Ch6 Practice Test Part 1: Multiple Choice Choose the most correct answer from the choices provided.

Transcription

1 Part 1: Multiple Choice Choose the most correct answer from the choices provided. 1. The factor which determines whether or not goods should be included in a physical count of inventory is a. physical possession. b. legal title. c. management's judgement. d. whether or not the purchase price has been paid. 2. If goods in transit are shipped FOB shipping point to a carrier named by the buyer a. the seller has legal title to the goods until they are delivered. b. the buyer has legal title to the goods when a public carrier accepts the goods from the seller. c. the transportation company has legal title to the goods while the goods are in transit. d. no one has legal title to the goods until they are delivered. 3. An employee assigned to counting computer monitors in boxes should a. estimate the number if there are a large quantity to be counted. b. read each box and rely on the box description for the contents. c. open each box and check that the box contains a monitor. d. rely on the warehouse records of the number of computer monitors. 4. Under a consignment arrangement, the a. consignor has ownership until goods are sold to a customer. b. consignor has ownership until goods are shipped to the consignee. c. consignee has ownership when the goods are in the consignee's possession. d. consigned goods are included in the inventory of the consignee. 5. A company just starting in business purchased three merchandise inventory items at the following prices. First purchase $80; Second purchase $95; Third purchase $85. If the company sold two units for a total of $200 and used FIFO costing, the gross profit for the period would be a. $25. b. $35. c. $20. d. $ Which of the following is not a common cost flow assumption used in costing inventory? a. First-in, first-out b. Middle-in, first-out c. Last-in, first-out d. Average cost 7. Of the following companies, which one would not likely employ the specific identification method for inventory costing? a. Music store specializing in organ sales b. Farm implement dealership c. Antique shop d. Hardware store

2 8. The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is a. called the matching principle. b. called the consistency principle. c. nonexistent; that is, there is no accounting requirement. d. called the physical flow assumption. 9. In a perpetual inventory system, the cost of goods sold is recorded a. on a monthly basis. b. on a daily basis. c. on an annual basis. d. with each sale. 10. The accountant at Kramer Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or average cost as an inventory costing method. The tax rate is 30% and the FIFO method will result in income before taxes of $4,370. The average cost method will result in income before taxes of $3,950. What is the difference in tax that would be paid between the two methods? a. $420. b. $294. c. $126. d. Cannot be determined from the information provided Fill in the Blanks Determine the correct term that makes the statement true. 1 mark each. 1. The two inventory systems studied so far in this course are called perpetual and periodic. a. The system uses the asset Merchandise Inventory. b. The system uses the asset Purchases. c. The system determines COGS at the end of an economic time frame. d. The system determines COGS after each and every sale. e. The system uses the Freight In expense account. 2. Goods are considered when they are in the hands of a public carrier such as railway, airline, trucking, or shipping company at the statement date. 3. Accounting for inventories is important because inventories affect the section of the balance sheet and the section on the income statement. 4. Inventoriable costs are by freight charges paid by the purchaser and by volume discounts taken by the purchaser. 5. If the unit cost of inventory has continuously increased, the, first-out inventory valuation method will result in a higher valued ending inventory than if the, first-out method had been used. solution: 1a perpetual 1b periodic 1c periodic 1d perpetual 1e periodic 2 in transit 3 current assets, COGS 4 increased, decreased 5 first in last in

3 Part 2: Problems 1) Complete this question on the provided template. Choi Company had a beginning inventory on January 1 of 100 units of a product named BAT4M at a cost of $20 per unit. During the year, the following purchases were made: March units at $24 July units at $25 Sept units at $28 Dec units at $30 By year end, 750 units were sold. Choi Company uses a Periodic Inventory System. a) Determine the Cost of Goods available for sale. (3) b) Determine (1) the cost of the ending inventory, and (2) the cost of goods sold under each of the three assumed cost flow methods (FIFO, LIFO, AVG) (5 marks ea = 15 total) c) During a period of rising prices, which cost flow method results in (1) the highest inventory amount for the Balance Sheet, and (2) the highest cost of goods sold for the Income Statement? (4) Solution: (a) COST OF GOODS AVAILABLE FOR SALE Date Explanation Units Unit Cost Total Cost Jan. 1 Beginning inventory 100 $20 $ 2,000 Mar. 15 Purchase ,200 July 20 Purchase ,000 Sept. 4 Purchase ,400 Dec. 2 Purchase ,000 Total 1,000 $25,600 (b)fifo (1) Ending Inventory Date Units UnitCost TotalCost Sept $ 28 $4,200 Dec , * $7,200 *1, = 250 (2) Cost of Goods Sold Date Units UnitCost TotalCost Jan $ 20 $ 2,000 Mar ,200 July ,000 Sept , $18,400 Check: EI + CGS = GAS $7,200 + $18,400 = $25,600

4 WEIGHTED AVERAGE COST Weighted average unit cost: $25,600 1,000 = $25.60 (1) Ending Inventory Unit Total Units Cost Cost 250 $25.60 $6,400 (2) Cost of Goods Sold Unit Total Units Cost Cost 750 $25.60 $19,200 Check: EI + CGS = GAS $6,400 + $19,200 = $25,600 LIFO (1) Ending Inventory Unit Total Date Units Cost Cost Jan $ 20 $2,000 Mar , $5,600 (2) Cost of Goods Sold Unit Total Date Units Cost Cost Mar $ 24 $ 3,600 July ,000 Sept ,400 Dec , $20,000 Check: EI + CGS = GAS $5,600 + $20,000 = $25,600 (c) FIFO produces the highest inventory cost for the balance sheet, $7,200. LIFO produces the highest cost of goods sold for the income statement, $20,000.

5 2) The following information is presented for Rusty s Warehouse, for the year ended Jan 31, Prepare a multi-step income statement. Rusty s uses a periodic system. (hint: operating expenses need not be split up into administrative and selling expenses) Freight In $10,000 Freight Out $7,000 Merchandise Inventory, Beginning $42,000 Purchase Returns and Allowances $6,000 Merchandise Inventory, Ending $63,000 Purchases $200,000 Rent Expense $20,000 Salary Expense $61,000 Insurance Expense $12,000 Sales $312,000 Sales Returns and Allowances $13,000 Solution RUSTY S WAREHOUSE Income Statement For the Year Ended January 31, 2014 Sales revenues Sales... $312,000 Less: Sales returns and allowances... 13,000 Net sales... $299,000 Cost of goods sold Inventory, February 1, $ 42,000 Purchases... $200,000 Less: Purchase returns and allowances... 6,000 Net purchases ,000 Add: Freight in ,000 Cost of goods purchased ,000 Cost of goods available for sale ,000 Inventory, January 31, ,000 Cost of goods sold ,000 Gross profit ,000 Operating expenses Salary expense... $ 61,000 Rent expense... 20,000 Insurance expense... 12,000 Freight out... 7,000 Total operating expenses ,000 Net income... $ 16,000

6 3) On October 1, Mr. D's Bicycle Store had an inventory of 10 ten speed bicycles at a cost of $150 each. During the month of October the following transactions occurred. Oct. 3 Purchased 20 bicycles at a cost of $150 each from the Lyons Bicycle Company, terms n/30. 6 Sold 20 bicycles to Team Canada for $250 each, terms n/30. 7 Received credit from the Lyons Bicycle Company for the return of 2 defective bicycles. 13 Issued a credit to Team Canada for the return of a defective bicycle. 19 Purchased 10 bicycles from Huffy Bicycle Company at a cost of $125, terms n/ Paid freight of $80 on the October 19 purchase. Instructions Prepare the journal entries to record the transactions assuming the company uses a periodic inventory system. Oct. 3 Purchases... 3,000 Accounts Payable... 3,000 6 Accounts Receivable... 5,000 Sales... 5,000 7 Accounts Payable Purchase Returns and Allowances Sales Returns and Allowances Accounts Receivable Purchases... 1,250 Accounts Payable... 1, Freight In Cash... 80