443
Chapter 13—Operating Activities
True/
False
L.O.’s
Level of
Difficulty
True/
False
L.O.’s
Level of
Difficulty
1
2
EASY
8
4
MOD
2
2
EASY
9
4
EASY
3
2
MOD
10
4
MOD
4
3
MOD
11
4
EASY
5
4
EASY
12
4
EASY
6
4
MOD
13
4
MOD
7
4
MOD
14
5
MOD
Multiple
Choice
L.O.’s
Level of
Difficulty
Multiple
Choice
Level of
Difficulty
Multiple
Choice
L.O.’s
Level of
Difficulty
1
1,5
MOD
20
MOD
38
4
MOD
2
1
MOD
21
MOD
39
4
MOD
3
2
EASY
22
MOD
40
4
MOD
4
2
EASY
23
MOD
41
4
MOD
5
2
EASY
24
MOD
42
4
MOD
6
2
MOD
25
MOD
43
4
MOD
7
2
MOD
26
EASY
44
4
MOD
8
2
EASY
27
EASY
45
5
MOD
9
2
MOD
28
EASY
46
5
EASY
10
2
MOD
29
MOD
47
5
EASY
11
2
EASY
30
MOD
48
5
MOD
12
2
MOD
31
DIFF
49
5
EASY
13
2
MOD
32
EASY
50
5
DIFF
14
2
DIFF
33
MOD
51
5
MOD
15
2
MOD
34
MOD
52
5
EASY
16
2
MOD
35
MOD
53
5
MOD
17
2
MOD
36
DIFF
54
5
MOD
18
2
EASY
37
MOD
55
5
MOD
19
2
MOD
444 ♦ Chapter 13
Matching
L.O.’s
Level of
Difficulty
Matching
L.O.’s
Level of
Difficulty
Matching
L.O.’s
Level of
Difficulty
1
5
MOD
8
1
MOD
15
2
MOD
2
2
MOD
9
3
MOD
16
3
MOD
3
1
MOD
10
4
MOD
17
5
MOD
4
2
MOD
11
4
MOD
18
5
MOD
5
1
MOD
12
4
MOD
19
5
MOD
6
1
MOD
13
3
MOD
20
5
MOD
7
2
MOD
14
4
MOD
21
5
MOD
Problem
L.O.’s
Level of
Difficulty
Problem
L.O.’s
Level of
Difficulty
Problem
L.O.’s
Level of
Difficulty
1
2
MOD
10
2
DIFF
18
4
DIFF
2
2
MOD
11
4
MOD
19
4
MOD
3
2
DIFF
12
2
MOD
20
4
DIFF
4
2
DIFF
13
3
MOD
21
5
EASY
5
2
MOD
14
3
MOD
22
5
EASY
6
2
MOD
15
4
MOD
23
3
DIFF
7
2
DIFF
16
3
MOD
24
2,3
EASY
8
2
MOD
17
4
MOD
25
3
MOD
9
2
MOD
Essay
L.O.’s
Level of
Difficulty
Essay
L.O.’s
Level of
Difficulty
1
1,5
EASY
6
4
MOD
2
2
EASY
7
5
EASY
3
2
MOD
8
5
MOD
4
2
MOD
9
5
MOD
5
4
MOD
Operating Activities ♦ 445
TRUE/FALSE
1. Revenues are reported on the income statement net of discounts and of expected returns.
2. For most firms, revenue is recognized at the point of cash collection.
3. Firms should recognize the expense related to uncollectible accounts when accounts are written
off.
4. Raw materials inventory includes the costs of component parts that become part of the product
being manufactured.
5. FIFO always results in the oldest inventory costs being reported on the income statement and the
most recent inventory costs being reported on the balance sheet.
6. When prices are rising, the cost of inventory generally will be lower when reported on the balance
sheet under the LIFO method than would have been reported under the FIFO method.
7. In a period of rising inventory costs, the LIFO inventory method results in the largest dollar
amount of ending inventory being reported on the balance sheet.
8. If a company holds its inventory levels constant but experiences declining inventory costs per unit,
LIFO produces a lower net income and lower taxes than does FIFO.
446 ♦ Chapter 13
9. The last-in-first-out inventory measurement method would have the most recent costs in cost of
goods sold.
10. Income tax expense is lowest if FIFO is used during periods of increasing prices.
11. Generally accepted accounting principles require firms to value inventories at lower-of-cost-or-
market.
12. A company that uses LIFO for taxes also must use LIFO on its income statement.
13. A perpetual inventory system involves determining cost of goods sold at the end of the fiscal
period.
14. Extraordinary items are reported as a separate item on the income statement, net of income taxes.
MULTIPLE CHOICE
1. Which of the following is considered in the calculation of BOTH net income and operating
income?
a.
extraordinary loss
b.
interest expense
c.
cost of goods sold
d.
minority interest in income
Operating Activities ♦ 447
2. When preparing an income statement, cost of goods sold has been subtracted out in order to obtain
which of the following?
Gross Profit Operating Income
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
3. Firms should recognize the expense related to uncollectible accounts
a.
during the period of sale
b.
when accounts are written off
c.
when customers declare bankruptcy
d.
never; there is no expense related to uncollectible accounts
4. For most firms, revenue is recognized
a.
at the point of cash collection
b.
at completion of production
c.
at the time the sale takes place
d.
during production
5. When goods are sold FOB destination, title passes
a.
at the destination
b.
when the goods are loaded onto the truck at the seller’s place of business
c.
when the goods are paid for by the buyer
d.
midway between the seller’s and buyer’s places of business
6. Revenue should be recognized on a transaction
a.
at the a customer places an order
b.
when the cash has been collected from the buyer
c.
when the seller has earned the right to payment from the buyer
d.
as soon as the seller is confident that he has a buyer for the goods under consideration
448 ♦ Chapter 13
7. Revenue should ordinarily be recognized when four criteria have been met. Which of the
following is NOT one of the four criteria?
a.
seller has completed most of the activities necessary to produce and sell the goods or
services
b.
cash has been collected from the buyer
c.
seller is reasonably certain the buyer will pay the cash that is due
d.
seller can objectively measure the amount of revenue he/she has earned
8. Alpha Builders specializes in large construction contracts that take several years to complete. As a
general rule, Alpha should recognize revenue
A little each year As soon as the
as work progresses contract is signed
a.
Yes No
b.
No No
c.
Yes Yes
d.
No Yes
9. The City of Gunnison awarded a $5,000,000 road-construction contract to the Fast Builders
Construction Company. Construction was expected to take three years. After one year, Fast
Builders had incurred $625,000 of cost and was approximately 20% completed with the road. The
company estimated that another $2,500,000 would be expended to complete the contract. The
company is confident regarding its estimates. What amount of profit, if any, should Fast Builders
recognize for the first year?
a.
$0
b.
$375,000
c.
$500,000
d.
$625,000
e.
$1,000,000
10. Commercial Developers, Inc. was awarded a three-year contract to build a giant shopping mall
complex at a price of $230 million. At the end of the first year, the company had incurred $57
million of costs and the project was about 30% completed. The firm estimated that it would take
another $133 million to complete the project. What amount of profit should the firm recognize in
the first year of this project in proportion to its work completed?
a.
$0
b.
$12,000,000
c.
$17,100,000
d.
$69,000,000
Operating Activities ♦ 449
11. When goods are sold FOB shipping point, title passes
a.
at the shipping point
b.
when the goods are unloaded at the buyer’s place of business
c.
when the goods are paid for by the buyer
d.
midway between the seller’s and buyer’s places of business
12. When reporting revenues on the income statement, they should be reported net of
Expected Estimated
Sales Returns Uncollectible Accounts
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
13. At the beginning of March, Freewill Magazine Company’s unearned revenues included 15,000
annual subscriptions at $18 each. During March, the company received 4,000 new annual
subscriptions at $18 each. The March issue was shipped to all subscribers on March 20. The
amount of subscription revenue the company should recognize in March would be
a.
$15,000
b.
$28,500
c.
$72,000
d.
$270,000
e.
$342,000
14. Sanders Corporation had gross sales today totaling $80,000. All sales were on credit terms of 2%
discount if payment is received within 10 days of the sale date. Historically, about 10% of goods
are returned by customers and about 80% of customers take advantage of the sales discount. If
today is the last day of the accounting period, what amount of net revenue SHOULD be reported
on the financial statements for today’s sales?
a.
$80,000
b.
$78,560
c.
$72,000
d.
$70,848
e.
$70,560
450 ♦ Chapter 13
15. Which of the following should be subtracted out to arrive at the proper amount of net sales
revenue to be reported on the income statement.
Estimated sales
discounts to be Expected
taken by customers Warranty Costs
a.
Yes No
b.
Yes Yes
c.
No Yes
d.
No No
16. Consumer Enterprises (CE) sold goods on 60-day credit to one of its usual customers for the
amount of $18,000. CE offered a 2% discount if the customer would pay within 15 days of the
sale date. When accounting for this sale, what is the minimum amount that should be recorded on
the day of sale for Accounts Receivable?
a.
$0
b.
$17,640
c.
$18,000
d.
$18,360
17. The Fat Brush Paint Store sold merchandise on 30-day credit in the amount of $1,500. A discount
of 3% was offered if the customer would pay within 10 days. What is the minimum amount that
should be recorded on the day of sale for Accounts Receivable?
a.
$0
b.
$1,455
c.
$1,500
d.
$1,545
18. Sara, the bookkeeper at North Company is recording information into the accounting system to
recognize the estimated amount of bad debt expense for the fiscal period. This entry into the
accounting system will affect which of the account balances below?
Allowance for
Doubtful Accounts Bad Debts Expense
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
Operating Activities ♦ 451
19. Hildegoth Company reported accounts receivable of $40,000 at the beginning of 2007 It reported a
balance of $28,000 at the end of 2007. From this information, it is possible to determine that
during 2007,
a.
credit sales were higher than cash collected from customers
b.
credit sales were less than cash collected from customers
c.
the firm was doing a poor job of collecting its receivables
d.
credit sales decreased from the prior year
20. The Philandering Soy Company reported the following accounts receivable balances for 2008:
Beginning of the year
$84,000
End of the year
90,000
This information means that
a.
credit sales exceeded cash collections from customers during the year
b.
cash collections from customers exceeded credit sales during the year
c.
the firm did an excellent job of collecting its receivables
d.
credit sales increased during the current year over the prior year
21. Poinsetta Ventures sold $600,000 of goods during its fiscal 2007 year. At the end of the year, the
company had accounts receivable of $60,000 outstanding. An estimated 5% of these receivables is
uncollectible. The amount of net accounts receivable and revenue that should be reported on the
financial statements at the end of 2007 is
Net Accounts
Receivable Revenue
a.
$57,000 $600,000
b.
$60,000 $597,000
c.
$57,000 $597,000
d.
$60,000 $600,000
22. Lennon Co. recorded sales (all credit) of $870,000 during the current year. The ending balance in
accounts receivable was $167,040. On the basis of past experience, Lennon estimated
uncollectible accounts as 4% of credit sales. The amount of bad debts expense that should be
reported is
a.
$6,682
b.
$41,460
c.
$28,118
d.
$34,800
452 ♦ Chapter 13
23. Bad debts expense is correctly recorded on the income statement as a(n)
a.
addition to sales discounts
b.
extraordinary expense
c.
reduction of revenue
d.
selling expense
24. Certain depreciation costs and the amounts paid to certain employees would be reported on the
income statement as part of cost of goods sold if the company
a.
is a manufacturer
b.
follows a practice of deferring taxes whenever possible
c.
had discontinued operations during the period
d.
is using the LIFO method of inventory valuation
25. Which of the following would NOT be included in a company’s work-in-process inventory
account balance at year-end?
a.
cost of materials added to production during the period
b.
cost of labor added to production during the current period
c.
depreciation on equipment used in production during the current period
d.
cost of goods completed during the period
26. You would expect to see the account Work-in-Process Inventory reported on the balance sheet of a
Manufacturing Firm Merchandising Firm
a.
Yes No
b.
No No
c.
Yes Yes
d.
No Yes
27. Which of the following is NOT a category of inventory used in a manufacturing company?
a.
work-in-process
b.
finished goods
c.
raw materials
d.
overhead
Operating Activities ♦ 453
28. Work-in-process includes all of the items below EXCEPT
a.
cost of materials used in the production of goods
b.
cost of labor used directly in the production of goods
c.
selling costs associated with the goods
d.
overhead costs incurred in the production of goods
29. Cost of goods sold for a manufacturing company would be calculated as
Beginning finished goods inventory (BFGI)
Ending finished goods inventory (EFGI)
Work-in-process (WIP)
Cost of goods manufactured (CGM)
Raw materials (RM)
Overhead (OH)
a.
BFGI + RM + CGM – EFGI
b.
RM + OH – CGM + EFGI
c.
RM + WIP + OH – EFGI
d.
BFGI + CGM – EFGI
30. The Food-Mart Grocery is preparing its 2007 income statements. In doing so, cost of goods sold
and wages expense are both deducted in computing which of the following?
Operating Income Gross Profit
a.
No No
b.
No Yes
c.
Yes Yes
d.
Yes No
31. Which of the following is FALSE concerning the lower-of-cost-or-market (LCM) when applied to
the valuation of inventory?
a.
inventory must be written-up (increased) if current market cost of ending inventory is
greater than the cost of ending inventory as estimated using the LIFO method
b.
inventory must be written-down (decreased) if current market cost of ending inventory is
less than the cost of ending inventory as estimated using the LIFO method
c.
inventory must be written-down (decreased) if current market cost of ending inventory is
less than the cost of ending inventory as estimated using the FIFO method
d.
All of the above are FALSE
454 ♦ Chapter 13
32. Which inventory measurement method would have the most recent costs in cost of goods sold?
a.
first-in-first-out (FIFO)
b.
last-in-first-out (LIFO)
c.
weighted average
d.
work-in-process
33. Which inventory method results in the lowest income taxes during periods of increasing prices?
a.
first-in-first-out (FIFO)
b.
last-in-first-out (LIFO)
c.
weighted average
d.
work-in-process
34. The inventory valuation method that results in the recognition of the most recent inventory costs
on the balance sheet and income statement, respectively, is
Balance Sheet Income Statement
a.
FIFO LIFO
b.
FIFO FIFO
c.
LIFO LIFO
d.
LIFO FIFO
35. The inventory valuation method that results in the recognition of the oldest inventory costs on the
balance sheet and income statement, respectively, is
Balance Sheet Income Statement
a.
FIFO LIFO
b.
FIFO FIFO
c.
LIFO LIFO
d.
LIFO FIFO
36. When the cost of inventory is decreasing, which of the following is TRUE regarding the three
best-known inventory valuation methods?
a.
the LIFO method will yield the smallest amount for cost of goods sold
b.
the weighted-average method will yield the largest amount for ending inventory
c.
the FIFO method will yield the highest amount for ending inventory
d.
both LIFO and FIFO will yield a smaller tax obligation than weighted-average
Operating Activities ♦ 455
37. The Big Tobacco Company sells cigars. Inventory information for a recent week is below:
Units
Unit Cost
Total Cost
Beginning inventory
2
$ 6
$12
Purchase
4
8
32
Purchase
6
10
60
If five units were sold during the week, what is the COST OF GOODS SOLD if the LIFO method
is used?
a.
$68
b.
$54
c.
$50
d.
$36
38. Steinbrenner Company has the following inventory information for a recent year:
Beginning inventory
$500
(10 units with an average cost of $50 each)
February purchase
10 units @ $48 each
August purchase
30 units @ $52 each
November purchase
20 units @ $48 each
Ending inventory
25 units
Compute the cost of ending inventory using the weighted average method.
a.
$1,250.00
b.
$1,240.00
c.
$1,237.50
d.
$1,220.00
39. An advocate of the LIFO inventory method would maintain that
a.
current costs are matched with current selling prices
b.
the lowest possible costs are always shown in the ending inventory
c.
the oldest inventory is relieved of its cost before the newer purchases
d.
the highest possible costs are always shown in the ending inventory
456 ♦ Chapter 13
40. Automated Merchandising Company uses the LIFO method of cost assignment. The following
data are available:
Date
Units
Unit Cost
Total Cost
Beginning inventory
Jan. 1
400
$24
$ 9,600
Purchase
Mar. 13
800
28
22,400
Purchase
June 20
1,200
32
38,400
Ending inventory
Dec. 31
200
The value of the ending inventory will be
a.
$2,400
b.
$4,800
c.
$5,866
d.
$6,400
41. Sam’s Auto Parts uses the FIFO costing method. The following data is available:
Units
Unit Cost
Total Cost
Beginning inventory
20
$4,000
$80,000
Purchase
20
4,800
96,000
Purchase
16
3,600
57,600
Sales during the year
25
The ending inventory should be valued at
a.
$81,600
b.
$100,800
c.
$129,600
d.
$132,800
42. Apparatus Co. had beginning inventory of 50 units with a total cost of $1,000. During the period,
Apparatus first purchased 20 units for $800 and then 30 units for $1,800. The company uses the
LIFO method of costing inventory. If a physical count of ending inventory showed 45 units, at
what amount would they be valued on the balance sheet?
a.
$1,620
b.
$ 900
c.
$2,400
d.
$3,600
Operating Activities ♦ 457
43. The FIFO inventory cost method differs from the LIFO method in that the
a.
LIFO method more clearly matches current inventory cost with sales revenue
b.
FIFO method more clearly matches current inventory cost with sales revenue
c.
LIFO method assumes the oldest purchases are stored in the rear of the storage areas
d.
FIFO method is a more acceptable accounting method
44. If prices are rising steadily during an accounting period,
a.
gross margin will be higher with LIFO than with FIFO
b.
LIFO will ensure that the ending inventory is stated at or near current market values on the
balance sheet
c.
cost of goods sold will be closest to current costs with FIFO
d.
LIFO will minimize income taxes
45. Product lines eliminated by a company due to the fact that they no longer generate profits are
known as
a.
discarded operations
b.
discharged operations
c.
abandoned operations
d.
discontinued operations
46. Which of the following would NOT be reported as a separate item on the income statement, net of
tax?
a.
extraordinary item
b.
discontinued operations
c.
sale of inventory
d.
change in accounting method
47. Which of the following items is reported on an income statement?
Income from Cash provided
Continuing operations by operations
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
458 ♦ Chapter 13
48. Which of the following is NOT a deduction on the income statement when computing net income?
a.
loss from discontinued operations
b.
cost of goods sold
c.
interest expense
d.
preferred dividends
49. Which of the following items is NOT considered a non-recurring item and reported separately
from other items on the income statement?
a.
loss from discontinued operations
b.
extraordinary expenses
c.
cumulative effect of accounting changes
d.
net income before taxes
50. Identify the TRUE statement regarding non-recurring items on the income statement.
a.
they are generally reported after operating income in order to highlight their special
circumstances
b.
the reporting of other revenue is an example of a non-recurring item
c.
non-recurring items are excluded when computing earnings per share and when computing
earnings available for common stockholders
d.
most non-recurring items have no significant effect on net income
51. When a company changes from using one generally accepted accounting method to using another
generally accepted accounting method, the effects of that change are reported in a special section
on the
a.
the income statement only
b.
the balance sheet only
c.
the statement of cash flows only
d.
all of the financial statements
52. In order for an event to be reported on the income statement as an extraordinary item, it must be
Unusual Infrequent
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
Operating Activities ♦ 459
53. Duhany Auto Company sold off a major segment of its business during March of 2007 at a loss.
The loss from the sale should be reported in the firm’s financial statements as a(n)
a.
extraordinary item
b.
discontinued operation
c.
subsequent event
d.
change in accounting method
54. A loss from a natural disaster that is both unusual and infrequent should be reported on a
company’s income statement
a.
as part of the computation of operating income
b.
as part of the computation of pretax income
c.
as part of the computation of net income
d.
after net income
55. Discontinued operations, extraordinary items, and cumulative effects are all similar in that they
a.
result in an increase in net income for the period reported
b.
have no effect on the cash flow statement (have no cash flow consequences)
c.
are all reported separately on the income statement
d.
all are caused by management having made poor decisions in the past
460 ♦ Chapter 13
MATCHING
Match each term with the correct definition.
a.
Equity income
b.
Discount
c.
Matching principle
d.
Warranty costs
e.
FOB shipping point
f.
Deferred compensation cost
g.
FOB destination
h.
Revenue recognition
1. Results when a company agrees to pay retirement benefits
2. Requires recognition of expenses in the period that related revenue is recognized
3. The income that a company earns using the equity method of accounting for investments in other
companies.
4. A reduction in the normal sales price
5. Usually occurs when goods are transferred or services rendered to customers
6. Ownership is transferred to the customer when goods are delivered
7. The cost of replacing or repairing defective products
8. Ownership is transferred to the customer when goods are transferred to a freight company
Operating Activities ♦ 461
For each of the following items, select the letter of the best answer and write it in the space
provided:
a.
Raw material
b.
First-in-first-out
c.
Lower-of-cost-or-market
d.
Last-in-first-out
e.
Work-in-process
f.
Weighted average
g.
Uncollectible accounts
h.
Finished goods
9. Bases the cost of units sold on average costs of units on inventory available during a period
10. The cost of products that have been completed in the manufacturing process
11. Amounts customers are unable or unwilling to pay
12. Reporting inventory at original cost or replacement cost, whichever is less
13. The costs of component parts that become part of the product being manufactured
14. Assumes that cost of goods sold is made up of the cost of the oldest items available during the
period
15. Firms that use this method for income tax purposes must also use it for financial reporting
purposes
16. The costs of materials, labor, and overhead that have been applied to products that are being
manufactured
462 ♦ Chapter 13
For each of the following items, select the letter of the best answer and write it in the space
provided:
a.
Discontinued operations
b.
Extraordinary items
c.
Basic earnings per share
d.
Income tax expense
e.
Effect of accounting changes
17. Gains and losses that are both unusual and infrequent
18. Pretax accounting income times corporate tax rate
19. Expenses associated with closing an obsolete factory
20. Reported when a firm switches from one acceptable accounting method to another
21. Net income available to stockholders divided by average common stock outstanding
PROBLEM
1. On May 20, Major Wholesalers purchased 2,000 chairs at an invoice price of $150 each and paid
for them on May 30, earning a 2% cash discount. Major sold all of the chairs at $200 each. The
customer also earned a 2% cash discount.
a. What amount should Major report as net sales?
b. What amount should Major report as cost of goods sold?