Achievement Test 3: Chapters 5 and 6 Name __________________________
Accounting Instructor _______________________
Kimmel, Weygandt, and Kieso Section # _______ Date _________
Part
I
II
III
IV
V
Total
Points
30
30
18
12
10
100
Score
PART I — MULTIPLE CHOICE (30 points)
Instructions: Designate the best answer for each of the following questions.
____ 1. A company returned goods for credit to the supplier. Which one of the following is a
portion of the journal entry required if a perpetual inventory system is used?
a. Credit Accounts Payable
b. Credit Purchase Returns and Allowances
c. Debit Accounts Receivable
d. Credit Inventory
____ 2. A company sells item on account with credit terms of 2/10, n/20. What is the meaning
of these terms?
a. An additional amount equal to 2 percent of the invoice price must be paid if
payment is not received within 10 days; the account is overdue after 20 days.
b. A 10 percent cash discount may be taken if payment is made immediately; a 2
percent discount if paid within 20 days.
c. A 2 percent cash discount may be taken if payment is made within 10 days of the
invoice date; otherwise the full amount is due within 20 days.
d. A 10 percent cash discount may be taken if payment is made within 2 days of the
invoice date; otherwise the full amount is due in 20 days.
____ 3. Which statement below is true concerning a perpetual inventory system?
a. It allows for the determination of cost of goods sold after each sale.
b. It requires a physical inventory count to determine the cost of goods on hand.
c. Cost of goods sold is determined based on a physical count at the end of the
period.
d. It is used infrequently due to the high cost of determining the cost of goods
acquired.
____ 4. An analyst calculated the quality of earnings ratio for a company and determined it to
be 2.7. What does this measure indicate?
a. The company may be using more aggressive accounting techniques in order to
accelerate income recognition.
b. The company’s net income significantly exceeds its net cash provided by operating
activities.
c. The company is relatively profitable.
d. The company’s net cash provided by operating activities significantly exceeds its
net income.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
AT3-2
____ 5. What does the inventory turnover measure?
a. The average amount of time inventory sits on a company’s shelves
b. The dollar amount of funds tied up in inventory
c. How quickly a company sells its goods
d. The profit generated from the selling of inventory
____ 6. Which of the following items are reported on a multiple-step income statement and on
a single-step income statement?
a. Cost of goods sold and sales
b. Gross profit and operating expenses
c. Operating expenses and total expenses
d. Sales and income from operations
____ 7. What do freight terms of FOB shipping point indicate?
a. The seller places the goods free on board the carrier, and the seller pays for the
goods.
b. Goods are placed free on board to the buyer’s place of business and the buyer
deducts the freight costs from the purchase price of the goods.
c. Goods are placed free on board to the buyer’s place of business and the seller
pays the freight costs. d. The seller places the goods free on
board the carrier, and the buyer pays for the freight costs.
____ 8. With regard to accounting for a merchandising company versus a service company,
which of the following is true?
a. Additional accounts and entries are typically required for a service company.
b. Retailers and wholesalers can be either service companies or merchandising
companies.
c. The operating cycle of a merchandising company is longer than that of a service
company.
d. Because inventory is an asset, it is recognized on the balance sheet by both
service and merchandising companies.
____ 9. In periods of rising prices, what will LIFO produce?
a. Lower income taxes than FIFO
b. Higher net income than FIFO
c. Higher net income than average costing
d. Lower cost of goods sold than FIFO
____ 10. Which of the following relationships is true concerning the Sales Returns and
Allowances account? a. It is a contra account that is reported on the
balance sheet as a deduction from the related sales.
b. It can flag problems of inferior merchandise, inefficiencies in filling orders, and
other mistakes.
c. It represents the cost of merchandise returned by customers.
d. It has a normal credit balance and is added to sales to determine net sales.
Achievement Test 3
AT3-3
____ 11. DynaTrue Industries reported net sales totaling $3,200,000 during the year. The
company’s gross profit rate was determined to be 41%. Which statement is true?
a. The company generated $1,312,000 of net income during the year.
b. The company generated 41 cents of net income out of each dollar of assets owned
by the company.
c. The company generated 41 cents out of every sales dollar that is available to
cover its operating expenses and contribute to profit.
d. The inventory cost is 41% of the sales price of the inventory items.
____ 12. Which statement is true regarding the lower–of-cost-or-market (LCM) method of
inventory?
a. LCM is an example of the revenue recognition principle.
b. LCM is departure from the cost basis of accounting.
c. Market is defined as current selling price.
d. Inventory is adjusted to market value each accounting period.
____ 13. Advantage Company’s ending inventory is overstated by $2,000. What is the effect of
this error on the current year’s cost of goods sold and net income, respectively?
a. Overstated and understated
b. Overstated and overstated
c. Understated and overstated
d. Understated and understated
____ 14. What is a LIFO reserve?
a. The tax savings resulting when LIFO is used during periods of rising prices
b. The difference in net income when a company uses LIFO as compared to FIFO
c. The difference between the inventory value and cost of goods sold when a
company uses LIFO
d. The difference between the inventory value under LIFO and FIFO
____ 15. A company uses LIFO to cost its inventory. Which statement is true?
a. The company must sell its newer inventory items before its older items.
b. The company will pay less income taxes in periods of rising prices compared to
using FIFO.
c. The cost of the company’s older inventory items are transferred to cost of goods
sold prior to the cost of the newly acquired items.
d. One way to think about the ending inventory under LIFO is the LISH assumption.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
AT3-4
PART II — JOURNAL ENTRIES (30 points)
The ledger accounts given below, with an identification number for each, are used by Tactical
Supplies. The company uses a perpetual inventory system.
Instructions: Prepare appropriate entries for the month of May by placing the appropriate
identification number(s) in the debit and credit columns provided and the dollar amounts
pertaining to each account in the adjoining columns. Item 0 is given as an example.
1.
Cash
5.
Supplies
9.
Sales Discounts
2.
Accounts Receivable
6.
Land
10.
Sales Revenue
3.
Notes Receivable
7.
Accounts Payable
11.
Cost of Goods Sold
4.
Inventory
8.
Sales Returns and Allowances
12.
Freight-Out
Entry Information
Account(s)
Debited
Account(s)
Credited
Debit
Amount
Credit
Amount
0
Purchased merchandise for cash of $200
4
1
$ 200
$ 200
1
May 1: Sold merchandise with a cost of
$250 for cash of $450, terms net 30
2
May 2: Purchased merchandise from
Supplier, Inc. on account for $2,000,
terms 2/10, n/30
3
May 7: Returned $500 of merchandise
that had been purchased from Supplier,
Inc. on May 2
4
May 12: Sold merchandise costing $550
to Bike World on account for $900, terms
2/10, n/30. Bike World will pay $40 freight
costs per the shipping terms
5
May 13: Accepted a return of
merchandise from Bike World with a cost
of $60. Granted a credit on account of
$100
6
May 19: Purchased merchandise from AB
Supply on account for $1,600; terms 1/10,
n/30
7
May 20: Paid freight of $90 on the
shipment from Supplier, Inc. per the
shipping terms of purchase on May 3
8
May 21: Received payment in full from
Bike World
9
May 23: Paid Supplier, Inc. in full
10
May 28: Paid AB Supply in full
Achievement Test 3
AT3-5
PART III — INVENTORY COMPUTATIONS (18 points)
Lan Enterprises uses a periodic inventory system for buckets it sells. It had a beginning inventory
on April 1 of 80 units at a cost of $6 per unit. During April, the following purchases and sales were
made.
Purchases Sales
April 7 60 units at $7.00 April 5 120 units at $20
13 120 units at $7.50 11 90 units at $20
23 90 units at $8.00 20 80 units at $20
29 50 units at $8.80 30 40 units at $20
320 330
Instructions: Compute the April 30 ending inventory and April cost of goods sold under (a)
average cost, (b) FIFO, and (c) LIFO. Provide appropriate supporting calculations.
(1) Average – Ending Inventory = $_________; Cost of Goods Sold = $_________.
(2) FIFO – Ending Inventory = $_________; Cost of Goods Sold = $_________.
(3) LIFO – Ending Inventory = $_________; Cost of Goods Sold = $_________.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
AT3-6
PART IV — RATIOS (12 points)
Sanders Enterprises reported the following information for 2014:
Beginning inventory $ 32,000
Cost of goods sold 404,000
Ending inventory 45,000
Net income 28,000
Net sales 750,000
Operating expenses 220,000
Sales revenue 765,000
Instructions: Compute each of the following ratios:
(1) Gross profit rate
(2) Inventory turnover
(3) Days in inventory
(4) Profit margin
PART V — COMPUTATION OF NET PURCHASES/COST OF GOODS SOLD (10 points)
Journey Luggage uses a periodic inventory system and has the following account balances:
Beginning Inventory $31,000 Ending Inventory $ 18,000
Purchase Discounts 2,000 Purchases 240,000
Purchase Returns and Allowances 3,000 Freight-In 11,000
Operating Expenses 88,000 Net sales 489,000
Instructions: Compute each of the following:
(1) Net purchases
(2) Cost of goods available for sale
(3) Cost of goods sold
Achievement Test 3
AT3-7
Solutions — Achievement Test 3: Chapters 5 and 6
PART I — MULTIPLE CHOICE (30 points)
PART II — JOURNAL ENTRIES (30 points)
PART III — INVENTORY COMPUTATIONS (18 points)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
AT3-8
PART IV — RATIOS (12 points)
PART V — COMPUTATION OF NET PURCHASES/COST OF GOODS SOLD (10 points)