ACC 304 Week 5 Midterm Exam – Strayer NEW

ACC 304 Week 5 Midterm Exam – Strayer NEW

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Week 5 Midterm Exam: Chapters 8 Through 11

CHAPTER 8

VALUATION OF INVENTORIES: A COST-BASIS APPROACH

IFRS questions are available at the end of this chapter.


TRUE FALSE—Conceptual

1. A manufacturing concern would report the cost of units only partially processed as inventory in the balance sheet.

2. Both merchandising and manufacturing companies normally have multiple inventory accounts.

3. When using a perpetual inventory system, freight charges on goods purchased are debited to Freight-In.

4. If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier delivers the goods to the common carrier.

5. If ending inventory is understated, then net income is understated.

6. If both purchases and ending inventory are overstated by the  same amount, net income is not affected.

7. Freight charges on goods purchased are considered a period cost and therefore are not part of the cost of the inventory.

8. Purchase Discounts Lost is a financial expense and is reported in the “other expenses and losses” section of the income statement.

9. The cost flow assumption adopted must be consistent with the physical movement of the goods.

10. In all cases when FIFO is used, the cost of goods sold would be the same whether a perpetual or periodic system is used.

11. The change in the LIFO Reserve from one period to the next is recorded as an adjustment to Cost of Goods Sold.

12. Many companies use LIFO for both tax and internal reporting purposes.

13. LIFO liquidation often distorts net income, but usually leads to substantial tax savings.

14. LIFO liquidations can occur frequently when using a specific-goods approach.

15. Dollar-value LIFO techniques help protect LIFO layers from erosion.

16. The dollar-value LIFO method measures any increases and decreases in a pool in terms of total dollar value and physical quantity of the goods.

17. A disadvantage of LIFO is that it does not match more recent costs against current revenues as well as FIFO.

18. The LIFO conformity rule requires that if a company uses LIFO for tax purposes, it must also use LIFO for financial accounting purposes.

19. Use of LIFO provides a tax benefit in an industry where unit costs tend to decrease as production increases.

20. LIFO is inappropriate where unit costs tend to decrease as production increases.


True False Answers—Conceptual



MULTIPLE CHOICE—Conceptual

21. Which of the following inventories carried by a manufacturer is similar to the merchandise inventory of a retailer?
a. Raw materials.
b. Work-in-process.
c. Finished goods.
d. Supplies.

22. Where should raw materials be classified on the balance sheet?
a. Prepaid expenses.
b. Inventory.
c. Equipment.
d. Not on the balance sheet.

23. Which of the following accounts is not reported in inventory?
a. Raw materials.
b. Equipment.
c. Finished goods.
d. Supplies.

24. Why are inventories included in the computation of net income?
a. To determine cost of goods sold.
b. To determine sales revenue.
c. To determine merchandise returns.
d. Inventories are not included in the computation of net income.

25. Which of the following is a characteristic of a perpetual inventory system?
a. Inventory purchases are debited to a Purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in inventory.


26. How is a significant amount of consignment inventory reported in the balance sheet?
a. The inventory is reported separately on the consignor's balance sheet.
b. The inventory is combined with other inventory on the consignor's balance sheet.
c. The inventory is reported separately on the consignee's balance sheet.
d. The inventory is combined with other inventory on the consignee's balance sheet.

27. Where should goods in transit that were recently purchased f.o.b. destination be included on the balance sheet?
a. Accounts payable.
b. Inventory.
c. Equipment.
d. Not on the balance sheet.

28. If a company uses the periodic inventory system, what is the impact on net income of including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate net income.
b. Understate net income.
c. No effect on net income.
d. Not sufficient information to determine effect on net income.

29. If a company uses the periodic inventory system, what is the impact on the current ratio of including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate the current ratio.
b. Understate the current ratio.
c. No effect on the current ratio.
d. Not sufficient information to determine effect on the current ratio.

30. What is consigned inventory?
a. Goods that are shipped, but title transfers to the receiver.
b. Goods that are sold, but payment is not required until the goods are sold.
c. Goods that are shipped, but title remains with the shipper.
d. Goods that have been segregated for shipment to a customer.

31. When using a perpetual inventory system,
a. no Purchases account is used.
b. a Cost of Goods Sold account is used.
c. two entries are required to record a sale.
d. all of these.

32. Goods in transit which are shipped f.o.b. shipping point should be
a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.

33. Goods in transit which are shipped f.o.b. destination should be
a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.

34. Which of the following items should be included in a company's inventory at the balance sheet date?
a. Goods in transit which were purchased f.o.b. destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at his or her convenience.
d. None of these.

Use the following information for questions 35 and 36.
During 2012 Carne Corporation transferred inventory to Nolan Corporation and agreed to repurchase the merchandise early in 2013. Nolan then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to Carne. In 2013 when Carne repurchased the inventory, Nolan used the proceeds to repay its bank loan.

35. This transaction is known as a(n)
a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.

36. On whose books should the cost of the inventory appear at the December 31, 2012 balance sheet date?
a. Carne Corporation
b. Nolan Corporation
c. Norwalk Bank
d. Nolan Corporation, with Carne making appropriate note disclosure of the transaction

37. Goods on consignment are
a. included in the consignee's inventory.
b. recorded in a Consignment Out account which is an inventory account.
c. recorded in a Consignment In account which is an inventory account.
d. all of these

S38. Valuation of inventories requires the determination of all of the following except
a. the costs to be included in inventory.
b. the physical goods to be included in inventory.
c. the cost of goods held on consign¬ment from other companies.
d. the cost flow assumption to be adopted.

P39. The accountant for the Pryor Sales Company is preparing the income statement for 2012 and the balance sheet at December 31, 2012. Pryor uses the periodic inventory system. The January 1, 2012 merchandise inventory balance will appear
a. only as an asset on the balance sheet.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet.
d. as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet.


P40. If the beginning inventory for 2012 is overstated, the effects of this error on cost of goods sold for 2012, net income for 2012, and assets at December 31, 2013, respectively, are
a. overstatement, understatement, overstatement.
b. overstatement, understatement, no effect.
c. understatement, overstatement, overstatement.
d. understatement, overstatement, no effect.

S41. The failure to record a purchase of mer¬chandise on account even though the goods are properly included in the physical inven¬tory results in
a. an overstatement of assets and net income.
b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an overstatement of assets.
d. an understatement of liabilities and an overstatement of owners' equity.

42. Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would be
a. no effect.
b. net income was correct and current assets and current liabilities were overstated.
c. net income, current assets, and current liabilities were overstated.
d. net income and current liabilities were overstated.

43. Green Co. received merchandise on consignment. As of January 31, Green included the goods in inventory, but did not record the transaction. The effect of this on its financial statements for January 31 would be
a. net income, current assets, and retained earnings were overstated.
b. net income was correct and current assets were understated.
c. net income and current assets were overstated and current liabilities were understated.
d. net income, current assets, and retained earnings were understated.

44. Feine Co. accepted delivery of merchandise which it purchased on account. As o