Accounting Volume 1 Canadian 9th Edition By Charles T. Horngren – Test Bank

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Accounting Volume 1 Canadian 9th Edition By Charles T. Horngren – Test Bank

Accounting, Vol. 1, 9e Cdn. Ed. (Horngren et al.)

Chapter 6   Accounting for Merchandise Inventory

 

Objective 6-1

 

1) All balance sheets have inventory listed as an asset.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

2) The two main types of inventory systems are the perpetual system and the periodic system.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

3) Gross margin is the excess of net sales revenue over cost of goods sold.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

4) The inventory costing method used must match the physical flow of goods in and out of inventory.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

5) Under moving-weighted-average cost method, the cost of goods sold is based on the oldest purchases.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

6) It is  necessary to do a physical count of inventory when using a perpetual inventory system.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

7) Measuring the cost of inventory is difficult when prices are constant.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

8) FIFO costing is consistent with the physical movement of inventory for many companies.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

9) The specific-unit-cost method is useful for inventory items that have common characteristics, such as tonnes of ore or litres of paint.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

10) The specific-unit-cost method is useful for inventory items that have a distinctive identity.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

11) Under the FIFO method, ending inventory is valued based on the most recent purchases.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

12) Under the perpetual system, ending inventory and cost of goods sold will be the same when FIFO inventory costing method is used.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

13) In a perpetual inventory system, recording a sale also includes a corresponding journal entry to record the inventory reduction.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

14) A FIFO perpetual inventory system:

  1. A) assigns the most recent costs to ending inventory.
  2. B) assigns the most recent costs to cost of goods sold when goods are sold.
  3. C) reports the oldest costs for ending inventory values.
  4. D) does not match the typical physical flow of goods.

Answer:  A

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

15) Inventory is classified:

  1. A) as a property, plant, and equipment asset on the balance sheet.
  2. B) as a current asset on the balance sheet.
  3. C) as a current liability on the balance sheet.
  4. D) as either an investment or a current asset on the balance sheet.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

16) A perpetual inventory system:

  1. A) keeps a running record of all goods.
  2. B) can be maintained only with computer software.
  3. C) is used only for inexpensive goods.
  4. D) does not required a physical count at the end of the fiscal year.

Answer:  A

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

17) Which of the following is not an acceptable inventory cost method?

  1. A) first-in, first-out
  2. B) last-out, first-in
  3. C) specific-unit-cost
  4. D) weighted-average cost

Answer:  B

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

18) If inventory items may be identified individually, the business could easily use this method of inventory costing:

  1. A) average cost.
  2. B) specific-unit-cost.
  3. C) FIFO.
  4. D) weighted-average cost.

Answer:  B

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

19) Which of the following methods represents the most accurate cost?

  1. A) FIFO
  2. B) specific-unit-cost
  3. C) average cost
  4. D) weighted-average cost

Answer:  B

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

20) A jeweller selling unique, high-priced items of jewellery would most likely use which method of inventory costing?

  1. A) FIFO
  2. B) average cost
  3. C) specific-unit-cost
  4. D) weighted-average cost

Answer:  C

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

21) Refer to Table 6-1. Assume a perpetual inventory system and all sales occurred prior to October 30th. Under the FIFO method, cost of goods sold on the income statement would be:

  1. A) $375.
  2. B) $537.
  3. C) $162.
  4. D) $420.

Answer:  A

Explanation:  A) [(10 × $7) + (15 × $9) + (17 × $10)] = $375

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

22) Which of the following inventory costing methods requires a company to keep track of the actual physical movement of individual inventory items?

  1. A) specific-unit-cost
  2. B) weighted-average cost
  3. C) FIFO
  4. D) average cost

Answer:  A

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

23) Given the following data, what is the weighted-average cost of ending inventory rounded to the nearest whole dollar?

 

Sales revenue 100 units at $10 per unit
Beginning inventory 50 units at $8 per unit
Purchases 90 units at $9 per uni

 

  1. A) $400
  2. B) $360
  3. C) $346
  4. D) $864

Answer:  C

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

24) When the FIFO method is used, ending inventory is assumed to consist of the:

  1. A) oldest units.
  2. B) most recently purchased units.
  3. C) units with the highest per unit cost.
  4. D) units with the lowest per unit cost.

Answer:  B

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

25) When the FIFO method of inventory valuation is used, cost of goods sold is assumed to consist of the:

  1. A) most recently purchased units.
  2. B) most expensive units.
  3. C) least expensive units.
  4. D) oldest units.

Answer:  D

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

26) If a company uses a perpetual inventory system, it will maintain all the following accounts except:

  1. A) cost of goods sold.
  2. B) inventory.
  3. C) sales.
  4. D) purchases.

Answer:  D

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

27) The adjusting entry at year end under a perpetual inventory system to record cost of goods sold includes a:

  1. A) debit to cost of goods sold and a credit to inventory for the ending balance of inventory.
  2. B) debit to purchases and a credit to cost of goods sold for the beginning balance of purchases.
  3. C) debit to cost of goods sold and a credit to inventory for the beginning balance of inventory.
  4. D) No adjusting entry is required under a perpetual inventory system to adjust the beginning and ending balances.

Answer:  D

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

Table 6-4

 

Assume the following data for Burnette Sales for 2014:

 

Beginning inventory 10 units at $7 each
March 18 purchase 15 units at $9 each
        Sale 20 units at $15 each
June 10 purchase 20 units at $10 each
        Sale 12 units at $15 each
October 30 purchase 12 units at $11 each
        Sale 10 units at $16 each

 

On December 31, a physical count reveals 15 units on hand.

 

28) Refer to Table 6-4. Under the FIFO method (assuming a perpetual inventory system), ending inventory would be valued at:

  1. A) $162.
  2. B) $105.
  3. C) $115.
  4. D) $135.

Answer:  A

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

29) Refer to Table 6-4. Assume a perpetual system. Under the moving-weighted-average-cost method, the cost of goods sold for the first sale (20 units) would be valued at:

  1. A) $164.
  2. B) $105.
  3. C) $115.
  4. D) $135.

Answer:  A

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

30) Refer to Table 6-4. Assume a perpetual inventory system. Under FIFO method, the cost of goods sold for the second sale (12 units) would be calculated as:

  1. A) $165.
  2. B) $105.
  3. C) $115.
  4. D) $135.

Answer:  C

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

Table 6-6 Sam’s Wholesale Bikes

 

January 1 inventory balance 15 units at $350 per unit
January 4 purchase 50 units at $375 per unit
January 15 sale 40 units at $550 per unit
February 8 purchase 80 units at $405 per unit
February 15 sale 70 units at $550 per unit

 

31) Refer to Table 6-6.  What is the cost of goods sold for the two months assuming that Sam’s uses the perpetual FIFO inventory method?

  1. A) $42,225
  2. B) $56,400
  3. C) $48,900
  4. D) $38,900

Answer:  A

Explanation:  A) (15 × $350) + (50 × $375) + (45 × $405) = $42,225

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

32) Refer to Table 6-6. What is the value of the February ending inventory assuming that Sam’s uses the perpetual FIFO inventory method?

  1. A) $7,500
  2. B) $17,500
  3. C) $14,175
  4. D) $15,875

Answer:  C

Explanation:  C) 35 × $405 = $ 14,175

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

33) Refer to Table 6-6. What is the gross margin  for the two months assuming that Sam’s uses the perpetual inventory FIFO inventory method?

  1. A) $18,275
  2. B) $4,100
  3. C) $11,600
  4. D) $21,600

Answer:  A

Explanation:  A) $60,500 – $42,225 = $18,275

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

34) Refer to Table 6-6. What is the cost of goods sold for  the two months assuming that Sam’s uses the perpetual weighted-average inventory method?

  1. A) $38,772
  2. B) $42,523
  3. C) $49,700
  4. D) $46,996

Answer:  B

Explanation:  B)

Jan 1       15 × $350             =        $5,250

Jan 4       50 × $375             =        18,750

65                                    $24,000     Avg. = $369.23

Jan 15    (40) × $369.23                 (14,769)

25                                       $9,231

Feb 8      80  × $405                        32,400

105                                                  $41,631     Avg. = $396.49

Feb 15   (70) × $396.49                (27,754)

35                                                     $13,877

 

Cost of goods sold = $14,769 + $27,754 = $ 42,523

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

 

35) Refer to Table 6-6. What is the value of the February ending inventory assuming that Sam’s uses the perpetual weighted-average inventory method?

  1. A) $13,877
  2. B) $17,628
  3. C) $6,700
  4. D) $9,404

Answer:  A

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

36) Refer to Table 6-6. What is the gross margin  for the two months assuming that Sam’s uses the perpetual inventory weighted-average-cost method?

  1. A) $13,504
  2. B) $21,728
  3. C) $10,800
  4. D) $17,977

Answer:  D

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

Match the following.

 

A)gross profit

B)weighted average

C)specific-unit-cost method

D)perpetual inventory system

E)FIFO

 

37) Inventory cost method based on the specific cost of particular units of inventory.

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

38) Another name for gross margin

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

39) Inventory costing method in which ending inventory is based on the costs of the most recent purchases

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

40) Inventory system maintaining a continual count of inventory

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

Answers: 37) C 38) A 39) E 40) D

 

41) The following data pertain to Cross Company (assume a perpetual inventory system) for the month ended January 31, 2013:

 

Date           Description                  Units                  Unit Cost       Unit Selling Price

                                                                                                                               

Jan.1        Beg. Inventory                    10                        $50

5        Purchase                              25                          52

10        Sale                                        (6)                                                        $80

16        Sale                                     (10)                                                          82

20        Purchase                              12                          55

25        Sale                                     (20)                                                          85

 

Required:

  1. Compute the cost of goods sold and ending inventory under FIFO.
  2. Compute Gross Margin under FIFO

Answer:

  1. Cost of Goods Sold:

10 × $50 =                   $500

25 × $52 =                 1,300

1 × $55=                           55

$1,855

 

Ending inventory: 11 × $55 = $605

 

  1. Gross Margin:

Sales (6 × $80) + (10 × $82) + (20 × $85)      $3,000

COGS                                                                     1,855

$1,145

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

42) The Snowboarding Company provided the following information for one of its top-selling snowboards:

 

Date       Item                                      Units           Amount

Nov.1    Beginning inventory            26               $197

5    Sale                                         (12)                 300

12    Purchase                                  65                 210

16    Sale                                         (50)                 305

19    Purchase                                  38                 215

22    Sale                                         (62)                 310

26    Purchase                                  40                 216

 

Required:

  1. Calculate the cost of goods sold using moving-weighted-average, assuming a perpetual inventory system.
  2. Calculate the ending inventory using a weighted-average assuming a periodic inventory system.

Answer:

Cost of Goods Sold                  Balance

  1. 26 × $197= $5,122

(12) × $197 =        $2,634            ($2,364)

14 × $197                                         $2,758

65 × $210 =                                      13,650

79                                                     $16,408

16,408/79 = $208

(50) × $208           10,400            (10,400)

29                                                       $6,008

38 × $215                                            8,170

67                                                       14,178

14,178/67=$212

(62) × $212           13,144            (13,144)

5                              26,178                 1,034

40 × $216                                            8,640

45                                                         9,674

 

  1. Total units = 26 + 65 + 38 + 40=169

Total Cost = $5,122 + 13,650 + 8,170 + 8,640 = $35,582

Weighted-average = $35,583/169

= $211.

Ending Inventory in units = 169 – [(12 + 50 + 62)]

= 169 – 124

= 45

Total cost of Ending Inventory = 45 × $211 = $9,495

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

Table 6-5

 

Assume the following data for Kruger Sales for November 2013:

 

Beginning inventory Nov. 1          5 units at $90 each

Sale Nov. 3                                          3 units at $120 each

Nov. 6 purchase                                11 units at $95 each

Sale Nov. 8                                          4 units at $120 each

Sale Nov. 9                                          3 units at $120 each

 

On November 30, a physical count reveals 6 units on hand.

 

43) Refer to Table 6-5. Calculate ending inventory for Kruger Sales assuming the perpetual moving-weighted-average-cost method is being used.

Answer:

Received                     Sold                                  Balance

Date                  Qty.      Cost    Amt.   Qty.     Cost      Amt.   Qty.      Cost      Amt.

 

Nov. 1                5            90        450                                           5            90               450

Nov. 3                                                     3          90          270     2            90               180

Nov. 6                11         95        1,045                                          13          94.23      1,225

Nov. 8                                                     4          94.23    377     9            94.23         848

Nov. 9                                                     3          94.23    283     6            94.23         565

Cost of goods sold                                                           930

Ending inventory                                                                                                           565

 

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

44) Refer to Table 6-5. Calculate gross margin for Kruger Sales assuming the perpetual moving-weighted-average-cost method is being used.

Answer:

Received                         Sold                              Balance

Date                  Qty.      Cost    Amt.   Qty.     Cost      Amt.   Qty.      Cost      Amt.

 

Nov. 1                5            90        450                                           5            90               450

Nov. 3                                                     3          90          270     2            90               180

Nov. 6                11         95        1,045                                          13          94.23      1,225

Nov. 8                                                     4          94.23    377     9            94.23         848

Nov. 9                                                     3          94.23    283     6            94.23         565

Cost of goods sold                                                           930

Ending inventory                                                                                                           565

 

Sales

Nov. 3         3

Nov. 8         4

Nov. 9         3

10        ×       120      =       $1,200

 

Cost of goods sold:

Cost of goods available                 1,495

Less ending inventory                  ( 565)

Cost of goods sold                              930

Gross margin                                      270

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

45) Refer to Table 6-5. Calculate ending inventory for Kruger Sales assuming the perpetual FIFO cost method is being used.

Answer:

Received                     Sold                                  Balance

Date                   Qty.      Cost    Amt.   Qty.     Cost      Amt.   Qty.      Cost      Amt.

 

Nov. 1                5            90        450                                                5          90          450

Nov. 3                                                       3          90          270         2          90          180

Nov. 6                11         95        1,045                                             2          90          180

11        95       1,045

13                    1,225

Nov. 8                                                       2          90          180

2          95          190

4                         370         9          95          855

Nov. 9                                                       3          95          285         6          95          570

Cost of goods sold                                                           925

 

Ending inventory                                                                                                        570

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

46) Refer to Table 6-5. Calculate gross margin for Kruger Sales assuming the perpetual FIFO cost method is being used.

Answer:

Received                       Sold                              Balance

Date                   Qty.      Cost    Amt.   Qty.     Cost      Amt.   Qty.      Cost      Amt.

 

Nov. 1                5            90        450                                             5            90            450

Nov. 3                                                       3          90          270     2            90            180

Nov. 6                11         95        1,045                                          2            90            180

11          95         1,045

13                       1,225

Nov. 8                                                       2          90          180

2          95          190

4                         370     9            95            855

Nov. 9                                                       3          95          285     6            95            570

Cost of goods sold                                                           925

 

Ending inventory                                                                                                        570

Sales

Nov. 3         3

Nov. 8         4

Nov. 9         3

10     × 120    =     $1,200

 

Cost of goods sold:

Cost of goods available             1,495

Less ending inventory               ( 570)

Cost of goods sold                         925

Gross margin                                   275

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

47) Sam Levine Merchandising had the following transactions during May:

 

May   1          Beginning inventory was 20 units valued at $25 per unit.

May   5          Purchased 80 units of merchandise on account for $2,160, terms n/15,

FOB shipping point.

May   9          Paid transportation cost on the May 5 purchase, $240.

May 10          Returned two units of defective merchandise purchased on May 5.

May 11          Sold 30 units for $50 per unit on account.

May 15          Paid for the May 5 purchase, less the return .

May 20          Sold 10 units for $50 per unit on account.

 

Required:

  1. Assuming FIFO and that the perpetual inventory system is used, prepare the journal entries to record the above transactions.

 

  1. Assuming weighted-average and that the periodic inventory system is used, prepare the journal entries to record the above transactions.

Answer:

Requirement 1: Perpetual Inventory Method

 

Date Account Name Debit Credit
May 5 Inventory 2,160
          Accounts Payable 2,160
May 9 Inventory 240
          Cash 240
May 10 Accounts Payable 54
          Inventory 54
May 11 Accounts Receivable (30 × $50) 1,500
          Sales  1,500
Cost of Goods Sold (20 × $25) + (10 × ($27 + $3)) 800
           Inventory 800
May 15 Accounts Payable  ($2,160 – $54) 2,106
           Cash  2,106
May 20 Accounts receivable 500
          Sales 500
Cost of Goods Sold (10 × $30) 300
           Inventory 300

 

 

Requirement 2: Periodic Inventory Method

 

Date Account Name Debit Credit
May 5 Purchases 2,160  
          Accounts Payable   2,160
       
May 9 Freight-in 240  
          Cash   240
       
May 10 Accounts Payable 54
          Purchase Returns 54
   
May 11 Accounts Receivable 1,500  
          Sales   1,500
       
May 15 Accounts Payable 2,160  
          Cash   2,160
       
May 20 Accounts Receivable 500
            Sales   500
       

 

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

48) Jan-Con Company provides the following information for the month of August.

 

Date   Units $/Unit Total
Aug   1 Opening inventory 40 $ 30 $ 1,200
Aug   3 Purchase 60 $ 35 $ 2,100
Aug 10 Sale 100 $ 60 $ 6,000
Aug 22 Purchase 90 $ 40 $ 3,600
Aug 24 Sale 70 $ 70 $ 4,900

 

Required:

(a)   What is the value of the ending inventory assuming the company uses a periodic inventory system and the weighted-average method?

(b) What is the cost of goods sold if the company uses a perpetual inventory system and the FIFO method of valuing inventory?

(c)   What is the cost of goods sold if the company uses a perpetual inventory system and the weighted average method of valuing inventory?

Answer:

(a)   What is the value of the ending inventory assuming the company uses a periodic inventory system and the weighted-average method?

 

Units available                    190

Units sold                             170

Ending inventory                20

 

Average cost = $6,900/190 = $36.32

Ending inventory = 20 units * $36.32 = $726.40

 

(b)   What is the cost of goods sold if the company uses a perpetual inventory system and the FIFO method of valuing inventory?

 

Aug 10th COGS = (40 units * $30) + (60 units * $35)       =       $3,300.00

Aug 22nd COGS = (70 units * $40)                                       =          2,800.00

                                                                                                                 $ 6,100.00

 

(c)   What is the cost of goods sold if the company uses a perpetual inventory system and the weighted average method of valuing inventory?

 

Aug 10th COGS =  ∗ 100       =    $ 3,300.00

 

Aug 22nd COGS =    ∗ 70                          =       2,800.00

$ 6,100.00

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

49) Sam’s Corner Store has the following purchase and sales information for one of their inventory items:

 

Date   Units $/Unit Total
Feb   1 Opening inventory 10 $8 $80
Feb   9 Purchase 25 $9 $225
Feb 15 Sale 15 $15 $225
Feb 17 Purchase 20 $11 $220
Feb 25 Sale 10 $16 $160

 

Required:

For (a) and (b) assume the company uses the periodic inventory system.

 

(a)   Calculate the gross profit if the company uses first-in, first-out (FIFO)

(b)   Calculate the value of the ending inventory if the company uses weighted average.

 

For (c) and (d) assume the company uses the perpetual inventory system.

 

(c)   What is the cost of goods sold for the Feb 25 sale if the company uses weighted average to cost the inventory?

(d)   What is the value of the ending inventory if the company uses FIFO?

Answer:  For (a) and (b) assume the company uses the periodic inventory system.

 

(a)   Calculate the gross profit if the company uses first-in, first-out (FIFO)

 

Units available to sell                                                           55

Units sold                                                                                (25)

Ending inventory                                                                  30

 

Sales [(15 ∗ $15) + (10 ∗ $16)] = $385

Cost of goods sold:

Beginning inventory                                                          $ 80

Purchases [(25 ∗ $9) + (20 ∗ $11)]                                     445

Goods available                                                        $525

Less: ending inventory (20 ∗ $11)+(10 ∗ $9)         (310)

Cost of goods sold                                                        215

Gross margin                                                             $170

(b)   Calculate the value of the ending inventory if the company uses weighted average.

Weighted average cost per unit = $ 525/55 units = $ 9.55

Ending inventory = 30 units ∗ $9.55 = $286.50

 

For (c) and (d) assume the company uses the perpetual inventory system.

 

 

(c)    What is the cost of goods sold for the Feb 25 sale if the company uses weighted average to cost the inventory?

 

Feb 15 sale weighted average:

 

Beginning inventory                 10 * $8.00 =    $80

Feb 9 purchase                            25 * $9.00 =    225

Total                                            35                   $305

 

Average cost = $305/35 = $ 8.71

Cost of goods sold =  15 * $8.71 = $130.65

Remaining units = 35 – 15 = 20

 

Feb 25 sale weighted average:

 

Units remaining Apr 15                   20 * $8.71    =      174.20

Feb 17 purchase                                  20 * $11.00  =      220.00

Total                                                    40                         394.20

 

Average cost = $394.20/40 = $ 9.86

Cost of goods sold = 10 * $9.86 = $98.60

 

(d)  What is the value of the ending inventory if the company uses FIFO?

 

(20 units ∗ $11.00) + (10 units ∗ $9) = $310

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods

 

Objective 6-2

 

1) FIFO will report the lowest cost of goods sold on the income statement when prices are falling.

Answer:  FALSE

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

 

2) FIFO results in a more accurate portrayal of ending inventory on the balance sheet than does moving-weighted-average.

Answer:  FALSE

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

 

3) Moving-weighted-average matches cost of goods sold to sales on the income statement better than FIFO.

Answer:  FALSE

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

4) The FIFO method can result in misleading inventory costs on the balance sheet because the oldest prices are left in ending inventory.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

 

5) When inventory costs are rising, FIFO results in the highest cost of goods sold and the lowest gross margin.

Answer:  FALSE

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

 

6) The moving-weighted-average-cost method generates a gross margin that will be lower than the gross margin generated under FIFO costing when prices are rising.

Answer:  TRUE

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

 

7) When prices are rising, the ending inventory balance reported on a weighted-average basis is generally:

  1. A) lower than on a FIFO basis.
  2. B) greater than on a FIFO basis.
  3. C) equal to ending inventory reported on a FIFO basis.
  4. D) equally likely to be higher or lower on a weighted-average basis as opposed to a FIFO basis.

Answer:  A

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

 

 

8) When prices are rising, the cost of goods sold on the income statement reported on a weighted-average basis is generally:

  1. A) lower than on a FIFO basis.
  2. B) equal to ending inventory reported on a FIFO basis.
  3. C) greater than on a FIFO basis.
  4. D) equally likely to be higher or lower on a weighted-average basis as opposed to a FIFO basis.

Answer:  C

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

9) When prices are falling, the ending inventory balance reported on a FIFO basis is generally:

  1. A) lower than on a weighted-average basis.
  2. B) greater than on a weighted-average basis.
  3. C) equal to ending inventory reported on a weighted-average basis.
  4. D) equally likely to be higher or lower on a weighted-average basis as opposed to a FIFO basis.

Answer:  A

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

 

10) When prices are falling, the cost of goods sold reported on the income statement on a weighted-average basis is generally:

  1. A) lower than on a FIFO basis.
  2. B) greater than on a FIFO basis.
  3. C) equal to ending inventory reported on a FIFO basis.
  4. D) equally likely to be higher or lower on a weighted-average basis as opposed to a FIFO basis.

Answer:  A

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

 

11) When inventory prices are rising, the FIFO method will generally yield a gross margin that is:

  1. A) less than the weighted average method.
  2. B) equal to the gross margin of the weighted-average method.
  3. C) higher than the weighted-average method.
  4. D) FIFO does not generally cause a gross margin that is different from that of any other costing method.

Answer:  C

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

 

 

12) When inventory prices are declining, the FIFO method will generally yield a gross margin that is:

  1. A) less than the weighted-average method.
  2. B) equal to the gross margin of the weighted-average method.
  3. C) higher than the weighted-average method.
  4. D) FIFO does not generally cause a gross margin that is different from that of any other costing method.

Answer:  A

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

13) When inventory prices are rising, the weighted-average method will generally result in a:

  1. A) higher gross margin than FIFO.
  2. B) lower ending inventory value than FIFO.
  3. C) higher owner’s equity balance than FIFO.
  4. D) lower cost of goods sold than FIFO.

Answer:  B

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

 

14) When inventory prices are declining, the weighted-average method will generally result in a:

  1. A) lower gross margin than FIFO.
  2. B) higher ending inventory value than FIFO.
  3. C) lower owner’s equity balance than FIFO.
  4. D) higher cost of goods sold than FIFO.

Answer:  B

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

 

 

15) State which inventory method would best meet the specific goal of management stated below. Show your answer by inserting the proper letter beside each statement.

 

  1. a) FIFO
  2. b) Specific-unit-cost
  3. c) Weighted-average

 

1)    Management desires to precisely match cost of goods sold

with net sales revenue.                                                                                ________

2)    Management desires to minimize the company’s ending

inventory balance during a period of falling prices.                          ________

3)    The company sells rare, antique items.                                                  ________

4)    Management desires to show the current value inventory

on the balance sheet.                                                                                    ________

5)    Management desires to maximize the company’s gross margin

during a period of rising prices.                                                               ________

Answer:

1) b

2) a

3) b

4) a

5) a.

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

 

16) Identify the inventory method; FIFO, weighted-average, or specific-unit-cost, most likely used for the following situations.

 

  1. a) results in ending inventory close to current cost

of replacing inventory                                                                                   ________

  1. b) precisely matches cost of goods sold against sales revenue ________
  2. c) used to account for inventory of automobiles ________
  3. d) Usually the best method to maximize gross margin

when prices are rising                                                                                   ________

  1. e) provides a middle-ground measure of ending inventory

and cost of goods sold                                                                                   ________

  1. f) generally tends to maximize net income when prices are rising ________

 

Answer:

  1. a) FIFO

b)specific-unit cost

  1. c) specific-unit cost
  2. d) FIFO
  3. e) weighted-average
  4. f) FIFO

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

 

17) Compare the effects of the FIFO and moving-weighted-average-cost methods on the value of ending inventory and cost of goods sold. Then contrast the methods when purchase prices are rising.

Answer:  FIFO costing reports ending inventory at the most current cost. Moving-weighted-average costing reports ending inventory and cost of goods sold at an average amount determined by the value of all relevant units in inventory. When prices are rising, moving-weighted-average costing produces the higher cost of goods sold and therefore the lower gross margin, the reverse is true for FIFO. The effect will balance out in the following year as the difference in ending inventory cost for each method becomes a corresponding difference in beginning inventory resulting in the opposite effect.

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods

 

Objective 6-3

 

1) Under either the periodic or the perpetual system, ending inventory will be the same when FIFO inventory costing method is used.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

2) The disclosure principle of accounting requires that a business reveal to the user of the financial statement the method to value inventory that has been used.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

3) The materiality concept of accounting allows a business to expense the cost of freight in rather than add it to the cost of the inventory on the basis that the difference in the accounting treatment would not sway a decision by a financial statement user.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

4) Once an inventory method is selected by a business, the consistency characteristic of accounting would require that this method be used from year to year.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

5) The lower-of-cost-and-net-realizable-value rule is an application of the consistency principle.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

6) Using the FIFO method, the earliest purchases of inventory are assumed to be contained:

  1. A) on the balance sheet as part of ending inventory.
  2. B) on the income statement as part of cost of goods sold.
  3. C) equally split between the income statement and the balance sheet.
  4. D) majority on the income statement and minority on the balance sheet.

Answer:  B

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

Table 6-1

 

Assume the following data for Burnette Merchandsing for 2014:

 

Beginning inventory 10 units at $7 each
March 18 purchase 15 units at $9 each
June 10 purchase 20 units at $10 each
October 30 purchase 12 units at $11 each

 

On December 31, a physical count reveals 15 units in ending inventory.

 

7) Refer to Table 6-1.  Assume a periodic inventory system. Under the FIFO method, ending inventory would be valued at:

  1. A) $165.
  2. B) $105.
  3. C) $162.
  4. D) $135.

Answer:  C

Explanation:  C) (12 × $11) + (3 × $10) = $162

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

8) Refer to Table 6-1. Assume a periodic inventory system. Under the weighted-average method, cost of goods sold on the income statement would be:

  1. A) $396.
  2. B) $294.
  3. C) $389.
  4. D) $420.

Answer:  A

Explanation:  A)

[(10 × $7) + (15 × $9) + (20 × $10) + (12 × $11)]/57 units = $9.42

$9.42 × (57 – 15) = $396.64

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

 

9) Refer to Table 6-1. Assume a periodic inventory system. Under the FIFO method, cost of goods sold on the income statement would be:

  1. A) $294.
  2. B) $375.
  3. C) $462.
  4. D) $420.

Answer:  B

Explanation:  B) [(10 × $7) + (15 x $9) + (17 × $10)] = $375

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

10) Given the following data, what is the cost of goods sold rounded to the nearest whole dollar using periodic FIFO?

 

Sales revenue 100 units at $10 per unit
Beginning inventory 50 units at $8 per unit
Purchases 90 units at $9 per unit

 

  1. A) $400
  2. B) $360
  3. C) $890
  4. D) $850

Answer:  D

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

11) Given the following data, what is the cost of ending inventory rounded to the nearest whole dollar using periodic FIFO?

 

Sales revenue 100 units at $10 per unit
Beginning inventory 50 units at $8 per unit
Purchases 90 units at $9 per unit

 

  1. A) $400
  2. B) $360
  3. C) $890
  4. D) $850

Answer:  B

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

 

12) Given the following data, what is the gross margin if cost of goods sold is determined using the FIFO periodic method?

 

Sales revenue 200 units at $20 per unit
Beginning inventory 60 units at $12 per unit
Purchases 210 units at $13 per unit

 

  1. A) $2,540
  2. B) $1,460
  3. C) $1,400
  4. D) $1,390

Answer:  B

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

13) Given the following data, what is the value of ending inventory if the FIFO periodic method is used?

 

Sales revenue 200 units at $20 per unit
Beginning inventory 60 units at $12 per unit
Purchases 210 units at $13 per unit

 

  1. A) $1,400
  2. B) $840
  3. C) $910
  4. D) $1,600

Answer:  C

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

 

14) Given the following data, what is the gross margin if cost of goods sold is determined using the weighted-average method?

 

Sales revenue 200 units at $20 per unit
Beginning inventory 60 units at $12 per unit
Purchases 210 units at $13 per unit

 

  1. A) $2,556
  2. B) $1,444
  3. C) $2,500
  4. D) $1,500

Answer:  B

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

Table 6-2

 

January 1 inventory balance 100 units at $10 per unit
March 2 purchase 50 units at $11 per unit
July 8 purchase 80 units at $10 per unit
November 15 purchase 30 units at $12 per unit

 

On December 31, a physical count reveals 80 units in ending inventory.

 

15) Referring to Table 6-2, the cost of ending inventory using the periodic FIFO method would be:

  1. A) $1,910.
  2. B) $860.
  3. C) $800.
  4. D) $850.

Answer:  B

Explanation:  B) (30 × $12) + (50 × $10) = $ 860

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

 

16) Referring to Table 6-2, cost of goods sold calculated under the periodic FIFO method would be:

  1. A) $1,800.
  2. B) $2,160.
  3. C) $1,910.
  4. D) $1,850.

Answer:  D

Explanation:  D) [(100 × $10) + (50 × $11) + (30 × $10)] = $1,850

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

17) Referring to Table 6-2, assuming all goods are sold throughout the year for $17 per unit, gross margin calculated under the periodic FIFO method would be:

  1. A) $1,210.
  2. B) $1,260.
  3. C) $1,150.
  4. D) $900.

Answer:  A

Explanation:  A) (180 × $17) – [(100 × $10) + (50 × $11) + (30 × $10)] = $1,210

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

18) Referring to Table 6-2, assuming all goods are sold throughout the year for $19 per unit, gross margin calculated under the periodic FIFO method would be:

  1. A) $1,620.
  2. B) $1,510.
  3. C) $1,260.
  4. D) $1,570.

Answer:  D

Explanation:  D) (180 × $19) – [(100 × $10) + (50 × $11) + (30 × $10)] = $1,570

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

 

19) Referring to Table 6-2, the cost of ending inventory using the periodic weighted-average-cost  method rounded to the nearest whole number would be:

  1. A) $1,910.
  2. B) $860.
  3. C) $834.
  4. D) $850.

Answer:  C

Explanation:  C) {[(100 × $10) + (50 × $11) + (80 × $10) + (30 × $12)]/260} × 80 = $833.85

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

20) Which statement addresses the consistency characteristic of accounting information?

  1. A) Companies in the same industry must use the same inventory costing method to facilitate comparison of results.
  2. B) Financial reporting practices in one country should be consistent with those in other countries.
  3. C) Businesses should generally use the same accounting methods and procedures from one period to the next.
  4. D) Once a company selects an inventory costing method, it must always use that method.

Answer:  C

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

21) Which of the following statements is true about a company making an accounting change in its financial statements?

  1. A) It must disclose the effect of the change on net income.
  2. B) It is generally entitled to make one accounting change per year.
  3. C) Companies can never make accounting changes because of the consistency characteristic.
  4. D) Management must ask permission from the federal government.

Answer:  A

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

 

22) An item is considered material if:

  1. A) it facilitates comparison with the financial statements of another company in the same industry.
  2. B) its inclusion in the financial statements would cause a statement user to change a decision.
  3. C) its dollar value is greater than 10% of net income.
  4. D) it is accounted for using a treatment that is not normally allowed by generally accepted accounting principles.

Answer:  B

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

23) If a company uses periodic inventory and FIFO when prices are falling, the effect will:

  1. A) reduce cost of goods sold.
  2. B) increase the inventory ending balance on the balance sheet.
  3. C) reduce the gross margin.
  4. D) increase the gross margin.

Answer:  C

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

24) The perpetual and periodic inventory systems will produce identical cost of goods sold and ending inventory balances using which of the following cost flow assumptions:

  1. A) FIFO.
  2. B) average.
  3. C) weighted-average.
  4. D) just in time.

Answer:  A

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

25) If a company uses a periodic inventory system, which of the following entries is required to record the sale of merchandise on credit?

A)

Accounts Receivable
Sales Revenue

 

B)

Purchases
Cost of Goods Sold

 

C)

Cost of Goods Sold
Purchases

 

D)

Accounts Payable
Sales Revenue

 

Answer:  A

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

26) Given the following data, what is cost of goods sold?

 

Sales revenue $950,000
Beginning inventory 150,000
Ending inventory 230,000
Purchases 720,000

 

  1. A) $870,000
  2. B) $640,000
  3. C) $570,000
  4. D) $510,000

Answer:  B

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

27) Given the following data, what is gross margin?

 

Sales revenue $950,000
Beginning inventory 150,000
Ending inventory 230,000
Purchases 720,000

 

  1. A) $150,000
  2. B) $640,000
  3. C) $570,000
  4. D) $310,000

Answer:  D

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

28) The journal entry to sell merchandise under a periodic inventory system includes a:

  1. A) debit to cost of goods sold.
  2. B) debit to inventory.
  3. C) credit to purchases.
  4. D) credit to sales revenue.

Answer:  D

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

29) The journal entry to purchase merchandise under a periodic inventory system includes a:

  1. A) debit to cost of goods sold.
  2. B) debit to inventory.
  3. C) credit to purchases.
  4. D) debit to purchases.

Answer:  D

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

 

30) One scheme for using inventory to increase reported income is to:

  1. A) overstate ending inventory.
  2. B) understate ending inventory.
  3. C) overstate cost of goods sold.
  4. D) overstate purchases.

Answer:  A

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

Table 6-6 Sam’s Wholesale Bikes

 

January 1 inventory balance 15 units at $350 per unit
January 4 purchase 50 units at $375 per unit
January 15 sale 40 units at $550 per unit
February 8 purchase 80 units at $405 per unit
February 15 sale 70 units at $550 per unit

 

31) Refer to Table 6-6. What is the cost of goods sold for the two months assuming that Sam’s uses the periodic FIFO inventory method?

  1. A) $42,225
  2. B) $56,400
  3. C) $48,900
  4. D) $38,900

Answer:  A

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

32) Refer to Table 6-6. What is the value of the February ending inventory assuming that Sam’s uses the periodic FIFO inventory method?

  1. A) $7,500
  2. B) $17,500
  3. C) $14,175
  4. D) $15,875

Answer:  C

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

 

33) Refer to Table 6-6. What is the gross margin for the two months assuming that Sam’s uses the periodic inventory FIFO inventory method?

  1. A) $4,100
  2. B) $21,600
  3. C) $11,600
  4. D) $18,275

Answer:  D

Explanation:  D) $60,500 – $42,225 = $18,275

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

34) Refer to Table 6-6. What is the cost of goods sold for  the two months assuming that Sam’s uses the periodic weighted-average inventory method?

  1. A) $42,787
  2. B) $45,797
  3. C) $38,992
  4. D) $43,555

Answer:  A

Explanation:  A) Available $/Available units = $56,400/145 = $ 388.97

110 × $ 388.97 = $42,787

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

35) Refer to Table 6-6. What is the value of the February ending inventory assuming that Sam’s uses the periodic weighted-average inventory method?

  1. A) $12,845
  2. B) $17,408
  3. C) $13,614
  4. D) $10,603

Answer:  C

Explanation:  C) Available $/Available units = $56,400/145 = $ 388.97

(145-110) × $ 388.97 = $13,614

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

 

36) Refer to Table 6-6. What is the gross margin for the two months assuming that Sam’s uses the periodic inventory weighted-average inventory method?

  1. A) $14,703
  2. B) $16,945
  3. C) $17,713
  4. D) $21,508

Answer:  C

Explanation:  C) $60,500 – $42,787 = $17,713

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

37) The cost of goods available for sale is equal to the:

  1. A) cost of goods sold minus the ending inventory.
  2. B) Sales revenue minus the cost of goods sold.
  3. C) cost of goods sold plus the ending inventory.
  4. D) ending inventory plus the sales revenues.

Answer:  C

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

Match the following.

 

  1. A) periodic inventory system
  2. B) FIFO
  3. C) conservatism
  4. D) consistency characteristic
  5. E) materiality
  6. F) disclosure principle

 

38) Inventory system sometimes referred to as the physical system because it relies on the actual physical count of inventory

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

39) Inventory cost method that will result in the same value for ending inventory using either a perpetual or periodic inventory system

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

40) Principle that allows the financial statement user the ability to know which of the cost methods is being used in valuing inventory.

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

41) A principle requiring the financial statements to report enough information for outsiders to make knowledgeable decisions about the business

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

42) A concept by which the least favourable figures are presented in the financial statements

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

 

43) A characteristic requiring the use of the same accounting methods and procedures from period to period

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

44) Accounting concept that states that a company must perform strictly proper accounting only for items that are significant to the business’s financial statements

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

45) The accounting principle that discourages managers from manipulating income by changing from one inventory method to another

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

Answers: 38) A 39) B 40) F 41) F 42) C 43) D 44) E 45) D

 

 

46) The following data pertain to Stratus Company for the year ended December 31, 2014:

 

Beginning inventory balance                                       $245,500

Purchases of inventory on credit during year           570,000

Sales (40% on credit) during year                                 780,000

Cost of goods sold during year                                      550,000

 

Required:

  1. Calculate the value of ending inventory on December 31, 2014.
  2. Determine the gross margin

Answer:

  1. Beginning inventory $245,500

Purchases                                                      570,000

Cost of Goods Available                        $ 815,500

Less: Cost of Goods Sold                          550,000

Ending Inventory                                    $ 265,500

 

  1. Gross Margin = Sales – Cost of Goods Sold

= $780,000 – 550,000

= $230,000

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

47) The following data are available for the month of April for Gore Company:

 

April 1 inventory               120 units at $8.15 each

April 10 purchase             200 units at $8.20 each

April 20 purchase             410 units at $8.40 each

April 25 purchase             310 units at $8.50 each

 

Gore sold 630 units during April.

Compute the value of ending inventory under FIFO. Assume a periodic inventory system.

Answer:  (310 × $8.50) + (100 × $8.40) = $2,635 + $840 = $3,475

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

48) The following data are available for the month of April for Gore Company:

 

April 1 inventory              120 units at $8.15 each

April 10 purchase             200 units at $8.20 each

April 20 purchase             410 units at $8.40 each

April 25 purchase             310 units at $8.50 each

Gore sold 630 units during April.

 

Compute the value of ending inventory under the weighted-average method. Assume a periodic inventory system.(round per unit cost to the nearest cent, round final answer to the nearest dollar)

Answer:  (120 × $8.15) + (200 × $8.20) + (410 × $8.40) + (310 × $8.50)

= $978 + $1,640 + $3,444 + $2,635

= $8,697/1,040 units = $8.36 average cost per unit

 

$8.36 × 410 = $3,428

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

49) The following data are available for the month of March:

 

March 1 balance                20 units at $15 each

March 10 purchase           40 units at $16 each

March 17 purchase           30 units at $17.50 each

March 30 purchase           25 units at $18 each

 

On March 31, 35 units are on hand.

 

Calculate cost of goods sold under the following methods:

 

  1. a) FIFO b) weighted-average (round per unit cost to the nearest cent, round final answer to the nearest dollar, assume periodic inventory system)

Answer:

115 units available – 35 ending units = 80 units sold

 

  1. a) (20 × $15) + (40 × $16) + (20 × $17.50) = $300 + $640 + $350 = $1,290

 

  1. b) (20 × $15) + (40 × $16) + (30 × $17.50) + (25 × $18) = $300 + $640 + $525 + $450 = $1,915

$1,915/115 units = $16.65 × 80 = $1,332

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

50) Engle Enterprises reports net sales revenue for 2013 to be $595,000, January 1, 2013 inventory at $102,000, net purchases at $370,000, and operating expenses at $155,000.  Under FIFO, December 31, 2013, inventory would be valued at $96,700.

 

Compute net income for 2013.

Answer:                                                                                                    

Net sales revenue                                                     $595,000

Cost of goods sold

Beginning inventory                                          102,000

Net purchases                                                     370,000

Cost of goods available for sale                      472,000

Ending inventory                                                  96,700

Cost of goods sold                                                      375,300

Gross margin                                                               219,700

Operating expenses                                                   155,000

Net income                                                                   $64,700

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

Table 6-5

 

Assume the following data for Kruger Sales for November 2013:

 

Beginning inventory Nov. 1          5 units at $90 each

Sale Nov. 3                                          3 units at $120 each

Nov. 6 purchase                                11 units at $95 each

Sale Nov. 8                                          4 units at $120 each

Sale Nov. 9                                          3 units at $120 each

 

On November 30, a physical count reveals 6 units on hand.

 

51) Refer to Table 6-5. Calculate ending inventory for Kruger Sales assuming the weighted-average-cost method is being used and a periodic inventory system.

Answer:

Cost of Goods Available:                                 Qty.         Cost     Amt.

Nov. 1           Beginning Bal.                             5               90        450

Nov. 6           Purchase                                      11              95        1,045

Goods Available                                                16                          1,495

 

Weighted Average:                                            = 93.44

Ending Inventory = 6 units             ×             93.44  =  561

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

52) Refer to Table 6-5. Calculate gross margin for Kruger Sales assuming the weighted-average cost method is being used and a periodic inventory system.

Answer:

Cost of Goods Available:                         Qty.       Cost          Amt.

Nov. 1           Beginning Bal.                          5           90             450

Nov. 6           Purchase                                  11           95         1,045

Goods Available                                           16                         1,495

 

Weighted Average:                                        = 93.44

Ending Inventory = 6 units             ×          93.44 = 561

 

Sales

Nov. 3         3

Nov. 8         4

Nov. 9         3

10        ×         120=              $1,200

 

Cost of goods sold:

Cost of goods available         1,495

Less ending inventory          ( 561)

Cost of goods sold                                          934

Gross profit                                                      266

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

53) Refer to Table 6-5. Calculate ending inventory for Kruger Sales assuming the periodic FIFO cost method is being used.

Answer:

Cost of Goods Available:                        Qty.       Cost         Amt.

Nov. 1           Beginning Bal.                          5           90            450

Nov. 6           Purchase                                  11           95         1,045

Goods Available                                           16                         1,495

 

Ending Inventory = 6 units × 95 = $570

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

54) Refer to Table 6-5. Calculate gross profit for Kruger Sales assuming the periodic FIFO cost method is being used.

Answer:  Cost of Goods Available:                                  Qty.    Cost       Amt.

Nov. 1           Beginning Bal.                              5              90           450

Nov. 6           Purchase                                      11              95        1,045

Goods Available                                                 16                                         1,495

 

Ending Inventory =                            6 units   ×                95  =  570

 

Sales

Nov. 3         3

Nov. 8         4

Nov. 9         3

10        ×     120  =                $1,200

 

Cost of goods sold:

Cost of goods available         1,495

Less ending inventory          ( 570)

Cost of goods sold                                    925

Gross profit                                                 275

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

55) Sam Levine Merchandising had the following transactions during May:

 

May   1          Beginning inventory was 20 units valued at $25 per unit.

May   5          Purchased 80 units of merchandise on account for $2,160,

terms n/15, FOB shipping point.

May   9          Paid transportation cost on the May 5 purchase, $240.

May 10          Returned two units of defective merchandise purchased on May 5.

May 11          Sold 30 units for $50 per unit on account.

May 15          Paid for the May 5 purchase, less the return .

May 20          Sold 10 units for $50 per unit on account.

 

Required:

  1. Assuming FIFO and that the perpetual inventory system is used, prepare the journal entries to record the above transactions.
  2. Assuming weighted-average and that the periodic inventory system is used, prepare the journal entries to record the above transactions.

Answer:

Requirement 1: Perpetual Inventory Method

 

Date Account Name Debit Credit
May 5 Inventory 2,160
          Accounts Payable 2,160
May 9 Inventory 240
          Cash 240
May 10 Accounts Payable 54
          Inventory 54
May 11 Accounts Receivable (30 × $50) 1,500
          Sales  1,500
Cost of Goods Sold (20 × $25) + (10 × ($27 + $3)) 800
           Inventory 800
May 15 Accounts Payable  ($2,160 – $54) 2,106
           Cash  2,106
May 20 Accounts receivable 500
          Sales 500
Cost of Goods Sold (10 × $30) 300
           Inventory 300

 

 

Requirement 2: Periodic Inventory Method

 

Date Account Name Debit Credit
May 5 Purchases 2,160  
          Accounts Payable   2,160
       
May 9 Frieght-in 240  
          Cash   240
       
May 10 Accounts Payable 54
          Purchase Returns 54
   
May 11 Accounts Receivable 1,500  
          Sales   1,500
       
May 15 Accounts Payable 2,160  
          Cash   2,160
       
May 20 Accounts Receivable 500
            Sales   500
       

 

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

56) Jan-Con Company provides the following information for the month of August.

 

Date   Units $/Unit Total
Aug   1 Opening inventory 40 $ 30 $ 1,200
Aug   3 Purchase 60 $ 35 $ 2,100
Aug 10 Sale 100 $ 60 $ 6,000
Aug 22 Purchase 90 $ 40 $ 3,600
Aug 24 Sale 70 $ 70 $ 4,900

 

Required:

(a)   What is the value of the ending inventory assuming the company uses a periodic inventory system and the weighted-average method?

 

(b)   What is the cost of goods sold if the company uses a perpetual inventory system and the FIFO method of valuing inventory?

 

(c)   What is the cost of goods sold if the company uses a perpetual inventory system and the weighted average method of valuing inventory?

Answer:

(a)   What is the value of the ending inventory assuming the company uses a periodic inventory system and the weighted-average method?

 

Units available               190

Units sold                         170

Ending inventory             20

 

Average cost = $6,900/190 = $36.32

Ending inventory = 20 units ∗ $36.32 = $726.40

 

(b)   What is the cost of goods sold if the company uses a perpetual inventory system and the FIFO method of valuing inventory?

 

Aug 10th COGS = (40 units ∗ $30) + (60 units ∗ $35)     =       $3,300.00

Aug 22nd COGS = (70 units ∗ $40)                                      =         2,800.00

                                                                                                                 $6,100.00

 

(c)           What is the cost of goods sold if the company uses a perpetual inventory system and the weighted average method of valuing inventory?

 

Aug 10th COGS =   ∗ 100      =     $3,300.00

Aug 22nd COGS =  ∗ 70                            =       2,800.00

$6,100.00

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

57) Sam’s Corner Store has the following purchase and sales information for one of their inventory items:

 

Date   Units $/Unit Total
Feb   1 Opening inventory 10 $8 $80
Feb   9 Purchase 25 $9 $225
Feb 15 Sale 15 $15 $225
Feb 17 Purchase 20 $11 $220
Feb 25 Sale 10 $16 $160

 

Required:

For (a) and (b) assume the company uses the periodic inventory system.

 

(a)    Calculate the gross profit if the company uses first-in, first-out (FIFO)

(b)    Calculate the value of the ending inventory if the company uses weighted average.

 

For (c) and (d) assume the company uses the perpetual inventory system.

 

(c)    What is the cost of goods sold for the Feb 25 sale if the company uses weighted average to cost the inventory?

(d)    What is the value of the ending inventory if the company uses FIFO?

Answer:  For (a) and (b) assume the company uses the periodic inventory system.

 

(a)   Calculate the gross profit if the company uses first-in, first-out (FIFO)

 

Units available to sell             55

Units sold                                 (25)

Ending inventory                     30

 

Sales [(15 ∗ $15) + (10 ∗ $16)] =                                                                $385

Cost of goods sold:

Beginning inventory                                                           $80

Purchases [(25 ∗ $9) + (20 ∗ $11)]                                   445

Goods available                                                                   525

Less: ending inventory (20 ∗ $11)+(10 ∗ $9)              (310)

Cost of goods sold                                                               215

Gross margin                                                                                       $170

 

(b)   Calculate the value of the ending inventory if the company uses weighted average.

 

Weighted average cost per unit = $ 525/55 units = $ 9.55

 

Ending inventory = 30 units ∗ $9.55 = $286.50

 

For (c) and (d) assume the company uses the perpetual inventory system.

 

 

(c)   What is the cost of goods sold for the Feb 25 sale if the company uses weighted average to cost the inventory?

 

Feb 15 sale weighted average:

 

Beginning inventory         10 ∗ $ 8.00    =     $80

Feb 9 purchase                   25 ∗ $ 9.00    =     225

Total                              35                         $305

 

Average cost = $305/35 = $ 8.71

Cost of goods sold = 15 ∗ $8.71 = $130.65

Remaining units = 35 – 15 = 20

 

Feb 25 sale weighted average:

 

Units remaining Apr 15     20 * $8.71      =    174.20

Feb 17 purchase                    20 * $11.00   =    220.00

Total                                  40                          394.20

 

Average cost = $394.20/40 = $ 9.86

Cost of goods sold = 10 ∗ $9.86 = $98.60

 

(d)   What is the value of the ending inventory if the company uses FIFO?

 

(20 units ∗ $11.00) + (10 units ∗ $9) = $ 310

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-3 Account for periodic inventory under FIFO and weighted-average-cost methods

 

Objective 6-4

 

1) The lower-of-cost-and-net-realizable-value rule is a good example of conservatism in accounting.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

2) When applying the lower-of-cost-and-net-realizable-value rule to ending inventory valuation, net realizable value generally refers to the company’s expected selling price for its inventory net of any selling costs.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

3) When the sales value of the inventory subsequently increases after a write down to net-realizable-value the reported value may be increased to the the limit of the original cost.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

4) Using the lower-of-cost-and-net-realizable-value rule of valuing inventory allows the accountant to attain:

  1. A) consistency.
  2. B) conservatism.
  3. C) matching.
  4. D) full disclosure.

Answer:  B

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

5) If the cost of an item of inventory is $80 and the current selling price is $75, the amount shown in inventory on the balance sheet under the lower-of-cost-and-net realizable-value rule is:

  1. A) $75.
  2. B) $80.
  3. C) $100.
  4. D) $75 or $80.

Answer:  A

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

6) Ending inventory for Commodity X consists of 20 units. Under the FIFO method, the cost of the 20 units is $5 each. Current net realizable value is $4.75 per unit. Using the lower-of-cost-and-net -realizable-value rule to value inventory, the balance sheet would show ending inventory of:

  1. A) $5.00.
  2. B) $4.75.
  3. C) $95.00.
  4. D) $100.00.

Answer:  C

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

7) Piggly Wiggly Sales had six CD players in inventory on December 31. They were purchased in November for $170 each. A quoted price received from the supplier on December 31 shows the CD players now cost $175 each. Piggly Wiggly has marked each player to sell for $320. Using the lower-of-cost-and-net-realizable-value rule, the ending inventory of CD players should be shown at:

  1. A) $1,050.
  2. B) $1,920.
  3. C) $1,020.
  4. D) $900.

Answer:  C

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

8) Piggly Wiggly Sales had six CD players in inventory on December 31.  The players were purchased in November for $170.  Price lists from Piggly Wiggly Sales’ supplier indicate that the same CD player would now cost the company $168.  The current sales price for each of the CD players is $320. Using the lower-of-cost-and-net-realizable-value rule, the ending inventory of CD players should be shown at:

  1. A) $1,008.
  2. B) $1,035.
  3. C) $1,020.
  4. D) $1,920.

Answer:  C

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

9) For the current year, Heedy’s Department Store reported the following data:

 

Goods available for sale $1,074,450
December 31, inventory balance 85,430

 

The current net realizable value of the inventory on the balance sheet date is $91,730. Using the lower-of-cost-and-net-realizable-value rule, what is cost of goods sold for Heedy’s Department Store?

  1. A) $989,020
  2. B) $982,720
  3. C) $897,290
  4. D) $1,080,750

Answer:  A

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

10) Given the following data:

 

Ending inventory at cost $23,600
Ending inventory at net realizable value  24,000
Cost of goods sold (before consideration of the

lower-of-cost-and-net-realizable-value rule)

37,000

 

Which of the following depicts the proper account balance after the application of the lower-of-cost-and-net-realizable-value rule?

  1. A) Ending inventory will be $24,000.
  2. B) Cost of goods sold will be $36,400.
  3. C) Cost of goods sold will be $37,400.
  4. D) Ending inventory will be $23,600.

Answer:  D

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

11) Given the following data:

 

Ending inventory at cost $24,000
Ending inventory at net realizable value  23,600
Cost of goods sold (before consideration of the

lower-of-cost-and-net-realizable-value rule)

37,000

 

Which of the following depicts the proper account balance after the application of the lower-of-cost-and-net realizable value rule?

  1. A) Cost of goods sold will be $37,400.
  2. B) Cost of goods sold will be $36,400.
  3. C) Cost of goods sold will be $37,000.
  4. D) Ending inventory will be $24,000.

Answer:  A

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

12) Williams Company had the following balances and transactions during 2013.

 

Beginning inventory 10 units at $70
June 10 Purchased 20 units at $80
December 30 Sold 15 units
December 31 Replacement cost $60

 

What would the company’s inventory amount be on the December 31, 2013 balance sheet if the perpetual FIFO method is used and the lower-of-cost-or-market-rule is applied?

  1. A) $1,200
  2. B) $900
  3. C) $1,050
  4. D) $1,100

Answer:  B

Explanation:  B) Calculations: 15 × $60 = $900

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

Match the following.

 

  1. A) market value
  2. B) long-term asset
  3. C) net realizable value
  4. D) lower-of-cost-and-net realizable-value rule
  5. E) current asset

 

13) A rule that requires an asset be reported in the financial statements at whichever is lower, its historical cost or its net realizable value

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

14) The selling price less the cost of disposition

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

15) The classification of inventory on the balance sheet.

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

Answers: 13) D 14) C 15) E

 

 

16) The following data are available for Wood Products Company for 2013:

 

Sales revenue                                            $400,500

January 1 inventory at cost                     110,600

Purchases                                                     275,000

December 31 inventory at cost                 98,000

 

The current net realizable value of the inventory on December 31 is $93,500. Compute gross margin for Wood Products Company assuming the use of the lower-of-cost-and-net realizable value rule to value ending inventory.

Answer:  Sales revenue                  $400,500

Cost of goods sold

Beginning inventory                       $110,600

Purchases                                             275,000

Goods available for sale                   385,600

Less: Ending inventory                       93,500

Cost of goods sold                              292,100

Gross margin                                    $108,400

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

17) Both accounting standards for private enterprises (ASPE) and international financial reporting standards (IFRS) follow the lower-of-cost-and-net-realizable-value rule to value inventory when market prices are changing. Explain how this relates to the accounting guideline of conservatism.

Answer:  The lower-of-cost-and-net-realizable-value rule requires companies to carry inventory at the lower of historical cost and net realizable value where net realizable value is generally defined as the expected selling price. Therefore, when market circumstances are such that the net realizable the inventory declines below its cost, the value of the inventory is written down to reflect the decline in value. If conditions change, the inventory write down may be reversed but only up to the original cost of the inventory.

 

Accounting conservatism requires us to report items in the financial statements at amounts that lead to the most cautious immediate results. With respect to assets this means that if doubt exists, the assets should be recorded at the lowest reasonable amount. Users of financial statements would normally expect inventory on the balance sheet to be sold at a price higher than its carrying value thus generating a profit for the company. When the market value of the inventory has declined to below inventory cost it would be misleading to not adjust the value of the inventory accordingly and would violate accounting conservatism.

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory

 

Objective 6-5

 

1) Understating beginning inventory in 2012 will overstate net income for 2013.

Answer:  FALSE

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-5 Measure the effects of inventory errors

 

2) Understating ending inventory in 2012 will overstate net income for 2013.

Answer:  TRUE

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-5 Measure the effects of inventory errors

 

3) Overstating ending inventory in 2012 will overstate net income for 2013.

Answer:  FALSE

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-5 Measure the effects of inventory errors

 

4) Overstating ending inventory in 2012 will understate net income for 2013.

Answer:  TRUE

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-5 Measure the effects of inventory errors

 

5) Owners and managers of companies whose profits do not meet expectations are sometimes tempted to “cook the books” by manipulating the value of ending inventory.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-5 Measure the effects of inventory errors

 

6) In a periodic inventory system, an overstatement of beginning inventory results in an overstatement of gross margin.

Answer:  FALSE

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  6-5 Measure the effects of inventory errors

 

7) Inventory at the end of the current year is overstated by $20,000. What effect will this error have on the following year’s net income?

  1. A) Net income will be overstated $20,000.
  2. B) Net income will be understated $20,000.
  3. C) Net income will be correctly stated.
  4. D) Net income will be understated $40,000.

Answer:  B

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  6-5 Measure the effects of inventory errors

 

8) Two separate errors affected Satellite City in 2014. The beginning inventory was understated by $28,000 and the ending inventory was understated by $43,000. Net income in 2014 will be:

  1. A) understated by $15,000.
  2. B) understated by $71,000.
  3. C) understated by $43,000.
  4. D) overstated by $15,000.

Answer:  A

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Analysis

Objective:  6-5 Measure the effects of inventory errors

 

9) Two separate errors affected Satellite City in 2013. The beginning inventory was understated by $28,000 and the ending inventory was understated by $43,000. Net income in 2014 will be:

  1. A) overstated by $15,000.
  2. B) overstated by $43,000.
  3. C) understated by $43,000.
  4. D) understated by $71,000.

Answer:  B

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Analysis

Objective:  6-5 Measure the effects of inventory errors

 

10) Two separate errors affected Rollings Company in 2013. The beginning inventory was overstated by $12,000 and the ending inventory was overstated by $18,000. Net income in 2013 will be:

  1. A) overstated by $30,000.
  2. B) overstated by $12,000.
  3. C) overstated by $6,000.
  4. D) understated by $6,000.

Answer:  C

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Analysis

Objective:  6-5 Measure the effects of inventory errors

11) Two separate errors affected Rollings Company in 2013. The beginning inventory was overstated by $12,000 and the ending inventory was overstated by $18,000. Net income in 2014 will be:

  1. A) overstated by $30,000.
  2. B) understated by $18,000.
  3. C) overstated by $18,000.
  4. D) overstated by $6,000.

Answer:  B

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Analysis

Objective:  6-5 Measure the effects of inventory errors

 

12) If ending inventory for the current accounting period is overstated by $3,500:

  1. A) net income for the current period will be overstated by $3,500.
  2. B) ending inventory for the next period will be overstated by $3,500.
  3. C) cost of goods sold for the current period will be overstated by $3,500.
  4. D) owner’s equity at the end of the next accounting period will be overstated by $3,500.

Answer:  A

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Analysis

Objective:  6-5 Measure the effects of inventory errors

 

13) If ending inventory for the current period is understated, then owner’s equity will be:

  1. A) overstated at the end of the current period and understated at the end of the next period.
  2. B) understated at the end of the current period and overstated at the end of the next period.
  3. C) overstated at the end of the current period, but it will be correct at the end of the next period.
  4. D) understated at the end of the current period, but it will be correct at the end of the next period.

Answer:  D

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-5 Measure the effects of inventory errors

 

14) If ending inventory for the current accounting period is understated by $4,700:

  1. A) beginning inventory for the next period will be overstated by $4,700.
  2. B) net income for the current period will be overstated by $4,700.
  3. C) owner’s equity at the end of the next accounting period will be understated by $4,700.
  4. D) cost of goods sold for the current period will be overstated by $4,700.

Answer:  D

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-5 Measure the effects of inventory errors

 

15) The bookkeeper for Duncan Company made an error in recording the year-end inventory balance on December 31, 2013. As a result, ending inventory was understated by $37,000.

 

  1. a) What effect will this error have on cost of goods sold, gross margin, net income, and owner’s equity in 2013?
  2. b) As of December 31, 2014, what will be the cumulative effect of this error on owner’s equity?

Answer:

  1. a) Cost of goods sold will be overstated $37,000. Gross margin will be understated $37,000. Net income will be understated $37,000. Owner’s equity will be understated $37,000.
  2. b) Owner’s equity will be correct on December 31, 2014.

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Analysis

Objective:  6-5 Measure the effects of inventory errors

 

16) Determine the effect on cost of goods sold and net income for the current year of the following inventory errors. Indicate your answer with either a + (overstated) or a – (understated).

 

Item Error Effect on Cost

of Goods Sold

Effect on

Net Income

1) Beginning inventory is overstated.
2) Ending inventory is understated.
3) Beginning inventory is understated.
4) Ending inventory is

overstated.

 

Answer:

Item Error Effect on Cost

of Goods Sold

Effect on

Net Income

1) Beginning inventory is overstated. +
2) Ending inventory is understated. +
3) Beginning inventory is understated. +
4) Ending inventory is

overstated.

+

 

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Analysis

Objective:  6-5 Measure the effects of inventory errors

 

17) The following data are available for three products of the Classic Company:

 

A                      B                    C

Beginning inventory                  $ 5,000        $20,000         $15,000

Purchases                                       45,000          65,000            62,000

Goods available for sale             50,000           85,000            77,000

Ending inventory                         18,000           13,000              9,000

Cost of goods sold                        32,000           72,000            68,000

 

You discover the following errors:

  1. a) Ending inventory for product A was overstated by $6,000.
  2. b) Ending inventory for product B was understated by $5,000.
  3. c) Beginning inventory for product C was overstated by $3,000.

 

Considering these errors, recalculate cost of goods sold for each product.

Answer:

  1. a) $50,000 – $12,000 = $38,000

 

  1. b) $85,000 – $18,000 = $67,000

 

  1. c) $74,000 – $9,000 = $65,000

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Analysis

Objective:  6-5 Measure the effects of inventory errors

 

18) Delta Cleaning Supplies reported the comparative income statement for the years ended December 31, 2013 and 2014:

 

2014                     2013

Sales revenue                                               $82,500                 $73,000

Cost of goods sold:

Beginning inventory                                  8,250                     7,700

Net purchases                                           45,500                   39,000

Cost of goods available                           53,750                   46,700

Ending inventory                                      11,800                    8,250

Cost of goods sold                                    41,950                   38,450

Gross margin                                                 40,550                   34,550

Operating expenses                                     18,200                   15,750

Net income before taxes                          $ 22,350                 $18,800

 

In the audit of the 2013 financial statements it was discovered that the ending inventory was actually $10,050 and the beginning inventory was actually $6,500.

 

Required:

  1. What adjustment to the 2013 owner’s capital account is necessary?
  2. Prepare a corrected income statement for 2014.

Answer:

  1. The 2013 adjusted net income before taxes will be an increase of $3,000; therefore the owner’s capital will be increased by this amount.

 

2.

2014                      2013

Sales revenue                                               $82,500                 $73,000

Cost of goods sold:

Beginning inventory                                10,050                      6,500

Net purchases                                           45,500                  39,000

Cost of goods available                           55,550                   45,500

Ending inventory                                     11,800                  10,050

Cost of goods sold                                    43,750                  35,450

Gross margin                                                 38,750                   37,550

Operating expenses                                    18,200                  15,750

Net income before taxes                           $20,550                 $21,800

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Analysis

Objective:  6-5 Measure the effects of inventory errors

 

 

Objective 6-6

 

1) An inventory count should be done at least once per year.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

2) The gross margin method is an estimate of inventory sometimes used to estimate losses for insurance claims due to a fire or natural disaster.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Comprehension

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

 

3) To apply the retail method of estimating the cost of inventory the business must know both the total cost and total selling price of its’ net purchases.

Answer:  TRUE

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

 

4) The following data are for Fern’s Florist Shop for the first seven months of its fiscal year:

 

Beginning inventory $53,500
Purchases 75,500
Net sales revenue 93,700
Normal gross margin percent 30%

 

What is the estimated ending inventory?

  1. A) $28,110
  2. B) $65,590
  3. C) $100,890
  4. D) $63,410

Answer:  D

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

 

Table 6-3

 

  Cost Selling Price
Beginning inventory $ 50,400 $ 67,900
Purchases   128,500  170,600
Goods available for sale $178,900 238,500

 

Ending inventory at selling price (retail)   $ 53,500

 

5) Referring to Table 6-3, in arriving at the estimated ending inventory at cost, using the retail method, the retail ratio to be used is:

  1. A) 75%
  2. B) 78%
  3. C) 133%
  4. D) 68%

Answer:  A

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

 

6) Referring to Table 6-3, the estimated ending inventory at cost, using the retail method, is:

  1. A) $36,380
  2. B) $39,050
  3. C) $71,155
  4. D) $40,125

Answer:  D

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

 

7) Using the gross margin method, find the ending inventory value when purchases were $105,000, net sales revenue was $128,000, beginning inventory was $31,000 and cost of goods sold historically runs 58% of net sales revenue.

  1. A) $82,240
  2. B) $61,760
  3. C) $23,000
  4. D) $54,000

Answer:  B

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

 

8) Bathworks Company wants to estimate its ending inventory based on the following data: beginning inventory of $70,000, net sales revenue of $195,000, purchases of $140,000, and a normal gross margin percent of 40%. Ending inventory is equal to:

  1. A) $78,000
  2. B) $117,000
  3. C) $93,000
  4. D) $132,000

Answer:  C

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

 

9) Assume a beginning inventory of $28,000, ending inventory of $47,000, and purchases of $110,000. If the gross margin percent is 60%, how much is net sales revenue?

  1. A) $168,333
  2. B) $101,000
  3. C) $252,500
  4. D) $227,500

Answer:  D

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Analysis

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

 

10) Callahan Computers stores its inventory in a warehouse that burned to the ground in late November, 2012. Their sales office was at a different location.  In order to file a claim with their insurance, the owners ask you to estimate the inventory in the warehouse. The following information is available:

 

Beginning inventory $375,500
Purchases through November 30 470,250
Net sales revenue through November 31 793,000

 

The company’s gross profit has historically been 40% of Net sales revenue.  Estimate the value of the inventory destroyed in the fire using the gross profit method.

  1. A) $369,950
  2. B) $528,550
  3. C) $410,000
  4. D) $388,450

Answer:  A

Explanation:  A) Calculations: $375,500 + $470,250 – (60% × $793,000)  = $369,950

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

 

Match the following.

 

  1. A) gross margin method
  2. B) retail method
  3. C) gross margin percentage

 

11) One of two methods used to estimate ending inventory

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

 

12) A method of estimating ending inventory based on the total cost and total selling price of opening inventory and net purchases

Diff: 1

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Knowledge

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

 

13) The relationship of gross margin to net sales.

Diff: 1

Learning Outcome:  A-16 Define and use the different types of financial statement analysis tools

Skill:  Knowledge

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

Answers: 11) A 12) B 13) C

 

 

14) Late on the night of September 30, 2014, an arsonist destroyed the Lampkin Company warehouse, which was full of inventory. Luckily the accounting records were stored in another facility and not destroyed in the fire. Lampkin Company is in the process of filing a claim with its insurance company for the inventory loss due to the fire.

 

Beginning inventory                                                   $350,500

Purchases through September 30, 2010                  470,250

Net sales revenue through Sept. 30, 2010               745,200

 

The gross margin percent has historically been 40% of net sales revenue.

 

Estimate the value of the inventory destroyed in the fire using the gross margin method.

Answer:

Beginning inventory                                       $350,500

Purchases                                                             470,250

Cost of goods available for sale                   $820,750

Less: Cost of goods sold*                                 447,120

Ending inventory                                            $373,630

 

* Cost of goods sold = $745,200 × 60% = $447120

Diff: 2

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

 

15) The inventory of Runners Company was destroyed by flood on Jun 1.  From an examination of the accounting records, the following data for the first five months (Jan to May) of the year are obtained:

 

Sales                                                                           $55,000

Sales Returns and Allowances                             2,000

Purchases                                                                   34,500

Freight-In                                                                      1,000

Purchase Returns and Allowances                      1,400

 

Required:

Determine the merchandise lost by flood using the Gross Profit Method, assuming a beginning inventory of $3,000 and a gross profit rate of 40% on net sales.

Answer:

Est. GAFS     = Beg. Inv + Purchases – Pur. Ret. + Fr

= 3,000 + 34,500 – 1,400 + 1000 = 37,100

Net sales       = 55,000 – 2000 = 53,000

 

Est. COGS    = (1 – 40%) × 53,000 = 31,800

Est. ending inventory = 37,100 – 31,800 = 5,300

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

16) Aardvark Novelty Sales has the following information available:

 

Selling

Cost                     Price

Beginning inventory             $75,600            $108,000

Purchases                                 252,000              360,000

Net sales                                                                348,000

 

Required:

 

Estimate the value of the ending inventory using the Retail Method.

Answer:

Selling

Cost                        Price

Beginning inventory                                      $75,600               $108,000

Purchases                                                          252,000                360,000

Goods available for sale                             $327,600               $468,000

Net sales                                                                                             348,000

Ending inventory at retail                                                          $120,000

Ending inventory at cost ($120,000 × 70%) $84,000

 

Retail ratio = $327,600/$468,000 = 70%

Diff: 3

Learning Outcome:  A-09 Explain and apply inventory costing methods

Skill:  Application

Objective:  6-6 Estimate ending inventory by the gross margin method and the retail method

 

Objective 6-7

 

1) The treatment of inventories under accounting standards for private enterprises (ASPE) is significantly different than for companies reporting under international financial reporting standards (IFRS).

Answer:  FALSE

Diff: 2

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  6-7 Assess the inventory recording and reporting impacts of IFRS

 

2) For companies reporting under international financial reporting standards (IFRS), it is possible to value inventory higher than its original cost.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  6-7 Assess the inventory recording and reporting impacts of IFRS

 

3) There are more acceptable inventory costing methods under international financial reporting rules (IFRS) than there are under accounting standards for private enterprise (ASPE).

Answer:  FALSE

Diff: 2

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  6-7 Assess the inventory recording and reporting impacts of IFRS

 

4) The lower-of-cost-or-net-realizable-value rule does not apply to Canadian companies reporting under the accounting standards for private enterprises (ASPE).

Answer:  FALSE

Diff: 2

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  6-7 Assess the inventory recording and reporting impacts of IFRS

 

5) The same three inventory costing methods that are permitted under accounting standards for private enterprises (ASPE) are allowed under international financial reporting standards (IFRS). Specifically these include:

  1. A) specific identification, FIFO and weighted-average.
  2. B) random identification, FIFO and weighted-average.
  3. C) specific identification, LIFO and weighted-average.
  4. D) specific identification, FIFO and average.

Answer:  A

Diff: 2

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  6-7 Assess the inventory recording and reporting impacts of IFRS

 

6) Which of the following is not a main issue in accounting for inventory under both accounting standards for private enterprises (ASPE) and international financial reporting standards (IFRS)?

  1. A) costs to include in inventory
  2. B) inventory costing method to use
  3. C) competitor pricing of similar inventory
  4. D) value of inventory when market value has fallen below cost

Answer:  C

Diff: 2

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  6-7 Assess the inventory recording and reporting impacts of IFRS

 

7) Which of the following costing methods is not acceptable under the international financial reporting standards (IFRS)?

  1. A) LIFO
  2. B) FIFO
  3. C) weighted average
  4. D) specific identification

Answer:  A

Diff: 2

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Comprehension

Objective:  6-7 Assess the inventory recording and reporting impacts of IFRS

 

Accounting, Vol. 1, 9e Cdn. Ed. (Horngren et al.)

Chapter 7   Accounting Information Systems

 

Objective 7-1

 

1) Internal controls are the methods and procedures used to safeguard assets and eliminate waste.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-1 Describe an effective accounting information system

 

2) The two basic components of a computerized accounting information system are the hardware and software.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-1 Describe an effective accounting information system

 

3) Managers strive for an accounting system that offers maximum benefits at a minimum cost, known as a good cost/benefit relationship.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-1 Describe an effective accounting information system

 

4) Accounting system flexibility creates additional cost to the organization.

Answer:  FALSE

Diff: 3

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-1 Describe an effective accounting information system

 

5) A combination of personnel, records, and procedures that a business uses to provide financial data is known as:

  1. A) an accounting information system.
  2. B) input.
  3. C) output.
  4. D) source documents.

Answer:  A

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-1 Describe an effective accounting information system

6) An effective accounting information system:

  1. A) allows employees flexibility in setting the working hours.
  2. B) guarantee a company will not go bankrupt.
  3. C) includes control, compatibility, flexibility, and a favourable cost/benefit relationship.
  4. D) promote operational efficiency.
  5. E) will prevent fraud in all cases.

Answer:  C

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-1 Describe an effective accounting information system

 

7) Accounting information systems cope with heavy transaction loads by:

  1. A) computerization and specialization.
  2. B) segregation of duties between personnel.
  3. C) hiring temporary personnel.
  4. D) outsourcing the processing of data.

Answer:  A

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-1 Describe an effective accounting information system

 

8) A good accounting information system includes all of the following features except:

  1. A) compatibility.
  2. B) inflexibility.
  3. C) a favourable cost/benefit relationship.
  4. D) control.

Answer:  B

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-1 Describe an effective accounting information system

 

9) Keeping accurate records of accounts receivable is an example of which feature of a good accounting information system?

  1. A) control
  2. B) compatibility
  3. C) favourable cost/benefit relationship
  4. D) flexibility

Answer:  A

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-1 Describe an effective accounting information system

 

10) The Hide and Seek Company has retail outlets at both large malls and small strip malls throughout Canada. Its accounting information system is able to track total revenues by store, by type of mall, by size of the store, by province, and by region. This is an example of which feature of a good information accounting system?

  1. A) flexibility
  2. B) favourable cost/benefit relationship
  3. C) compatibility
  4. D) control

Answer:  C

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-1 Describe an effective accounting information system

 

11) A good cost/benefit relationship:

  1. A) offers maximum benefits at a minimum cost.
  2. B) is impossible to achieve.
  3. C) exists in manual accounting systems only.
  4. D) would be ignored in a large organization.

Answer:  A

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-1 Describe an effective accounting information system

 

12) Which of the following is not an element of internal control?

  1. A) assessing cost/benefit relationship.
  2. B) safeguarding assets and records.
  3. C) authorizing transactions.
  4. D) procedures to ensure adherence to company policy.

Answer:  A

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-1 Describe an effective accounting information system

 

13) Two components that form a computerized accounting system include:

  1. A) hardware and personnel.
  2. B) hardware and software.
  3. C) hardware and input.
  4. D) personnel and input.

Answer:  B

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-1 Describe an effective accounting information system

 

14) The main computer in a network, where the program and data are stored, is called the:

  1. A) database.
  2. B) hardware.
  3. C) server.
  4. D) software.

Answer:  C

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-1 Describe an effective accounting information system

 

15) A computerized storehouse of information is known as a(n):

  1. A) network.
  2. B) database.
  3. C) management system.
  4. D) input system.

Answer:  B

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-1 Describe an effective accounting information system

 

16) Hardware is the electronic equipment that includes:

  1. A) computers, monitors, printers and the network.
  2. B) disk drives, software, and servers.
  3. C) servers, databases, and software.
  4. D) servers and software only.

Answer:  A

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-1 Describe an effective accounting information system

 

17) Which of the following is true of internal control?

  1. A) A company’s outside auditor is responsible for the company’s internal control system.
  2. B) One of the major purposes of internal control is to ensure accurate, reliable accounting records.
  3. C) Internal control procedures tend to diminish the importance of operational efficiency.
  4. D) Internal controls are only necessary for large businesses.

Answer:  B

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-1 Describe an effective accounting information system

 

18) Which of the following is not one of the purposes of internal control?

  1. A) to encourage employees to follow company policy
  2. B) to safeguard the company’s assets
  3. C) to ensure accurate, reliable accounting records
  4. D) to guarantee that a business makes a profit

Answer:  D

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-1 Describe an effective accounting information system

Match the following.

 

  1. A) network
  2. B) accounting information system
  3. C) software

 

19) Set of programs or instructions that cause the computer to perform the work desired

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-1 Describe an effective accounting information system

 

20) The combination of personnel, records, and procedures that a business uses to meet the need for financial data

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-1 Describe an effective accounting information system

 

21) Set of programs that drives the computer

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-1 Describe an effective accounting information system

22) The system of electronic linkages that allows different computers to share the same information

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-1 Describe an effective accounting information system

 

Answers: 19) C 20) B 21) C 22) A

 

 

23) Describe the five features of a good accounting information system and give an example of each.

Answer:

  1. Control. Internal control is the organizational plan and all the related measures adopted by an entity to safeguard its assets and eliminate waste. It includes the methods and procedures used to authorize transactions, to ensure adherence to policy, to safeguard assets and records, to prevent and detect error and fraud, to provide security by limiting access to assets and records and to ensure that information produced is relevant, accurate and timely. An example is management actions to control cash payments to avoid theft through unauthorized payments.
  2. Compatibility. This feature means that the accounting system works smoothly with the businesses operations, personnel and organizational structure of the business. An example is the ability to produce segmented results of the business.
  3. Flexibility. Flexibility is the ability of the information system to accommodate change. An example is the ability of the system to integrate the financial records of a new acquisition.
  4. Reports that meet users’ needs. A good accounting information system should have the ability to produce the reports that managers need for decision making.
  5. Good cost/benefit relationship. The major constraint is cost/benefit. Unlimited amounts of money could be spent without ever achieving a perfect internal control system. A reasonable system should be installed that will produce benefits that at least equal the costs of implementation.

Diff: 3

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-1 Describe an effective accounting information system

24) Define, in a few words, the meaning of internal control.

Answer:  Internal control is an organizational plan and all the related measures adopted by a business to authorize transactions, ensure adherence to company policy,  prevention and detection of fraud and error, safeguarding of assets, reliability of accounting records, and timely preparation of reliable financial information.

Diff: 3

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-1 Describe an effective accounting information system

 

Objective 7-2

 

1) In a manual system, processing includes journalizing transactions, posting the accounts, and preparing the financial statements.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

 

2) Data from source documents such as sales receipts and bank deposit slips are referred to as outputs of a data processing system.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

3) The system of electronic linkages that allows different computers to share the same information is called a worksheet.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

4) Outputs are the reports used for decision making.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

5) Spreadsheets can be linked to computerized accounting packages to help create more complex reports.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-2 Understand the elements of computerized and manual accounting systems

6) Manual accounting systems are never used in real life.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

7) With a computerized accounting system, the accounting cycle has several additional steps.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

 

8) In a computerized accounting system, the posting to the general accounts ledger is done automatically.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

9) An advantage of enterprise resource planning (ERP) systems is the integration of all company activities from purchasing to production to customer service.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

10) In computerized accounting systems, modules can be the same as submenus.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

11) Inputs would include:

  1. A) sales receipts.
  2. B) an income statement.
  3. C) a balance sheet.
  4. D) a statement of owner’s equity.

Answer:  A

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

12) Outputs would include:

  1. A) fax orders.
  2. B) sales receipts.
  3. C) bank deposit slips.
  4. D) an income statement.

Answer:  D

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

 

13) Design of an accounting system begins with the:

  1. A) previous year’s financial statements
  2. B) using a firewall
  3. C) chart of accounts
  4. D) opening trial balance

Answer:  C

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

14) The set of programs that cause the computer to perform the work desired is called the:

  1. A) hardware.
  2. B) network.
  3. C) server.
  4. D) software.

Answer:  D

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

15) All of the following are advantages of an enterprise resource planning system except:

  1. A) helps companies adjust to changes.
  2. B) expensive to implement.
  3. C) can replace hundreds of separate software systems.
  4. D) can save lots of money.

Answer:  B

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

16) The three stages of data processing are:

  1. A) inputs, outputs, and processing.
  2. B) source documents, processing, and decision making.
  3. C) processing, reports, and decision making.
  4. D) inputs, decision making, and outputs.

Answer:  A

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

 

17) Computerized accounting systems are organized by:

  1. A) outputs.
  2. B) inputs.
  3. C) function.
  4. D) networks.

Answer:  C

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

18) In a computerized accounting system, a list of options for choosing computer functions is called a(n):

  1. A) menu.
  2. B) server.
  3. C) on-line processor.
  4. D) batch processor.

Answer:  A

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

19) In a computerized accounting system, the posting of journal entries performed on a continuous basis is referred to as:

  1. A) batch processing.
  2. B) on-line processing.
  3. C) quick processing.
  4. D) accuracy processing.

Answer:  B

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

20) The final stage of data processing is the:

  1. A) posting of transactions to the accounts.
  2. B) generation of the accounting reports.
  3. C) batch processing of transactions.
  4. D) preparation of the special journals.

Answer:  B

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

 

21) When transactions are posted in a computerized accounting system as a group it is known as:

  1. A) batch processing.
  2. B) online processing.
  3. C) real-time processing.
  4. D) output processing.

Answer:  A

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

Match the following.

 

  1. A) batch processing
  2. B) database
  3. C) menu
  4. D) on-line processing
  5. E) inputs

 

22) Computerized accounting for similar transactions in a group or batch

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

23) Computerized storehouse of information

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

24) The first stage of data processing

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

25) Computerized processing of related functions on a continuous basis

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

26) A list of options for choosing computer functions

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

Answers: 22) A 23) B 24) E 25) D 26) C

 

 

27) Indicate using the following codes, indicate whether the items described are inputs (Code I),  outputs (Code O), or neither input or output (Code N) of the computerized or manual accounting system.

 

1)    Bank statement                          ________

2)    Sales invoice                               ________

3)    Cheque from customer            ________

4)    Cheque payable to supplier   ________

5)    Bank deposit slip                       ________

6)    Inventory printout                     ________

7)    Balance sheet                              ________

8)    Debit memo from supplier     ________

9)    Post closing trial balance        ________

10)  Unadjusted trial balance         ________

11)  Auditor’s report                         ________

 

Answer:

1)    I

2)    I

3)    I

4)    I

5)    I

6)    O

7)    O

8)    I

9)    O

10)  O

11)  N

Diff: 2

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

28) List the four special journals.

Answer:  Sales Journal

Purchases Journal

Cash Receipts Journal

Cash Payments Journal

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

Table 7-3

 

Accounts payable

Accounts receivable

Accumulated amortization

Cash

Equipment

Gasoline expense

Martin Mann, Capital

Martin Mann, Withdrawals

Notes payable

Salary payable

Service revenue

Supplies

 

29) Refer to Table 7-3.

Put the accounts in the proper order for the chart of accounts, starting with the most liquid assets.

Answer:

Cash

Accounts receivable

Supplies

Equipment

Accumulated Amortization

Accounts payable

Notes payable

Salary payable

Martin Mann, Capital

Martin Mann, Withdrawals

Service revenue

Gasoline expense

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

Table 7-4

 

Accounts Payable

Accounts Receivable

Accumulated Amortization – Factory

Amortization Expense

Cash

Cost of Goods Sold

Factory Building

GST Payable

GST Recoverable

Inventory

Land

Marvin Fish, Capital

Marvin Fish, Withdrawals

Sales

Sales Discounts

Sales Returns and Allowances

Supplies

Unearned Rent Revenue

Wages Payable

 

30) Refer to Table 7-4.

Put the accounts in the proper order for the chart of accounts, starting with the most liquid assets.

Answer:

Cash

Accounts Receivable

GST Recoverable

Supplies

Inventory

Land

Factory Building

Accumulated Amortization – Factory

Accounts Payable

GST Payable

Unearned Rent Revenue

Wages Payable

Marvin Fish, Capital

Marvin Fish, Withdrawals

Sales

Sales Returns and Allowances

Sales Discounts

Cost of Goods Sold

Amortization Expense

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  7-2 Understand the elements of computerized and manual accounting systems

Table 7-5

 

Accounts Payable

Accounts Receivable

Accumulated Amortization – Equipment

Amortization Expense

Cash

Cost of Goods Sold

Equipment

Insurance Expense

Interest Expense

Interest Revenue

Inventory

Marvin Fish, Capital

Marvin Fish, Withdrawals

Prepaid Insurance

Sales

Wages Payable

 

31) Refer to Table 7-5.

Put the accounts in the proper order for the chart of accounts, starting with the most liquid assets.

Answer:

Cash

Accounts Receivable

Prepaid Insurance

Inventory

Equipment

Accumulated Amortization – Equipment

Accounts Payable

Wages Payable

Marvin Fish, Capital

Marvin Fish, Withdrawals

Sales

Interest Revenue

Cost of Goods Sold

Amortization Expense

Insurance Expense

Interest Expense

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

32) What are the benefits of studying a manual accounting system given that most companies have computerized accounting systems?

Answer:  Because the accounting is the same regardless of the system, learning a manual accounting system will help the student to fully understand the accounting process and therefore understand what the computer is doing in a computerized system. This understanding will provide the necessary skills to analyze the output of the computer in a meaningful way. Additionally, some companies, although computerized, keep some manual accounting records.

Diff: 3

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

33) Describe the benefits of a computerized accounting system versus a manual accounting system.

Answer:  Computerized accounting systems process inputs faster than do manual systems and can generate more types of reports. Therefore computerized systems reduce both time and personnel costs.  They free employees from processing large numbers of transactions manually, thereby increasing time for decision making and reducing errors. In computerized systems, account balances are updated automatically and reports are generated on demand which greatly enhances the information available for management decision making.

Diff: 3

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Comprehension

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

34) Why is a well-structured chart of accounts particularly important in a computerized accounting system?

Answer:  A well-structured chart of accounts is essential in a computerized accounting system because the reporting component of computerized accounting systems relies on account number ranges to translate accounts and their balances into properly organized financial statements and other reports.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  7-2 Understand the elements of computerized and manual accounting systems

 

Objective 7-3

 

1) A special journal is an accounting journal designed to record one specific type of transaction.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

2) The general journal is used to record all transactions that do not fit one of the special journals.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

3) Cash in the chart of accounts is an example of a control account.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

4) Special journals save much time in recording repetitive transactions and posting to the ledgers.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

5) Transactions must be recorded in either the general journal or a special journal, but not both.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

6) A subsidiary ledger is a group of accounts that provides supporting details on individual balances, the total of which appears in a general ledger account.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

7) A subsidiary ledger is a book of accounts that provides supporting details on individual balances, the total of which appears in the general journal.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

8) Transactions in the sales journal are posted both to the general ledger and the accounts payable subsidiary ledger.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

9) The sum of the account balances in the accounts receivable subsidiary ledger should equal the balance in the accounts receivable account in the general ledger.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

10) The seller would record the return of merchandise sold on account in the sales journal.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

11) Accounts receivable in the general ledger is known as a control account.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

12) Credit postings to the accounts receivable general ledger account come from the cash receipts journal and the general journal.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

13) In a manual accounting system the posting from a sales journal includes daily posting for cash transactions.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

14) Both the sales journal and the cash receipts journal require daily posting to the accounts receivable subsidiary ledger and the accounts receivable control account.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

15) Posting the entries in the sales journal to the accounts receivable subsidiary ledger should be done:

  1. A) on a weekly basis
  2. B) only at the end of the accounting period
  3. C) on a daily basis
  4. D) at the end of each month

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

16) Customers’ individual accounts included in a subsidiary ledger are said to be controlled by the Accounts Receivable account in the:

  1. A) accounts payable ledger.
  2. B) accounts receivable ledger.
  3. C) controlling ledger.
  4. D) general ledger.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

17) The general ledger accounts used when posting the sales journal are:

  1. A) cash, sales revenue, accounts receivable, and inventory.
  2. B) sales returns and allowances, sales revenue, accounts receivable, and cost of goods sold.
  3. C) sales revenue, cost of goods sold, inventory, and accounts receivable.
  4. D) sales discounts, sales returns and allowances, sales revenue, and accounts receivable.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

18) The sales journal is used for the sale of:

  1. A) merchandise for cash.
  2. B) merchandise on account.
  3. C) assets other than merchandise for cash.
  4. D) assets other than merchandise on account.

Answer:  B

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

19) Every subsidiary ledger must have its own:

  1. A) control account.
  2. B) subsidiary account.
  3. C) general account.
  4. D) general ledger.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

20) A cash receipts journal would likely contain all of the following columns except:

  1. A) cash debit.
  2. B) sales revenue credit.
  3. C) accounts receivable debit.
  4. D) sales discounts debit.

Answer:  C

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

21) The accounts receivable credit column of the cash receipts journal is:

  1. A) posted in summary only at the end of the month.
  2. B) posted by individual amounts only at the end of the month.
  3. C) not posted.
  4. D) posted in summary at the end of the month and by individual amounts on a daily basis

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

22) Assuming the use of special journals, the sale of equipment for cash would be recorded in the:

  1. A) sales journal.
  2. B) cash payments journal.
  3. C) cash receipts journal.
  4. D) general journal.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

23) Assuming the use of special journals, the sale of merchandise to Jerri Blackwell on account would be recorded in the:

  1. A) general journal.
  2. B) accounts receivable journal.
  3. C) sales journal.
  4. D) cash receipts journal.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

24) Assuming the use of special journals, the sale of merchandise to Landon Browning for cash would be recorded in the:

  1. A) cash receipts journal.
  2. B) cash payments journal.
  3. C) general journal.
  4. D) sales journal.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

25) Assuming the use of special journals, the borrowing of $80,000 from the bank by signing a note payable would be recorded in the:

  1. A) cash payments journal.
  2. B) sales journal.
  3. C) cash receipts journal.
  4. D) general journal.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

26) Gere Company returned defective supplies to a supplier and received a cash refund. Assuming the use of special journals, this entry would be recorded in the:

  1. A) sales journal.
  2. B) cash payments journal.
  3. C) cash receipts journal.
  4. D) general journal.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

27) Clooney Enterprises received a tax refund cheque in the mail and immediately deposited it in the bank. Assuming the use of special journals, this entry would be recorded in the:

  1. A) general journal.
  2. B) cash payments journal.
  3. C) cash receipts journal.
  4. D) sales journal.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

28) Lee Enterprises received payment within the discount period from a customer who had purchased merchandise on account. The sales invoice was for $2,000, and credit terms were 3/15 n/30. In the cash receipts journal, $1,940 will appear under the:

  1. A) sales revenue credit column.
  2. B) accounts receivable credit column.
  3. C) cash debit column.
  4. D) cash credit column.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

29) Rockhill Industries received payment after the expiration of the discount period from a customer who had purchased merchandise on account. The sales invoice was for $3,000, and credit terms were 3/15 n/30. The cost of the merchandise was $1,800. In the cash receipts journal:

  1. A) $3,000 will appear in the sales revenue credit column.
  2. B) $3,000 will appear in the accounts receivable debit column.
  3. C) $3,000 will appear in the accounts receivable credit column.
  4. D) $90 will appear in the sales discounts debit column.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

Table 7-1

 

On April 1, Pro Company received a cheque from Carter Company for payment of an invoice dated March 24 for $3,000 with credit terms of 2/10 n/30. On March 28, Carter had returned $200 of the merchandise because it was defective.

 

30) Referring to Table 7-1, how would this transaction be recorded in Pro’s cash receipts journal?

  1. A) debit Cash $3,000; credit Accounts Receivable-Carter Company $3,000
  2. B) debit Cash $2,800; credit Accounts Receivable-Carter Company $2,800
  3. C) debit Cash $2,744; credit Accounts Receivable-Carter Company $2,744
  4. D) debit Cash $2,744 and Sales Discounts $56; credit Accounts Receivable-Carter Company $2,800

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

31) Referring to Table 7-1, when will the cash receipt be posted to Carter Company’s account receivable account in the accounts receivable subsidiary ledger?

  1. A) on April 30, because special journals are always posted monthly
  2. B) on April 1, because subsidiary ledgers are posted daily
  3. C) anytime, it doesn’t matter when subsidiary ledgers are posted
  4. D) at the end of the next accounting period

Answer:  B

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

32) Referring to Table 7-1, how would this transaction be recorded in Pro’s cash receipts journal if payment is made on April 15?

  1. A) debit Cash $2,800; credit Accounts Receivable-Carter Company $3,000
  2. B) debit Cash $2,800; credit Accounts Receivable-Carter Company $2,800
  3. C) debit Cash $2,800; credit Accounts Receivable-Carter Company $3,000 and Sales Discounts $56
  4. D) debit Accounts Receivable-Carter Company $3,000; credit Cash $2,744 and Sales Discounts $56

Answer:  B

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

33) On April 10, Salt Company received a cheque from Pepper Company for payment of an invoice dated March 24 for $2,000 with credit terms of 2/10 n/30. On March 28, Pepper had returned $200 of the merchandise because it was defective. How would this transaction be recorded in Salt’s cash receipts journal?

  1. A) debit Cash $2,000; credit Accounts Receivable-Pepper Company $2,000
  2. B) debit Cash $1,800; credit Accounts Receivable-Pepper Company $1,800
  3. C) debit Cash $1,764; credit Accounts Receivable-Pepper Company $1,764
  4. D) debit Cash $1,764 and Sales Discounts $36; credit Accounts Receivable-Pepper Company $1,800

Answer:  B

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

34) The end-of-month balance in Dryer Company’s cash receipts journal cash column is $22,630. How will this column be posted?

  1. A) The total will be posted to the cash account as a credit.
  2. B) The total will be posted to the cash account as a debit.
  3. C) The individual amounts are posted on a daily basis.
  4. D) The total is not posted.

Answer:  B

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

35) The sales journal contains columns for:

  1. A) accounts receivable/sales revenue and supplies/inventory.
  2. B) accounts receivable/sales revenue and inventory/accounts payable.
  3. C) accounts receivable/sales and cost of goods sold/inventory.
  4. D) accounts receivable/inventory and cost of goods sold/accounts payable.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

36) Parker Industrial Corp. uses a sales journal to record each sale transaction. At the end of January, the sales journal was as you see below:

 

Sales Journal

Date Invoice # Customer Post

Ref.

Accts Rec DR/

Sales Rev CR

COGS DR/

Inventory CR

Jan 12 3077 Fogelin, A. $2,400 $ 960
    19 3078 Faass Products Co. 1,012 800
    24 3079 Lanier Service Inc. 444 201
    29 3080 June, L. 709 366
    31      Total $4,565 $2,327

 

When the sales journal is posted to the general ledger, which entries are made?

  1. A) Debit Accounts receivable $4,565; credit Inventory $2,327

Debit Sales revenue $4,565; credit COGS $2,327

  1. B) Debit Sales revenue $4,565; credit Accounts receivable $4,565

Debit Inventory $2,327; credit COGS $2,327

  1. C) Debit Accounts receivable $4,565; credit Sales revenue $4,565;

Debit COGS $2,327; credit Inventory $2,327

  1. D) Debit Accounts receivable $2,327; credit Inventory $2,327

Debit COGS $4,565; credit Inventory $4,565

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

37) Which of the following best describes the action known as balancing the ledgers?

  1. A) Totaling the subsidiary account balances and cross checking against the main account balance
  2. B) Making sure that the ending balance in Sales is equal to the ending balance in Accounts receivable
  3. C) Identifying the differences between the cash balance in the ledger and the bank statement
  4. D) Totaling the expense account balances and cross checking against total expenses shown on the income statement

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

38) Special journals are particularly efficient for:

  1. A) similar, repetitive transactions.
  2. B) unusual transactions.
  3. C) transactions that require recording in 3 or more accounts.
  4. D) transactions that are corrections of previous errors.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

Table 7-6

 

Provincewide Milling Company uses a sales journal. On June 2, the sales journal appears as you see below.

 

Sales Journal

 

Date Invoice # Customer Post

Ref.

Accts Rec DR/

Sales Rev CR

COGS DR/

Inventory CR

June 2 909 Richardson Products $ 4,200 $ 1,090
     Total

 

Other sales that took place in June are as follows:

 

Inv # Sales Amount Customer Cost of Goods Sold
910  $ 880  Anton, Michael  $390
911  1,120  A1 Repairs    560
912     500 Thompson, Al    220

 

39) Refer to Table 7-6, at the end of the month, what entry was made to accounts receivable?

  1. A) Credit $6,700
  2. B) Debit $6,700
  3. C) Debit $2,260
  4. D) Credit $2,260

Answer:  B

Explanation:  B) $4,200 + $880 + $1,120 + $500 = $6,700

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

40) Refer to Table 7-6, at the end of the month, what entry was made to inventory?

  1. A) Credit $2,260
  2. B) Debit $2,260
  3. C) Debit $6,700
  4. D) Credit $6,700

Answer:  A

Explanation:  A) $1,090 + $390 + $560 + $220 = $2,260

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

41) Refer to Table 7-6, at the end of the month, what entry was made to sales revenue?

  1. A) Credit $6,700
  2. B) Debit $6,700
  3. C) Debit $2,260
  4. D) Credit $2,260

Answer:  A

Explanation:  A) $4,200 + $880 + $1,120 + $500 = $6,700

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

42) Refer to Table 7-6, at the end of the month what entry was made to cost of goods sold?

  1. A) Credit $2,260
  2. B) Debit $2,260
  3. C) Debit $6,700
  4. D) Credit $6,700

Answer:  B

Explanation:  B) $1,090 + $390 + $560 + $220 = $2,260

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

Table 7-8 Nordin Avionics

 

  1. Nordin Avionics began business on January 1, 2013. The business was started with $10,000 in the cash account and $30,000 of inventory in stock. Nordin uses a sales journal to record credit sales and a cash receipts journal to record all cash receipts, including both cash sales and cash collections of credit sales. At the end of January, the two journals appeared as follows:

 

Sales Journal

 

Date Invoice # Customer Post

Ref.

Accts Rec DR/

Sales Rev CR

COGS DR/

Inventory CR

Jan   4 1000 Reed, A. $ 5,000 $ 4,100
      6 1001 Charles, B. 1,240 990
     13 1002 Reed, A. 3,200 2,800
     20 1003 Williams, D. 900 820
     22 1004 Charles, B. 5,100 4,600
     Total $ 15,440 $ 13,310

 

Cash Receipts Journal

 

Date Cash

Debit

Sales Revenue Credit Accts. Rec.

Credit

Invoice # Customer COGS DR/

Inventory CR

Jan   5 $  3,300 $  3,300 $ 2,700
     10 5,000 $ 5,000 1000 Reed, A.
     14 9,000 9,000  8,000
     18 1,240 1,240 1001 Charles, B.
$ 18,540 $ 12,300 $ 6,240 $ 10,700

 

43) Refer to Table 7-8 at the end of January, what was the balance in accounts receivable?

  1. A) $ 9,200
  2. B) $14,200
  3. C) $ 7,960
  4. D) $ 8,000

Answer:  A

Explanation:  A) $15,440 – $6,240 = $9,200

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

44) Refer to Table 7-8 at the end of January, what was the balance in the subsidiary account receivable for A. Reed?

  1. A) $9,200 credit balance
  2. B) $3,200 debit balance
  3. C) $5,000 credit balance
  4. D) $3,200 credit balance

Answer:  B

Explanation:  B) $5,000 – $5,000 + $3,200 = $3,200

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

45) Refer to Table 7-8 at the end of January, what was the balance in Inventory? Assume no new inventory was acquired during January.

  1. A) $ 5,990 debit balance
  2. B) $ 6,340 debit balance
  3. C) $24,010 credit balance
  4. D) $ 5,100 debit balance

Answer:  A

Explanation:  A) $30,000 – $13,310 – $10,700 = $5,990

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

Match the following.

 

  1. A) special journal
  2. B) sales journal
  3. C) control account
  4. D) subsidiary ledger
  5. E) balancing the ledgers

 

46) An account whose balance equals the sum of the balances in a group of related accounts in a subsidiary ledger

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

47) Credit sales are recorded in this special journal.

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

48) Book of accounts that provides supporting details on individual balances, the total of which appears in a general ledger account

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

49) An accounting journal designed to record one specific type of transaction

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

50) An important control feature that ensures the accuracy of the accounting records

Diff: 1

Learning Outcome:  A-06 Define internal controls and discuss the internal control principles

Skill:  Knowledge

Objective:  7-3 Journalize and post transactions using the sales & cash receipts journals; & the A/R subsidiary ledger

 

Answers: 46) C 47) B 48) D 49) A 50) E

 

51) M and N Sporting Goods reports these selected transactions for the month of July:

 

July 9     Issued invoice No. 159 for a sale on account to Evans Company, $4,600,

terms 1/10 n/30. The cost of the merchandise was $2,700.

 

10     Issued invoice No. 160 for a sale on account to Sails and Boats, $5,700,

terms 2/15 n/45. The cost of the merchandise was $2,450.

 

20     Issued a credit memo to Sails and Boats for $2,800 for merchandise

returned. The cost of the returned merchandise was $1,200.

 

Record the above transactions in either the sales journal or the general journal. M and N Sporting Goods has a perpetual inventory system.

 

Sales Journal

Date Account Debited Acc. Rec. Dr.

Sales Rev. Cr.

Cost of Goods Sold Dr.

Inventory Cr.

   

 

                                                        General Journal

Date Accounts Debit Credit

 

Answer:                                           Sales Journal

Date Account Debited Acc. Rec. Dr.

Sales Rev. Cr.

Cost of Goods Sold Dr.

Inventory Cr.

July 9 Evans Company 4,600 2,700
10 Sails and Boats 5,700 2,450
31 Totals 10,300 5,150

 

                                                        General Journal

Date Accounts Debit Credit
July 20 Sales Returns and Allowances 2,800
          Accounts Rec.-Sails and Boats 2,800
Inventory 1,200
          Cost of Goods Sold 1,200

 

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

 

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