Chapter 5: Inventories and Cost of Goods Sold
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
149. If a company understates its ending inventory balance for 2016 by $15,500, what are the effects on its net income for
2017 and 2016?
Effect on 2017 Net Income Effect on 2016 Net Income
a.
Overstated by $15,500 Understated by $15,500
b.
Understated by $15,500 Overstated by $15,500
c.
Understated by $15,500 No effect
d.
Overstated by $15,500 No effect
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-08 – LO: 05-08
KEYWORDS:
Bloom’s: Applying
150. If a company overstates its ending inventory balance for 2017 by $10,000, and understates its ending inventory
balance for 2016 by $5,000 what are the effects on its net income for 2017 and 2016?
Effect on 2017 Net Income Effect on 2016 Net Income
a.
Understated by $5,000 Overstated by $10,000
b.
Overstated by $15,000 Understated by $10,000
c.
Overstated by $15,000 Understated by $5,000
d.
Overstated by $10,000 Understated by$5,000
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-08 – LO: 05-08
KEYWORDS:
Bloom’s: Applying
151. If a company overstates its ending inventory balance for 2017 by $10,000, and overstates its ending inventory
balance for 2016 by $5,000 what are the effects on its net income for 2017 and 2016?
Effect on 2017 Net Income Effect on 2016 Net Income
a.
Overstated by $5,000 Overstated by $5,000
b.
Overstated by $15,000 Overstated by $10,000
c.
Overstated by $10,000 Overstated by $5,000
d.
Understated by $5,000 Overstated by $10,000
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-08 – LO: 05-08
KEYWORDS:
Bloom’s: Understanding
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
152. When the market value of inventory items has declined below its cost, which method would be the most appropriate
in complying with GAAP?
a.
Lower of Cost or market
b.
LIFO
c.
Retail
d.
Gross Profit
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-09 – LO: 05-09
KEYWORDS:
Bloom’s: Understanding
153. When inventories are written down due to the application of the lower of cost or market (LCM) rule, the account that
is usually increased is
a.
Accumulated Depreciation—Inventory
b.
Inventories
c.
Loss on Decline in Inventory Value
d.
Cost of Goods Sold
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-09 – LO: 05-09
KEYWORDS:
Bloom’s: Understanding
154. Which one of the following statements regarding the application of the lower of cost or market method is true?
a.
The lower of cost or market method is most commonly applied on a total inventory basis because it is a more
conservative approach.
b.
The lower of cost or market method is an exception to the historical cost principle.
c.
When the lower of cost or market method is used, inventories are valued at selling price.
d.
Generally, market value is greater than replacement cost.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-09 – LO: 05-09
KEYWORDS:
Bloom’s: Understanding
155. All of the following statements are true except:
a.
IFRS uses net realizable value with no upper or lower limits imposed.
b.
Both U.S. GAAP and international financial reporting standards (IFRS) require the use of the lower-of-cost-
or-market rule to value inventories.
c.
Write-downs of inventory can be reversed in later periods under U.S. GAAP.
d.
U.S. GAAP defines market value as replacement cost.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-09 – LO: 05-09
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
156. Which of these is not an acceptable inventory costing method under IFRS?
a.
FIFO
b.
Specific Identification
c.
Average cost
d.
LIFO
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-09 – LO: 05-09
KEYWORDS:
Bloom’s: Analyzing
157. Selected data for Sorenta, Inc. and New World Corp., two companies in the same industry, are presented below:
Sorenta, Inc.
New World Corp.
Sales
$50,000
$80,000
Cost of goods sold
30,000
50,000
Average inventory balance
5,000
5,000
Based on this data, which statement below is true?
a.
New World Corp sells its inventory faster than Sorenta, Inc.
b.
Sorenta, Inc. has a lower gross profit ratio than New World Corp.
c.
Sorenta, Inc. has lower storage costs and a lower investment in inventory than New World Corp.
d.
New World Corp has a higher net income than Sorenta, Inc.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-10 – LO: 05-10
KEYWORDS:
Bloom’s: Analyzing
158. Caruso, Inc. has an inventory turnover rate of 8 times. If its cost of goods sold is $150,000, then
a.
It sells its inventory 1,200 times per year.
b.
The company will report sales of $1,200,000.
c.
The gross margin will be $1,200,000.
d.
The company’s average inventory is $18,750.
ANSWER:
d
RATIONALE:
$150,000 (Cost of Goods Sold)/8.0 Times = $18,750
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-10 – LO: 05-10
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
159. A company began the year with $150,000 in inventory and ended the year with $170,000 in inventory. Cost of goods
sold for the year amounted to $960,000. Assuming 360 days in a year, how long, on average, does it take the company to
sell its inventory (to the nearest day)?
a.
3 days
b.
60 days
c.
6 days
d.
120 days
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-10 – LO: 05-10
KEYWORDS:
Bloom’s: Analyzing
160. The following information is reported in the operating activities section of Gateway’s statement of cash flows for
2016:
Net income
$1,200,000
Increase in inventories
600,000
Decrease in accounts payable
400,000
Which one of the following conclusions can be assumed from the information provided?
a.
Gateway purchased more merchandise than it sold in 2016.
b.
Cash payments for merchandise exceeded cost of goods sold by $200,000.
c.
Gateway used the direct method to determine cash flows from operating activities.
d.
Cash payments for merchandise purchases were less than the amount of merchandise purchased on credit
during 2016.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-11 – LO: 05-11
KEYWORDS:
Bloom’s: Analyzing
161. The following information was taken from the operating activity section of the 2016 statement of cash flows for
Limited Corp:
Additions to net income: Change in accounts payable
$2,000
Deductions from net income: Change in inventories
8,000
Based on the information provided, which one of the following conclusions is correct?
a.
Inventories increased $8,000 in 2016.
b.
The direct method was used to prepare the operating section of the cash flow statement.
c.
Cash payments of merchandise exceeded cost of goods sold by $2,000.
d.
Accounts payable decreased $2,000 in 2016.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-11 – LO: 05-11
KEYWORDS:
Bloom’s: Understanding
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
162. Payment for the acquisition of inventories is shown on the statement of cash flows as
a.
An investing activity
b.
A financing activity
c.
An operating activity
d.
Either an operating activity or a financing activity
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-11 – LO: 05-11
KEYWORDS:
Bloom’s: Understanding
163. Which of the following statements is true when using the indirect method of preparing the operating activities section
of the statement of cash flows?
a.
Inventory decreases are subtracted from net income.
b.
Inventory increases are subtracted from net income.
c.
Inventory increases are added to net income.
d.
None of the above.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-11 – LO: 05-11
KEYWORDS:
Bloom’s: Analyzing
164. Readers.com uses a perpetual inventory system.
Feb. 1
On hand, 30 units at $5.00 each
$150
8
Purchased 40 units at $5.35 each
214
15
Sold 50 units
22
Purchased 40 units at $5.20 each
208
28
On hand, 60 units
If Readers.com uses the moving average method, how much is cost of goods sold for the units sold on February 15?
a.
$255
b.
$260
c.
$270
d.
$245
ANSWER:
b
RATIONALE:
[[($5 × 30) + ($5.35 × 40)] / (30 + 40)] × 50 = $260
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 – LO: 05-12
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
165. Readers.com uses a perpetual inventory system.
Feb. 1
On hand, 30 units at $5.00 each
$150
8
Purchased 40 units at $5.35 each
214
15
Sold 50 units
22
Purchased 40 units at $5.20 each
208
28
On hand, 60 units
If Readers.com uses the moving average method, how much is ending inventory on February 28?
a.
$312
b.
$318
c.
$300
d.
$306
ANSWER:
a
RATIONALE:
Feb 15 – [($5 × 30) + ($5.35 × 40)/(30+40)] × 50] = $260 or $5.20 per unit
Feb 28 – [($5.20 × 20) + ($5.20 × 40)/(20 + 40)] × 60 = $312
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 – LO: 05-12
KEYWORDS:
Bloom’s: Analyzing
166. Adam Inc. uses a perpetual inventory system.
Jan. 1
On hand, 10 units at $2 each
$ 20
4
Sold 8 units for $10 each
80
22
Purchased 50 units at $4 each
200
26
Sold 48 units for $10 each
480
If Adam uses the FIFO method, how much is cost of goods sold for the month of January?
a.
$208
b.
$212
c.
$560
d.
$204
ANSWER:
d
RATIONALE:
($2 × 10) + ($4 × 46) = $204
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 – LO: 05-12
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
167. Adam Inc. uses a perpetual inventory system.
Jan. 1
On hand, 10 units at $2 each
$ 20
4
Sold 8 units for $10 each
80
22
Purchased 50 units at $4 each
200
26
Sold 48 units for $10 each
480
If Adam uses the LIFO method, how much is cost of goods sold for the month of January?
a.
$208
b.
$560
c.
$204
d.
$212
ANSWER:
a
RATIONALE:
($2 × 8) + ($4 × 48) = $208
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 – LO: 05-12
KEYWORDS:
Bloom’s: Analyzing
168. Adam Inc. uses a perpetual inventory system.
Jan. 1
On hand, 10 units at $2 each
$ 20
4
Sold 8 units for $10 each
80
22
Purchased 50 units at $4 each
200
26
Sold 48 units for $10 each
480
If Adam uses the FIFO method, how much is ending inventory on January 31?
a.
$ 12
b.
$ 16
c.
$ 40
d.
$ 8
ANSWER:
b
RATIONALE:
$4 × 4 = $16
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 – LO: 05-12
KEYWORDS:
Bloom’s: Analyzing
169. Which one of the following best explains the distinction between inventory and an operating asset?
a.
ownership
b.
cost
c.
intent
d.
purchase price
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-01 – LO: 05-01
KEYWORDS:
Bloom’s: Applying
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
170. Which one of the following would not be found as an asset on the balance sheet of a manufacturer?
a.
finished goods
b.
work in process
c.
merchandise inventory
d.
raw materials
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-01 – LO: 05-01
KEYWORDS:
Bloom’s: Applying
171. Which one of the following statements is false regarding the gross profit ratio?
a.
The gross profit ratio is a measure of profitability.
b.
The gross profit ratio is calculated by dividing net sales by gross profit.
c.
The gross profit ratio can help investors decide whether or not to buy a company’s stock.
d.
The gross profit ratio should be compared with both a company’s prior years’ ratios and also competitor ratios.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-04 – LO: 05-04
KEYWORDS:
Bloom’s: Understanding
172. Which of the following would not be included in inventory costs?
a.
Shelving to hold the inventory.
b.
The cost of insurance taken out during the time that inventory is in transit.
c.
The cost of storing inventory before it is ready to be sold.
d.
Freight costs incurred by the buyer in shipping inventory to its place of business.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-05 – LO: 05-05
KEYWORDS:
Bloom’s: Understanding
Completion
173. The inventory of a(n) ____________________ consists of three distinct types of costs: direct materials, direct labor,
and manufacturing overhead.
ANSWER:
manufacturer
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-01 – LO: 05-01
KEYWORDS:
Bloom’s: Remembering
174. Sales returns and allowances is a contra ____________________ account.
ANSWER:
revenue
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-02 – LO: 05-02
KEYWORDS:
Bloom’s: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
175. A _________________________ is an amount deducted by customers for payment within the discount period.
ANSWER:
purchase discount
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-02 – LO: 05-02
KEYWORDS:
Bloom’s: Remembering
176. Cost of goods sold is equal to beginning inventory plus the net cost of purchases minus
_________________________.
ANSWER:
ending inventory
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 – LO: 05-03
KEYWORDS:
Bloom’s: Remembering
177. Under the ____________________ inventory system, the inventory account is updated after each purchase or sale.
ANSWER:
perpetual
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 – LO: 05-03
KEYWORDS:
Bloom’s: Remembering
178. The cost of goods purchased is equal to net purchases plus ____________________.
ANSWER:
freight-in
transportation-in
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 – LO: 05-03
KEYWORDS:
Bloom’s: Remembering
179. Shipping terms of ___________________________________ mean that the buyer pays shipping costs.
ANSWER:
FOB shipping point
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 – LO: 05-03
KEYWORDS:
Bloom’s: Remembering
180. The amount recognized on the Income Statement as the cost of inventory will be recognized as a(n)
_________________________.
ANSWER:
cost of goods sold
expense
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-05 – LO: 05-05
KEYWORDS:
Bloom’s: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
181. When a company using LIFO experiences a partial or complete liquidation of its older, lower-priced inventory, its
gross margin will be ____________________ (higher, lower, or unchanged) for the period.
ANSWER:
higher
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-07 – LO: 05-07
KEYWORDS:
Bloom’s: Remembering
182. The ____________________ method most nearly approximates replacement cost of inventory on the balance sheet.
ANSWER:
FIFO
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-07 – LO: 05-07
KEYWORDS:
Bloom’s: Remembering
183. The excess of the value of a company’s inventory stated at FIFO over the value stated at LIFO is called a(n)
_________________________.
ANSWER:
LIFO reserve
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-07 – LO: 05-07
KEYWORDS:
Bloom’s: Remembering
184. The ____________________ method results in the best approximation of replacement cost of goods sold on the
income statement during periods of rising prices.
ANSWER:
LIFO
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-07 – LO: 05-07
KEYWORDS:
Bloom’s: Remembering
185. The understatement of ending inventories in one period leads to a(n) ____________________ of cost of goods sold
expense in the same period.
ANSWER:
overstatement
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-08 – LO: 05-08
KEYWORDS:
Bloom’s: Remembering
186. A departure from the cost basis of accounting may be necessary when the _________________________ of the
inventory is less than its cost to the company.
ANSWER:
market value
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-09 – LO: 05-09
KEYWORDS:
Bloom’s: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
187. Accountants define the market value of inventory as its ______________________________.
ANSWER:
replacement cost
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-09 – LO: 05-09
KEYWORDS:
Bloom’s: Remembering
188. The ratio of a company’s cost of goods sold to its average inventory is called its
________________________________________.
ANSWER:
inventory turnover ratio
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-10 – LO: 05-10
KEYWORDS:
Bloom’s: Remembering
189. Under the ____________________ method, the amount of cash paid to suppliers of inventory is shown as a
deduction in the operating activities category of the cash flow statement.
ANSWER:
direct
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-11 – LO: 05-11
KEYWORDS:
Bloom’s: Remembering
190. Under the ____________________ method, an increase in inventory is shown as an adjustment to net income in the
operating activities category of the cash flow statement.
ANSWER:
indirect method
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-11 – LO: 05-11
KEYWORDS:
Bloom’s: Remembering
191. When a weighted average cost assumption is applied with a perpetual system, it is sometimes called a
__________________.
ANSWER:
moving average
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-12 – LO: 05-12
KEYWORDS:
Bloom’s: Remembering
Chapter 5: Inventories and Cost of Goods Sold
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Matching
Match the inventory-related accounts to costs that may be included in inventories for retailers and manufacturers.
a.
Merchandise Inventory
b.
Raw Materials
c.
Work in Process
d.
Finished Goods
e.
Cost of Goods Sold
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-01 – LO: 05-01
KEYWORDS:
Bloom’s: Remembering
192. Cost of completed, but unsold items.
ANSWER:
d
193. Costs of direct materials, overhead, and direct labor used in goods that have been sold.
ANSWER:
e
194. Costs of direct materials, overhead, and direct labor used in unfinished goods.
ANSWER:
c
195. Cost of materials which are not yet entered into the production process.
ANSWER:
b
196. Costs to purchase goods ready to sell.
ANSWER:
a
Match the terms with the descriptions related to merchandise sales and purchases.
a.
Transportation-in
b.
Perpetual inventory system
c.
Net purchases
d.
FOB Destination
e.
Cost of goods available for sale
f.
Periodic inventory system
g.
FOB Shipping point
h.
Delivery expense
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 – LO: 05-03
KEYWORDS:
Bloom’s: Remembering
197. The buyer must pay the shipping costs.
ANSWER:
g
198. The seller is responsible for the cost of delivering the merchandise to the buyer.
ANSWER:
d
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
199. Requires updating of the inventory account at the time of each purchase and each sale.
ANSWER:
b
200. Shipping costs paid to acquire merchandise.
ANSWER:
a
201. Relies on a count of inventory on the last day of the year to determine amount on hand.
ANSWER:
f
Maxim Company sells auto parts. The company employs a periodic inventory system. Identify all the effects on the
accounting equation.
a.
Increase in assets
b.
Decrease in assets
c.
Increase in liabilities
d.
Decrease in liabilities
e.
Increase on owners’ equity
f.
Decrease in owners’ equity
g.
Increase in assets and increase in owners’ equity
h.
Decrease in assets and decrease in owners’ equity
i.
Increase in liabilities and decrease in owners’ equity
j.
Decrease in liabilities and increase in owners’ equity
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 – LO: 05-03
KEYWORDS:
Bloom’s: Applying
202. Sold merchandise on credit to customers.
ANSWER:
g
203. Granted a customer a credit on its balance due for goods that were returned.
ANSWER:
h
204. Gave a customer a cash refund.
ANSWER:
h
205. Recorded cash sales for the day.
ANSWER:
g
Chapter 5: Inventories and Cost of Goods Sold
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Match the costs that might be included as part of the cost of inventory to the listed accounting treatment.
a.
Add to inventory cost
b.
Subtract from inventory cost
c.
Not an inventory cost
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-05 – LO: 05-05
KEYWORDS:
Bloom’s: Applying
206. Cost of insurance during transit to acquire inventory items
ANSWER:
a
207. Excise taxes paid on goods acquired
ANSWER:
a
208. Cost of storing the goods before they are sold to customers
ANSWER:
a
209. Invoice price paid for resale goods
ANSWER:
a
210. Freight costs incurred by the buyer to ship goods to its place of business
ANSWER:
a
211. Freight costs incurred by the seller to ship goods to its customers
ANSWER:
c
212. Income taxes paid on profits earned from selling goods to customers
ANSWER:
c
213. Sales taxes paid on goods acquired
ANSWER:
a
Identify which inventory costing method (LIFO or FIFO) achieves the effect listed in the following items:
a.
LIFO
b.
FIFO
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-07 – LO: 05-07
KEYWORDS:
Bloom’s: Applying
214. Prices are rising; profits are higher with this method.
ANSWER:
b
215. Prices are declining; income taxes are higher with this method.
ANSWER:
a
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
216. Prices are rising; cost of goods sold is lower with this method.
ANSWER:
b
217. Prices are declining; gross margin is higher with this method.
ANSWER:
a
Subjective Short Answer
218. During the current period, Mercado Corp. sold products to customers for a total of $76,000. Due to defective
products, customers were given $2,800 in refunds for products that were returned and another $3,500 in reductions to their
account balances. Discounts in the amount of $5,500 were given for early payment of account balances.
REQUIRED:
Prepare the Net Sales section of Mercado’s income statement.
ANSWER:
Sales revenue
$ 76,000
Less:
Sales returns and allowances
(6,300)
Sales discounts
(5,500)
Net sales
$ 64,200
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.05-02 – LO: 05-02
KEYWORDS:
Bloom’s: Analyzing
219. Based upon the following data, determine the cost of merchandise sold for April.
Merchandise Inventory April 1
$ 85,560
Merchandise Inventory April 30
96,330
Purchases
373,880
Purchases Returns & Allowances
14,760
Purchases Discounts
10,900
Freight In
4,135
ANSWER:
Cost of merchandise sold:
Merchandise Inventory April 1
$ 85,560
Purchases
$373,880
Less: Purchases Returns and Allowances
$14,760
Purchases Discounts
10,900
(25,660)
Net Purchases
$348,220
Add Freight In
4,135
Cost of merchandise purchased
352,355
Merchandise available for sale
437,915
Less merchandise inventory, April 30
(96,330)
Cost of merchandise sold
$341,585
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 – LO: 05-03
KEYWORDS:
Bloom’s: Analyzing
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220. Complete the following data taken from the condensed income statements for merchandising companies: Action,
Break, & Connors.
Action
Break
Connors
Net income
315
?
215
Sales
?
865
560
Gross profit
430
?
325
Operating expenses
?
125
?
Cost of merchandise sold
545
320
?
ANSWER:
Action
Break
Connors
Net income
315
420
215
Sales
975
865
560
Gross profit
430
545
325
Operating expenses
115
125
110
Cost of merchandise sold
545
320
235
OR rearranged in the order of the income statement:
Action
Break
Connors
Sales
975
865
560
Less: Cost of merch. sold
545
320
235
Gross profit
430
545
325
Less: Operating expenses
115
125
110
Net income
315
420
215
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 – LO: 05-03
KEYWORDS:
Bloom’s: Analyzing
221. For each of the following, calculate the cost of inventory reported on the balance sheet.
(a)
The total merchandise inventory counted at the end of the year was $73,000. Purchases for
$5,000 are in transit under FOB shipping point terms.
(b)
The total merchandise inventory counted at the end of the year was $75,000. Purchases
for $5,000 are in transit under FOB destination terms.
ANSWER:
(a)
$78,000 = $73,000 + 5,000
(b)
$75,000 (The $5,000 is not part of the inventory until it reaches the company.)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-03 – LO: 05-03
KEYWORDS:
Bloom’s: Analyzing
222. Hound Dog Bisquits reported the following financial data for 2016 and 2017:
2016
2017
Sales
$700,000
$600,000
Sales returns and allowances
(10,000)
(D)
Net sales
690,000
580,000
Cost of goods sold:
Inventory, January 1
30,000
E
Net purchases
A
340,000
Goods available for sale
250,000
380,000
Inventory, December 31
(40,000)
(30,000)
Cost of goods sold
B
F
Gross profit
C
G
======
======
Provide the answer for each missing letter above.
ANSWER:
A)
$220,000 ($250,000 – $30,000)
B)
$210,000 ($250,000 – $40,000)
C)
$480,000 ($690,000 – $210,000)
D)
$20,000 ($600,000 – $580,000)
E)
$40,000 (from 2016 ending inventory)
F)
$350,000 ($380,000 – $350,000)
G)
$230,000 ($580,000 – $350,000)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.05-02 – LO: 05-02
FACC.PONO.13.05-03 – LO: 05-03
KEYWORDS:
Bloom’s: Analyzing