Which of the following will occur when inventory costs are decreasing?
A) FIFO will result in a lower net income but a higher ending inventory than will LIFO.
B) FIFO will result in a higher net income but a lower ending inventory than will LIFO.
C) FIFO will result in a lower net income and a lower ending inventory than will LIFO.
D) FIFO will result in a higher net income and a higher ending inventory than will
LIFO.
Martinez, Inc. acquired a patent on January 1, 2016 for $40,000 cash. The patent was
estimated to have a useful life of 10 years with no residual value. On December 31,
2017, before any adjustments were recorded for the year, management determined that
the remaining useful life was 6 years (with that new estimate being effective as of
January 1, 2017). On June 30, 2018, the patent was sold for $25,000.
Required:
Part a. Prepare the journal entry to record the acquisition of the patent on January 1,
2016.
Part b. Prepare the journal entry to record the annual amortization for 2016.
Part c. Compute the amount of amortization that would be recorded in 2017.
Part d. Determine the gain (loss) on sale on June 30, 2018.
Part e. Prepare the journal entry to record the sale of the patent on June 30, 2018.
Ambiance Inc. buys back 3,000 shares of its $10 par value common stock from
investors at $45 per share. This stock repurchase would be recorded with a debit to:
A) Cash and a credit to Treasury Stock for $135,000.
B) Treasury Stock and a credit to Cash for $30,000.
C) Treasury Stock and a credit to Cash for $135,000.
D) Treasury Stock for $30,000, a debit to Additional Paid-in Capital for $105,000, and a
credit to Cash for $135,000.
Which of the following is the usual last step in the accounting cycle?
A) Preparing the adjusted trial balance.
B) Preparing the financial statements.
C) Preparing a post-closing trial balance.
D) Preparing an unadjusted trial balance.
Which of the following ratios is used to evaluate how efficient a company is in using its
fixed assets to generate revenues?
A) Current ratio
B) Debt-to-assets ratio
C) Return on fixed assets ratio
D) Fixed asset turnover ratio
Which of the following applies to Accounts Payable?
A) They can be outstanding for more than one year.
B) They charge interest.
C) It is an amount a business is obligated to repay.
D) They are documented using formal documents.
On October 1, a company lends $10,000 to an employee who signs a 9%, 6-month
promissory note. The company is preparing its year-end financial statements on
December 31. No adjusting entries have been recorded in connection with this note.
What adjusting entry should be recorded before the financial statements are prepared?
A) Debit Interest Revenue and credit Interest Receivable for $225
B) Debit Interest Receivable and credit Interest Revenue for $450
C) Debit Interest Revenue and credit Interest Receivable for $450
D) Debit Interest Receivable and credit Interest Revenue for $225
Use the information above to answer the following question. What is the amount of
stockholders’ equity at the beginning of the year?
A) $0
B) $25,000.
C) $175,000.
D) $100,000.
Assume a company uses the direct method to prepare its statement of cash flows. If the
company’s inventory and accounts payable both increase during the accounting period,
how would these changes affect cash flow calculations?
A) The changes in each account are both added to net income.
B) The change in inventory is subtracted from cost of goods sold and the change in
accounts payable is added to cost of goods sold to find the cash paid to suppliers.
C) The changes in each account are both subtracted from net income.
D) The change in inventory is added to cost of goods sold and the change in accounts
payable is subtracted from cost of goods sold to find the cash paid to suppliers.
Which one of the following statements about earnings per share (EPS) is correct?
A) The EPS ratio is important because it signals the ability of the company to pay future
dividends, which investors factor into the stock price.
B) Earnings per share (EPS) is generally reported in the balance sheet under
stockholders’ equity.
C) Earnings per share (EPS) is the best way to compare the performance of different
companies.
D) EPS, in its basic form, is calculated by dividing net income by the average number
of common shares issued.
A corporation had 10,000 shares of $10 par value common stock outstanding. The
board of directors declared and issued a 10% stock dividend. The market value of the
stock was $20 per share. What is the journal entry to record this stock dividend?
A) Debit Retained Earnings and credit Common Stock for $20,000
B) Debit Retained Earnings and credit Common Stock for $10,000
C) Debit Retained Earnings for $20,000, credit Common Stock for $10,000, and credit
Additional Paid-in Capital for $10,000
D) No entry is made to record the stock dividend.
Choose the appropriate letter to match the term and the definition. There are more
definitions than terms.
TERM
1) ____ Days to Sell
2)____ FIFO
3)____ Inventory Turnover
4)____ LIFO
5)____ LIFO Conformity Rule
6) ____ Lower of Cost or Market Rule
7) ____ Specific Identification
8)____ Weighted Average Cost
DEFINITION
A. A valuation rule that requires Inventory to be written down when its market value
falls below its cost.
B. Inventory costing method that assumes that the costs of the first goods purchased are
the costs of the first goods sold.
C. Beginning Inventory + Purchases – Ending Inventory
D. Consists of products acquired in a finished condition, ready for sale without further
processing.
E. The expense that follows directly after Net Sales on a multiple step income
statement.
F. Goods a company is holding on behalf of the goods’ owner.
G. Goods that are held for sale in the normal course of business or are used to produce
other goods for sale.
H. Goods that are in the process of being manufactured.
I. Inventory costing method that identifies the cost of the specific item that was sold.
J. The inventory that starts the manufacturing process.
K. Inventory that was in process and now is completed and ready for sale.
L. Inventory items being transported.
M. A measure of the average number of days from the time inventory is bought to the
time it is sold.
N. How many times (on average) that inventory has been bought or sold.
O. Requires that if LIFO is used on the income tax return, it also must be used in
financial statement reporting.
P. Beginning Inventory + Purchases – Cost of Goods Sold
Q. The difference between net sales and cost of goods sold.
R. Inventory costing method that assumes that the costs of the last goods purchased are
the costs of the first goods sold.
S. Inventory costing method that uses the weighted average unit cost of the goods
available for sale for both cost of goods sold and ending inventory.
Baylor Service Corp. redeemed $1,000 of gift cards that customers used to pay for
services that were performed by the company. The related adjusting entry would
include a debit to:
A) Accounts Receivable and a credit to Service Revenue.
B) Unearned Revenue and a credit to Service Revenue.
C) Cash and a credit to Unearned Revenue.
D) Cash and a credit to Service Revenue.
Which of the following statements about inventory measures is not correct?
A) If the inventory turnover ratio increases, the days to sell measure decreases.
B) The days to sell measure can help managers make ordering decisions for inventory.
C) A higher inventory turnover ratio indicates that inventory is moving more quickly
from purchase to sale.
D) It is rare for a company with a lower gross profit percentage to have a faster
inventory turnover.