Finance Chapter 5 Inventories And Cost Goods Sold The Lifo Conformity Rule Requires That

Chapter 5: Inventories and Cost of Goods Sold

True / False

1. The three forms or states in the development of inventory for a manufacturer are direct materials, direct labor, and

finished goods.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-01 – LO: 05-01

KEYWORDS:

Bloom’s: Remembering

2. The three distinct types of cost to a manufacturer are direct materials, direct labor, and

manufacturing overhead.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-01 – LO: 05-01

KEYWORDS:

Bloom’s: Remembering

3. Gross margin as a percentage of sales is a common analytical tool for service companies.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Remembering

4. Sales revenue is an inflow of assets.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Remembering

5. If a customer returns merchandise which has already been paid for, the retailer may give either a cash refund or a credit

on account.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Applying

6. Sales Returns and Allowances is a contra-asset account.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Remembering

7. Credit terms of n/30 mean that the net amount of the invoice, less any returns or allowances, is due within 30 days of

the date of the invoice.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Understanding

8. On the income statement of a merchandising company, cost of goods is added to net sales to arrive at gross margin or

gross profit.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Understanding

9. Like sales revenue, cost of goods sold represents an inflow of assets.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Understanding

10. Cost of goods sold represents an outflow of an asset, inventory, from the sale of products.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Remembering

11. If cost of goods sold does not equal the cost of merchandise purchased during the period, an adjustment must be made

to correct the error.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Understanding

12. Net purchases equal purchases less purchase return, allowances, and discounts plus transportation-in.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Understanding

13. Cost of goods sold is the difference between costs available for sale and beginning inventory.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Understanding

14. With the periodic inventory system, the inventory account is updated after each sale or purchase.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Understanding

15. Under the periodic inventory system, a physical inventory must be taken at the end of the period to determine cost of

goods sold.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Understanding

16. Under the perpetual inventory system, each time goods are purchased, the inventory account is transferred to sales

revenue.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Understanding

17. A company using the periodic inventory system must total the selling prices of the units on hand at the end of the

period to value the ending inventory.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Understanding

18. Purchase returns and allowances is subtracted from cost of goods sold to determine net purchases.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Understanding

19. Purchase discounts decrease the total cost of merchandise acquired.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Understanding

20. The buyer must include goods purchased FOB shipping point in its inventory account if the goods are still in transit.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Understanding

21. When merchandise is sold FOB shipping point, the buyer is responsible for the shipping costs.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Understanding

22. Cost of goods available for sale is equal to beginning inventory less cost of goods sold.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Understanding

23. The gross profit ratio is computed by dividing net sales by gross profit.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-04 – LO: 05-04

KEYWORDS:

Bloom’s: Remembering

24. The gross profit ratio is calculated as gross profit divided by net income.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-04 – LO: 05-04

KEYWORDS:

Bloom’s: Remembering

25. It important that the proper amount be assigned to inventory because the amount assigned to inventory will affect the

amount eventually recorded as net sales.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-05 – LO: 05-05

KEYWORDS:

Bloom’s: Understanding

26. The inventory method that assigns the most recent costs to ending inventory is LIFO.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-06 – LO: 05-06

KEYWORDS:

Bloom’s: Understanding

27. The weighted average cost is calculated by adding up the units’ costs from each purchase and then dividing by the

number of purchases.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-06 – LO: 05-06

KEYWORDS:

Bloom’s: Understanding

28. Under FIFO, the units in the ending inventory represent the oldest purchase(s).

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-06 – LO: 05-06

KEYWORDS:

Bloom’s: Understanding

29. Specific identification relies on matching unit costs with the actual units sold.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-06 – LO: 05-06

KEYWORDS:

Bloom’s: Understanding

30. Under LIFO, the units in the ending inventory represent the most recent purchase(s).

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-06 – LO: 05-06

KEYWORDS:

Bloom’s: Understanding

31. Changing inventory methods to take advantage of the tax breaks offered by LIFO is not a valid reason for a change in

methods.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-07 – LO: 05-07

KEYWORDS:

Bloom’s: Understanding

32. A LIFO liquidation occurs when a company sells fewer units than it buys during the period.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-07 – LO: 05-07

KEYWORDS:

Bloom’s: Remembering

33. According to the IRS’s LIFO conformity rule, a company that chooses LIFO to report net income to its shareholders

may not use LIFO in preparing its income tax return.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-07 – LO: 05-07

KEYWORDS:

Bloom’s: Understanding

34. A LIFO reserve represents the amount by which cost of goods sold on a FIFO basis exceeds the cost of goods sold on

a LIFO basis for the current year.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-07 – LO: 05-07

KEYWORDS:

Bloom’s: Understanding

35. FIFO results in the least amount of income before taxes, assuming a period of rising prices.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-07 – LO: 05-07

KEYWORDS:

Bloom’s: Understanding

36. The LIFO conformity rule requires that if a company uses LIFO in reporting income to stockholders, it also must use

LIFO on its tax return.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-07 – LO: 05-07

KEYWORDS:

Bloom’s: Understanding

37. Many countries prohibit the use of LIFO for tax or financial reporting purposes.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-07 – LO: 05-07

KEYWORDS:

Bloom’s: Understanding

38. A counterbalancing inventory error is one where the error on the balance sheet is offset by the same amount of error

on the income statement.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-08 – LO: 05-08

KEYWORDS:

Bloom’s: Understanding

39. If ending inventory is understated, then cost of goods sold is overstated.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-08 – LO: 05-08

KEYWORDS:

Bloom’s: Understanding

40. If ending inventory is overstated, then net income is overstated as well.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-08 – LO: 05-08

KEYWORDS:

Bloom’s: Understanding

41. The lower of cost or market (LCM) rule violates the historical cost principle.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-09 – LO: 05-09

KEYWORDS:

Bloom’s: Understanding

42. The journal entry to write down inventory to its market value results in a loss on the income statement.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-09 – LO: 05-09

KEYWORDS:

Bloom’s: Applying

43. Both U.S. GAAP and international financial reporting standards (IFRS) require the use of the lower-of-cost-or-market

rule to value inventories.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-09 – LO: 05-09

KEYWORDS:

Bloom’s: Understanding

44. The inventory turnover ratio is defined as cost of goods sold divided by average inventory.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-10 – LO: 05-10

KEYWORDS:

Bloom’s: Remembering

45. The inventory turnover ratio is a measure of how many times during a period a company sells off its inventory.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-10 – LO: 05-10

KEYWORDS:

Bloom’s: Understanding

46. Under the indirect method, a decrease in inventory is added to net income to determine cash flow from operating

activities.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-11 – LO: 05-11

KEYWORDS:

Bloom’s: Understanding

47. If a change in accounts payable was added back to net income on the statement of cash flows prepared using the

indirect method, then the amount owed to suppliers during the period had decreased.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-11 – LO: 05-11

KEYWORDS:

Bloom’s: Understanding

48. Moving average is the name given to the use of an average cost method used with a periodic inventory system.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-12 – LO: 05-12

KEYWORDS:

Bloom’s: Understanding

49. Whether LIFO costing is applied at the time each sale is made or only at the end of the period, both the periodic and

perpetual systems will yield the same ending inventory under LIFO.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-12 – LO: 05-12

KEYWORDS:

Bloom’s: Understanding

50. Ending inventory valued under the FIFO method will be the same regardless of whether the periodic system or the

perpetual system is used.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-12 – LO: 05-12

KEYWORDS:

Bloom’s: Understanding

51. Finished goods are the equivalent of merchandise inventory for a retailer or wholesaler in that both represent the

inventory of goods held for sale.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-01 – LO: 05-01

KEYWORDS:

Bloom’s: Remembering

52. When inventory is sold by a wholesaler or retailer, it is recorded in a different account on the income statement than a

manufacturer would use.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-01 – LO: 05-01

KEYWORDS:

Bloom’s: Remembering

53. Assets are unexpired costs, and expenses are expired costs.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-05 – LO: 05-05

KEYWORDS:

Bloom’s: Understanding

54. The value assigned to an asset such as inventory on the balance sheet determines the amount eventually recognized as

an expense on the income statement.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-05 – LO: 05-05

KEYWORDS:

Bloom’s: Understanding

55. The effect of a misstatement of the year-end inventory is limited to the net income for that year.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-08 – LO: 05-08

KEYWORDS:

Bloom’s: Understanding

56. If a company has a number of day’s sales in inventory equal to 60, that means that it takes about two months on

average to sell its inventory.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-10 – LO: 05-10

KEYWORDS:

Bloom’s: Remembering

57. Under the indirect method, an increase in accounts payable is added to net income to determine cash flow from

operating activities.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-11 – LO: 05-11

KEYWORDS:

Bloom’s: Understanding

58. If the direct method is used to prepare the Operating Activities category of the statement of cash flows, the amount of

cash paid

to suppliers of inventory is shown as an addition in this section of the statement.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-11 – LO: 05-11

KEYWORDS:

Bloom’s: Understanding

59. The inventory costing method is applied after each sale of merchandise to update the Inventory account.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-12 – LO: 05-12

KEYWORDS:

Bloom’s: Understanding

60. The lower the inventory turnover ratio, the less time inventory resides in storage.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-10 – LO: 05-10

KEYWORDS:

Bloom’s: Remembering

65. Which one of the following accounts most likely would appear on the income statement of a merchandise company,

but not on the income statement of a service company?

a.

Income Tax Expense

b.

Cost of Goods Sold

c.

Selling Expenses

d.

Administrative Expenses

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Applying

66. Which one of the following ratios is a common analytical tool used by merchandise corporations, but not by service

corporations?

a.

Earnings per share

b.

Gross profit ratio

c.

Current ratio

d.

Profit margin

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Applying

67. A customer returned damaged goods for credit. Which of the seller’s accounts decreases?

a.

Sales Returns

b.

Purchase Returns

c.

Accounts Receivable

d.

Sales Revenue

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Applying

68. Travelli Co. sold merchandise to Trapani Co. on account, $17,000, terms 2/15, net 45. The cost of the merchandise

sold is $15,400. Tavella Co. issued a credit memo for $1,750 for merchandise returned that originally cost $1,400. The

Trapani Co. paid the invoice within the discount period. What is amount of net sales from the above transactions?

a.

$17,000

b.

$14,945

c.

$15,250

d.

None of these choices

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Analyzing

69. A company using the periodic inventory system has the following account balances: Merchandise Inventory at the

beginning of the year, $3,600; Freight-In, $650; Purchases, $10,700; Purchases Returns and Allowances, $1,950;

Purchases Discounts, $330. The cost of merchandise purchased is equal to

a.

$8,420

b.

$17,230

c.

$12,670

d.

$9,070

ANSWER:

d

RATIONALE:

$10,700 – $1,950 – $330 + $650 = $9,070

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Analyzing

70. Using the following information, what is the amount of cost of goods sold?

Purchases

$32,000

Purchases discounts

$960

Merchandise inventory

September 1

5,700

Merchandise inventory

September 30

6,370

Sales returns and

allowances

910

Sales

63,000

Purchases returns and

allowances

1,200

Freight In

1,040

a.

$26,900

b.

$20,530

c.

$28,130

d.

$30,210

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Analyzing

71. Which of the following terms best describes “Cost of goods available for sale”?

a.

Cost of goods available for sale is an expense account.

b.

Cost of goods available for sale is added to beginning inventory to determine cost of purchases during the

period.

c.

Cost of goods available for sale is subtracted from net sales to arrive at the gross margin

d.

Cost of goods available for sale is allocated into cost of goods on hand and cost of goods sold at the end of the

fiscal year

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Applying

72. Ending inventory is equal to the cost of items on hand plus

a.

the cost of all inventory purchased during the period.

b.

merchandise in transit sold to customers FOB shipping point.

c.

merchandise purchased in transit with terms FOB destination.

d.

merchandise in transit sold to customers FOB destination.

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Applying

Takenson Corp.

Takenson Corp. is a merchandising company that uses the periodic inventory system. Selected account balances are listed

below:

Sales

$500,000

Purchases

225,000

Inventory (beginning)

16,000

Inventory (ending)

30,000

Operating Expenses

148,000

Income Tax Expense

10,000

Retained Earnings (beginning)

53,000

Dividends

15,000

73. Refer to information for Takenson Corp.

Calculate the cost of goods sold for Takenson Corp.

a.

$275,000

b.

$211,000

c.

$241,000

d.

$259,000

ANSWER:

b

RATIONALE:

$16,000 (Inventory – Beginning) + $225,000 (Purchases) – $30,000 (Inventory – Ending) =

$211,000

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Analyzing

74. Refer to the information for Takenson Corp.

Calculate the gross profit.

a.

$241,000

b.

$275,000

c.

$425,000

d.

$289,000

ANSWER:

d

RATIONALE:

$500,000 Sales – [($16,000 + $225,000 – $30,000) Cost of goods sold] = $289,000

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Analyzing

75. Refer to the information for Takenson Corp.

Calculate net income.

a.

$289,000

b.

$131,000

c.

$141,000

d.

$116,000

ANSWER:

b

RATIONALE:

$289,000 (Gross Profit) – $148,000 (Operating Expenses) – $10,000 (Income Tax Expense)

= $131,000

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Analyzing

George’s Department Store

George’s Department Store is a merchandising company that uses the periodic inventory system. Selected account

balances are listed below:

Sales

$200,000

Purchases

90,000

Inventory (beginning)

23,000

Inventory (ending)

17,000

Purchase returns and allowances

3,000

Purchase discounts

7,000

Transportation-in

4,000

Sales discounts

8,000

Sales returns and allowances

5,000

KEYWORDS:

Bloom’s: Analyzing

76. Refer to the account information for George’s Department Store.

Calculate George’s net sales.

a.

$200,000

b.

$187,000

c.

$195,000

d.

$192,000

ANSWER:

b

RATIONALE:

$200,000 (Sales) – $8,000 (Sales discounts) – $5,000 (Sales returns and allowances) =

$187,000

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Analyzing

77. Refer to the account information for George’s Department Store

Calculate George’s cost of goods purchased

a.

$ 90,000

b.

$ 84,000

c.

$ 117,000

d.

$ 103,000

ANSWER:

b

RATIONALE:

$90,000 (Purchases) + $4,000 (Transportation-in) – $3,000 (Purchase returns and

allowances) – 7,000 (Purchase discounts) = $84,000

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Analyzing

78. Refer to the account information for George’s Department Store.

Determine George’s gross profit.

a.

$93,000

b.

$97,000

c.

None of these choices

d.

$103,000

ANSWER:

b

RATIONALE:

Net Sales =

$200,000 (Sales) – $8,000 (Sales discounts) – $5,000 (Sales

returns and allowances) = $187,000

Cost of goods sold =

$23,000 (Beginning inventory) + [$90,000 (Purchases) + $4,000

(Transportation-in) – $3,000 (Purchase returns and allowances)

– $7,000 (Purchase discounts)] – $17,000 (Ending inventory) =

$90,000

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

79. Anthony’s Shoe Company uses a perpetual inventory system. The beginning balance in its inventory account is $1,500

and the ending balance is $1,000. Cost of goods sold is $6,500. What was the amount of inventory purchased during the

year?

a.

$ 500

b.

$7,000

c.

$7,500

d.

$6,000

ANSWER:

d

RATIONALE:

$6,500 (Cost of goods sold) + $1,000 (Ending inventory) – $1,500 (Beginning inventory) =

$6,000

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-03 – LO: 05-03

KEYWORDS:

Bloom’s: Analyzing

80. What effects on a retail store’s accounting equation occur when merchandise returned by customers is recorded?

a.

Stockholders’ equity decreases and liabilities increase.

b.

Assets and stockholders’ equity decrease.

c.

Assets and stockholders’ equity increase.

d.

Assets decrease and liabilities increase.

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Applying

81. Vern Corp. sold merchandise to a customer on credit. The invoice amount was $2,000; the invoice date was June 10;

credit terms were 1/20, n/30. Which one of the following statements is true?

a.

The customer must pay a $20 penalty if payment is made after July 9.

b.

The customer should pay $2,000 if the invoice is paid on July 9.

c.

The customer must pay $2,020 if payment is made after June 20.

d.

The customer can take a $20 discount if the invoice is paid on June 30.

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Analyzing

82. Grinn, Inc. offers terms of 2/10, n/30 to credit customers. Great Buy Corp. purchased 100 tile cutters with a list price

of $20 each on March 5, 2016, on account. If Great Buy Corp. pays the amount of the invoice for its purchase on March

14, 2016, how much cash will Grinn receive from Great Buy Corp.?

a.

$1,764

b.

$2,000

c.

$1,800

d.

$1,960

ANSWER:

d

RATIONALE:

($20 × 100 Tile cutters) – 98% (or 100% – 2%) = $1,960

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Analyzing

83. Floors, Inc. offers terms of 2/10, n/30 to credit customers. Tile Magic Corp. purchased 100 tile cutters with a list price

of $20 each on August 5, 2016, on account. Tile Magic Corp. paid the invoice on August 31, 2016. How much sales

discount will Floors recognize?

a.

$ 40

b.

$ -0-

c.

$ 200

d.

$ 236

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Analyzing

84. Blenham, Inc. sells merchandise on credit. If a customer pays its balance due within the discount period, what is the

effect of the payment on Blenham’s accounting equation?

a.

Assets and stockholders’ equity decrease.

b.

Assets and stockholders’ equity increase.

c.

Assets decrease and liabilities increase.

d.

Stockholders’ equity decreases and liabilities increase.

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.05-02 – LO: 05-02

KEYWORDS:

Bloom’s: Applying