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Chapter 006 Inventories and Cost of Sales

Multiple Choice Questions


67. Damaged and obsolete goods:
A. Are never counted as inventory.
B. Are included in inventory at their full cost.
C. Are included in inventory at their net realizable value.
D. Should be disposed of immediately.
E. Are assigned a value of zero.

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68. Merchandise inventory includes:


A. All goods owned by a company and held for sale.
B. All goods in transit.
C. All goods on consignment.
D. Only damaged goods.
E. All of these.

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69. Goods in transit are included in a purchaser's inventory:


A. At any time during transit.
B. When the purchaser is responsible for paying freight charges.
C. When the supplier is responsible for freight charges.
D. If the goods are shipped FOB destination.
E. After the half-way point between the buyer and seller.

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Chapter 006 Inventories and Cost of Sales

70. Goods on consignment:


A. Are goods shipped by the owner to the consignee who sells the goods for the owner.
B. Are reported in the consignee's books as inventory.
C. Are goods shipped to the consignor who sells the goods for the owner.
D. Are not reported in the consignor's inventory since they do not have possession of the
inventory.
E. Are always paid for by the consignee when they take possession.

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71. Regardless of the inventory costing system used, cost of goods available for sale must be
allocated between
A. beginning inventory and net purchases during the period.
B. ending inventory and beginning inventory.
C. net purchases during the period and ending inventory.
D. ending inventory and cost of goods sold.
E. beginning inventory and cost of goods sold.

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Chapter 006 Inventories and Cost of Sales

72. On December 31 of the current year, Hewett Company reported an ending inventory
balance of $215,000. The following additional information is also available:
Hewett sold goods costing $38,000 to Trump Enterprises on December 28 and shipped the
goods on that date with shipping terms of FOB shipping point. The goods were not included
in the ending inventory amount of $215,000 because they were not in Hewett's warehouse.
Hewett purchased goods costing $44,000 on December 29. The goods were shipped FOB
destination and were received by Hewett on January 2 of the following year. The shipment
was a rush order that was supposed to arrive by December 31. These goods were included in
the ending inventory balance of $215,000.
Hewett's ending inventory balance of $215,000 included $15,000 of goods being held on
consignment from Rumsfeld Company. (Hewett Company is the consignee.)
Hewett's ending inventory balance of $215,000 did not include goods costing $95,000 that
were shipped to Hewett on December 27 with shipping terms of FOB destination and were
still in transit at year-end.
Based on the above information, the correct balance for ending inventory on December 31 is:
A. $194,000
B. $209,000
C. $200,000
D. $171,000
E. $156,000
Start with beginning inventory of $215,000. The information in the first bullet point was
handled correctly, although the explanation for why is incorrect. No adjustment. For the
second bullet point, the $44,000 of goods should not have been included in ending inventory
since the goods were shipped FOB destination. Subtract $44,000. For the third bullet point,
ending inventory should not include goods held on consignment from another company.
Subtract $15,000. The information in the fourth bullet point was handled correctly.
No adjustment. $215,000 - $44,000 - $15,000 = $156,000.

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Chapter 006 Inventories and Cost of Sales

73. Gotham Company reported a December 31 ending inventory balance of $412,000. The
following additional information is also available:
The ending inventory balance of $412,000 included $72,000 of consigned inventory for
which Gotham was the consignor.
The ending inventory balance of $412,000 included $22,000 of office supplies that were
stored in the warehouse and were to be used by the company's supervisors and managers
during the coming year.
The ending inventory balance of $412,000 did not include goods costing $48,000 that were
purchased by Gotham on December 28 and shipped FOB destination on that date. Gotham did
not receive the goods until January 2 of the following year.
The ending inventory balance of $412,000 included damaged goods at their original cost of
$38,000. The net realizable value of the damaged goods was $10,000.
The ending inventory balance of $412,000 included $43,000 of consigned inventory for
which Gotham was the consignee.
Based on this information, the correct balance for ending inventory on December 31 is:
A. $247,000
B. $341,000
C. $362,000
D. $309,000
E. $319,000
Start with beginning inventory of $412,000. The information in the first bullet point was
handled correctly since inventory should include consigned goods for which the subject
company is the consignor. No adjustment. With respect to the second bullet point, inventory
should not include office supplies held for use. Subtract $22,000. The information in the third
bullet point was handled correctly since inventory should not include goods shipped FOB
destination that have not yet been received by the buyer. With respect to the fourth bullet
point, damaged goods should not be included in inventory at their original cost if the net
realizable value is materially below cost. Subtract $28,000 ($38,000 - $10,000). With respect
to the fifth bullet point, inventory should not include the value of consigned inventory for
which the subject company is the consignee. Subtract $43,000. Thus, ending inventory should
be $412,000 - $22,000 - $28,000 - $43,000 = $319,000.

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Chapter 006 Inventories and Cost of Sales

74. Costs included in the Merchandise Inventory account can include:


A. Invoice price minus any discount.
B. Transportation-in.
C. Storage.
D. Insurance.
E. All of these.

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75. Internal controls that should be applied when a business takes a physical count of
inventory should include
A. Prenumbered inventory tickets.
B. Counters of inventory should not be those who are responsible for the inventory.
C. Counters must confirm the validity of inventory existence, amounts, and quality.
D. Second counts by a different counter.
E. All of these.

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76. Physical counts of inventory:


A. Are not necessary under the perpetual system.
B. Are necessary to measure and adjust for inventory shrinkage.
C. Must be taken at least once a month.
D. Requires the use of hand-held portable computers.
E. Are not necessary under the cost-to benefit constraint.

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Chapter 006 Inventories and Cost of Sales

77. Incidental and necessary costs of inventory:


A. Can be assigned to each inventory unit.
B. May be immaterial.
C. Can be allocated to cost of goods sold.
D. Are subject to the cost-to-benefit constraint when deciding how to account for them.
E. All of these.

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78. During a period of steadily rising costs, the inventory valuation method that yields the
lowest reported net income is:
A. Specific identification method.
B. Average cost method.
C. Weighted-average method.
D. FIFO method.
E. LIFO method.

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79. The inventory valuation method that tends to smooth out erratic changes in costs is:
A. FIFO.
B. Weighted average.
C. LIFO.
D. Specific identification.
E. WIFO

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Chapter 006 Inventories and Cost of Sales


80. The inventory valuation method that has the advantages of assigning an amount to
inventory on the balance sheet that approximates its current cost, and also mimics the actual
flow of goods for most businesses is:
A. FIFO.
B. Weighted average.
C. LIFO.
D. Specific identification.
E. All of these.
81. The inventory valuation method that results in the lowest taxable income in a period of
inflation is:
A. LIFO method.
B. FIFO method.
C. Weighted-average cost method.
D. Specific identification method.
E. Gross profit method.
82. The consistency concept:
A. Requires a company to consistently apply the same accounting method of inventory
valuation, an exception being when a change from one method to another will improve its
financial reporting.
B. Requires a company to use one method of inventory valuation exclusively.
C. Requires that all companies in the same industry use the same accounting methods of
inventory valuation.
D. Is also called the full disclosure principle.
E. Is also called the matching principle.
83. The full disclosure principle:
A. Requires that when a change in inventory valuation method is made, the notes to the
statements report the type of change, its justification and its effect on net income.
B. Requires that companies use the same accounting method for inventory valuation period
after period.
C. Is not subject to the materiality principle.
D. Is only applied to retailers.
E. Is also called the consistency principle.
84. Which of the following inventory costing methods will always result in the same values
for ending inventory and cost of goods sold regardless of whether a perpetual or periodic
inventory system is used?
A. FIFO and LIFO
B. LIFO and weighted-average cost
C. Specific identification and FIFO
D. FIFO and weighted-average cost
E. LIFO and specific identification

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Chapter 006 Inventories and Cost of Sales


85. If a period-end inventory amount is reported in error, it can cause a misstatement in:
A. Cost of goods sold.
B. Gross profit.
C. Net income.
D. Current assets.
E. All of these.
86. An error in the period-end inventory causes an offsetting error in the next period and
therefore:
A. Managers can ignore the error.
B. It is sometimes said to be self-correcting.
C. It affects only income statement accounts.
D. If affects only balance sheet accounts.
E. Is immaterial for managerial decision making.
87. The understatement of the ending inventory balance causes:
A. Cost of goods sold to be overstated and net income to be understated.
B. Cost of goods sold to be overstated and net income to be overstated.
C. Cost of goods sold to be understated and net income to be understated.
D. Cost of goods sold to be understated and net income to be overstated.
E. Cost of goods sold to be overstated and net income to be correct.
88. The understatement of the beginning inventory balance causes:
A. Cost of goods sold to be understated and net income to be understated.
B. Cost of goods sold to be understated and net income to be overstated.
C. Cost of goods sold to be overstated and net income to be overstated.
D. Cost of goods sold to be overstated and net income to be understated.
E. Cost of goods sold to be overstated and net income to be correct.

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Chapter 006 Inventories and Cost of Sales


89. Thelma Company reported cost of goods sold for Year 1 and Year 2 as follows:

Thelma Company made two errors: 1) ending inventory at the end of Year 1 was understated
by $15,000 and 2) ending inventory at the end of Year 2 was overstated by $6,000. Given this
information, the correct cost of goods sold figure for Year 2 would be:
A. $291,000
B. $276,000
C. $264,000
D. $285,000
E. $249,000
If ending inventory for Year 1 was reported at $130,000 but was understated by $15,000, the
correct ending inventory figure for Year 1 was $145,000. That amount becomes the beginning
inventory for Year 2. Add to that amount the $275,000 of cost of goods purchased in Year 2
and you get cost of goods available for sale of $420,000. Finally, the reported ending
inventory figure for Year 2 of $135,000 was overstated by $6,000. Thus, the correct ending
inventory figure for Year 2 was $129,000. Subtracting ending inventory of $129,000 from
cost of goods available for sale of $420,000 yields cost of goods sold of $291,000.

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Chapter 006 Inventories and Cost of Sales


90. Louise Company reported the following income statement information for Year 1 and Year
2:

The beginning inventory balance for Year 1 is correct. The ending inventory balance for Year
2 is also correct. However, the ending inventory figure for Year 1 was overstated by $20,000.
Given this information, the correct gross profit figures for Year 1 and Year 2 would be:
A. $129,000 for Year 1 and $256,000 for Year 2.
B. $281,000 for Year 1 and $274,000 for Year 2.
C. $129,000 for Year 1 and $276,000 for Year 2.
D. $169,000 for Year 1 and $236,000 for Year 2.
E. $169,000 for Year 1 and $276,000 for Year 2.
If ending inventory of $144,000 for Year 1 were overstated by $20,000, the correct amount of
ending inventory was $124,000. As a result, cost of goods sold for Year 1 was not $261,000 as
reported, but rather $281,000. Thus, gross profit for Year 1 was $129,000 (Sales of $410,000 Cost of Goods Sold of $281,000). The adjusted ending inventory balance for Year 1
($124,000) becomes the beginning inventory balance for Year 2. Adding to that figure the
$302,000 of purchases during the year and you get cost of goods available for sale of
$426,000. If we then subtract the $152,000 of ending inventory for Year 2, we get cost of
goods sold in Year 2 of $274,000. Accordingly, gross profit for Year 2 is $276,000 (Sales of
$550,000 - Cost of Goods Sold of $274,000).

91. An overstatement of ending inventory will cause


A. An overstatement of assets and equity on the balance sheet.
B. An understatement of assets and equity on the balance sheet.
C. An overstatement of assets and an understatement of equity on the balance sheet.
D. An understatement of assets and an overstatement of equity on the balance sheet.
E. No effect on the balance sheet.
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Chapter 006 Inventories and Cost of Sales


92. The inventory turnover ratio:
A. Is used to analyze profitability.
B. Is used to measure solvency.
C. Reveals how many times a company turns over (sells) its merchandise inventory.
D. Validates the acid-test ratio.
E. Calculation depends on the company's inventory valuation method.

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Chapter 006 Inventories and Cost of Sales


93. Days' sales in inventory:
A. Is also called days' stock on hand.
B. Focuses on average inventory rather than ending inventory.
C. Is used to measure solvency.
D. Is calculated by dividing cost of goods sold by ending inventory.
E. Is a substitute for the acid-test ratio.
94. The inventory turnover ratio is calculated as:
A. Cost of goods sold divided by average merchandise inventory.
B. Sales divided by cost of goods sold.
C. Ending inventory divided by cost of goods sold.
D. Cost of goods sold divided by ending inventory.
E. Cost of goods sold divided by ending inventory times 365.
95. Days' sales in inventory is calculated as:
A. Ending inventory divided by cost of goods sold.
B. Cost of goods sold divided by ending inventory.
C. Ending inventory divided by cost of goods sold times 365.
D. Cost of goods sold divided by ending inventory times 365.
E. Ending inventory times cost of goods sold.

96. Toys "R" Us had cost of goods sold of $9,421 million, ending inventory of $2,089 million,
and average inventory of $1,965 million. Its inventory turnover equals:
A. 0.21.
B. 4.51
C. 4.79.
D. 76.1 days.
E. 80.9 days.
9,421/1,965 = 4.79 times

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Chapter 006 Inventories and Cost of Sales

97. Toys "R" Us had cost of goods sold of $9,421 million, ending inventory of $2,089 million,
and average inventory turnover of $1,965 million. Its days' sales in inventory equals:
A. 0.21.
B. 4.51.
C. 4.79.
D. 76.1 days.
E. 80.9.days.
2,089//9,421 * 365 = 80.9 days

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98. Acceptable inventory methods include:


A. LIFO method.
B. FIFO method.
C. Specific identification method.
D. Weighted average method.
E. All of these.

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99. Management must confront which of the following considerations when accounting for
inventory:
A. Costing (valuation) method.
B. Inventory system (perpetual or periodic).
C. Items to be included and their cost.
D. Use of lower of cost or market or other estimate.
E. All of these.

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Chapter 006 Inventories and Cost of Sales

100. The inventory valuation method that identifies each item in ending inventory with a
specific purchase and invoice is the:
A. Weighted average inventory method.
B. First-in, first-out method.
C. Last-in, first-out method.
D. Specific identification method
E. Retail inventory method.
101. A company had the following purchases during the current year:

On December 31, there were 26 units remaining in ending inventory. These 26 units consisted
of 2 from January, 4 from February, 6 from May, 4 from September, and 10 from November.
Using the specific identification method, what is the cost of the ending inventory?
A. $3,500.
B. $3,800.
C. $3,960.
D. $3,280.
E. $3,640.

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Chapter 006 Inventories and Cost of Sales

102. A company had inventory on November 1 of 5 units at a cost of $20 each. On November
2, they purchased 10 units at $22 each. On November 6 they purchased 6 units at $25 each.
On November 8, 8 units were sold for $55 each. Using the LIFO perpetual inventory method,
what was the value of the inventory on November 8 after the sale?
A. $304
B. $296
C. $288
D. $280
E. $276
Units available = 5 + 10 + 6 = 21 units
Units in inventory = 21 - 8 units = 13 units
Cost of inventory = (5 x $20) + (8 x $22) = $276

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103. Acme-Jones Corporation uses a weighted-average perpetual inventory system.


August 2, 10 units were purchased at $12 per unit.
August 18, 15 units were purchased at $14 per unit.
August 29, 12 units were sold.
What was the amount of the cost of goods sold for this sale?
A. $148.00.
B. $150.50.
C. $158.40.
D. $210.00.
E. $330.00.
Average cost = [(10 x $12) + (15 x $14)]/25 units = $13.20/unit
Cost of sale = 12 units x $13.20/unit = $158.40

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Chapter 006 Inventories and Cost of Sales

104. A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, it
purchased 20 units at $12 each. 12 units are sold on June 5. Using the FIFO perpetual
inventory method, what is the cost of the 12 units that were sold?
A. $120.
B. $124.
C. $128.
D. $130.
E. $140.
(10 units x $10) + ($2 x $12) = $124

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105. A company has inventory of 15 units at a cost of $12 each on August 1. On August 5, it
purchased 10 units at $13 per unit. On August 12 it purchased 20 units at $14 per unit. On
August 15, it sold 30 units. Using the FIFO perpetual inventory method, what is the value of
the inventory at August 12 after the sale?
A. $140.
B. $160.
C. $210.
D. $380.
E. $590.
Units available for sale = 15 + 10 + 20 = 45 units
Units in inventory = 45 - 30 = 15 units
Cost of inventory = 15 x $14 each = $210
106. A company had inventory of 5 units at a cost of $20 each on November 1. On November
2, it purchased 10 units at $22 each. On November 6 it purchased 6 units at $25 each. On
November 8, it sold 18 units for $54 each. Using the LIFO perpetual inventory method, what
was the cost of the 18 units sold?
A. $395.
B. $410.
C. $450.
D. $510.
E. $520.

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Chapter 006 Inventories and Cost of Sales


(6 x $25) + (10 x $22) + (2 x $20) = $410
107. A company sells a climbing kit and uses the perpetual inventory system to account for its
merchandise. The beginning balance of the inventory and its transactions during January were
as follows:

If the ending inventory is reported at $276, what inventory method was used?
A. LIFO method.
B. FIFO method.
C. Weighted-average method.
D. Specific identification method.
E. Retail inventory method.

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Chapter 006 Inventories and Cost of Sales

108. Acme-Jones Company uses a weighted-average perpetual inventory system.


August 2, 10 units were purchased at $12 per unit.
August 18, 15 units were purchased at $15 per unit.
August 29, 20 units were sold.
August 31, 14 units were purchased at $16 per unit.
What is the per-unit value of ending inventory on August 31?
A. $12.00.
B. $13.80.
C. $15.42.
D. $16.00.
E. $17.74.

* $345/25 units = $13.80/unit


**$293/19 units = $15.42/unit

109. Given the following information, determine the cost of the inventory at June 30 using the
LIFO perpetual inventory method.

The cost of the ending inventory is


A. $200.
B. $220.
C. $380.
D. $275.
E. $300.

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Chapter 006 Inventories and Cost of Sales

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110. In applying the lower of cost or market method to inventory valuation, market is defined
as:
A. Historical cost.
B. Current replacement cost.
C. Current sales price.
D. FIFO.
E. LIFO.

111. Generally accepted accounting principles require that the inventory of a company be
reported at:
A. Market value.
B. Historical cost.
C. Lower of cost or market.
D. Replacement cost.
E. Retail value.

112. The conservatism constraint:


A. Requires that when multiple estimates of amounts to be received or paid in the future are
equally likely, then the least optimistic amount should be used.
B. Requires that a company use the same accounting methods period after period.
C. Requires that revenues and expenses be reported in the period in which they are earned or
incurred.
D. Requires that all items of a material nature be included in financial statements.
E. Requires that all inventory items be reported at full cost.

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Chapter 006 Inventories and Cost of Sales

113. A company normally sells its product for $20 per unit. However, the selling price has
fallen to $15 per unit. This company's current inventory consists of 200 units purchased at $16
per unit. Replacement cost has now fallen to $13 per unit. Calculate the value of this
company's inventory at the lower of cost or market.
A. $2,550.
B. $2,600.
C. $2,700.
D. $3,000.
E. $3,200.
200 units @ $13 per unit = $2,600

114. A company has the following per unit original costs and replacement costs for its
inventory:
Part A: 50 units with a cost of $5, and replacement cost of $4.50
Part B: 75 units with a cost of $6, and replacement cost of $6.50
Part C: 160 units with a cost of $3, and replacement cost of $2.50
Under the lower of cost or market method, the total value of this company's ending inventory
is:
A. $1,180.00.
B. $1,075.00.
C. $1,075.00 or $1,112.50, depending upon whether LCM is applied to individual items or the
inventory as a whole.
D. $1,112.50.
E. $1180.00 or $1075.00, depending upon whether LCM is applied to individual items or to
the inventory as a whole.

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Chapter 006 Inventories and Cost of Sales

115. A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, it
purchased 20 units at $12 each. 12 units are sold on June 5. Using the FIFO periodic
inventory method, what is the cost of the 12 units that were sold?
A. $120.
B. $124.
C. $128.
D. $130.
E. $140.
(10 units x $10) + ($2 x $12) = $124

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Chapter 006 Inventories and Cost of Sales


116. A company has inventory of 15 units at a cost of $12 each on August 1. On August 5, it
purchased 10 units at $13 per unit. On August 12 it purchased 20 units at $14 per unit. On
August 15, it sold 30 units. Using the FIFO periodic inventory method, what is the value of
the inventory at August 15 after the sale?
A. $140.
B. $160.
C. $210.
D. $380.
E. $590.
Units available for sale = 15 + 10 + 20 = 45 units
Units in inventory = 45 - 30 = 15 units
Cost of inventory = 15 x $14 each = $210
117. A company had inventory of 10 units at a cost of $20 each on November 1. On
November 2, it purchased 10 units at $22 each. On November 6 it purchased 6 units at $25
each. On November 8, it sold 22 units for $54 each. Using the FIFO perpetual inventory
method, what was the cost of the 22 units sold?
A. $470.
B. $490.
C. $450.
D. $570.
E. $520.
(10 x $20) + (10 x $22) + (2 x $25) = $470
118. A company uses the periodic inventory system and had the following activity during the
current monthly period.

In a periodic inventory system, using the weighted-average inventory method, the company's
ending inventory would be:
A. $2,000.
B. $2,200.
C. $2,250.
D. $2,400.
E. $4,400.

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Chapter 006 Inventories and Cost of Sales

Weighted average cost per unit: $6,600/300 units = $22


Ending inventory: (300 units - 200 units) x $22 = $2,200
119. A company sells a climbing kit and uses the periodic inventory system to account for its
merchandise. The beginning balance of the inventory and its transactions during January were
as follows:

If the ending inventory is reported at $357, what inventory method was used?
A. LIFO.
B. FIFO.
C. Weighted average.
D. Specific identification.
E. Retail inventory method.

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120. A company's warehouse was destroyed by a tornado on March 15. The following
information was the only information that was salvaged:

The company's average gross profit ratio is 35%. What is the estimated cost of the lost
inventory?
A. $ 9,705.
B. $25,995.
C. $29,250.
D. $44,000.
E. $45,000.
COGS = ($55,000 - $700) x 65% = $35,295
Goods available for sale = $28,000 + $17,000 = $45,000
EI = $45,000 - $35,295 = $9,705
121. A company reported the following information regarding its inventory.
Beginning inventory: cost is $70,000; retail is $130,000
Net purchases: cost is $65,000; retail is $120,000
Sales at retail: $145,000
The year-end inventory showed $105,000 worth of merchandise available at retail prices.
What is the cost of the ending inventory?
A. $ 48,300.
B. $ 56,700.
C. $ 56,441.
D. $ 78,300.
E. $105,000.

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122. On September 30 a company needed to estimate its ending inventory to prepare its third
quarter financial statements. The following information is available:
Beginning inventory, July 1: $4,000
Net sales: $40,000
Net purchases: $41,000
The company's gross margin ratio is 15%. Using the gross profit method, the cost of goods
sold would be:
A. $ 4,000.
B. $ 5,000.
C. $21,000.
D. $25,000.
E. $34,000.
85% x $40,000 = $34,000
123. A company that has operated with a 30% average gross profit ratio for a number of years
had $100,000 in sales during the first quarter of this year. If it began the quarter with $18,000
of inventory at cost and purchased $72,000 of inventory during the quarter, its estimated
ending inventory by the gross profit method is:
A. $30,000.
B. $21,000.
C. $20,000.
D. $18,000.
E. $27,000.
COGS = $100,000 x 70% = $70,000
Costs available for sale = $18,000 + $72,000 = $90,000
EI = $90,000 - $70,000 = $20,000

124. On December 31, a company needed to estimate its ending inventory to prepare its fourth
quarter financial statements. The following information is currently available:
Inventory as of October 1: $12,500
Net sales for fourth quarter: $40,000
Net purchases for fourth quarter: $27,500
This company typically achieves a gross profit ratio of 15%. Ending Inventory under the gross
profit method would be:
A. $ 4,000.
B. $ 6,000.
C. $10,000.
D. $16,000.
E. $34,000.

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Chapter 006 Inventories and Cost of Sales


COGS = $40,000 x 85% = $34,000
Costs available for sale = $12,500 + $27,500 = $40,000
EI = $40,000 - $34,000 = $6,000
125. Interim statements:
A. Are required by the Congress.
B. Are necessary to achieve full disclosure about a business's operations.
C. Are usually monthly or quarterly statements prepared for periods less than the traditional,
annual statements.
D. Require the use of the perpetual method for inventories.
E. Cannot be prepared if the company follows the conservatism principle.
126. The Jackson Company has sales of $300,000 and cost of goods available for sale of
$270,000. If the gross profit ratio is typically 30%, the estimated cost of the ending inventory
under the gross profit method would be:
A. $60,000
B. $180,000
C. $30,000
D. $90,000
E. Impossible to determine from the information provided.
If sales for the period were $300,000 and the company's typical gross profit ratio is 30%,
gross profit would be approximately $90,000. That means that cost of goods sold must have
been $210,000. Subtracting cost of goods sold of $210,000 from the $270,000 of cost of
goods available for sale yields ending inventory of $60,000.
127. The Georgia Peach Company reported net sales in June of the current year of
$1,000,000. At the beginning of June, the company reported beginning inventory of $368,000.
Cost of goods purchased during June amounted to $217,500. The company reported ending
inventory at the end of June of $226,750.
The company's gross profit rate for June of the current year was:
A. 35.9%
B. 18.8%
C. 81.2%
D. 64.1%
E. Impossible to determine from the information provided.
Combining beginning inventory of $368,000 with purchases for the period of $217,500 yields
cost of goods available for sale of $585,500. If we then subtract the ending inventory of
$226,750, we get cost of goods sold of $358,750. Subtracting cost of goods sold ($358,750)
from sales ($1,000,000) yields gross profit of $641,250. Dividing gross profit of $641,250 by
sales of $1,000,000 yields a gross profit percentage of 64.125% or 64.1% rounded.

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128. On July 24 of the current year, The Georgia Peach Company experienced a natural
disaster that destroyed the company's entire inventory. At the beginning of July, the company
reported beginning inventory of $226,750. Inventory purchased during July (until the date of
the disaster) was $197,800. Sales for the month of July through July 24 were $642,500.
Assuming the company's typical gross profit ratio is 50%, estimate the amount of inventory
destroyed in the natural disaster.
A. $212,275
B. $103,300
C. $217,950
D. $321,250
E. $157,788
Beginning inventory on July 1 was $226,750. Purchases for the month of July amounted to
$197,800, yielding cost of goods available for sale of $424,550. If the company's typical gross
profit ratio is 50% and if sales for the month of July were $642,500, then the cost of goods
sold during July was $321,250. Subtracting that amount from the cost of goods available for
sale yields ending inventory of $103,300.
Multiple Choice Questions
80. An internal control system consists of the policies and procedures managers use to:
A. Protect assets.
B. Ensure reliable accounting.
C. Promote efficient operations.
D. Urge adherence to company policies.
E. All of these.
81. Managers place a high priority on internal control systems because the systems assist
managers in the:
A. Prevention of avoidable losses.
B. Planning of operations.
C. Monitoring of company performance.
D. Monitoring of employee performance.
E. All of these.

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Chapter 006 Inventories and Cost of Sales

82. The principles of internal control include:


A. Establish responsibilities.
B. Maintain minimal records.
C. Use only computerized systems.
D. Bond all employees.
E. Require automated sales systems.

83. Principles of internal control include:


A. Apply technological controls.
B. Divide responsibilities for related transactions.
C. Perform regular and independent reviews.
D. Separate recordkeeping from custody of assets.
E. All of these.
84. A properly designed internal control system:
A. Lowers the company's risk of loss.
B. Insures profitable operations.
C. Eliminates the need for an audit.
D. Requires the use of non-computerized systems.
E. Is not necessary if the company uses a computerized system.
85. A company's internal control system:
A. Eliminates the company's risk of loss.
B. Monitors company and employee performance.
C. Eliminates human error.
D. Eliminates the need for audits.
E. All of these.

86. When two clerks share the same cash register it is a violation of which internal control
principle?
A. Establish responsibilities.
B. Maintain adequate records.
C. Insure assets.
D. Bond key employees.
E. Apply technological controls.

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Chapter 006 Inventories and Cost of Sales


87. Prenumbered printed checks are an example of which internal control principle?
A. Technological controls.
B. Maintain adequate records.
C. Perform regular and independent reviews.
D. Establish responsibilities.
E. Divide responsibility for related transactions.

88. The impact of technology on internal controls includes:


A. Reduced processing errors.
B. Elimination of the need for regular audits.
C. Elimination of the need to bond employees.
D. Elimination of separation of duties.
E. Elimination of fraud.

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Chapter 006 Inventories and Cost of Sales


89. Internal control policies and procedures have limitations including:
A. Human error.
B. Human fraud.
C. Cost-benefit principle.
D. Collusion.
E. All of these.

90. Internal control systems are:


A. Developed by the Securities and Exchange Commission for public companies.
B. Developed by the Small Business Administration for non-public companies.
C. Developed by the Internal Revenue Service for all U.S. companies.
D. Required by Sarbanes-Oxley (SOX) to be documented and certified if the company's stock
is traded on an exchange.
E. Required only if a company plans to engage in interstate commerce.

91. Cash, not including cash equivalents, includes:


A. Postage stamps.
B. Coins, currency, and checking accounts.
C. IOUs.
D. Two-year certificates of deposit.
E. Money market funds.

92. Cash equivalents:


A. Are short-term, highly liquid investment assets.
B. Include 6-month CDs.
C. Include checking accounts.
D. Are recorded in petty cash.
E. Include money orders.
93. Cash equivalents:
A. Include savings accounts.
B. Include checking accounts.
C. Are short-term investments sufficiently close to their maturity date that their value is not
sensitive to interest rate changes.
D. Include time deposits.
E. Have no immediate value.

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94. Cash equivalents:
A. Are readily convertible to a known cash amount.
B. Include short-term investments purchased within 3 months of their maturity dates.
C. Have a market value that is not sensitive to interest rate changes.
D. Include short-term U.S. treasury bills.
E. All of these.

95. The following information is available for Holland Company at December 31:

Based on this information, Holland Company should report Cash and Cash Equivalents on
December 31 of:
A. $35,421
B. $50,421
C. $37,546
D. $36,246
E. $40,439
Add $2,790 in money market fund + $22,431 of cash in bank + $200 of cash in petty cash
fund + $10,000 of U.S. Treasury bill with maturity of less than three months on date of
purchase = $35,421.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Hard
Learning Objective: C2

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Chapter 006 Inventories and Cost of Sales

96. The following information is available for Johnson Manufacturing Company at June 30:

Based on this information, Johnson Manufacturing Company should report Cash and Cash
Equivalents on June 30 of:
A. $15,062
B. $20,146
C. $20,072
D. $19,205
E. $19,462
Add $6,455 of cash in bank + $12,400 of money market fund, $350 of petty cash balance +
$257 of money orders = $19,462.

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
Learning Objective: C2

97. Banking activities include:


A. Bank accounts.
B. Bank deposits.
C. Checking.
D. Electronic funds transfer.
E. All of these.

AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: C3

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Chapter 006 Inventories and Cost of Sales

98. A check involves three parties:


A. The writer, the cashier, and the bank.
B. The maker, the payee, and the bank.
C. The maker, the manager, and the payee.
D. The bookkeeper, the payee, and the bank.
E. The signer, the cashier, and the company.

AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: C3

99. A remittance advice is:


A. An explanation for a payment by check.
B. A bank statement.
C. A voucher.
D. An EFT.
E. A cancelled check.

AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: C3

100. A bank statement includes:


A. A list of outstanding checks.
B. A list of petty cash amounts.
C. The beginning and the ending balance of the depositor's account.
D. A listing of deposits in transit.
E. All of these.

AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: C3

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Chapter 006 Inventories and Cost of Sales

101. For which item does a bank NOT issue a debit memorandum?
A. To notify a depositor of all withdrawals through an ATM.
B. To notify a depositor of a fee assessed to the depositor's account.
C. To notify a depositor of a uncollectible check.
D. To notify a depositor of periodic payments arranged in advance, by a depositor.
E. To notify a depositor of a deposit to their account.

AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: C3

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Chapter 006 Inventories and Cost of Sales


102. Preparing a bank reconciliation on a monthly basis is an example of:
A. Establishing responsibility.
B. Separation of duties.
C. Protecting assets by proving accuracy of cash records.
D. A technological control.
E. Poor internal control.
103. The number of days' sales uncollected:
A. Is used to evaluate the liquidity of receivables.
B. Is calculated by dividing accounts receivable by sales.
C. Measures a company's ability to pay its bills on time.
D. Measures a company's debt to income.
E. Is calculated by dividing sales by accounts receivable.

104. The days' sales uncollected ratio is used to:


A. Measure how many days of sales remain until the end of the year.
B. Determine the number of days that have passed without collecting on accounts receivable.
C. Identify the likelihood of collecting sales on account.
D. Estimate how much time is likely to pass before the amount of accounts receivable is
received in cash.
E. Measure the amount of layaway sales for a period.
105. The number of days' sales uncollected is calculated by:
A. Dividing accounts receivable by net sales.
B. Dividing accounts receivable by net sales and multiplying by 365.
C. Dividing net sales by accounts receivable.
D. Dividing net sales by accounts receivable and multiplying by 365.
E. Multiplying net sales by accounts receivable and dividing by 365.
106. The number of days' sales uncollected:
A. Measures how much time is likely to pass before the current amount of accounts receivable
is received in cash.
B. Can be used for comparisons to other companies in the same industry.
C. Can be used for comparisons between current and prior periods.
D. Reflects the liquidity of receivables.
E. All of these.

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Chapter 006 Inventories and Cost of Sales

107. A company had net sales of $31,500 and ending accounts receivable of $2,700 for the
current period. Its days' sales uncollected equals:
A. 11.7 days.
B. 23.3 days.
C. 31.3 days.
D. 42.5 days.
E. 46.6 days.

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($2,700/$31,500) x 365 = 31.3 days
108. Mattel had net sales of $4,235 million and ending accounts receivable of $775 million.
Its days' sales uncollected equals:
A. 298 days.
B. 66.8 days.
C. 19.4 days.
D. 81.8 days.
E. 65.2 days.
($775/$4,235) x 365 = 66.8 days
109. The following information is taken from Hogan Company's December 31 balance sheet:

If net credit sales and cost of goods sold for the current year were $612,000 and $367,200,
respectively, the firm's days' sales uncollected for the year is:
A. 60 days
B. 85 days
C. 42 days
D. 154 days
E. 70 days
($70,422/$612,000) x 365 = 42 days
110. An income statement account that is used to record cash overages and cash shortages
arising from petty cash transactions or from errors in making change is titled:
A. Cash Lost.
B. Bank Reconciliation.
C. Petty Cash.
D. Cash Over and Short.
E. Cash Receivable.

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111. A set of procedures and approvals designed to control cash disbursements and the
acceptance of obligations is referred to as a(n):
A. Internal cash system.
B. Petty cash system.
C. Cash disbursement system.
D. Voucher system.
E. Cash control system.
112. Internal control procedures for cash receipts require that:
A. Custody over cash is kept separate from its recordkeeping.
B. Cash sales should be recorded on a cash register at the time of each sale.
C. Clerks having access to cash in a cash register should not have access to the register tape or
file.
D. An employee (with no access to cash receipts) should compare the total cash recorded by
the register with the record of cash receipts reported by the cashier.
E. All of these.
113. The Cash Over and Short account:
A. Is used to record a credit balance in the cash account.
B. Is an income statement account used for recording the income effects of cash overages and
cash shortages from errors in making change and/or from errors in processing petty cash
transactions.
C. Is not necessary in a computerized accounting system.
D. Can never have a debit balance.
E. Can never have a credit balance.
114. The voucher system of control:
A. Is a set of procedures and approvals designed to control cash receipts and the acceptance of
obligations.
B. Establishes procedures for verifying, approving, and recording obligations for eventual
cash disbursement.
C. Establishes procedures for receiving checks for the sale of verified, approved, and recorded
activities.
D. Applies only when multiple purchases are made from the same supplier.
E. All of these.
115. A voucher is an internal file:
A. Prepared after an invoice is received.
B. Used as a substitute for an invoice.
C. Used to accumulate information needed to control cash disbursements and to ensure that
transactions are properly recorded.
D. Takes the place of a bank check.
E. Prepared before the company orders goods.

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Chapter 006 Inventories and Cost of Sales


116. Which of the following procedures would weaken control over cash receipts that arrive
through the mail?
A. After the mail is opened, a list (in triplicate) of the money received is prepared with a
record of the sender's name, the amount, and an explanation of why the money is sent.
B. The bank reconciliation is prepared by a person who does not handle cash or record cash
receipts.
C. For safety, only one person should open the mail, and that person should immediately
deposit the cash received in the bank.
D. The cashier should not also be the record keeper who records the amounts received in the
accounting records.
E. All of these are good internal control procedures over cash receipts that arrive through the
mail.
117. At the end of the day, the cash register's record shows $1,250, but the count of cash in the
cash register is $1,245. The correct entry to record the cash sales is
A.

B.
C.

D.
E.
118. At the end of the day, the cash register tape shows $1,000 in cash sales but the count of
cash in the register is $1,035. The proper entry to account for this excess includes a:
A. Credit to Cash for $35.
B. Debit to Cash for $35.
C. Credit to Cash Over and Short for $35.
D. Debit to Cash Over and Short for $35.
E. Debit to Petty Cash for $35.
119. A key factor in a voucher system is:
A. Only approved departments and individuals are authorized to incur an obligation that will
result in the payment of cash.
B. Procedures for purchasing, receiving and paying for merchandise are divided among
several departments.
C. The system limits the individuals that can incur cash payment obligations for a company.
D. It should be extended to all expenses.
E. All of these.
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Chapter 006 Inventories and Cost of Sales

120. The entry necessary to establish a petty cash fund should include:
A. A debit to Cash and a credit to Petty Cash.
B. A debit to Cash and a credit to Cash Over and Short.
C. A debit to Petty Cash and a credit to Cash.
D. A debit to Petty Cash and a credit to Accounts Receivable.
E. A debit to Cash and a credit to Petty Cash Over and Short.
121. The entry to record reimbursement of the petty cash fund for postage expense should
include:
A. A debit to Postage Expense.
B. A debit to Petty Cash.
C. A debit to Cash.
D. A debit to Cash Short and Over.
E. A debit to Supplies.
122. When a petty cash fund is in use:
A. Expenses paid with petty cash are recorded when the fund is replenished.
B. Petty Cash is debited when funds are replenished.
C. Petty Cash is credited when funds are replenished.
D. Expenses are not recorded.
E. Cash is debited when funds are replenished.
123. In reimbursing the petty cash fund:
A. Cash is debited.
B. Petty Cash is credited.
C. Petty Cash is debited.
D. Appropriate expense accounts are debited.
E. No expenses are recorded.
124. Assume that the custodian of a $450 petty cash fund has $62.50 in coins and currency
plus $382.50 in receipts at the end of the month. The entry to replenish the petty cash fund
will include:
A. A debit to Cash for $377.50.
B. A credit to Cash Over and Short for $5.00.
C. A debit to Petty Cash for $382.50.
D. A credit to Cash for $387.50.
E. A debit to Cash for $387.50.
$450 - 62.50 - 382.50 = $5.00 cash shortage
$382.50 + 5.00 = $387.50 reimbursement and credit to cash
125. A company plans to decrease a $200 petty cash fund to $75. The current balance in the
account includes $45 petty cash payment in receipts and $165 in currency. The entry to reduce
the fund will include a:
A. Debit to Cash Short and Over for $10.
B. Debit to Cash for $90.
C. Debit to Miscellaneous Expenses for $35.
D. Credit to Petty Cash for $165.
E. Credit to Cash for $90.

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Chapter 006 Inventories and Cost of Sales


$200.00 - 165.00 - 45.00 = $-10.00 cash overage
$125.00 - 45.00 + 10.00 = $90.00 debit to cash
126. A company had $43 missing from petty cash that was not accounted for by petty cash
receipts. The correct procedure is to:
A. Debit Cash Over and Short for $43.
B. Credit Cash Over and Short for $43.
C. Debit Petty Cash for $43.
D. Credit Petty Cash for $43.
E. Credit Cash for $43.

127. Martha Company has an established petty cash fund in the amount of $500. The fund
was last reimbursed on November 30. At the end of December, the fund contained the
following petty cash receipts:

If, in addition to these receipts, the petty cash fund contains $301 of cash, the journal entry to
reimburse the fund on December 31 will include:
A. A debit to Transportation-In of $73.
B. A debit to Transportation-Out of $73.
C. A credit to Office Supplies of $66.
D. A credit to Cash Over and Short of $10.
E. A debit to Cash Over and Short of $10.
Opening cash balance of $500. Subtract the $189 of disbursements from the petty cash fund
during December (as evidenced by the petty cash receipts). This yields an expected cash
balance of $311. Since there is only $301 of cash in the fund, the journal entry to reimburse
the fund will include a $10 debit to Cash Over and Short.
128. An analysis that explains any differences between the checking account balance
according to the depositor's records and the balance reported on the bank statement is a(n):
A. Internal audit.
B. Bank reconciliation.
C. Bank audit.
D. Trial reconciliation.
E. Analysis of debits and credits.

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Chapter 006 Inventories and Cost of Sales

129. On a bank reconciliation, an unrecorded debit memorandum for printing checks is:
A. Noted as a memorandum only.
B. Added to the book balance of cash.
C. Deducted from the book balance of cash.
D. Added to the bank balance of cash.
E. Deducted from the bank balance of cash.
130. Outstanding checks refer to checks that have been:
A. Written, recorded, sent to payees, and received and paid by the bank.
B. Written and not yet recorded in the company books.
C. Held as blank checks.
D. Written, recorded on the company books, sent to the customer, but have not yet been paid
by the bank.
E. Issued by the bank.
131. On a bank reconciliation, the amount of an unrecorded bank service charge should be:
A. Added to the book balance of cash.
B. Deducted from the book balance of cash.
C. Added to the bank balance of cash.
D. Deducted from the bank balance of cash.
E. Noted in memorandum form only.
132. A check that was outstanding on last period's bank reconciliation was not among the
cancelled checks returned by the bank this period. As a result, in preparing this period's
reconciliation, the amount of this check should be:
A. Added to the book balance of cash.
B. Deducted from the book balance of cash.
C. Added to the bank balance of cash.
D. Deducted from the bank balance of cash.
E. Ignored in preparing the period's bank reconciliation.
133. A company made a bank deposit on September 30 that did not appear on the bank
statement dated as of September 30. In preparing the September 30 bank reconciliation, the
company should:
A. Deduct the deposit from the bank statement balance.
B. Send the bank a debit memorandum.
C. Deduct the deposit from the September 30 book balance and add it to the October 1 book
balance.
D. Add the deposit to the book balance of cash.
E. Add the deposit to the bank statement balance.

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Chapter 006 Inventories and Cost of Sales


134. If a check correctly written and paid by the bank for $794 is incorrectly recorded in the
company's books for $749, how should this error be treated on the bank reconciliation?
A. Subtract $45 from the bank's balance.
B. Add $45 to the bank's balance.
C. Subtract $45 from the book balance.
D. Add $45 to the book balance.
E. Subtract $45 from the bank's balance and add $45 to the book's balance.
$794 - 749 = $45
135. During the month of September, Norris Industries issued a check in the amount of $845
to a supplier on account. The check cleared the bank during September. The disbursement was
recorded incorrectly as $854. The journal entry to correct this mistake when discovered will
include:
A. A debit to Accounts Payable for $854.
B. A credit to Cash for $854.
C. A credit to Cash for $9.
D. A credit to Accounts Payable for $9.
E. A debit to Cash for $49.
$854 - 845 = $9

136. In the process of reconciling Marks Enterprises' bank statement for September, Mr.
Marks compiles the following information:

The adjusted cash balance per the books on September 30 is:


A. $ 6,900
B. $ 8,160
C. $ 4,600
D. $ 6,520
E. $ 5,840

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Chapter 006 Inventories and Cost of Sales

137. Which of the following events would cause a bank to debit a depositor's account?
A. The depositor authorizes the bank to charge the depositor's account $50 for new checks.
B. The bank collects a note receivable and related interest on the depositor's behalf.
C. The depositor determines there are outstanding checks drawn on the account at month-end.
D. The depositor determines there are deposits in transit on the account at month-end.
E. The bank determines it incorrectly charged the depositor's account twice for the monthly
service charge in a previous month.

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Chapter 006 Inventories and Cost of Sales

138. A seller of goods or services, usually a manufacturer or wholesaler, is known as a:


A. Vendor.
B. Payee.
C. Vendee.
D. Creditor.
E. Debtor.
139. The internal document prepared by a department manager that informs the purchasing
department of its needs that lists the merchandise needed and requests that it be purchased is
the
A. Purchase requisition.
B. Purchase order.
C. Invoice.
D. Receiving report.
E. Invoice approval.
140. The document that the purchasing department prepares and sends to the vendor to place
an order is the
A. Purchase requisition.
B. Purchase order.
C. Invoice.
D. Receiving report.
E. Invoice approval.

141. The document that is an itemized statement of goods prepared by a vendor listing the
customer's name, items sold, sales prices, and terms of the sale is the
A. Purchase requisition.
B. Purchase order.
C. Invoice.
D. Receiving report.
E. Invoice approval
142. The internal document that is prepared to notify the appropriate persons that ordered
goods have been received and describes the quantities and condition of the goods is the
A. Purchase requisition.
B. Purchase order.
C. Invoice.
D. Receiving report.
E. Invoice approval

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143. The document, also known as the check authorization, that is a checklist of steps
necessary for approving an invoice for recording and payment is the
A. Purchase requisition.
B. Purchase order.
C. Invoice.
D. Receiving report.
E. Invoice approval
144. A voucher system is a series of prescribed control procedures:
A. Designed to eliminate the need for subsidiary ledgers.
B. Designed to determine if the company is operating profitably.
C. Used almost exclusively by small companies.
D. Used to ensure that the company sells on credit only to creditworthy customers.
E. Designed to control cash disbursements and the acceptance of obligations.
145. The gross method of recording purchases refers to the method of recording:
A. Purchases at the invoice price less any cash discounts.
B. Specified amounts and timing of payments that a buyer agrees to make in return for being
granted credit.
C. Purchases at the full invoice price, without deducting any cash discounts.
D. Inventory at its selling price.
E. Inventory at the lower of cost or market.
146. An expense resulting from failing to take advantage of cash discounts on purchases is
called:
A. Sales discounts.
B. Trade discounts.
C. Purchases discounts.
D. Discounts lost.
E. Discounts earned.
147. A company using the net method of recording purchases failed to take advantage of a
discount available. When they pay the full (gross) amount of an invoice at the end of the
credit period the journal entry will include a debit to:
A. Merchandise Inventory.
B. Sales Discounts.
C. Discounts Lost.
D. Cash.
E. Accounts Receivable.

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148. A company that uses the net method of recording invoices made a purchase of $400 with
terms of 2/10, n/30. The entry to record the purchase would include:
A. A debit to Merchandise Inventory for $392.
B. A credit to Discounts Lost for $8.
C. A credit to Cash for $392.
D. A debit to Discounts Lost for $8.
E. A debit to Cash for $392.
$400 x .98 = $392
149. Merchandise with an invoice price of $2,000 was purchased on October 3, terms 1/15,
n/60. The company uses the net method to record purchases. The entry to record the cash
payment of this purchase obligation on October 17 is:
A.
B.

C.

D.

E.
$2,000 x .99 = $1,980
150. A company records purchases using the net method. On February 1, they purchased
merchandise inventory on account for $8,300 with terms of 1/10, n/30. The February 1 journal
entry to record this transaction would include a:
A. Debit to Merchandise Inventory of $8,300.
B. Debit to Merchandise Inventory of $8,217.
C. Debit to Merchandise Inventory of $83.
D. Credit to Merchandise Inventory of $83.
E. Credit to Accounts Payable of $8,300.
$8,300 x .99 = $8,217
Multiple Choice Questions

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56. Accounts receivable information for specific customers is important because it reveals:
A. How much each customer has purchased on credit.
B. How much each customer has paid.
C. How much each customer still owes.
D. The basis for sending bills to customers.
E. All of these.
57. A credit sale of $3,275 to a customer would result in:
A. A debit to the Accounts Receivable account in the general ledger and a debit to the
customer's account in the accounts receivable subsidiary ledger.
B. A credit to the Accounts Receivable account in the general ledger and a credit to the
customer's account in the accounts receivable subsidiary ledger.
C. A debit to the Accounts Receivable account in the general ledger and a credit to the
customer's account in the accounts receivable subsidiary ledger.
D. A credit to the Accounts Receivable account in the general ledger and a debit to the
customer's account in the accounts receivable subsidiary ledger.
E. A credit to Sales and a credit to the customer's account in the accounts receivable
subsidiary ledger.
58. Sellers allow customers to use credit cards:
A. To avoid having to evaluate a customer's credit standing for each sale.
B. To lessen the risk of extending credit to customers who cannot pay.
C. To speed up receipt of cash from the credit sale.
D. To increase total sales volume.
E. All of these.
59. Credit card expense may be classified as:
A. A "discount" deducted from sales to get net sales.
B. A selling expense.
C. An administrative expense.
D. All of these.
E. Only A and B.
60. A promissory note received from a customer in exchange for an account receivable:
A. Is a cash equivalent for the recipient.
B. Is an account receivable for the recipient.
C. Is a note receivable for the recipient.
D. Is a short-term investment for the recipient.
E. Is a note payable for the recipient.
61. The person who signs a note receivable and promises to pay the principal and interest is
the:
A. Maker.
B. Payee.
C. Holder.
D. Receiver.
E. Owner.

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62. The accounting principle that requires financial statements (including notes) to report all
relevant information about the operations and financial condition of a company is called:
A. Relevance.
B. Full disclosure.
C. Evaluation.
D. Materiality.
E. Matching.
63. A promissory note:
A. Is a short-term investment for the maker.
B. Is a written promise to pay a specified amount of money at a certain date.
C. Is a liability to the payee.
D. Is another name for an installment receivable.
E. Cannot be used in payment of an account receivable.
64. The maturity date of a note receivable:
A. Is the day of the credit sale.
B. Is the day the note was signed.
C. Is the day the note is due to be paid.
D. Is the date of the first payment.
E. Is the last day of the month.
65. The interest accrued on $6,500 at 6% for 60 days is:
A. $ 36.
B. $ 42.
C. $ 65.
D. $180.
E. $420.
$6,500 x 0.06 x 60/360 = $65
66. A 90-day note issued on April 10 matures on:
A. July 9.
B. July 10.
C. July 11.
D. July 12.
E. July 13.

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67. A company receives a 10%, 90-day note for $1,500. The total interest due on the maturity
date is:
A. $ 50.00
B. $150.00.
C. $ 75.00.
D. $ 37.50.
E. $ 87.50.
$1,500 x 0.10 x 90/360 = $37.50
68. A company borrowed $10,000 by signing a 180-day promissory note at 11%. The total
interest due on the maturity date is.
A. $50
B. $275
C. $550
D. $825
E. $1,100
$10,000 x 0.11 x 1/2 = $550
69. A company borrowed $10,000 by signing a 180-day promissory note at 11%. The
maturity value of the note is:
A. $12,050
B. $12,275
C. $10,550
D. $12,825
E. $13,100
$10,000 + ($10,000 x 0.11 x 180/360) = $10,550
70. The buyer who purchases and takes ownership of another company's accounts receivable
is called a:
A. Payer.
B. Pledgor.
C. Factor.
D. Payee.
E. Pledgee.
71. Pledging receivables:
A. Allows firms to raise cash.
B. Allows a firm to retain ownership of its receivables.
C. Does not transfer risk of bad debts to the lender.
D. Should be disclosed in the financial statements.
E. All of these.

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72. A company factored $45,000 of its accounts receivable and was charged a 3% factoring
fee. The journal entry to record this transaction would include a:
A. Debit to Cash of $45,000, a debit to Factoring Fee Expense of $1,350, and credit to
Accounts Receivable of $43,650.
B. Debit to Cash of $45,000 and a credit to Accounts Receivable of $45,000.
C. Debit to Cash of $43,650, a debit to Factoring Fee Expense of $1,350, and a credit to
Accounts Receivable of $45,000.
D. Debit to Cash of $46,350 and a credit to Accounts Receivable of $46,350.
E. Debit to Cash of $45,000 and a credit to Notes Payable of $45,000.
$45,000 x .03 = $1,350
$45,000 - $1,350 = $43,650

73. The quality of receivables refers to:


A. The creditworthiness of sellers.
B. The speed of collection.
C. The likelihood of collection without loss.
D. Sales turnover.
E. The interest rate.
74. The account receivable turnover measures:
A. How long it takes to sell accounts receivable to a factor.
B. How often, on average, receivables are received and collected during the period.
C. The relation of cash sales to credit sales.
D. How long it takes to sell merchandise inventory.
E. All of these.
75. The accounts receivable turnover is calculated by:
A. Dividing net sales by average accounts receivable.
B. Dividing net sales by average accounts receivable and multiplying by 365.
C. Dividing average accounts receivable by net sales.
D. Dividing average accounts receivable by net sales and multiplying by 365.
E. Dividing net income by average accounts receivable.
76. A company has net sales of $900,000 and average accounts receivable of $300,000. What
is its accounts receivable turnover for the period?
A. 0.20.
B. 5.00
C. 20.0
D. 73.0
E. 3.0
$900,000/$300,000 = 3.0

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77. Dell reported net sales of $8,739 million and average accounts receivable of $864 million.
Its accounts receivable turnover is:
A. 0.90.
B. 10.1.
C. 36.1.
D. 50.0.
E. 3,686.
$8,739/$864 = 10.1
78. Pepsi's accounts receivable turnover was 9.9 for this year and 11.0 for last year. Coke's
turnover was 9.3 for this year and 9.3 for last year. These results imply that:
A. Coke has the better turnover for both years.
B. Pepsi has the better turnover for both years.
C. Coke's turnover is improving.
D. Coke's credit policies are too loose
E. Coke is collecting its receivables more quickly than Pepsi in both years.
79. A company had net sales of $600,000, total sales of $750,000, and an average accounts
receivable of $75,000. Its accounts receivable turnover equals:
A. .13
B. .80
C. 7.75
D. 8.00
E. 10.00
$600,000/$75,000 = 8.00
80. The matching principle requires:
A. That expenses be ignored if their effect on the financial statements is unimportant to users'
business decisions.
B. The use of the direct write-off method for bad debts.
C. The use of the allowance method of accounting for bad debts.
D. That bad debts be disclosed in the financial statements.
E. That bad debts not be written off.
81. The materiality principle:
A. States that an amount can be ignored if its effect on financial statements is unimportant to
user's business decisions.
B. Requires use of the allowance method for bad debts.
C. Requires use of the direct write-off method.
D. States that bad debts not be written off.
E. Requires that expenses be reported in the same period as the sales they helped produce.

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82. If the credit balance of the Allowance for Doubtful Accounts account exceeds the amount
of a bad debt being written off, the entry to record the write-off against the allowance account
results in:
A. An increase in the expenses of the current period.
B. A reduction in current assets.
C. A reduction in equity.
D. No effect on the expenses of the current period.
E. A reduction in current liabilities.
83. On October 29 of the current year, a company concluded that a customer's $4,400 account
receivable was uncollectible and that the account should be written off. What effect will this
write-off have on this company's net income and total assets assuming the allowance method
is used to account for bad debts?
A. Decrease in net income; no effect on total assets.
B. No effect on net income; no effect on total assets.
C. Decrease in net income; decrease in total assets.
D. Increase in net income; no effect on total assets.
E. No effect on net income; decrease in total assets.
84. Newton Company uses the allowance method of accounting for uncollectible accounts.
On May 3, the Newton Company wrote off the $3,000 uncollectible account of its customer,
P. Best. On July 10, Newton received a check for the full amount of $3,000 from Best. On
July 10, the entry or entries Newton makes to record the recovery of the bad debt is:

A.
B.

C.

D.
E.

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85. The amount of bad debt expense can be estimated by:


A. The percent of sales method.
B. The percent of accounts receivable method.
C. The aging of accounts receivable method.
D. All of these.
E. Only B and C.

86. A method of estimating bad debts expense that involves a detailed examination of
outstanding accounts and their length of time past due is the:
A. Direct write-off method.
B. Aging of accounts receivable method.
C. Percentage of sales method.
D. Aging of investments method.
E. Percent of accounts receivable method.

87. An accounting procedure that (1) estimates and reports bad debts expense from credit
sales during the period the sales are recorded, and (2) reports accounts receivable at the
estimated amount of cash to be collected is the:
A. Allowance method of accounting for bad debts.
B. Aging of notes receivable.
C. Adjustment method for uncollectible debts.
D. Direct write-off method of accounting for bad debts.
E. Cash basis method of accounting for bad debts.
8. On December 31 of the current year, a company's unadjusted trial balance included the
following: Accounts Receivable, debit balance of $97,250; Allowance for Doubtful Accounts,
credit balance of $951. What amount should be debited to Bad Debts Expense, assuming 6%
of outstanding accounts receivable at the end of the current year will be uncollectible?
A. $ 951.
B. $3,992.
C. $4,884.
D. $5,835.
E. $6,786.

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89. A company ages its accounts receivables to determine its end of period adjustment for bad
debts. At the end of the current year, management estimated that $15,750 of the accounts
receivable balance would be uncollectible. Prior to any year-end adjustments, the Allowance
for Doubtful Accounts had a debit balance of $175. What adjusting entry should the company
make at the end of the current year to record its estimated bad debts expense?
A.
B.
C.

D.
E.

90. A company used the percent of sales method to determine its bad debts expense. At the
end of the current year, the company's unadjusted trial balance reported the following selected
amounts:

All sales are made on credit. Based on past experience, the company estimates 0.6% of credit
sales to be uncollectible. What amount should be debited to Bad Debts Expense when the
year-end adjusting entry is prepared?
A. $1,275
B. $1,775
C. $4,500
D. $4,800
E. $5,500

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$800,000 x .006 = $4,800
91. A company used the percent of sales method to determine its bad debts expense. At the
end of the current year, the company's unadjusted trial balance reported the following selected
amounts:

All sales are made on credit. Based on past experience, the company estimates 0.6% of credit
sales to be uncollectible. What adjusting entry should the company make at the end of the
current year to record its estimated bad debts expense?
A.
B.
C.
D.
E.
$800,000 x .006 = $4,800

92. A company has $90,000 in outstanding accounts receivable and it uses the allowance
method to account for uncollectible accounts. Experience suggests that 6% of outstanding
receivables are uncollectible. The current debit balance (before adjustments) in the allowance
for doubtful accounts is $800. The journal entry to record the adjustment to the allowance
account includes a debit to Bad Debts Expense for:
A. $4,600
B. $5,400
C. $6,200
D. $6,800
E. None of these

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93. Electron borrowed $75,000 cash from TechCom by signing a promissory note. TechCom's
entry to record the transaction should include a:
A. Debit to Notes Receivable for $75,000.
B. Debit to Accounts Receivable for $75,000.
C. Credit to Notes Receivable for $75,000.
D. Debit Notes Payable for $75,000.
E. Credit to Sales for $75,000.
94. The amount due on the maturity date of a $6,000, 60-day 8%, note receivable is:
A. $6,000.
B. $6,480.
C. $5,520.
D. $6,080.
E. $5,920.
Interest: $6,000 x .08 x 60/360 = $80
Maturity value: $6,000 + $80 = $6,080

95. Paoli Pizza bought $5,000 worth of merchandise from TechCom and signed a 90-day,
10% promissory note for the $5,000. TechCom's journal entry to record the sales portion of
the transaction is:
A.
B.
C.
D.

E.

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Chapter 006 Inventories and Cost of Sales


96. MixRecording Studios purchased $7,800 in electronic components from TechCom.
MixRecording Studios signed a 60-day, 10% promissory note for $7,800. TechCom's journal
entry to record the sales portion of the transaction is:
A.
B.
C.
D.

E.
97. When the maker of a note honors a note this indicates that the note is:
A. Signed.
B. Paid in full.
C. Guaranteed.
D. Notarized.
E. Cosigned.

98. Failure by a promissory note's maker to pay the amount due at maturity is known as:
A. Protesting a note.
B. Closing a note.
C. Dishonoring a note.
D. Discounting a note.
E. Depreciating a note.

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99. Teller purchased merchandise from TechCom on October 17 of the current year and
TechCom accepted Teller's $4,800, 90-day, 10% note. What entry should TechCom make on
January 15 of the next year when the note is paid?

A.
B.

C.

D.

E.
Interest accrued at December 31: $4,800 x .10 x 75/360 = $100
Interest earned during January: $4,800 x .10 x 15/360 = $20

100. Teller purchased merchandise from TechCom on October 17 of the current year and
TechCom accepted Teller's $4,800, 90-day, 10% note. What entry should TechCom make on
December 31, to record the accrued interest on the note?
A.
B.
C.
D.

E.

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Chapter 006 Inventories and Cost of Sales


Interest accrued at December 31: $4,800 x .10 x 75/360 = $100

101. Teller purchased merchandise from TechCom on October 17 of the current year and
TechCom accepted Teller's $4,800, 90-day, 10% note. If the note is dishonored, what entry
should TechCom make on January 15 of the next year?

A.
B.

C.

D.

E.
Interest accrued at December 31: $4,800 x .10 x 75/360 = $100
Interest earned during January: $4,800 x .10 x 15/360 =$20

102. MixRecording Studios purchased $7,800 in electronic components from TechCom.


MixRecording Studios signed a 60-day, 10% promissory note for $7,800. If the note is
dishonored, what is the amount due on the note?
A. $130
B. $7,800
C. $7,930
D. $8,050
E. $8,130
$7,800 x .10 x 60/360 = $130 + $7,800 = $7,930

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Matching Questions
103. Match each of the following terms with the appropriate definitions.
One who signs a note and promises to pay it at
maturity.
The accounts of customers who do not pay what they
2. Payee of a note
have promised to pay a company.
A process of classifying accounts receivable by how
3. Allowance for
long it is past its due date for the purpose of estimating
doubtful accounts
the amount of uncollectible accounts.
4. Accounts
The cost of borrowing money for a borrower,
receivable
alternatively the profit from lending money for a lender.
5. Matching
A written promise to pay a specified amount either on
principle
demand or at a definite future date.
The one to whom the promissory note is made
6. Interest
payable.
Amounts due from customers arising from credit
7. Promissory note
sales.
A contra asset account with a balance approximating
the amount of accounts receivable expected to be
8. Maker of a note
uncollectible.
The expected proceeds from converting an asset into
9. Bad debts
cash.
The accounting principle that requires expenses to be
10. Aging of
reported in the same period as the sales they helped to
accounts receivable
produce.
1. Realizable value

AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: C1
Learning Objective: C2
Learning Objective: P1
Learning Objective: P2

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Chapter 006 Inventories and Cost of Sales

104. Match each of the following terms with the appropriate definitions.

A method of accounting for bad debts that matches


1. Principal of a
the estimated loss from uncollectible accounts receivable
note
against the sales they helped to produce.
Amounts owed by customers from credit sales for
2. Full disclosure
which payment is required in periodic payments over an
principle
extended period of time.
The amount that the signer of a note agrees to pay
3. Factor
back when the note matures, not including interest.
The accounting principle that requires the financial
4. Accounts
statements (including the notes) to report all relevant
receivable turnover
information about operations and financial condition.
The accounting constraint that states that an amount
5. Materiality
can be ignored if its effect on the financial statements is
constraint
unimportant to their users.
A method of accounting for bad debts that records the
6. Allowance
loss from an uncollectible account receivable when it is
method
determined to be uncollectible.
Refers to a note maker's inability or refusal to pay the
7. Maker of a note
note at maturity.
A measure of both the quality and liquidity of
8. Installment
accounts receivable. It indicates how often, on average,
accounts receivable receivables are received and collected during the period.
A buyer of accounts receivable who charges the seller
9. Dishonoring a
a fee and then receives cash from the receivables as they
note
come due.
One who signs a note and promises to pay it at
10. Direct write-off
maturity.
AACSB: Communications
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: A1
Learning Objective: C1-C3
Learning Objective: P1-P4

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