Question 1

In a period of increasing prices, LIFO generally results in a lower tax liability.

Accepted Answer

A) True 
 B)False

Question 2

In order to detect large errors, a company can use the gross profit method to test for the overall reasonableness of an ending inventory amount.

Accepted Answer

A) True 
 B)False

Question 3

If prices are rising and a company is using LIFO, large purchases of inventory near the end of the year will:

Accepted Answer

A)  increase income taxes paid.
B)  decrease income taxes paid.
C)  not change the value of ending inventory.
D)  do none of the above.E) B) and C)
F) A) and D)

Question 4

A company purchased merchandise inventory on credit for $600 per unit, and later sold the inventory for $800 per unit. The journal entry to record the purchase of inventory included a debit to:

Accepted Answer

A)  Accounts Receivable.
B)  Inventory.
C)  Accounts Payable.
D)  Cost of Goods Sold.E) All of the above
F) B) and D) B

Question 5

The merchandise inventory is reported as an asset until it is sold.

Accepted Answer

A) True 
 B)False

Question 6

When LIFO is used and inventory quantities fall below the level of the previous period, the situation is called a:

Accepted Answer

A)  LIFO adjustment.
B)  LIFO failure.
C)  LIFO liquidation.
D)  LIFO materiality.E) All of the above
F) None of the above

Question 7

When applying the lower-of-cost-or-market rule, market value generally refers to:

Accepted Answer

A)  FIFO cost using the periodic method.
B)  LIFO cost using the periodic method.
C)  current sales price of the inventory.
D)  current replacement cost.E) C) and D)
F) None of the above

Question 8

Happy House Corporation reported net sales of $425,000 for the current year. After the financial statements had been prepared, it was discovered that ending inventory had been understated by $25,000. If the tax rate is 40%, after the error has been corrected, net income will:

Accepted Answer

A)  increase by $25,000.
B)  decrease by $25,000.
C)  increase by $15,000.
D)  decrease by $15,000.E) All of the above
F) B) and D)

Question 9

The ending inventory using the LIFO costing method reports the oldest inventory costs.

Accepted Answer

A) True 
 B)False

Question 10

The accounting principle that states that a business should use the same accounting methods and procedures from period to period is the:

Accepted Answer

A)  consistency principle.
B)  historical cost principle.
C)  disclosure principle.
D)  conservatism principle.E) B) and C)
F) None of the above A

Question 11

In a merchandising business, gross profit is the sum of sales revenue and the cost of goods sold.

Accepted Answer

A) True 
 B)False

Question 12

A company has cost of goods available for sale of $32,000, consisting of 8,000 units. The average cost per unit to be used to value the ending inventory:

Accepted Answer

A)  is $40.
B)  is $4.
C)  is $8.
D)  cannot be determined from the data.E) B) and C)
F) C) and D)

Question 13

Adjusting entries for inventory are required under the perpetual inventory system.

Accepted Answer

A) True 
 B)False

Question 14

The conservatism principle in accounting means that a company should:

Accepted Answer

A)  report enough information in its financial statements for outsiders to make knowledgeable decisions about the company.
B)  report items in the financial statements at the least favorable amounts.
C)  use the same accounting methods and procedures from period to period.
D)  perform strictly proper accounting for items and transactions that are significant to the company's financial statements.E) A) and B)
F) A) and C)

Question 15

In a merchandising company's income statement, which of the following would NOT be included in the Cost of Goods Sold calculation?

Accepted Answer

A)  Shipping costs from the manufacturer to the merchandiser
B)  Sales commissions
C)  Returns of inventory purchases
D)  Sales taxes on inventory purchases, as shown on the invoicesE) C) and D)
F) B) and C) B

Question 16

1.1.rule?

Accepted Answer

A)  The Ending Inventory balance will be $100,000, and Cost of Goods Sold will be $60,000.
B)  The Ending Inventory balance will be $87,500, and Cost of Goods Sold will be $60,000.
C)  The Ending Inventory balance will be $87,500, and Cost of Goods Sold will be $72,500.
D)  The Ending Inventory balance will be $100,000, and Cost of Goods Sold will be $72,500.E) A) and B)
F) A) and C)

Question 17

What is the formula used to calculate net purchases?

Accepted Answer

A)  Purchases less Purchase Returns and Allowances plus Purchase Discounts less freight-in
B)  Purchases plus Purchase Returns and Allowances less Purchase Discounts plus freight-in
C)  Purchases less Purchase Returns and Allowances less Purchase Discounts plus freight-in
D)  Beginning Inventory less PurchasesE) None of the above
F) A) and B)

Question 18

The following data are for the Bi-Star Technologies for the year ended December 31, 2011:  What is the estimated ending inventory?

Accepted Answer

A)  $635,000
B)  $762,000
C)  $167,500
D)  $ 10,000E) A) and D)
F) A) and C)

Question 19

If ending inventory is overstated, then:

Accepted Answer

A)  stockholders' equity is overstated.
B)  cost of goods sold is overstated.
C)  gross profit is understated.
D)  net income is understated.E) All of the above
F) B) and C)

Question 20

When inventory costs are increasing with no LIFO liquidation:

Accepted Answer

A)  FIFO cost of goods sold will be higher than LIFO cost of goods sold.
B)  FIFO ending inventory will be lower than LIFO ending inventory.
C)  FIFO cost of goods sold will be lower than LIFO cost of goods sold.
D)  FIFO and LIFO will result in the same cost of goods sold and ending inventory.E) C) and D)
F) B) and C)

Exam 6: Inventory and Cost of Goods Sold

In a period of increasing prices, LIFO generally results in a lower tax liability.

Correct AnswerverifiedShow Answer

In order to detect large errors, a company can use the gross profit method to test for the overall reasonableness of an ending inventory amount.

Correct AnswerverifiedShow Answer

If prices are rising and a company is using LIFO, large purchases of inventory near the end of the year will:

Correct AnswerverifiedShow Answer

A company purchased merchandise inventory on credit for $600 per unit, and later sold the inventory for $800 per unit. The journal entry to record the purchase of inventory included a debit to:

Correct AnswerverifiedB

The merchandise inventory is reported as an asset until it is sold.

Correct AnswerverifiedShow Answer

When LIFO is used and inventory quantities fall below the level of the previous period, the situation is called a:

Correct AnswerverifiedShow Answer

When applying the lower-of-cost-or-market rule, market value generally refers to:

Correct AnswerverifiedShow Answer

Happy House Corporation reported net sales of $425,000 for the current year. After the financial statements had been prepared, it was discovered that ending inventory had been understated by $25,000. If the tax rate is 40%, after the error has been corrected, net income will:

Correct AnswerverifiedShow Answer

The ending inventory using the LIFO costing method reports the oldest inventory costs.

Correct AnswerverifiedShow Answer

The accounting principle that states that a business should use the same accounting methods and procedures from period to period is the:

Correct AnswerverifiedA

In a merchandising business, gross profit is the sum of sales revenue and the cost of goods sold.

Correct AnswerverifiedShow Answer

A company has cost of goods available for sale of $32,000, consisting of 8,000 units. The average cost per unit to be used to value the ending inventory:

Correct AnswerverifiedShow Answer

Adjusting entries for inventory are required under the perpetual inventory system.

Correct AnswerverifiedShow Answer

The conservatism principle in accounting means that a company should:

Correct AnswerverifiedShow Answer

In a merchandising company's income statement, which of the following would NOT be included in the Cost of Goods Sold calculation?

Correct AnswerverifiedB

1.1.rule?

Correct AnswerverifiedShow Answer

What is the formula used to calculate net purchases?

Correct AnswerverifiedShow Answer

The following data are for the Bi-Star Technologies for the year ended December 31, 2011: What is the estimated ending inventory?

Correct AnswerverifiedShow Answer

If ending inventory is overstated, then:

Correct AnswerverifiedShow Answer

When inventory costs are increasing with no LIFO liquidation:

Correct AnswerverifiedShow Answer

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B

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A

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B

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