Chapter 9: Working Capital Key
1. The current–noncurrent distinction refers to whether a firm will convert an asset to cash, or consume it, or
sell it within one operating cycle and whether a firm will pay or otherwise settle a liability within one operating
cycle.
2. One year is the conventional cutoff for distinguishing a current and a noncurrent asset or liability, because the
operating cycle for most firms is one year or less.
3. Working capital is the difference between a firm’s current assets and its current liabilities.
4. The current ratio, also called the working capital ratio, is current assets divided by current liabilities.
5. The accountant’s definition of working capital is the same as the definition often used in finance.
6. The measurement of cash is the present value of future cash flows of the instruments included in this
category.
7. The principle for cost inclusion is that the balance sheet amount for inventory should include all costs
incurred to acquire goods but not to prepare them for sale.
8. The accounting procedures for the marketing and administrative costs of manufacturing firms resemble those
for merchandising firms.
9. Market value generally means replacement cost, the amount the firm would have to pay to replace the
inventory.
10. U.S. GAAP and IFRS permit firms to remeasure inventories upward to an amount exceeding their
acquisition cost.
11. Both U.S. GAAP and IFRS require firms to write down inventories when their replacement cost, or market
value, declines below acquisition cost.
12. IFRS permits firms to reverse previous impairments, up to the amount of the original acquisition cost of the
inventory, if the circumstances that caused the inventory impairment no longer exist.
13. U.S. GAAP specifies that, in the context of inventories, market means replacement cost, except that market
may not exceed net realizable value and may not be less than net realizable value reduced by a normal profit
margin.
14. U.S. GAAP and IFRS requires firms to use a cost-flow assumption that matches the actual physical flow of
units within the firm.
15. U.S. GAAP and IFRS requires firms to use specific identification for inventory valuation and
cost-of-goods-sold whenever feasible.
16. An impediment to U.S. companies switching from U.S. GAAP to IFRS may come from the IFRS
prohibition of LIFO which has negative income tax implications.
17. FIFO is like a conveyor belt: the first items put on the conveyor belt come off first for use or sale, while the
last items put on the conveyor belt remain there at the end of the period.
18. LIFO is like a stack of trays in a cafeteria: the last tray deposited on the stack is the first one taken off, and
the lowest tray in the stack remains there as long as any trays remain.
19. IFRS prohibits use of the LIFO cost-flow assumption.
20. The U.S. taxing authorities permit a firm to use LIFO for tax purposes as long as it also uses LIFO for
financial reporting purposes.
21. Of the three cost-flow assumptions, FIFO results in balance sheet figures that are closest to current cost
because the latest purchases dominate the ending inventory amounts.
22. Of the three cost-flow assumptions, FIFO usually results in the smallest net income when inventory costs
are rising and the largest net income when inventory costs are falling.
23. Of the three cost-flow assumptions, LIFO has the highest cost of goods sold when inventory costs are rising
and the lowest cost of goods sold when inventory costs are falling.
24. U.S. disclosure rules require that a LIFO firm must disclose ending inventory either at its current cost or on
a FIFO cost-flow basis.
25. Of the three cost-flow assumptions, FIFO results in the least fluctuation in gross margins in businesses in
which selling prices tend to change as acquisition costs of inventories change.
26. The weighted-average cost-flow assumption falls between the other two in its effects, but it resembles FIFO
more than LIFO in its effects on the financial statements.
27. The longer a firm uses LIFO, the greater will be the difference between inventories based on LIFO and
FIFO cost-flow assumptions.
28. A deferred performance liability arises when a firm agrees to provide a warrantyfor service or repairs for
some period after a sale.
29. As time passes, firms gain information about both actual warranty usage and actual warranty
expenditures.
30. IFRS requires that firms accrue the warranty expense and the related warranty liability when they can
“reasonably estimate” the amount, while U.S. GAAP does not.
31. Expenditures to satisfy warranty claims affect net income during the period of servicing the warranty.
32. The accounting for warranties resembles the allowance method for uncollectible accounts
receivable.
33. Examples of restructuring activities include selling or closing divisions or plants, combining offices, moving
operations from one location to another, terminating employees or leases, and selling assets.
34. Under U.S. GAAP, firms recognize restructuring costs when the firm has committed to and
approved a restructuring plan that management will control.
35. During the first year of operations, a company granted warranties on its products. The estimated cost of the
product warranty liability at the end of the year is $8,500. The product warranty expense of $8,500 should be
recorded in the years the expenditures to repair the products covered by the warranty will be paid.
36. The journal entry to record the cost of warranty repairs that were incurred during the current period, but
related to sales made in prior years, includes a debit to Warranty Expense.
37. Many firms provide similar types of airline services with similar types of assets. They each received
unqualified opinions from their independent auditors. Yet, Flash Airlines appears to apply its accounting
principles more aggressively in income-enhancing ways relative to its competitors. The choices for Flash
Airlines in applying generally accepted accounting principles under the accrual basis of accounting include:
38. _____ provide information about liquidity—a firm’s ability to meet short-term obligations as they come
due.
39. A firm with assets that will convert to cash within the next 12 months, in excess of its obligations to pay
cash in this same interval, has
40. A firm with assets that will convert to cash within the next 12 months, less than its obligations to pay cash in
this same interval, has
41. Cash includes:
42. Cash equivalents includes short-term,
43. Which of the following is/are true regarding inventory?
44. Which of the following is/are not true regarding inventory?
45. The inventory equation describes changes in inventory. The following equation measures all quantities in
physical units:
46. Sparkle Industries began a period with 2,000 pounds of sugar and purchased 4,500 pounds during the
period. Sparkle used 5,300 pounds during the period. How many pounds of sugar remain at the end of the
period?
47. Sparkle Industries began a period with 2,000 pounds of sugar and purchased 4,500 pounds during the
period. Sparkle used 5,300 pounds during the period. How many pounds of sugar were available for sale or use
during the period?
48. The principle for cost inclusion is that the balance sheet amount for inventory should include all costs
incurred to
49. _____ firms acquire inventory items in a physical condition ready for sale.
50. _____ firms transform raw materials, purchased parts, and components into finished products in their
factories.
51. The acquisition cost of manufactured inventories does not include which category of costs?
52. Which of the following is/are true regarding the Raw Materials Inventory account?
53. Which of the following is/are not true regarding the Raw Materials Inventory account?
54. Which of the following is/are true regarding the Work-in-Process Inventory account?
55. Which of the following is not true regarding the Work-in-Process Inventory account?
56. Which of the following is/are not true regarding a merchandising firm?
57. Which of the following is/are false regarding a merchandising firm?
58. Which of the following is/are not true regarding a manufacturing firm?
59. The sales manager of Sebastian Company failed to record a valid sale on account of merchandise that had
been shipped to a customer prior to the end of the current year; however, the company uses a periodic method
of accounting for inventory and the merchandise had been properly excluded from inventory at the end of the
current year. As a result of this error, Sebastian Company’s
60. For manufacturing firms, the cost of completed products remains on the balance sheet as __________ assets
until the firm sells the products; upon sale, the cost of the assets becomes a cost of goods sold expense.
61. For manufacturing firms, the balance sheet reports the costs of incomplete items as
62. Manufacturing overhead includes:
63. Brussels Products began its Belgian operations on January 1.The following is the journal entry for the
issuance, to producing departments of raw materials costing €20,000:
64. Brussels Products began its Belgian operations on January 1. The following is the journal entry for the total
payroll for January of €60,000: €40,000 paid to factory workers and €20,000 paid to marketing and
administrative personnel:
65. Which of the following is/are true regarding the Finished Goods Inventory account?
66. The market value for inventory valuation purposes generally means
67. Which of the following is true regarding the remeasurement of inventories upward to an amount exceeding
their acquisition cost?
68. Why might inventories increase in market value subsequent to acquisition?
69. Which of the following is/are not true regarding inventories when their replacement cost declines below
acquisition cost?
70. U.S. GAAP specifies that, in the context of inventories, market means
71. IFRS specifies that, in the context of inventories, market means
72. Flower Company had beginning inventory of $19,000, purchases were $100,000, and ending inventory had
a cost of $25,000 and a market value of $20,000. Which of the following is/are not true?
73. Forgone Company had beginning inventory of $19,000, purchases were $100,000, and ending inventory had
a cost of $25,000 and a market value of $20,000. The same inventory increased $3,000 in market value in the
subsequent period. Which of the following is/are not true?
74. The lower-of-cost-or-market basis for inventory valuation
75. Which of the following is not true regarding the lower-of-cost-or-market basis for inventory valuation?
76. Mystical Duds estimates that unsold women’s clothing with a carrying value of $500 million has minimal
market value given a change in fashion. To reflect the minimal market value of the merchandise, Mystical
Duds
77. City Bicycle
City Bicycle , a cycling store has a beginning inventory of one bi-level touring bicycle 1, for which it paid
$2,500. Suppose that during the period the store purchases bi-level touring bicycle 2 for $2,900 and bi-level
touring bicycle 3 for $3,000, and that it sells one bicycle for $5,500. The three bicycles are physically identical;
the store acquired them at different times as their acquisition costs changed, so only their costs differ.
Using the City Bicycle example, suppose the cycling store uses the specific identification system, and uses
serial numbers or product bar codes to identify bi-level touring bicycle 2 as the unit sold. The cost of goods sold
is _____, and the ending inventory is _____.
78. City Bicycle
City Bicycle , a cycling store has a beginning inventory of one bi-level touring bicycle 1, for which it paid
$2,500. Suppose that during the period the store purchases bi-level touring bicycle 2 for $2,900 and bi-level
touring bicycle 3 for $3,000, and that it sells one bicycle for $5,500. The three bicycles are physically identical;
the store acquired them at different times as their acquisition costs changed, so only their costs differ.
Using the City Bicycle example, suppose the cycling store uses the weighted-average cost-flow assumption.
The cost of goods sold is _____, and the ending inventory is _____.
79. City Bicycle
City Bicycle , a cycling store has a beginning inventory of one bi-level touring bicycle 1, for which it paid
$2,500. Suppose that during the period the store purchases bi-level touring bicycle 2 for $2,900 and bi-level
touring bicycle 3 for $3,000, and that it sells one bicycle for $5,500. The three bicycles are physically identical;
the store acquired them at different times as their acquisition costs changed, so only their costs differ.
Using the City Bicycle example, suppose the cycling store uses the FIFO cost-flow assumption. The cost of
goods sold is _____, and the ending inventory is _____.
80. City Bicycle
City Bicycle , a cycling store has a beginning inventory of one bi-level touring bicycle 1, for which it paid
$2,500. Suppose that during the period the store purchases bi-level touring bicycle 2 for $2,900 and bi-level
touring bicycle 3 for $3,000, and that it sells one bicycle for $5,500. The three bicycles are physically identical;
the store acquired them at different times as their acquisition costs changed, so only their costs differ.
Suppose the cycling store uses the LIFO cost-flow assumption. The cost of goods sold is _____, and the
ending inventory is _____.
81. Firms do not use LIFO because it
82. In periods of rising purchase prices and increasing inventory quantities, LIFO results in a _____ than either
FIFO or the weighted-average cost-flow assumption.
83. In periods of falling purchase prices and increasing inventory quantities, LIFO results in a _____ than either
FIFO or the weighted-average cost-flow assumption.
84. Of the three cost-flow assumptions, when prices rise FIFO results in balance sheet figures that are _____,
cost of goods sold will _____, and _____ reported net income
85. Of the three cost-flow assumptions, when inventory costs have been rising and inventory amounts
increasing, LIFO results in balance sheet figures that are _____, cost of goods sold will _____, and _____
reported net income
86. Of the three cost-flow assumptions, when prices fall FIFO results in balance sheet figures that are _____,
cost of goods sold will _____, and _____ reported net income
87. Of the three cost-flow assumptions, when inventory costs have been falling and inventory amounts
increasing, LIFO results in balance sheet figures that are _____, cost of goods sold will _____, and _____
reported net income
88. The requirement that U.S. firms using LIFO for tax reporting purposes must also use LIFO for financial
reporting purposes is called the _____ rule.
89. Which of the following accounts would you expect to find on the balance sheet of a manufacturing
company?
90. Cox Merchandising Company began the year with merchandise inventory of $60,000, ended the year with
merchandise inventory of $70,000, and had cost of goods sold of $110,000. What was the Cox Merchandising
Company’s net purchases for the year?
91. For merchandising firms, inventory items are valued at acquisition cost which includes
92. A department store had items in its inventory at the end of the year that had a recorded book value of
$10,000 and, because of fashion changes, a market value of only $7,000. The department store failed to write
down these inventory items to market value. To keep the obsolete condition of the inventory items away from
its auditors, the firm shipped the goods to a remote warehouse. The effect of this error was to
93. On January 1, 20×3, Fallon Company, a manufacturer of consumer products, had a balance in direct
materials inventory of $100,000. During the year, an additional $400,000 of direct materials were purchased.
Also during 20×3, direct materials worth $450,000 were transferred to work-in-process inventory. What was
Fallon Company’s ending direct materials inventory at December 31, 20×3?
94. During 20×4, all sales and purchases at Virginia Corporation were on credit. At December 31, 20×4,
Virginia Corporation shipped goods to the New York Corporation but failed to record the sale. As a result,
before making any corrections to the accounting records
95. Which of the following is a product cost?
96. Using these abbreviations—DL = Direct Labor, MO = Manufacturing Overhead, DM = Direct Materials,
WIP = Work-in-Process, FG = Finished Goods, COGS = Cost of Goods Sold—how would you represent the
flow of manufacturing costs through the accounts? (Use + to mean “add to” and ® to mean “is transferred to.”)
97. At the end of a manufacturing company’s accounting period, Work-in-Process is generally
98. Winner Company
Winner Company’s beginning and ending inventories for the fiscal year ended September 30, Year 5, are
October 1, Year 4
September 30, Year 5
Raw materials
$15,000
$22,000
Work-in-process
40,000
35,000
Finished goods
8,000
12,000
Production data for the fiscal year ended September 30, Year 5, are
Raw materials purchased
$ 80,000
Purchase discounts
1,000
Direct labor
100,000
Manufacturing overhead
75,000
Assume Winner Company treats all raw materials as direct materials once they enter the production process. Thus, no raw materials are treated as
manufacturing overhead.
(CMA adapted, Dec 95 #28) Refer to the Winner Company example. Cost of goods sold for the year ended September 30, Year 5, for Winner
Company is