Question 1

From an accounting point of view,one implication of an effective just-in-time inventory system is that:

Accepted Answer

A) Sales transactions must be recorded using on-line point-of-sale terminals. 
B) Inventories are less material in dollar amount and alternative inventory flow assumptions will produce more similar results. 
C) The cost of goods sold is significantly reduced. 
D) Purchases of merchandise are recorded as cash payments are made,and sales transactions are recorded as cash is received. 
A) Sales transactions must be recorded using on-line point-of-sale terminals. 
B) Inventories are less material in dollar amount and alternative inventory flow assumptions will produce more similar results. 
C) The cost of goods sold is significantly reduced. 
D) Purchases of merchandise are recorded as cash payments are made,and sales transactions are recorded as cash is received.

Question 2

The Valley Garden Company had the following transactions:   (A)Prepare journal entries for Valley Garden assuming the company uses a perpetual inventory.
(B)Prepare journal entries for Valley Garden assuming the company uses a periodic inventory.

Accepted Answer

The answer of The Valley Garden Company had the following...

Question 3

In a period of rising prices,a company is most likely to use the FIFO method of pricing inventory if:

Accepted Answer

A) Each item in the inventory is unique. 
B) Management wants the same unit cost assigned to items sold and items remaining in inventory. 
C) Management's primary objective is to minimize income taxes. 
D) Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income. 
A) Each item in the inventory is unique. 
B) Management wants the same unit cost assigned to items sold and items remaining in inventory. 
C) Management's primary objective is to minimize income taxes. 
D) Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income.

Question 4

In a perpetual inventory system,two entries are normally made to record each sales transaction.The purpose of these entries is best described as follows:

Accepted Answer

A) One entry recognizes the sales revenue and the other recognizes the cost of goods sold. 
B) One entry records the purchase of merchandise and the other records the sale. 
C) One entry records the cost of goods sold and the other reduces the balance in the Inventory account. 
D) One entry updates the subsidiary ledger and the other updates the general ledger. 
A) One entry recognizes the sales revenue and the other recognizes the cost of goods sold. 
B) One entry records the purchase of merchandise and the other records the sale. 
C) One entry records the cost of goods sold and the other reduces the balance in the Inventory account. 
D) One entry updates the subsidiary ledger and the other updates the general ledger.

Question 5

Gross profit method
On April 30,Greenfield Sales,Inc.lost its entire inventory in a flood.The following information is available from the company's accounting records,which were recovered from the waterproof safe:   The gross profit of Greenfield Sales,Inc.over the past several years has consistently averaged 35% of net sales.Using the gross profit method,estimate the cost of the inventory lost in the flood on April 30.

Accepted Answer

The answer of Gross profit method
On April 30,Greenfield Sales,Inc.lost its...

Question 6

Harris Corporation's inventory of a particular product includes 200 units purchased at a per-unit cost of $50,and another 100 units purchased at a unit cost of $60.If Harris sells 10 units of this product,the cost of goods sold will be:

Accepted Answer

A) $500. 
B) $550. 
C) $660. 
D) The answer will depend upon the inventory cost flow assumption in use. 
A) $500. 
B) $550. 
C) $660. 
D) The answer will depend upon the inventory cost flow assumption in use.

Question 7

In order to obtain the maximum tax benefit,companies that use a perpetual inventory system can restate their year-end inventory at costs indicated by periodic LIFO costing procedures.

Accepted Answer

A) True 
 B)False

Question 8

If the inventory at the end of the current year is understated and the error is never caught,the effect is to:

Accepted Answer

A) Understate income this year and overstate income next year. 
B) Overstate income this year and understate income next year. 
C) Understate income this year with no effect on income next year. 
D) Overstate the cost of goods sold,but have no effect on net income. 
A) Understate income this year and overstate income next year. 
B) Overstate income this year and understate income next year. 
C) Understate income this year with no effect on income next year. 
D) Overstate the cost of goods sold,but have no effect on net income.

Question 9

An advantage of the average-cost method of accounting for inventory is that the inventory is valued in the balance sheet at current replacement costs.

Accepted Answer

A) True 
 B)False

Question 10

Accounting terminology
Listed below are eight technical accounting terms introduced in this chapter:
1.Just-in-time
2.Average-cost method
3.LIFO method
4.Gross profit method
5.Inventory shrinkage
6.FIFO method
7.Retail method
8.Inventory turnover
Each of the following statements may (or may not)describe one of these technical terms.In the space provided below each statement,indicate the accounting term described,or answer "None" if the statement does not correctly describe any of the terms.
_______ a.The cost flow assumption in which the oldest units purchased are assumed to have remained in inventory.
_______ b.A method of estimating the cost of goods sold and ending inventory based upon cost relationships from prior periods.
_______ c.The practice of valuing inventory in the balance sheet at expected sales prices,rather than at cost.
_______ d.An inventory cost flow assumption involving only one "cost layer."
_______ e.The inventory cost flow assumption likely to result in the highest reported amount of gross profit during a period of rising prices.
_______ f.A technique for minimizing a company's investment in inventory,particularly inventories of raw materials and finished goods.
_______ g.A measure of a company's ability to sell its inventory quickly.

Accepted Answer

(a)LIFO method,(b)Gross profit

Question 11

If an error in valuing inventory occurs in one year:

Accepted Answer

A) It has no effect upon income in the following year. 
B) It has no effect upon the income statement,only on the balance sheet. 
C) It is self-correcting after two years. 
D) Retained earnings will be adversely affected until corrected. 
A) It has no effect upon income in the following year. 
B) It has no effect upon the income statement,only on the balance sheet. 
C) It is self-correcting after two years. 
D) Retained earnings will be adversely affected until corrected.

Question 12

Comparison of LIFO and FIFO
Both Company X and Company Y sell the same product.The cost of this product has been rising steadily throughout the year.Both companies reported the same net income for the year,although Company X used the first-in,first-out method of pricing inventory,while Company Y used the last-in,first-out method.
(a)Which company's valuation of ending inventory in the balance sheet is more likely to approximate replacement cost?
Company ______________________________
(b)Which company reports a cost of goods sold figure in the current year income statement that is more likely to reflect the replacement cost of the units sold?
Company ______________________________
(c)Which company is minimizing income taxes it must pay?
Company ______________________________
(d)Which company would have reported the higher net income if both companies had used the same method of pricing inventory?
Company ______________________________

Accepted Answer

(a)Company X (FIFO m

Question 13

A write down of inventory due to obsolescence reduces the amount in the Inventory account and may increase the amount in the Cost of Goods Sold account.

Accepted Answer

A) True 
 B)False

Question 14

The lower-of-cost-or-market rule:

Accepted Answer

A) Is used in conjunction with any inventory cost flow assumptions. 
B) Cannot be used if LIFO or FIFO is also used. 
C) Can be used in conjunction with LIFO but not FIFO. 
D) Can only be used with the specific identification. 
A) Is used in conjunction with any inventory cost flow assumptions. 
B) Cannot be used if LIFO or FIFO is also used. 
C) Can be used in conjunction with LIFO but not FIFO. 
D) Can only be used with the specific identification.

Question 15

Which of the following is not considered an acceptable inventory cost method according to GAAP?

Accepted Answer

A) First-in,first-out. 
B) First-in,last-out. 
C) Last-in,first-out. 
D) Average cost. 
A) First-in,first-out. 
B) First-in,last-out. 
C) Last-in,first-out. 
D) Average cost.

Question 16

Any business that sells numerous units of identical products may determine its cost of goods sold using a cost flow assumption,rather than the specific identification method.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following inventory valuation methods is only an estimate of actual costs?

Accepted Answer

A) Only the retail method. 
B) Only the gross profit method. 
C) Both retail and gross profit methods are only estimations. 
D) Neither the retail nor the gross profit methods are estimations. 
A) Only the retail method. 
B) Only the gross profit method. 
C) Both retail and gross profit methods are only estimations. 
D) Neither the retail nor the gross profit methods are estimations.

Question 18

Inventory flow assumptions
The perpetual inventory records of Handy Hardware show 150 units of a particular product on hand,acquired at the following dates and costs:   On June 3,Handy sold 120 units of this product.
Instructions: Prepare a journal entry to record the cost of goods sold relating to the sale on June 3,assuming that Handy uses: (Show your computations as per below format.)
(a)A LIFO flow assumption.
(b)A FIFO flow assumption.
(c)The average cost (or moving average)flow assumption.

Accepted Answer

The answer of Inventory flow assumptions
The perpetual inventory records of...

Question 19

The specific identification method is acceptable only when the actual cost of individual units of merchandise can be determined from the accounting records.

Accepted Answer

A) True 
 B)False

Question 20

The inventory method used by a company will affect profitability by affecting the amount of income taxes a company owes.

Accepted Answer

A) True 
 B)False

Exam 8: Inventories and the Cost of Goods Sold

From an accounting point of view,one implication of an effective just-in-time inventory system is that:

The Valley Garden Company had the following transactions: (A)Prepare journal entries for Valley Garden assuming the company uses a perpetual inventory. (B)Prepare journal entries for Valley Garden assuming the company uses a periodic inventory.

In a period of rising prices,a company is most likely to use the FIFO method of pricing inventory if:

In a perpetual inventory system,two entries are normally made to record each sales transaction.The purpose of these entries is best described as follows:

Harris Corporation's inventory of a particular product includes 200 units purchased at a per-unit cost of $50,and another 100 units purchased at a unit cost of $60.If Harris sells 10 units of this product,the cost of goods sold will be:

In order to obtain the maximum tax benefit,companies that use a perpetual inventory system can restate their year-end inventory at costs indicated by periodic LIFO costing procedures.

If the inventory at the end of the current year is understated and the error is never caught,the effect is to:

An advantage of the average-cost method of accounting for inventory is that the inventory is valued in the balance sheet at current replacement costs.

If an error in valuing inventory occurs in one year:

A write down of inventory due to obsolescence reduces the amount in the Inventory account and may increase the amount in the Cost of Goods Sold account.

The lower-of-cost-or-market rule:

Which of the following is not considered an acceptable inventory cost method according to GAAP?

Any business that sells numerous units of identical products may determine its cost of goods sold using a cost flow assumption,rather than the specific identification method.

Which of the following inventory valuation methods is only an estimate of actual costs?

The specific identification method is acceptable only when the actual cost of individual units of merchandise can be determined from the accounting records.

The inventory method used by a company will affect profitability by affecting the amount of income taxes a company owes.

Accounting: Information for Decision Making

Basic Financial Statements

The Accounting Cycle: Capturing Economic Events

The Accounting Cycle: Accruals and Deferrals

The Accounting Cycle: Reporting Financial Results

Merchandising Activities

Financial Assets

Plant and Intangible Assets

Liabilities

Stockholders Equity: Paid-In Capital

Income and Changes in Retained Earnings

Statement of Cash Flows

Financial Statement Analysis

Global Business and Accounting

Management Accounting: a Business Partner

Job Order Cost Systems and Overhead Allocations

Process Costing

Costing and the Value Chain

Cost-Volume-Profit Analysis

Incremental Analysis

Responsibility Accounting and Transfer Pricing

Operational Budgeting

Standard Cost Systems

Rewarding Business Performance

Capital Budgeting

Forms of Business Organization

The Time Value of Money: Future Amounts and Present Values

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