Achievement Test 3: Chapters 5 and 6 Name _________________________
Financial Accounting, 9e Instructor ______________________
Section # _______ Date _________
Part
I
II
III
IV
V
Total
Points
34
26
20
10
10
100
Score
PART I — MULTIPLE CHOICE (36 points)
Instructions: Designate the best answer for each of the following questions.
____ 1. When a customer returns merchandise purchased on credit, the
a. customer should credit Accounts Payable.
b. seller should credit Sales Returns and Allowances.
c. customer should credit Accounts Receivable.
d. none of these answer choices are correct.
____ 2. Credit terms of 2/10, n/30 mean that
a. a 10% cash discount may be taken if payment is made immediately; a 2% discount
if paid within 30 days.
b. a 2% cash discount may be taken if payment is made within 10 days of the invoice
date; otherwise the full amount is due at the end of the month.
c. an additional amount equal to 2% of the invoice price must be paid if payment is
not received within 10 days; the account is overdue after 30 days.
d. a 2% cash discount may be taken if payment is made within 10 days of the invoice
date; otherwise the full amount is due within 30 days.
____ 3. A periodic inventory system
a. allows for the determination of cost of goods sold after each sale.
b. traditionally has been used with low unit-value items.
c. requires that detailed inventory records be kept.
d. none of these answer choices are correct.
____ 4. In accordance with the revenue recognition principle, sales revenues are recorded
when
a. the goods are transferred from the seller to the buyer.
b. cash is received from the customer for items already delivered.
c. an order is received from a customer with delivery of the product expected to take
place within the next 30 days.
d. the accountant determines which period’s income statement “needs” more
revenue.
Test Bank for Financial Accounting, Ninth Edition
AT3- 2
____ 5. Expenses that relate to such activities as personnel management, accounting, and
office security generally should appear in a multiple-step income statement in the
a. cost of goods sold section.
b. administrative expenses section.
c. nonoperating section.
d. selling expenses section.
____ 6. Which of the following accounts should appear in the nonoperating section of a
multiple-step income statement?
a. Freight-out
b. Sales Discounts
c. Sales Returns and Allowances
d. Interest Expense
____ 7. Freight terms of FOB shipping point mean that the
a. buyer must bear the freight costs.
b. seller must debit freight out.
c. goods are placed free on board at the buyer’s place of business.
d. seller must bear the freight costs.
____ 8. With regard to accounting for a merchandising company versus a service company,
which of the following is false?
a. Additional accounts and entries are typically required for a merchandising
company.
b. Both retail and wholesale enterprises generally use accounting techniques of a
merchandising company.
c. The process of measuring net income is conceptually different.
d. There are just as many steps in the accounting cycle for both types of companies.
____ 9. With regard to the accounts used to record freight costs,
a. Freight-out is added to cost of goods sold.
b. Freight-out has a normal balance of debit.
c. Freight-out is recorded when freight terms are FOB shipping point.
d. Freight-out is a contra account to Sales.
____ 10. The Sales Returns and Allowances account
a. normally has a credit balance.
b. should not be closed at the end of the period.
c. is a contra account to Accounts Receivable.
d. is used by a merchandising company, but not a service enterprise.
____ 11. A debit to Sales Returns and Allowances is evidence of a
a. sale for cash received only.
b. return of goods originally purchased on account.
c. return of goods originally sold.
d. purchase of goods on account.
____ 12. Which of the following accounts is not included in the computation of net sales?
a. Sales Discounts
b. Sales
c. Sales Returns and Allowances
d. Freight Out
Achievement Test 3
AT3- 3
____ 13. Given the following information, compute the amount of cash finally remitted by the
customer.
Oct. 22—Sale on credit, terms of 2/10, n/30—$6,000
Oct. 27—Allowance granted due to some items being damaged—$600
Oct. 31—Payment in full received from customer—$?
a. $5,292.
b. $6,000.
c. $5,280.
d. $5,628.
____ 14. Which statement is false regarding the lower-of-cost-or-market (LCM) method of
inventory?
a. Market is defined as current replacement cost, not selling price.
b. LCM is an example of the accounting concept of conservatism.
c. LCM is applied to individual items listed on the inventory summary sheets.
d. All of these answer choices are correct.
____ 15. Proponents of LIFO, as opposed to FIFO, point out that LIFO results in
a. lower income taxes in a period of deflation.
b. a more current cost of goods sold.
c. lower net income in a period of deflation.
d. higher net income in periods of inflation.
____ 16. Goods in transit should be included in the inventory of the
a. buyer when the terms are FOB destination.
b. buyer when the terms are FOB shipping point.
c. transportation company when the terms are FOB destination.
d. seller when the terms are FOB shipping point.
____ 17. The ending inventory of Larkin Company, which uses a periodic inventory system, was
understated $7,000 on December 31, 2015. Because of this error, 2015 net income
was
a. overstated $5,000.
b. overstated $7,000.
c. understated $2,000.
d. understated $7,000.
Test Bank for Financial Accounting, Ninth Edition
AT3- 4
PART II — JOURNAL ENTRIES (26 points)
The ledger accounts given below, with an identification number for each, are used by Kiner
Company which uses perpetual inventory methods.
Instructions: Prepare appropriate entries for the month of August 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 7. Accounts Payable
2. Accounts Receivable 8. Sales Returns and Allowances
3. Notes Receivable 9. Sales Discounts
4. Inventory 10. Sales Revenue
5. Supplies 11. Cost of Goods Sold
6. Land 12. Freight-Out
———————————————————————————————————————————
Account(s) Account(s) Debit Credit
Entry Information Debited Credited Amount(s) Amount(s)
———————————————————————————————————————————
0. Aug. 1 Sold merchandise for cash $300. 1 10 $300 $300
The cost of the merchandise sold
was $200. 11 4 200 200
1. Aug. 2 Purchased merchandise from
ABC Co. on account for $5,000;
terms 2/10, n/30.
2. Aug. 4 Sold excess land for $7,000
accepting a 2-year, 12% note.
The land was purchased for
$7,000 last year.
3. Aug. 6 Sold merchandise to D. Trent
on account for $1,100, terms 2/10,
n/30. D. Trent will pay $30 freight
costs per the shipping terms. The
merchandise sold cost $800.
4. Aug. 8 Accepted a sales return of misordered
merchandise from D. Trent—credit
granted was $300. The returned
merchandise cost $200.
5. Aug. 11 Purchased merchandise from
Tanner Hardware on account for
$3,000; terms 1/10, n/30.
6. Aug. 12 Paid freight of $200 on the shipment
from Tanner per the shipping terms.
7. Aug. 15 Received payment in full from D.
Trent.
8. Aug. 19 Paid ABC Co. in full.
9. Aug. 20 Paid Tanner Hardware in full.
10. Aug. 27 Purchased supplies for $250
cash.
———————————————————————————————————————————
Achievement Test 3
AT3- 5
PART III — BASIC INVENTORY COMPUTATIONS (20 points)
Vaughn Company, which uses a periodic inventory system, had a beginning inventory on May 1,
of 400 units of Product A at a cost of $7 per unit. During May, the following purchases and sales
were made.
Purchases Sales
May 6 375 units at $9 May 4 275 units
14 250 units at $10 8 350 units
21 300 units at $11 22 450 units
28 425 units at $13 24 225 units
1,350 1,300
Instructions: Compute the May 31 ending inventory and May cost of goods sold under (a)
Average Cost, (b) FIFO, and (c) LIFO. Provide appropriate supporting calculations.
(a) Average – Ending Inventory = $_________; Cost of Goods Sold = $_________.
(b) FIFO – Ending Inventory = $_________; Cost of Goods Sold = $_________.
(c) LIFO – Ending Inventory = $_________; Cost of Goods Sold = $_________.
Test Bank for Financial Accounting, Ninth Edition
AT3- 6
PART IV — CLOSING ENTRIES (10 points)
Below is a partial listing of accounts in the general ledger of Denton Co.
Instructions: Place an X in the appropriate column to designate whether the account should be
closed at year-end and, if so, whether the appropriate closing entry would require a debit or credit
to the account.
———————————————————————————————————————————
Not Closed
Account Closed Debit Credit
———————————————————————————————————————————
1. Sales Revenue …………………………..………………………….. ___ ___ ___
2. Cost of Goods Sold…………………………………………………. ___ ___ ___
3. Accumulated Depreciation – Equipment ……………………… ___ ___ ___
4. Inventory ……………………………………………………………….. ___ ___ ___
5. Sales Returns and Allowances …………………………………. ___ ___ ___
6. Dividends ………………………………………………………………. ___ ___ ___
7. Freight-Out ……………………………………………………………. ___ ___ ___
8. Retained Earnings ………………………………………………….. ___ ___ ___
9. Interest Expense …………………………………………………….. ___ ___ ___
10. Sales Discounts ……………………………………………………… ___ ___ ___
Achievement Test 3
AT3- 7
PART V — INVENTORY: SHORT PROBLEMS (10 points)
Instructions: Complete the requirements specified for each of the following independent
situations.
A. State the missing items identified by “?”.
1. Net purchases + ? = Cost of goods purchased
2. Net purchases + ? + ? = Purchases
3. ? + Purchases – Purchases discounts – Purchases returns and allowances
+ Freight-in = ?
B. Watts Company uses the lower-of-cost-or-market (LCM) basis for its inventory. The
following information relates to its December 31, 2015 inventory. Determine the amount of
the ending inventory applying LCM to individual items.
December 31, 2015
Product Units Unit Cost Market
A 200 $19 22
B 250 29 26
C 300 17 18
D 150 30 28
E 180 16 17
Test Bank for Financial Accounting, Ninth Edition
AT3- 8
Solutions — Achievement Test 3: Chapters 5 and 6
Achievement Test 3
AT3- 9
PART IV — CLOSING ENTRIES (10 points)
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