. Snug-As-A-Bug Blankets has the following inventory data: July 1 Beginning inventory 15 units at $60 5 Purchases 90 units at $56 14 Sale 60 units 21 Purchases 45 units at $58 30 Sale 42 units Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis for July? b. $2,754 *186. Snug-As-A-Bug Blankets has the following inventory data: July 1 Beginning inventory 15 units at $60 5 Purchases 90 units at $56 14 Sale 60 units 21 Purchases 45 units at $58 30 Sale 42 units Assuming that a perpetual inventory system is used, what is ending inventory (rounded) under the average cost method for July? a. $2,750 *187. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is Cost of Goods Sold Net Income c. Understated Overstated *188. If beginning inventory is understated by $10,000, the effect of this error in the current period is Net Income Overstated Cost of Goods Sold Understated c. *189. A company uses the periodic inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are Asset Stockholders’ Equity b. Correct Correct *190. An overstatement of the beginning inventory results in c. an understatement of net income. An overstatement of ending inventory in one period results in *191. c. an understatement of net income of the next period. Answers to Multiple Choice Questions Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition IFRS QUESTIONS 1. The requirements for accounting for and reporting of inventories under IFRS, compared to GAAP, tend to be more c. principles-based. 2.The major IFRS requirements related to accounting for and reporting inventories are b. the same as GAAP with a couple of exceptions. 3. Inventory accounting under IFRS differs from GAAP in regard to d. the use of LIFO and lower-of-cost-or-market. 4. Under GAAP, companies can choose which inventory system? 5. Under IFRS, companies can choose which inventory system? LIFO FIFO 6.Inventories are defined by IFRS as d. All of these answer choices are correct. 7. Specific Identification can be used for inventory valuation under GAAP IFRS 8. Specific Identification must be used for inventory valuation where the inventory items are not interchangeable under GAAP IFRS 9. GAAP’s provision for ownership of goods (goods-in-transit or consigned goods), as well as which costs to include in inventory, as compared to IFRS are: Ownership of goods Costs to include in inventory a. essentially similar essentially similar FOR INSTRUCTOR USE ONLY 5-35 10. The only acceptable cost flow assumptions under IFRS are 12. The requirement that companies use the same cost flow assumption of all goods of a similar nature is found in GAAP IFRS 13.IFRS defines market for lower-of-cost-or market as a. net realizable value. 14.GAAP defines market for lower-of-cost-or market essentially as 16. Inventory written down under lower-of-cost-or market may be written back up to original cost in a subsequent period under 17. The option to value inventory at fair value exists under GAAP IFRS 18. Certain agricultural and mineral products can be reported at net realizable value under GAAP IFRS 19. The convergence issue that will be most difficult to resolve in the area of inventory accounting is: [Show More]

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