Accounting What the Numbers Mean David Marshall 12e - Test Bank

Accounting What the Numbers Mean David Marshall 12e – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Accounting – What the Numbers Mean, 12e (Marshall)

Chapter 5   Accounting for and Presentation of Current Assets

 

1) The current assets of most companies are usually made up of:

1. A) assets that are currently used in the operations of the company.
2. B) cash and assets expected to be converted to cash within a year.
3. C) a very small proportion (less than 10%) of the total assets of the entity.
4. D) cash, marketable securities, and accounts and notes receivable.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Cash and Cash Equivalents

Learning Objective:  05-01 Explain what is included in the cash and cash equivalents amount reported on the balance sheet.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

2) Which of the following is the correct balance sheet presentation for current assets?

1. A) Cash, inventories, account receivables, prepaid expenses.
2. B) Cash equivalents, cash, other current assets, accounts receivable.
3. C) Cash, accounts receivable, inventories, prepaid expenses, other current assets.
4. D) Marketable securities, cash, accounts receivable, prepaid expenses.

 

Answer:  C

Difficulty: 3 Hard

Topic:  Cash and Cash Equivalents

Learning Objective:  05-01 Explain what is included in the cash and cash equivalents amount reported on the balance sheet.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

3) The principal reason for reconciling the cash balance per books with the balance shown on the bank statement is to:

1. A) determine the amount of cash in the account actually available to the entity.
2. B) satisfy generally accepted accounting principles.
3. C) verify the amount of petty cash on hand.
4. D) determine whether or not the entity has issued an NSF check.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Cash and Cash Equivalents

Learning Objective:  05-03 Explain the bank reconciliation procedure.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

4) For which of the following reconciling items would an adjusting entry be necessary on the company’s books?

1. A) A deposit in transit.
2. B) An error by the bank.
3. C) Outstanding checks.
4. D) A bank service charge.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Cash and Cash Equivalents

Learning Objective:  05-03 Explain the bank reconciliation procedure.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

5) When a manufacturer invests in short-term marketable securities:

1. A) the return on investment is more important than the risk involved.
2. B) the securities are likely to have a maturity date more than a year in the future.
3. C) the market value of the securities is likely to fluctuate significantly.
4. D) risk avoidance is of great importance.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Short-Term Marketable Securities

Learning Objective:  05-04 Explain how short-term marketable securities are reported on the balance sheet.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

6) A cash equivalent is a current asset that:

1. A) will be converted to cash within one year.
2. B) will be converted to cash within one month.
3. C) is readily convertible into cash with a minimal risk.
4. D) is readily convertible into cash with a substantial risk.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Cash and Cash Equivalents

Learning Objective:  05-01 Explain what is included in the cash and cash equivalents amount reported on the balance sheet.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

7) The accounting concept or principle applied when the cost of short-term marketable securities is adjusted to market value is:

1. A) objectivity.
2. B) matching revenue and expense.
3. C) original cost.
4. D) consistency.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Short-Term Marketable Securities

Learning Objective:  05-04 Explain how short-term marketable securities are reported on the balance sheet.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

8) The accrual of interest on short-term marketable securities results in:

1. A) an increase in current assets and a decrease in net income.
2. B) an increase in current assets and an increase in net income.
3. C) an increase in noncurrent assets and an increase in liabilities.
4. D) an increase in current liabilities and an increase in net income.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Short-Term Marketable Securities

Learning Objective:  05-04 Explain how short-term marketable securities are reported on the balance sheet.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

9) The accounting concept or principle applied when an allowance is provided for estimated uncollectible accounts receivable is:

1. A) consistency.
2. B) matching revenue and expense.
3. C) original cost.
4. D) objectivity.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

10) The Allowance for Bad Debts account is a(n):

1. A) current asset.
2. B) contra current asset.
3. C) expense.
4. D) contra revenue.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

11) Bad debt expense is recognized in the same accounting period as the revenue that is related to the receivable because:

1. A) the accounts receivable asset should be stated at original cost.
2. B) the exact amount of the losses from bad debts is known.
3. C) revenues should be stated at realizable value plus interest.
4. D) all expenses incurred in the current period should be subtracted from current period revenues.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

12) When an uncollectible account receivable is written off against the Allowance for Bad Debts account:

1. A) total current assets decrease and expenses increase.
2. B) total current assets are not affected.
3. C) total current assets decrease and expenses decrease.
4. D) current assets decrease and expenses are not affected.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

13) With respect to the write-off of an uncollectible account receivable against the Allowance for Bad Debts account, a sound system of internal control would require:

1. A) the write-off be approved by two employees.
2. B) an investigation of why credit was extended to this customer in the first place.
3. C) a lawsuit to be initiated to recover the uncollectible amount.
4. D) the write-off to be made within six months after the date of sale.

 

Answer:  A

Difficulty: 2 Medium

Topic:  Cash and Cash Equivalents

Learning Objective:  05-02 Describe the key features of a system of internal control and explain why internal controls are important.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

14) An organization’s system of internal control is designed primarily to:

1. A) ensure that no employees steal the organization’s property.
2. B) increase efficiency by letting one employee handle all aspects of a transaction from beginning to end.
3. C) ensure that the organization’s balance sheet will always balance.
4. D) provide an operating framework for all employees as they work to achieve the organization’s goals.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Cash and Cash Equivalents

Learning Objective:  05-02 Describe the key features of a system of internal control and explain why internal controls are important.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

15) If an organization purchases $3,000 of supplies on account, with terms of 2/10, n30:

1. A) $2,880 must be paid within 10 days of the invoice date.
2. B) $2,994 must be paid within 30 days of the invoice date.
3. C) $2,940 can be paid within 10 days of the invoice date, or $3,000 must be paid within 30 days of the invoice date.
4. D) $2,940 can be paid within 10 days of the invoice date, or $3,060 must be paid within 30 days of the invoice date.

 

Answer:  C

Explanation:  $3,000 × 98% = $2,940

Difficulty: 2 Medium

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

16) Trading and Available-for-Sale securities are reported on the balance sheet at:

1. A) net realizable value.
2. B) historical cost.
3. C) weighted average cost.
4. D) market value.

 

Answer:  D

Difficulty: 3 Hard

Topic:  Short-Term Marketable Securities

Learning Objective:  05-04 Explain how short-term marketable securities are reported on the balance sheet.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

17) Which of the following is(are) a category for securities?

1. A) Trading.
2. B) Held-to-maturity.
3. C) Available-for-sale.
4. D) All of the answers are correct.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Short-Term Marketable Securities

Learning Objective:  05-04 Explain how short-term marketable securities are reported on the balance sheet.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

18) When a firm uses the LIFO inventory cost flow assumption:

1. A) ending inventory will be greater than if FIFO were used.
2. B) net income will be greater than if FIFO were used.
3. C) cost of goods sold will be the same as if FIFO were used.
4. D) better matching of revenue and expense is achieved than under FIFO.

 

Answer:  D

Difficulty: 3 Hard

Topic:  Inventories

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

19) Accounts receivable are reported at:

1. A) net realizable value.
2. B) historical cost.
3. C) weighted average cost.
4. D) market value.

 

Answer:  A

Difficulty: 2 Medium

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

20) An accounts receivable results from the sale of:

1. A) property, plant, and equipment for cash.
2. B) goods and services to customers on account.
3. C) goods and services to customers for cash.
4. D) the firm’s common stock.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

21) The principal reason for converting a customer’s account receivable to a note receivable is:

1. A) the note receivable earns interest and the account receivable does not.
2. B) the receivable is less likely to have to be written off as uncollectible.
3. C) working capital is immediately increased.
4. D) the customer is more likely to continue purchasing the company’s products.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Notes Receivable

Learning Objective:  05-06 Explain how notes receivable and related accrued interest are reported on the balance sheet.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

22) The inventory cost flow assumption describes the flow of product cost:

1. A) from the warehouse to the customer.
2. B) from the asset (inventory) account and to the expense (cost of goods sold) account.
3. C) from the revenue (sales) account and to the expense (cost of goods sold) account.
4. D) from the asset (inventory) account and to the revenue (sales) account.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Inventories

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

23) One inventory cost flow assumption will result in different cost of goods sold from another inventory cost flow assumption only if:

1. A) inventory quantities change from the beginning to end of the year.
2. B) a new product is added to inventory during the year.
3. C) the cost of inventory items changes during the year.
4. D) price levels do not change during the year.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Inventories

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

24) When costs are rising over time:

1. A) LIFO results in higher profits that FIFO.
2. B) cost of goods sold using the weighted average method will be greater than LIFO cost of goods sold.
3. C) ending inventory balances will be greater under LIFO.
4. D) FIFO results in higher profits than LIFO.

 

Answer:  D

Difficulty: 3 Hard

Topic:  Inventories

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

25) In an inflationary economic environment, the selling price set for a firm’s products will:

1. A) not be affected by the cost flow assumption used.
2. B) be higher if LIFO is used than if FIFO is used.
3. C) be higher if FIFO is used than if LIFO is used.
4. D) be derived from the weighted average cost of inventory.

 

Answer:  A

Difficulty: 2 Medium

Topic:  Inventories

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

26) One of the principal reasons for selecting the LIFO cost flow assumption instead of the FIFO cost flow assumption in an inflationary economic environment is that:

1. A) net income will be higher.
2. B) income taxes will be lower.
3. C) balance sheet inventory values will be higher.
4. D) a higher selling price can be established.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Inventories

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

27) The balance sheet valuation of inventories is:

1. A) lower of cost or market.
2. B) lower of selling price or cost.
3. C) lower of realizable value or selling price.
4. D) cost, regardless of the cost of replacing the inventory.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Inventories

Learning Objective:  05-07 Explain how inventories are reported on the balance sheet.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

28) Which of the following inventory accounting systems has been made much more feasible as a result of computer systems developments?

1. A) Periodic.
2. B) Physical.
3. C) Perpetual.
4. D) Punctual.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Inventories

Learning Objective:  05-07 Explain how inventories are reported on the balance sheet.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

29) The effect of an error resulting in an understatement of ending inventory is to:

1. A) overstate the next period’s beginning inventory.
2. B) understate cost of goods sold of the current period.
3. C) overstate cost of goods sold of the current period.
4. D) overstate operating expenses of the current period.

 

Answer:  C

Difficulty: 3 Hard

Topic:  Inventories

Learning Objective:  05-09 Discuss the impact of inventory errors on the balance sheet and income statement.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

30) Which of the following is true regarding notes receivables?

1. A) A notes receivable is always a long-term asset.
2. B) A notes receivable is always a current asset.
3. C) A note is a more formal document than an account receivable.
4. D) A note is a less formal document than an account receivable.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Notes Receivable

Learning Objective:  05-06 Explain how notes receivable and related accrued interest are reported on the balance sheet.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

31) Regardless of the inventory cost flow assumption used, inventories on the balance sheet are stated at:

1. A) original cost.
2. B) realizable value.
3. C) replacement cost.
4. D) the lower of cost or market.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Inventories

Learning Objective:  05-07 Explain how inventories are reported on the balance sheet.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

32) Prepaid expenses classified as current assets represent:

1. A) current year expenses that have been accrued.
2. B) cash payments in the current year that will be recognized as expenses and matched against revenues of the next year.
3. C) cash that has been segregated to pay for future expenses.
4. D) expenses of the current year that have been paid in advance.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Prepaid Expenses and Other Current Assets

Learning Objective:  05-10 Explain what prepaid expenses are and how they are reported on the balance sheet.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

33) The balance sheet presentation of accounts receivable net of the allowance for bad debts has the effect of stating accounts receivable at:

1. A) original cost.
2. B) net realizable value.
3. C) market value.
4. D) lower of cost or market.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

34) A firm has used LIFO for several years during which costs have trended higher. The effect on 2020 net income using LIFO, relative to FIFO, will be:

1. A) net income for 2020 will be greater under LIFO than FIFO.
2. B) net income for 2020 will be less under LIFO than FIFO.
3. C) net income for 2020 will be the same under LIFO as under FIFO.
4. D) impossible to determine from the information given.

 

Answer:  B

Difficulty: 3 Hard

Topic:  Inventories

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

35) One of the most important reasons for having a system of internal control is to:

1. A) improve the effectiveness and efficiency of the operations of the organization.
2. B) ensure no employees have ever been convicted of fraud or embezzlement.
3. C) eliminate any temptations that may be presented to employees that could lead to theft from the company.
4. D) prevent a salesperson from using a company car for personal transportation.

 

Answer:  A

Difficulty: 2 Medium

Topic:  Cash and Cash Equivalents

Learning Objective:  05-02 Describe the key features of a system of internal control and explain why internal controls are important.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

36) A firm has used LIFO for several years during which costs have trended higher. If this firm achieves a substantial reduction in inventory quantities in 2020 by selling more merchandise than it purchases, the effect on 2020 net income of the inventory reduction (or LIFO liquidation), compared to having no change in inventory quantity from the beginning to the end of 2020, is:

1. A) net income for 2020 will be greater if the inventory quantity declines.
2. B) net income for 2020 will be less if the inventory quantity declines.
3. C) net income for 2020 will not be affected because of the inventory quantity decline.
4. D) impossible to determine from the information given.

 

Answer:  A

Difficulty: 3 Hard

Topic:  Inventories

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

37) The amount of cash related to a particular bank checking account that is shown on the balance sheet at December 31 is:

1. A) the cash balance shown on the bank’s records at the close of business on December 31, without further adjustments.
2. B) the cash balance shown in the company’s general ledger account for this checking account at the close of business on December 31, without further adjustments.
3. C) the cash balance shown in the general ledger account for this checking account as of the close of business on December 31, after recognizing any outstanding checks and/or deposits in transit from the December 31 bank account reconciliation.
4. D) the cash balance shown in the general ledger account for this checking account as of the close of business on December 31, after recognizing any bank service charges and/or interest income from the December 31 bank account reconciliation.

 

Answer:  D

Difficulty: 3 Hard

Topic:  Cash and Cash Equivalents

Learning Objective:  05-03 Explain the bank reconciliation procedure.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

38) The valuation of short-term marketable securities on the balance sheet is likely to be for an amount that is approximately equal to the cost of these investments because:

1. A) the market value of short-term marketable securities does not fluctuate from cost.
2. B) the high quality and close maturity date of the securities cause their market values to be relatively stable.
3. C) generally accepted accounting principles require that short-term marketable securities be reported at cost.
4. D) the question statement is false; the valuation of short-term marketable securities on the balance sheet is not likely to be for an amount that is approximately equal to the cost of these investments.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Short-Term Marketable Securities

Learning Objective:  05-04 Explain how short-term marketable securities are reported on the balance sheet.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

39) Which of the following is true regarding cost flow assumptions?

1. A) Manufacturing firms are required to use FIFO.
2. B) Service firms are required to use LIFO.
3. C) If a firm uses FIFO for tax purposes, then FIFO must be used for financial reporting purposes.
4. D) If a firm uses LIFO for tax purposes, then LIFO must be used for financial reporting purposes.

 

Answer:  D

Difficulty: 3 Hard

Topic:  Inventories

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

40) Which of the following is not an example of an inventory account a manufacturing firm might use?

1. A) Work in process inventory.
2. B) Finished goods inventory.
3. C) Merchandise inventory.
4. D) Raw materials inventory.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Inventories

Learning Objective:  05-07 Explain how inventories are reported on the balance sheet.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

41) The reason for recording a prepaid expense as a current asset is:

1. A) that the prepaid item will be returned for a cash refund.
2. B) that the prepaid item has not yet become an expense.
3. C) that the expense has been incurred but not yet paid.
4. D) to avoid recognizing an expense so net income will be higher for the current accounting period.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Prepaid Expenses and Other Current Assets

Learning Objective:  05-10 Explain what prepaid expenses are and how they are reported on the balance sheet.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

42) Assume that on November 1, 2019, a 3-month rent payment for $8,000 per month (for a total of $24,000) was made with respect to a lease that the company entered into on that date as a tenant. The company took occupancy of the rented space immediately. The lease term will expire on January 31, 2020. The $72,000 payment was recorded as a debit to Prepaid Rent on November 1, 2019. The adjusting entry on December 31, 2019, is as follows:

A)

Dr.	Prepaid Rent	8,000
Cr.	Rent Expense		8,000

 

B)

Dr.	Prepaid Rent	16,000
Cr.	Rent Expense		16,000

 

C)

Dr.	Rent Expense	8,000
Cr.	Prepaid Rent		8,000

 

D)

Dr.	Rent Expense	16,000
Cr.	Prepaid Rent		16,000

 

 

Answer:  D

Explanation:  $8,000 × 2 = $16,000

Difficulty: 2 Medium

Topic:  Prepaid Expenses and Other Current Assets

Learning Objective:  05-10 Explain what prepaid expenses are and how they are reported on the balance sheet.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

43) The balance in Jahapp Inc.’s Cash account was $6,320 at April 30, 2019 before reconciliation. The April 30, 2019 balance shown in the bank statement was $4,590. Reconciling items included deposits in transit, $2,600; bank service charges, $140; outstanding checks, $950; and interest credited to the bank account during the month but not recorded on the company’s books, $60. The reconciled balance at April 30, 2019 is:

100. A) $6,100.
101. B) $6,240.
102. C) $6,380.
103. D) $7,190.

 

Answer:  B

Explanation:  Book side: $6,320 − $140 + $60 = $6,240.

Or bank side: $4,590 + $2,600 – $950 = $6,240.

Difficulty: 2 Medium

Topic:  Cash and Cash Equivalents

Learning Objective:  05-03 Explain the bank reconciliation procedure.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

44) At the beginning of the year, accounts receivable were $45,000 and the allowance for bad debts was $4,200. During the year, sales (all on account) were $180,000, cash collections were $165,000, bad debts expense totaled $3,100, and $2,600 of accounts receivable were written off as bad debts.

 

The balance at the end of the year for the Accounts Receivable account was:

400. A) $42,400.
401. B) $54,300.
402. C) $57,400.
403. D) $60,000.

 

Answer:  C

Explanation:  $45,000 + $180,000 − $165,000 − $2,600 = $57,400.

Difficulty: 2 Medium

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

45) At the beginning of the year, accounts receivable were $45,000 and the allowance for bad debts was $4,200. During the year, sales (all on account) were $180,000, cash collections were $165,000, bad debts expense totaled $3,100, and $2,600 of accounts receivable were written off as bad debts.

 

The balance at the end of the year for the Allowance for Bad Debts account was:

600. A) $1,600.
601. B) $3,700.
602. C) $4,700.
603. D) $7,300.

 

Answer:  C

Explanation:  $4,200 + $3,100 − $2,600 = $4,700.

Difficulty: 2 Medium

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

46) The Allowance for Bad Debts account had a balance of $8,500 at the beginning of the year and $7,200 at the end of the year. During the year (including the year-end adjustment), bad debts expense of $16,000 was recognized. The total amount of past-due accounts receivable that were written off as uncollectible during the year were:

700. A) $14,700.
701. B) $16,000.
702. C) $17,300.
703. D) $23,200.

 

Answer:  C

Explanation:  $8,500 − $7,200 = $1,300 net decrease in account during the year + $16,000 increase for bad debts expense = $17,300 decrease for past-due accounts written off.

Difficulty: 2 Medium

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

47) Sales during the year were 500 units. Beginning inventory was 250 units at a cost of $5 per unit. Purchase 1 was 400 units at $6 per unit. Purchase 2 was 200 units at $7 per unit.

 

Cost of goods sold under the LIFO cost flow assumption (using a periodic inventory system) was:

850. A) $1,850.
851. B) $2,750.
852. C) $3,200.
853. D) $3,800.

 

Answer:  C

Explanation:  (200 units × $7) + (300 units × $6) = $3,200.

Difficulty: 2 Medium

Topic:  Inventories

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

48) Sales during the year were 500 units. Beginning inventory was 250 units at a cost of $5 per unit. Purchase 1 was 400 units at $6 per unit. Purchase 2 was 200 units at $7 per unit.

 

Ending inventory under the LIFO cost flow assumption (using a periodic inventory system) was:

250. A) $1,250.
251. B) $1,850.
252. C) $2,300.
253. D) $3,200.

 

Answer:  B

Explanation:  (250 units × $5) + (100 units × $6) = $1,850.

Difficulty: 2 Medium

Topic:  Inventories

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

49) Sales during the year were 500 units. Beginning inventory was 250 units at a cost of $5 per unit. Purchase 1 was 400 units at $6 per unit. Purchase 2 was 200 units at $7 per unit.

 

Cost of goods sold under the FIFO cost flow assumption (using a periodic inventory system) was:

300. A) $2,300.
301. B) $2,750.
302. C) $3,200.
303. D) $3,650.

 

Answer:  B

Explanation:  (250 units × $5) + (250 units × $6) = $2,750.

Difficulty: 2 Medium

Topic:  Inventories

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

50) Sales during the year were 500 units. Beginning inventory was 250 units at a cost of $5 per unit. Purchase 1 was 400 units at $6 per unit. Purchase 2 was 200 units at $7 per unit.

 

Ending inventory under the FIFO cost flow assumption (using a periodic inventory system) was:

850. A) $1,850.
851. B) $2,300.
852. C) $2,750.
853. D) $3,650.

 

Answer:  B

Explanation:  (200 units × $7) + (150 units × $6) = $2,300.

Difficulty: 2 Medium

Topic:  Inventories

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

51) On January 1, 2020, the balance in Great Lakes Co.’s Allowance for Bad Debts account was $15,600. During the year, a total of $10,500 of delinquent accounts receivable were written off as bad debts. The balance in the Allowance for Bad Debts account at December 31, 2020, was $21,900.

 

(a.) What was the total amount of bad debts expense recognized during the year?

(b.) As a result of a comprehensive analysis, it is determined that the December 31, 2020, balance of Allowance for Bad Debts should be $18,900. Show, in general journal format the adjustment required.

 

Answer:

(a.)

$15,600 + Bad debts expense − $10,500 = $21,900

Bad debts expense = $16,800

 

(b.)

Dr.	Allowance for Bad Debts	3,000
Cr.	Bad Debts Expense		3,000

 

Difficulty: 2 Medium

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

52) Prepare a bank reconciliation for Show Me, Inc., as of June 30 from the following information:

 

(a.)	The June 30 balance shown on the bank statement is $5,796.
(b.)	Outstanding checks at June 30 totaled $330.
(c.)	A deposit of $424 made on June 30 was not included in the balance shown on the bank statement.
(d.)	The bank statement contained an adjustment of $410 for a note receivable collected by the bank on behalf of Show Me, Inc. ($382 principal and $28 interest).
(e.)	A bank charge of $34 was made to the account during June. Although the company was expecting a charge, the amount was not known until the bank statement arrived.
(f.)	The bank erroneously charged a $340 check of Shirt, Inc., against the Show Me, Inc., bank account.
(g.)	The June 30 balance in the general ledger Cash account, before reconciliation, is $6,026.
(h.)	The bank statement included a notice that a customer’s check for $172 that had been deposited on June 14 had been returned NSF.

 

Required:

 

(1.) Prepare the bank reconciliation for Show Me, Inc., as of June 30.

(2.) Prepare the appropriate adjusting entry(ies) or show the reconciling items in a horizontal model, for Show Me, Inc., related to the bank reconciliation.

 

 

 

Answer:

(1.)

 

Balance per bank	$	5,796			Balance per books	$	6,026
Add: Deposits in transit		424			Add: Note collected		410
Error		340			Less: NSF check		(172	)
Less: Outstanding checks		(330	)		Bank service charge		(34	)
Reconciled balance	$	6,230			Reconciled balance	$	6,230

 

(2.)

 

Cash		204
Service Charge Expense		34
Accounts Receivable		172
Notes Receivable				382
Interest Income				28

 

Difficulty: 2 Medium

Topic:  Cash and Cash Equivalents

Learning Objective:  05-03 Explain the bank reconciliation procedure.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

53) The following is a portion of the current assets section of the balance sheets of The Sweet Cafe at December 31, 2020 and 2019:

 

	12/31/20	12/31/19
Accounts receivable, less allowance for bad debts of $14,400 (for 2020) and $10,200 (for 2019).	$487,200	$431,600

 

 

(a.) If bad debts expense for 2020 totaled $32,800, what was the amount of accounts receivable written off during the year?

 

(b.) The December 31, 2020, Allowance account balance includes $6,800 for a past due account that is not likely to be collected. This account has not been written off. If it had been written off, what would have been the effect of the write off on:

 

(1.) The current ratio at December 31, 2020?

(2.) Net income and ROE for the year ended December 31, 2020?

 

(c.) What do you suppose was the level of The Sweet Cafe’s sales in 2020, compared to 2019? Explain your answer.

 

Answer:

(a.)

$10,200 + $32,800 − Accounts written off = $14,400 Accounts written off = $28,600

 

(b.)

(1.) No effect

(2.) No effect

 

(c.)

Sales were probably higher in 2020 because the accounts receivable balance has increased during the year.

Difficulty: 2 Medium

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

54) Prepare a bank reconciliation for Grace, Inc., as of January 31, from the following information:

 

(a.)	The January 31 cash balance in the general ledger is $5,088.
(b.)	The January 31 balance shown on the bank statement is $4,544.
(c.)	Checks issued but not returned with the bank statement were No. 435 for $452 and No. 448 for $182.
(d.)	A deposit made on January 31 for $1,280 was included in the general ledger balance but not in the bank statement balance.
(e.)	Interest credited to the account during January but not recorded on the company’s books amounted to $72.
(f.)	A bank charge of $24 for printing new checks was made to the account during January. Although the company was expecting a charge, the amount was not Known until the bank statement arrived.
(g.)	In the process of reviewing canceled checks, it was determined that a check issued to a supplier in payment of an account payable of $139 was recorded as a $193 cash disbursement.

 

 

Required:

 

(1.) Prepare the bank reconciliation for Grace, Inc., as of January 31.

(2.) Prepare the appropriate adjusting entry(ies) or show the reconciling items in a horizontal model for Grace, Inc., related to the bank reconciliation.

 

Answer:

Balance per bank	$	4,544			Balance per books	$	5,088
Add: Deposits in transit		1,280			Add: Interest earned		72
Less: Outstanding checks		(634	)		Error		54
					Less: Check printing cost		(24	)
Reconciled balance	$	5,190			Reconciled balance	$	5,190
Cash		102
Service Charge Expense		24
Accounts Payable				54
Interest Income				72

 

 

Difficulty: 2 Medium

Topic:  Cash and Cash Equivalents

Learning Objective:  05-03 Explain the bank reconciliation procedure.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

55) The following are data available for Blue Grass for the month of June:

 

Sales	2,400	units
Beginning inventory	600	units @ $8.00
Purchases, in chronological order	1,200	units @ $8.40
	800	units @ $8.80
	1,000	units @ $9.00

 

(a.) Calculate cost of goods sold and ending inventory under the following cost flow assumptions:

 

(1.) Weighted-average

(2.) FIFO

(3.) LIFO

 

(b.) Assume net income using the weighted average cost flow assumption was $12,800. Calculate net income under FIFO and LIFO.

 

 

 

Answer:

(a.)

Compute goods available for sale in units and dollars; these amounts are common to all three inventory costing methods:

 

Beginning inventory	600	×	$	8.00	=	$	4,800
Purchases	1,200	×		8.40	=		10,080
	800	×		8.80	=		7,040
	1,000	×		9.00	=		9,000
Goods available for sale	3,600					$	30,920

 

 

(1.)	Weighted average:
	$30,920/3,600	=	$	8.59	(rounded)
	Cost of goods sold	=		2,400	×	$	8.59	=	$	20,616
	Ending inventory	=		1,200	×		8.59	=		10,308
									$	30,920	(rounded)
(2.)	FIFO: Cost of goods sold	=		600	×	$	8.00	=	$	4,800
				1,200	×		8.40	=		10,080
				600	×		8.80	=		5,280	=	$	20,160
	Ending inventory	=		200	×		8.80	=		1,760
				1,000	×		9.00	=		9,000	=		10,760
												$	30,920
(3.)	LIFO: Cost of goods sold	=		1,000	×	$	9.00	=	$	9,000
				800	×		8.80	=		7,040
				600	×		8.40	=		5,040	=	$	21,080
	Ending inventory	=		600	×		8.00	=		4,800
				600	×		8.40	=		5,040	=		9,840
												$	30,920

 

 

 

 

(b.)

The effect on net income will be the difference between cost of goods sold under each cost flow assumption.

 

Costs of goods sold:
Weighted average	$	20,616
FIFO		20,160
LIFO		21,080

 

FIFO cost of goods sold is $456 less than weighted average, so net income will be $456 higher, or $13,256 ($12,800 + $456).

 

LIFO cost of goods sold is $464 higher than weighted average, so net income will be $464 lower, or $12,336 ($12,800 − $464).

Difficulty: 3 Hard

Topic:  Inventories

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

56) The following are data available for Richards Co. for the month of May:

 

Sales	1,120	units
Beginning inventory	200	units @ $1.25
Purchases, in chronological order	500	units @ $1.30
	400	units @ $1.40
	700	units @ $1.50

 

Calculate cost of goods sold and ending inventory under the following cost flow assumptions:

 

(1.) Weighted average

(2.) FIFO

(3.) LIFO

 

Answer:  Compute goods available for sale in units and dollars; these amounts are common to all three inventory costing methods:

 

Beginning inventory	200	×	$	1.25	=	$	250
Purchases	500	×		1.30	=		650
	400	×		1.40	=		560
	700	×		1.50	=		1,050
Goods available for sale	1,800					$	2,510

 

(1.)	Weighted average:
	$2,510 / 1,800	=	$	1.39	(rounded)
	Cost of goods sold	=		1,120	×	$	1.39	=	$	1,557	(rounded)
	Ending inventory	=		680	×		1.39	=		945	(rounded)
									$	2,510	(rounded)
(2.)	FIFO: Cost of goods sold	=		200	×	$	1.25	=	$	250
				500	×		1.30	=		650
				400	×		1.40	=		560
	Ending inventory	=		20	×		1.50	=		30	=	$	1,490
				680	×		1.50	=					1,020
												$	2,510
(3.)	LIFO: Cost of goods sold	=		700	×	$	1.50	=	$	1,050
				400	×		1.40	=		560
				20	×		1.30	=		26	=	$	1,636
	Ending inventory	=		480	×		1.30	=		624
				200	×		1.25	=		250	=		874
												$	2,510

 

Difficulty: 3 Hard

Topic:  Inventories

 

 

Learning Objective:  05-08 Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

57) At the beginning of the year, accounts receivable were $39,000 and the allowance for bad debts was $2,400. During the year, sales (all on account) were $120,000, cash collections were $114,000, bad debts expense totaled $1,700, and $2,000 of accounts receivable were written off as bad debts.

 

Required:

 

Calculate the balances at the end of the year for the Accounts Receivable and Allowance for Bad Debts accounts. (Hint: Use T-accounts to analyze each of these accounts, plug in the amounts that you know, and solve for the ending balances.)

 

Answer:

 

Ending balance = $39,000 + $120,000 − $114,000 − $2,000 = $43,000.  This makes sense because the debit to accounts receivable for sales on account of $120,000 was greater than the credits during the year for cash collections and write-offs of $116,000, so the ending balance is $4,000 more than the beginning balance.

 

 

Ending balance = $2,400 + $1,700 − $2,000 = $2,100.

 

This makes sense because this company wrote-off $300 more accounts during the year than it added to the allowance account with the bad debts expense adjustment; thus, the ending balance of the allowance account is $300 less than the beginning balance.

 

Net realizable value:
Accounts receivable	$	43,000
Less: Allowance for bad debts		(2,100	)		$	40,900

 

Difficulty: 3 Hard

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

58) The Allowance for Bad Debts account had a balance of $20,400 at the beginning of the year and $24,500 at the end of the year. During the year (including the year-end adjustment), bad debts expense of $33,600 was recognized.

 

Required:

 

Calculate the total amount of past-due accounts receivable that were written off as uncollectible during the year. (Hint: Make a T-account for the Allowance for Bad Debts account, plug in the amounts that you know, and solve for the missing amount.)

 

Answer:

 

Bad debt write-offs = $20,400 + $33,600 − $24,500 = $29,500.

 

This makes sense because the ending balance of the Allowance for Bad Debts account was $4,100 greater than the beginning balance, so the bad debt write-offs (debits to the account) are $4,100 less than the bad debts expense for the year (credits to the account).

Difficulty: 2 Medium

Topic:  Accounts Receivable

Learning Objective:  05-05 Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

59) Agrico, Inc., accepted a 6-month, 9% (annual rate), $8,000 note from one of its customers on November 1, 2019; interest is payable with the principal at maturity.

 

Required:

1. Use the horizontal model or write the journal entry to record the interest earned

by Agrico during its year ended December 31, 2019.

1. Use the horizontal model or write the journal entry to record collection of the note

and interest at maturity.

 

Answer:

a.

Interest earned = $8,000 × 9% × 2/12 = $120

 

Balance Sheet

Income Statement

Assets

=

Liabilities

+

Stockholders’ Equity

←

Net income

=

Revenues

–

Expenses

Interest Receivable +120

Interest Revenue +120

 

 

December 31, 2019

Dr.	Interest Receivable	120
Cr.	Interest Revenue		120

 

To accrue interest earned on a short-term note.

 

 

 

b.

Balance Sheet

Income Statement

Assets

=

Liabilities

+

Stockholders’ Equity

←

Net income

=

Revenues

–

Expenses

Cash +8,360

Interest Revenue +240

Note Receivable –8,000

Interest Receivable –120

 

 

May 1, 2020

Dr.	Cash ($8,000 + ($8,000 × 9% × 6/12))	8,360
Cr.	Note Receivable		8,000
Cr.	Interest Receivable (accrued at 12/31/16)		120
Cr.	Interest Revenue ($8,000 × 9% × 4/12)		240

 

To record the collection of principal and interest at the maturity date of a short-term note (for which some interest had been previously accrued).

Difficulty: 2 Medium

Topic:  Notes Receivable

Learning Objective:  05-06 Explain how notes receivable and related accrued interest are reported on the balance sheet.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

60) a. Use the horizontal model or write the journal entry to record the payment of a one-year insurance premium of $18,000 on October 1, 2019.

 

1. Use the horizontal model or write the adjusting entry that will be made at the end of every month to show the amount of insurance premium “used” that month.

 

1. Calculate the amount of prepaid insurance that should be reported on the December 31, 2019 balance sheet with respect to this policy.

 

Answer:

a.

Balance Sheet						Income Statement
Assets	=	Liabilities	+	Stockholders’ Equity	←	Net income	=	Revenues	−	Expenses
Prepaid Insurance +18,000
Cash −18,000

 

 

October 1, 2019

Dr.	Prepaid Insurance	18,000
Cr.	Cash		18,000

 

To record the payment of a one-year insurance premium.

 

 

b.

Balance Sheet						Income Statement
Assets	=	Liabilities	+	Stockholders’ Equity	←	Net income	=	Revenues	−	Expenses
Prepaid Insurance −1,500										Insurance Expense −1,500

 

Each month-end:

Dr.	Insurance Expense	1,500
Cr.	Prepaid Insurance		1,500

 

To record the expiration of prepaid insurance each month.

 

 

 

c.

At December 31, 2019, 3 months of insurance coverage has been used, and 9 months remains unused (prepaid). Thus, 9/12 of the original premium of $18,000, or $13,500, is prepaid and will be shown on the December 31, 2019 balance sheet as a current asset.

Difficulty: 2 Medium

Topic:  Prepaid Expenses and Other Current Assets

Learning Objective:  05-10 Explain what prepaid expenses are and how they are reported on the balance sheet.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

61) a. If the beginning balance of the Inventory account and the cost of items purchased or made during the period are correct, but an error resulted in understating the firm’s ending inventory balance by $12,000, how would the firm’s cost of goods sold be affected?

 

1. If management wanted to overstate net income, would ending inventory be understated or overstated? Explain your answer.

 

Answer:

1. To correct the understatement, inventory should be increased (debited)

by $12,000, and cost of goods sold should be decreased (credited) by $12,000.

If the error is not corrected, cost of goods sold will be overstated (too high),

and net income will be understated (too low).

 

1. If ending inventory were overstated (too high), cost of goods sold would be

understated (too low), and net income would be overstated (too high).

Difficulty: 2 Medium

Topic:  Inventories

Learning Objective:  05-09 Discuss the impact of inventory errors on the balance sheet and income statement.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation