Introduction to Financial Accounting International Edition 8e Curtis L Norton Gary A Porter - Test Bank

Introduction to Financial Accounting International Edition 8e Curtis L Norton Gary A Porter – Test Bank

Instant Download – Complete Test Bank With Answers

Sample Questions Are Posted Below

Chapter 5: Inventories and Cost of Goods Sold

MULTIPLE CHOICE

Which one of the following types of inventory accounts would be used by a wholesaler or retailer?

a.	Raw materials inventory
b.	Work in process inventory
c.	Finished goods inventory
d.	Merchandise inventory

ANS: D PTS: 1 DIF: Difficulty: Easy

REF: pp. 232-235 OBJ: LO: 05-01 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

The inventory account a manufacturer uses to record the cost of products completed and available for sale is called

a.	Raw materials inventory
b.	Work in process inventory
c.	Finished goods inventory
d.	Merchandise inventory

ANS: C PTS: 1 DIF: Difficulty: Easy

REF: pp. 232-235 OBJ: LO: 05-01 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Items should be reported as part of the company’s “inventory” if they are

a.	Purchased from a creditor, although not paid for by year end
b.	Held in anticipation of an increase in market value.
c.	Determined to be part of cost of goods sold.
d.	Sold during the period.

ANS: A PTS: 1 DIF: Difficulty: Easy

REF: pp. 232-235 OBJ: LO: 05-01 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

For what reason would retailers like The Gap select an accounting period that ends on or near the end of January?

a.	The company originally started business operations on that date.
b.	Business activity has reached a slow period that is suited to the preparation of its financial statements at the end of the year.
c.	The company’s CPAs are attempting to spread out the workload.
d.	The Internal Revenue Service requires merchandise companies to select such a date for their fiscal year.

ANS: B PTS: 1 DIF: Difficulty: Easy

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Which one of the following accounts most likely would appear on the income statement of a merchandise company, but not on the income statement of a service company?

a.	Cost of Goods Sold
b.	Selling Expenses
c.	Administrative Expenses
d.	Income Tax Expense

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Which one of the following ratios is a common analytical tool used by merchandise corporations, but not by service corporations?

a.	Gross profit ratio
b.	Earnings per share
c.	Current ratio
d.	Profit margin

ANS: A PTS: 1 DIF: Difficulty: Easy

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

A customer returned damaged goods for credit. Which of the seller’s accounts decreases?

a.	Purchase Returns
b.	Accounts Receivable
c.	Sales Returns
d.	Sales Revenue

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Asago Co. sold merchandise to Health Co. on account, $18,000, terms 2/15, net 45. The cost of the merchandise sold is $15,500. Asago Co. issued a credit memo for $1,750 for merchandise returned that originally cost $1,400. The Health Co. paid the invoice within the discount period. What is amount of net sales from the above transactions?

a.	$16,250
b.	$14,100
c.	$15,925
d.	$13,818

ANS: C PTS: 1 DIF: Difficulty: Moderate

REF: pp. 235-244 OBJ: LO: 05-02 | LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

A company using the periodic inventory system has the following account balances: Merchandise Inventory at the beginning of the year, $3,600; Freight-In, $650; Purchases, $10,700; Purchases Returns and Allowances, $1,950; Purchases Discounts, $330. The cost of merchandise purchased is equal to

a.	$12,670
b.	$9,070
c.	$8,420
d.	$17,230

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Using the following information, what is the amount of cost of goods sold?

Purchases	$32,000	Purchases discounts	$960
Merchandise inventory September 1	5,700	Merchandise inventory September 30	6,370
Sales returns and allowances	910	Sales	63,000
Purchases returns and allowances	1,200	Freight In	1,040

a.	$26,900
b.	$20,530
c.	$28,130
d.	$30,210

ANS: D PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Which of the following terms best describes “Cost of goods available for sale”?

a.	Cost of goods available for sale is an expense account.
b.	Cost of goods available for sale is added to beginning inventory to determine cost of purchases during the period.
c.	Cost of goods available for sale is subtracted from net sales to arrive at the gross margin
d.	Cost of goods available for sale is allocated into cost of goods on hand and cost of goods sold at the end of the fiscal year

ANS: D PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Ending inventory is equal to the cost of items on hand plus

a.	Merchandise in transit sold to customers FOB shipping point
b.	Merchandise in transit sold to customers FOB destination
c.	The cost of all inventory purchased during the period
d.	Merchandise purchased in transit with terms FOB destination

ANS: B PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Givens Corp.

Givens Corp. is a merchandising company that uses the periodic inventory system. Selected account balances are listed below:

Sales	$500,000
Purchases	225,000
Inventory (beginning)	16,000
Inventory (ending)	30,000
Operating Expenses	148,000
Income Tax Expense	10,000
Retained Earnings (beginning)	53,000
Dividends	15,000

Refer to information for Givens Corp.

Calculate the cost of goods sold for Givens Corp.

a.	$275,000
b.	$259,000
c.	$241,000
d.	$211,000

ANS: D

$16,000 (Inventory – Beginning) + $225,000 (Purchases) – $30,000 (Inventory – Ending) =

$211,000

PTS: 1 DIF: Difficulty: Easy REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Refer to the information for Givens Corp.

Calculate the gross profit.

a.	$241,000
b.	$275,000
c.	$289,000
d.	$425,000

ANS: C

$500,000 Sales – [($16,000+$225,000-$30,000) Cost of goods sold] = $289,000

PTS: 1 DIF: Difficulty: Moderate REF: pp. 235-237

OBJ: LO: 05-02 NAT: BUSPROG: Communication

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Refer to the information for Givens Corp.

Calculate net income.

a.	$289,000
b.	$141,000
c.	$131,000
d.	$116,000

ANS: C

$289,000 (Gross Profit) – $148,000 (Operating Expenses) – $10,000 (Income Tax Expense) =

$131,000

PTS: 1 DIF: Difficulty: Moderate REF: pp. 235-237

OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Chen’s Department Store

Chen’s Department Store is a merchandising company that uses the periodic inventory system. Selected account balances are listed below:

Sales	$175,000
Purchases	90,000
Inventory (beginning)	23,000
Inventory (ending)	17,000
Purchase returns and allowances	3,000
Purchase discounts	7,000
Transportation-in	4,000
Sales discounts	8,000
Sales returns and allowances	5,000

Refer to the account information for Chen’s Department Store.

Calculate Chen’s net sales.

a.	$162,000
b.	$167,000
c.	$170,000
d.	$175,000

ANS: A

$175,000 (Sales) – $8,000 (Sales discounts) – $5,000 (Sales returns and allowances) = $162,000

PTS: 1 DIF: Difficulty: Easy REF: pp. 235-237

OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Refer to the account information for Chen’s Department Store

Calculate Chen’s cost of goods purchased

a.	$ 84,000
b.	$ 90,000
c.	$ 103,000
d.	$ 117,000

ANS: A

$90,000 (Purchases) + $4,000 (Transportation-in) – $3,000 (Purchase returns and allowances) – $7,000 (Purchase discounts) = $84,000

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Refer to the account information for Chen’s Department Store.

Determine Chen’s gross profit.

a.	$68,000
b.	$72,000
c.	$78,000
d.	$85,000

ANS: B

Net Sales =	$175,000 (Sales) – $8,000 (Sales discounts) – $5,000 (Sales returns and allowances) = $162,000

Cost of goods sold =	$23,000 (Beginning inventory) + [$90,000 (Purchases) + $4,000 (Transportation-in) – $3,000 (Purchase returns and allowances) – $7,000 (Purchase discounts)] – $17,000 (Ending inventory) = $90,000

Gross profit =	$162,000 – $90,000 = $72,000

PTS: 1 DIF: Difficulty: Moderate REF: pp. 232-235

OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Klein’s Shoe Company uses a perpetual inventory system. The beginning balance in its inventory account is $1,500 and the ending balance is $1,000. Cost of goods sold is $6,500. What was the amount of inventory purchased during the year?

a.	$ 500
b.	$6,000
c.	$7,000
d.	$7,500

ANS: B

$6,500 (Cost of goods sold) + $1,000 (Ending inventory) – $1,500 (Beginning inventory) = $6,000

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

What effects on a retail store’s accounting equation occur when merchandise returned by customers is recorded?

a.	Assets and stockholders’ equity decrease.
b.	Assets and stockholders’ equity increase.
c.	Assets decrease and liabilities increase.
d.	Stockholders’ equity decreases and liabilities increase.

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Lalli Corp. sold merchandise to a customer on credit. The invoice amount was $1,000; the invoice date was June 10; credit terms were 1/10, n/30. Which one of the following statements is true?

a.	The customer can take a $10 discount if the invoice is paid on June 30
b.	The customer should pay $1,000 if the invoice is paid on July 9
c.	The customer must pay a $10 penalty if payment is made after July 9.
d.	The customer must pay $1,010 if payment is made after June 20.

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Grout, Inc. offers terms of 2/10, n/30 to credit customers. Tile Mart Corp. purchased 100 tile cutters with a list price of $20 each on March 5, 2014, on account.

If Tile Mart Corp. pays the amount of the invoice for its purchase on March 14, 2014, how much cash will Grout receive from Tile Mart Corp.?

a.	$1,764
b.	$1,800
c.	$1,960
d.	$2,000

ANS: C

($20 x 100 Tile cutters) – 98% (or 100% – 2%) = $1,960

PTS: 1 DIF: Difficulty: Moderate REF: pp. 235-237

OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Grout, Inc. offers terms of 2/10, n/30 to credit customers. Tile Mart Corp. purchased 100 tile cutters with a list price of $20 each on March 5, 2014, on account.

Tile Mart Corp. paid the invoice on March 31, 2014. How much sales discount will Grout recognize?

a.	$ -0-
b.	$ 40
c.	$ 200
d.	$ 236

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Blenham, Inc. sells merchandise on credit. If a customer pays its balance due within the discount period, what is the effect of the payment on Blenham’s accounting equation?

a.	Assets and stockholders’ equity decrease
b.	Assets and stockholders’ equity increase
c.	Assets decrease and liabilities increase
d.	Stockholders’ equity decreases and liabilities increase

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Blenham, Inc. sells merchandise on credit. If a customer pays its balance due after the discount period has passed, what is the effect of the payment on Blenham’s accounting equation?

a.	Assets and stockholders’ equity decrease
b.	Assets and stockholders’ equity increase
c.	Assets decrease and liabilities increase
d.	No net effect

ANS: D PTS: 1 DIF: Difficulty: Moderate

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Sales Discounts is classified as what type of account?

a.	an expense
b.	a revenue
c.	a contra-asset
d.	a contra-revenue

ANS: D PTS: 1 DIF: Difficulty: Easy

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

When an inventory system updates the Inventory account at the time of each sale, this is known as:

a.	a periodic system
b.	a contra-purchase system
c.	a perpetual system
d.	an accrual system

ANS: C PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Cost of goods sold is equal to

a.	the total amount of merchandise purchased during the year.
b.	the cost of merchandise purchased plus transportation-in costs less ending inventory.
c.	the cost of merchandise purchased plus transportation-in costs plus beginning inventory minus purchase returns and allowances and purchase discounts minus ending inventory.
d.	the cost of merchandise purchased plus transportation-in costs plus beginning inventory minus purchase returns and allowances and purchase discounts

ANS: C PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

The recognition of cost of goods sold expense in the same period that sales revenue is recognized from the sale of merchandise is a good example of the

a.	matching principle
b.	full disclosure principle
c.	revenue realization principle
d.	historical cost principle

ANS: A PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

The following is from Silverstein Inc.’s 2014 income statement.

Purchases	$182,000
Transportation-In	11,000
Inventory, January 1, 2014	26,500
Inventory, December 31, 2014	28,800
Purchase Returns and Allowances	8,400

How much will Silverstein report as cost of goods purchased in its 2014 income statement?

a.	$184,600
b.	$193,000
c.	$201,400
d.	$211,100

ANS: A

$182,000 (Purchases) – $8,400 (Purchase returns and allowances) + $11,000 (Transportation-in) = $184,600

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

The following is from Silverstein Inc.’s 2014 income statement.

Purchases	$182,000
Transportation-In	11,000
Inventory, January 1, 2014	26,500
Inventory, December 31, 2014	28,800
Purchase Returns and Allowances	8,400

How much will Silverstein report as its cost of goods sold in its 2014 income statement?

a.	$179,900
b.	$182,300
c.	$186,900
d.	$190,700

ANS: B

$182,000 (Purchases) – $8,400 (Purchase returns and allowances) + $11,000 (Transportation-in) + $26,500 (Inventory – January 1, 2014) – $28,800 (Inventory – December 31, 2014) = $182,300

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

In a periodic inventory system, the cost of purchases is recognized as

a.	An integral part of the calculation of cost of goods sold
b.	The only part of the calculation of cost of goods sold
c.	An increase in the inventory account
d.	An increase in an asset account

ANS: A PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

The cost of goods sold is

a.	Purchases less beginning inventory plus ending inventory
b.	Reported on the balance sheet in the inventory account
c.	Goods available for sale less ending inventory
d.	Equal to the amount of inventory on hand at the end of the accounting period

ANS: C PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Which one of the following statements is false?

a.	The inventory account is updated after every sale and after every merchandise purchase under the perpetual inventory system.
b.	The inventory account is updated only at the end of the accounting period under the periodic inventory system.
c.	A cost of goods sold account is updated after each sale of merchandise under the periodic inventory system.
d.	A purchases account is used only under the periodic inventory system.

ANS: C PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Feinstein Company buys designer clothing to sell in its retail stores. Since much of the merchandise comes from Dallas and Europe. Feinstein Company must pay freight charges to get the merchandise shipped in. Which statement is true?

a.	Transportation-in, paid by Feinstein Company, is added to the inventory account under the periodic system.
b.	Transportation-in, paid by Feinstein Company, is subtracted from purchases under the periodic system.
c.	Freight charges are only paid by a buyer in a periodic system.
d.	Transportation-in is added to net purchases to determine cost of goods purchased in a periodic system.

ANS: D PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

In order to determine inventory for its balance sheet, it is best for a company to count the inventory at the end of its accounting period for

a.	The periodic inventory system
b.	The perpetual inventory system
c.	Both the periodic and perpetual inventory systems
d.	Neither the periodic nor perpetual inventory systems

ANS: C PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Which one of the following is correct?

a.	Inventory losses can be identified and controlled better under the perpetual system.
b.	Inventory can only be sold at the end of an accounting period under the periodic system.
c.	There is no difference in cost to implement a perpetual as compared to a periodic system.
d.	The perpetual system eliminates the need for an annual inventory count

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Texas Inc. sold merchandise to Flange Corp. on December 28, 2013, with shipping terms of FOB destination. Flange Corp. received the merchandise on January 3, 2014. Which one of the following statements is true?

a.	Texas should record sales revenue on December 28, 2013.
b.	Flange Corp. should pay the transportation costs.
c.	Flange Corp. should include the merchandise in its inventory at December 31, 2013.
d.	Flange Corp. should record a liability for the purchase on January 3, 2014.

ANS: D PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

How are purchase discounts and purchase returns recorded by a company using the periodic inventory system?

a.	As a direct reduction to the Purchases account.
b.	In contra accounts to the Purchases account.
c.	As operating expenses.
d.	As miscellaneous expenses.

ANS: B PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Sunset, Inc. purchased merchandise from Rumble Music Company on June 5, 2014. The goods were shipped the same day. The merchandise’s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Sunset received the merchandise on June 10, 2014. Sunset paid the amount due on June 13, 2014.

Sunset uses a perpetual inventory system. When will the cost of merchandise sold be recorded as an expense?

a.	The date the merchandise was purchased.
b.	The date the merchandise is sold.
c.	The end of the accounting period
d.	Cannot be determined without further information.

ANS: B PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Sunset, Inc. purchased merchandise from Rumble Music Company on June 5, 2014. The goods were shipped the same day. The merchandise’s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Sunset received the merchandise on June 10, 2014. Sunset paid the amount due on June 13, 2014.

Sunset uses the periodic inventory system. What effect does recording the purchase of merchandise on June 5, 2014 have on Sunset’s accounting equation?

a.	Assets and liabilities increase.
b.	Liabilities increase and stockholders’ equity decreases.
c.	Assets and stockholders’ equity increase.
d.	Liabilities and stockholders’ equity decrease.

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Sunset, Inc. purchased merchandise from Rumble Music Company on June 5, 2014. The goods were shipped the same day. The merchandise’s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Sunset received the merchandise on June 10, 2014. Sunset paid the amount due on June 13, 2014.

If Sunset uses the periodic inventory system, the effect of recording the payment on June 13, 2014, will include

a.	A decrease to Purchases for $15,000.
b.	An increase to Inventory for $14,850.
c.	A decrease to Cash for $15,000.
d.	A decrease to Accounts Payable for $15,000.

ANS: D PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Sunset Band, Inc. purchased merchandise from Rumble Music Company on June 5, 2014. The goods were shipped the same day. The merchandise’s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Sunset received the merchandise on June 10, 2014. Sunset paid the amount due on June 13, 2014.

When did title to the merchandise transfer from Rumble Music Company to Sunset?

a.	June 5, 2014
b.	June 10, 2014
c.	June 13, 2014
d.	Cannot be determined from the information provided

ANS: A PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Sunset Band, Inc. purchased merchandise from Rumble Music Company on June 5, 2014. The goods were shipped the same day. The merchandise’s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Sunset received the merchandise on June 10, 2014. Sunset paid the amount due on June 13, 2014.

Who is responsible for payment of the transportation costs on the merchandise sold by Rumble Music to Sunset?

a.	Rumble Music Company
b.	Sunset, Inc.
c.	Split equally between the two companies.
d.	Cannot be determined from the information provided.

ANS: B PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Herndon Corp. purchased merchandise on account from Likert Corp. on November 18, 2014. On November 21, 2014, Herndon returned damaged merchandise to Likert and was granted an adjustment on its account. Herndon uses the periodic inventory system. What effect does the merchandise return have on Herndon’s accounting equation?

a.	Assets and stockholders’ equity decrease.
b.	Assets and liabilities decrease.
c.	Liabilities decrease and stockholders’ equity increases.
d.	Liabilities and stockholders’ equity decrease.

ANS: C PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Transportation-in is

a.	an operating expense
b.	part of purchases
c.	added to transportation-out as part of the calculation of cost of goods sold
d.	part of cost of goods purchased

ANS: D PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Which one of the following is not a contra account?

a.	Purchase Returns and Allowances
b.	Accumulated Depreciation
c.	Transportation-in
d.	Sales Discounts

ANS: C PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Wendt, Inc. counted its ending inventory as $178,000 at year-end, January 31, 2014. Upon review of the records, it was noted that the following items were in transit during the count:

$2,000 of goods shipped by a supplier to Wendt sent FOB destination on January 31 were received February 5, and were not counted by Wendt.

$5,000 of goods shipped by a supplier to Wendt sent FOB shipping point on January 30 were received February 2, and were not counted by Wendt.

$6,000 of goods shipped by Wendt to a customer FOB shipping point on January 31 were received by the customer February 3, and were counted by Wendt.

Determine the correct inventory balance at January 31.

a.	$178,000
b.	$177,000
c.	$174,000
d.	$172,000

ANS: B

$177,000

$178,000 + 0 (Item A) + $5,000 (Item B) – $6,000 (Item C) = $177,000

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

At the year end inventory count, if goods in transit are shipped FOB destination, they should be included in the inventory count of

a.	The seller
b.	The buyer
c.	Neither the buyer nor the seller

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

At the year end inventory count, if goods in transit are shipped FOB shipping point, they should be included in the inventory count of

a.	The seller
b.	The buyer
c.	Both the seller and the buyer
d.	Neither the seller no the buyer

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Many companies assign only the net invoice price for merchandise to inventory and cost of goods sold. All other costs, including transportation and other costs of bringing merchandise to the place of business, are charged to expense of the period in which they are incurred. Which accounting principle or concept is applied in this example?

a.	Historical cost
b.	Matching
c.	Cost/Benefit
d.	Conservatism

ANS: C PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

In order to evaluate a company’s gross profit ratio,

a.	the ratio should be compared with forecasted financial statements.
b.	the ratio should be compared with those of prior years.
c.	the ratio should be compared with other companies in the same industry.
d.	the ratio should be compared with those of both prior years and competitors.

ANS: D PTS: 1 DIF: Difficulty: Easy

REF: pp. 245-247 OBJ: LO: 05-04 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

All of the following statements regarding the gross profit ratio are true except:

a.	The gross profit ratio alone is sufficient to determine a company’s profitability.
b.	Managers, investors, and creditors use the gross profit ratio to measure one aspect of profitability.
c.	The gross profit ratio explains how many cents on every dollar are available to cover expenses other than cost of goods sold and to earn a profit.
d.	If a company’s net sales were $200,000 and cost of goods sold were $120,000, its gross profit ratio would be 40%.

ANS: A PTS: 1 DIF: Difficulty: Easy

REF: pp. 245-247 OBJ: LO: 05-04 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

The ending inventory balance represents

a.	Expired costs and is reported on the balance sheet as an asset.
b.	The cost of goods sold during the current period and is reported on the balance sheet as an asset.
c.	Expired costs and is reported on the income statement as an expense
d.	Unexpired costs and is reported on the balance sheet as an asset.

ANS: D PTS: 1 DIF: Difficulty: Easy

REF: pp. 247-248 OBJ: LO: 05-05 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Cost of goods sold represents

a.	Expired costs during a period and is reported on the income statement.
b.	Unexpired costs and is reported on the balance sheet as an asset.
c.	The cost of goods that will be purchased during the next operating cycle and is reported on the balance sheet as an asset.
d.	Expired costs and is reported on the balance sheet as an expense.

ANS: A PTS: 1 DIF: Difficulty: Easy

REF: pp. 247-248 OBJ: LO: 05-05 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

The Ramien Store held inventory items at the end of 2014. Which items should Ramien include as part of its total inventory cost?

a.	Freight incurred in shipping goods to customers.
b.	Annual income taxes paid for operations.
c.	Cost of storing inventory before it is sold.
d.	Cost of salaries of clerks that sell the inventory items.

ANS: C PTS: 1 DIF: Difficulty: Moderate

REF: pp. 247-248 OBJ: LO: 05-05 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Which one of the following statements is true?

a.	The flow of inventory costs should match the physical flow of the merchandise.
b.	Accounting standards require that merchandise costs be specifically traced to units left in inventory and to units that have been sold
c.	Accountants have developed methods which make assumptions concerning how costs should be assigned to inventory and cost of goods sold.
d.	Alternative inventory cost flow assumptions have the same effect on the amount of net income reported.

ANS: C PTS: 1 DIF: Difficulty: Moderate

REF: pp. 247-248 OBJ: LO: 05-05 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Which method assigns the cost of the most recent items purchased to ending inventory?

a.	Specific identification
b.	Weighted average cost
c.	FIFO
d.	LIFO

ANS: C PTS: 1 DIF: Difficulty: Easy

REF: pp. 249-253 OBJ: LO: 05-06 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Which method assigns the cost of the most recent items purchased to cost of goods sold?

a.	Specific identification
b.	Weighted average cost
c.	FIFO
d.	LIFO

ANS: D PTS: 1 DIF: Difficulty: Easy

REF: pp. 249-253 OBJ: LO: 05-06 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Which method assigns the same cost to all units whether sold or left in ending inventory?

a.	Specific identification
b.	Weighted average cost
c.	FIFO
d.	LIFO

ANS: B PTS: 1 DIF: Difficulty: Easy

REF: pp. 249-253 OBJ: LO: 05-06 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

For which type of inventory would a company most likely use the specific identification method?

a.	Barbie dolls
b.	Cartons of milk
c.	Custom designed diamond rings
d.	Gasoline in storage tanks at a gasoline station

ANS: C PTS: 1 DIF: Difficulty: Easy

REF: pp. 249-253 OBJ: LO: 05-06 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Eversoll Inc. uses the periodic inventory system.

June	1	On hand, 50 units @ $15.00 each	$ 750.00
	5	Purchased 115 units @ $15.10 each	1,736.50
	14	Purchased 75 units @ $15.20 each	1,140.00
		Total cost of goods available for sale	$3,626.50
	30	On hand, 90 units

If the June 30th inventory included 45 units from the June 5th purchase and 45 units from the June 14th purchase, Eversoll’s cost of goods sold for June under the specific identification method would be

a.	$2,263.00
b.	$2.373.00
c.	$2,945.00
d.	$3,626.50

ANS: A

(50 x $15 – On hand June 1) + (70 x $15.10 – June 5 purchase) + (30 x $15.20 – June 14 purchase) = $2,263.00

PTS: 1 DIF: Difficulty: Moderate REF: pp. 249-253

OBJ: LO: 05-06 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Eversoll Inc. uses the periodic inventory system.

June	1	On hand, 50 units @ $15.00 each	$ 750.00
	5	Purchased 115 units @ $15.10 each	1,736.50
	14	Purchased 75 units @ $15.20 each	1,140.00
		Total cost of goods available for sale	$3,626.50
	30	On hand, 90 units

If Eversoll uses the FIFO inventory method, the amount assigned to the June 30 inventory would be

a.	$1,354.00
b.	$1,366.50
c.	$1,590.42
d.	$1,594.00

ANS: B

(75 x $15.20 – June 14 Purchase) + (15 x $15.10 – June 5 Purchase) = $1,366.50

PTS: 1 DIF: Difficulty: Moderate REF: pp. 249-253

OBJ: LO: 05-06 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Eversoll Inc. uses the periodic inventory system.

June	1	On hand, 50 units @ $15.00 each	$ 750.00
	5	Purchased 115 units @ $15.10 each	1,736.50
	14	Purchased 75 units @ $15.20 each	1,140.00
		Total cost of goods available for sale	$3,626.50
	30	On hand, 90 units

If Eversoll uses the weighted average cost inventory method, the amount assigned to the June 30th inventory would be

a.	$1,359.90
b.	$1,486.50
c.	$1,549.00
d.	$1,591.50

ANS: A

$3,626.50/240 = $15.11; $15.11 x 90 = $1,359.90

PTS: 1 DIF: Difficulty: Moderate REF: pp. 249-253

OBJ: LO: 05-06 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Eversoll Inc. uses the periodic inventory system.

June	1	On hand, 50 units @ $15.00 each	$ 750.00
	5	Purchased 115 units @ $15.10 each	1,736.50
	14	Purchased 75 units @ $15.20 each	1,140.00
		Total cost of goods available for sale	$3,626.50
	30	On hand, 90 units

If Eversoll uses the LIFO inventory method, the cost of goods sold for June would be

a.	$1,354.00
b.	$2,200.00
c.	$2,272.50
d.	$2,296.08

ANS: C

($15.20 x 75) + ($15.10 x 75) = $2,272.50

PTS: 1 DIF: Difficulty: Moderate REF: pp. 249-253

OBJ: LO: 05-06 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Eversoll Inc. uses the periodic inventory system.

June	1	On hand, 50 units @ $15.00 each	$ 750.00
	5	Purchased 115 units @ $15.10 each	1,736.50
	14	Purchased 75 units @ $15.20 each	1,140.00
		Total cost of goods available for sale	$3,626.50
	30	On hand, 90 units

How many units did Eversoll, Inc. sell during June?

a.	50
b.	90
c.	100
d.	150

ANS: D

50 + 115 + 75 – 90 = 150

PTS: 1 DIF: Difficulty: Easy REF: pp. 249-253

OBJ: LO: 05-06 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Quan uses a periodic inventory system. At the end of April, Quan had 20 units on hand.

April 1	On hand, 10 units @ $2 each	$ 20
19	Purchased 90 units @ $3 each	270
	Goods available for sale	$290

If Quan, Inc. uses FIFO inventory costing, how much is cost of goods sold for April?

a.	$230
b.	$232
c.	$240
d.	$250

ANS: A

($2 x 10) + ($3 x 70) = $230

PTS: 1 DIF: Difficulty: Moderate REF: pp. 249-253

OBJ: LO: 05-06 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Quan uses a periodic inventory system. At the end of April, Quan had 20 units on hand.

April 1	On hand, 10 units @ $2 each	$ 20
19	Purchased 90 units @ $3 each	270
	Goods available for sale	$290

If Quan, Inc. uses the weighted average cost inventory method, how much is cost of goods sold for April?

a.	$230
b.	$232
c.	$240
d.	$250

ANS: B

($290/100) x 80 = $232

PTS: 1 DIF: Difficulty: Moderate REF: pp. 249-253

OBJ: LO: 05-06 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Quan uses a periodic inventory system. At the end of April, Quan had 20 units on hand.

April 1	On hand, 10 units @ $2 each	$ 20
19	Purchased 90 units @ $3 each	270
	Goods available for sale	$290

If Quan uses the LIFO inventory method, how much is inventory on the balance sheet as of April 30?

a.	$40
b.	$50
c.	$58
d.	$60

ANS: B

($2 x 10) + ($3 x 10) = $50

PTS: 1 DIF: Difficulty: Moderate REF: pp. 249-253

OBJ: LO: 05-06 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

A major advantage of the weighted average method of inventory costing is that

a.	Cost flows correspond with the physical flow of merchandise
b.	It is relatively easy to apply
c.	It matches current costs with revenues
d.	Recent costs are assigned to the ending inventory balance

ANS: B PTS: 1 DIF: Difficulty: Easy

REF: pp. 249-253 OBJ: LO: 05-06 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Which method of inventory costing is not acceptable for financial accounting purposes?

a.	Specific Identification
b.	FIFO
c.	LIFO
d.	Replacement Cost

ANS: D PTS: 1 DIF: Difficulty: Easy

REF: pp. 249-253 OBJ: LO: 05-06 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Which inventory costing method results in the highest inventory balance during a period of rising prices?

a.	Weighted average cost
b.	FIFO
c.	LIFO
d.	Both FIFO and LIFO result in the same inventory balance

ANS: B PTS: 1 DIF: Difficulty: Easy

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Which method might allow a company to make significant inventory purchases at year end for the purpose of manipulating income?

a.	FIFO
b.	LIFO
c.	Specific Identification
d.	Weighted Average Cost

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Which inventory costing method results in the lowest income tax expense during a period of decreasing prices?

a.	FIFO
b.	LIFO
c.	Specific Identification
d.	Weighted Average Cost

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

During a period of increasing cost prices, which inventory costing method will yield the lowest cost of goods sold?

a.	Any method in which the company uses a periodic inventory system
b.	FIFO
c.	LIFO
d.	Weighted Average Cost

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Ling Corp. started business at the beginning of 2013. Ling selected the FIFO method for its inventory. In order to maximize its profits for 2013 under this method, prices must be

a.	Increasing
b.	Decreasing
c.	Stable
d.	Fluctuating up and down at the same amount consistently over the year

ANS: A PTS: 1 DIF: Difficulty: Easy

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Federal income tax rules allow businesses to use different inventory costing methods for tax reporting and financial reporting with one exception. Which of the following situations is not allowed by federal income tax rules?

Inventory Method Inventory Method

for Tax Reporting for Financial Reporting

a.	LIFO LIFO
b.	LIFO FIFO
c.	Weighted Average FIFO
d.	FIFO LIFO

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Summer, Inc. has been in business for 20 years. During that time the company has consistently used the LIFO inventory costing method. Because of inflation, prices for merchandise have increased consistently over the 20 years. The company has maintained the same inventory quantities over the 20-year period. Which one of the following statements is true?

a.	Summer, Inc.’s total net income for the past 20 years is greater than it would have reported using another inventory method
b.	Summer, Inc. will have paid more income taxes over the past 20 years than it would have if it had used the FIFO method.
c.	Summer will have to continue using the LIFO method indefinitely because of generally accepted accounting principles and federal income tax rules.
d.	The ending inventory figure reported on the balance sheet may be significantly lower than its current value.

ANS: D PTS: 1 DIF: Difficulty: Moderate

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Which one of the following statements regarding changing inventory methods is true?

a.	A change in inventory methods can be justified if the change is made to better match profits with revenue.
b.	Changing inventory methods affects consistency.
c.	One place that the reader of an annual report would be able to identify that a company changed inventory methods is the statement of stockholders’ equity.
d.	Tax advantages are valid justification for changing inventory methods.

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

If cost of goods sold under FIFO was $8,000 and was $10,000 under LIFO, assuming a tax rate of 40%, how much tax savings resulted from using LIFO?

a.	There would be no tax savings.
b.	$ 800
c.	$ 1,200
d.	$ 2,000

ANS: B

$2,000 (Difference) x 40% = $800

PTS: 1 DIF: Difficulty: Easy REF: pp. 254-258

OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Which one of the following statements is false?

a.	Differences in cash flows between LIFO and FIFO inventory methods are a direct result of the differences in the purchases
b.	Differences in cash flows between LIFO and FIFO inventory methods are caused by differences in taxes.
c.	The amount of cash to acquire inventory is the same for companies that use LIFO as for those companies that use FIFO.
d.	The primary determinant in selecting an inventory costing method should be the ability of the method to accurately reflect the net income of the period.

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

When would LIFO liquidation occur?

a.	As a result of selling more units than are purchased during the period.
b.	As a result of selling less units than are purchased during the period.
c.	As a result of selling the same number of units that are purchased during the period.
d.	Not enough information.

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Accountants should be aware that LIFO liquidations can potentially result in which of the following?

a.	If older less costly layers are liquidated, a correspondingly lower cost of goods sold will result.
b.	If older less costly layers are liquidated, a correspondingly higher gross profit will result.
c.	If older less costly layers are liquidated, the company may be faced with higher taxes for those deferred in previous periods.
d.	All of these could result.

ANS: D PTS: 1 DIF: Difficulty: Moderate

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Zebra Company overstated its December 31, 2014 inventory by $5,200. Which statement is true concerning Zebra’s financial statement amounts for 2014?

a.	Working capital is understated.
b.	The current ratio is overstated.
c.	Cost of goods sold is overstated.
d.	Net income is understated.

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 259-261 OBJ: LO: 05-08 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

If the amount assigned to ending inventory is incorrect,

a.	The balance sheet is affected, but the income statement is not
b.	The income statement is affected, but the balance sheet is not
c.	The balance sheet is affected, but cost of goods sold is not
d.	Both the balance sheet and the income statement are affected

ANS: D PTS: 1 DIF: Difficulty: Easy

REF: pp. 259-261 OBJ: LO: 05-08 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

A company fails to record one storeroom full of inventory in its year-end inventory records. As a result, this will cause:

a.	an overstatement of inventory on the year-end balance sheet.
b.	an understatement of gross profit in the following year.
c.	an overstatement of retained earnings at the end of the year.
d.	an overstatement of cost of goods sold for the current year.

ANS: D PTS: 1 DIF: Difficulty: Moderate

REF: pp. 259-261 OBJ: LO: 05-08 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Hawk Store counted some of its inventory twice. As a result, its operating expenses will be

a.	Correct only if Hawk Store calculates it cost of goods sold correctly
b.	Correct since operating expenses are not affected by inventory costs
c.	Overstated
d.	Understated

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 259-261 OBJ: LO: 05-08 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

If a company overstates its ending inventory for the current year, what are the effects on cost of goods sold and net income for the current year?

Effect on Effect on

Cost of Goods Sold Net Income

a.	Understated Overstated
b.	Overstated No effect
c.	Understated Understated
d.	Overstated Overstated

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 259-261 OBJ: LO: 05-08 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

If a company understates its ending inventory balance for 2012 by $15,500, what are the effects on its net income for 2012 and 2011?

Effect on 2012 Net Income Effect on 2011 Net Income

a.	Overstated by $15,500 Understated by $15,500
b.	Understated by $15,500 Overstated by $15,500
c.	Understated by $15,500 No effect
d.	Overstated by $15,500 No effect

ANS: C PTS: 1 DIF: Difficulty: Moderate

REF: pp. 259-261 OBJ: LO: 05-08 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

If a company overstates its ending inventory balance for 2012 by $10,000, and understates its ending inventory balance for 2011 by $5,000 what are the effects on its net income for 2012 and 2011?

Effect on 2012 Net Income Effect on 2011 Net Income

a.	Overstated by $15,000 Understated by $10,000
b.	Understated by $5,000 Overstated by $10,000
c.	Overstated by $15,000 Understated by $5,000
d.	Overstated by $10,000 Understated by$5,000

ANS: C PTS: 1 DIF: Difficulty: Moderate

REF: pp. 259-261 OBJ: LO: 05-08 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

If a company overstates its ending inventory balance for 2012 by $10,000, and overstates its ending inventory balance for 2011 by $5,000 what are the effects on its net income for 2012 and 2011?

Effect on 2012 Net Income Effect on 2011 Net Income

a.	Overstated by $15,000 Overstated by $10,000
b.	Understated by $5,000 Overstated by $10,000
c.	Overstated by $5,000 Overstated by $5,000
d.	Overstated by $10,000 Overstated by $5,000

ANS: C PTS: 1 DIF: Difficulty: Moderate

REF: pp. 259-261 OBJ: LO: 05-08 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

When the market value of inventory items has declined below its cost, which method would be the most appropriate in complying with GAAP?

a.	Gross Profit
b.	LIFO
c.	Lower of Cost or market
d.	Retail

ANS: C PTS: 1 DIF: Difficulty: Easy

REF: pp. 262-264 OBJ: LO: 05-09 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

When inventories are written down due to the application of the lower of cost or market (LCM) rule, the account that is usually increased is

a.	Cost of Goods Sold
b.	Inventories
c.	Loss on Decline in Inventory Value
d.	Accumulated Depreciation – Inventory

ANS: C PTS: 1 DIF: Difficulty: Moderate

REF: pp. 262-264 OBJ: LO: 05-09 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Which one of the following statements regarding the application of the lower of cost or market method is true?

a.	Generally, market value is greater than replacement cost.
b.	When the lower of cost or market method is used, inventories are valued at selling price
c.	The lower of cost or market method is most commonly applied on a total inventory basis because it is a more conservative approach
d.	The lower of cost or market method is an exception to the historical cost principle.

ANS: D PTS: 1 DIF: Difficulty: Moderate

REF: pp. 262-264 OBJ: LO: 05-09 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

All of the following statements are true except:

a.	Both U.S. GAAP and international financial reporting standards (IFRS) require the use of the lower-of-cost-or-market rule to value inventories.
b.	U.S. GAAP defines market value as replacement cost.
c.	IFRS uses net realizable value with no upper or lower limits imposed.
d.	Write-downs of inventory can be reversed in later periods under U.S. GAAP.

ANS: D PTS: 1 DIF: Difficulty: Moderate

REF: pp. 262-264 OBJ: LO: 05-09 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Which of these is not an acceptable inventory costing method under IFRS?

a.	FIFO
b.	LIFO
c.	Specific Identification
d.	Average cost

ANS: B PTS: 1 DIF: Difficulty: Easy

REF: pp. 262-264 OBJ: LO: 05-09 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Selected data for Sorenta, Inc. and New World Corp., two companies in the same industry, are presented below:

	Sorenta, Inc.	New World Corp.
Sales	$50,000	$80,000
Cost of goods sold	30,000	50,000
Average inventory balance	5,000	5,000

Based on this data, which statement below is true?

a.	Sorenta, Inc. has a lower gross profit ratio than New World Corp.
b.	New World Corp has a higher net income than Sorenta, Inc.
c.	New World Corp sells its inventory faster than Sorenta, Inc.
d.	Sorenta, Inc. has lower storage costs and a lower investment in inventory than New World Corp.

ANS: C PTS: 1 DIF: Difficulty: Moderate

REF: pp. 265-266 OBJ: LO: 05-10 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Caruso, Inc. has an inventory turnover rate of 8 times. If its cost of goods sold is $150,000, then

a.	The company will report sales of $1,200,000.
b.	The gross margin will be $1,200,000.
c.	The company’s average inventory is $18,750.
d.	It sells its inventory 1,200 times per year.

ANS: C

$150,000 (Cost of Goods Sold)/8.0 Times = $18,750

PTS: 1 DIF: Difficulty: Moderate REF: pp. 265-266

OBJ: LO: 05-10 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

A company began the year with $150,000 in inventory and ended the year with $170,000 in inventory. Cost of goods sold for the year amounted to $960,000. Assuming 360 days in a year, how long, on average, does it take the company to sell its inventory (to the nearest day)?

a.	6 days
b.	60 days
c.	120 days
d.	3 days

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 265-266 OBJ: LO: 05-10 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

The following information is reported in the operating activities section of Gateway’s statement of cash flows for 2014:

Net income	$1,200,000
Increase in inventories	600,000
Decrease in accounts payable	400,000

Which one of the following conclusions can be assumed from the information provided?

a.	Gateway used the direct method to determine cash flows from operating activities.
b.	Gateway purchased more merchandise than it sold in 2014.
c.	Cash payments for merchandise purchases were less than the amount of merchandise purchased on credit during 2014.
d.	Cash payments for merchandise exceeded cost of goods sold by $200,000.

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 267-268 OBJ: LO: 05-11 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

The following information was taken from the operating activity section of the 2014 statement of cash flows for Limited Corp:

Additions to net income: Change in accounts payable	$2,000
Deductions from net income: Change in inventories	8,000

Based on the information provided, which one of the following conclusions is correct?

a.	Accounts payable decreased $2,000 in 2014.
b.	Inventories increased $8,000 in 2014.
c.	The direct method was used to prepare the operating section of the cash flow statement.
d.	Cash payments of merchandise exceeded cost of goods sold by $2,000.

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 267-268 OBJ: LO: 05-11 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Payment for the acquisition of inventories is shown on the statement of cash flows as

a.	An operating activity
b.	An investing activity
c.	A financing activity
d.	Either an operating activity or a financing activity

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 267-268 OBJ: LO: 05-11 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Which of the following statements is true when using the indirect method of preparing the operating activities section of the statement of cash flows?

a.	Inventory decreases are subtracted from net income.
b.	Inventory increases are subtracted from net income
c.	Inventory increases are added to net income.
d.	None of the above.

ANS: B PTS: 1 DIF: Difficulty: Moderate

REF: pp. 267-268 OBJ: LO: 05-11 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Readers.com uses a perpetual inventory system.

Feb. 1	On hand, 30 units at $5.00 each	$150
8	Purchased 40 units at $5.35 each	214
15	Sold 50 units
22	Purchased 40 units at $5.20 each	208
28	On hand, 60 units

If Readers.com uses the moving average method, how much is cost of goods sold for the units sold on February 15?

a.	$245
b.	$255
c.	$260
d.	$270

ANS: C

[[($5 x 30) + ($5.35 x 40)] / (30 + 40)] x 50 = $260

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Readers.com uses a perpetual inventory system.

Feb. 1	On hand, 30 units at $5.00 each	$150
8	Purchased 40 units at $5.35 each	214
15	Sold 50 units
22	Purchased 40 units at $5.20 each	208
28	On hand, 60 units

If Readers.com uses the moving average method, how much is ending inventory on February 28?

a.	$300
b.	$306
c.	$312
d.	$318

ANS: C

Feb 15 – [($5 x 30) + ($5.35 x 40)/(30+40)] x 50] = $260 or $5.20 per unit

Feb 28 – [($5.20 x 20) + ($5.20 x 40)/(20 + 40)] x 60 = $312

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Adam Inc. uses a perpetual inventory system.

Jan. 1	On hand, 10 units at $2 each	$ 20
4	Sold 8 units for $10 each	80
22	Purchased 50 units at $4 each	200
26	Sold 48 units for $10 each	480

If Adam uses the FIFO method, how much is cost of goods sold for the month of January?

a.	$204
b.	$208
c.	$212
d.	$560

ANS: A

($2 x 10) + ($4 x 46) = $204

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Adam Inc. uses a perpetual inventory system.

Jan. 1	On hand, 10 units at $2 each	$ 20
4	Sold 8 units for $10 each	80
22	Purchased 50 units at $4 each	200
26	Sold 48 units for $10 each	480

If Adam uses the LIFO method, how much is cost of goods sold for the sale of January 15?

a.	$204
b.	$208
c.	$212
d.	$560

ANS: B

($2 x 8) + ($4 x 48) = $208

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Adam Inc. uses a perpetual inventory system.

Jan. 1	On hand, 10 units at $2 each	$ 20
4	Sold 8 units for $10 each	80
22	Purchased 50 units at $4 each	200
26	Sold 48 units for $10 each	480

If Adam uses the FIFO method, how much is ending inventory on January 31?

a.	$ 8
b.	$ 12
c.	$ 16
d.	$ 40

ANS: C

$4 x 4 = $16

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

TRUE/FALSE

The three forms or states in the development of inventory for a manufacturer are direct materials, direct labor, and finished goods.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 232-235 OBJ: LO: 05-01 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

The three distinct types of cost to a manufacturer are direct materials, direct labor, and

manufacturing overhead.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 232-235 OBJ: LO: 05-01 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Gross margin as a percentage of sales is a common analytical tool for service companies.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Sales revenue is an inflow of assets.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

If a customer returns merchandise which has already been paid for, the retailer may give either a cash refund or a credit on account.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Sales Returns and Allowances is a contra-asset account.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Credit terms of n/30 mean that the net amount of the invoice, less any returns or allowances, is due within 30 days of the date of the invoice.

ANS: T PTS: 1 DIF: Difficulty: Moderate

REF: pp. 235-237 OBJ: LO: 05-02 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

On the income statement of a merchandising company, cost of goods is added to net sales to arrive at gross margin or gross profit.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Like sales revenue, cost of goods sold represents an inflow of assets.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Cost of goods sold represents an outflow of an asset, inventory, from the sale of products.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

If cost of goods sold does not equal the cost of merchandise purchased during the period, an adjustment must be made to correct the error.

ANS: F PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Net purchases equals purchases less purchase returns, allowances, and discounts plus transportation-in.

ANS: F PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Cost of goods sold is the difference between costs available for sale and beginning inventory.

ANS: F PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

With the periodic inventory system, the inventory account is updated after each sale or purchase.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Under the periodic inventory system, a physical inventory must be taken at the end of the period to determine cost of goods sold.

ANS: T PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Under the perpetual inventory system, each time goods are purchased, the inventory account is transferred to sales revenue.

ANS: F PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

A company using the periodic inventory system must total the selling prices of the units on hand at the end of the period to value the ending inventory.

ANS: F PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Purchase returns and allowances is subtracted from cost of goods sold to determine net purchases.

ANS: F PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Purchase discounts decrease the total cost of merchandise acquired.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

The buyer must include goods purchased FOB shipping point in its inventory account if the goods are still in transit.

ANS: T PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

When merchandise is sold FOB shipping point, the buyer is responsible for the shipping costs.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Cost of goods available for sale is equal to beginning inventory less cost of goods sold.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

The gross profit ratio is computed by dividing net sales by gross profit.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 245-247 OBJ: LO: 05-04 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

The gross profit ratio is calculated as gross profit divided by net income.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 245-247 OBJ: LO: 05-04 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

It important that the proper amount be assigned to inventory because the amount assigned to inventory will affect the amount eventually recorded as net sales.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 247-248 OBJ: LO: 05-05 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

The inventory method that assigns the most recent costs to ending inventory is LIFO.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 249-253 OBJ: LO: 05-06 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

The weighted average cost is calculated by adding up the units’ costs from each purchase and then dividing by the number of purchases.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 249-253 OBJ: LO: 05-06 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Under FIFO, the units in the ending inventory represent the oldest purchase(s).

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 249-253 OBJ: LO: 05-06 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Specific identification relies on matching unit costs with the actual units sold.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 249-253 OBJ: LO: 05-06 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Under LIFO, the units in the ending inventory represent the most recent purchase(s).

ANS: F PTS: 1 DIF: Difficulty: Moderate

REF: pp. 249-253 OBJ: LO: 05-06 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Changing inventory methods to take advantage of the tax breaks offered by LIFO is not a valid reason for a change in methods.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

A LIFO liquidation occurs when a company sells fewer units than it buys during the period.

ANS: F PTS: 1 DIF: Difficulty: Moderate

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

According to the IRS’s LIFO conformity rule, a company that chooses LIFO to report net income to its shareholders may not use LIFO in preparing its income tax return.

ANS: F PTS: 1 DIF: Difficulty: Moderate

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

A LIFO reserve represents the amount by which cost of goods sold on a FIFO basis exceeds the cost of goods sold on a LIFO basis for the current year.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

FIFO results in the least amount of income before taxes, assuming a period of rising prices.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

The LIFO conformity rule requires that if a company uses LIFO in reporting income to stockholders, it also must use LIFO on its tax return.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Many countries prohibit the use of LIFO for tax or financial reporting purposes.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

A counterbalancing inventory error is one where the error on the balance sheet is offset by the same amount of error on the income statement.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 259-261 OBJ: LO: 05-08 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

If ending inventory is understated, then cost of goods sold is overstated.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 259-261 OBJ: LO: 05-08 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

If ending inventory is overstated, then net income is overstated as well.

ANS: T PTS: 1 DIF: Difficulty: Moderate

REF: pp. 259-261 OBJ: LO: 05-08 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

The lower of cost or market (LCM) rule violates the historical cost principle.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 262-264 OBJ: LO: 05-09 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

The journal entry to write down inventory to its market value results in a loss on the income statement.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 262-264 OBJ: LO: 05-09 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Both U.S. GAAP and international financial reporting standards (IFRS) require the use

of the lower-of-cost-or-market rule to value inventories.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 262-264 OBJ: LO: 05-09 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

The inventory turnover ratio is defined as cost of goods sold divided by average inventory.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 265-266 OBJ: LO: 05-10 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

The inventory turnover ratio is a measure of how many times during a period a company sells off its inventory.

ANS: T PTS: 1 DIF: Difficulty: Easy

REF: pp. 265-266 OBJ: LO: 05-10 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Under the indirect method, a decrease in inventory is added to net income to determine cash flow from operating activities.

ANS: T PTS: 1 DIF: Difficulty: Moderate

REF: pp. 267-268 OBJ: LO: 05-11 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

If a change in accounts payable was added back to net income on the statement of cash flows prepared using the indirect method, then the amount owed to suppliers during the period had decreased.

ANS: F PTS: 1 DIF: Difficulty: Moderate

REF: pp. 267-268 OBJ: LO: 05-11 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Moving average is the name given to the use of an average cost method used with a periodic inventory system.

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 269-272 OBJ: LO: 05-12 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Whether LIFO costing is applied at the time each sale is made or only at the end of the period, both the periodic and perpetual systems will yield the same ending inventory under LIFO.

ANS: F PTS: 1 DIF: Difficulty: Moderate

REF: pp. 269-272 OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

Ending inventory valued under the FIFO method will be the same regardless of whether the periodic system or the perpetual system is used.

ANS: T PTS: 1 DIF: Difficulty: Moderate

REF: pp. 269-272 OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Comprehension

COMPLETION

The inventory of a(n) ____________________ consists of three distinct types of costs: direct materials, direct labor, and manufacturing overhead.

ANS: manufacturer

PTS: 1 DIF: Difficulty: Easy REF: pp. 232-235

OBJ: LO: 05-01 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Sales returns and allowances is a contra ____________________ account.

ANS: revenue

PTS: 1 DIF: Difficulty: Moderate REF: pp. 235-237

OBJ: LO: 05-02 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

A _________________________ is an amount deducted by customers for payment within the discount period.

ANS: purchase discount

PTS: 1 DIF: Difficulty: Easy REF: pp. 235-237

OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Cost of goods sold is equal to beginning inventory plus the net cost of purchases minus _________________________.

ANS: ending inventory

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Under the ____________________ inventory system, the inventory account is updated after each purchase or sale.

ANS: perpetual

PTS: 1 DIF: Difficulty: Easy REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

The cost of goods purchased is equal to net purchases plus ____________________.

ANS:

freight-in

transportation-in

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Shipping terms of ___________________________________ mean that the buyer pays shipping costs.

ANS: FOB shipping point

PTS: 1 DIF: Difficulty: Easy REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

The amount recognized on the Income Statement as the cost of inventory will be recognized as a(n) _________________________.

ANS:

cost of goods sold

expense

PTS: 1 DIF: Difficulty: Easy REF: pp. 247-248

OBJ: LO: 05-05 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

When a company using LIFO experiences a partial or complete liquidation of its older, lower-priced inventory, its gross margin will be ____________________ (higher, lower, or unchanged) for the period.

ANS: higher

PTS: 1 DIF: Difficulty: Moderate REF: pp. 254-258

OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

The ____________________ method most nearly approximates replacement cost of inventory on the balance sheet.

ANS: FIFO

PTS: 1 DIF: Difficulty: Easy REF: pp. 254-258

OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

The excess of the value of a company’s inventory stated at FIFO over the value stated at LIFO is called a(n) _________________________.

ANS: LIFO reserve

PTS: 1 DIF: Difficulty: Easy REF: pp. 254-258

OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

The ____________________ method results in the best approximation of replacement cost of goods sold on the income statement during periods of rising prices.

ANS: LIFO

PTS: 1 DIF: Difficulty: Moderate REF: pp. 254-258

OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

The understatement of ending inventories in one period leads to a(n) ____________________ of cost of goods sold expense in the same period.

ANS: overstatement

PTS: 1 DIF: Difficulty: Easy REF: pp. 259-261

OBJ: LO: 05-08 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

A departure from the cost basis of accounting may be necessary when the _________________________ of the inventory is less than its cost to the company.

ANS: market value

PTS: 1 DIF: Difficulty: Moderate REF: pp. 262-264

OBJ: LO: 05-09 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Accountants define the market value of inventory as its ______________________________.

ANS: replacement cost

PTS: 1 DIF: Difficulty: Moderate REF: pp. 262-264

OBJ: LO: 05-09 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

The ratio of a company’s cost of goods sold to its average inventory is called its ________________________________________.

ANS: inventory turnover ratio

PTS: 1 DIF: Difficulty: Easy REF: pp. 265-266

OBJ: LO: 05-10 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Under the ____________________ method, the amount of cash paid to suppliers of inventory is shown as a deduction in the operating activities category of the cash flow statement.

ANS: direct

PTS: 1 DIF: Difficulty: Easy REF: pp. 267-268

OBJ: LO: 05-11 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Under the ____________________ method, an increase in inventory is shown as an adjustment to net income in the operating activities category of the cash flow statement.

ANS: indirect method

PTS: 1 DIF: Difficulty: Easy REF: pp. 267-268

OBJ: LO: 05-11 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

When a weighted average cost assumption is applied with a perpetual system, it is sometimes

called a __________________.

ANS: moving average

PTS: 1 DIF: Difficulty: Easy REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

MATCHING

Match the inventory-related accounts to costs that may be included in inventories for retailers and manufacturers.

a.	Merchandise Inventory	d.	Finished Goods
b.	Raw Materials	e.	Cost of Goods Sold
c.	Work in Process

Cost of materials which are not yet entered into the production process.

Cost of completed, but unsold items.

Costs to purchase goods ready to sell.

Costs of direct materials, overhead, and direct labor used in unfinished goods.

Costs of direct materials, overhead, and direct labor used in goods that have been sold.

ANS: B PTS: 1 DIF: Difficulty: Easy

REF: pp. 232-235 OBJ: LO: 05-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

ANS: D PTS: 1 DIF: Difficulty: Easy

REF: pp. 232-235 OBJ: LO: 05-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

ANS: A PTS: 1 DIF: Difficulty: Easy

REF: pp. 232-235 OBJ: LO: 05-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

ANS: C PTS: 1 DIF: Difficulty: Easy

REF: pp. 232-235 OBJ: LO: 05-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

ANS: E PTS: 1 DIF: Difficulty: Easy

REF: pp. 232-235 OBJ: LO: 05-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Match the terms with the descriptions related to merchandise sales and purchases.

a.	Transportation-in	e.	Cost of goods available for sale
b.	Perpetual inventory system	f.	Periodic inventory system
c.	Net purchases	g.	FOB Shipping point
d.	FOB Destination	h.	Delivery expense

Requires updating of the inventory account at the time of each purchase and each sale.

Shipping costs paid to acquire merchandise.

The seller is responsible for the cost of delivering the merchandise to the buyer

Relies on a count of inventory on the last day of the year to determine amount on hand

The buyer must pay the shipping costs.

ANS: B PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

ANS: A PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

ANS: D PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

ANS: F PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

ANS: G PTS: 1 DIF: Difficulty: Easy

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Knowledge

Maxim Company sells auto parts. The company employs a periodic inventory system. Identify all the effects on the accounting equation.

a.	Increase in assets	f.	Decrease in owners’ equity
b.	Decrease in assets	g.	Increase in assets and increase in owners’ equity
c.	Increase in liabilities	h.	Decrease in assets and decrease in owners’ equity
d.	Decrease in liabilities	i.	Increase in liabilities and decrease in owners’ equity
e.	Increase on owners’ equity	j.	Decrease in liabilities and increase in owners’ equity

Sold merchandise on credit to customers.

Recorded cash sales for the day.

Gave a customer a cash refund.

Granted a customer a credit on its balance due for goods that were returned.

ANS: G PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

ANS: G PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

ANS: H PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

ANS: H PTS: 1 DIF: Difficulty: Moderate

REF: pp. 238-244 OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment.

a.	Add to inventory cost
b.	Subtract from inventory cost
c.	Not an inventory cost

Invoice price paid for resale goods

Freight costs incurred by the buyer to ship goods to its place of business

Freight costs incurred by the seller to ship goods to its customers

Cost of storing the goods before they are sold to customers

Excise taxes paid on goods acquired

Sales taxes paid on goods acquired

Income taxes paid on profits earned from selling goods to customers

Cost of insurance during transit to acquire inventory items

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 247-248 OBJ: LO: 05-05 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 247-248 OBJ: LO: 05-05 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

ANS: C PTS: 1 DIF: Difficulty: Moderate

REF: pp. 247-248 OBJ: LO: 05-05 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 247-248 OBJ: LO: 05-05 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 247-248 OBJ: LO: 05-05 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 247-248 OBJ: LO: 05-05 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

ANS: C PTS: 1 DIF: Difficulty: Moderate

REF: pp. 247-248 OBJ: LO: 05-05 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

ANS: A PTS: 1 DIF: Difficulty: Moderate

REF: pp. 247-248 OBJ: LO: 05-05 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Identify which inventory costing method (LIFO or FIFO) achieves the effect listed in the following items:

a.	LIFO
b.	FIFO

Prices are rising; profits are higher with this method

Prices are rising; cost of goods sold is lower with this method

Prices are declining; income taxes are higher with this method

Prices are declining; gross margin is higher with this method

ANS: B PTS: 1 DIF: Difficulty: Easy

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

ANS: B PTS: 1 DIF: Difficulty: Easy

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

ANS: A PTS: 1 DIF: Difficulty: Easy

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

ANS: A PTS: 1 DIF: Difficulty: Easy

REF: pp. 254-258 OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

PROBLEM

During the current period, Audix Corp. sold products to customers for a total of $76,000. Due to defective products, customers were given $2,800 in refunds for products that were returned and another $3,500 in reductions to their account balances. Discounts in the amount of $5,500 were given for early payment of account balances.

REQUIRED:

Prepare the Net Sales section of Audix’s income statement.

ANS:

Sales revenue $ 76,000

Less: Sales returns and allowances (6,300)

Sales discounts (5,500)

Net sales $ 64,200

PTS: 1 DIF: Difficulty: Easy REF: pp. 235-237

OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Based upon the following data, determine the cost of merchandise sold for April.

Merchandise Inventory April 1	$ 85,560
Merchandise Inventory April 30	96,330
Purchases	373,880
Purchases Returns & Allowances	14,760
Purchases Discounts	10,900
Freight In	4,135

ANS:

Cost of merchandise sold:

Merchandise Inventory April 1			$85,560
Purchases		$373,880
Less: Purchases Returns and Allowances	$14,760
Purchases Discounts	10,900	(25,660)
Net Purchases		$348,220
Add Freight In		4,135
Cost of merchandise purchased			352,355
Merchandise available for sale			437,915
Less merchandise inventory, April 30			(96,330)
Cost of merchandise sold			$341,585

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-2 | Example 5-4 KEY: Bloom’s: Analysis

Complete the following data taken from the condensed income statements for merchandising companies: Action, Break, & Connors.

	Action	Break	Connors
Net income	315	?	215
Sales	?	865	560
Gross profit	430	?	325
Operating expenses	?	125	?
Cost of merchandise sold	545	320	?

ANS:

	Action	Break	Connors
Net income	315	420	215
Sales	975	865	560
Gross profit	430	545	325
Operating expenses	115	125	110
Cost of merchandise sold	545	320	235

OR rearranged in the order of the income statement:

	Action	Break	Connors
Sales	975	865	560
Less: Cost of merch. sold	545	320	235
Gross profit	430	545	325
Less: Operating expenses	115	125	110
Net income	315	420	215

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-2 | Example 5-4 KEY: Bloom’s: Analysis

For each of the following, calculate the cost of inventory reported on the balance sheet.

(a)	The total merchandise inventory counted at the end of the year was $63,000. Purchases for $6,000 are in transit under FOB shipping point terms.
(b)	The total merchandise inventory counted at the end of the year was $75,000. Purchases for $5,000 are in transit under FOB destination terms.

ANS:

(a)	$69,000 = $63,000 + 6,000
(b)	$75,000 (The $5,000 is not part of the inventory until it reaches the company.)

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-8 KEY: Bloom’s: Analysis

Hound Dog Bisquits reported the following financial data for 2013 and 2014:

	2013	2014
Sales	$700,000	$600,000
Sales returns and allowances	(10,000)	( D )
Net sales	690,000	580,000
Cost of goods sold:
Inventory, January 1	30,000	E
Net purchases	A	340,000
Goods available for sale	250,000	380,000
Inventory, December 31	(40,000)	(30,000)
Cost of goods sold	B	F
Gross profit	C	G
	======	======

Provide the answer for each missing letter above.

ANS:

A)	$220,000 ($250,000 – $30,000)
B)	$210,000 ($250,000 – $40,000)
C)	$480,000 ($690,000 – $210,000)
D)	$20,000 ($600,000 – $580,000)
E)	$40,000 (from 2013 ending inventory)
F)	$350,000 ($380,000 – $350,000)
G)	$230,000 ($580,000 – $350,000)

PTS: 1 DIF: Difficulty: Moderate REF: pp. 235-237 | pp. 238-244

OBJ: LO: 05-02 | LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-2 KEY: Bloom’s: Analysis

Presented below is a partially completed income statement of Deep Sea, Inc. for 2014.

Net Sales	$ A
Cost of Sales:
Beginning Inventory	B
Net Purchases	138,193
Available for Sale	149,315
Less: Ending Inventory	C
Cost of Sales	136,225
Gross Profit	72,978
Selling, General and Administrative Expenses	D
Operating Income	$ 9,083

Using the partially completed income statement for Deep Sea, Inc., determine each of the following for 2014.

A) Net Sales

B) Beginning Inventory

C) Ending Inventory

D) Selling, General and Administrative Expenses

ANS:

A) $209,203 ($136,225 + $72,978)

B) $11,122 ($149,315 – $138,193)

C) $13,090 ($149,315 – $136,225)

D) $63,895 ($72,978 – $9,083)

PTS: 1 DIF: Difficulty: Easy REF: pp. 235-237 | pp. 238-244

OBJ: LO: 05-02 | LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-2 KEY: Bloom’s: Analysis

The cost of goods sold for Johnnie, Inc. totaled $1,305,000. Sales returns and purchase returns were $3,000 and $4,000, respectively. Purchases totaled $1,300,000. Discounts taken by Johnnie totaled $7,000, while discounts taken by customers totaled $5,000. Beginning inventory was $90,000. Determine the amount of ending inventory to be reported on Johnnie, Inc.’s balance sheet.

ANS:

$74,000

$90,000 (Beginning Inventory) + $1,300,000 (Purchases) – $4,000 (Purchase returns) –

$7,000 (Discounts) – $1,305,000 (Cost of goods sold) = $74,000

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-6 | Example 5-7 KEY: Bloom’s: Analysis

Gently Used Cars is a dealer that uses the periodic inventory system. The data presented below is from the accounting records of Gently for the year ended December 31, 2014.

Sales	$585,000
Sales Discounts	3,000
Purchases	420,000
Purchase Returns	5,000
Inventory (January 1)	33,000
Inventory (December 31)	37,000
Operating Expenses	146,000
Transportation-in	10,000
Retained Earnings (January 1)	71,000

Using the amounts provided above, calculate the cost of goods sold for 2014.

ANS:

$421,000

$33,000 (Inventory at January 1) + $420,000 (Purchases) + $10,000 (Transportation-in) – $5,000 (Purchase Returns) – $37,000 (Inventory at December 31) = $421,000

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-4| Example 5-5| Example 5-6 KEY: Bloom’s: Analysis

Baucus, Inc.

Baucus, Inc. reported the following information for 2014 and 2013:

	2014	2013
Sales	$951,200	$890,000
Sales discounts	12,000	23,000
Purchases	580,000	600,000
Inventory, December 31	46,000	40,000
Transportation-in	18,000	19,000
Purchase discounts	4,000	5,000

Refer to the information for Baucus, Inc.

How much is the cost of purchases for 2014?

ANS:

$580,000 (Purchases) + $18,000 (Transportation-in) – $4,000 (Purchase discounts) = $594,000

PTS: 1 DIF: Difficulty: Easy REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-6 | Example 5-7 KEY: Bloom’s: Analysis

Refer to the information for Baucus, Inc.

What amount is cost of goods available for sale for 2014?

ANS:

$580,000 (Purchases) + $18,000 (Transportation-in) – $4,000 (Purchase discounts) +

$40,000 (Inventory Dec. 31, 2013) = $634,000

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-6 | Example 5-7 KEY: Bloom’s: Analysis

Refer to the information for Baucus, Inc.

How much is cost of goods sold for 2014?

ANS:

$580,000 (Purchases) + $18,000 (Transportation-in) – $4,000 (Purchase discounts) +

$40,000 (Inventory, December 31, 2013) – $46,000 (Inventory, December 31, 2014) = $588,000

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-6 | Example 5-7 KEY: Bloom’s: Analysis

Refer to the information for Baucus, Inc.

How much is net sales for 2014? What other components that Baucus did not report could be included in this computation?

ANS:

$951,200 (Sales) – $12,000 (Sales discounts) = $939,200

Sales returns and allowances

PTS: 1 DIF: Difficulty: Easy REF: pp. 235-237

OBJ: LO: 05-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-6 | Example 5-7 KEY: Bloom’s: Analysis

Refer to the information for Baucus, Inc.

How much of every dollar is gross profit for 2014?

ANS:

($939,200 – $588,000)/$939,200 = 37.4%, or about 37 1/2 cents per dollar

PTS: 1 DIF: Difficulty: Moderate REF: pp. 245-247

OBJ: LO: 05-04 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-6 | Example 5-7 KEY: Bloom’s: Analysis

Cooking Corner

Cooking Corner reported inventory on its balance sheet at December 31, 2013 at $32,000. During 2014, Cooking Corner purchased goods totaling $634,000 on account with terms of 2/10, n/30, FOB shipping point. Total charges paid by Cooking Corner directly to the freight company were $1,000. At the end of 2014, inventory on hand totaled to $45,000. Net sales for 2014 totaled $1,300,000. Cooking Corner employs a periodic inventory system.

Refer to the information about Cooking Corner.

How much would Cooking Corner pay its supplier if Cooking Corner paid for one-half of the goods acquired within the discount period, and the other half after the expiration of the discount period?

ANS:

Payment within discount period: ($634,000 ´ 1/2) ´ 98% = $310,660

Payment after discount period: ($634,000 ´ 1/2) = $317,000

Total paid = $310,660 + $317,000 = $627,660

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-5| Example 5-6 | Example 5-7 KEY: Bloom’s: Analysis

Refer to the information about Cooking Corner.

How much is cost of goods available for sale for 2014 assuming Cooking Corner takes advantage of one-half of the cash discounts?

ANS:

$32,000 (Beginning Inventory) + $627,660 (Purchases) + $1,000 (Transportation-in) = $660,660

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-5| Example 5-6 | Example 5-7 KEY: Bloom’s: Analysis

Refer to the information about Cooking Corner.

How much is Cooking Corner’s cost of goods sold assuming that Cooking Corner takes advantage of one-half of the cash discount?

ANS:

$32,000 (Beginning Inventory) + $627,660 (Purchases) + $1,000 (Transportation-in) –

$45,000 (Ending Inventory) = $615,660

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-5| Example 5-6 | Example 5-7 KEY: Bloom’s: Analysis

Digital Marvels

Selected data from the financial statements for Digital Marvels is presented below.

Net Sales–2014	$200,000
Cost of Sales–2014	136,000
Selling, General & Administrative Expenses–2014	63,000
Other Operating Expenses–2014	600
Income Taxes–2014	3,000
Inventories–Dec. 31, 2013	11,000
Inventories–Dec. 31, 2014	13,000
Retained Earnings–Dec. 31, 2014	39,000

Refer to the financial statement information for Digital Marvels.

Determine the dollar amount of cost of goods purchased for Digital Marvels for 2014.

ANS:

$136,000 (Cost of Sales – 2014) + $13,000 (Inventories – Dec. 31, 2014) –

$11,000 (Inventories – Dec. 31, 2013) = $138,000

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-2 KEY: Bloom’s: Analysis

Refer to the financial statement information for Digital Marvels.

What portion of every dollar is available to cover operating costs and to contribute to profits for 2014?

ANS:

($200,000 – $136,000)/$200,000 = 32%, or 32 cents out of every dollar of sales

PTS: 1 DIF: Difficulty: Easy REF: pp. 245-247

OBJ: LO: 05-04 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-2 KEY: Bloom’s: Analysis

The following data is available for one of the products sold by Wild Optics Company, which uses the periodic inventory system:

Dec. 1	On hand, 10 units at $8.00 each	$ 80
5	Purchased 30 units at $7.80 each	234
18	Purchased 40 units at $8.15 each	326
24	Purchased 20 units at $8.25 each	165
	Available for sale during December—100 units	$805

At the end of December, Wild Optics had 25 units on hand. The 75 units sold created revenue of $13 each. Determine the amounts for the December 31 ending inventory, the cost of goods sold for December, and the gross margin for December for each of the inventory costing methods listed below.

	Ending Inventory	Cost of Goods Sold	Gross Profit
a. Weighted average
b. FIFO
c. LIFO

ANS:

	Ending Inventory	Cost of Goods Sold	Gross Profit
a. Weighted average	($805/100) x 25 = $201.25	($805/100) x 75 = $603.75	(75 x $13) – $603.75 = $371.25
b. FIFO	(20 x $8.25) + (5 x $8.15) = $205.75	(10 x $8.00) + (30 x $7.80) + (35 x $8.15) = $599.25	(75 x $13 ) – $599.25 = $375.75
c. LIFO	(10 x $8.00) + (15 x $7.80) = $197.00	(20 x $8.25) + (40 x $8.15) + (15 x $7.80) = $608.00	(75 x $13 ) – $608.00 = $367.00

PTS: 1 DIF: Difficulty: Moderate REF: pp. 249-253

OBJ: LO: 05-06 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-11| Example 5-12| Example 5-13 KEY: Bloom’s: Analysis

School Time Corp. completed a physical inventory at the end of 2014. A review of the physical inventory procedures and records uncovered several errors that are described below. In the columns provided, indicate the effect, if any, on the four financial statement items listed. Use the following codes for your answers:

O Overstatement

U Understatement

NE No Effect

		Balance Sheet		Income Statement
		Ending Inventory	Retained Earnings	Cost of Goods Sold	Net Income
a.	One batch of goods was counted twice.
b.	One page of items was misplaced when the inventory was calculated
c.	Goods sold FOB shipping point were included in School Time’s inventory.
d.	Goods in transit from a supplier, FOB shipping point, were not included in inventory.

ANS:

		Balance Sheet		Income Statement
		Ending Inventory	Retained Earnings	Cost of Goods Sold	Net Income
a.	One batch of goods was counted twice.	O	O	U	O
b.	One page of items was misplaced when the inventory was calculated	U	U	O	U
c.	Goods sold FOB shipping points were included in School Time’s inventory.	O	O	U	O
d.	Goods in transit from a supplier, FOB shipping point, were not included in inventory.	U	U	O	U

PTS: 1 DIF: Difficulty: Moderate REF: pp. 259-261

OBJ: LO: 05-08 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-17| Example 5-18| Example 5-19 KEY: Bloom’s: Analysis

The cost of Garmin Corp.’s inventory at the end of the year was $85,000; however, due

to obsolescence, the cost to replace the inventory was only $65,000. Prepare the journal

entry needed at the end of the year.

ANS:

Dec. 31 Loss on Decline in Value of Inventory……………… 20,000

Inventory…………………………………………………………… 20,000

To record decline in value of inventory.

Balance Sheet

Income Statement

Assets

Liabilities

Stockholders’

Equity

Revenues

–

Expenses

Net

Income

Inven-

tory 20,000

(20,000)

Loss on Decline

in Value of

Inventory 20,000

(20,000)

PTS: 1 DIF: Difficulty: Easy REF: pp. 262-264

OBJ: LO: 05-09 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Carrington, Inc. began the year with $130,000 in merchandise inventory and ended the year

with $190,000. Sales and cost of goods sold for the year were $900,000 and $640,000,

respectively.

Required:

Compute Carrington’s inventory turnover ratio.
Compute the number of days’ sales in inventory.

ANS:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory = $640,000 / ($130,000 + $90,000) / 2 = $640,000 /$160,000 = 4 times
Number of Days’ Sales in Inventory = Number of Days in the Period / Inventory Turnover Ratio = 360 / 4 = 90 days

PTS: 1 DIF: Difficulty: Moderate REF: pp. 265-266

OBJ: LO: 05-10 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Analysis

Learning Tree, Inc.

The following data is available for one of the products sold by Learning Tree, Inc., which uses the perpetual inventory system:

May 1	On hand, 1,000 units at $2.00 each	$2,000
5	Purchased 2,000 units at $2.75 each	5,500
10	Sold 2,500 units at $16 each
18	Purchased 2,000 units at $4.00 each	8,000
24	Sold 1,500 units at $12 each
30	On hand, 1,000 units

Refer to the data for Learning Tree, Inc.

If the moving average method is used, what is the amount assigned to cost of goods sold for the 2,500 units sold on May 10?

ANS:

$6,250

($2,000 + $5,500)/3,000 ´ 2,500 = $6,250

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-22 KEY: Bloom’s: Analysis

Refer to the data for Learning Tree, Inc.

If the moving average method is used, what is the amount assigned to the ending inventory on May 30?

ANS:

$3,700

Ending inventory on May 10: ($7,500/3,000) ´ (3,000 – 2,500) = $1,250

or 500 units @ $2.50 each

Ending inventory on May 30:[ [(500 ´ $2.50) + (2,000 ´ $4.00)]/2,500] ´ 1,000 = $3,700

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-22 KEY: Bloom’s: Analysis

Refer to the data for Learning Tree, Inc.

If the LIFO method is used, what is the amount assigned to cost of goods sold for the 2,500 units sold on May 10?

ANS:

$6,500

(2,000 ´ $2.75) + (500 ´ $2.00) = $6,500

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-21 KEY: Bloom’s: Analysis

Refer to the data for Learning Tree, Inc.

If the LIFO method is used, what is the amount assigned to the ending inventory on May 30?

ANS:

$3,000

(500 ´ $2.00) + (500 ´ $4.00) = $3,000

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-21 KEY: Bloom’s: Analysis

Refer to the data for Learning Tree, Inc.

Explain why the amounts for ending inventory are different under the two average cost methods–weighted average(periodic) and moving average(perpetual).

ANS:

The amounts for ending inventory and cost of goods sold are different because a new (moving) average cost must be calculated after each purchase and assigned to cost of goods sold for sales prior to the next purchase under the perpetual system. Under the periodic system, a single (weighted) average cost is calculated for the entire period and assigned to all units regardless of when they were sold.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-11 | Example 5-22 KEY: Bloom’s: Application

Refer to the data for Learning Tree, Inc.

Explain why the amounts are different for LIFO under periodic and perpetual inventory systems.

ANS:

The amounts for ending inventory and cost of goods sold are different because under the perpetual system, costs must be assigned to cost of goods sold as units are sold during the period using the LIFO flow assumption. Thus, some of the units on hand early in the period are assigned to cost of goods sold when the perpetual system is used. Under the periodic system, costs are assigned to units only at the end of the period. Thus, it is assumed that the earliest units are still on hand under the periodic system.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-13 | Example 5-21 KEY: Bloom’s: Application

Share, Inc.

The following data is available for one of the products sold by Share, Inc., which uses a perpetual inventory system.

May 1	On hand, 10 units at $2 each
8	Sold 6 units at $10 each
14	Purchased 30 units at $3 each
23	Sold 24 units at $10 each

Refer to the data for Share, Inc.

If the moving average method is used, how much is cost of goods sold for May?

ANS:

May 8	Sale (6 units x $2)	$ 12.00
May 23	[Sale (4 units x $2) + (30 units x $3)]/34 x 24	69.12
	Total	$ 81.12
		====

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-22 KEY: Bloom’s: Analysis

Refer to the data for Share, Inc.

If the moving average method is used, how much is ending inventory on May 30?

ANS:

$28.80

($98/34 ´10) = $28.80 (possible difference due to rounding)

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-22 KEY: Bloom’s: Analysis

Refer to the data for Share, Inc.

Required:

If the FIFO method is used, how much is ending inventory on May 30?
How does this differ from the amount calculated using a periodic system and FIFO?

ANS:

10 ´ $3.00 = $30
There is no difference. The FIFO amounts are the same under both a periodic and a perpetual assumption.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-12 | Example 5-20 KEY: Bloom’s: Analysis

Refer to the data for Share, Inc.

If the LIFO method is used, how much is cost of goods sold for May?

ANS:

$84.00

(6 ´ $2.00) + (24 ´ $3.00) = $84.00

PTS: 1 DIF: Difficulty: Moderate REF: pp. 269-272

OBJ: LO: 05-12 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

TOP: Example 5-21 KEY: Bloom’s: Analysis

ESSAY

Describe how the inventories of manufacturers differ from the inventories of retailers.

ANS:

Manufacturers have to produce the products they sell whereas retailers purchase products which are ready to sell (i.e., the retailers purchase finished goods from manufacturers). Inventories of manufacturers, therefore, will consist of raw materials, work in process, and finished goods.

PTS: 1 DIF: Difficulty: Easy REF: pp. 232-235

OBJ: LO: 05-01 NAT: BUSPROG: Communication

STA: AICPA: FN-Reporting | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Several transactions of sales and purchase activities for Genoa Department Store are described below.

A)	Genoa purchases shoes from Nike on credit.
B)	Genoa returns defective shoes to Nike before payment is made to Nike for the shoes purchased in transaction A.
C)	Genoa pays for the shoes purchased from Nike.
D)	Genoa sells shoes to its customers for cash and on credit.
E)	Credit customers return shoes to Genoa for a refund.
F)	Credit customers pay their account balances to Genoa.

REQUIRED: For each transaction described above, describe the economic effects of the transaction on the company under a periodic inventory system.

ANS:

A)	Liabilities increase and stockholders’ equity decreases (through an increase in expenses)
B)	Liabilities decrease and equity increases (through a decrease in expenses)
C)	Assets and liabilities decrease.
D)	Assets increase and stockholders’ equity (revenue) increases.
E)	Assets decrease and stockholders’ equity decreases.
F)	Assets increase and decrease by the same amount

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Flores Department Store currently uses the periodic inventory system.

REQUIRED: Explain what the advantages would be to Flores if it uses the perpetual inventory system. Assume that Flores can use a computer system which is linked to its cash registers and that all products have bar codes that can be read by bar code readers attached to the cash registers.

ANS:

If Flores uses the perpetual system, it will have better control of its inventory. Losses due to theft, shrinkage, etc. can be identified at the end of the accounting period when a physical inventory count is taken. Also, information will be available on inventory balances and cost of goods sold for interim financial statements; these items must be estimated under a periodic system. The perpetual system would also allow Flores to determine which items sell well and to keep sufficient quantities on hand to meet customer demands. When the perpetual inventory system is linked to the computer, the cost of maintaining a perpetual inventory can be decreased and the efficiency of the system can be improved. Flores will have information that is more current and will obtain that information more quickly with the computer system.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Giant-Mart purchased a big shipment of shoes from Right Balance, Inc. on credit near the end of its accounting period. Right Balance shipped the shoes in January and Giant-Mart received the shoes in February. Assume that Giant-Mart’s accounting period ends on January 31, while Right Balance’s accounting period ends on May 31.

REQUIRED: If the shoes are shipped FOB destination, who will pay the freight costs? If the shoes are shipped FOB shipping point, who will pay the freight costs?

ANS:

If the shoes are shipped FOB destination by Right Balance, Right Balance should pay the freight charges. If the shoes are shipped FOB shipping point, Giant-Mart should pay the freight charges.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Giant-Mart purchased a large shipment of shoes from Primus, Inc. on credit near the end of its accounting period. Primus shipped the shoes in January and Giant-Mart received the shoes in February. Assume that Giant-Mart’s accounting period ends on January 31, while Primus’ accounting period ends on May 31. Answer each independent question in the set that follows.

REQUIRED: If the shoes are shipped FOB destination, when should Giant-Mart record the purchase? If the shoes are shipped FOB shipping point, when should Giant-Mart record the purchase?

ANS:

If the shoes are shipped FOB destination, Giant-Mart should not record the purchase until the shoes are received in February; title passes when the shoes are received. If the shoes are shipped FOB shipping point, Giant-Mart should record the purchase when the shoes are shipped in January; title passes when the shoes are shipped.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Giant-Mart purchased a large shipment of shoes from Primus, Inc. on credit near the end of its accounting period. Primus shipped the shoes in January and Giant-Mart received the shoes in February. Assume that Giant-Mart’s accounting period ends on January 31, while Giant’s accounting period ends on May 31. Answer each independent question in the set that follows.

REQUIRED: Under what shipping terms would Giant-Mart include the shoes as part of inventory on its January 31 balance sheet?

ANS:

Giant-Mart will include the shoes in its January 31 balance sheet only if title to the shoes has been passed from Primus to Giant-Mart. This occurs if the shoes are shipped FOB shipping point.

PTS: 1 DIF: Difficulty: Easy REF: pp. 238-244

OBJ: LO: 05-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Explain the relationship between the valuation of inventory and income measurement as it relates to the balance sheet and the income statement.

ANS:

Cost or other values must be assigned to merchandise that makes up a company’s inventory. As the merchandise is sold, these costs are assigned to cost of goods sold (expense). Since expenses are deducted from revenues to determine the net income or net loss for the period, inventory valuation affects the amount of income or loss measured.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 247-248

OBJ: LO: 05-05 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

In the following information from the 2014 annual reports of Technic Industries all figures have been rounded to millions of dollars.

Balance Sheet Data	May 31, 2014	May 31, 2013
Raw materials	$ 25.8	$ 52.1
Work in process	44.8	34.7
Finished goods	1,132.7	1,303.8
Inventories at FIFO	1,203.3	1,390.6
Adjustment to LIFO	5.6	21.9

Cash Flow Data (Operating Activities)
Net income	$451.4	$399.9
Additions to net income:
Depreciation	198.2	100.2
Amortization	30.6	49.0
Changes in assets and liabilities:
Inventories	197.3	(58.0)
Accounts payable and other	(170.4)	(70.1)

REQUIRED:

(1) Describe what costs are included in each of the three types of inventories listed above for Technic Industries.

(2) Even though the footnote describing the inventory costing method(s) used by Technic Industries is not provided above, what can you conclude about the inventory costing method(s) used by the company?

ANS:

(1) “Raw materials” consists of materials and supplies which have not yet been placed into process to produce the company’s products. “Work in process” includes materials and supplies, direct labor, and manufacturing overhead costs for products started but not completed during the period. “Finished goods” includes raw materials and supplies, direct labor, and manufacturing overhead used to produce products that were completed but not sold during the period.

(2) Control Industries must be using the LIFO inventory method for at least some, if not all, of its inventories because the company has disclosed the amount of the adjustment that converts its inventories at FIFO to LIFO. There is a significant difference in the “adjustment to LIFO” in the inventories for 2014 from 2013. Review of the footnotes would reveal that during fiscal 2014, Technic Industries changed its inventory valuation method for substantially all U.S. inventories. Technic Industries believes the change is immaterial to its results from operations and allows its inventory valuation method to be in agreement with its inventories held outside the U.S.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 232-235 | pp. 254-258

OBJ: LO: 05-01 | LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

In the following information from the 2014 annual reports of Technic Industries all figures have been rounded to millions of dollars.

Balance Sheet Data	May 31, 2014	May 31, 2013
Raw materials	$ 25.8	$ 52.1
Work in process	44.8	34.7
Finished goods	1,132.7	1,303.8
Inventories at FIFO	1,203.3	1,390.6
Adjustment to LIFO	5.6	21.9

Cash Flow Data (Operating Activities)
Net income	$451.4	$399.9
Additions to net income:
Depreciation	198.2	100.2
Amortization	30.6	49.0
Changes in assets and liabilities:
Inventories	187.3	(58.0)
Accounts payable and other	(170.4)	(70.1)

REQUIRED:

(1) Explain what the amount “adjustment to LIFO” represents. What effects has this “adjustment” had on Technic Industries’ net earnings in 2013 and 2014?

(2) What method of determining cash flows from operating activities has Technic Industries used in preparing its statement of cash flows? Explain your answer.

(3) From 2013 to 2014, what change in the inventory balance (increase or decrease) occurred in each year as a result of operating activities? What was the effect on the company’s cash flow each year as a result of the inventory change?

ANS:

(1) The “adjustment to LIFO” of inventories is the amount by which current replacement cost of inventories exceeds the actual cost assigned to inventory under the LIFO method. Through the use of the LIFO method, Technic Industries has been able to assign recent, higher costs to the cost of products sold and retain older, lower costs in its asset balances for inventories. Thus, Technic Industries has reported lower amounts for net income than it would if the FIFO method had been used. It also benefits from the lower taxable income reported to the IRS. Technic Industries believes that this has not had a material effect on their operating results. It has switched to a FIFO valuation method at the end of fiscal 2014.

(2) Since Technic Industries has added back depreciation and amortization to net income, as well as made adjustments for the changes in inventories and accounts payable in the operating activities section of the statement of cash flows, it is using the indirect method for the operating activities section.

(3) The net change in inventories is an adjustment to net income in Technic Industries’ statement of cash flows for 2014 and 2013 because it uses the indirect method of cash flows. The net change in inventories for 2014, $187.3 million, was added to net income because the cash outflow for purchases was less than cost of goods sold; this means that inventories decreased in 2014 from 2013. The net change in inventories for 2013, $58 million, was deducted from net income because the cash outflow for purchases was greater than cost of goods sold; this means that inventories increased in 2014 from 2013.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 254-258 | pp. 267-268

OBJ: LO: 05-07 | LO: 05-11 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

What is LIFO inventory liquidation? Why is it important to disclose the effects of a LIFO inventory liquidation

ANS:

A LIFO liquidation means that some of the inventory items included in inventory under the LIFO method have been sold, i.e., the company sold more units of merchandise than it purchased during the year. If the units sold in the LIFO liquidation had been carried in inventory at older, lower prices, these lower prices will have been assigned to cost of goods sold. Thus, income will be higher than it would have been if the company had purchased enough units at current prices to maintain its inventory at the lower prices. If the effects of this unexpected LIFO liquidation are material, the information may be relevant to some of the users of the financial statements.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 254-258

OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Carrington Inc. manufactures digital cameras and has experienced noticeable declines in the purchase price of many of the components it uses, including memory components. Which inventory costing method should Carrington use if it wants to maximize net income? Explain your answer.

ANS:

For Carrington, the use of LIFO will have the effect of maximizing net income if a company is experiencing a decline in the unit cost of inventory. Last-in, first-out charges the most recent purchases to cost of goods sold. If prices are declining, the amounts charged to cost of goods sold will be less than if either the weighted average method or FIFO is used. Because less is charged to cost of goods sold, net income will be higher.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 254-258

OBJ: LO: 05-07 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

If an entity overstates its ending inventory for the current year, what are the effects on assets, cost of goods sold, income before taxes, and retained earnings for the current year?

ANS:

An overstatement of ending inventory for the current period results in an understatement of cost of goods sold and an overstatement of income before taxes for the same period. Cost of goods sold is understated because the overstated ending inventory figure is deducted from the cost of goods available for sale to determine cost of goods sold. Thus, a larger portion of the cost of goods available for sale is assigned to inventory and a smaller portion is assigned to cost of goods sold than should be. The overstated inventory figure also overstates the amount reported as an asset on the balance sheet. The overstatement of income results in an overstatement of retained earnings when net income is transferred to retained earnings through a closing entry.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 259-261

OBJ: LO: 05-08 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Assume that a company is experiencing increasing inventory prices and prepares its financial statements in accordance with IFRS. Which costing method should it use to pay the least amount of taxes? Explain your answer.

ANS:

If a company prepares its financial statements in accordance with IFRS, it is not allowed to use LIFO which would result in the lowest amount of taxes as inventory costs are increasing. Under IFRS, LIFO cannot be used; so the weighted average method will result in the largest cost of goods sold, the lowest income, and consequently the lowest income tax for the company.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 262-264

OBJ: LO: 05-09 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Bower Corp.’s cost of sales has remained steady over the last two years. During this same time period, however, its inventory has increased considerably. What does this information tell you about the company’s inventory turnover? Explain your answer.

ANS:

Inventory turnover equals cost of goods sold (cost of sales) divided by average inventory. If the cost of sales remains constant while the denominator (average inventory) increases, inventory turnover will decrease. This indicates that inventory is staying on the shelf for a longer time. The company should probably evaluate the salability of its inventory.

PTS: 1 DIF: Difficulty: Moderate REF: pp. 265-266

OBJ: LO: 05-10 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-17-Inventories Reporting

KEY: Bloom’s: Application

Introduction to Financial Accounting International Edition 8e Curtis L Norton Gary A Porter - Test Bank

Description

Additional Information

Reviews

Additional information

Add Review Cancel reply

Community & Public Health Nursing Promoting the Public's Health 9th Edition by Cherie Rector

Evidence Based Practice For Nurses 4th Edition By Schmidt Brown

Basic And Clinical Pharmacology 14th Edition by Katzung Trevor

Bates’ Guide To Physical Examination and History Taking 13th Edition by Bickley

Kaplan And Sadock's Synopsis of Psychiatry 11th Edition by Sadock

Burns' Pediatric Primary Care 7th Edition By Burns

Quick Links

Contact Information

Introduction to Financial Accounting International Edition 8e Curtis L Norton Gary A Porter - Test Bank

Description

Additional Information

Reviews

Additional information

Add Review Cancel reply

Related Products

Community & Public Health Nursing Promoting the Public's Health 9th Edition by Cherie Rector

Evidence Based Practice For Nurses 4th Edition By Schmidt Brown

Basic And Clinical Pharmacology 14th Edition by Katzung Trevor

Bates’ Guide To Physical Examination and History Taking 13th Edition by Bickley

Kaplan And Sadock's Synopsis of Psychiatry 11th Edition by Sadock

Burns' Pediatric Primary Care 7th Edition By Burns

Quick Links

Contact Information