Name: Using Financial Accounting Information The Alternative to Debits and Credits 10e Gary A Porter Curtis L Norton - Test Bank
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Complete Test Bank With Answers

Sample Questions Posted Below

Chapter 5

True / False

1. The three forms of inventory for a manufacturer are direct materials, direct labor, and finished goods.

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 210-211

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

2. The three distinct types of costs to a manufacturer are direct materials, direct labor, and manufacturing overhead.

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 210-211

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

3. When inventory is sold by a wholesaler or retailer, it is recorded in a different account on the income statement than a

manufacturer would use.

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 210-211

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

4. Finished goods for a manufacturer are the equivalent of merchandise inventory for a retailer or wholesaler in that both

represent the inventory of goods held for sale.

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 210-211

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

5. The distinction between inventory and an operating asset is the intent of the owner.

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 210-211

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

6. Sales revenue is an inflow of assets.

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

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

on account.

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

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

the date of the invoice.

a. True

b. False

ANSWER: True

DIFFICULTY: Moderate

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

or gross profit.

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

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

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

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

to correct the error.

a. True

b. False

ANSWER: False

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

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

a. True

b. False

ANSWER: False

DIFFICULTY: Moderate

REFERENCES: pp. 231-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

a. True

b. False

ANSWER: False

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

15. With the periodic inventory system, the Inventory account is updated after each sale or purchase of merchandise.

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

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

goods sold.

a. True

b. False

ANSWER: True

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

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

revenue.

a. True

b. False

ANSWER: False

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

18. A company using the periodic inventory system must total the selling prices of the units on hand at the end of the

period to value the ending inventory.

a. True

b. False

ANSWER: False

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

19. Purchases is the temporary account used in a perpetual inventory system to record acquisitions of merchandise.

a. True

b. False

ANSWER: False

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

20. Purchase discounts decrease the total cost of merchandise acquired.

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

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

a. True

b. False

ANSWER: True

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

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

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

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

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

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

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 218-220

LEARNING OBJECTIVES: FACC.PONO.18.05-04 – LO: 05-04

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

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

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 218-220

LEARNING OBJECTIVES: FACC.PONO.18.05-04 – LO: 05-04

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

26. It important that the proper amount be assigned to inventory because the amount assigned to inventory will affect the

amount eventually recorded as net sales.

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: p. 222

LEARNING OBJECTIVES: FACC.PONO.18.05-05 – LO: 05-05

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

27. The value assigned to an asset such as inventory on the balance sheet determines the amount eventually recognized as

an expense on the income statement.

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: p. 222

LEARNING OBJECTIVES: FACC.PONO.18.05-05 – LO: 05-05

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

28. Assets are unexpired costs, and expenses are expired costs.

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: p. 222

LEARNING OBJECTIVES: FACC.PONO.18.05-05 – LO: 05-05

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

29. One problem with the weighted average cost method is that it allows management to manipulate income.

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

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

number of purchases.

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

31. Under FIFO, the units in the ending inventory represent the oldest purchase of the period.

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

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

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

33. Under LIFO, the units in the ending inventory represent the most recent purchase of the period.

a. True

b. False

ANSWER: False

DIFFICULTY: Moderate

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

34. Changing inventory methods to take advantage of the tax breaks offered by LIFO is not a valid justification for a

change in methods.

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

a. True

b. False

ANSWER: False

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

36. According to the IRS’s LIFO conformity rule, a company that chooses LIFO to report net income to its stockholders

may not use LIFO in preparing its tax return.

a. True

b. False

ANSWER: False

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

a LIFO basis for the current year.

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

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

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

39. The primary determinant in selecting an inventory costing method should be the ability of the method to accurately

reflect the cost of goods sold of the period.

a. True

b. False

ANSWER: False

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

LIFO on its tax return.

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

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

on the income statement.

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

43. The effect of a misstatement of the year-end inventory is limited to the net income for that year.

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

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

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

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

a. True

b. False

ANSWER: True

DIFFICULTY: Moderate

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

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

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 235-237

LEARNING OBJECTIVES: FACC.PONO.18.05-09 – LO: 05-09

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

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

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 235-237

LEARNING OBJECTIVES: FACC.PONO.18.05-09 – LO: 05-09

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

48. Both U.S. GAAP and international financial reporting standards (IFRS) require the use of the lower-of-cost-or-market

rule to value inventories.

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 235-237

LEARNING OBJECTIVES: FACC.PONO.18.05-09 – LO: 05-09

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

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

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 237-239

LEARNING OBJECTIVES: FACC.PONO.18.05-10 – LO: 05-10

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

50. If a company has a number of days’ sales in inventory equal to 60, that means that it takes about two months on

average to sell its inventory.

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 237-239

LEARNING OBJECTIVES: FACC.PONO.18.05-10 – LO: 05-10

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

51. The lower the inventory turnover ratio, the less time inventory resides in storage.

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 227-239

LEARNING OBJECTIVES: FACC.PONO.18.05-10 – LO: 05-10

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

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

a. True

b. False

ANSWER: True

DIFFICULTY: Easy

REFERENCES: pp. 237-239

LEARNING OBJECTIVES: FACC.PONO.18.05-10 – LO: 05-10

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

53. If the direct method is used to prepare the Operating Activities category of the statement of cash flows, the amount of

cash paid to suppliers of inventory is shown as an addition in this section of the statement.

a. True

b. False

ANSWER: False

DIFFICULTY: Moderate

REFERENCES: pp. 240-241

LEARNING OBJECTIVES: FACC.PONO.18.05-11 – LO: 05-11

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

54. Under the indirect method of preparing the statement of cash flows, an increase in accounts payable is added to net

income to determine cash flow from operating activities.

a. True

b. False

ANSWER: True

DIFFICULTY: Moderate

REFERENCES: pp. 240-241

LEARNING OBJECTIVES: FACC.PONO.18.05-11 – LO: 05-11

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

55. Under the indirect method of preparing the statement of cash flows, a decrease in inventory is added to net income to

determine cash flow from operating activities.

a. True

b. False

ANSWER: True

DIFFICULTY: Moderate

REFERENCES: pp. 240-241

LEARNING OBJECTIVES: FACC.PONO.18.05-11 – LO: 05-11

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

56. If a change in accounts payable was added back to net income on the statement of cash flows prepared using the

indirect method, then the amount owed to suppliers during the period had decreased.

a. True

b. False

ANSWER: False

DIFFICULTY: Moderate

REFERENCES: pp. 240-241

LEARNING OBJECTIVES: FACC.PONO.18.05-11 – LO: 05-11

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

a. True

b. False

ANSWER: False

DIFFICULTY: Easy

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

58. Whether LIFO costing is applied at the time each sale is made or only at the end of the period, both the periodic and

perpetual systems will yield the same ending inventory under LIFO.

a. True

b. False

ANSWER: False

DIFFICULTY: Moderate

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

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

perpetual system is used.

a. True

b. False

ANSWER: True

DIFFICULTY: Moderate

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

Multiple Choice

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

a. Raw Materials Inventory

b. Work-in-Process

Inventory

c. Finished Goods Inventory

d. Merchandise Inventory

ANSWER: d

DIFFICULTY: Easy

REFERENCES: pp. 210-211

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

61. Which one of the following best explains the distinction between inventory and an operating asset?

a. ownership

b. intent

c. cost

d. purchase price

ANSWER: b

DIFFICULTY: Easy

REFERENCES: pp. 210-211

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

62. Which of the following accounts would not be found as an asset on the balance sheet of a manufacturer?

a. Raw Materials Inventory

b. Work in Process Inventory

c. Finished Goods Inventory

d. Merchandise Inventory

ANSWER: d

DIFFICULTY: Easy

REFERENCES: pp. 210-211

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

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

a. Raw Materials Inventory.

b. Work in Process Inventory.

c. Finished Goods Inventory.

d. Merchandise Inventory.

ANSWER: c

DIFFICULTY: Easy

REFERENCES: pp. 210-211

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

64. Which of the following statements regarding inventory is true?

a. Wholesalers and retailers incur a single type of cost, the purchase price, of the inventory they sell.

b. It is not unusual for inventories to account for half the total assets of a manufacturer.

c. Wholesalers and retailers buy merchandise and transform the product before offering it to resale to

customers.

d. The inventory of a manufacturer takes three distinct forms—direct materials, direct labor, and finished goods.

ANSWER: a

DIFFICULTY: Moderate

REFERENCES: pp. 210-211

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

65. For what reason might retailers like Target select an accounting period that ends on or near the end of January?

a. The company originally started business operations on that date so it is required to use the date as fiscal year-

end.

b. Business activity is in a slow period that is suited to the preparation of its financial statements at the end of the

year.

c. The company’s CPAs are attempting to spread out the workload.

d. The Internal Revenue Service requires merchandise companies to select such a date for their fiscal year.

ANSWER: b

DIFFICULTY: Easy

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Applying

66. Which one of the following would appear on the income statement of a merchandising company, but not on the

income statement of a service company?

a. Cost of goods sold

b. Selling and administrative

expenses

c. Net sales

d. Income tax expense

ANSWER: a

DIFFICULTY: Moderate

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

67. Which one of the following is a common analytical tool used by merchandising companies, but not by service

companies?

a. Gross profit ratio

b. Earnings per share

c. Current ratio

d. Working capital

ANSWER: a

DIFFICULTY: Easy

REFERENCES: pp. 211-213 and pp. 218-220

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

FACC.PONO.18.05-04 – LO: 05-04

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

68. A customer returned damaged goods and was given an allowance. Which of the seller’s accounts decreases?

a. Purchase Returns

b. Accounts Receivable

c. Sales Returns

d. Sales Revenue

ANSWER: b

DIFFICULTY: Moderate

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

69. Travelli Co. sold merchandise to Trapani Co. on account, $17,000, terms 2/15, net 45. The cost of the merchandise

sold is $15,400. Travelli Co. issued an allowance for $1,750 for merchandise returned that originally cost $1,400. Trapani

Co. paid the invoice within the discount period. What is amount of net sales from the above transactions?

a. $17,000

b. $15,250

c. $14,945

d. None of these choices

ANSWER: c

RATIONALE: ($17,000 – $1,750) × 0.98 (or 100% – 2%) = $14,945

DIFFICULTY: Moderate

REFERENCES: pp. 211-213 and pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

70. A company using the periodic inventory system has the following account balances: Merchandise Inventory at the

beginning of the year, $3,600; Transportation-In, $650; Purchases, $10,700; Purchase Returns and Allowances, $1,950;

Purchase Discounts, $330. The cost of goods purchased is equal to

a. $12,670.

b. $9,070.

c. $8,420.

d. $17,230.

ANSWER: b

RATIONALE: $10,700 (Purchases) – $1,950 (Purchases Returns and Allowances) – $330 (Purchase

Discounts) + $650 (Transportation-In) = $9,070

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

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

Purchases $32,000

Merchandise inventory, September 1 5,700

Merchandise inventory, September 30 6,370

Purchase returns and allowances 1,200

Purchase discounts 960

Transportation-in 1,040

Sales 63,000

Sales returns and allowances 910

a. $26,900

b. $20,530

c. $28,130

d. $30,210

ANSWER: d

RATIONALE: $5,700 (Merchandise inventory, September 1) + $32,000 (Purchases) – $1,200 (Purchase

returns and allowances) – $960 (Purchase discounts) + $1,040 (Transportation-in) –

$6,370 (Merchandise inventory, September 30) = $30,210

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

72. Which of the following statements regarding cost of goods available for sale is true?

a. Cost of goods available for sale is an expense account.

b. Cost of goods available for sale is added to beginning inventory to determine cost of purchases during the

period.

c. Cost of goods available for sale is subtracted from net sales to arrive at the gross margin.

d. Cost of goods available for sale is a “pool” of costs to be distributed between what was sold and what was not

sold during a period.

ANSWER: d

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

73. Ending inventory is equal to the cost of merchandise on hand plus

a. merchandise in transit sold to customers FOB shipping point.

b. merchandise in transit sold to customers FOB destination point.

c. the cost of all inventory purchased during the period.

d. merchandise purchased in transit with terms FOB destination point.

ANSWER: b

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

Takenson Corp.

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

below:

Sales $500,000

Purchases 225,000

Inventory (beginning) 16,000

Inventory (ending) 30,000

Operating expenses 148,000

Income tax expense 10,000

Retained earnings (beginning) 53,000

Dividends 15,000

74. Refer to the information for Takenson Corp.

Calculate the cost of goods sold

a. $275,000

b. $259,000

c. $241,000

d. $211,000

ANSWER: d

RATIONALE: $16,000 (Beginning inventory) + $225,000 (Purchases) – $30,000 (Ending inventory) =

$211,000

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

75. Refer to the information for Takenson Corp.

Calculate the gross profit.

a. $241,000

b. $275,000

c. $289,000

d. $425,000

ANSWER: c

RATIONALE: DIFFICULTY: Moderate

REFERENCES: pp. 211-213 and pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

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

76. Refer to the information for Takenson Corp.

Calculate net income.

a. $289,000

b. $141,000

c. $131,000

d. $116,000

ANSWER: c

RATIONALE: $289,000 (Gross profit) – $148,000 (Operating expenses) – $10,000 (Income tax

expense) = $131,000

DIFFICULTY: Challenging

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

George’s Department Store

George’s Department Store is a merchandising company that uses the periodic inventory system. Selected account

balances are listed below:

Sales $200,000

Purchases 90,000

Inventory (beginning) 23,000

Inventory (ending) 17,000

Purchase returns and allowances 3,000

Purchase discounts 7,000

Transportation-in 4,000

Sales discounts 8,000

Sales returns and allowances 5,000

77. Refer to the account information for George’s Department Store.

Calculate net sales.

a. $187,000

b. $192,000

c. $195,000

d. $200,000

ANSWER: a

RATIONALE: $200,000 (Sales) – $8,000 (Sales discounts) – $5,000 (Sales returns and allowances) =

$187,000

DIFFICULTY: Easy

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

78. Refer to the account information for George’s Department Store.

Calculate cost of goods purchased.

a. $ 84,000

b. $ 90,000

c. $ 103,000

d. $ 117,000

ANSWER: a

RATIONALE: $90,000 (Purchases) + $4,000 (Transportation-in) – $3,000 (Purchase returns and

allowances) – $7,000 (Purchase discounts) = $84,000

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

79. Refer to the account information for George’s Department Store.

Determine gross profit.

a. $93,000

b. $97,000

c. $103,000

d. None of these choices

ANSWER: b

RATIONALE: Net sales = Cost of goods sold =

$200,000 (Sales) – $8,000 (Sales discounts) – $5,000 (Sales

returns and allowances) = $187,000

$23,000 (Beginning inventory) + [$90,000 (Purchases) +

$4,000 (Transportation-in) – $3,000 (Purchase returns and

allowances) – $7,000 (Purchase discounts)] – $17,000

(Ending inventory) = $90,000

$187,000 – $90,000 = $97,000

Gross profit = DIFFICULTY: Challenging

REFERENCES: pp. 211-213 and pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

80. Anthony’s Shoe Company uses a perpetual inventory system. The beginning balance in its Inventory account is

$1,500, and the ending balance is $1,000. Cost of goods sold is $6,500. What was the amount of inventory purchased

during the year?

a. $500

b. $6,000

c. $7,000

d. $7,500

ANSWER: b

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

= $6,000

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

81. What net effect is there on a retail store’s accounting equation when merchandise sold for a profit is returned by

customers?

a. Assets and stockholders’ equity decrease.

b. Assets and stockholders’ equity increase.

c. Assets decrease and liabilities increase.

d. Stockholders’ equity decreases and liabilities

increase.

ANSWER: a

DIFFICULTY: Challenging

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

82. Vern Corp. sold merchandise to a customer on credit. The invoice amount was $2,000; the invoice date was June 10;

credit terms were 1/20, n/30. Which one of the following statements is true?

a. The customer can take a $20 discount if the invoice is paid on July

10.

b. The customer should pay $2,000 if the invoice is paid on July 9.

c. The customer must pay a $20 penalty if payment is made after July 9.

d. The customer must pay $2,020 if payment is made after June 20.

ANSWER: b

DIFFICULTY: Moderate

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

83. Grinn, Inc. offers terms of 2/10, n/30 to credit customers. Great Buy Corp. purchased 100 tile cutters with a list price

of $20 each on March 5, 2017, on account. If Great Buy Corp. pays the amount of the invoice for its purchase on March

14, 2017, how much cash will Grinn receive from Great Buy Corp.?

a. $1,764

b. $1,800

c. $1,960

d. $2,000

ANSWER: c

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

DIFFICULTY: Moderate

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

84. Floors, Inc. offers terms of 2/10, n/30 to credit customers. Tile Magic Corp. purchased 100 tile cutters with a list price

of $20 each on August 5, 2017, on account. Tile Magic Corp. paid the invoice on August 31, 2017. How much sales

discount will Floors recognize?

a. $0

b. $40

c. $200

d. $236

ANSWER: a

DIFFICULTY: Moderate

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

85. Blenham, Inc. sells merchandise on credit. If a customer pays its balance due within the discount period, what is the

effect of the payment on Blenham’s accounting equation?

a. Assets and stockholders’ equity decrease.

b. Assets and stockholders’ equity increase.

c. Assets decrease and liabilities increase.

d. Stockholders’ equity decreases and liabilities

increase.

ANSWER: a

DIFFICULTY: Challenging

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

86. Blenham, Inc. sells merchandise on credit. If a customer pays its balance due after the discount period has passed,

what is the effect of the payment on Blenham’s accounting equation?

a. Assets and stockholders’ equity

decrease.

b. Assets and stockholders’ equity increase.

c. Assets decrease and liabilities increase.

d. There is no net effect.

ANSWER: d

DIFFICULTY: Moderate

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

87. When an inventory system updates the Inventory account after each sale or purchase of merchandise, this is known as

a(n)

a. periodic system.

b. inventory costing

system.

c. perpetual system.

d. accrual system.

ANSWER: c

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

88. Cost of goods sold is equal to the

a. total amount of merchandise purchased during the year.

b. cost of goods purchased plus transportation-in costs less ending inventory.

c. cost of goods purchased plus transportation-in costs plus beginning inventory minus purchase returns and

allowances and purchase discounts minus ending inventory.

d. cost of goods purchased plus transportation-in costs plus beginning inventory minus purchase returns and

allowances and purchase discounts.

ANSWER: c

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

89. The recognition of cost of goods sold as an expense in the same period that sales revenue is recognized from the sale

of merchandise is a good example of the

a. matching principle.

b. full disclosure principle.

c. revenue realization

principle.

d. historical cost principle.

ANSWER: a

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

90. Goldman Inc.

The following is from Goldman Inc.’s 2017 income statement.

Purchases $172,000

Transportation-in 11,000

Inventory, January 1, 2017 26,500

Inventory, December 31, 2017 28,800

Purchase returns and allowances 8,400

How much will Goldman report as cost of goods purchased in its 2017 income statement?

a. $174,600

b. $183,000

c. $180,400

d. None of these choices

ANSWER: a

RATIONALE: $172,000 (Purchases) – $8,400 (Purchase returns and allowances) + $11,000

(Transportation-in) = $174,600

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

91. The following is from Goldman Inc.’s 2017 income statement.

Purchases $172,000

Transportation-In 11,000

Inventory, January 1, 2017 26,500

Inventory, December 31, 2017 28,800

Purchase Returns and Allowances 8,400

How much will Goldman report as its cost of goods sold in its 2016 income statement?

a. $161,500

b. $172,300

c. $161,300

d. None of these choices

ANSWER: b

RATIONALE: $172,000 (Purchases) – $8,400 (Purchase returns and allowances) + $11,000

(Transportation-in) + $26,500 (Inventory, January 1, 2017) – $28,800 (Inventory,

December 31, 2016) = $172,300

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

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

a. an integral part of the calculation of cost of goods

sold.

b. the only part of the calculation of cost of goods sold.

c. an increase in the Inventory account.

d. an increase in an asset account.

ANSWER: a

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

93. Cost of goods sold is

a. purchases less beginning inventory plus ending inventory.

b. reported on the balance sheet in the Inventory account.

c. the cost of goods available for sale less ending inventory.

d. equal to the amount of inventory on hand at the end of the accounting

period.

ANSWER: c

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

94. Which one of the following statements is not true?

a. The Inventory account is updated after every sale or purchase of merchandise under the perpetual inventory

system.

b. The Inventory account is updated only at the end of the accounting period under the periodic inventory system.

c. The Cost of Goods Sold account is updated after each sale of merchandise under the periodic inventory

system.

d. The Purchases account is used only under the periodic inventory system.

ANSWER: c

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

95. Chamberlain Company buys designer clothing to sell in its retail stores. Since much of the merchandise comes from

Dallas and Europe, Chamberlain Company must pay freight charges to get the merchandise shipped in. Which of the

following statements is true?

a. Transportation-in, paid by Chamberlain Company, is added to the inventory account under the periodic

system.

b. Transportation-in, paid by Chamberlain Company, is subtracted from purchases under the periodic system.

c. Freight charges are only paid by a buyer in a periodic system.

d. Transportation-in is added to net purchases to determine cost of goods purchased in a periodic system.

ANSWER: d

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Applying

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

accounting period for

a. the periodic inventory system.

b. the perpetual inventory system.

c. both the periodic and perpetual inventory systems.

d. neither the periodic nor perpetual inventory

systems.

ANSWER: c

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

97. Which of the following statements is true?

a. Inventory losses can be identified and controlled better under the perpetual system.

b. Inventory can only be sold at the end of an accounting period under the periodic system.

c. There is no difference in cost to implement a perpetual as compared to a periodic

system.

d. The perpetual system eliminates the need for an annual inventory count.

ANSWER: a

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

98. Texas Inc. sold merchandise to Fagin Corp. on December 28, 2017, with shipping terms of FOB destination point.

Fagin Corp. received the merchandise on January 3, 2018. Which of the following statements is true?

a. Texas should record sales revenue on December 28, 2017.

b. Fagin Corp. should pay the transportation costs.

c. Fagin Corp. should include the merchandise in its inventory at December 31,

2017.

d. Fagin Corp. should record a liability for the purchase on January 3, 2018.

ANSWER: d

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Applying

99. Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2017. The goods were shipped the same

day. The merchandise’s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB

shipping point. Park received the merchandise on June 10, 2017. Park paid the amount due on June 13, 2017.

Park uses the periodic inventory system. What effect does recording the purchase of merchandise on June 5, 2017 have on

Park’s accounting equation?

a. Assets and liabilities increase.

b. Liabilities increase and stockholders’ equity

decreases.

c. Assets and stockholders’ equity increase.

d. Liabilities and stockholders’ equity decrease.

ANSWER: b

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

100. Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2017. The goods were shipped the same

day. The merchandise’s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB

shipping point. Park received the merchandise on June 10, 2017. Park paid the amount due on June 13, 2017.

If Park uses the periodic inventory system, the effect of recording the payment on June 13, 2017, will include a(n)

a. decrease to Purchases for $15,000.

b. increase to Inventory for $14,850.

c. decrease to Cash for $15,000.

d. decrease to Accounts Payable for $15,000.

ANSWER: d

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

101. Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2017. The goods were shipped the same

day. The merchandise’s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB

shipping point. Park received the merchandise on June 10, 2017. Park paid the amount due on June 13, 2017.

When did title to the merchandise transfer from Jay Zee Music Company to Park?

a. June 5, 2017

b. June 10, 2017

c. June 13, 2017

d. Cannot be determined from the information

provided

ANSWER: a

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

102. Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2017. The goods were shipped the same

day. The merchandise’s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB

shipping point. Park received the merchandise on June 10, 2017. Park paid the amount due on June 13, 2017.

Who is responsible for payment of the transportation costs on the merchandise sold by Jay Zee Music to Park?

a. Jay Zee Music Company

b. Park, Inc.

c. Split equally between the two companies

d. Cannot be determined from the information

provided

ANSWER: b

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

103. Herndon Corp. purchased merchandise on account from Likert Corp. on November 18, 2017. On November 21,

2017, Herndon returned damaged merchandise to Likert and was granted an adjustment on its account. Herndon uses the

periodic inventory system. What effect does the merchandise return have on Herndon’s accounting equation?

a. Assets and stockholders’ equity decrease.

b. Assets and liabilities decrease.

c. Liabilities decrease and stockholders’ equity

increases.

d. Liabilities and stockholders’ equity decrease.

ANSWER: c

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

104. Transportation-in is

a. an operating expense.

b. recorded as a purchases expense in a periodic inventory system.

c. added to transportation-out as part of the calculation of cost of goods

sold.

d. part of cost of goods purchased.

ANSWER: d

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

105. Sherman, Inc. counted its ending inventory as $178,000 at year-end, January 31, 2017. Upon review of the records, it

was noted that the following items were in transit during the count:

A) B)

C) $2,000 of goods shipped by a supplier to Sherman sent FOB destination point on January 31 were received

February 5, and were not counted by Sherman.

$5,000 of goods shipped by a supplier to Sherman sent FOB shipping point on January 30 were received February

2, and were not counted by Sherman.

$6,000 of goods shipped by Sherman to a customer sent FOB shipping point on January 31 were received February

3, and were counted by Sherman.

Determine the correct inventory balance at January 31.

a. $178,000

b. $177,000

c. $174,000

d. $172,000

ANSWER: b

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

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

106. At the year-end inventory count, if goods in transit are shipped FOB destination point, they should be included in the

inventory count of

a. the seller.

b. the buyer.

c. neither the buyer nor the

seller.

d. both the buyer and the seller.

ANSWER: a

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

inventory count of

a. the seller.

b. the buyer.

c. both the seller and the buyer.

d. neither the seller nor the

buyer.

ANSWER: b

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

108. Dimension Lighting Corp. has the following data at its fiscal year-end:

Net Sales $27,250

Cost of Goods Sold 19,600

Gross Profit $ 7,650

Determine Dimension Lighting’s gross profit ration.

a. 28.1%

b. 39.0%

c. 71.9%

d. None of these choices

ANSWER: a

DIFFICULTY: Easy

REFERENCES: pp. 218-220

LEARNING OBJECTIVES: FACC.PONO.18.05-04 – LO: 05-04

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

109. In order to evaluate a company’s gross profit ratio, the ratio should be compared with

a. forecasted financial statements.

b. those of prior years.

c. other companies in the same industry.

d. those of both prior years and

competitors.

ANSWER: d

DIFFICULTY: Easy

REFERENCES: pp. 218-220

LEARNING OBJECTIVES: FACC.PONO.18.05-04 – LO: 05-04

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

110. Which of the following statements is not true regarding the gross profit ratio?

a. The gross profit ratio is calculated by dividing net sales by gross profit.

b. The gross profit ratio is a measure of profitability.

c. The gross profit ratio can help investors decide whether or not to buy a company’s stock.

d. The gross profit ratio should be compared with both a company’s prior years’ ratios and

competitors’.

ANSWER: a

DIFFICULTY: Easy

REFERENCES: pp. 218-220

LEARNING OBJECTIVES: FACC.PONO.18.05-04 – LO: 05-04

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

111. Which of the following statements regarding the gross profit ratio is not true?

a. The gross profit ratio alone is sufficient to determine a company’s profitability.

b. Managers, investors, and creditors use the gross profit ratio to measure one aspect of profitability.

c. The gross profit ratio explains how many cents on every dollar are available to cover operating

expenses and earn a profit.

d. If a company’s net sales were $200,000 and cost of goods sold were $120,000, its gross profit ratio would be

40%.

ANSWER: a

DIFFICULTY: Easy

REFERENCES: pp. 218-220

LEARNING OBJECTIVES: FACC.PONO.18.05-04 – LO: 05-04

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

112. The ending inventory balance represents

a. expired costs and is reported on the balance sheet as an asset.

b. the cost of goods sold during the current period and is reported on the balance sheet as an

asset.

c. expired costs and is reported on the income statement as an expense.

d. unexpired costs and is reported on the balance sheet as an asset.

ANSWER: d

DIFFICULTY: Easy

REFERENCES: p. 222

LEARNING OBJECTIVES: FACC.PONO.18.05-05 – LO: 05-05

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

113. Cost of goods sold represents

a. expired costs during a period and is reported on the income statement.

b. unexpired costs and is reported on the balance sheet as an asset.

c. the cost of goods that will be purchased during the next operating cycle and is reported on the balance sheet as

an asset.

d. expired costs and is reported on the balance sheet as an expense.

ANSWER: a

DIFFICULTY: Easy

REFERENCES: p. 222

LEARNING OBJECTIVES: FACC.PONO.18.05-05 – LO: 05-05

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

114. Which of the following would not be included in inventory costs?

a. Freight costs incurred by the buyer in shipping inventory to its place of

business

b. The cost of insurance taken out during the time that inventory is in transit

c. The cost of sales tax paid when purchasing the inventory

d. Shelving to hold the inventory

ANSWER: d

DIFFICULTY: Easy

REFERENCES: p. 222

LEARNING OBJECTIVES: FACC.PONO.18.05-05 – LO: 05-05

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

115. The Ramien Store held inventory items at the end of 2017. Which items should Ramien include as part of its total

inventory cost?

a. Freight incurred in shipping goods to customers

b. Annual income taxes paid for operations

c. Excise taxes and sales taxes paid to purchase the

inventory

d. Cost of salaries of clerks that sell the inventory items

ANSWER: c

DIFFICULTY: Moderate

REFERENCES: p. 222

LEARNING OBJECTIVES: FACC.PONO.18.05-05 – LO: 05-05

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

116. Which of the following statements is true?

a. The flow of inventory costs should match the physical flow of the merchandise.

b. Accounting standards require that merchandise costs be specifically traced to units left in inventory and to

units that have been sold.

c. Accountants have developed methods which make assumptions concerning how costs should be assigned to

inventory and cost of goods sold.

d. Alternative inventory cost-flow assumptions have the same effect on the amount of net income reported.

ANSWER: c

DIFFICULTY: Moderate

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

a. Specific identification

b. Weighted average cost

c. LIFO

d. FIFO

ANSWER: d

DIFFICULTY: Easy

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

118. Which inventory costing method assigns the cost of the most recent items purchased to cost of goods sold?

a. Specific identification

b. Weighted average cost

c. FIFO

d. LIFO

ANSWER: d

DIFFICULTY: Easy

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

a. Specific identification

b. Weighted average cost

c. FIFO

d. LIFO

ANSWER: b

DIFFICULTY: Easy

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

a. Barbie dolls

b. Cartons of milk

c. Custom-designed diamond rings

d. Gasoline in storage tanks at a gasoline station

ANSWER: c

DIFFICULTY: Easy

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Applying

1,736.50

1,140.00

$3,626.50

Chapter 5

121. Roki Inc. uses the periodic inventory system and has the following data for the month of June:

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

If the June 30 inventory included 45 units from the June 5 purchase and 45 units from the June 14 purchase, Roki’s cost of

goods sold for June under the specific identification method would be

a. $2,263.00.

b. $2.373.00.

c. $2,945.00.

d. $3,626.50.

ANSWER: a

RATIONALE: (50 × $15.00 – On hand June 1) + (70 × $15.10 – June 5 purchase) + (30 × $15.20 – June

14 purchase) = $2,263.00

DIFFICULTY: Moderate

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

122. Roki Inc. uses the periodic inventory system and has the following data for the month of June:

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

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

a. $1,354.00.

b. $1,366.50.

c. $1,590.42.

d. $1,594.00.

ANSWER: b

RATIONALE: (75 × $15.20 – June 14 purchase) + (15 × $15.10 – June 5 purchase) = $1,366.50

DIFFICULTY: Moderate

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

1,736.50

1,140.00

$3,626.50

Page 50Chapter 5

123. Roki Inc. uses the periodic inventory system and has the following data for the month of June:

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

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

a. $1,359.90.

b. $1,486.50.

c. $1,549.00.

d. $1,591.50.

ANSWER: a

RATIONALE: $3,626.50/240 = $15.11; $15.11 × 90 = $1,359.90

DIFFICULTY: Moderate

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

124. Roki Inc. uses the periodic inventory system and has the following data for the month of June:

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

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

a. $1,354.00.

b. $2,200.00.

c. $2,272.50.

d. $2,296.08.

ANSWER: c

RATIONALE: (75 × $15.20) + (75 × $15.10) = $2,272.50

DIFFICULTY: Moderate

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

1,736.50

1,140.00

$3,626.50

$ 750.00

1,736.50

1,140.00

$3,626.50

Page 51Chapter 5

125. Roki Inc. uses the periodic inventory system and has the following data for the month of June:

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

How many units did Roki Inc. sell during June?

a. 50

b. 90

c. 100

d. 150

ANSWER: d

RATIONALE: 50 + 115 + 75 – 90 = 150

DIFFICULTY: Easy

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

126. Quan uses a periodic inventory system. The company had the following data for the month of April:

April 1 On hand, 10 units @ $2 each 19 Purchased 90 units @ $3 each Cost of goods available for sale 30 On hand, 20 units

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

a. $230

b. $232

c. $240

d. $250

ANSWER: a

RATIONALE: (10 × $2) + (70 × $3) = $230

DIFFICULTY: Moderate

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

1,736.50

1,140.00

$3,626.50

$ 20

270

$290

Page 53Chapter 5

127. Quan uses a periodic inventory system. The company had the following data for the month of April:

April 1 On hand, 10 units @ $2 each 19 Purchased 90 units @ $3 each Cost of goods available for sale 30 On hand, 20 units

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

a. $230

b. $232

c. $240

d. $250

ANSWER: b

RATIONALE: $290/100 = $2.90; $2.90 × 80 = $232

DIFFICULTY: Moderate

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

128. Quan uses a periodic inventory system. The company had the following data for the month of April:

April 1 On hand, 10 units @ $2 each 19 Purchased 90 units @ $3 each Cost of goods available for sale 30 On hand, 20 units

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

a. $40

b. $50

c. $58

d. $60

ANSWER: b

RATIONALE: (10 × $2) + (10

$3) = $50

DIFFICULTY: Moderate

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

$ 20

270

$290

$ 20

270

$290

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

a. cost flows correspond with the physical flow of

merchandise.

b. it is relatively easy to apply.

c. it matches current costs with revenues.

d. recent costs are assigned to the ending inventory balance.

ANSWER: b

DIFFICULTY: Easy

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

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

a. Specific

Identification

b. FIFO

c. LIFO

d. Replacement Cost

ANSWER: d

DIFFICULTY: Easy

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

a. Weighted average cost

b. LIFO

c. FIFO

d. Both FIFO and LIFO result in the same inventory

balance

ANSWER: c

DIFFICULTY: Easy

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

132. Which inventory costing method might allow a company to make significant inventory purchases at year-end for the

purpose of manipulating income?

a. FIFO

b. LIFO

c. Specific identification

d. Weighted average cost

ANSWER: b

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

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

a. FIFO

b. LIFO

c. Specific identification

d. Weighted average cost

ANSWER: a

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

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

a. Any method in which the company uses a periodic inventory system

b. FIFO

c. LIFO

d. Weighted average cost

ANSWER: b

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

135. Xu Corp. started business at the beginning of 2017. Xu selected the FIFO method for its inventory. In order to

maximize its profits for 2017under this method, prices must be

a. increasing.

b. decreasing.

c. stable.

d. fluctuating up and down at the same amount consistently over the

year.

ANSWER: a

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

136. Federal income tax rules allow businesses to use different inventory costing methods for tax reporting and financial

reporting with one exception. Which of the following situations is not allowed by federal income tax rules?

Inventory Method Inventory Method

for Tax Reporting for Financial Reporting

a. LIFO LIFO

b. LIFO FIFO

c. Weighted average FIFO

d. FIFO LIFO

ANSWER: b

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

137. Summer, Inc. has been in business for 20 years. During that time, the company has consistently used the LIFO

inventory costing method. Because of inflation, prices for merchandise have increased consistently over the 20 years. The

company has maintained the same inventory quantities over the 20-year period. Which of the following statements is true?

a. Summer’s total net income for the past 20 years is greater than it would have reported using another inventory

method.

b. Summer will have paid more income taxes over the past 20 years than it would have if it had used the FIFO

method.

c. Summer will have to continue using the LIFO method indefinitely because of generally accepted accounting

principles and federal income tax rules.

d. The ending inventory figure reported on the balance sheet may be significantly lower than its current value.

ANSWER: d

DIFFICULTY: Challenging

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

a. A change in inventory methods can be justified if the change is made to better match profits with revenue.

b. Changing inventory methods affects consistency.

c. One place that the reader of an annual report would be able to identify that a company changed inventory

methods is the statement of stockholders’ equity.

d. Tax advantages are valid justification for changing inventory methods.

ANSWER: b

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

139. If cost of goods sold under FIFO was $8,000 and was $10,000 under LIFO, assuming a tax rate of 40%, how much

tax savings resulted from using LIFO?

a. There would be no tax savings.

b. $ 800

c. $ 1,200

d. $ 2,000

ANSWER: b

RATIONALE: ($10,000 – $8,000) = $2,000 × 40% = $800

DIFFICULTY: Easy

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

140. Which of the following statements is not true?

a. Differences in cash flows between LIFO and FIFO inventory methods are a direct result of the differences in

the purchases.

b. Differences in cash flows between LIFO and FIFO inventory methods are caused by differences in taxes.

c. The amount of cash to acquire inventory is the same for companies that use LIFO as for those companies that

use FIFO.

d. The primary determinant in selecting an inventory costing method should be the ability of the method to

accurately reflect the net income of the period.

ANSWER: a

DIFFICULTY: Challenging

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

141. LIFO liquidation

a. occurs as a result of selling more units than are purchased during the period.

b. occurs as a result of selling less units than are purchased during the period.

c. occurs as a result of selling the same number of units that are purchased during the

period.

d. often results in favorable tax consequences if a company is using LIFO.

ANSWER: a

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

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

a. If older, less costly layers are liquidated, a correspondingly lower cost of goods sold will result.

b. If older, less costly layers are liquidated, a correspondingly higher gross profit will result.

c. If older, less costly layers are liquidated, the company may be faced with higher taxes for those deferred in

previous periods.

d. All of these could result.

ANSWER: d

DIFFICULTY: Challenging

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

143. Zebra Company overstated its December 31, 2017, inventory by $5,200. Which of the following statement is true

concerning Zebra’s financial statement amounts for 2017?

a. Retained earnings are

understated.

b. Gross profit is overstated.

c. Cost of goods sold is overstated.

d. Net income is understated.

ANSWER: b

DIFFICULTY: Moderate

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

144. Which f the following statements is true if the amount assigned to ending inventory is incorrect?

a. The balance sheet is affected, but the income statement is not.

b. The income statement is affected, but the balance sheet is not.

c. Neither the balance sheet nor the income statement are affected.

d. Both the balance sheet and the income statement are affected.

ANSWER: d

DIFFICULTY: Easy

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

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

cause an

a. overstatement of inventory on the year-end balance

sheet.

b. understatement of gross profit in the following year.

c. overstatement of retained earnings at the end of the year.

d. overstatement of cost of goods sold for the current year.

ANSWER: d

DIFFICULTY: Moderate

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

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

a. correct only if Hawk Store calculates it cost of goods sold correctly.

b. correct since operating expenses are not affected by inventory

costs.

c. overstated.

d. understated.

ANSWER: b

DIFFICULTY: Moderate

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Applying

147. If Stevens Co. overstates its ending inventory for the current year, what are the effects on cost of goods sold and net

income for the current year?

Effect on Cost of Goods Sold Effect on Net Income

a. Understated Overstated

b. Overstated No effect

c. Understated Understated

d. Overstated Overstated

ANSWER: a

DIFFICULTY: Moderate

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

148. If Taylor Corp. understates its ending inventory balance for 2017 by $15,500 and it is not corrected, what are the

effects on its net income for 2018 and 2017?

Effect on 2018 Net Income a. Overstated by $15,500 $15,500

b. Understated by $15,500 c. Understated by $15,500 d. Overstated by $15,500 ANSWER: a

DIFFICULTY: Moderate

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

Effect on 2017 Net Income

Understated by

Overstated by $15,500

No effect

Overstated by $10,000

Understated by $5,000

Understated by$5,000

Chapter 5

149. If Diamond, Inc. overstates its ending inventory balance for 2018 by $10,000 and understates its ending inventory

balance for 2017 by $5,000 what are the effects on its net income for 2018 and 2017 if either error is corrected?

Effect on 2018 Net Income Effect on 2017 Net Income

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

DIFFICULTY: Moderate

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

150. If a company overstates its ending inventory balance for 2018 by $10,000 and overstates its ending inventory balance

for 2017 by $5,000, what are the effects on its net income for 2018 and 2017 if neither error is corrected?

Effect on 2018 Net Income a. Overstated by $15,000 Effect on 2017 Net Income

Overstated by

$10,000

b. Understated by $5,000 Overstated by

$10,000

c. Overstated by $5,000 d. Overstated by $10,000 Overstated by $5,000

Overstated by $5,000

ANSWER: c

DIFFICULTY: Moderate

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

151. When the market value of inventory items has declined below its cost, which method would be the most appropriate

in complying with GAAP?

a. Gross profit

b. LIFO

c. Lower of cost or

market

d. Retail

ANSWER: c

DIFFICULTY: Easy

REFERENCES: pp. 235-237

LEARNING OBJECTIVES: FACC.PONO.18.05-09 – LO: 05-09

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

152. When inventories are written down due to the application of the lower-of-cost-or-market (LCM) rule, the account

that is usually increased is

a. Cost of Goods Sold.

b. Inventories.

c. Loss on Decline in Value of Inventory.

d. Accumulated Depreciation—Inventory.

ANSWER: c

DIFFICULTY: Moderate

REFERENCES: pp. 235-237

LEARNING OBJECTIVES: FACC.PONO.18.05-09 – LO: 05-09

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

153. Which of the following statements regarding the application of the lower-of-cost-or-market (LCM) rule is true?

a. Generally, market value is greater than replacement cost.

b. When the LCM rule is used, inventories are valued at selling price.

c. The LCM rule is most commonly applied on a total inventory basis because it is a more conservative

approach.

d. The LCM rule is an exception to the historical cost principle.

ANSWER: d

DIFFICULTY: Moderate

REFERENCES: pp. 235-237

LEARNING OBJECTIVES: FACC.PONO.18.05-09 – LO: 05-09

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

154. Which of the following statements is not true?

a. Both U.S. GAAP and international financial reporting standards (IFRS) require the use of the lower-of-cost-

or-market rule to value inventories.

b. U.S. GAAP defines market value as replacement cost.

c. IFRS uses net realizable value with no upper or lower limits imposed.

d. Write-downs of inventory can be reversed in later periods under U.S. GAAP.

ANSWER: d

DIFFICULTY: Moderate

REFERENCES: pp. 235-237

LEARNING OBJECTIVES: FACC.PONO.18.05-09 – LO: 05-09

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

155. Which of the following is not an acceptable inventory costing method under IFRS?

a. FIFO

b. LIFO

c. Specific

identification

d. Average cost

ANSWER: b

DIFFICULTY: Easy

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

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

Sorenta, Inc . New World Corp.

Sales $50,000 $80,000

Cost of goods sold 30,000 50,000

Average inventory balance 5,000 5,000

Based on this data, which of the following statements is true?

a. Sorenta, Inc. has a lower gross profit ratio than New World Corp.

b. New World Corp. has a higher net income than Sorenta, Inc.

c. New World Corp. sells its inventory faster than Sorenta, Inc.

d. Sorenta, Inc. has lower storage costs and a lower investment in inventory than New World

Corp.

ANSWER: c

RATIONALE: Sorenta, Inc.: $30,000/$5,000 = 6 times

New World Corp.: $50,000/$5,000 = 10 times

DIFFICULTY: Challenging

REFERENCES: pp. 237-239

LEARNING OBJECTIVES: FACC.PONO.18.05-10 – LO: 05-10

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

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

a. the company will report sales of

$1,200,000.

b. the gross margin will be $1,200,000.

c. the company’s average inventory is $18,750.

d. it sells its inventory 1,200 times per year.

ANSWER: c

RATIONALE: $150,000/8 = $18,750

DIFFICULTY: Moderate

REFERENCES: pp. 237-239

LEARNING OBJECTIVES: FACC.PONO.18.05-10 – LO: 05-10

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

158. A company began the year with $150,000 in inventory and ended the year with $170,000 in inventory. Cost of goods

sold for the year amounted to $960,000. Assuming 360 days in a year, how long, on average, does it take the company to

sell its inventory (to the nearest day)?

a. 6 days

b. 60 days

c. 120 days

d. 3 days

ANSWER: b

RATIONALE: $960,000/[($150,000 + $170,000)/2] = 6 times inventory turned over; 360/6 = 60 days

DIFFICULTY: Challenging

REFERENCES: pp. 237-239

LEARNING OBJECTIVES: FACC.PONO.18.05-10 – LO: 05-10

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

159. The following information is reported in the Operating Activities category of Gateway’s statement of cash flows for

2017:

Net income $1,200,000

Increase in inventories 600,000

Decrease in accounts payable related to inventories 400,000

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

a. Gateway used the direct method to determine cash flows from operating activities.

b. Gateway purchased more merchandise than it sold in 2017.

c. Cash payments for merchandise purchases were less than the amount of merchandise purchased on credit

during 2017.

d. Cash payments for merchandise exceeded cost of goods sold by $200,000.

ANSWER: b

DIFFICULTY: Moderate

REFERENCES: pp. 240-241

LEARNING OBJECTIVES: FACC.PONO.18.05-11 – LO: 05-11

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

160. The following information was taken from the Operating Activities category of the 2017 statement of cash flows for

Limited Corp.:

Additions to net income: Change in accounts payable Deductions from net income: Change in inventories Based on the information provided, which of the following conclusions is correct?

a. Accounts payable decreased by $2,000 in 2017.

b. Inventories increased by $8,000 in 2017.

c. The direct method was used to prepare the Operating Activities of the statement of cash

flows.

d. Cash payments of merchandise exceeded cost of goods sold by $2,000.

ANSWER: b

DIFFICULTY: Moderate

REFERENCES: pp. 240-241

LEARNING OBJECTIVES: FACC.PONO.18.05-11 – LO: 05-11

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

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

a. an operating activity.

b. an investing activity.

c. a financing activity.

d. either an operating activity or a financing

activity.

ANSWER: a

DIFFICULTY: Moderate

REFERENCES: pp. 240-241

LEARNING OBJECTIVES: FACC.PONO.18.05-11 – LO: 05-11

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Understanding

$2,000

8,000

162. Which of the following statements is true when using the indirect method of preparing the Operating Activities

category of the statement of cash flows?

a. Inventory decreases are subtracted from net

income.

b. Inventory increases are subtracted from net income.

c. Inventory increases are added to net income.

d. None of these statements are true.

ANSWER: b

DIFFICULTY: Moderate

REFERENCES: pp. 240-241

LEARNING OBJECTIVES: FACC.PONO.18.05-11 – LO: 05-11

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Understanding

163. Readers.com uses a perpetual inventory system and has the following data for the month of February:

Feb. 1 On hand, 30 units @ $5.00 each 8 Purchased 40 units @ $5.35 each 15 Sold 50 units

22 Purchased 40 units @ $5.20 each 28 On hand, 60 units

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

a. $245

b. $255

c. $260

d. $270

ANSWER: c

RATIONALE: [[(30

$5.00) + (40

$5.35)]/(30 + 40)] × 50 = $260

DIFFICULTY: Moderate

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

$150

214

208

164. Readers.com uses a perpetual inventory system and has the following data for the month of February:

Feb. 1 On hand, 30 units @ $5.00 each 8 Purchased 40 units @ $5.35 each 15 Sold 50 units

22 Purchased 40 units @ $5.20 each 28 On hand, 60 units

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

a. $300

b. $306

c. $312

d. $318

ANSWER: c

RATIONALE: $150

214

208

Feb 15: [(30 × $5.00) + (40 × $5.35)/(30 + 40)] × 50] = $260, or $5.20 per unit

Feb 28: [(20 × $5.20) + (40 × $5.20)/(20 + 40)] × 60 = $312

DIFFICULTY: Moderate

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

165. Adam Inc. uses a perpetual inventory system and has the following data for January:

Jan. 1 On hand, 10 units @ $2 each 4 Sold 8 units @ $10 each 22 Purchased 50 units @ $4 each 26 Sold 48 units @ $10 each If Adam uses the FIFO method, how much is cost of goods sold for the month of January?

a. $204

b. $208

c. $212

d. $560

ANSWER: a

RATIONALE: (10 × $2) + (46 × $4) = $204

DIFFICULTY: Moderate

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

$ 20

200

480

166. Adam Inc. uses a perpetual inventory system and has the following data for January:

Jan. 1 On hand, 10 units @ $2 each 4 Sold 8 units @ $10 each 22 Purchased 50 units @ $4 each 26 Sold 48 units @ $10 each If Adam uses the LIFO method, how much is cost of goods sold for the month of January?

a. $204

b. $208

c. $212

d. $560

ANSWER: b

RATIONALE: (8 × $2) + (48 × $4) = $208

DIFFICULTY: Moderate

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

167. Adam Inc. uses a perpetual inventory system and has the following data for January:

Jan. 1 On hand, 10 units @ $2 each 4 Sold 8 units @ $10 each 22 Purchased 50 units @ $4 each 26 Sold 48 units @ $10 each If Adam uses the FIFO method, how much is ending inventory on January 31?

a. $8

b. $12

c. $16

d. $40

ANSWER: c

RATIONALE: 4 × $4 = $16

DIFFICULTY: Moderate

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

$ 20

200

480

$ 20

200

480

Completion

168. The inventory of a(n) __________ consists of three distinct types of costs: direct materials, direct labor, and

manufacturing overhead.

ANSWER: manufacturer

DIFFICULTY: Easy

REFERENCES: pp. 210-211

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

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

ANSWER: purchase discount

DIFFICULTY: Easy

REFERENCES: pp. 210-211

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

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

ANSWER: ending inventory

DIFFICULTY: Moderate

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

171. Under the __________ inventory system, the Inventory account is updated after each purchase or sale.

ANSWER: perpetual

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

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

ANSWER: freight-in

transportation-in

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

173. Shipping terms of __________ mean that the buyer pays shipping costs.

ANSWER: FOB shipping point

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

174. An error in assigning the proper amount to inventory on the balance sheet will affect the amount recognized as

__________ on the income statement

ANSWER: cost of goods sold

expense

DIFFICULTY: Moderate

REFERENCES: p. 222

LEARNING OBJECTIVES: FACC.PONO.18.05-05 – LO: 05-05

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

175. When a company using LIFO experiences a partial or complete liquidation of its older, lower-priced inventory, its

gross margin will be __________ (higher, lower, or unchanged) for the period.

ANSWER: higher

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

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

ANSWER: FIFO

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

177. The excess of the value of a company’s inventory stated at FIFO over the value stated at LIFO is called the

__________.

ANSWER: LIFO reserve

DIFFICULTY: Easy

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

178. The __________ method results in the best approximation of cost of goods sold on the income statement.

ANSWER: LIFO

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

179. The understatement of ending inventory in one period leads to a(n) __________ of cost of goods sold expense in the

same period.

ANSWER: overstatement

DIFFICULTY: Easy

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

180. A departure from the cost basis of accounting may be necessary when the __________ of the inventory is less than

its cost to the company.

ANSWER: market value

DIFFICULTY: Moderate

REFERENCES: pp. 235-237

LEARNING OBJECTIVES: FACC.PONO.18.05-09 – LO: 05-09

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

181. Accountants define the market value of inventory as its __________.

ANSWER: replacement cost

DIFFICULTY: Moderate

REFERENCES: pp. 235-237

LEARNING OBJECTIVES: FACC.PONO.18.05-09 – LO: 05-09

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

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

ANSWER: inventory turnover ratio

DIFFICULTY: Easy

REFERENCES: pp. 237-239

LEARNING OBJECTIVES: FACC.PONO.18.05-10 – LO: 05-10

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

183. Under the __________ method, the amount of cash paid to suppliers of inventory is shown as a deduction in the

Operating Activities category of the cash flow statement.

ANSWER: direct

DIFFICULTY: Easy

REFERENCES: pp. 240-241

LEARNING OBJECTIVES: FACC.PONO.18.05-11 – LO: 05-11

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

184. Under the __________ method, an increase in inventory is shown as an adjustment to net income in the Operating

Activities category of the statement of cash flows.

ANSWER: indirect method

DIFFICULTY: Easy

REFERENCES: pp. 240-241

LEARNING OBJECTIVES: FACC.PONO.18.05-11 – LO: 05-11

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

185. When a weighted average cost assumption is applied with a perpetual system, it is sometimes called a(n)

__________.

ANSWER: moving average

DIFFICULTY: Easy

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

Matching

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

a. Merchandise Inventory

b. Raw Materials Inventory

c. Work-in-Process Inventory

d. Finished Goods Inventory

e. Cost of Goods Sold

DIFFICULTY: Moderate

REFERENCES: pp. 210-211

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

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

ANSWER: b

187. Cost of completed, but unsold items.

ANSWER: d

188. Costs to purchase goods ready to sell.

ANSWER: a

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

ANSWER: c

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

ANSWER: e

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

a. Transportation-in

b. Perpetual inventory system

c. Purchases

d. FOB destination point

e. Cost of goods available for sale

f. Periodic inventory system

g. FOB shipping point

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Remembering

191. Requires updating of the Inventory account after each purchase and sale of merchandise.

ANSWER: b

192. Shipping costs paid to acquire merchandise.

ANSWER: a

193. The seller is responsible for the cost of shipping the merchandise to the buyer.

ANSWER: d

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

ANSWER: f

195. The buyer must pay the shipping costs.

ANSWER: g

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

accounting equation.

a. Increase in assets

b. Decrease in assets

c. Increase in liabilities

d. Decrease in liabilities

e. Increase on stockholders’ equity

f. Decrease in stockholders’ equity

g. Increase in assets and increase in stockholders’ equity

h. Decrease in assets and decrease in stockholders’ equity

i. Increase in liabilities and decrease in stockholders’ equity

j. Decrease in liabilities and increase in stockholders’

equity

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

196. Sold merchandise on credit to customers.

ANSWER: g

197. Recorded cash sales for the day.

ANSWER: g

198. Gave a customer a cash refund.

ANSWER: h

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

ANSWER: h

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

a. Add to inventory cost

b. Subtract from inventory cost

c. Not an inventory cost

DIFFICULTY: Moderate

REFERENCES: p. 222

LEARNING OBJECTIVES: FACC.PONO.18.05-05 – LO: 05-05

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

200. Invoice price paid for resale goods.

ANSWER: a

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

ANSWER: a

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

ANSWER: c

203. Cost of storing the goods before they are sold to customers.

ANSWER: a

204. Excise taxes paid on goods acquired.

ANSWER: a

205. Sales taxes paid on goods acquired.

ANSWER: a

206. Income taxes paid on profits earned from selling goods to customers.

ANSWER: c

207. Cost of insurance taken out during the time acquired inventory items are in transit.

ANSWER: a

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

a. LIFO

b. FIFO

DIFFICULTY: Easy

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

208. Prices are rising; profits are higher with this method.

ANSWER: b

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

ANSWER: b

210. Prices are declining; income taxes are higher with this method.

ANSWER: a

211. Prices are declining; gross margin is higher with this method.

ANSWER: a

Subjective Short Answer

212. During the current period, Mercado Corp. sold products to customers for a total of $76,000. Due to defective

products, customers were given $2,800 in refunds for products that were returned and another $3,500 in reductions to their

account balances. Discounts in the amount of $5,500 were given for early payment of account balances.

Required

Prepare the Net Sales section of Mercado’s income statement.

ANSWER: Sales revenue $ 76,000

Sales returns and allowances (6,300)

Sales discounts (5,500)

Net sales $ 64,200

DIFFICULTY: Easy

REFERENCES: pp. 212-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

213. Based upon the following data, determine the cost of goods sold for April.

Inventory, April 1 $ 85,560

Inventory, April 30 96,330

Purchases 373,880

Purchases returns and allowances 14,760

Purchases discounts 10,900

Transportation In 4,135

ANSWER: Cost of goods sold:

Inventory, April 1 $ 85,560

Purchases $373,880

Purchases returns and allowances $14,760

Purchases discounts 10,900 (25,660)

Net purchases $348,220

Transportation-In 4,135

Cost of goods purchased 352,355

Cost of goods available for sale 437,915

Inventory, April 30 (96,330)

Cost of goods sold $341,585

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-2

Example 5-4

Example 5-5

Example 5-6

KEYWORDS: Bloom’s: Analyzing

214. Complete the following data taken from the condensed income statements for merchandising companies: Action,

Break, and Connors.

Action Break Connors

Net income $315 ? $215

Sales ? $865 560

Gross profit 430 ? 325

Operating expenses ? 125 ?

Cost of goods sold 545 320 ?

ANSWER:

Action Break Connors

Net income $315 $420 $215

Sales 975 865 560

Gross profit 430 545 325

Operating expenses 115 125 110

Cost of goods sold 545 320 235

OR rearranged in the order of the income statement:

Action Break Connors

Sales $975 $865 $560

Cost of goods sold (545) (320) (235)

Gross profit $430 $545 $325

Operating expenses Net income DIFFICULTY: Challenging

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-2

Example 5-4

KEYWORDS: Bloom’s: Analyzing

(115) (125) (110)

$315 $420 $215

215. For each of the following, calculate the cost of inventory reported on the balance sheet.

(a) The total merchandise inventory counted at the end of the year was $73,000. Purchases for

$5,000 are in transit under FOB shipping point terms.

(b) The total merchandise inventory counted at the end of the year was $75,000. Purchases for

$5,000 are in transit under FOB destination point terms.

ANSWER: (a) $78,000 = $73,000 + $5,000

(b) $75,000 (The $5,000 is not part of the inventory until it reaches the company.)

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-7

KEYWORDS: Bloom’s: Analyzing

216. Hound Dog Bisquits reported the following financial data for 2016 and 2017:

2017 2018

Sales $ 700,000 $ 600,000

Sales returns and allowances (10,000) (D)

Net sales 690,000 580,000

Cost of goods sold:

Inventory, January 1 30,000 (E)

Net purchases ( A) 340,000

Cost of goods available for sale $ 250,000 $ 380,000

Inventory, December 31 (40,000) (30,000)

Cost of goods sold ( B) (F)

Gross profit (C) (G)

Provide the answer for each missing letter above.

ANSWER:

(A) $220,000 ($250,000 – $30,000)

(B) $210,000 ($250,000 – $40,000)

(D) $20,000 ($600,000 – $580,000)

(E) $40,000 (from 2016 ending inventory)

(F) $350,000 ($380,000 – $30,000)

(G) $230,000 ($580,000 – $350,000)

DIFFICULTY: Challenging

REFERENCES: pp. 211-213 and pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-2

KEYWORDS: Bloom’s: Analyzing

217. Presented below is a partially completed income statement of Lake, Inc. for 2016.

Net sales $ A

Cost of goods sold:

Beginning inventory B

Net purchases 138,193

Cost of goods available for sale $149,315

Ending inventory C

Cost of goods sold 136,225

Gross profit $ 72,978

Selling and administrative expenses D

Operating income $ 9,083

Fill in the missing amounts for Lake’s income statement.

ANSWER: (A) $209,203 ($136,225 + $72,978)

(B) $11,122 ($149,315 – $138,193)

(D) $63,895 ($72,978 – $9,083)

DIFFICULTY: Moderate

REFERENCES: pp. 211-213 and pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-2

KEYWORDS: Bloom’s: Analyzing

218. The cost of goods sold for Johnnie, Inc. totaled $1,305,000. Sales returns and purchase returns were $3,000 and

$4,000, respectively. Purchases totaled $1,300,000. Discounts taken by Johnnie totaled $7,000, while discounts taken by

customers totaled $5,000. Beginning inventory was $90,000. Determine the amount of ending inventory to be reported on

Johnnie, Inc.’s balance sheet.

ANSWER: $74,000

$90,000 (Beginning inventory) + $1,300,000 (Purchases) – $4,000 (Purchase returns)

–

$7,000 (Purchase discounts) – $1,305,000 (Cost of goods sold) = $74,000

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-2

Example 5-4

Example 5-5

KEYWORDS: Bloom’s: Analyzing

219. Gently Used Cars is a dealer that uses the periodic inventory system. The data presented below is from the

accounting records of Gently for the year ended December 31, 2017.

Sales $585,000

Sales discounts 3,000

Purchases 420,000

Purchase returns 5,000

Inventory (January 1, 2017) 33,000

Inventory (December 31, 2017) 37,000

Operating expenses 146,000

Transportation-in 10,000

Retained earnings (January 1, 2017) 71,000

Using the amounts provided above, calculate the cost of goods sold for 2017.

ANSWER: $421,000

$33,000 (Inventory at January 1, 2017) + $420,000 (Purchases) + $10,000

(Transportation-in) – $5,000 (Purchase returns and allowances) – $37,000 (Inventory

December 31, 2017) = $421,000

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-2

Example 5-4

Example 5-5

Example 5-6

KEYWORDS: Bloom’s: Analyzing

Grappa, Inc.

Grappa, Inc. reported the following information for 2018 and 2017:

2018 2017

Sales $951,200 $890,000

Sales discounts 12,000 23,000

Purchases 580,000 600,000

Inventory, December 31 46,000 40,000

Transportation-in 18,000 19,000

Purchase discounts 4,000 5,000

220. Refer to the information for Grappa, Inc.

How much is the cost of goods purchased for 2018?

ANSWER: $594,000

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-4

Example 5-5

Example 5-6

KEYWORDS: Bloom’s: Analyzing

$580,000 (Purchases) + $18,000 (Transportation-in) – $4,000 (Purchase discounts) =

221. Refer to the information for Grappa, Inc.

What amount is cost of goods available for sale for 2018?

ANSWER: $580,000 (Purchases) + $18,000 (Transportation-in) – $4,000 (Purchase discounts) +

$40,000 (Inventory, December 31, 2017) = $634,000

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-2

Example 5-4

Example 5-5

Example 5-6

KEYWORDS: Bloom’s: Analyzing

222. Refer to the information for Grappa, Inc.

How much is cost of goods sold for 2018?

ANSWER: $580,000 (Purchases) + $18,000 (Transportation-in) – $4,000 (Purchase discounts) +

$40,000 (Inventory, December 31, 2017) – $46,000 (Inventory, December 31, 2018) =

$588,000

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-2

Example 5-4

Example 5-5

Example 5-6

KEYWORDS: Bloom’s: Analyzing

223. Refer to the information for Grappa, Inc.

(A) How much is net sales for 2018?

(B) What other components that Grappa did not report could be included in this computation?

ANSWER: (A) $951,200 (Sales) – $12,000 (Sales discounts) = $939,200

(b) Sales returns and allowances

DIFFICULTY: Easy

REFERENCES: pp. 211-213

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

224. Refer to the information for Grappa, Inc.

How much of every dollar is gross profit for 2018?

ANSWER: ($939,200 – $588,000)/$939,200 = 37.4%, or about 37½ cents per dollar

DIFFICULTY: Moderate

REFERENCES: pp. 211-213 and pp. 218-220

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

FACC.PONO.18.05-04 – LO: 05-04

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

Cooking Corner

Cooking Corner reported inventory on its balance sheet at December 31, 2016 at $32,000. During 2017, Cooking Corner

purchased goods totaling $634,000 on account with terms of 2/10, n/30, FOB shipping point. Total charges paid by

Cooking Corner directly to the freight company were $1,000. At the end of 2017, inventory on hand totaled to $45,000.

Net sales for 2017 totaled $1,300,000. Cooking Corner employs a periodic inventory system.

225. Refer to the information about Cooking Corner.

How much would Cooking Corner pay its supplier if Cooking Corner paid for one-half of the goods acquired within the

discount period, and the other half after the expiration of the discount period?

ANSWER: Payment within discount period: ($634,000 × ½) × 98% =

$310,660

Payment after discount period: ($634,000 × ½) = $317,000

Total paid = $310,660 + $317,000 = $627,660

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-1

Example 5-5

KEYWORDS: Bloom’s: Analyzing

226. Refer to the information about Cooking Corner.

How much is cost of goods available for sale for 2017 assuming Cooking Corner takes advantage of one-half of the cash

discounts?

ANSWER: $32,000 (Beginning inventory) + $627,660 (Purchases) + $1,000 (Transportation-in) =

$660,660

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-1

Example 5-2

Example 5-4

Example 5-5

Example 5-6

KEYWORDS: Bloom’s: Analyzing

227. Refer to the information about Cooking Corner.

How much is Cooking Corner’s cost of goods sold assuming that Cooking Corner takes advantage of one-half of the cash

discount?

ANSWER: $32,000 (Beginning inventory) + $627,660 (Purchases) + $1,000 (Transportation-in)

–

$45,000 (Ending inventory) = $615,660

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-2

Example 5-4

Example 5-5

Example 5-6

KEYWORDS: Bloom’s: Analyzing

Digital Forces

Selected data from the financial statements for Digital Forces is presented below.

Net sales—2017 $200,000

Cost of sales—2017 136,000

Selling and Administrative Expenses—2017 63,000

Other operating Expenses—2017 600

Income taxes—2017 3,000

Inventories—December 31, 2016 11,000

Inventories—December 31, 2017 13,000

Retained Earnings—December 31, 2017 39,000

228. Refer to the financial statement information for Digital Forces.

Determine the dollar amount of cost of goods purchased for Digital Forces for 2017.

ANSWER: $136,000 (Cost of sales—2017) + $13,000 (Inventories—December 31, 2017) –

$11,000 (Inventories—December 31, 2016) = $138,000

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-2

KEYWORDS: Bloom’s: Analyzing

229. Refer to the financial statement information for Digital Forces.

What portion of every dollar is available to cover operating expenses and to contribute to profits for 2017?

($200,000 – $136,000)/$200,000 = 32%, or 32 cents out of every dollar of sales

ANSWER: DIFFICULTY: Easy

REFERENCES: LEARNING OBJECTIVES: pp. 211-213 and pp. 218-220

FACC.PONO.18.05-02 – LO: 05-02

FACC.PONO.18.05-04 – LO: 05-04

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

234

326

165

Chapter 5

230. The following data is available for one of the products sold by Wild Optics Company, which uses the periodic

inventory system:

Dec. 1 On hand, 10 units at $8.00 each 5 Purchased 30 units at $7.80 each 18 Purchased 40 units at $8.15 each 24 Purchased 20 units at $8.25 each Available for sale during December—100 units $805

At the end of December, Wild Optics had 25 units on hand. The 75 units sold created revenue of $13 each. Determine the

amounts for the December 31 ending inventory, the cost of goods sold for December, and the gross margin for December

for each of the inventory costing methods listed below.

Ending Inventory Cost of Goods Sold Gross Profit

a. Weighted average

b. FIFO

c. LIFO

ANSWER:

Ending

Inventory

Cost of Goods

Sold Gross Profit

a. Weighted

average

($805/100) × 25

$201.25

($805/100) × 75

$603.75

(75 × $13) – $603.75 =

$371.25

b. FIFO (20 × $8.25) +

(5 × $8.15)

$205.75

(10 × $8.00) +

(30 × $7.80) +

(35 × $8.15) =

$599.25

(75 × $13 ) – $599.25

$375.75

c. LIFO (10 × $8.00) +

(15 × $7.80)

$197.00

(20 × $8.25) +

(40 × $8.15) +

(15 × $7.80) =

$608.00

(75 × $13 ) – $608.00

$367.00

DIFFICULTY: Moderate

REFERENCES: pp. 223-227

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-10

Example 5-11

Example 5-12

KEYWORDS: Bloom’s: Analyzing

231. School Time Corp. completed a physical inventory at the end of 2017. A review of the physical inventory procedures

and records uncovered several errors that are described below. In the columns provided, indicate the effect, if any, on the

four financial statement items listed. Use the following codes for your answers:

OS = Overstatement US = Understatement NE = No Effect

Balance Sheet Income Statement

Ending

Inventory

Retained

Earnings

Cost of

Goods Sold Net Income

a. One batch of

goods was

counted

twice.

b. One page of

items was

misplaced

when the

inventory was

calculated.

c. Goods sold

FOB shipping

point were

included in

School

Time’s

inventory.

d. Goods in

transit from a

supplier, FOB

shipping

point, were

not included

in inventory.

ANSWER:

Balance Sheet Income Statement

Ending

Inventory

Retained

Earnings

Cost of

Goods Sold Net Income

a. One batch of

goods was

counted

twice.

OS OS US OS

b. One page of

items was

misplaced

when the

inventory was

calculated.

US US OS US

c. Goods sold

FOB shipping

points were

included in

School

Time’s

inventory.

OS OS US OS

d. Goods in

transit from a

supplier, FOB

shipping

point, were

not included

in inventory.

US US OS US

DIFFICULTY: Challenging

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-16

Example 5-17

Example 5-18

KEYWORDS: Bloom’s: Analyzing

232. The cost of Garmin Corp.’s inventory at the end of the year was $85,000; however, due to obsolescence, the cost to

replace the inventory was only $65,000. What is the effect on the accounting equation of the adjustment needed to write

down the inventory?

ANSWER:

Balance Sheet Income Statement

Assets = Liabilities +

Stockholders’

Equity Revenues – Expenses =

Net

Income

Loss on Decline in

Value of

Inventory

20,000 (20,000)

Inventory

20,000 (20,000)

DIFFICULTY: Easy

REFERENCES: pp. 235-237

LEARNING OBJECTIVES: FACC.PONO.18.05-09 – LO: 05-09

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

233. Carrington, Inc. began the year with $130,000 in merchandise inventory and ended the year with $190,000. Sales and

cost of goods sold for the year were $900,000 and $640,000, respectively. (Use a 360-day year in your calculations.)

Required

1. Compute Carrington’s inventory turnover ratio.

2. Compute the number of days’ sales in inventory.

ANSWER: 1. Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory =

$640,000/($130,000 + $90,000)/2 = $640,000/$160,000 = 4 times

2. Number of Days’ Sales in Inventory = Number of Days in the Period/Inventory

Turnover Ratio = 360/4 = 90 days

DIFFICULTY: Moderate

REFERENCES: pp. 237-239

LEARNING OBJECTIVES: FACC.PONO.18.05-10 – LO: 05-10

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Analyzing

Learning Tree, Inc.

The following data is available for one of the products sold by Learning Tree, Inc., which uses the perpetual inventory

system:

May 1 On hand, 1,000 units @ $2.00 each 5 Purchased 2,000 units @ $2.75 each 10 Sold 2,500 units @ $16.00 each

5,500

8,000

Page 99Chapter 5

24 Sold 1,500 units @ $12.00 each

31 On hand, 1,000 units

234. Refer to the data for Learning Tree, Inc.

If the moving average method is used, what is the amount assigned to cost of goods sold for the 2,500 units sold on May

10?

ANSWER: $6,250

[($2,000 + $5,500)/3,000]

× 2,500 = $6,250

DIFFICULTY: Moderate

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-21

KEYWORDS: Bloom’s: Analyzing

235. Refer to the data for Learning Tree, Inc.

If the moving average method is used, what is the amount assigned to the ending inventory on May 30?

ANSWER: $3,700

Ending inventory on May 10: ($7,500/3,000) × (3,000 – 2,500) = $1,250 or 500 units @

$2.50 each

Ending inventory on May 30: [[(500 × $2.50) + (2,000 × $4.00)]/2,500] × 1,000 = $3,700

DIFFICULTY: Moderate

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-21

KEYWORDS: Bloom’s: Analyzing

236. Refer to the data for Learning Tree, Inc.

If the LIFO method is used, what is the amount assigned to cost of goods sold for the 2,500 units sold on May 10?

ANSWER: $6,500

(2,000 × $2.75) + (500 × $2.00) = $6,500

DIFFICULTY: Moderate

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-20

KEYWORDS: Bloom’s: Analyzing

237. Refer to the data for Learning Tree, Inc.

If the LIFO method is used, what is the amount assigned to the ending inventory on May 30?

ANSWER: $3,000

(500 × $2.00) + (500 × $4.00) = $3,000

DIFFICULTY: Moderate

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-20

KEYWORDS: Bloom’s: Analyzing

238. Refer to the data for Learning Tree, Inc.

Explain why the amounts for ending inventory are different under the two average cost methods—weighted average

(periodic) and moving average (perpetual).

ANSWER: The amounts for ending inventory and cost of goods sold are different because a new

(moving) average cost must be calculated after each purchase and assigned to cost of

goods sold for sales prior to the next purchase under the perpetual system. Under the

periodic system, a single (weighted) average cost is calculated for the entire period and

assigned to all units regardless of when they were sold.

DIFFICULTY: Moderate

REFERENCES: pp. 223-227 and pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-10

Example 5-21

KEYWORDS: Bloom’s: Applying

239. Refer to the data for Learning Tree, Inc.

Explain why the amounts are different for LIFO under periodic and perpetual inventory systems.

ANSWER: The amounts for ending inventory and cost of goods sold are different because under the

perpetual system, costs must be assigned to cost of goods sold as units are sold during the

period using the LIFO cost-flow assumption. Thus, some of the units on hand early in the

period are assigned to cost of goods sold when the perpetual system is used. Under the

periodic system, costs are assigned to units only at the end of the period. Thus, it is

assumed that the earliest units are still on hand under the periodic system.

DIFFICULTY: Moderate

REFERENCES: pp. 223-227 and pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-12

Example 5-21

KEYWORDS: Bloom’s: Applying

Share, Inc.

The following data is available for one of the products sold by Share, Inc., which uses a perpetual inventory system.

May 1 On hand, 10 units @ $2 each

8 Sold 6 units @ $10 each

14 Purchased 30 units @ $3 each

23 Sold 24 units @ $10 each

240. Refer to the data for Share, Inc.

If the moving average method is used, how much is cost of goods sold for May?

ANSWER: May 8 Sale (6 units × $2) $12.00

23 [Sale [[(4 units × $2) + (30 × $3)]/34] × 24 69.12

Total $81.12

DIFFICULTY: Moderate

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-21

KEYWORDS: Bloom’s: Analyzing

241. Refer to the data for Share, Inc.

If the moving average method is used, how much is ending inventory on May 30?

ANSWER: $28.80

($98/34 × 10) = $28.80 (possible difference due to

rounding)

DIFFICULTY: Moderate

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-22

KEYWORDS: Bloom’s: Analyzing

242. Refer to the data for Share, Inc.

Required

1. If the FIFO method is used, how much is ending inventory on May 30?

2. How does this differ from the amount calculated using a periodic system and FIFO?

ANSWER: 1. 10 × $3 = $30

2. There is no difference. The FIFO amounts are the same under both a periodic and a

perpetual assumption.

DIFFICULTY: Moderate

REFERENCES: pp. 223-227 and pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-06 – LO: 05-06

FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-11

Example 5-19

KEYWORDS: Bloom’s: Analyzing

243. Refer to the data for Share, Inc.

If the LIFO method is used, how much is cost of goods sold for May?

ANSWER: $84

(6 × $2) + (24 × $3) = $84

DIFFICULTY: Moderate

REFERENCES: pp. 242-244

LEARNING OBJECTIVES: FACC.PONO.18.05-12 – LO: 05-12

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

TOPICS: Example 5-20

KEYWORDS: Bloom’s: Analyzing

Essay

244. Describe how the inventories of manufacturers differ from the inventories of retailers.

ANSWER: Manufacturers have to produce the products they sell, whereas retailers purchase products

which are ready to sell (i.e., the retailers purchase finished goods from manufacturers).

Inventories of manufacturers, therefore, will consist of raw materials, work in process,

and finished goods.

DIFFICULTY: Easy

REFERENCES: pp. 210-211

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Applying

245. Several transactions of sales and purchase activities for Genoa Department Store are described below.

(A) (B) (C) (D) (E) (F) Genoa purchases shoes from Nike on credit.

Genoa returns defective shoes to Nike before payment is made to Nike for the shoes purchased in transaction A.

Genoa pays for the shoes purchased from Nike.

Genoa sells shoes to its customers for cash and on credit.

Credit customers return shoes to Genoa for a refund.

Credit customers pay their account balances to Genoa.

Required

ANSWER: For each transaction described of each transaction listed above on the company under a periodic inventory system.

(A) Liabilities increase and stockholders’ equity decreases (through an increase in

expenses)

(B) Liabilities decrease and stockholders’ equity increases (through a decrease in

expenses)

(D) Assets increase and stockholders’ equity (revenue) increases

(E) Assets decrease and stockholders’ equity decreases

(F) Assets increase and decrease by the same amount

DIFFICULTY: Moderate

REFERENCES: pp. 211-213 and pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-02 – LO: 05-02

FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

246. Flores Department Store currently uses the periodic inventory system.

Required

Explain what the advantages would be to Flores if it uses the perpetual inventory system. Assume that Flores can use a

computer system that is linked to its cash registers and that all products have bar codes that can be read by bar code

readers attached to the cash registers.

ANSWER: If Flores uses the perpetual system, it will have better control of its inventory. Losses due

to theft, breakage, spoilage, etc. can be identified at the end of the accounting period

when a physical inventory count is taken. Also, information will be available on

inventory balances and cost of goods sold for interim financial statements; these items

must be estimated under a periodic system. The perpetual system would also allow Flores

to determine which items sell well and to keep sufficient quantities on hand to meet

customer demands. When the perpetual inventory system is linked to the computer, the

cost of maintaining a perpetual inventory can be decreased and the efficiency of the

system can be improved. Flores will have information that is more current and will obtain

that information more quickly with the computer system.

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

247. Giant-Mart purchased a large shipment of shoes from Right Balance, Inc. on credit near the end of its accounting

period. Right Balance shipped the shoes in January, and Giant-Mart received the shoes in February. Assume that Giant-

Mart’s accounting period ends on January 31, while Right Balance’s accounting period ends on May 31.

Required

If the shoes are shipped FOB destination point, who will pay the freight costs? If the shoes are shipped FOB shipping

point, who will pay the freight costs?

ANSWER: If the shoes are shipped FOB destination point by Right Balance, Right Balance should

pay the freight charges. If the shoes are shipped FOB shipping point, Giant-Mart should

pay the freight charges.

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

248. Giant-Mart purchased a large shipment of shoes from Primus, Inc. on credit near the end of its accounting period.

Primus shipped the shoes in January and Giant-Mart received the shoes in February. Assume that Giant-Mart’s accounting

period ends on January 31, while Primus’ accounting period ends on May 31. Answer each independent question in the set

that follows.

Required

If the shoes are shipped FOB destination point, when should Giant-Mart record the purchase? If the shoes are shipped

FOB shipping point, when should Giant-Mart record the purchase?

ANSWER: If the shoes are shipped FOB destination point, Giant-Mart should not record the

purchase until the shoes are received in February; title passes when the shoes are

received. If the shoes are shipped FOB shipping point, Giant-Mart should record the

purchase when the shoes are shipped in January; title passes when the shoes are shipped.

DIFFICULTY: Moderate

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

249. Giant-Mart purchased a large shipment of shoes from Primus, Inc. on credit near the end of its accounting period.

Primus shipped the shoes in January and Giant-Mart received the shoes in February. Assume that Giant-Mart’s accounting

period ends on January 31, while Giant’s accounting period ends on May 31. Answer each independent question in the set

that follows.

Required

ANSWER: Under what shipping terms would Giant-Mart include the shoes as part of inventory on its January 31 balance sheet?

Giant-Mart will include the shoes on its January 31 balance sheet only if title to the shoes

has been passed from Right Balance to Giant-Mart. This occurs if the shoes are shipped

FOB shipping point.

DIFFICULTY: Easy

REFERENCES: pp. 213-218

LEARNING OBJECTIVES: FACC.PONO.18.05-03 – LO: 05-03

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

250. Explain the relationship between the valuation of inventory and income measurement as it relates to the balance sheet

and the income statement.

ANSWER: Cost or other values must be assigned to merchandise that makes up a company’s

inventory. As the merchandise is sold, these costs are assigned to cost of goods sold

(expense). Since expenses are deducted from revenues to determine the net income or net

loss for the period, inventory valuation affects the amount of income or loss measured.

DIFFICULTY: Moderate

REFERENCES: p. 222

LEARNING OBJECTIVES: FACC.PONO.18.05-05 – LO: 05-05

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

251. In the following information is taken from the 2017 annual reports of Focal Point Industries. (All figures have been

rounded to millions of dollars.)

Balance Sheet Data May 31, 2017 May 31, 2016

Raw materials $ 25.8 $ 52.1

Work in process 44.8 34.7

Finished goods 1,132.7 1,303.8

Inventories at FIFO 1,203.3 1,390.6

Adjustment to LIFO 5.6 21.9

Cash Flow Data (Operating Activities)

Net income $451.4 $399.9

Additions to net income:

Depreciation 198.2 100.2

Amortization 30.6 49.0

Changes in assets and liabilities:

Inventories 197.3 (58.0)

Accounts payable and other (170.4) (70.1)

Required

(1) Describe what costs are included in each of the three types of inventories listed above for Focal Point Industries.

(2) Even though the footnote describing the inventory costing method(s) used by Focal Point Industries is not provided

above, what can you conclude about the inventory costing method(s) used by the company?

ANSWER: (1) “Raw materials” consists of materials and supplies which have not yet been placed

into process to produce the company’s products. “Work in process” includes materials

and supplies, direct labor, and manufacturing overhead costs for products started but not

completed during the period. “Finished goods” includes raw materials and supplies, direct

labor, and manufacturing overhead used to produce products that were completed but not

sold during the period.

(2) Focal Point Industries must be using the LIFO inventory method for at least some, if

not all, of its inventories because the company has disclosed the amount of the

adjustment that converts its inventories at FIFO to LIFO. There is a significant difference

in the “adjustment to LIFO” in the inventories for 2017 from 2016. Review of the

footnotes would reveal that during fiscal 2017, Focal Point Industries changed its

inventory valuation method for substantially all U.S. inventories. Focal Point Industries

believes the change is immaterial to its results from operations and allows its inventory

valuation method to be in agreement with its inventories held outside the United States.

DIFFICULTY: Challenging

REFERENCES: pp. 210-211 and pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-01 – LO: 05-01

FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

252. In the following information from the 2017 annual reports of Focal Point Industries all figures have been rounded to

millions of dollars.

Balance Sheet Data May 31, 2017 May 31, 2016

Raw materials $ 25.8 $ 52.1

Work in process 44.8 34.7

Finished goods 1,132.7 1,303.8

Inventories at FIFO 1,203.3 1,390.6

Adjustment to LIFO 5.6 21.9

Cash Flow Data (Operating Activities)

Net income $451.4 $399.9

Additions to net income:

Depreciation 198.2 100.2

Amortization 30.6 49.0

Changes in assets and liabilities:

Inventories 187.3 (58.0)

Accounts payable and other (170.4) (70.1)

Required

(1) Explain what the amount “adjustment to LIFO” represents. What effects has this “adjustment” had on Focal Point

Industries’ net earnings in 2016 and 2017?

(2) What method of determining cash flows from operating activities has Focal Point Industries used in preparing its

statement of cash flows? Explain your answer.

(3) From 2016 to 2017, what change in the inventory balance (increase or decrease) occurred in each year as a result of

operating activities? What was the effect on the company’s cash flow each year as a result of the inventory change?

ANSWER: (1) The “adjustment to LIFO” of inventories is the amount by which current replacement

cost of inventories exceeds the actual cost assigned to inventory under the LIFO method.

Through the use of the LIFO method, Focal Point Industries has been able to assign

recent, higher costs to the cost of products sold and retain older, lower costs in its asset

balances for inventories. Thus, Focal Point Industries has reported lower amounts for net

income than it would if the FIFO method had been used. It also benefits from the lower

taxable income reported to the IRS. Focal Point Industries believes that this has not had a

material effect on their operating results. It has switched to a FIFO valuation method at

the end of fiscal 2017.

(2) Since Focal Point Industries has added back depreciation and amortization to net

income, as well as made adjustments for the changes in inventories and accounts payable

in the Operating Activities category of the statement of cash flows, it is using the indirect

method for the Operating Activities category.

(3) The net change in inventories is an adjustment to net income in Focal Point

Industries’ statement of cash flows for 2017 and 2016 because it uses the indirect method

of cash flows. The net change in inventories for 2017, $197.3 million, was added to net

income because the cash outflow for purchases was less than cost of goods sold; this

means that inventories decreased in 2017 from 2016. The net change in inventories for

2016, $58 million, was deducted from net income because the cash outflow for purchases

was greater than cost of goods sold; this means that inventories increased in 2017 from

2016.

DIFFICULTY: Challenging

REFERENCES: pp. 227-231 and pp. 240-241

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

FACC.PONO.18.05-11 – LO: 05-11

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

253. What is LIFO inventory liquidation? Why is it important to disclose the effects of a LIFO inventory liquidation?

ANSWER: A LIFO liquidation means that some of the inventory items included in inventory under

the LIFO method have been sold (i.e., the company sold more units of merchandise than

it purchased during the year). If the units sold in the LIFO liquidation had been carried in

inventory at older, lower prices, these lower prices will have been assigned to cost of

goods sold. Thus, income will be higher than it would have been if the company had

purchased enough units at current prices to maintain its inventory at the lower prices. If

the effects of this unexpected LIFO liquidation are material, the information may be

relevant to some of the users of the financial statements.

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

254. Ewing Inc. manufactures digital cameras and has experienced noticeable declines in the purchase price of many of

the components it uses, including memory components. Which inventory costing method should Ewing use if it wants to

maximize net income? Explain your answer.

ANSWER: For Ewing, the use of LIFO will have the effect of maximizing net income if a company

is experiencing a decline in the unit cost of inventory. LIFO charges the most recent

purchases to cost of goods sold. If prices are declining, the amounts charged to cost of

goods sold will be less than if either the weighted average method or FIFO is used.

Because less is charged to cost of goods sold, net income will be higher.

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

255. If an entity overstates its ending inventory for the current year, what are the effects on assets, cost of goods sold,

income before taxes, and retained earnings for the current year?

ANSWER: An overstatement of ending inventory for the current period results in an understatement

of cost of goods sold and an overstatement of income before taxes for the same period.

Cost of goods sold is understated because the overstated ending inventory figure is

deducted from the cost of goods available for sale to determine cost of goods sold. Thus,

a larger portion of the cost of goods available for sale is assigned to inventory and a

smaller portion is assigned to cost of goods sold than should be. The overstated inventory

figure also overstates the amount reported as an asset on the balance sheet. The

overstatement of income results in an overstatement of retained earnings when net

income is transferred to retained earnings through a closing entry.

DIFFICULTY: Moderate

REFERENCES: pp. 232-235

LEARNING OBJECTIVES: FACC.PONO.18.05-08 – LO: 05-08

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

256. Assume that a company is experiencing increasing inventory prices and prepares its financial statements in

accordance with IFRS. Which costing method should it use to pay the least amount of taxes? Explain your answer.

ANSWER: If a company prepares its financial statements in accordance with IFRS it is not allowed

to use LIFO which would result in the lowest amount of taxes as inventory costs are

increasing. Since LIFO cannot be used, the weighted average cost method will result in

the largest cost of goods sold, the lowest income, and consequently the lowest income tax

for the company.

DIFFICULTY: Moderate

REFERENCES: pp. 227-231

LEARNING OBJECTIVES: FACC.PONO.18.05-07 – LO: 05-07

FACC.PONO.18.05-09 – LO: 05-09

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

257. Bower Corp.’s cost of sales has remained steady over the last two years. During this same time period, however, its

inventory has increased considerably. What does this information tell you about the company’s inventory turnover?

Explain your answer.

ANSWER: Inventory turnover equals cost of goods sold (cost of sales) divided by average inventory.

If the cost of sales remains constant while the denominator (average inventory) increases,

inventory turnover will decrease. This indicates that inventory is staying on the shelf for a

longer time. The company should probably evaluate the salability of its inventory.

DIFFICULTY: Moderate

REFERENCES: pp. 237-239

LEARNING OBJECTIVES: FACC.PONO.18.05-10 – LO: 05-10

NATIONAL STANDARDS: United States – BUSPROG: Analytic

ACCREDITING STANDARDS: ACBSP: APC-17-Inventories Report

AICPA: FN-Measurement

KEYWORDS: Bloom’s: Applying

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