978-1337276337 Test Bank Chapter 5 Part 4

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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

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.

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.

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.

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

a. FIFO

b. LIFO

c. Specific identification

d. Average cost

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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.

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.

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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

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.

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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 $2,000

Deductions from net income: Change in inventories 8,000

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.

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.

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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.

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 $150

8 Purchased 40 units @ $5.35 each 214

15 Sold 50 units

22 Purchased 40 units @ $5.20 each 208

28 On hand, 60 units

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

a. $245

b. $255

c. $260

d. $270

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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 $150

8 Purchased 40 units @ $5.35 each 214

15 Sold 50 units

22 Purchased 40 units @ $5.20 each 208

28 On hand, 60 units

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

a. $300

b. $306

c. $312

d. $318

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

Jan. 1 On hand, 10 units @ $2 each $ 20

4 Sold 8 units @ $10 each 80

22 Purchased 50 units @ $4 each 200

26 Sold 48 units @ $10 each 480

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

a. $204

b. $208

c. $212

d. $560

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

Jan. 1 On hand, 10 units @ $2 each $ 20

4 Sold 8 units @ $10 each 80

22 Purchased 50 units @ $4 each 200

26 Sold 48 units @ $10 each 480

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

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

Jan. 1 On hand, 10 units @ $2 each $ 20

4 Sold 8 units @ $10 each 80

22 Purchased 50 units @ $4 each 200

26 Sold 48 units @ $10 each 480

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

a. $8

b. $12

c. $16

d. $40

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Completion

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

manufacturing overhead.

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

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

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

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

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

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

__________ on the income statement

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.

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

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

__________.

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

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

same period.

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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.

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

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

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.

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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.

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

__________.

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.

187. Cost of completed, but unsold items.

188. Costs to purchase goods ready to sell.

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

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

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.

192. Shipping costs paid to acquire merchandise.

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

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

195. The buyer must pay the shipping costs.

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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.

197. Recorded cash sales for the day.

198. Gave a customer a cash refund.

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

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200. Invoice price paid for resale goods.

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

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

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

204. Excise taxes paid on goods acquired.

205. Sales taxes paid on goods acquired.

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

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

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.

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

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

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

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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.

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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

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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 ?