174) The gross profit ratio measures:
A) The ratio of net income to net sales.
B) How quickly the company receives inventory from its suppliers.
C) The amount by which the sale of inventory exceeds its cost per dollar of sales.
D) How many times during the year a company sells its average inventory balance.
175) Which of the following would increase the gross profit ratio?
A) The company reduces operating expenses.
B) The cost of inventory increases.
C) The number of units sold increases.
D) The sales price of a product increases by a higher percentage than does its cost of goods sold.
176) The gross profit ratio will typically be higher for companies that:
A) Collect cash more quickly from customers.
B) Purchase inventory more frequently during the year.
C) Sell products that are more highly specialized.
D) Sell a greater number of units.
177) A company reported the following data for its first year of operations:
Net sales
$
2,800
Cost of goods sold
1,680
Operating expenses
880
Ending inventories
820
What is the company’s gross profit ratio?
A) 80%.
B) 49%.
C) 40%.
D) 5%.
178) In a periodic inventory system, the purchase of inventory is debited to:
A) Purchases.
B) Cost of Goods Sold.
C) Inventory.
D) Accounts Payable.
83
179) Northwest Fur Co. started the year with $94,000 of merchandise inventory on hand. During
the year, $400,000 in merchandise was purchased on account with credit terms of 1/15, n/45. All
discounts were taken. Northwest paid freight-in charges of $7,500. Merchandise with an invoice
amount of $5,000 was returned for credit. Cost of goods sold for the year was $380,000. What is
ending inventory?
A) $112,490.
B) $112,550.
C) $116,500.
D) $120,300.
84
180) A company reports the following amounts at the end of the year:
Sales revenue
$
900,000
Beginning inventory
100,000
Total purchases
500,000
Freight charges
10,000
Purchase discounts
25,000
Purchase returns
50,000
Ending inventory
120,000
Operating expenses
200,000
For what amount would the company report gross profit?
A) $285,000.
B) $485,000.
C) $465,000.
D) $400,000.
85
181) On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with
terms 2/10, n/30. On May 18, Ace pays for this inventory and records which of the following using
a periodic inventory system?
1.
Accounts Payable
2,000
Cash
2.
Accounts Payable
1,960
Purchase Discounts
40
Cash
3.
Accounts Payable
2,000
Purchase Discounts
Cash
4.
Cash
2,000
Accounts Payable
A) Option 1
B) Option 2
C) Option 3
D) Option 4
86
182) On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with
terms 2/10, n/30. On May 8, Ace pays for this inventory and records which of the following using
a periodic inventory system?
1.
Accounts Payable
2,000
Cash
2.
Accounts Payable
1,960
Purchase Discounts
40
Cash
3.
Accounts Payable
2,000
Purchase Discounts
Cash
4.
Cash
2,000
Accounts Payable
A) Option 1
B) Option 2
C) Option 3
D) Option 4
87
183) Steelman Company purchased inventory on account. The inventory costs $2,000 and is
expected to sell for $3,000. How should Steelman record the purchase using a periodic inventory
system?
1.
Purchases
2,000
Accounts Payable
2.
Cost of Goods Sold
2,000
Deferred Revenue
1,000
Sales Revenue
3.
Cost of Goods Sold
2,000
Accounts Payable
4.
Cost of Goods Sold
2,000
Gain
1,000
Accounts Payable
A) Option 1
B) Option 2
C) Option 3
D) Option 4
184) Davis Hardware Company uses a periodic inventory system. How should Davis record the
sale of inventory costing $620 for $960 on account?
1.
Cost of Goods Sold
620
Purchases
Accounts Receivable
960
Sales Revenue
2.
Accounts Receivable
960
Sales Revenue
3.
Purchases
620
Gain
340
Sales Revenue
4.
Accounts Receivable
960
Sales Revenue
Gain
A) Option 1
B) Option 2
C) Option 3
D) Option 4
185) Danton Company uses a periodic inventory system. How should Danton record the return of
inventory previously purchased on account for $200?
1.
Inventory
200
Accounts Payable
200
2.
Accounts Payable
200
Inventory
200
3.
Purchase Returns
200
Accounts Payable
200
4.
Accounts Payable
200
Purchase Returns
200
A) Option 1
B) Option 2
C) Option 3
D) Option 4
186) In a periodic inventory system, the entry at the time of a sale to record the cost of inventory
sold includes a:
A) Debit to Accounts Receivable.
B) Credit to Cost of Goods Sold.
C) Debit to Cost of Goods Sold.
D) Not recorded at this time of the sale.
187) A company sold inventory for $1,200 that was purchased for $700. The company records
which of the following when it sells inventory using a periodic inventory system?
A) No entry is required for cost of goods sold and inventory.
B) Debit Cost of Goods Sold $700; credit Inventory $700.
C) Debit Cost of Goods Sold $1,200; credit Inventory $1,200.
D) Debit Inventory $700; credit Cost of Goods Sold $700.
188) Suppose a company overstates its ending inventory for 2021. What effect will this have on
the reported amount of cost of goods sold for 2021?
A) Overstate cost of goods sold.
B) Understate cost of goods sold.
C) Have no effect on cost of goods sold.
D) Cannot be determined given the information provided.
189) A company’s correct ending balance for the inventory account at the end of 2021 should be
$5,000, but the company incorrectly stated it as $3,000. In 2022, the company correctly recorded
its ending balance of the inventory account. Which one of the following is true?
A) Gross profit is overstated by $2,000 in 2021.
B) Retained earnings are understated by $2,000 in 2022.
C) Gross profit is overstated by $2,000 in 2022.
D) Cost of goods sold is understated by $2,000 in 2021.
190) If a company overstates its ending balance of inventory in year 1 and it records inventory
correctly in year 2, which one of the following is true?
A) Net income is overstated in year 2.
B) Cost of goods sold is overstated in year 1.
C) Net income is understated in year 1.
D) Retained earnings is overstated in year 1.
191) If a company understates its ending balance of inventory in year 1 and it records inventory
correctly in year 2, which one of the following is true?
A) Net income is overstated in year 1.
B) Cost of goods sold is understated in year 2.
C) Net income is understated in year 2.
D) Retained earnings is understated in year 2.
192) If a company understates its count of ending inventory in Year 1, which of the following is
true?
A) Costs of goods sold is understated at the end of Year 1.
B) Profit is correct in Year 2.
C) The balance of retained earnings is overstated at the end of Year 1.
D) The balance of retained earnings is correct at the end of Year 2.
92
Match each term with its description.
A) Raw materials
B) Work-in-process inventory
C) Merchandise inventory
D) Finished goods
E) Service companies
F) Manufacturing companies
G) Merchandising companies
193) Products that have started the production process but are not yet complete at the end of the
period.
Difficulty: 2 Medium
Topic: Types of Inventory
Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to
merchandising companies and is reported as an asset on the balance sheet.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
194) Companies that purchase inventories that are primarily in finished form for resale to
customers.
Difficulty: 2 Medium
Topic: Types of Inventory
Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to
merchandising companies and is reported as an asset on the balance sheet.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
195) Inventory items for which the manufacturing process is complete.
Difficulty: 2 Medium
Topic: Types of Inventory
Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to
merchandising companies and is reported as an asset on the balance sheet.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
93
196) Cost of components that will become part of the finished product but have not yet been used
in production.
Difficulty: 2 Medium
Topic: Types of Inventory
Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to
merchandising companies and is reported as an asset on the balance sheet.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
197) Companies that produce the inventories they sell, rather than buying them from suppliers in
finished form.
Difficulty: 2 Medium
Topic: Types of Inventory
Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to
merchandising companies and is reported as an asset on the balance sheet.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
198) Companies that generate revenues by providing services to their customers rather than selling
inventory.
Difficulty: 2 Medium
Topic: Types of Inventory
Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to
merchandising companies and is reported as an asset on the balance sheet.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
199) Inventory that has been purchased in its finished form but has not yet been sold to customers.
Difficulty: 2 Medium
Topic: Types of Inventory
Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to
merchandising companies and is reported as an asset on the balance sheet.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
94
Match each term used in a multiple-step income statement with its description.
A) Nonoperating expenses
B) Operating expenses
C) Net income
D) Sales revenue
E) Gross profit
F) Operating income
G) Income before income taxes
H) Cost of goods sold
200) Amount recorded from the sale of products and services to customers.
Difficulty: 2 Medium
Topic: Multiple-Step Income Statement
Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step
income statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
201) Amount of profit after including nonoperating revenues and expenses.
Difficulty: 2 Medium
Topic: Multiple-Step Income Statement
Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step
income statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
202) Expenses arising from activities that are not part of a company’s primary operations.
Difficulty: 2 Medium
Topic: Multiple-Step Income Statement
Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step
income statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
203) Cost of inventory sold during the period.
Difficulty: 2 Medium
Topic: Multiple-Step Income Statement
Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step
income statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
95
204) Profit from normal operations that is a key performance measure for predicting future profit.
Difficulty: 2 Medium
Topic: Multiple-Step Income Statement
Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step
income statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
205) All revenues minus all expenses.
Difficulty: 2 Medium
Topic: Multiple-Step Income Statement
Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step
income statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
206) Expenses arising from activities that are part of a company’s normal operations.
Difficulty: 2 Medium
Topic: Multiple-Step Income Statement
Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step
income statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
207) Profit most directly related to the sale of inventory.
Difficulty: 2 Medium
Topic: Multiple-Step Income Statement
Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step
income statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
96
Match each inventory method with its definition.
A) Weighted-average
B) LIFO
C) Specific identification
D) FIFO
208) Assume inventory sold for the year includes the items that were purchased first.
Difficulty: 2 Medium
Topic: Inventory Cost Methods – Specific Identification; Inventory Cost Methods – FIFO;
Inventory Cost Methods – LIFO; Inventory Cost Methods – Weighted-Average
Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different
inventory cost methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
209) Ending inventory represents the actual units not sold during the year.
Difficulty: 2 Medium
Topic: Inventory Cost Methods – Specific Identification; Inventory Cost Methods – FIFO;
Inventory Cost Methods – LIFO; Inventory Cost Methods – Weighted-Average
Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different
inventory cost methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
210) Assume ending inventory for the year includes the items that were purchased first.
Difficulty: 2 Medium
Topic: Inventory Cost Methods – Specific Identification; Inventory Cost Methods – FIFO;
Inventory Cost Methods – LIFO; Inventory Cost Methods – Weighted-Average
Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different
inventory cost methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
211) Assume ending inventory for the year includes a random mixture of all goods available for
sale.
Difficulty: 2 Medium
Topic: Inventory Cost Methods – Specific Identification; Inventory Cost Methods – FIFO;
Inventory Cost Methods – LIFO; Inventory Cost Methods – Weighted-Average
Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different
inventory cost methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
97
Match each term related to inventory methods with its description.
A) LIFO reserve
B) LIFO conformity rule
C) LIFO
D) Consistency
E) FIFO
212) Results in higher ending inventory during periods of rising prices.
Difficulty: 2 Medium
Topic: Effects of Inventory Cost Methods
Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory
cost methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
213) LIFO must be used for financial reporting if elected for tax reporting.
Difficulty: 2 Medium
Topic: Effects of Inventory Cost Methods
Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory
cost methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
214) Additional amount of inventory a company would report if it used FIFO instead of LIFO.
Difficulty: 2 Medium
Topic: Effects of Inventory Cost Methods
Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory
cost methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
215) Once a company chooses an inventory method, it is not allowed to frequently change to
another one.
Difficulty: 2 Medium
Topic: Effects of Inventory Cost Methods
Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory
cost methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
98
216) Best matches cost of inventory sold with its related revenue.
Difficulty: 2 Medium
Topic: Effects of Inventory Cost Methods
Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory
cost methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
99
Match each term related to recording inventory transactions with its description.
A) Sales revenue
B) Inventory
C) FOB destination
D) FOB shipping point
E) Perpetual inventory system
F) Freight-out
G) Periodic inventory system
H) Cost of goods sold
I) Freight-in
217) Account to credit when inventory is sold. The amount to credit equals the selling price to
customer.
Difficulty: 2 Medium
Topic: Recording Transactions Using a Perpetual Inventory System
Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
218) Recording inventory transactions as they occur.
Difficulty: 2 Medium
Topic: Recording Transactions Using a Perpetual Inventory System
Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
219) Record inventory purchases at the time inventory departs from the supplier.
Difficulty: 2 Medium
Topic: Recording Transactions Using a Perpetual Inventory System
Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
220) Account to debit when inventory is sold.
Difficulty: 2 Medium
Topic: Recording Transactions Using a Perpetual Inventory System
Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
100
221) Record inventory purchases at the time inventory arrives at the company.
Difficulty: 2 Medium
Topic: Recording Transactions Using a Perpetual Inventory System
Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
222) The cost of shipping inventory from suppliers.
Difficulty: 2 Medium
Topic: Recording Transactions Using a Perpetual Inventory System
Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
223) Calculate the balance of inventory once per period.
Difficulty: 2 Medium
Topic: Recording Transactions Using a Perpetual Inventory System
Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
224) Account to credit when inventory is sold. The amount to credit equals the original cost of
inventory.
Difficulty: 2 Medium
Topic: Recording Transactions Using a Perpetual Inventory System
Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
225) The cost of shipping inventory to customers.
Difficulty: 2 Medium
Topic: Recording Transactions Using a Perpetual Inventory System
Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking