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 revenue minus operating ex
...
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 revenue 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
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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?
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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
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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.
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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
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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
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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
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*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
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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
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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.
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*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.
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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*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
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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:
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