Financial Accounting, 11e (Harrison/Horngren/Thomas)
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Chapter 6 Inventory & Cost of Goods Sold
1 Learning Objective 6-1
1) Cost of Goods Sold is an operating expense on the income statement.
Answer: FALSE
Diff: 1 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement, Reporting
2) Inventory is reported on the balance sheet at the selling price of the inventory still on hand.
Answer: FALSE
Diff: 2 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
3) Service entities report cost of goods sold on the income statement.
Answer: FALSE
Diff: 1 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement, Reporting
4) A company will include goods out on consignment in its ending inventory.
Answer: TRUE
Diff: 2 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
5) To document approval of purchase returns, management issues a credit memorandum meaning that
accounts payable are reduced for the amount of the return.
Answer: FALSE
Diff: 2 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
6) In a perpetual inventory system, a business maintains a running record of the number of units bought, sold and on hand for each inventory item.
Answer: TRUE
Diff: 2 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
7) Since a perpetual inventory system continuously updates the inventory account, a physical inventory count is not necessary to prove the inventory records.
Answer: FALSE
Diff: 2 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
8) A purchase discount decreases the cost of the inventory.
Answer: TRUE
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
9) Freight in is accounted for as a delivery expense.
Answer: FALSE
Diff: 2 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
10) The cost of inventory shifts from asset to expense when the seller fulfills its contract with the customer, delivers the goods to the buyer and recognizes revenue.
Answer: TRUE
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
11) The financial statements of a merchandising company will show:
A) the same accounts as the financial statements of a service company.
B) gross profit after operating expenses on the income statement.
C) inventory as a current asset on the balance sheet.
D) cost of goods sold as a contra revenue account on the income statement.
Answer: C
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
12) The cost of the inventory that a business has sold to customers is called:
A) inventory.
B) cost of goods sold.
C) purchases.
D) gross profit.
Answer: B
Diff: 2 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
13) The cost of inventory that is still on hand is called:
A) cost of goods sold, an expense that appears on the balance sheet.
B) inventory, a long-term asset that appears on the balance sheet.
C) inventory, a current asset that appears on the balance sheet.
D) purchases, a current asset that appears on the balance sheet.
Answer: C
Diff: 2 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
14) Another term for gross profit is:
A) gross income.
B) gross sales.
C) gross margin.
D) gross operating income.
Answer: C
Diff: 1 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
15) Two accounts that appear on the financial statements of a merchandising company but are not needed by a service company are:
A) cost of goods sold and depreciation.
B) cost of goods sold and net income.
C) cost of goods sold and inventory.
D) inventory and depreciation.
Answer: C
Diff: 2 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
16) Sales revenue is based on the ________ of the inventory, while cost of goods sold is based on the ________ of the inventory.
A) cost; sale price
B) cost; fair market value
C) sale price; retail price
D) sale price; cost
Answer: D
Diff: 2 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
17) Which is the CORRECT order for items to appear on the income statement?
A) sales revenue, operating expenses, gross profit, net income
B) sales revenue, gross profit, net income, operating expenses
C) sales revenue, gross profit, cost of goods sold, operating expenses
D) sales revenue, cost of goods sold, gross profit, operating expenses
Answer: D
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
18) A periodic inventory system:
A) is used for inexpensive goods.
B) is not expensive to maintain.
C) does not keep a running record of inventory on hand.
D) is all of the above.
Answer: D
Diff: 2 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
19) The inventory system that uses computer software to keep a running record of inventory on hand is the:
A) cost of goods sold inventory system.
B) periodic inventory system.
C) perpetual inventory system.
D) hybrid inventory system.
Answer: C
Diff: 2 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
20) Roadway Company purchases inventory from Fedway Company with the shipping terms FOB destination. This means that:
A) Roadway Company owns the goods while they are in transit.
B) Legal title passes to Roadway Company when the goods leave Fedway's shipping dock.
C) Fedway Company will pay the freight on this transaction.
D) Roadway Company will include the goods in their inventory as soon as they leave Fedway's shipping dock.
Answer: C
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
21) Under a perpetual inventory system, when a sale is made, the seller needs to prepare:
A) no journal entry.
B) one journal entry only.
C) two journal entries.
D) three journal entries.
Answer: C
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
22) How do purchase returns and allowances and purchase discounts affect gross purchases?
A) Both are added to purchases.
B) Both are subtracted from purchases.
C) Purchase returns and allowances are added to purchases; purchase discounts are subtracted from purchases.
D) Purchase returns and allowances are subtracted from purchases; purchase discounts are added to purchases.
Answer: B
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
23) Which of the following is NOT used to determine the cost of net purchases?
A) freight-out
B) freight-in
C) purchase returns
D) purchase discounts
Answer: A
Diff: 2 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
24) When inventory is shipped from the seller to the buyer with shipping terms of FOB destination:
A) title passes from the seller to the buyer when the goods leave the seller's shipping dock.
B) the goods will be included in the inventory of the buyer while in transit.
C) the seller has title to the goods while they are in transit.
D) the buyer will pay the transportation costs associated with the purchase.
Answer: C
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
25) Company A has inventory out on consignment and held for sale by Company B. Which company will include the goods in their inventory?
A) Company A
B) Company B
C) either Company A or Company B
D) cannot be determined from the facts
Answer: A
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
26) Using a perpetual inventory system, which journal entry(ies) is(are) prepared when two units of merchandise are sold on account?
A) debit Accounts Receivable and credit Sales Revenue only
B) debit Cash and credit Sales Revenue; debit Cost of Goods Sold and credit Inventory
C) debit Accounts Receivable and credit Sales Revenue; debit Cost of Goods Sold and credit Inventory
D) debit Accounts Receivable and credit Sales Revenue; debit Inventory and credit Cost of Goods Sold
Answer: C
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
27) A company purchased inventory for $700 per unit. The company later sold one unit of the inventory for cash of $2400. Under the perpetual inventory system, which accounts will be debited to record the sale?
A) Cash, $2400; Inventory, $700
B) Cash, $2400; Cost of Goods Sold, $700
C) Cash, $2400; Cost of Goods Sold, $1700
D) Cash, $2400; Inventory, $1700
Answer: B
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
28) Under a perpetual inventory system, the journal entry to record the purchase of inventory on account will include a:
A) debit to Inventory and a credit to Cash
B) debit to Inventory and a credit to Accounts Payable
C) debit to Accounts Payable and a credit to Inventory
D) debit to Purchases and a credit to Accounts Payable
Answer: B
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
29) The selling price of a television is $1600 and the cost to the retailer is $225. What is the retailer's gross profit from the sale of the television?
A) $0
B) $1375
C) $225
D) $1600
Answer: B
Explanation: B) $1600 - $225 = $1375
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
30) Boston Company sells twenty items for $1100 per unit, and has a cost of goods sold percentage of 60%. The gross profit to be reported for selling 20 items is:
A) $440.
B) $8800.
C) $13,200.
D) $22,000.
Answer: B
Explanation: B) $1100 × 40% = $440 × 20 = $8800
Diff: 3 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
31) Sanfran Company purchased inventory for $110,000. In addition they had purchase returns of $5000 and paid freight-in of $10,000. Sanfran Company's net cost of purchases would be:
A) $95,000.
B) $105,000.
C) $115,000.
D) $125,000.
Answer: C
Explanation: C) 110,000 - 5000 + 10,000 = 115,000
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
32) Grogan Company purchases inventory on account with a cost of $1300 and a retail price of $2600. Grogan Company uses the perpetual inventory method. What journal entry is required on the date of purchase?
A) debit Purchases for $1300 and credit Accounts Payable for $1300
B) debit Purchases for $2600 and credit Cash for $2600
C) debit Inventory for $1300 and credit Accounts Payable for $1300
D) debit Accounts Receivable for $2600 and credit Purchases for $2600
Answer: C
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
33) On June 1, Nicholson Company purchased inventory on account with a cost of $1300. Credit terms were 2/10, net 30. On June 2, Nicholson Company returned 40 percent of the inventory. Nicholson Company uses the perpetual inventory system. What journal entry did Nicholson Company prepare on June 2?
A) debit Purchase Returns for $1300 and credit Accounts Payable for $1300
B) debit Cash for $1300 and credit Accounts Payable for $1300
C) debit Purchase Returns for $520 and credit Accounts Payable for $520
D) debit Accounts Payable for $520 and credit Inventory for $520
Answer: D
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
34) On July 1, Corrao Company purchased $1600 of inventory on account with credit terms of 2/10, net 30. Corrao Company uses the perpetual inventory system. On July 5, Corrao Company paid the amount due. What journal entry did they prepare on July 5?
A) debit Accounts Receivable for $1600 and credit Cash for $1600
B) debit Accounts Payable for $1600, credit Inventory for $32 and credit Cash for $1568
C) debit Purchase Discount for $32, debit Accounts Payable for $1536 and credit Cash for $1568
D) debit Accounts Payable for $1568 and credit Cash for $1568
Answer: B
Explanation: B) $1600 × 2% = $32 discount
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
35) On August 1, Savage Company purchased $2200 of inventory on account with credit terms of 4/10, net 30. Savage Company uses the perpetual inventory system. On August 15, Savage Company paid the amount due. What journal entry did they prepare on August 15?
A) debit Inventory for $2200 and credit Accounts Payable for $2200
B) debit Accounts Payable for $2200, credit Purchase Discounts for $88 and credit Cash for $2112
C) debit Accounts Payable for $2200 and credit Cash for $2200
D) debit Accounts Payable for $2112 and credit Cash for $2112
Answer: C
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
36) On May 1, Santelle Company purchased $700 of inventory on account with credit terms of 2/10, net 30. Santelle uses the perpetual inventory system. On May 2, the seller gave Santelle a $100 allowance due to a product defect. What journal entry did Santelle Company prepare on May 2?
A) debit Accounts Payable for $100 and credit Purchase Returns and Allowances for $100
B) debit Accounts Payable for $100 and credit Purchase Discounts for $100
C) debit Cash for $100 and credit Accounts Payable for $100
D) debit Accounts Payable for $100 and credit Inventory for $100
Answer: D
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
37) To determine the cost of goods sold, to report on the income statement, multiply the number of units of inventory:
A) sold times the retail price per unit.
B) sold times the cost per unit.
C) purchased times the retail price per unit.
D) purchased times the cost per unit.
Answer: B
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
38) Which statement is TRUE?
A) Most businesses use the periodic inventory system.
B) The excess of sales revenue over cost of goods sold is called gross profit because operating expenses have not yet been subtracted.
C) Most companies use the specific identification method.
D) Most companies in the United States follow International Financial Reporting Standards.
Answer: B
Diff: 2 Var: 1
LO: 6-1
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
39) On June 1, Neighbor Company purchased inventory on account with a cost of $5000. The credit terms were 2/10, net 30. On June 2, Neighbor returned 60 percent of the inventory. Neighbor uses the perpetual inventory system. On June 8, Neighbor paid for the inventory. What journal entry did Neighbor Company prepare on June 8?
A) debit Purchase Discount for $40, debit Cash for $1960 and credit Accounts Payable for $2000
B) debit Accounts Payable for $3000 and credit Cash for $3000
C) debit Accounts Payable for $2000 credit Purchase Discount for $40 and credit Cash for $1960
D) debit Accounts Payable for $2000, credit Inventory for $40 and credit Cash for $1960
Answer: D
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
40) In 2017, the following transactions occurred for Marjorie's Jewelry Store:
A. On May 1, the business purchased 10 rings on account at $6,000 each. Credit terms were 2/10, net/30.
B. On May 2, the business returned one ring because of a defect.
C. On May 3, three of the rings were sold on account at $8,000 each, to one customer. Credit terms were n/30. No sales returns were expected.
D. On May 9, the accounts payable was paid in full.
E. On May 10, the customer paid for one ring sold on May 3.
F. On May 31, the business paid rent of $4,000 for the month of May and wages of $5,000.
Required:
1. Journalize the above transactions for Marjorie's Jewelry Store. The store uses the perpetual inventory system. Explanations are not required.
2. Prepare the income statement for the month ending May 31, 2017. Use the multistep format and ignore taxes.
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
41) Steve's Hardware Store uses the perpetual inventory system. The business incurred the following transactions:
A. On November 1, 10 snow blowers were purchased on account at $1,000 each. Credit terms were 2/10, net 30.
B. On November 2, the business returned two snow blowers due to damage incurred in shipping.
C. On November 3, the supplier granted Steve's Hardware an allowance of $80 because one of the snow blowers was missing an attachment.
D. On November 10, the business sold three of the snow blowers on account at $1,500 each. The credit terms were 2/10, net 30. No sales returns are expected.
E. On November 12, the business paid for the snow blowers.
F. On November 30, business paid wages of $2,000.
Required:
Journalize the above transactions for Steve's Hardware Store. Explanations are not required. Answer:
*Before the sale on Nov. 10, there were 8 snow blowers in inventory. The total cost of $8,000 was reduced by the $80 allowance that was granted by the vendor on Nov. 3. The cost of each snow blower is now $7,920/8 = $990.
Diff: 2 Var: 1
LO: 6-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
42) An auto dealer uses a perpetual inventory system. The dealer incurred the following transactions during the month of May:
1. On May 1, the dealer purchased 10 vehicles on account at $20,000 each, with credit terms of 2/10, net 30.
2. On May 2, the dealer returned one vehicle due to a product defect.
3. On May 3, the dealer sold 5 vehicles for $25,000 each on account. The credit terms are n/30. No sales returns are expected.
4. On May 9, the dealer paid for the vehicles purchased less the return on May 2.
5. On May 31, the dealer collected one-half of the amount due from the May 3 sale.
6. On May 31, the dealer paid the rent for the next month of $2,500.
Required: Prepare the journal entries for the dealer during the month of May. Explanations are not required.
2 Learning Objective 6-2
1) The choice of an inventory costing method does not impact a company's balance sheet.
Answer: FALSE
Diff: 1 Var: 1
LO: 6-2
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
2) The LIFO method assigns the most recent inventory cost to cost of goods sold.
Answer: TRUE
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
3) The average cost per unit is calculated as the cost of goods available for sale divided by the number of units sold.
Answer: FALSE
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
4) The inventory cost under the average cost per unit method will generally fall in between the inventory cost using the LIFO and FIFO methods.
Answer: TRUE
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
5) If a company uses LIFO for tax purposes, they must use LIFO for financial reporting purposes.
Answer: TRUE
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
6) When inventory costs are rising, a company using the LIFO costing method will generally pay less taxes than if the company had been using the FIFO method.
Answer: TRUE
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
7) When inventory costs are rising, FIFO allows managers to manipulate net income by timing the purchases of inventory.
Answer: FALSE
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
8) All of the following costs would be included in the cost of inventory EXCEPT for:
A) insurance while in transit from seller.
B) costs to get inventory ready for sale.
C) taxes paid on the purchase price.
D) sales commission paid to salesperson when the inventory is sold.
Answer: D
Diff: 2 Var: 1
LO: 6-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
9) ABC Furniture Unlimited sells antique furniture. ABC will most likely use the ________ method to cost its ending inventory.
A) First-in, first-out
B) Last-in, first-out
C) Specific-unit-cost
D) Average
Answer: C
Diff: 1 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
10) The inventory method used by a company affects:
A) net income on the income statement.
B) the income taxes to be paid.
C) the ending inventory on the balance sheet.
D) all of the above.
Answer: D
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
11) To determine the cost of ending inventory using the LIFO method:
A) the latest purchase costs are used.
B) the specific unit cost of the inventory is used.
C) the average cost of the inventory is used.
D) the beginning inventory and earliest purchase costs are used.
Answer: D
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
12) Under the average-cost inventory method, to determine the average cost per unit:
A) the cost of beginning inventory is divided by the number of units available.
B) the cost of beginning inventory plus the cost of purchases is divided by the number of units sold.
C) the cost of purchases for the period are divided by the number of units available.
D) the cost of beginning inventory plus the cost of purchases is divided by the number of units available.
Answer: D
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
13) When inventory costs are increasing, the FIFO costing method will generally yield a cost of goods sold that is:
A) higher than cost of goods sold under the LIFO method.
B) lower than cost of goods sold under the LIFO method.
C) equal to the gross profit under the LIFO method.
D) equal to cost of goods sold under the LIFO method.
Answer: B
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
14) Under the ________ method, ending inventory is based on the costs of the most recent purchases.
A) average-cost
B) FIFO
C) LIFO
D) specific-identification
Answer: B
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
15) When inventory costs are decreasing, the LIFO costing method will generally result in:
A) a higher gross profit than under FIFO.
B) a lower gross profit than under FIFO.
C) a lower inventory value than under FIFO.
D) the same inventory value as FIFO.
Answer: A
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
16) When comparing the results of LIFO and FIFO when inventory costs are decreasing:
A) cost of goods sold will be lower using FIFO.
B) ending inventory will be higher using FIFO.
C) cost of goods sold will be higher using LIFO.
D) ending inventory will be higher using LIFO.
Answer: D
Diff: 3 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
17) The use of the FIFO method generally increases taxable income:
A) when inventory costs are constant.
B) when inventory costs are declining.
C) when inventory costs are increasing.
D) under all circumstances.
Answer: C
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
18) If inventory costs are rising and a company is using LIFO, large purchases of inventory near the end of the year will:
A) increase income taxes paid.
B) decrease income taxes paid.
C) not change the amount of income taxes paid.
D) cannot be determined.
Answer: B
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
19) When comparing the FIFO and LIFO inventory methods:
A) LIFO reports inventory at net realizable value.
B) LIFO reports the most up-to-date inventory cost on the balance sheet.
C) FIFO results in the most realistic net income figure.
D) FIFO matches old inventory costs against revenue.
Answer: D
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
20) A LIFO liquidation occurs when ________ fall(s) below the ending inventory quantities in the previous period.
A) beginning inventory quantities
B) ending inventory quantities
C) beginning inventory costs
D) ending inventory retail value
Answer: B
Diff: 2 Var: 1
LO: 6-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
21) A company has a beginning inventory of $50,000 and purchases during the year of $110,000 The beginning inventory consisted of 1000 units and 7000 units were purchased during the year. The company has 5000 units left at year-end. Under average-cost, what is Cost of Goods Sold? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.)
A) $140,000
B) $60,000
C) $110,000
D) $160,000
Answer: B
Explanation: B) ($50,000 + $110,000) ÷ (1000 + 7000) = $20.00 per unit; $20.00 × 3000 = $60,000
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
22) A company has a beginning inventory of $60,000 and purchases during the year of $160,000. The beginning inventory consisted of 2000 units and 8000 units were purchased during the year. 4080 units remain in ending inventory. The cost of the ending inventory using the average-cost method will be: (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.)
A) $130,240.
B) $220,000.
C) $89,760.
D) $309,760.
Answer: C
Explanation: C) $220,000 ÷ 10,000 = $22.00 per unit; $22.00 × 4080 = $89,760
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
23) Given the following data, calculate the cost of ending inventory using the average cost method. (Round any intermediary and final answers to two decimal places.)
A)
C)
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
24) Given the following data, calculate the cost of goods sold using the average-cost method. Round average cost per unit calculations to two decimal places. Round final answer to the nearest dollar.
A)
B)
C)
D)
$1540
(70
Diff:
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
25) Tomasino's inventory records show the following data at January 31:
Beginning inventory Jan. 1 100 units at $9 per unit
Jan. 10 purchase 300 units at $12 per unit
Jan. 22 purchase 130 units at $13 per unit
At January 31, 230 units are still on hand. What is the cost of the ending inventory at January 31 if Tomasino uses the FIFO method?
A) $2070
B) $2200
C) $2890
D) $2460
Answer: C
Explanation: C)
130 units × $13 =$1690
100 units × $12 =$1200
230 $2890
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
26) Thelen's inventory records show the following data at January 31:
Beginning inventory Jan. 1 120 units at $6 per unit
Jan. 10 purchase 320 units at $11 per unit
Jan. 22 purchase 110 units at $12 per unit
At January 31, 240 units are still on hand. What is the cost of the ending inventory at January 31 if Thelen uses the LIFO method?
A) $1440
B) $2040
C) $2880
D) $2160
Answer: B
Explanation: B) (120 × $6) + (120 × $11) = $2040
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
27) Given the following data, what is cost of goods sold as determined by the FIFO method?
Sales 280 units
Beginning inventory 250 units at $6 per unit
Purchases 128 units at $11 per unit
A) $1680
B) $1830
C) $2320
D) $3080
Answer: B
Explanation: B) (250 × $6) + (30 × $11) = $1830
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
28) Summertime had the following data for the month of March:
Beginning inventory March 1 316 units at $16 per unit
March 19 purchase 204 units at $25 per unit
March 27 purchase 198 units at $27 per unit
On March 31, 320 units are still on hand. Determine the cost of goods sold for March if Summertime uses the FIFO method.
A) $11,488
B) $8640
C) $7106
D) $8546
Answer: C
Explanation: C)
Beginning inventory + Purchases = units available
+ 204 + 198 = 718
718 units - 320 units on hand = 398 units sold
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
29) The following data was extracted from the records of Today Company:
Sales revenue 200 units at $55 per unit
Beginning inventory 80 units at $17 per unit
Purchases 200 units at $21 per unit
What is the gross profit using the LIFO method?
A) $6800
B) $9640
C) $4200
D) $11,000
Answer: A
Explanation: A)
Sales 200 units × $55 = $11,000
COGS 200 units × $21 = 4200
GP 200 × $34 = $6800
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
30) Given the following data, calculate cost of goods sold using the FIFO costing method.
A) $748 B) $976 C) $915 D) $1215 Answer: A Explanation: A)
29 units × $8 = $232
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
31) Given the following data, calculate the cost of goods sold using the LIFO costing method.
A) $2068
B) $1461
C) $1456
D) $1122
Answer: C
Explanation: C)
28 units × $29 = $812
23 units × $28 = $644 $1456
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
32) Which statement is FALSE?
A) LIFO is not allowed in several countries outside the United States.
B) IFRS does not permit the use of LIFO.
C) FIFO and average cost are allowed in Australia and the United Kingdom.
D) If LIFO is no longer allowed to be used in the United States, the tax burden on many companies will be lower.
Answer: D
Diff: 3 Var: 1
LO: 6-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
33) If inventory costs are decreasing over time, the income taxes paid using FIFO will ________ the income taxes paid using LIFO.
A) exceed
B) equal
C) be less than
D) none of the above
Answer: C
Diff: 3 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
34) Gross profit will be the:
A) highest if LIFO is used and inventory costs are decreasing.
B) lowest if LIFO is used and inventory costs are increasing.
C) highest if FIFO is used and inventory costs are increasing.
D) all of the above.
Answer: D
Diff: 3 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
35) Which inventory costing method provides the most realistic measure of net income?
A) FIFO
B) LIFO
C) average cost
D) specific identification
Answer: B
Diff: 3 Var: 1
LO: 6-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
36) Which inventory costing method provides the most current, up-to-date cost of inventory on the balance sheet?
A) FIFO
B) LIFO
C) average cost
D) specific identification
Answer: A
Diff: 3 Var: 1
LO: 6-2
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
37) When inventory costs are falling, which inventory costing method minimizes the taxes paid?
A) FIFO
B) LIFO
C) average cost
D) specific identification
Answer: A
Diff: 3 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
38) Which of the following is not an issue in keeping track of perpetual inventories under LIFO and weighted-average-cost methods?
A) The LIFO cost-flow assumption does not follow the logical flow of goods.
B) Many companies keep track of perpetual inventories in quantities only during the year, making yearend adjusting entries to apply either LIFO or weighted-average-cost to both ending inventory and cost of goods sold.
C) When costs are changing, it is physically impossible to apply LIFO unit costs to units purchased and sold, as the transactions are happening, using a perpetual inventory accounting system.
D) All of the above statements are issues in keeping track of perpetual inventories under LIFO and weighted-average-cost methods.
Answer: D
Diff: 3 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
39) The following data was obtained from the records of Ivanovich Artists, Inc., for the current year. Sales during the year were 400 units.
Jan. 1 Beginning Inventory 100 units at $10
February 1 Purchase 200 units at $12
April 1 Purchase 100 units at $14
July 1 Purchase 60 units at $16
Required:
1. Calculate the cost of the ending inventory using:
a. FIFO.
b. LIFO.
c. Average cost. Round final answers to the nearest dollar.
2. Calculate the cost of goods sold by:
a. FIFO.
b. LIFO.
c. Average cost. Round final answers to the nearest dollar.
Answer:
1
a. FIFO Ending Inventory: 60 × $16 = $960
b. LIFO Ending Inventory: 60 × $10 = $600
c. Average Cost - Ending Inventory:
40) The following data was obtained from the records of Brankovich Tool and Die, Inc., for the current year:
at $10
The company sold 200 units during the year. Sales for the year are $70,000; operating expenses are $20,000; and the tax rate is 40%.
Required:
Using the multistep format, prepare the income statement using:
1. FIFO
2. LIFO
3. Average cost (Round all calculations to two decimal places.)
3. Average Cost
Ending Inventory:
$12.61 × 290 = $3,656.90
(110 × $10) + (200 × $12) + (100 × $14) + (80 × $16) = $6,180
110 + 200 + 100 + 80 = 490
Average cost per unit = $6,180 ÷ 490 = $12.61
Diff: 3 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
41) The units of inventory available for sale during the month of June were as follows:
June 1 Beginning Inventory 60 units at $40
June 15 Purchase 40 units at $30
June 22 Purchase 20 units at $20
There are 20 units of inventory at June 30.
Required: Determine the ending inventory using:
1. FIFO
2. LIFO
3. Average cost (Round all calculations to two decimal places.)
Answer:
1. FIFO 20 units × $20 = $400
2. LIFO 20 units × $40 = $800
3. Average 60 × $40 = $2,400 cost 40 × $30 = 1,200 20 × $20 =
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
42) Carboni Company had the following data available for the current month:
Beginning Inventory 10 units $55 per unit
Purchase #1 30 units $60 per unit
Purchase #2 25 units $65 per unit
Assume 40 units were sold during the month. Sales Revenue for the month is $7,000 and operating expenses are $2,200. The income tax rate is 30%.
Required:
Compute cost of goods sold using:
a. FIFO
b. LIFO
Answer:
a. FIFO Cost of Goods Sold:
10 × $55 = $550
30 × $60 = 1,800
Total $2,350
b. LIFO Cost of Goods Sold:
25 × $65 = $1,625
15 × $60 = 900
Total $2,525
Diff: 2 Var: 1
LO: 6-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
3 Learning Objective 6-3
1) When applying the lower-of-cost-or-market rule to inventory valuation in the United States, market value generally refers to the selling price of the inventory.
Answer: FALSE
Diff: 2 Var: 1
LO: 6-3
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
2) IFRS defines market value for inventory as net realizable value.
Answer: TRUE
Diff: 1 Var: 1
LO: 6-3
AACSB: Reflective Thinking
AICPA Bus Persp: International/Global
AICPA Functional: Measurement
3) The disclosure principle holds that a company's financial statements should report enough information for outsiders to make informed decisions about the company.
Answer: TRUE
Diff: 2 Var: 1
LO: 6-3
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement, Reporting
4) By having knowledge of the company's inventory method, as well as having clear, complete disclosures in the financial statements, bankers are guaranteed that the company will repay its loans.
Answer: FALSE
Diff: 2 Var: 1
LO: 6-3
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement, Reporting
5) The lower-of-cost-or-market rule is based on the principles of relevance and representational faithfulness.
Answer: TRUE
Diff: 2 Var: 1
LO: 6-3
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement, Reporting
6) Under U.S. GAAP, the application of the lower-of-cost-or-market rule to inventories is optional.
Answer: FALSE
Diff: 2 Var: 1
LO: 6-3
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement, Reporting
7) If IFRS is adopted in the United States, inventory write-downs may become more common than they are now, due to the fact that selling prices are usually greater than replacement cost.
Answer: FALSE
Diff: 2 Var: 1
LO: 6-3
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement, Reporting
8) A company uses LIFO in one year, then switches to FIFO and then to average-cost. This is a violation of the:
A) disclosure principle
B) historical cost principle.
C) consistency principle.
D) conservatism principle.
Answer: C
Diff: 1 Var: 1
LO: 6-3
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
9) Under U.S. GAAP, inventories are reported on the balance sheet at:
A) historical cost only.
B) current replacement cost only.
C) net realizable value.
D) lower-of-cost-or-market.
Answer: D
Diff: 2 Var: 1
LO: 6-3
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement, Reporting
10) Following IFRS, the lower-of-cost-or-market rule requires a company to report inventories at the lower of:
A) historical cost or current sales price.
B) historical cost or net realizable value.
C) current replacement cost or historical cost.
D) FIFO cost or LIFO cost.
Answer: B
Diff: 1 Var: 1
LO: 6-3
AACSB: Reflective Thinking
AICPA Bus Persp: International/Global
AICPA Functional: Measurement, Reporting
11) When applying the lower-of-cost-or-market rule to inventories, market value generally refers to ________ under U.S. GAAP and ________ under IFRS.
A) current replacement cost; historical cost
B) historical cost; net realizable value
C) historical cost; current replacement cost
D) current replacement cost; net realizable value
Answer: D
Diff: 2 Var: 1
LO: 6-3
AACSB: Reflective Thinking
AICPA Bus Persp: International/Global
AICPA Functional: Measurement
12) Which of the following is a CORRECT statement about the lower-of-cost-or market rule?
A) Under U.S. GAAP, once inventory has been written down to market value, the write-downs can be reversed in future periods.
B) Under U.S. GAAP, the lower-of-cost-or-market rule is optional.
C) Currently, the lower-of-cost-or-market rules are the same for both U.S. GAAP and IFRS.
D) Under IFRS, some lower-of-cost-or-market write-downs may be reversed.
Answer: D
Diff: 2 Var: 1
LO: 6-3
AACSB: Reflective Thinking
AICPA Bus Persp: International/Global
AICPA Functional: Measurement
13) Perfect Catering Company's ending inventory was $109,700 at historical cost and $111,500 at current replacement cost. Before consideration of the lower-of-cost-or-market rule, the company's cost of goods sold was $65,000. Following U.S. GAAP, which of the following statements reflect the correct application of the lower-of-cost-or-market rule?
A) The Ending Inventory balance will be $109,700, and Cost of Goods Sold will be $65,000.
B) The Ending Inventory balance will be $111,500, and Cost of Goods Sold will be $65,000.
C) The Ending Inventory balance will be $111,500, and Cost of Goods Sold will be $66,800.
D) The Ending Inventory balance will be $111,500, and Cost of Goods Sold will be $63,200.
Answer: A
Diff: 2 Var: 1
LO: 6-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
14) Mariah Company has inventory at the end of the year with a historical cost of $95,000. Mariah Company uses the perpetual inventory system. Under the LCM rule, the current replacement cost is $75,600. Under U.S. GAAP, the journal entry to record the write-down to LCM will:
A) debit Cost of Goods Sold for $19,400 and credit Inventory for $19,400.
B) debit Cost of Goods Sold for $19,400 and credit Purchases for $19,400.
C) debit Inventory for $19,400 and credit Cost of Goods Sold for $19,400.
D) debit Purchases for $19,400 and credit Cost of Goods Sold for $19,400.
Answer: A
Diff: 2 Var: 1
LO: 6-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
15) The historical cost of Jahn Company's ending inventory was less than the current replacement cost. Following U.S. GAAP, which journal entry is required?
A) debit Cost of Goods Sold and credit Sales
B) debit Inventory and credit Cost of Goods Sold
C) debit Cost of Goods Sold and credit Inventory
D) No journal entry is needed.
Answer: D
Diff: 2 Var: 1
LO: 6-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
16) Uptown Department Store uses the perpetual inventory system and has ending inventory with a historical cost of $620,000. The current replacement cost of the inventory is $598,000. The net realizable value is $670,000. Before any adjustments at the end of the period, the cost of goods sold account has a balance of $920,000. Which journal entry is required under U.S. GAAP?
A) debit Cost of Goods Sold for $50,000 and credit Inventory for $50,000
B) debit Inventory for $50,000 and credit Cost of Goods Sold for $50,000
C) debit Cost of Goods Sold for $22,000 and credit Inventory for $22,000
D) debit Inventory for $22,000 and credit Cost of Goods Sold for $22,000
Answer: C
Diff: 2 Var: 1
LO: 6-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
17) The Madyson Dress Shop uses the perpetual inventory system and has ending inventory with a historical cost of $620,000. The current replacement cost of the inventory is $608,000. The net realizable value is $640,000. Before any adjustments at the end of the period, the cost of goods sold account has a balance of $880,000. What journal entry is required under IFRS?
A) No journal entry is required.
B) debit Cost of Goods Sold $20,000 and credit Inventory $20,000
C) debit Inventory $20,000 and credit Cost of Goods Sold $20,000
D) debit Cost of Goods Sold $12,000 and credit Inventory $12,000
Answer: A
Diff: 2 Var: 1
LO: 6-3
AACSB: Analytical Thinking
AICPA Bus Persp: International/Global
AICPA Functional: Measurement, Reporting
18) The lower-of-cost-or-market rule for inventory is based on the accounting principle(s) of:
A) relevance.
B) representational faithfulness.
C) disclosure.
D) A and B.
Answer: D
Diff: 2 Var: 1
LO: 6-3
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
19) It is the end of the year and Katerinos Company is applying the lower-of-cost-or-market (LCM) rule to inventory. The company uses the perpetual inventory system. Katerinos has provided the following information before any year-end adjustments:
Required: Prepare the required journal entry at year-end:
1. Following U.S. GAAP.
2. Following IFRS. Answer:
Diff:
LO: 6-3
AACSB: Analytical Thinking
AICPA Bus Persp: International/Global
AICPA Functional: Measurement
20) Why does U.S. GAAP require companies to apply the lower-of-cost-or-market rule to inventories?
Answer: If the replacement cost of inventory falls below its historical cost, a business must write down the value of its goods to market value because that is the most relevant and representationally faithful measure of the true worth to the business.
Diff: 2 Var: 1
LO: 6-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
21) How does the disclosure principle help financial statements users compare the financial statements of retailers, with regard to inventories?
Answer: The disclosure principle holds that a company's financial statements should report enough information for outsiders to make informed decisions about the company. The company should report relevant and representationally faithful information about itself. This means properly disclosing inventory accounting methods, as well as the substance of all material transactions impacting the existence and proper valuation of inventory. It also requires the use of comparable methods for consistency of presentation from period to period. The financial statements typically contain a footnote describing the inventory pricing method used, as well as the fact that inventory was valued at the lower of that method or market.
The financial statements of retailers can be compared if they use the same inventory method. The disclosures reveal the inventory method used by each company so users can compare companies with the same inventory method.
Diff: 2 Var: 1
LO: 6-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
4 Learning Objective 6-4
1) For most firms, the gross profit percentage changes significantly from year to year.
Answer: FALSE
Diff: 1 Var: 1
LO: 6-4
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
2) The gross profit percentage equals net sales divided by gross profit.
Answer: FALSE
Diff: 1 Var: 1
LO: 6-4
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
3) The inventory turnover ratio should be the same for all types of industries.
Answer: FALSE
Diff: 2 Var: 1
LO: 6-4
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
4) An inventory turnover of 3.65 means that, on average, items of inventory sat on a retailer's shelves for 100 days before being sold.
Answer: TRUE
Diff: 2 Var: 1
LO: 6-4
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
5) A 30% gross profit percentage means that:
A) for each dollar of sales, the company has a cost of goods sold of seventy cents.
B) for each dollar of sales, the company has a gross profit of thirty cents.
C) for each dollar of sales, the company has a cost of goods sold of thirty cents.
D) A and B
Answer: D
Diff: 2 Var: 1
LO: 6-4
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
6) The inventory turnover ratio:
A) is determined by dividing cost of goods sold by net sales.
B) shows how many times the company sold its average level of inventory.
C) should be high for a company that sells high-end merchandise.
D) will be lower for companies that have many low-priced items in their inventory.
Answer: B
Diff: 2 Var: 1
LO: 6-4
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
7) The gross profit percentage is calculated as:
A) cost of goods sold divided by net sales revenue.
B) net sales revenue minus gross profit on sales.
C) net sales revenue minus cost of goods sold.
D) gross profit divided by net sales revenue.
Answer: D
Diff: 2 Var: 1
LO: 6-4
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
8) Marian Company reported the following items for the month of July:
Inventory turnover is: (Round your final answer to two decimal places.)
A) 2.24.
B) 4.37.
C) 4.55.
D) 4.75.
Answer: C
Explanation: C) ($67,400 + $73,200) ÷ 2 = $70,300
$320,000 ÷ $70,300 = 4.55
Diff: 2 Var: 1
LO: 6-4
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
9) Maydak Company reported the following items for the month of July:
The gross profit percentage is: (Round your final answer to the nearest percentage.)
A) 26%.
B) 49%.
C) 51%.
D) 23%.
Answer: C
Explanation: C) ($630,000 - $310,000) ÷ $630,000 = 51%
Diff: 2 Var: 1
LO: 6-4
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
10) Thomas Industries reported the following:
Net sales $630,000 Cost of goods sold $310,000
Operating expenses $67,400 Tax rate 40%
The gross profit percentage is: (Round your final answer to the nearest percentage.)
A) 69%.
B) 18%.
C) 28%.
D) 31%.
Answer: D
Explanation: D) sales $480,000 - cost of goods sold $330,000 = $150,000 gross profit
$150,000 ÷ $480,000 = 31%
Diff: 2 Var: 1
LO: 6-4
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
11) Margaret Company reported the following information for the current year:
How do the inventory turnover and gross profit percentage for Margaret Company compare to the industry averages for the same ratios? (Round inventory turnover to two decimal places. Round gross profit percentage to the nearest percent.)
A) Margaret Company has superior gross profit percentage and inventory turnover.
B) Margaret Company has superior gross profit percentage and inferior inventory turnover.
C) Margaret Company has inferior gross profit percentage and superior inventory turnover.
D) Margaret Company has inferior gross profit percentage and inventory turnover.
Answer: A
Explanation: A) Average inventory = ($275,000 + $145,000) ÷ 2 = $210,000
Cost of Goods Sold = 45% × $2,700,000 = $1,215,000
Inventory turnover = $1,215,000 ÷ $210,000 = 5.79
Gross Profit = 55% × $2,700,000 = $1,485,000
Gross Profit Percentage = $1,485,000 ÷ $2,700,000 = 55%
Margaret's ratios for inventory turnover and gross profit percentage exceed industry averages.
Diff: 2 Var: 1
LO: 6-4
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting