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Survey of Accounting, 5e (Edmonds)
Chapter 5 Accounting for Receivables and Inventory Cost Flow
1) The year-end adjusting entry to recognize uncollectible accounts expense will:
A) decrease assets and decrease equity.
B) increase assets and decrease equity.
C) increase liabilities and increase equity.
D) decrease liabilities and increase equity.
Answer: A
Explanation: The adjusting entry will decrease assets by increasing the contra-asset allowance for doubtful accounts and will increase uncollectible accounts expense, which decreases equity.
Difficulty: 1 Easy
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
2) On January 1, Year 2, the Accounts Receivable balance was $37,000 and the balance in the Allowance for Doubtful Accounts was $2,800. On January 15, Year 2, an $800 uncollectible account was written-off. The net realizable value of accounts receivable immediately after the write-off is:
A) $36,200.
B) $33,400.
C) $35,000.
D) $34,200.
Answer: D
Explanation: $37,000 – $800 = $36,200 accounts receivable balance after the write-off; $2,800 – $800 = $2,000 allowance balance after the write-off; $36,200 – $2,000 = $34,200 net realizable value after the write-off.
Difficulty: 3 Hard
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
3) On January 1, Year 2, Grande Company had a $16,000 balance in the Accounts Receivable account and a zero balance in the Allowance for Doubtful Accounts account. During Year 2, Grande provided $104,000 of service on account. The company collected $97,000 cash from accounts receivable. Uncollectible accounts are estimated to be 2% of sales on account.
Based on this information, the amount of cash flow from operating activities that would appear on the Year 2 statement of cash flows is:
A) $97,000.
B) $104,000.
C) $89,520.
D) $95,060.
Answer: A
Explanation: $97,000 cash collected from accounts receivable is a cash inflow for operating activities.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
4) On January 1, Year 2, Grande Company had a $16,000 balance in the Accounts Receivable account and a zero balance in the Allowance for Doubtful Accounts account. During Year 2, Grande provided $104,000 of service on account. The company collected $97,000 cash from accounts receivable. Uncollectible accounts are estimated to be 2% of sales on account.
The amount of uncollectible accounts expense recognized on the Year 2 income statement is:
A) $320.
B) $1,000.
C) $2,080.
D) $1,940.
Answer: C
Explanation: $104,000 sales on account × 2% = $2,080 uncollectible accounts expense
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
5) The Miller Company earned $190,000 of revenue on account during Year 2. There was no beginning balance in the accounts receivable and allowance accounts. During Year 2, Miller collected $136,000 of cash from its receivables accounts. The company estimates that it will be unable to collect 3% of its sales on account.
The amount of uncollectible accounts expense recognized on the Year 2 income statement was:
A) $5,700.
B) $1,320.
C) $4,080.
D) $54,000.
Answer: A
Explanation: $190,000 revenue on account × 3% = $5,700
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
6) The Miller Company earned $190,000 of revenue on account during Year 2. There was no beginning balance in the accounts receivable and allowance accounts. During Year 2, Miller collected $136,000 of cash from its receivables accounts. The company estimates that it will be unable to collect 3% of its sales on account.
The net realizable value of Miller’s receivables at the end of Year 2 was:
A) $54,000.
B) $49,920.
C) $59,700.
D) $48,300.
Answer: D
Explanation: $0 beginning balance + $190,000 revenue on account – $136,000 collections = $54,000 ending accounts receivable balance; $0 beginning balance + $5,700 uncollectible accounts expense – $0 write-offs = $5,700 ending allowance for doubtful accounts balance; $54,000 – $5,700 = $48,300 net realizable value
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
7) The balance in Accounts Receivable at the beginning of the period amounted to $16,000. During the period $64,000 of credit sales were made to customers. If the ending balance in Accounts Receivable amounted to $10,000, and uncollectible accounts expense amounted to $4,000, then the amount of cash inflow from customers that would appear in the operating activities section of the cash flow statement would be:
A) $66,000.
B) $64,000.
C) $80,000.
D) None of these answers are correct.
Answer: D
Explanation: $16,000 beginning accounts receivable balance + $64,000 credit sales – $10,000 ending accounts receivable balance = $70,000 cash collected from customers; The $4,000 in uncollectible accounts expense does not affect accounts receivable, and does not affect cash flows.
Difficulty: 3 Hard
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
8) On January 1, Year 2, Kincaid Company’s Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $31,000 and $500, respectively. During the year Kincaid reported $72,500 of credit sales. Kincaid wrote off $550 of receivables as uncollectible in Year 2. Cash collections of receivables amounted to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales.
The amount of uncollectible accounts expense recognized in the Year 2 income statement will be:
A) $310.
B) $725.
C) $745.
D) $550.
Answer: B
Explanation: $72,500 credit sales × 1% = $725 uncollectible accounts expense
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
9) On January 1, Year 2, Kincaid Company’s Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $31,000 and $500, respectively. During the year Kincaid reported $72,500 of credit sales. Kincaid wrote off $550 of receivables as uncollectible in Year 2. Cash collections of receivables amounted to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales.
Kincaid’s entry to recognize the write-off of the uncollectible accounts will:
A) increase total assets and total equity.
B) increase total assets and decrease total equity.
C) decrease total assets and total equity.
D) not affect total assets or total equity.
Answer: D
Explanation: The write-off decreases both the allowance for doubtful accounts account (a contra-asset) and accounts receivable (an asset) equally. Therefore, there is no net effect on assets or equity.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Resource Management
10) On January 1, Year 2, Kincaid Company’s Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $31,000 and $500, respectively. During the year Kincaid reported $72,500 of credit sales. Kincaid wrote off $550 of receivables as uncollectible in Year 2. Cash collections of receivables amounted to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales.
Kincaid’s entry required to recognize the uncollectible accounts expense for Year 2 will:
A) increase total assets and retained earnings.
B) decrease total assets and increase retained earnings.
C) decrease total assets and net income.
D) increase total assets and decrease net income.
Answer: C
Explanation: Recognizing uncollectible accounts expense decreases assets by increasing the contra-asset allowance for doubtful accounts and increases expenses, which decreases net income and retained earnings.
Difficulty: 1 Easy
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Resource Management
11) On January 1, Year 2, Kincaid Company’s Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $31,000 and $500, respectively. During the year Kincaid reported $72,500 of credit sales. Kincaid wrote off $550 of receivables as uncollectible in Year 2. Cash collections of receivables amounted to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales.
The net realizable value of receivables appearing on Kincaid’s Year 2 balance sheet will amount to:
A) $29,075.
B) $27,725.
C) $28,950.
D) $28,400.
Answer: B
Explanation: $31,000 beginning balance + $72,500 credit sales – $74,550 collections – $550 write-offs = $28,400 ending accounts receivable balance; $500 beginning allowance balance + $725 uncollectible account expense – $550 write-offs = $675 ending allowance balance; $28,400 accounts receivable – $675 allowance = $27,725 net realizable value
Difficulty: 3 Hard
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
12) Which of the following reflects the effect of the year-end adjusting entry to record estimated uncollectible accounts expense using the allowance method?
| Assets | = | Liab. | + | Equity | Rev. | Exp. | = | Net Inc. | Cash Flow | |
| A. | − | = | NA | + | − | NA | − | = | − | − OA |
| B. | NA | = | − | + | − | NA | + | = | − | NA |
| C. | NA | = | − | + | − | NA | + | = | − | − OA |
| D. | − | = | NA | + | − | NA | + | = | − | NA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: D
Explanation: Recording uncollectible accounts expense decreases assets (increases allowance for doubtful accounts) and increases expenses, which decreases net income and equity. It does not affect the statement of cash flows.
Difficulty: 1 Easy
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Resource Management
13) Houff Company uses the allowance method to account for uncollectible accounts. An account that had been previously written-off as uncollectible was recovered. How would the recovery affect the company’s accounting equation?
A) Increase assets and increase equity.
B) Increase assets and decrease liabilities.
C) Reduce liabilities and increase equity.
D) Have no effect on assets, liabilities or equity.
Answer: D
Explanation: Houff must first reinstate the receivable that was previously written off. The reinstatement increases assets (accounts receivable) and decreases assets (increases the contra-asset allowance for doubtful accounts), with no overall effect on the financial statements. Next, Houff records collection of the receivable, which increases assets (cash) and decreases assets (accounts receivable), again with no overall effect on assets. The event is reported as a cash inflow for operating activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
14) How would accountants estimate the amount of a company’s uncollectible accounts expense?
A) Consider new circumstances that are anticipated to be experienced in the future.
B) Compute as a percentage of credit sales.
C) Consult with trade association and business associates.
D) All of these answer choices are correct.
Answer: D
Explanation: Accountants use a variety of methods to estimate uncollectible accounts expense. There is no requirement that they use a particular approach.
Difficulty: 1 Easy
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Decision Making; BB Industry
15) Domino Company uses the aging of accounts receivable method to estimate uncollectible accounts expense. Domino began Year 2 with balances in Accounts Receivable and Allowance for Doubtful Accounts of $76,500 and $5,800, respectively. During the year, the company wrote off $4,640 in uncollectible accounts. In preparation for the company’s Year 2 estimate, Domino prepared the following aging schedule:
| Number of days | Receivables | % Likely to be | |||||||
| past due | amount | uncollectible | |||||||
| Current | $ | 104,000 | 1 | % | |||||
| 0-30 | 45,000 | 5 | % | ||||||
| 31-60 | 9,920 | 10 | % | ||||||
| 61-90 | 4,440 | 25 | % | ||||||
| Over 90 | 3,800 | 50 | % | ||||||
| Total | $ | 167,160 | |||||||
What will Domino record as Uncollectible Accounts Expense for Year 2?
A) $6,132
B) $1,512
C) $7,292
D) $4,640
Answer: A
Explanation: ($104,000 × 1%) + ($45,000 × 5%) + ($9,920 × 10%) + ($4,440 × 25%) + ($3,800 × 50%) = $7,292 estimated ending allowance balance; $5,800 beginning allowance balance + uncollectible accounts expense – $4,640 write-offs = $7,292 ending allowance balance; uncollectible accounts expense = $7,292 – $5,800 + $4,640 = $6,132
Difficulty: 3 Hard
Topic: Aging Accounts Receivable
Learning Objective: 05-03 Use aging of accounts receivable to estimate the uncollectible accounts expense.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
16) Allegheny Company ended Year 1 with balances in Accounts Receivable and Allowance for Doubtful Accounts of $23,000 and $900, respectively. During Year 2, Allegheny wrote off $1,500 of Uncollectible Accounts. After aging its receivables, Allegheny estimates that the ending Allowance for Doubtful Accounts balance should be $1,600. What will Allegheny report as Uncollectible Accounts Expense on its Year 2 income statement?
A) $2,200
B) $1,500
C) $700
D) $1,600
Answer: A
Explanation: $900 beginning allowance balance – $1,500 write-offs + uncollectible accounts expense = $1,600 ending allowance balance; uncollectible accounts expense = $1,600 – $900 + $1,500 = $2,200
Difficulty: 2 Medium
Topic: Aging Accounts Receivable
Learning Objective: 05-03 Use aging of accounts receivable to estimate the uncollectible accounts expense.
Bloom’s: Analyze; Apply
AACSB: Analytical Thinking; Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
17) The practice of reporting the net realizable value of receivables in the financial statements is commonly called the:
A) cash flow method of accounting for uncollectible accounts.
B) allowance method of accounting for uncollectible accounts.
C) direct write-off method of accounting for uncollectible accounts.
D) accrual method of accounting for uncollectible accounts.
Answer: B
Explanation: The allowance method dictates that a company report its receivables net of estimated uncollectible accounts.
Difficulty: 1 Easy
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
18) The amount of accounts receivable that is actually expected to be collected is known as the:
A) allowance for doubtful accounts.
B) uncollectible accounts expense.
C) present value of accounts receivable.
D) net realizable value.
Answer: D
Explanation: Net realizable value is calculated as the general ledger accounts receivable balance (what has been billed to customers, but not yet collected) minus allowance for doubtful accounts (the estimate of what a company believes is uncollectible).
Difficulty: 1 Easy
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
19) A company that uses the allowance method to account for uncollectible accounts:
A) records Uncollectible Accounts Expense when a receivable is written off.
B) does not record uncollectible accounts until the amount becomes significant.
C) reports the net realizable value of its accounts receivable on the balance sheet.
D) None of these answer choices are correct.
Answer: C
Explanation: A company that uses the allowance method estimates uncollectible accounts expense before they actually become uncollectible, using a contra-asset account known as allowance for doubtful accounts, and reports the net realizable value of accounts receivable on the balance sheet.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
20) Hancock Medical Supply Co., which had no beginning balance in its Accounts Receivable and Allowance for Doubtful Accounts, earned $160,000 of revenue on account during Year 1. During Year 1, Hancock collected $128,000 of cash from its receivables accounts. The company estimates that it will be unable to collect 1% of revenue on account. The amount of net realizable value of receivables on the December 31, Year 1 balance sheet would be:
A) $30,400.
B) $30,720.
C) $32,000.
D) $30,000.
Answer: A
Explanation: $0 beginning accounts receivable + $160,000 revenue on account – $128,000 collected = $32,000 ending accounts receivable; $0 beginning allowance balance + ($160,000 × 1%) uncollectible accounts expense = $1,600 ending allowance balance; net realizable value of receivables = $32,000 – $1,600 = $30,400
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
21) Which one of the following is not an accurate description of the Allowance for Doubtful Accounts?
A) The account is a contra account.
B) The account is a temporary account.
C) The amount of the Allowance for Doubtful Accounts decreases the net realizable value of a company’s receivables.
D) The account is increased by an estimate of uncollectible accounts expense.
Answer: B
Explanation: Allowance for doubtful accounts is a contra account that decreases the net realizable value of a company’s receivable. It is increased when a company estimates uncollectible accounts expense.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
22) The percent of receivables method to estimate uncollectible accounts expense is also known as:
A) the income statement approach.
B) the direct write-off approach.
C) the credit sales approach.
D) the balance sheet approach.
Answer: D
Explanation: The percent of receivables method to estimate uncollectible accounts expense is known as the balance sheet approach because it uses a percentage of one balance sheet account (accounts receivable) to estimate another balance sheet account (allowance for doubtful accounts).
Difficulty: 1 Easy
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Receivables Method
Learning Objective: 05-02 Use the percent of receivables method to estimate the uncollectible accounts expense.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
23) The primary reason for a business to allow customers to purchase goods or services on account is to:
A) increase sales.
B) increase cash flow from financing.
C) decrease cost of goods sold.
D) decrease the marketability of the company’s inventory.
Answer: A
Explanation: The primary benefit of offering credit to customers is to encourage sales that may not be made if customers are required to pay cash.
Difficulty: 1 Easy
Topic: Accounting for Credit Card Sales
Learning Objective: 05-05 Show how accounting for credit card sales affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; BB Marketing
24) The net effect of the entries to recognize the receipt of a previously written-off account under the allowance method is to:
A) have no effect on total assets or total equity.
B) increase total equity only.
C) decrease total assets.
D) increase total assets and total equity.
Answer: A
Explanation: When a company receives payment on a previously written-off account, it must first reinstate the written-off account. The reinstatement increases assets (accounts receivable) and decreases assets (increases the contra-asset allowance for doubtful accounts), with no overall effect on the financial statements. Next, the company records collection of the receivable, which increases assets (cash) and decreases assets (accounts receivable), again with no overall effect on assets. The event is reported as a cash inflow for operating activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
25) On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method of accounting for uncollectible accounts. In February of Year 2, one of Loudoun’s customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050.
Which of the following answers correctly states the effect of the December 31, Year 1 adjusting entry for uncollectible accounts on the financial statements of the Loudoun Corporation?
| Assets | = | Liab. | + | Equity | Rev. | − | Expenses | = | Net Inc. | Cash Flow | |||||||
| A. | (3,375 | ) | = | 3,375 | + | NA | NA | − | NA | = | NA | NA | |||||
| B. | (3,375 | ) | = | NA | + | (3,375 | ) | NA | − | 3,375 | = | (3,375 | ) | NA | |||
| C. | 3,375 | = | NA | + | 3,375 | NA | − | (3,375 | ) | = | 3,375 | 3,375 | OA | ||||
| D. | NA | = | NA | + | NA | NA | − | NA | = | NA | NA | ||||||
A) Option A
B) Option B
C) Option C
D) Option D
Answer: B
Explanation: $112,500 credit sales × 3% = $3,375 uncollectible accounts expense. The adjusting entry decreases assets (increases allowance for doubtful accounts) and increases expenses (uncollectible accounts expense), which decreases net income and equity. It does not affect the statement of cash flows.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
26) On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method of accounting for uncollectible accounts. In February of Year 2, one of Loudoun’s customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050.
Which of the following answers correctly states the effect of Loudoun Company’s February Year 2 entry to write off the customer’s account?
| Assets | = | Liab. | + | Equity | Re v. | − | Expenses | = | Net Inc. | Cash Flow | ||||||||
| A. | NA | = | NA | + | NA | NA | − | NA | = | NA | NA | |||||||
| B. | (1,050 | ) | = | NA | + | (1,050 | ) | (1,050 | ) | − | NA | = | (1,050 | ) | NA | |||
| C. | (1,050 | ) | = | (1,050 | ) | + | NA | NA | − | NA | = | NA | NA | |||||
| D. | NA | = | 1,050 | + | (1,050 | ) | NA | − | 1,050 | = | (1,050 | ) | NA | |||||
A) Option A
B) Option B
C) Option C
D) Option D
Answer: A
Explanation: The write-off increases assets by decreasing the allowance for doubtful accounts and decreases assets (accounts receivable), resulting in no net effect on assets, liabilities, or equity.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
27) On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method of accounting for uncollectible accounts. In February of Year 2, one of Loudoun’s customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050.
Which of the following answers correctly states the effect of Loudoun’s recording the reestablishment of the receivable on April 4, Year 2?
| Assets | = | Liab. | + | Equity | Re v. | − | Expenses | = | Net Inc. | Cash Flow | ||||||||
| A. | NA | = | 1,050 | + | (1,050 | ) | NA | − | 1,050 | = | (1,050 | ) | NA | |||||
| B. | 1,050 | = | NA | + | 1,050 | 1,050 | − | NA | = | 1,050 | 1,050 | OA | ||||||
| C. | (1,050 | ) | = | NA | + | (1,050 | ) | NA | − | 1,050 | = | (1,050 | ) | NA | ||||
| D. | NA | = | NA | + | NA | NA | − | NA | = | NA | NA | |||||||
A) Option A
B) Option B
C) Option C
D) Option D
Answer: D
Explanation: Reestablishing the receivable increases assets (accounts receivable) and decreases assets (increase to allowance for doubtful accounts), resulting in no net effect to assets.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
28) On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method of accounting for uncollectible accounts. In February of Year 2, one of Loudoun’s customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050.
Which of the following answers correctly states the effect of recording the collection of the reestablished receivable on April 4, Year 2?
| Assets | = | Liab. | + | Equity | Re v. | − | Expenses | = | Net Inc. | Cash Flow | |||||||
| A. | NA | = | NA | + | NA | NA | − | NA | = | NA | NA | ||||||
| B. | 1,050 | = | NA | + | 1,050 | 1,050 | − | NA | = | 1,050 | 1,050 | OA | |||||
| C. | 1,050 | = | NA | + | 1,050 | NA | − | (1,050 | ) | = | 1,050 | 1,050 | OA | ||||
| D. | NA | = | NA | + | NA | NA | − | NA | = | NA | 1,050 | OA | |||||
A) Option A
B) Option B
C) Option C
D) Option D
Answer: D
Explanation: Once the receivable is reestablished, collection of the receivable is recorded as an increase to assets (cash) and a decrease to assets (accounts receivable), resulting in no net effect to assets. It is reported as a cash inflow for operating activities.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Receivables Method
Learning Objective: 05-02 Use the percent of receivables method to estimate the uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
29) Rosewood Company made a loan of $16,000 to one of the company’s employees on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest revenue that Rosewood would report during the years ending December 31, Year 1 and Year 2, respectively, would be:
A) $960 and $0
B) $0 and $960
C) $240 and $720
D) $720 and $240
Answer: D
Explanation: $16,000 × 6% × 9/12 months = $720 interest revenue in April – December, Year 1; $16,000 × 6% × 3/12 months = $240 interest revenue in January – March, Year 2
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable (Promissory Notes)
Learning Objective: 05-04 Show how accounting for notes receivable and accrued interest affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
30) The party that issues a promissory note is known as the:
A) lender.
B) maker.
C) borrower.
D) borrower and maker.
Answer: D
Explanation: The terms maker and borrower can both be used to describe the issuer of a promissory note.
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable (Promissory Notes)
Learning Objective: 05-04 Show how accounting for notes receivable and accrued interest affects financial statements.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Industry
31) Buttercup Florist uses the allowance method to account for uncollectible accounts. Unable to collect a $150 account from a customer, Buttercup determined it was uncollectible. How would the write-off of this account affect the company’s financial statements?
| Assets | = | Liab. | + | Equity | Rev. | − | Expenses | = | Net Inc. | Cash Flow | |
| A. | − | = | − | + | NA | NA | − | Na | = | NA | − OA |
| B. | NA | = | NA | + | NA | NA | − | NA | = | NA | NA |
| C. | − | = | + | + | NA | NA | − | NA | = | NA | − FA |
| D. | NA | = | − | + | − | NA | − | + | = | − | NA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: B
Explanation: The write-off decreases assets (accounts receivable) and increases assets (decrease to allowance for doubtful accounts), resulting in no net change to assets.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
32) The Yankee Corporation has recently begun to accept credit cards. On July 7, Yankee made a credit card sale of $600. The credit card company charges a fee of 3%.
Which of the following correctly shows the effects of the sale on July 7? Assume that the credit card fee is recorded on the date of sale.
| Assets | = | Liab. | + | Equity | Rev. | − | Expenses | = | Net Inc. | Cash Flow | |
| A. | 600 | = | 18 | + | 582 | 582 | − | NA | = | 582 | NA |
| B. | 582 | = | NA | + | 582 | 600 | − | 18 | = | 582 | 582 OA |
| C. | 582 | = | NA | + | 582 | 600 | − | 18 | = | 582 | NA |
| D. | 600 | = | NA | + | 600 | 600 | − | NA | = | 600 | NA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: C
Explanation: The sale increases assets (accounts receivable – credit card) by $582, the net amount that will be collected from the credit card company, increases revenue by $600, and increases expenses (credit card expense) by $18 (3% of $600). Net income and equity increase by $582, and the statement of cash flows is unaffected.
Difficulty: 2 Medium
Topic: Accounting for Credit Card Sales
Learning Objective: 05-05 Show how accounting for credit card sales affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
33) The Yankee Corporation has recently begun to accept credit cards. On July 7, Yankee made a credit card sale of $600. The credit card company charges a fee of 3%.
Which of the following answers correctly describes the effect of the collection of cash from the credit card company on the financial statements of Yankee Corporation?
| Assets | = | Liab. | + | Equity | Rev. | − | Expenses | = | Net Inc. | Cash Flow | |
| A. | NA | = | NA | + | NA | NA | − | NA | = | NA | 582 OA |
| B. | 582 | = | NA | + | NA | 582 | − | NA | = | 582 | 582 OA |
| C. | NA | = | NA | + | NA | NA | − | NA | = | NA | NA |
| D. | 582 | = | 582 | + | NA | NA | − | NA | = | NA | 582 OA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: A
Explanation: Collecting the amount due ($582) from the credit card company increases assets (cash) and decreases assets (accounts receivable – credit card), resulting in no net effect on assets. It is reported as a cash inflow for operating activities.
Difficulty: 2 Medium
Topic: Accounting for Credit Card Sales
Learning Objective: 05-05 Show how accounting for credit card sales affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
34) Which of the following is not an advantage of accepting credit cards from retail customers?
A) The acceptance of credit cards tends to increase sales.
B) The credit card company performs credit worthiness assessments.
C) There are fees charged for the privilege of accepting credit cards.
D) The credit card company assumes the cost of slow collections and write-offs.
Answer: C
Explanation: The fees associated with credit card sales are a disadvantage, not an advantage, of accepting credit cards.
Difficulty: 1 Easy
Topic: Accounting for Credit Card Sales
Learning Objective: 05-05 Show how accounting for credit card sales affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; BB Resource Management; FN Decision Making
35) Elliston Company accepted credit card payments for $10,000 of services provided to customers. The credit card company charges a 3% service charge. This transaction would increase:
A) revenue by $9,700.
B) assets by $10,000.
C) Retained Earnings by $9,700.
D) net income by $10,000.
Answer: C
Explanation: The credit card sale increases assets by $9,700 (accounts receivable – credit card), increases revenue by $10,000, and increases expenses by $300. This increases net income and equity (retained earnings) by $9,700.
Difficulty: 2 Medium
Topic: Accounting for Credit Card Sales
Learning Objective: 05-05 Show how accounting for credit card sales affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
36) Alberta Company accepts a credit card as payment for $450 of services provided for the customer. The credit card company charges a 4% handling charge for its collection services. Select the answer that shows how the entry to record the sale would affect Alberta’s financial statements.
| Assets | = | Liab. | + | Equity | Rev. | − | Expenses | = | Net Inc. | Cash Flow | |
| A. | 432 | = | NA | + | 432 | 432 | − | NA | = | 432 | 432 OA |
| B. | 432 | = | NA | + | 432 | 450 | − | 18 | = | 432 | 432 OA |
| C. | 432 | = | NA | + | 432 | 450 | − | 18 | = | 432 | NA |
| D. | 450 | = | NA | + | 450 | 450 | − | NA | = | 450 | NA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: C
Explanation: The sale increases assets (accounts receivable – credit card) by $432, the amount to be collected from the credit card company, increases revenue by $450, and increases expenses (credit card expense) by $18 (4% of $450). Net income and equity increase by $432, and the statement of cash flows is not affected.
Difficulty: 2 Medium
Topic: Accounting for Credit Card Sales
Learning Objective: 05-05 Show how accounting for credit card sales affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
37) Glebe Company accepted a credit card account receivable in exchange for $1,100 of services provided to a customer. The credit card company charges a 5% service charge. The collection of cash from the credit card company when it settles the account receivable balance will act to:
A) increase assets by $1,045.
B) decrease assets and equity by $55.
C) increase assets by $1,100.
D) None of these answer choices are correct.
Answer: D
Explanation: The collection of the receivable from the credit card company increases one asset (cash) and decreases another asset (accounts receivable – credit card) by $1,045 ($1,100 – 5% service charge).
Difficulty: 2 Medium
Topic: Accounting for Credit Card Sales
Learning Objective: 05-05 Show how accounting for credit card sales affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
38) At a time of declining prices, which cost flow assumption will result in the highest ending inventory?
A) Weighted average
B) FIFO
C) LIFO
D) Either weighted average or FIFO
Answer: C
Explanation: In a period of declining prices, LIFO will result in the lowest cost of goods sold (most recent purchases) and the highest ending inventory (earliest purchases).
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
39) When prices are rising, which method of inventory, if any, will result in the lowest relative net cash outflow (including the effects of taxes, if any)?
A) LIFO.
B) FIFO.
C) Weighted average
D) None of these; inventory methods cannot affect cash flows.
Answer: A
Explanation: When prices are rising, LIFO will result in the highest cost of goods sold (most recent purchases), and therefore will result in the lowest income tax expense. Income tax expense is the only cash flow affected by cost flow assumption.
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Resource Management
40) Which inventory costing method will produce an amount for cost of goods sold that is closest to current market value?
A) Weighted average.
B) Specific identification.
C) LIFO.
D) FIFO.
Answer: C
Explanation: LIFO will produce cost of goods sold that is based on the most recent purchases.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
41) Blake Company purchased two identical inventory items. The item purchased first cost $16.00, and the item purchased second cost $18.00. Blake sold one of the items for $24.00. Which of the following statements is true?
A) Ending inventory will be lower if Blake uses weighted average than if FIFO were used.
B) Cost of goods sold will be higher if Blake uses FIFO than if weighted average were used.
C) The dollar amount assigned to ending inventory will be the same no matter which cost flow method is used.
D) Gross margin will be higher if Blake uses LIFO than it would be if FIFO were used.
Answer: A
Explanation: If Blake uses weighted average, ending inventory will be $17.00. If the company uses FIFO, ending inventory will be $18.00.
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
42) When prices are falling, LIFO will result in:
A) lower income and a lower inventory valuation than will FIFO.
B) lower income and a higher inventory valuation than will FIFO.
C) higher income and a higher inventory valuation than will FIFO.
D) higher income and a lower inventory valuation than will FIFO.
Answer: C
Explanation: When prices are falling, LIFO will produce a low cost of goods sold (most recent purchases) and a high ending inventory (earliest purchases), compared to FIFO, which will produce a high cost of goods sold (earliest purchases) and low ending inventory (most recent purchases).
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
43) If prices are rising, which inventory cost flow method will produce the lowest amount of cost of goods sold?
A) LIFO
B) FIFO
C) Weighted average
D) LIFO, FIFO, and weighted average will all produce equal amounts.
Answer: B
Explanation: When prices are rising, FIFO will produce the lowest cost of goods sold compared with other methods because it is based on the earliest, lowest priced, purchases.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
44) Barker Company paid cash to purchase two identical inventory items. The first purchase cost $18.00 cash and the second cost $20.00 cash. Barker sold one inventory item for $30.00 cash. Based on this information alone, without considering the effect of income tax:
A) cash flow from operating activities is $11.00 assuming a weighted average cost flow.
B) cash flow from operating activities is $12.00 assuming a FIFO cost flow.
C) cash flow from operating activities is $10.00 assuming a LIFO cost flow.
D) the amount of cash flow from operating activities is not affected by the cost flow method.
Answer: D
Explanation: Regardless of the cost flow assumption, Barker reported outflow of $38.00 for the purchases of the two items and inflow of $30.00 for the sale of one item.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
45) When the cost of purchasing inventory is declining, which inventory cost flow method will produce the highest amount of cost of goods sold?
A) Weighted average
B) LIFO
C) FIFO
D) LIFO, FIFO, and weighted average will all produce the same amount of cost of goods sold.
Answer: C
Explanation: When prices are declining, FIFO will produce the highest cost of goods sold (earliest purchases) compared with LIFO which will be based on more recent, lower priced purchases. Weighted average will be somewhere in between.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
46) In an inflationary environment:
A) a company’s net income will be higher if it uses LIFO than if it uses FIFO.
B) a company’s cost of goods sold will be lower if it uses LIFO as opposed to FIFO.
C) a company’s net income will be the same regardless of whether LIFO or FIFO is used.
D) a company’s assets will be lower if it uses LIFO as opposed to FIFO cost flow.
Answer: D
Explanation: In an inflationary environment, prices are rising. LIFO will produce the lowest ending inventory (earliest purchases) compared with FIFO.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
47) Hoover Company purchased two identical inventory items. The item purchased first cost $33.00. The item purchased second cost $35.00. Then Hoover sold one of the inventory items for $62.00. Based on this information, the amount of:
A) ending inventory is $35.00 if Hoover uses the LIFO cost flow method.
B) gross margin is $28.00 if Hoover uses the weighted average cost flow method.
C) cost of goods sold is $35.00 if Hoover uses the FIFO cost flow method.
D) cost of goods sold is $33.00 if Hoover uses the LIFO cost flow method.
Answer: B
Explanation: If Hoover uses LIFO, cost of goods sold will be $35.00 (most recent purchase) and ending inventory will be $33.00, not $35.00. If Hoover uses weighted average, the weighted average cost per unit is $34.00. Therefore, gross margin will be $28.00 ($62.00 Sales – $34.00 Cost of goods sold). If Hoover uses FIFO, cost of goods sold will be $33.00 (earliest purchase), not $35.00.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
48) Anton Co. uses the perpetual inventory method. Anton purchased 400 units of inventory that cost $12.00 each. At a later date the company purchased an additional 600 units of inventory that cost $16.00 each. If Anton uses the FIFO cost flow method and sells 700 units of inventory, the amount of cost of goods sold will be:
A) $11,200.
B) $10,400.
C) $8,400.
D) $9,600.
Answer: D
Explanation: (400 × $12.00) + (300 × $16.00) = $9,600
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
49) The inventory records for Radford Co. reflected the following
| Beginning inventory @ May 1 | 100 | units | @ | $ | 4.00 | |
| First purchase @ May 7 | 300 | units | @ | $ | 4.40 | |
| second purchase @ May 17 | 500 | units | @ | $ | 4.60 | |
| Third purchase @ May 23 | 100 | units | @ | $ | 4.80 | |
| Sales @ May 31 | 900 | units | @ | $ | 7.80 |
Determine the weighted average cost per unit for May.
A) $4.45
B) $4.50
C) $5.12
D) $6.34
Answer: B
Explanation: [(100 × $4.00) + (300 × $4.40) + (500 × $4.60) + (100 × $4.80)] ÷ 1,000 units = $4.50 per unit
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
50) The inventory records for Radford Co. reflected the following
| Beginning inventory @ May 1 | 100 | units | @ | $ | 4.00 | |
| First purchase @ May 7 | 300 | units | @ | $ | 4.40 | |
| second purchase @ May 17 | 500 | units | @ | $ | 4.60 | |
| Third purchase @ May 23 | 100 | units | @ | $ | 4.80 | |
| Sales @ May 31 | 900 | units | @ | $ | 7.80 |
Determine the amount of cost of goods sold assuming the LIFO cost flow method.
A) $4,100
B) $4,320
C) $2,360
D) $3,600
Answer: A
Explanation: (100 × $4.80) + (500 × $4.60) + (300 × $4.40) = $4,100
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
51) The inventory records for Radford Co. reflected the following
| Beginning inventory @ May 1 | 100 | units | @ | $ | 4.00 | |
| First purchase @ May 7 | 300 | units | @ | $ | 4.40 | |
| second purchase @ May 17 | 500 | units | @ | $ | 4.60 | |
| Third purchase @ May 23 | 100 | units | @ | $ | 4.80 | |
| Sales @ May 31 | 900 | units | @ | $ | 7.80 |
Determine the amount of ending inventory assuming the FIFO cost flow method.
A) $480
B) $440
C) $400
D) $940
Answer: A
Explanation: 1,000 units available for sale – 900 units sold = 100 units in ending inventory; 100 × $4.80 = $480
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
52) The inventory records for Radford Co. reflected the following
| Beginning inventory @ May 1 | 100 | units | @ | $ | 4.00 | |
| First purchase @ May 7 | 300 | units | @ | $ | 4.40 | |
| second purchase @ May 17 | 500 | units | @ | $ | 4.60 | |
| Third purchase @ May 23 | 100 | units | @ | $ | 4.80 | |
| Sales @ May 31 | 900 | units | @ | $ | 7.80 |
Determine the amount of gross margin assuming the weighted average cost flow method.
A) $3,015
B) $2,412
C) $1,314
D) $2,970
Answer: D
Explanation: [(100 × $4.00) + (300 × $4.40) + (500 × $4.60) + (100 × $4.80)] ÷ 1,000 units = $4.50 per unit; (900 × $7.80) – (900 × $4.50) = $2,610
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
53) The inventory records for Radford Co. reflected the following
| Beginning inventory @ May 1 | 100 | units | @ | $ | 4.00 | |
| First purchase @ May 7 | 300 | units | @ | $ | 4.40 | |
| second purchase @ May 17 | 500 | units | @ | $ | 4.60 | |
| Third purchase @ May 23 | 100 | units | @ | $ | 4.80 | |
| Sales @ May 31 | 900 | units | @ | $ | 7.80 |
Determine the amount of gross margin assuming the FIFO cost flow method.
A) $2,920
B) $3,420
C) $3,000
D) $4,020
Answer: C
Explanation: (100 × $4.00) + (300 × $4.40) + (500 × $4.60) = $4,020 cost of goods sold; $7,020 sales – $4,020 cost of goods sold = $3,000
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
54) Glasgow Enterprises started the period with 80 units in beginning inventory that cost $7.50 each. During the period, the company purchased inventory items as follows. Glasgow sold 220 units after purchase 3 for $17.00 each.
| Purchase | No. of items | Cost | |||
| 1 | 200 | $ | 9.00 | ||
| 2 | 150 | $ | 9.30 | ||
| 3 | 50 | $ | 10.50 | ||
Glasgow’s cost of goods sold under FIFO would be:
A) $1,650.
B) $1,860.
C) $2,310.
D) $2,100.
Answer: B
Explanation: (80 × $7.50) + (140 × $9.00) = $1,860
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
55) Glasgow Enterprises started the period with 80 units in beginning inventory that cost $7.50 each. During the period, the company purchased inventory items as follows. Glasgow sold 220 units after purchase 3 for $17.00 each.
| Purchase | No. of items | Cost | |||
| 1 | 200 | $ | 9.00 | ||
| 2 | 150 | $ | 9.30 | ||
| 3 | 50 | $ | 10.50 | ||
Glasgow’s ending inventory under LIFO would be:
A) $2,730.
B) $2,460.
C) $2,220.
D) $1,950.
Answer: C
Explanation: 80 units + 400 units purchased – 220 units sold = 260 units in ending inventory; (80 × $7.50) + (180 × $9.00) = $2,220
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
56) Glasgow Enterprises started the period with 80 units in beginning inventory that cost $7.50 each. During the period, the company purchased inventory items as follows. Glasgow sold 220 units after purchase 3 for $17.00 each.
| Purchase | No. of items | Cost | |||
| 1 | 200 | $ | 9.00 | ||
| 2 | 150 | $ | 9.30 | ||
| 3 | 50 | $ | 10.50 | ||
Glasgow’s ending inventory under weighted average would be approximately:
A) $2,361.
B) $2,340.
C) $1,980.
D) $1,998.
Answer: B
Explanation: 80 units + 400 units purchased – 220 units sold = 260 units in ending inventory
[(80 × $7.50) + (200 × $9.00) + (150 × $9.30) + (50 × $10.50)] ÷ 480 = $9.00 per unit × 260 = $2,340
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
57) Poole Company purchased two identical inventory items. One of the items, purchased in January, cost $4.50. The other, purchased in February, cost $4.75. One of the items was sold in March at a selling price of $7.50. Assuming that Poole uses a LIFO cost flow, which of the following statements is correct?
A) The balance in ending inventory would be $4.75.
B) The amount of gross margin would be $2.75.
C) The amount of ending inventory would be $4.625.
D) The amount of cost of goods sold would be $4.50.
Answer: B
Explanation: $7.50 sales – $4.75 cost of goods sold = $2.75 gross margin
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
58) Koontz Company uses the perpetual inventory method. On January 1, Year 1, the company’s first day of operations, Koontz purchased 400 units of inventory that cost $7.50 each. On January 10, Year 1, the company purchased an additional 600 units of inventory that cost $9.00 each. If Koontz uses a weighted average cost flow method and sells 550 units of inventory, the amount of inventory appearing on balance sheet following the sale will be approximately:
A) $3,780.
B) $4,738.
C) $3,080.
D) $3,713.
Answer: A
Explanation: 400 units + 600 units – 550 units sold = 450 units in ending inventory; [(400 × $7.50) + (600 × $9.00)] ÷ 1,000 = $8.40 per unit;
450 units × $8.40 = $3,780
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
59) Stubbs Company uses the perpetual inventory method. On January 1, Year 1, Stubbs purchased 400 units of inventory that cost $8.00 each. On January 10, Year 1, the company purchased an additional 600 units of inventory that cost $9.00 each. If Stubbs uses a weighted average cost flow method and sells 700 units of inventory for $16.00 each, the amount of gross margin reported on the income statement will be:
A) $5,180.
B) $5,250.
C) $5,000.
D) $6,020.
Answer: A
Explanation: [(400 × $8.00) + (600 × $9.00)] ÷ 1,000 = $8.60 per unit; 700 × $8.60 = $6,020 cost of goods sold; $11,200 sales – $6,020 cost of goods sold = $5,180 gross margin
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
60) Melbourne Company uses the perpetual inventory method. Melbourne purchased 500 units of inventory that cost $4.00 each. At a later date the company purchased an additional 600 units of inventory that cost $5.00 each. If Melbourne uses a LIFO cost flow method, and sells 800 units of inventory, the amount of ending inventory appearing on the balance sheet will be:
A) $3,800.
B) $1.350.
C) $1,500.
D) $1,200.
Answer: D
Explanation: 500 units + 600 units – 800 units sold = 300 units in ending inventory; 300 units × $4.00 = $1,200
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
61) Vargas Company uses the perpetual inventory method. Vargas purchased 400 units of inventory that cost $15.00 each. At a later date the company purchased an additional 800 units of inventory that cost $18.00 each. Vargas sold 500 units of inventory for $27.00. If Vargas uses a FIFO cost flow method, the amount of cost of goods sold appearing on the income statement will be:
A) $7,800.
B) $6,000.
C) $4,500.
D) $5,700.
Answer: A
Explanation: (400 × $15.00) + (100 × $18.00) = $7,800 cost of goods sold
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
62) Which of the following businesses is most likely to use a specific identification cost flow method?
A) Car dealership
B) Grocery store
C) Hardware store
D) Roofing company
Answer: A
Explanation: A car dealership sells a relatively small number of high-value items of inventory, each of which bears a unique vehicle identification number.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management; BB Industry
63) Tetra Company purchased 2,000 units of inventory that cost $4.00 each on January 1, Year 1. An additional 3,000 units of inventory were purchased on January 12, Year 1 at a cost of $4.20 each. Tetra Company sold 4,000 units of inventory on January 20, Year 1. Assuming that Tetra Co. uses the perpetual inventory method and a FIFO cost flow method, how would the entry to recognize the cost of goods sold affect the financial statements?
A) Increase inventory and increase cost of goods sold by $16,400
B) Decrease cost of goods sold and increase inventory by $16,600
C) Increase cost of goods sold and decrease inventory by $16,400
D) Increase inventory and increase cost of goods sold by $16,600
Answer: C
Explanation: (2,000 × $4.00) + (2,000 × $4.20) = $16,400
The entry to recognize cost of goods sold increases cost of goods sold (an expense) and decreases inventory (an asset) by $16,400.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
64) Chase Co. uses the perpetual inventory method. The inventory records for Chase reflected the following
| Jan 1 | Beginning inventory | 300 | units | @ | $ | 2.30 | |
| Jan 12 | Purchase | 400 | units | @ | $ | 2.10 | |
| Jan 18 | Sales | 500 | units | @ | $ | 3.80 | |
| Jan 21 | Purchase | 300 | units | @ | $ | 2.40 | |
| Jan 25 | Purchase | 100 | units | @ | $ | 2.20 | |
| Jan 31 | Sales | 450 | units | @ | $ | 3.80 |
Assuming Chase uses a LIFO cost flow method, the amount of cost of goods sold for the sales transaction on January 18 is:
A) $1,150.
B) $1,050.
C) $1,070.
D) $1,130.
Answer: C
Explanation: (400 × $2.10) + (100 × $2.30) = $1,070
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
65) Chase Co. uses the perpetual inventory method. The inventory records for Chase reflected the following
| Jan 1 | Beginning inventory | 300 | units | @ | $ | 2.30 | |
| Jan 12 | Purchase | 400 | units | @ | $ | 2.10 | |
| Jan 18 | Sales | 500 | units | @ | $ | 3.80 | |
| Jan 21 | Purchase | 300 | units | @ | $ | 2.40 | |
| Jan 25 | Purchase | 100 | units | @ | $ | 2.20 | |
| Jan 31 | Sales | 450 | units | @ | $ | 3.80 |
Assuming Chase uses a FIFO cost flow method, the cost of goods sold for the sales transaction on January 31 is:
A) $1,020.
B) $1,005.
C) $1,045.
D) $340.
Answer: A
Explanation: (200 × $2.10) + (250 × $2.40) = $1,020 cost of goods sold
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
66) Chase Co. uses the perpetual inventory method. The inventory records for Chase reflected the following
| Jan 1 | Beginning inventory | 300 | units | @ | $ | 2.30 | |
| Jan 12 | Purchase | 400 | units | @ | $ | 2.10 | |
| Jan 18 | Sales | 500 | units | @ | $ | 3.80 | |
| Jan 21 | Purchase | 300 | units | @ | $ | 2.40 | |
| Jan 25 | Purchase | 100 | units | @ | $ | 2.20 | |
| Jan 31 | Sales | 450 | units | @ | $ | 3.80 |
Assuming Chase uses a FIFO cost flow method, the ending inventory on January 31 is:
A) $345.
B) $340.
C) $330.
D) $1,020.
Answer: B
Explanation: (50 × $2.40) + (100 × $2.20) = $340 ending inventory
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
67) Indicate whether each of the following statements is true or false.
_____ a) Most companies expect to receive the full face value of their receivables.
_____ b) The estimated amount of uncollectible accounts is called the net realizable value.
_____ c) The direct write-off method of accounting for uncollectible accounts does not require the computation of the net realizable value of accounts receivable.
_____ d) The practice of reporting the net realizable value of receivables is the result of using the allowance method of accounting for uncollectible accounts.
_____ e) The materiality principle requires the computation of net realizable value for a company’s liabilities.
Answer: a) This is false. Most companies that extend credit to customers expect that some of those customers will fail to pay their obligations.
b) This is false. The estimated amount of uncollectible accounts is called uncollectible accounts expense (for a particular accounting period) or allowance for doubtful accounts (for the accounts receivable balance).
c) This is true. Net realizable value is not computed when the direct write-off method is used.
d) This is true. Net realizable value is the amount reported that is net of an allowance for uncollectible amounts.
e) This is false. The materiality concept requires computation of net realizable value of a company’s receivables, not its liabilities.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
68) On December 31, Year 1, the West Corporation estimated that $6,000 of its receivables might not be collected. Before adjusting entries, the balance of Accounts Receivable and the Allowance for Doubtful Accounts respectively was $150,000 and zero on December 31, Year 1. On February 1, Year 2, West wrote-off of a delinquent account from one of its customers. West Corp. uses the allowance method of accounting for uncollectible accounts. Indicate whether each of the following statements is true or false.
_____a) The net realizable value of accounts receivable (after the appropriate adjusting entry on December 31, Year 1) was $144,000.
_____b) The write-off of the account on February 1, Year 2, did not affect the net realizable value of West’s accounts receivable.
_____c) The adjusting entry on December 31, Year 1, had no effect on West’s total assets.
_____d) The write-off entry on February 1, Year 2, had no effect on West’s total assets.
_____e) The write-off entry on February 1, Year 2, decreased net income for Year 2.
Answer: a) This is true. The net realizable value of accounts receivable after the adjusting entry is $144,000 ($150,000 accounts receivable minus $6,000 allowance for doubtful accounts).
b) This is true. The write-off decreased accounts receivable and allowance for doubtful accounts equally, so it did not affect net realizable value.
c) This is false. The adjusting entry decreased assets by increasing the contra-asset allowance for doubtful accounts.
d) This is true. The write-off decreased assets (accounts receivable) and increased assets (decreased the contra-asset allowance for doubtful accounts), resulting in no net change in assets.
e) This is false. The write-off decreased net income for Year 1, not for Year 2.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
69) Barton Corporation uses the aging of accounts receivable method of accounting for uncollectible accounts. As of December 31, Year 1, prior to estimating uncollectible accounts expense, Barton’s balance of accounts receivable was $68,900, the balance of allowance for doubtful accounts was $2,500, and total sales for Year 1 were $875,000. On December 31, Year 1, Barton aged its receivables and determined the following:
| Number of Days | Receivables | % Likely to be | |||||||
| Past Due | Amount | Uncollectible | |||||||
| Current | $ | 29,500 | 1 | % | |||||
| 0-30 | 16,700 | 5 | % | ||||||
| 31-60 | 11,000 | 10 | % | ||||||
| 61-90 | 9,400 | 25 | % | ||||||
| Over 90 | 2,300 | 50 | % | ||||||
| Total | $ | 68,900 | |||||||
Indicate whether each of the following statements is true or false.
_____ a) Barton will report Net Realizable Value of Accounts Receivable equal to $63,170 on its December 31, Year 1 balance sheet.
_____ b) Barton will report Uncollectible Accounts Expense of $5,730 on its Year 1 income statement.
_____ c) The December 31 adjusting entry related to uncollectible accounts will increase liabilities and decrease equity by $3,230.
_____ d) The method Barton uses to account for uncollectible accounts is known as the balance sheet approach.
_____ e) Write-offs of uncollectible accounts in Year 2 will reduce Barton’s net realizable value of receivables.
Answer: a) This is true. ($29,500 × 1%) + ($16,700 × 5%) + ($11,000 × 10%) + ($9,400 × 25%) + ($2,300 × 50%) = $5,730 adjusted balance in allowance for doubtful accounts; $68,900 accounts receivable – $5,730 allowance = $63,170 net realizable value
b) This is false. $5,730 adjusted allowance – $2,500 unadjusted allowance = $3,230 uncollectible accounts expense
c) This is false. Allowance for doubtful accounts is a contra-asset, not a liability. The adjusting entry will decrease assets (increase to allowance for doubtful accounts) and decrease equity (increase uncollectible accounts expense) by $3,230 to produce an ending balance in the allowance of $5,730.
d) This is true. Aging of receivables is known as the balance sheet approach because it uses a percentage of one balance sheet account (accounts receivable) to estimate another balance sheet account (allowance for doubtful accounts).
e) This is false. Write-offs do not affect net realizable value when the allowance method is used because the write-off decreases both accounts receivable and allowance for doubtful accounts equally.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Receivables Method
Learning Objective: 05-02 Use the percent of receivables method to estimate the uncollectible accounts expense.
Bloom’s: Analyze; Apply
AACSB: Analytical Thinking; Knowledge Application
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
70) Indicate whether each of the following statements is true or false.
_____ a) Loaning cash to another company is considered a financing activity on the statement of cash flows.
_____ b) The major difference between treating the extension of credit to a customer as accounts receivable and treating it as notes receivable is the existence of interest.
_____ c) In a promissory note, the payee issues the note to the maker.
_____ d) Interest rates are always stated on an annual basis, regardless of the length of the note.
_____ e) Accruing interest on a note receivable is considered an asset use transaction.
Answer: a) This is false. Loaning cash to another company is considered an investing activity on the statement of cash flows.
b) This is true. Interest is charged on a note receivable, while it is not customary on accounts receivable.
c) This is false. The payee is the party that accepts the note, not the party that issues the note.
d) This is true. Interest rates are expressed on an annual basis, even if, for example, the term of the note is 18 months.
e) This is false. Accruing interest on a note receivable is an asset source, not use, transaction that increases assets (interest receivable) and increases equity by increasing interest revenue.
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable (Promissory Notes)
Learning Objective: 05-04 Show how accounting for notes receivable and accrued interest affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
71) The Griffin Corporation accepted a credit card for a sale of $3,000 on December 16, Year 1. The credit card company charges a fee of 4%. On January 5, Year 2, Griffin received payment from the credit card company. Indicate whether each of the following statements is true or false.
_____ a) Griffin should record $2,880 revenue in Year 1 when the sale is made.
_____ b) Griffin should record a credit card receivable account receivable of $3,000 on December 16, Year 1.
_____ c) The sale has no impact on the statement of cash flows in Year 1.
_____ d) The collection of cash increases total assets in Year 2.
_____ e) The entry on December 16, Year 1, increases total revenues and total expenses on the Year 1 income statement.
Answer: a) This is false. Revenue for the full amount of the sale, $3,000, is recorded when the sale is made.
b) This is false. The credit card receivable is equal to the net amount that Griffin will receive from the credit card company ($3,000 – 4%), $2,880
c) This is true. The cash flow is reported in Year 2 when cash is received from the credit card company.
d) This is false. The collection of cash has no net effect on assets because cash is increased and accounts receivable – credit cards is decreased by the same amount.
e) This is true. $3,000 of revenue and $120 of expense will be reported on December 16, Year 1.
Difficulty: 2 Medium
Topic: Accounting for Credit Card Sales
Learning Objective: 05-05 Show how accounting for credit card sales affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
72) Indicate whether each of the following statements is true or false.
_____ a) A benefit of making credit card sales is that there is no cost to the merchant.
_____ b) A benefit of accepting credit cards is that increased sales may be generated.
_____ c) Recording a credit card sale increases total assets and increases total liabilities.
_____ d) Recording the collection of cash from the credit card company increases cash and increases revenue.
_____ e) The income statement is not affected at the time the cash receipt is recorded.
Answer: a) This is false. Credit card companies withhold a fee on credit card sales.
b) This is true. Merchants who accept credit cards typically sell more than merchants who do not.
c) This is false. Recording a credit card sale increases accounts receivable – credit cards (an asset), and increases equity (revenue for the full amount, less credit card expense).
d) This is false. Revenue is recorded when the sale is made, not when the cash is collected from the credit card company. Collecting the cash increases cash and decreases accounts receivable – credit cards.
e) This is true. See “d” above.
Difficulty: 1 Easy
Topic: Accounting for Credit Card Sales
Learning Objective: 05-05 Show how accounting for credit card sales affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
73) On June 1, Delaware Co. had one unit in beginning inventory that cost $10.00. During June, Delaware paid cash to purchase two additional inventory items. Delaware purchased the first item for cash at a cost of $10.00, and the second at a cost of $12.00. Delaware Co. sold two inventory items for $24.00 each, receiving cash. Based on this information alone, indicate whether each of the following items is true or false.
_____ a) The amount of ending inventory will be $10 assuming the LIFO cost flow was used.
_____ b) Cost of goods sold would be $24 assuming the weighted average cost flow was used.
_____ c) Cash flow from operating activities in June would be $28 assuming a FIFO cost flow was used.
_____ d) Cash flow from operating activities in June would be $26 independent of what cost flow assumption was used.
_____ e) The amount of gross margin would be $26 assuming the FIFO cost flow was used.
Answer: a) This is true. LIFO will report the cost of the oldest unit of inventory (beginning inventory) as its ending inventory.
b) This is false. Weighted average cost per unit = ($10 + $10 + $12) ÷ 3 = $10.67 per unit; Cost of goods sold = 2 units × $10.67 = $21.34
c) This is false. Cash flow from operating activities = $24 inflow + $24 inflow – $10 outflow – $12 outflow = $26 inflow
d) This is true. Cash flow from operating activities = $24 inflow + $24 inflow – $10 outflow – $12 outflow = $26 inflow. This is unaffected by the cost flow assumption used.
e) This is false. $48 sales – ($10 + $10) cost of goods sold = $28 gross margin
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
74) Indicate whether each of the following statements is true or false.
_____ a) The FIFO cost flow method assumes that the company physically rotates inventory so that the oldest inventory is sold first.
_____ b) In a period of rising prices, FIFO gives higher cost of goods sold than LIFO.
_____ c) Under the weighted average cost flow method, the cost per unit of ending inventory is equal to the cost per unit of inventory sold.
_____ d) In a period of declining prices, LIFO will result in higher income tax expense than FIFO.
_____ e) In a period of rising prices, FIFO gives higher ending inventory than LIFO does.
Answer: a)This is false. Although FIFO mimics the physical flow of most inventory, cost flow assumptions are not tied to physical flow.
b) This is false. In a period of rising prices the cost of the most recent purchases is higher than the cost of older inventory, so LIFO will produce a higher cost of goods sold than FIFO.
c) This is true. Weighted average cost per unit is the same for all units of inventory, whether the inventory has been sold during the period or remains in inventory.
d) This is true. In a period of declining prices the cost of the most recent purchases is lower than the cost of older inventory, so LIFO will produce a lower cost of goods sold than FIFO, resulting in a higher net income and a higher income tax expense.
e) This is true. In a period of rising prices, the cost of the most recent purchases (which remain in inventory using FIFO)is higher than the cost of older inventory.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
75) Indicate whether each of the following statements is true or false.
_____ a) To compute cost of goods sold under the weighted average method, it is necessary to first compute the weighted-average cost per unit.
_____ b) The weighted average cost per unit is computed by dividing the total cost of goods purchased by the number of units sold.
_____ c) Under the FIFO method, each time units are sold the unit cost of the oldest inventory is applied to the number of units sold.
_____ d) Under a perpetual inventory system, it is not possible to use the LIFO method of cost flow.
_____ e) A U.S. company can use LIFO for income tax purposes only if it also uses LIFO for financial reporting purposes.
Answer: a) This is true. The first step in applying the weighted average method is computing the weighted average cost per unit.
b) This is false. Weighted average cost per unit is calculate by dividing cost of goods available for sale by units available for sale.
c) This is true. Under the FIFO method, each time units are sold the unit cost of the oldest inventory is applied to the number of units sold.
d) This is false. LIFO is possible under perpetual inventory, although it does require a more sophisticated accounting system.
e) This is true. The U.S. Internal Revenue Service only permits LIFO for tax reporting if it is also used for financial reporting.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
76) The net realizable value of accounts receivable is the amount of receivables a company expects to collect.
Answer: TRUE
Explanation: Net realizable value is calculated as accounts receivable minus allowance for doubtful accounts.
Difficulty: 1 Easy
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
77) The best estimate for the amount of cash a company expects to collect from its accounts receivable is the face value of the receivables.
Answer: FALSE
Explanation: The best estimate for the amount of cash a company expects to collect is the net realizable value of its accounts receivable.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
78) Most companies report receivables on their balance sheets at the net realizable value.
Answer: TRUE
Explanation: Net realizable value is required by GAAP unless uncollectible accounts are immaterial.
Difficulty: 1 Easy
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
79) The face value of Accounts Receivable plus the balance in the Allowance for Doubtful Accounts is equal to the net realizable value of the receivables.
Answer: FALSE
Explanation: Accounts receivable – allowance for doubtful accounts = net realizable value
Difficulty: 1 Easy
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
80) The collection of an account receivable is an asset source transaction.
Answer: FALSE
Explanation: Collection of an account receivable is an asset exchange transaction.
Difficulty: 1 Easy
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
81) Using the allowance method of accounting for uncollectible receivables requires an estimate of the amount of receivables that will not be collected.
Answer: TRUE
Explanation: The estimate is made at the end of each accounting period.
Difficulty: 1 Easy
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
82) The percent of revenue method for estimating uncollectible accounts expense is considered superior to the percent of receivables method because it is more conservative.
Answer: FALSE
Explanation: The percent of receivables method is considered to be superior to the percent of revenue method because it is based on aging of receivables.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Receivables Method
Learning Objective: 05-02 Use the percent of receivables method to estimate the uncollectible accounts expense.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
83) Willis Company had $200,000 in credit sales for Year 1, and it estimated that 2% of the credit sales would not be collected. The balance in Accounts Receivable at the end of the year was $38,000. Willis had never used the allowance method to account for its receivables till Year 1. The net realizable value of its accounts receivable at the end of the year was $34,000.
Answer: TRUE
Explanation: $200,000 × 2% = $4,000 uncollectible accounts expense (increase to allowance for doubtful accounts); $38,000 accounts receivable – $4,000 allowance for doubtful accounts = $34,000 net realizable value
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
84) The net realizable value of accounts receivable decreases when an account receivable is written off.
Answer: FALSE
Explanation: Net realizable value is unaffected by a write-off because both accounts receivable and allowance for doubtful accounts decrease equally.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
85) For a company that uses the allowance method, the write-off of an uncollectible account receivable is an asset use transaction.
Answer: FALSE
Explanation: The write-off is an asset exchange transaction that decreases assets (accounts receivable) and increases assets (decreases allowance for doubtful accounts).
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
86) When an uncollectible account receivable is written off, the amount of total assets is unchanged.
Answer: TRUE
Explanation: The write-off is an asset exchange transaction that decreases assets (accounts receivable) and increases assets (decreases allowance for doubtful accounts).
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
87) When a company receives payment from a customer whose account was previously written off, the customer’s account should be reinstated.
Answer: TRUE
Explanation: Reinstatement is necessary so that the receivable exists to match the payment to.
Difficulty: 1 Easy
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
88) When a customer’s account, previously written off as uncollectible, is reinstated, the net realizable value of Accounts Receivable increases.
Answer: FALSE
Explanation: Reinstating an account does not affect net realizable value because accounts receivable and allowance for doubtful accounts increase equally.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Resource Management
89) The adjusting entry to recognize uncollectible accounts expense is an asset use transaction.
Answer: TRUE
Explanation: Recognizing uncollectible accounts expense is an asset use transaction that increases the contra-asset allowance for doubtful accounts.
Difficulty: 3 Hard
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
90) The adjusting entry to recognize uncollectible accounts expense does not affect the net realizable value of receivables.
Answer: FALSE
Explanation: Recognizing uncollectible accounts expense decreases net realizable value because it increases allowance for doubtful accounts.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method
Learning Objective: 05-01 Use the percent of revenue method to account for uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
91) If a company estimates uncollectible accounts based on a percentage of receivables, the resulting estimate will be presented on the balance sheet as the ending balance in Allowance for Doubtful Accounts.
Answer: TRUE
Explanation: Percent of accounts receivable yields the estimated ending balance in allowance for doubtful accounts, and uncollectible accounts expense is the amount necessary to adjust the allowance to the estimated balance.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Receivables Method
Learning Objective: 05-02 Use the percent of receivables method to estimate the uncollectible accounts expense.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
92) The longer an account receivable has been outstanding, the less likely it is to be collected.
Answer: TRUE
Explanation: This concept is the basis of aging receivables. The older receivables are assigned greater percentages of estimated uncollectibles.
Difficulty: 1 Easy
Topic: Aging Accounts Receivable
Learning Objective: 05-03 Use aging of accounts receivable to estimate the uncollectible accounts expense.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Risk Analysis
93) If a company uses the percent of receivables method to estimate uncollectible accounts, the company will first determine the required ending balance in Allowance for Doubtful Accounts, and Uncollectible Accounts Expense will be the difference between that amount and the current balance in the allowance.
Answer: TRUE
Explanation: This is the correct procedure for using percent of receivables to estimate uncollectible accounts.
Difficulty: 2 Medium
Topic: Estimating Uncollectible Accounts Expense Using the Percent of Receivables Method
Learning Objective: 05-02 Use the percent of receivables method to estimate the uncollectible accounts expense.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
94) The year-end adjusting entry to accrue interest on a note receivable is an asset source transaction.
Answer: TRUE
Explanation: The entry increases assets (interest receivable) and increases equity (interest revenue).
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable (Promissory Notes)
Learning Objective: 05-04 Show how accounting for notes receivable and accrued interest affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
95) On June 1, Year 2, Carolina Company collected a $24,000 note receivable that had been issued on June 1, Year 1. The note carried a 6% interest rate. The interest revenue recognized on the maturity date is $1,440.
Answer: FALSE
Explanation: Carolina will only recognize five months of interest revenue on June 1, Year 2. The other seven months of interest were recognized (accrued) in Year 1, $24,000 × 6% × 7/12 = $840.
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable (Promissory Notes)
Learning Objective: 05-04 Show how accounting for notes receivable and accrued interest affects financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
96) Making a loan to another party is considered an investing activity on the statement of cash flows.
Answer: TRUE
Explanation: Loaning cash is an investing activity.
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable (Promissory Notes)
Learning Objective: 05-04 Show how accounting for notes receivable and accrued interest affects financial statements.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
97) Accepting credit cards is usually more costly to a business than offering credit directly to customers.
Answer: FALSE
Explanation: Accepting credit cards is usually less costly than offering credit directly because the credit card company assumes the risk of uncollectible accounts, and the company receives cash from the credit card company very soon after the transaction rather than having to wait for payment from the customer.
Difficulty: 1 Easy
Topic: Accounting for Credit Card Sales
Learning Objective: 05-05 Show how accounting for credit card sales affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Decision Making
98) When a company accepts a credit card payment for a sale, the amount of sales revenue to be recorded is reduced by the amount of the credit card company’s fee.
Answer: FALSE
Explanation: Revenue is recorded for the full amount of the sale, and the fee is recorded as a separate expense.
Difficulty: 2 Medium
Topic: Accounting for Credit Card Sales
Learning Objective: 05-05 Show how accounting for credit card sales affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
99) Collection of a credit card receivable is an asset source transaction.
Answer: FALSE
Explanation: Collection of a credit card receivable is an asset exchange transaction that increases cash and decreases the credit card receivable.
Difficulty: 2 Medium
Topic: Accounting for Credit Card Sales
Learning Objective: 05-05 Show how accounting for credit card sales affects financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
100) One of the disadvantages of the specific identification inventory cost flow method is that it can allow managers of a business to manipulate the amount of income the business reports.
Answer: TRUE
Explanation: Managers can choose which costs to assign to cost of goods sold if specific identification is used.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Understand
AACSB: Ethics
AICPA: BB Critical Thinking; FN Risk Analysis
101) The specific identification inventory method is not practical for companies that sell many low-priced, high turnover items.
Answer: TRUE
Explanation: It is not cost effective for companies to track the specific costs of low-priced items.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
102) The last-in, first-out cost flow method assigns the cost of the items purchased first to ending inventory.
Answer: TRUE
Explanation: LIFO assigns the cost of the items purchased last to cost of goods sold, so the cost of the goods purchased first is assigned to ending inventory.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
103) Generally accepted accounting principles do not allow the cost flow pattern for merchandise inventory to differ from the physical flow of merchandise within the business.
Answer: FALSE
Explanation: Companies do not need to select a cost flow method that matches the physical flow of goods.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
104) In most businesses, the physical flow of goods occurs on a FIFO basis, but a different cost flow method is allowed under generally accepted accounting principles.
Answer: TRUE
Explanation: Most companies rotate their inventory so as to sell the oldest inventory first. However, the company is free to choose other cost flow methods.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
105) A company’s gross margin reported on the income statement is not affected by the inventory cost flow method it uses.
Answer: FALSE
Explanation: The selection of cost flow method impacts cost of goods sold, which impacts gross margin.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
106) During a period of rising prices the LIFO cost flow method will result in higher total assets than FIFO.
Answer: FALSE
Explanation: FIFO will report lower cost of goods sold (older, lower prices), and higher ending inventory (newer, higher prices).
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Resource Management
107) During a period of rising prices, a company’s cost of goods sold would be higher using the LIFO cost flow method than with FIFO.
Answer: TRUE
Explanation: During a period of rising prices, cost of goods sold will include the higher, most recent prices when LIFO is used.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
108) During a period of declining prices, a company would report a lower gross margin using the FIFO cost flow method than with LIFO.
Answer: TRUE
Explanation: During a period of declining prices, cost of goods sold will include the lower, most recent prices when LIFO is used, resulting in higher gross margin.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
109) A company uses a cost flow method (such as LIFO or FIFO) to allocate product costs between cost of goods sold and beginning inventory.
Answer: FALSE
Explanation: The selection of cost flow method allocates product costs between cost of goods sold and ending, not beginning, inventory.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
110) During a period of rising prices, the amount of ending inventory reported on the balance sheet will be lower using the LIFO cost flow method than with FIFO.
Answer: TRUE
Explanation: During a period of rising prices, ending inventory will include the lower, older prices when using LIFO.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
111) Generally accepted accounting principles would allow a company to use FIFO for part of its inventory and the weighted-average cost flow assumption for the rest of its inventory.
Answer: TRUE
Explanation: GAAP allows companies to use different cost flow methods for different parts of its inventory.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
112) In a period of rising prices, use of the FIFO cost flow method would cause a company to pay more income taxes than would use of LIFO.
Answer: TRUE
Explanation: In a period of rising prices, FIFO will produce the lowest cost of goods sold, resulting in the highest net income and the highest income tax expense.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking; BB Resource Management
113) If a company uses the FIFO cost flow method for its income tax return it must also use FIFO for financial reporting.
Answer: FALSE
Explanation: The requirement to match cost flow for income tax reporting and financial reporting applies only to the LIFO cost flow assumption.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
114) Generally accepted accounting principles restrict or limit a company’s freedom to change accounting methods from one year to the next.
Answer: TRUE
Explanation: Changes in cost flow assumption must be justified by reasons other than earnings management.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
115) Singleton Company’s perpetual inventory records included the following information:
| Date | Number of units and unit cost | Total cost | ||||||||
| January 1 | Beginning inventory | 200 | units | @ | $ | 7.00 | $ | 1,400 | ||
| March 4 | Purchase | 150 | units | @ | $ | 8.00 | 1,200 | |||
| September 28 | Purchase | 350 | units | @ | $ | 9.00 | 3,150 | |||
| Number of units sold during the year: 520 | ||||||||||
If Singleton uses the LIFO cost flow method, its ending inventory would be $1,260.
Answer: TRUE
Explanation: 200 + 150 + 350 = 700 units available for sale – 520 units sold = 180 units in ending inventory; 180 units × $7.00 = $1,260 ending inventory
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
116) Singleton Company’s perpetual inventory records included the following information:
| Date | Number of units and unit cost | Total cost | ||||||||
| January 1 | Beginning inventory | 200 | units | @ | $ | 7.00 | $ | 1,400 | ||
| March 4 | Purchase | 150 | units | @ | $ | 8.00 | 1,200 | |||
| September 28 | Purchase | 350 | units | @ | $ | 9.00 | 3,150 | |||
| Number of units sold during the year: 520 | ||||||||||
If Singleton uses the FIFO cost flow method, its cost of goods sold would be $4,490.
Answer: FALSE
Explanation: (200 units × $7.00) + (150 × $8.00) + (170 × $9.00) = $4,130 cost of goods sold
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
117) Singleton Company’s perpetual inventory records included the following information:
| Date | Number of units and unit cost | Total cost | ||||||||
| January 1 | Beginning inventory | 200 | units | @ | $ | 7.00 | $ | 1,400 | ||
| March 4 | Purchase | 150 | units | @ | $ | 8.00 | 1,200 | |||
| September 28 | Purchase | 350 | units | @ | $ | 9.00 | 3,150 | |||
| Number of units sold during the year: 520 | ||||||||||
If Singleton uses the weighted-average cost flow method, its weighted-average cost per unit would be $8.00.
Answer: FALSE
Explanation: [(200 × $7.00) + (150 × $8.00) + (350 × $9.00)] ÷ 700 units = $8.21 per unit
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
118) Warner Company purchased two units of a product for $36 and later purchased one more for $40. If the company uses the weighted average cost flow method, and it sold one unit of the product for $60, its gross margin would be $22.00.
Answer: FALSE
Explanation: [(2 × $36) + (1 × $40)] ÷ 3 units = $37.33 per unit; $60 sales – $37.33 cost of goods sold = $22.66 gross margin
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
119) The Internal Revenue Service allows a company to use LIFO for income tax purposes only if it also uses LIFO for financial reporting.
Answer: TRUE
Explanation: This is an IRS requirement in order to use the LIFO cost flow assumption.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
120) International Financial Reporting Standards (IFRS) do not permit the use of the LIFO cost flow assumption.
Answer: TRUE
Explanation: This is a difference between IFRS and U.S. GAAP.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-06 Show how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.
Bloom’s: Remember
AACSB: Reflective Thinking; Diversity
AICPA: FN Measurement; BB Global
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