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SOAL OFC III – CASH, RECEIVABLE, INVENTORY

INTERNAL CONTROL & CASH


1.
Which one of the following is not an objective of a system of internal
controls?
a. Safeguard company assets
b. Overstate liabilities in order to be conservative
c. Enhance the accuracy and reliability of accounting records
d. Reduce the risks of errors

Internal controls are concerned with


a. only manual systems of accounting.
b. the extent of government regulations.
c. safeguarding assets.
d. preparing income tax returns.

Internal control is defined, in part, as a plan that safeguards


a. all balance sheet accounts.
b. assets.
c. liabilities.
d. capital stock.

Internal controls are not designed to safeguard assets from


a. natural disasters.
b. employee theft.
c. robbery.
d. unauthorized use.

2.
Having one person post entries to accounts receivable subsidiary ledger and
a different person post to the Accounts Receivable Control account in the
general ledger is an example of
a. inadequate internal control.
b. duplication of effort.
c. external verification.
d. segregation of duties.

Having one person responsible for the related activities of ordering


merchandise, receiving goods, and paying for them
a. increases the potential for errors and fraud.
b. decreases the potential for errors and fraud.
c. is an example of good internal control.
d. is a good example of safeguarding the company's assets.

The custodian of a company asset should


a. have access to the accounting records for that asset.
b. be someone outside the company.
c. not have access to the accounting records for that asset.
d. be an accountant.
Internal auditors
a. are hired by CPA firms to audit business firms.
b. are employees of the IRS who evaluate the internal controls of companies
filing tax
returns.
c. evaluate the system of internal controls for the companies that employ
them.
d. cannot evaluate the system of internal controls of the company that
employs them
because they are not independent.

3.
When two or more people get together for the purpose of circumventing
prescribed controls, it is called
a. a fraud committee.
b. collusion.
c. a division of duties.
d. bonding of employees.

From an internal control standpoint, the asset most susceptible to improper


diversion and use is
a. prepaid insurance.
b. cash.
c. buildings.
d. land.

The principle of establishing responsibility does not include


a. one person being responsible for one task.
b. authorization of transactions.
c. independent internal verification.
d. approval of transactions.

The control principle related to not having the same person authorize and
pay for goods is known as
a. establishment of responsibility.
b. independent internal verification.
c. separation of duties.
d. rotation of duties.

4.
Two individuals at a retail store work the same cash register. You evaluate
this situation as
a. a violation of establishment of responsibility.
b. a violation of separation of duties.
c. supporting the establishment of responsibility.
d. supporting internal independent verification.

An accounts payable clerk also has access to the approved supplier master
file for
purchases. The control principle of
a. establishment of responsibility is violated.
b. independent internal verification is violated.
c. documentation procedures is violated.
d. separation of duties is violated.

Controls that enhance the accuracy and reliability of the accounting records
are
a. automated controls.
b. external controls.
c. mechanical and electronic controls.
d. physical controls.

Related selling activities do not include


a. ordering the merchandise.
b. making a sale.
c. shipping the goods.
d. billing the customer.

5.
The independent internal verification principle involves each of the following
except the
______________ of data prepared by other employees.
a. comparison
b. reconciliation
c. review
d. segregation

Related buying activities include


a. ordering, receiving, paying.
b. ordering, selling, paying.
c. ordering, shipping, billing.
d. selling, shipping, paying.

Joe is warehouse custodian and also maintains the accounting record of the
inventory
held at the warehouse. An assessment of this situation indicates
a. documentation procedures are violated.
b. independent internal verification is violated.
c. segregation of duties is violated.
d. establishment of responsibility is violated.

Physical controls to safeguard assets do not include


a. cashier department supervisors.
b. vaults.
c. employee identification badges.
d. security guards.

6.
In large companies the independent internal verification procedure is often
assigned to
a. computer operators.
b. management.
c. internal auditors.
d. outside CPAs.

Maximum benefit from independent internal verification is obtained when


a. it is made on a pre-announced basis.
b. it is done by the employee possessing custody of the asset.
c. discrepancies are reported to management.
d. it is done at the time of the audit.

If employees are bonded


a. it means that they are not allowed to handle cash.
b. they have worked for the company for at least 10 years.
c. they have been insured against misappropriation of assets.
d. it is impossible for them to steal from the company.

Mrs. Smith has worked for Arcco Inc., for 20 years without taking a vacation.
An internal
control feature that would address this situation would be
a. other controls.
b. establishment of responsibility.
c. physical controls.
d. documentation procedures.

7.
A system of internal control
a. is infallible.
b. can be rendered ineffective by employee collusion.
c. invariably will have costs exceeding benefits.
d. is premised on the concept of absolute assurance.

For accounting purposes, postdated checks (checks payable in the future) are
considered to be
a. money orders.
b. cash.
c. petty cash.
d. accounts receivable.

Postage stamps on hand are considered to be


a. cash.
b. petty cash.
c. cash equivalents.
d. a prepaid expense.

Which one of the following items would not be considered cash?


a. Coins
b. Money orders
c. Currency
d. Postdated checks

8.
Checks received through the mail should
a. immediately be endorsed "For Deposit Only."
b. be sent to the accounts receivable subsidiary ledger clerk for immediate
posting to the
customer's account.
c. be cashed at the bank as soon as possible.
d. be "rung up" on a cash register immediately.

Proper control for over-the-counter cash receipts includes


a. a cash register with totals visible to the customer.
b. using electronic cash registers with no tapes.
c. cash count sheets requiring only the supervisor's signature.
d. cash count sheets requiring only the cashier's signature.

A company stamps checks received in the mail with the words "For Deposit
Only". This
endorsement is called
a. a blank endorsement.
b. a rubber stamp.
c. a restrictive endorsement.
d. an operational endorsement.

The daily cash count of cash register receipts made by department


supervisors is an
example of
a. other controls.
b. independent internal verification.
c. establishment of responsibility.
d. segregation of duties.

9.
The use of remittance advices for mail receipts is an example of
a. documentation procedures.
b. other controls.
c. physical controls.
d. independent internal verification.

Allowing only designated personnel to handle cash receipts is an example of


a. establishment of responsibility.
b. segregation of duties.
c. documentation procedures.
d. independent internal verification.

Control over cash disbursements is generally more effective when


a. all bills are paid in cash.
b. disbursements are made by the accounts payable subsidiary clerk.
c. payments are made by check.
d. all purchases are made on credit.

Reconciling the bank statement monthly is an example of


a. segregation of duties.
b. independent internal verification.
c. establishment of responsibility.
d. documentation procedures.

10.
An exception to disbursements being made by check is acceptable when cash
is paid
a. to an owner.
b. to employees as wages.
c. from petty cash.
d. to employees as loans.

Allowing only the treasurer to sign checks is an example of


a. documentation procedures.
b. separation of duties.
c. other controls.
d. establishment of responsibility.

Blank checks
a. should be safeguarded.
b. should be pre-signed.
c. do not need to be safeguarded since they must be signed to be valid.
d. should not be pre-numbered.

An employee authorized to sign checks should not record


a. owner cash contributions.
b. mail receipts.
c. cash disbursement transactions.
d. sales transactions.

11.
A voucher system is a series of prescribed control procedures
a. to check the credit worthiness of customers.
b. designed to assure that disbursements by check are proper.
c. which eliminates the need for a sales journal.
d. specifically designed for small firms who may not have checking accounts.

Under a voucher system, a prenumbered voucher is prepared for every


a. cash receipt, regardless of source.
b. transaction entered into by the business.
c. expenditure except those made from petty cash.
d. journal entry.

A credit balance in Cash Over and Short is reported as a(n)


a. asset.
b. liability.
c. miscellaneous expense.
d. miscellaneous revenue.

The entry to replenish a petty cash fund includes a credit to


a. Petty Cash.
b. Cash.
c. Freight-in.
d. Postage Expense.

12.
A debit balance in Cash Over and Short is reported as a
a. contra asset.
b. miscellaneous asset.
c. miscellaneous expense.
d. miscellaneous revenue.

A petty cash fund of $100 is replenished when the fund contains $4 in cash
and receipts
for $93. The entry to replenish the fund would
a. credit Cash Over and Short for $3.
b. credit Miscellaneous Revenue for $3.
c. debit Cash Over and Short for $3.
d. debit Miscellaneous Expense for $3.

A petty cash fund is generally established in order to


a. pay for all merchandise purchased on account.
b. pay employees’ wages.
c. make loans internally to employees.
d. pay relatively small expenditures.

A petty cash fund should be replenished


a. every day.
b. at the end of every accounting period.
c. once a year.
d. as soon as an expense is paid from the fund.

13.
A petty cash fund should not be used for
a. postage due.
b. loans to the petty cash custodian.
c. taxi fares.
d. customer lunches.

The size of the petty cash fund is dependent on


a. the wishes of the custodian of the fund.
b. anticipated disbursements for the year.
c. anticipated disbursements for a three- to four-week period.
d. the size of the regular cash account.
Replenishing the petty cash fund requires
a. a debit to Cash.
b. a credit to Petty Cash.
c. a debit to various expense accounts.
d. no accounting entry.

Entries are made to the Petty Cash account when


a. establishing the fund.
b. making payments out of the fund.
c. recording shortages in the fund.
d. replenishing the fund.

14.
All of the following are parties to a check except the
a. bank.
b. Federal Reserve.
c. maker.
d. payee.

When opening a bank checking account, a signature card


a. indicates to whom money is to be paid.
b. indicates each person authorized to sign checks on the account.
c. is attached to all pre-printed checks.
d. is required only when dealing with an out-of-state bank.

Which one of the following is not necessarily a party to a check?


a. Maker
b. Buyer
c. Payee
d. Payer

A bank statement
a. lets a depositor know the financial position of the bank as of a certain date.
b. is a credit reference letter written by the depositor's bank.
c. is a bill from the bank for services rendered.
d. shows the activity which increased or decreased the depositor's account
balance.

15.
Which one of the following would not cause a bank to debit a depositor's
account?
a. Bank service charge
b. Collection of a note receivable
c. Wiring of funds to other locations
d. Checks marked NSF

A company maintains the asset account, Cash in Bank, on its books, while the
bank
maintains a reciprocal account which is
a. a contra-asset account.
b. a liability account.
c. also an asset account.
d. an owner's equity account.

A remittance advice attached to a company check provides


a. details about the running cash balance in the checking account.
b. the magnetic bank routing numbers.
c. the explanation of the purpose of the check.
d. the signature space for the maker.

A deposit made by a company will appear on the bank statement as a


a. debit.
b. credit.
c. debit memorandum.
d. credit memorandum.

16.
A check returned by the bank marked "NSF" means
a. no service fee.
b. no signature found.
c. not satisfactorily filled-out.
d. not sufficient funds.

A debit memorandum would not be issued by the bank for


a. a bank service charge.
b. the issuance of traveler's checks.
c. the wiring of funds.
d. the collection of a notes receivable.

On a bank reconciliation, deposits in transit are


a. added to the bank balance.
b. deducted from the bank balance.
c. added to the book balance.
d. deducted from the book balance.

A bank reconciliation should be prepared


a. whenever the bank refuses to lend the company money.
b. when an employee is suspected of fraud.
c. to explain any difference between the depositor's balance per books with
the balance
per bank.
d. by the person who is authorized to sign checks.

17.
Deposits in transit
a. have been recorded on the company's books but not yet by the bank.
b. have been recorded by the bank but not yet by the company.
c. have not been recorded by the bank or the company.
d. are checks from customers which have not yet been received by the
company.
In preparing a bank reconciliation, outstanding checks are
a. added to the balance per bank.
b. deducted from the balance per books.
c. added to the balance per books.
d. deducted from the balance per bank.

If a check correctly written and paid by the bank for $438 is incorrectly
recorded on the
company's books for $483, the appropriate treatment on the bank
reconciliation would be to
a. add $45 to the bank's balance.
b. add $45 to the book's balance.
c. deduct $45 from the bank's balance.
d. deduct $438 from the book's balance.

Notification by the bank that a deposited customer check was returned NSF
requires that
the company make the following adjusting entry:
a. Accounts Receivable
Cash
b. Cash
Accounts Receivable
c. Miscellaneous Expense
Accounts Receivable
d. No adjusting entry is necessary.

18.
Dolan Company had checks outstanding totaling $5,400 on its June bank
reconciliation. In July, Dolan Company issued checks totaling $38,900. The
July bank statement shows
that $26,300 in checks cleared the bank in July. A check from one of Dolan
Company's
customers in the amount of $300 was also returned marked "NSF." The
amount of
outstanding checks on Dolan Company's July bank reconciliation should be
a. $12,600.
b. $18,000.
c. $17,700.
d. $7,200.

Each of the following items affect the cash balance per books except
a. bank service charges.
b. notes collected by the bank.
c. NSF checks.
d. outstanding checks.

Grant Company gathered the following reconciling information in preparing


its July bank
reconciliation:
Cash balance per books, 7/31 $3,500
Deposits-in-transit 150
Notes receivable and interest collected by bank 850
Bank charge for check printing 20
Outstanding checks 2,000
NSF check 170
The adjusted cash balance per books on July 31 is
a. $4,160.
b. $4,010.
c. $2,310.
d. $2,460.

Zebb Company developed the following reconciling information in preparing


its September
bank reconciliation:
Cash balance per bank, 9/30 $12,000
Note receivable collected by bank 6,000
Outstanding checks 9,000
Deposits-in-transit 4,500
Bank service charge 75
NSF check 1,200
Determine the cash balance per books (before adjustments) for Zebb
Company.
a. $8,775.
b. $16,500.
c. $2,775.
d. $12,000.

19.
Bank errors
a. occur because of time lags.
b. must be corrected by debits.
c. are infrequent in occurrence.
d. are corrected by making an adjusting entry on the depositor's books.

An adjusting entry is not required for


a. outstanding checks.
b. collection of a note by the bank.
c. NSF checks.
d. bank service charges.

Cash equivalents include each of the following except


a. bank certificates of deposit.
b. money market funds.
c. petty cash.
d. U.S. Treasury bills.

Which of the following would not be reported on the balance sheet as a cash
equivalent?
a. Money market fund
b. Sixty-day certificate of deposit
c. Six-month Treasury bill
d. Money market savings certificate

20.
Compensating balances are a restriction on the use of a company's cash and
should be
a. reported as a current asset.
b. reported as a noncurrent asset.
c. disclosed in the financial statements.
d. reported as a reduction of cash.

The principles of internal control include all of the following except


a. establishment of responsibility.
b. combining of duties.
c. physical, mechanical, and electronic controls.
d. independent internal verification.

An example of poor internal control is


a. The accountant should not have physical custody of the asset nor access
to it.
b. The custodian of an asset should not maintain or have access to the
accounting
records.
c. One person should be responsible for handling related transactions.
d. A salesperson should make the sale, and a different person ships the
goods.

Having different individuals receive cash, record cash receipts, and hold the
cash is an
example of
a. establishment of responsibility.
b. segregation of duties.
c. documentation procedures.
d. independent internal verification.

21.
Storing cash in a company safe is an application of which internal control
principle?
a. Segregation of duties
b. Documentation procedures
c. Physical controls
d. Establishment of responsibility

Using pre-numbered checks and having an approved invoice for each check is
an
example of
a. establishment of responsibility.
b. segregation of duties.
c. documentation procedures.
d. independent internal verification.

An application of good internal control over cash disbursements is


a. following payment, the approved invoice should be stamped “paid”.
b. blank checks should be stored in the treasurer's desk.
c. each check should be compared with the approved invoice after the check
is issued.
d. check signers should record the cash disbursements.

When making a payment from the petty cash fund for postage stamps, the
following
journal entry is made.
a. Office Supplies ......................... XXXX
Petty Cash ........................ XXXX
b. Postage Expense ..................... XXXX
Petty Cash ........................ XXXX
c. Miscellaneous Expense............ XXXX
Petty Cash ........................ XXXX
d. No entry is made.

22.
All of the following would involve a debit memorandum except
a. a bank service charge.
b. an NSF check.
c. the cost of printing checks.
d. interest earned.

A bank may issue a credit memoranda for


a. a bank service charge.
b. an NSF (not sufficient funds) check from a customer.
c. the collection of a note receivable for the depositor by the bank.
d. the cost of printing checks.

Journal entries are required by the depositor for all of the following except
a. collection of a note receivable.
b. bank errors.
c. bank service charges.
d. an NSF check.

Cash equivalents are highly liquid investments that can be converted into a
specific
amount of cash with maturities of
a. 1 month or less when purchased.
b. 3 months or less when purchased.
c. 6 months or less when purchased.
d. 1 year or less when purchased.

RECEIVABLE
23.
Claims for which formal instruments of credit are issued as proof of the debt
are
a. accounts receivable.
b. interest receivable.
c. notes receivable.
d. other receivables.

Interest is usually associated with


a. accounts receivable.
b. notes receivable.
c. doubtful accounts.
d. bad debts.

The receivable that is usually evidenced by a formal instrument of credit is


a(n)
a. trade receivable.
b. note receivable.
c. accounts receivable.
d. income tax receivable.

Which of the following receivables would not be classified as an "other


receivable"?
a. Advance to an employee
b. Refundable income tax
c. Notes receivable
d. Interest receivable

24.
Notes or accounts receivables that result from sales transactions are often
called
a. sales receivables.
b. non-trade receivables.
c. trade receivables.
d. merchandise receivables.

The term "receivables" refers to


a. amounts due from individuals or companies.
b. merchandise to be collected from individuals or companies.
c. cash to be paid to creditors.
d. cash to be paid to debtors.

A cash discount is usually granted to all of the following except


a. customers.
b. retailers.
c. wholesalers.
d. All of these are granted discounts.

Which one of the following is not a primary problem associated with accounts
receivable?
a. Depreciating accounts receivable
b. Recognizing accounts receivable
c. Valuing accounts receivable
d. Disposing of accounts receivable

25.
Trade accounts receivable are valued and reported on the balance sheet
a. in the investment section.
b. at gross amounts less sales returns and allowances.
c. at net realizable value.
d. only if they are not past due.

Three accounting issues associated with accounts receivable are


a. depreciating, returns, and valuing.
b. depreciating, valuing, and collecting.
c. recognizing, valuing, and disposing.
d. accrual, bad debts, and disposing.

Which of the following would require a compound journal entry?


a. To record merchandise returned that was previously purchased on
account.
b. To record sales on account.
c. To record purchases of inventory when a discount is offered for prompt
payment.
d. To record collection of accounts receivable when a cash discount is taken.

Which of the following would be considered as an unlikely occurrence?


a. Manufacturer offers a cash discount to a wholesaler.
b. Wholesaler offers a cash discount to a retailer.
c. Retailer offers a cash discount to a customer.
d. All of these are standard practices.

26
Use the following information for next questions.
A customer charges a treadmill at Hank's Sport Shop. The price is $1,000 and
the financing
charge is 9% per annum if the bill is not paid in 30 days. The customer fails to
pay the bill within
30 days and a finance charge is added to the customer's account.
50. What is the amount of the finance charge?
a. $30.00
b. $7.50
c. $90.00
d. $3.00

The accounts affected by the journal entry made by Hank's Sport Shop to
record the
finance charge are
a. Accounts Receivable
Cash
b. Cash
Finance Receivable
c. Accounts Receivable
Interest Payable
d. Accounts Receivable
Interest Revenue

Which of the following practices by a credit card company results in lower


interest charges
to the cardholder?
a. The card company states interest as a monthly percentage rather than an
annual
percentage.
b. The card company allows a grace period before interest is accrued.
c. The card company allows cardholders to skip payments on their cards.
d. The card company calculates finance charges from the date of purchase to
the date
the amount is paid.

If a department store fails to make the entry to accrue the finance charges
due from
customers,
a. accounts receivable will be overstated.
b. interest revenue will be understated.
c. interest expense will be overstated.
d. interest expense will be understated.

27.
Under the allowance method, writing off an uncollectible account
a. affects only balance sheet accounts.
b. affects both balance sheet and income statement accounts.
c. affects only income statement accounts.
d. is not acceptable practice.

The net amount expected to be received in cash from receivables is termed


the
a. cash realizable value.
b. cash-good value.
c. gross cash value.
d. cash-equivalent value.

If a company fails to record estimated bad debts expense,


a. cash realizable value is understated.
b. expenses are understated.
c. revenues are understated.
d. receivables are understated.

The existing balance in Allowance for Doubtful Accounts is considered in


computing bad
debts expense in the
a. direct write-off method.
b. percentage of receivables basis.
c. percentage of sales basis.
d. percentage of receivables and percentage of sales basis.

28.
When the allowance method is used to account for uncollectible accounts,
Bad Debts
Expense is debited when
a. a sale is made.
b. an account becomes bad and is written off.
c. management estimates the amount of uncollectibles.
d. a customer's account becomes past-due.

When an account becomes uncollectible and must be written off,


a. Allowance for Doubtful Accounts should be credited.
b. Accounts Receivable should be credited.
c. Bad Debts Expense should be credited.
d. Sales should be debited.

The collection of an account that had been previously written off under the
allowance
method of accounting for uncollectibles
a. will increase income in the period it is collected.
b. will decrease income in the period it is collected.
c. requires a correcting entry for the period in which the account was written
off.
d. does not affect income in the period it is collected.

The percentage of sales basis of estimating expected uncollectibles


a. emphasizes the matching of expenses with revenues.
b. emphasizes balance sheet relationships.
c. emphasizes cash realizable value.
d. is not generally accepted as a basis for estimating bad debts.

29.
An aging of a company's accounts receivable indicates that $8,000 are
estimated to be
uncollectible. If Allowance for Doubtful Accounts has a $1,100 credit balance,
the
adjustment to record bad debts for the period will require a
a. debit to Bad Debts Expense for $8,000.
b. debit to Allowance for Doubtful Accounts for $6,900.
c. debit to Bad Debts Expense for $6,900.
d. credit to Allowance for Doubtful Accounts for $8,000.

A debit balance in the Allowance for Doubtful Accounts


a. is the normal balance for that account.
b. indicates that actual bad debt write-offs have exceeded previous
provisions for bad
debts.
c. indicates that actual bad debt write-offs have been less than what was
estimated.
d. cannot occur if the percentage of sales method of estimating bad debts is
used.

Under the direct write-off method of accounting for uncollectible accounts,


Bad Debts
Expense is debited
a. when a credit sale is past due.
b. at the end of each accounting period.
c. whenever a pre-determined amount of credit sales have been made.
d. when an account is determined to be uncollectible.

An alternative name for Bad Debts Expense is


a. Deadbeat Expense.
b. Uncollectible Accounts Expense.
c. Collection Expense.
d. Credit Loss Expense.

30.
A reasonable amount of uncollectible accounts is evidence
a. that the credit policy is too strict.
b. that the credit policy is too lenient.
c. of a sound credit policy.
d. of poor judgments on the part of the credit manager.

Bad Debts Expense is considered


a. an avoidable cost in doing business on a credit basis.
b. an internal control weakness.
c. a necessary risk of doing business on a credit basis.
d. avoidable unless there is a recession.

The best managed companies will have


a. no uncollectible accounts.
b. a very strict credit policy.
c. a very lenient credit policy.
d. some accounts that will prove to be uncollectible.

Two methods of accounting for uncollectible accounts are the


a. allowance method and the accrual method.
b. allowance method and the net realizable method.
c. direct write-off method and the accrual method.
d. direct write-off method and the allowance method.

31.
The allowance method of accounting for uncollectible accounts is required if
a. the company makes any credit sales.
b. bad debts are significant in amount.
c. the company is a retailer.
d. the company charges interest on accounts receivable.
Bad Debts Expense is reported on the income statement as
a. part of cost of goods sold.
b. reducing gross profit.
c. an operating expense.
d. a contra-revenue account.

When the allowance method of accounting for uncollectible accounts is used,


Bad Debts
Expense is recorded
a. in the year after the credit sale is made.
b. in the same year as the credit sale.
c. as each credit sale is made.
d. when an account is written off as uncollectible.

The method of accounting for uncollectible accounts that results in a better


matching of
expenses with revenues is the
a. aging accounts receivable method.
b. direct write-off method.
c. percentage of receivables method.
d. percentage of sales method.

32.
To record estimated uncollectible accounts using the allowance method, the
adjusting
entry would be a
a. debit to Accounts Receivable and a credit to Allowance for Doubtful
Accounts.
b. debit to Bad Debts Expense and a credit to Allowance for Doubtful
Accounts.
c. debit to Allowance for Doubtful Accounts and a credit to Accounts
Receivable.
d. debit to Loss on Credit Sales and a credit to Accounts Receivable.

Under the allowance method of accounting for uncollectible accounts,


a. the cash realizable value of accounts receivable is greater before an
account is written off than after it is written off.
b. Bad Debts Expense is debited when a specific account is written off as
uncollectible.
c. the cash realizable value of accounts receivable in the balance sheet is the
same
before and after an account is written off.
d. Allowance for Doubtful Accounts is closed each year to Income Summary.

Allowance for Doubtful Accounts on the balance sheet


a. is offset against total current assets.
b. increases the cash realizable value of accounts receivable.
c. appears under the heading "Other Assets."
d. is offset against accounts receivable.
When an account is written off using the allowance method, the
a. cash realizable value of total accounts receivable will increase.
b. total accounts receivable will decrease.
c. allowance account will increase.
d. total accounts receivable will stay the same.

33.
If an account is collected after having been previously written off,
a. the allowance account should be debited.
b. only the control account needs to be credited.
c. both income statement and balance sheet accounts will be affected.
d. there will be both a debit and a credit to accounts receivable.

When an account is written off using the allowance method, accounts


receivable
a. is unchanged and the allowance account increases.
b. increases and the allowance account increases.
c. decreases and the allowance account decreases.
d. decreases and the allowance account increases.

Two bases for estimating uncollectible accounts are:


a. percentage of assets and percentage of sales.
b. percentage of receivables and percentage of total revenue.
c. percentage of current assets and percentage of sales.
d. percentage of receivables and percentage of sales.

The percentage of receivables basis for estimating uncollectible accounts


emphasizes
a. cash realizable value.
b. the relationship between accounts receivable and bad debts expense.
c. income statement relationships.
d. the relationship between sales and accounts receivable.

34.
King Company uses the percentage of sales method for recording bad debts
expense. For the year, cash sales are $500,000 and credit sales are
$2,000,000. Management
estimates that 2% is the sales percentage to use. What adjusting entry will
King Company make to record the bad debts expense?
a. Bad Debts Expense ....................................................... 50,000
Allowance for Doubtful Accounts .......................... 50,000
b. Bad Debts Expense ....................................................... 40,000
Allowance for Doubtful Accounts .......................... 40,000
c. Bad Debts Expense ....................................................... 40,000
Accounts Receivable ............................................ 40,000
d. Bad Debts Expense ....................................................... 50,000
Accounts Receivable ............................................ 50,000
The balance of Allowance for Doubtful Accounts prior to making the adjusting
entry to
record estimated uncollectible accounts
a. is relevant when using the percentage of receivables basis.
b. is relevant when using the percentage of sales basis.
c. is relevant to both bases of adjusting for uncollectible accounts.
d. will never show a debit balance at this stage in the accounting cycle.

The direct write-off method of accounting for bad debts


a. uses an allowance account.
b. uses a contra-asset account.
c. does not require estimates of bad debt losses.
d. is the preferred method under generally accepted accounting principles.

Under the direct write-off method of accounting for uncollectible accounts


a. the allowance account is increased for the actual amount of bad debt at
the time of
write-off.
b. a specific account receivable is decreased for the actual amount of bad
debt at the
time of write-off.
c. balance sheet relationships are emphasized.
d. bad debts expense is always recorded in the period in which the revenue
was recorded.

35.
Major advantages of credit cards to the retailer include all of the following
except the
a. issuer does the credit investigation of customers.
b. issuer undertakes the collection process.
c. retailer receives more cash from the credit card issuer.
d. All of these are advantages.

The sale of receivables by a business


a. indicates that the business is in financial difficulty.
b. is generally the major revenue item on its income statement.
c. is an indication that the business is owned by a factor.
d. can be a quick way to generate cash for operating needs.

If a retailer regularly sells its receivables to a factor, the service charge of the
factor
should be classified as a(n)
a. selling expense.
b. interest expense.
c. other expense.
d. contra asset.

If a company sells its accounts receivables to a factor,


a. the seller pays a commission to the factor.
b. the factor pays a commission to the seller.
c. there is a gain on the sale of the receivables.
d. the seller defers recognition of sales revenue until the account is collected.

36.
Major advantages of credit cards to the retailer include all of the following
except the
a. issuer does credit investigation of the customer.
b. issuer maintains customer accounts.
c. retailer receives more cash from the credit card issuer than from the
customer.
d. issuer undertakes the collection process and absorbs any losses.

Receivables might be sold to


a. lengthen the cash-to-cash operating cycle.
b. take advantage of deep discounts on the cash realizable value of
receivables.
c. generate cash quickly.
d. finance companies at an amount greater than cash realizable value.

A company regularly sells its receivables to a factor who assesses a 2%


service charge
on the amount of receivables purchased. Which of the following statements is
true for the seller of the receivables?
a. The loss section of the income statement will increase each time
receivables are sold.
b. The credit to Accounts Receivable is less than the debit to Cash when the
accounts
are sold.
c. Selling expenses will increase each time accounts are sold.
d. The other expense section of the income statement will increase each time
accounts
are sold.

Vernon Furniture factors $600,000 of receivables to Fast Factors, Inc. Fast


Factors
assesses a 2% service charge on the amount of receivables sold. Vernon
Furniture
factors its receivables regularly with Fast Factors. What journal entry does
Vernon make
when factoring these receivables?
a. Cash .............................................................................. 588,000
Loss on Sale of Receivables ......................................... 12,000
Accounts Receivable ............................................ 600,000
b. Cash .............................................................................. 588,000
Accounts Receivable ............................................ 588,000
c. Cash .............................................................................. 600,000
Accounts Receivable ............................................ 588,000
Gain on Sale of Receivables ................................ 12,000
d. Cash .............................................................................. 588,000
Service Charge Expense ............................................... 12,000
Accounts Receivable ............................................ 600,000

37.
When customers make purchases with a national credit card, the retailer
a. is responsible for maintaining customer accounts.
b. is not involved in the collection process.
c. absorbs any losses from uncollectible accounts.
d. receives cash equal to the full price of the merchandise sold from the
credit card
company.

The retailer considers VISA and MasterCard sales as


a. cash sales.
b. promissory sales.
c. credit sales.
d. contingent sales.

The basic issues in accounting for notes receivable include each of the
following except
a. analyzing notes receivable.
b. disposing of notes receivable.
c. recognizing notes receivable.
d. valuing notes receivable.

A 60-day note receivable dated April 13 has a maturity date of


a. June 13.
b. June 12.
c. June 11.
d. June 10.

38.
The maturity value of a $60,000, 10%, 60-day note receivable dated July 3 is
a. $60,000.
b. $66,000.
c. $70,000.
d. $61,000.

A 90-day note dated June 21 has a maturity date of


a. September 21.
b. September 19.
c. September 20.
d. September 22.

A 30-day note dated August 18 has a maturity date of


a. September 18.
b. September 17.
c. September 19.
d. September 16.

A promissory note
a. is not a formal credit instrument.
b. may be used to settle an accounts receivable.
c. has the party to whom the money is due as the maker.
d. cannot be factored to another party.

39.
Which of the following is not true regarding a promissory note?
a. Promissory notes may not be transferred to another party by endorsement.
b. Promissory notes may be sold to another party.
c. Promissory notes give a stronger legal claim to the holder than accounts
receivable.
d. Promissory notes may be bearer notes and not specifically identify the
payee by
name.

The two key parties to a promissory note are the


a. maker and a bank.
b. debtor and the payee.
c. maker and the payee.
d. sender and the receiver.

When calculating interest on a promissory note with the maturity date stated
in terms of
days, the
a. maker pays more interest if 365 days are used instead of 360.
b. maker pays the same interest regardless if 365 or 360 days are used.
c. payee receives more interest if 360 days are used instead of 365.
d. payee receives less interest if 360 days are used instead of 365.

The maturity value of a $2,000, 9%, 60-day note receivable dated February
10th is
a. $2,030.
b. $2,015.
c. $2,000.
c. $2,180.

40.
The interest on a $3,000, 10%, 1-year note receivable is
a. $3,000.
b. $300.
c. $3,030.
d. $3,300.

The maturity value of a $20,000, 8%, 3-month note receivable is


a. $20,400.
b. $20,160.
c. $21,600.
d. $20,133.

Notes receivable are recognized in the accounts at


a. cash (net) realizable value.
b. face value.
c. gross realizable value.
d. maturity value.

A note receivable is a negotiable instrument which


a. eliminates the need for a bad debts allowance.
b. can be transferred to another party by endorsement.
c. takes the place of checks in a business firm.
d. can only be collected by a bank.

41.
A company that receives an interest bearing note receivable will
a. debit Notes Receivable for the maturity value of the note.
b. credit Notes Receivable for the maturity value of the note.
c. debit Notes Receivable for the face value of the note.
d. credit Notes Receivable for the face value of the note.

The face value of a note refers to the amount


a. that can be received if sold to a factor.
b. borrowed plus interest received at maturity from the maker.
c. that is identified on the formal instrument of credit.
d. remaining after a service charge has been deducted.

Seely Company receives a $4,000, 3-month, 8% promissory note from Dodd


Company in settlement of an open accounts receivable. What entry will Seely
Company make upon receiving the note?
a. Notes Receivable............................................................ 4,080
Accounts Receivable—Dodd Company ................. 4,080
b. Notes Receivable............................................................ 4,080
Accounts Receivable—Dodd Company ................. 4,000
Interest Revenue ................................................... 80
c. Notes Receivable............................................................ 4,000
Interest Receivable......................................................... 80
Accounts Receivable—Dodd Company ................. 4,000
Interest Revenue ................................................... 80
d. Notes Receivable............................................................ 4,000
Accounts Receivable—Dodd Company ................. 4,000

When a note is accepted to settle an open account, Notes Receivable is


debited for the
note's
a. net realizable value.
b. maturity value.
c. face value.
d. face value plus interest.

42.
Short-term notes receivable are reported at
a. cash (net) realizable value.
b. face value.
c. gross realizable value.
d. maturity value.

Short-term notes receivables


a. have a related allowance account called Allowance for Doubtful Notes
Receivable.
b. are reported at their gross realizable value.
c. use the same estimations and computations as accounts receivable to
determine cash
realizable value.
d. present the same valuation problems as long-term notes receivables.

When a note receivable is dishonored,


a. interest revenue is never recorded.
b. bad debts expense is recorded.
c. the maturity value of the note is written off.
d. Accounts Receivable is debited if eventual collection is expected.

Jenkins Company lends Newton Company $20,000 on April 1, accepting a


four-month,
9% interest note. Jenkins Company prepares financial statements on April 30.
What
adjusting entry should be made before the financial statements can be
prepared?
a. Note Receivable ............................................................ 20,000
Cash ..................................................................... 20,000
b. Interest Receivable ........................................................ 150
Interest Revenue .................................................. 150
c. Cash .............................................................................. 150
Interest Revenue .................................................. 150
d. Interest Receivable ........................................................ 600
Interest Revenue .................................................. 600

43.
When a note receivable is honored, Cash is debited for the note's
a. net realizable value.
b. maturity value.
c. gross realizable value.
d. face value.

The average collection period for receivables is computed by dividing 365


days by
a. net credit sales.
b. average accounts receivable.
c. ending accounts receivable.
d. accounts receivable turnover ratio.

The average collection period is computed by dividing


a. net credit sales by average gross accounts receivable.
b. net credit sales by ending gross accounts receivable.
c. the accounts receivable turnover ratio by 365 days.
d. 365 days by the accounts receivable turnover ratio.
Additional Multiple-Choice Questions

Which of the following are also called trade receivables?


a. Accounts receivable
b. Other receivables
c. Advances to employees
d. Income taxes refundable

44.
On February 1, 2005, Dickens Company sells merchandise on account to
Livingston
Company for $5,000. The entry to record this transaction by Dickens
Company is
a. Sales .................................................................................... 5,000
Accounts Payable ......................................................... 5,000
b. Cash..................................................................................... 5,000
Sales ............................................................................. 5,000
c. Accounts Receivable............................................................ 5,000
Sales ............................................................................. 5,000
d. Notes Receivable ................................................................. 5,000
Accounts Receivable ....................................................
5,000

Writing off an uncollectible account under the allowance method requires a


debit to
a. Accounts Receivable.
b. Allowance for Doubtful Accounts.
c. Bad Debts Expense.
d. Uncollectible Accounts Expense.

When the allowance method of recognizing bad debts expense is used, the
entry to
recognize that expense
a. increases net income.
b. decreases current assets.
c. has no effect on current assets.
d. has no effect on net income.

The direct write-off method


a. is acceptable for financial reporting purposes.
b. debits Allowance for Doubtful Accounts to record write-offs of accounts.
c. shows only actual losses from uncollectible accounts receivable.
d. estimates bad debt losses.

45.
Voight Company's account balances at December 31 for Accounts Receivable
and
Allowance for Doubtful Accounts were $1,400,000 and $70,000 (Cr.),
respectively. An
aging of accounts receivable indicated that $128,000 are expected to
become
uncollectible. The amount of the adjusting entry for bad debts at December
31 is
a. $128,000.
b. $58,000.
c. $198,000.
d. $70,000.

In recording the sale of accounts receivable, the commission charged by a


factor is
recorded as
a. Bad Debts Expense.
b. Commission Expense.
c. Loss on Sale of Receivables.
d. Service Charge Expense.

Gudenas Co., makes a credit card sale to a customer for $500. The credit
card sale has a grace period of 30 days and then an interest charge of 18%
per year or 1.5% per month is added to the balance. If the unpaid balance on
the above sale is $300 at the end of the grace period, the interest charge is
a. $7.50.
b. $5.00.
c. $3.00.
d. $4.50.

The interest rate specified on any note is for a


a. day.
b. month.
c. week.
d. year.

46.
On February 1, Kline Company received a $6,000, 10%, four-month note
receivable. The cash to be received by Kline Company when the note
becomes due is
a. $200.
b. $6,000.
c. $6,200.
d. $6,600.

The entry to record the dishonor of a note receivable assuming the payee
expects
eventual collection includes a debit to
a. Notes Receivable.
b. Cash.
c. Allowance for Doubtful Accounts.
d. Accounts Receivable.
Which of the following statements concerning receivables is incorrect?
a. Notes receivable are often listed last under receivables.
b. The contingent liability from selling notes receivable should be disclosed.
c. Both the gross amount of receivables and the allowance for doubtful
accounts should
be reported.
d. Interest revenue and gain on sale of notes receivable are shown under
other
revenues and gains.

The accounts receivable turnover ratio is computed by dividing


a. total sales by average gross accounts receivable.
b. net credit sales by average gross accounts receivable.
c. total sales by ending gross accounts receivable.
d. net credit sales by ending gross accounts receivable.

INVENTORY
47.
Inventories affect
a. only the balance sheet.
b. only the income statement.
c. both the balance sheet and the income statement.
d. neither the balance sheet nor the income statement.

Merchandise inventory is
a. reported under the classification of Property, Plant, and Equipment on the
balance
sheet.
b. often reported as a miscellaneous expense on the income statement.
c. reported as a current asset on the balance sheet.
d. generally valued at the price for which the goods can be sold.

Items waiting to be used in production are considered to be


a. raw materials.
b. work in progress.
c. finished goods.
d. merchandise inventory.

In a manufacturing business, inventory that is ready for sale is called


a. raw materials inventory.
b. work in process inventory.
c. finished goods inventory.
d. store supplies inventory.

48.
The factor which determines whether or not goods should be included in a
physical count of inventory is
a. physical possession.
b. legal title.
c. management's judgment.
d. whether or not the purchase price has been paid.

If goods in transit are shipped FOB destination


a. the seller has legal title to the goods until they are delivered.
b. the buyer has legal title to the goods until they are delivered.
c. the transportation company has legal title to the goods while the goods are
in transit.
d. no one has legal title to the goods until they are delivered.

An auto manufacturer would classify vehicles in various stages of production


as
a. finished goods.
b. merchandise inventory.
c. raw materials.
d. work in process.

Independent internal verification of the physical inventory process occurs


when
a. the employee is required to count all items twice for sake of verification.
b. the items counted are compared to the inventory account balance.
c. a second employee counts the inventory and compares the result to the
count made
by the first employee.
d. all prenumbered inventory tags are accounted for.

49.
An employee assigned to counting computer monitors in boxes should
a. estimate the number if there is a large quantity to be counted.
b. read each box and rely on the box description for the contents.
c. determine that the box contains a monitor.
d. rely on the warehouse records of the number of computer monitors.

After the physical inventory is completed,


a. quantities are listed on inventory summary sheets.
b. quantities are entered into various general ledger inventory accounts.
c. the accuracy of the inventory summary sheets is checked by the person
listing the
quantities on the sheets.
d. unit costs are determined by dividing the quantities on the summary
sheets by the
total inventory costs.

A recommended internal control procedure for taking physical inventories is


that the
counting should be done by employees who do not have custodial
responsibility for the
inventory. This is an example of what type of internal control procedure?
a. Establishment of responsibility
b. Documentation procedure
c. Independent internal verification
d. Segregation of duties

Westcoe Company's goods in transit at December 31 include:


sales made purchases made
(1) FOB destination (3) FOB destination
(2) FOB shipping point (4) FOB shipping point
Which items should be included in Westcoe's inventory at December 31?
a. (2) and (3)
b. (1) and (4)
c. (1) and (3)
d. (2) and (4)

50.
The term "FOB" denotes
a. free on board.
b. freight on board.
c. free only (to) buyer.
d. freight charge on buyer.

Under a consignment arrangement, the


a. consignor has ownership until goods are sold to a customer.
b. consignor has ownership until goods are shipped to the consignee.
c. consignee has ownership when the goods are in the consignee's
possession.
d. consigned goods are included in the inventory of the consignee.

Inventoriable costs include all of the following except the


a. freight costs incurred when buying inventory.
b. costs of the purchasing and warehousing departments.
c. cost of the beginning inventory.
d. cost of goods purchased.

Beginning inventory plus the cost of goods purchased equals


a. cost of goods sold.
b. cost of goods available for sale.
c. net purchases.
d. total goods purchased.

51.
Cost of goods sold is computed from the following equation:
a. beginning inventory – cost of goods purchased + ending inventory.
b. sales – cost of goods purchased + beginning inventory – ending inventory.
c. sales + gross profit – ending inventory + beginning inventory.
d. beginning inventory + cost of goods purchased – ending inventory

A company just starting in business purchased three merchandise inventory


items at the
following prices. First purchase $80; Second purchase $95; Third purchase
$85. If the
company sold two units for a total of $240 and used FIFO costing, the gross
profit for the
period would be
a. $65.
b. $75.
c. $60.
d. $50.

The LIFO inventory method assumes that the cost of the latest units
purchased are
a. the last to be allocated to cost of goods sold.
b. the first to be allocated to ending inventory.
c. the first to be allocated to cost of goods sold.
d. not allocated to cost of goods sold or ending inventory.

A company purchased inventory as follows:


200 units at $7
300 units at $8
The average unit cost for inventory is
a. $7.00.
b. $7.50.
c. $7.60.
d. $8.00.

52.
Use the following information for next questions.
A company just starting business made the following four inventory
purchases in June:
June 1 150 units $ 780
June 10 200 units 1,170
June 15 200 units 1,260
June 28 150 units 990
$4,200
A physical count of merchandise inventory on June 30 reveals that there are
200 units on hand.

Using the LIFO inventory method, the value of the ending inventory on June
30 is
a. $1,073.
b. $1,305.
c. $2,895.
d. $3,128.

Using the FIFO inventory method, the amount allocated to cost of goods sold
for June is
a. $1,305.
b. $2,545.
c. $2,895.
d. $3,128.
Using the average cost method, the amount allocated to the ending inventory
on June 30 is
a. $4,200.
b. $3,000.
c. $1,150.
d. $1,200.

The inventory method which results in the highest gross profit for June is
a. the FIFO method.
b. the LIFO method.
c. the weighted average unit cost method.
d. not determinable.

53.
Which of the following items will increase inventoriable costs for the buyer of
goods?
a. Purchase returns and allowances granted by the seller
b. Purchase discounts taken by the purchaser
c. Freight charges paid by the seller
d. Freight charges paid by the purchaser

Inventoriable costs may be thought of as a pool of costs consisting of which


two
elements?
a. The cost of beginning inventory and the cost of ending inventory
b. The cost of ending inventory and the cost of goods purchased during the
year
c. The cost of beginning inventory and the cost of goods purchased during
the year
d. The difference between the costs of goods purchased and the cost of
goods sold
during the year

The cost of goods available for sale is allocated between


a. beginning inventory and ending inventory.
b. beginning inventory and cost of goods on hand.
c. ending inventory and cost of goods sold.
d. beginning inventory and cost of goods purchased.

Vic's Used Cars uses the specific identification method of costing inventory.
During
March, Vic purchased three cars for $4,000, $5,000, and $6,500, respectively.
During
March, two cars are sold for $6,000 each. Vic determines that at March 31,
the $6,500 car is still on hand. What is Vic’s gross profit for March?
a. $3,500.
b. $3,000.
c. $500.
d. $5,500.
54.
Of the following companies, which one would not likely employ the specific
identification
method for inventory costing?
a. Music store specializing in organ sales
b. Farm implement dealership
c. Antique shop
d. Hardware store

A problem with the specific identification method is that


a. inventories can be reported at actual costs.
b. management can manipulate income.
c. matching is not achieved.
d. the lower of cost or market basis cannot be applied.

The selection of an appropriate inventory cost flow assumption for an


individual company is made by
a. the external auditors.
b. the SEC.
c. the internal auditors.
d. management.

Which one of the following inventory methods is often impractical to use?


a. Specific identification
b. LIFO
c. FIFO
d. Average cost

55.
Which of the following is not a common cost flow assumption used in costing
inventory?
a. First-in, first-out
b. Middle-in, first-out
c. Last-in, first-out
d. Average cost

The accounting principle that requires that the cost flow assumption be
consistent with the physical movement of goods is
a. called the matching principle.
b. called the consistency principle.
c. nonexistent; that is, there is no accounting requirement.
d. called the physical flow assumption.

Which of the following statements is true regarding inventory cost flow


assumptions?
a. A company may use more than one costing method concurrently.
b. A company must comply with the method specified by industry standards.
c. A company must use the same method for domestic and foreign
operations.
d. A company may never change its inventory costing method once it has
chosen a
method.

Which of the following statements is correct with respect to inventories?


a. The FIFO method assumes that the costs of the earliest goods acquired are
the last to
be sold.
b. It is generally good business management to sell the most recently
acquired goods
first.
c. Under FIFO, the ending inventory is based on the latest units purchased.
d. FIFO seldom coincides with the actual physical flow of inventory.

56.
The cost of goods available for sale is allocated to the cost of goods sold and
the
a. beginning inventory.
b. ending inventory.
c. cost of goods purchased.
d. gross profit.

Companies adopt different cost flow methods for each of the following
reasons except
a. balance sheet effects.
b. cash flow effects.
c. income statements effects.
d. tax effects.

In periods of rising prices, the inventory method which results in the


inventory value on the
balance sheet that is closest to current cost is the
a. FIFO method.
b. LIFO method.
c. average cost method.
d. tax method.

Two companies report the same cost of goods available for sale but each
employs a
different inventory costing method. If the price of goods has increased during
the period,
then the company using
a. LIFO will have the highest ending inventory.
b. FIFO will have the highest cost of good sold.
c. FIFO will have the highest ending inventory.
d. LIFO will have the lowest cost of goods sold.

57.
If companies have identical inventoriable costs but use different inventory
flow
assumptions when the price of goods have not been constant, then the
a. cost of goods sold of the companies will be identical.
b. cost of goods available for sale of the companies will be identical.
c. ending inventory of the companies will be identical.
d. net income of the companies will be identical.

In a period of increasing prices, which inventory flow assumption will result in


the lowest
amount of income tax expense?
a. FIFO
b. LIFO
c. Average Cost
d. Income tax expense for the period will be the same under all assumptions.

The specific identification method of costing inventories is used when the


a. physical flow of units cannot be determined.
b. company sells large quantities of relatively low cost homogeneous items.
c. company sells large quantities of relatively low cost heterogeneous items.
d. company sells a limited quantity of high-unit cost items.

The specific identification method of inventory costing


a. always maximizes a company's net income.
b. always minimizes a company's net income.
c. has no effect on a company's net income.
d. may enable management to manipulate net income.

58.
The managers of Teng Company receive performance bonuses based on the
net income of the firm. Which inventory costing method are they likely to
favor in periods of declining prices?
a. LIFO
b. Average Cost
c. FIFO
d. Physical inventory method

In periods of inflation, phantom or paper profits may be reported as a result


of using the
a. perpetual inventory method.
b. FIFO costing assumption.
c. LIFO costing assumption.
d. periodic inventory method.

Selection of an inventory costing method by management does not usually


depend on
a. the fiscal year end.
b. income statement effects.
c. balance sheet effects.
d. tax effects.
In a period of rising prices, the costs allocated to ending inventory may be
understated in
the
a. average cost method.
b. FIFO method.
c. gross profit method.
d. LIFO method.

59.
The accountant at Kline Company is figuring out the difference in income
taxes the
company will pay depending on the choice of either FIFO or LIFO as an
inventory costing method. The tax rate is 30% and the FIFO method will
result in income before taxes of $3,640. The LIFO method will result in
income before taxes of $3,290. What is the difference in tax that would be
paid between the two methods?
a. $350.
b. $150.
c. $105.
d. Cannot be determined from the information provided.

The accountant at Carey Company has determined that income before


income taxes
amounted to $4,500 using the FIFO costing assumption. If the income tax
rate is 30% and the amount of income taxes paid would be $150 greater if
the LIFO assumption were used, what would be the amount of income before
taxes under the LIFO assumption?
a. $4,650.
b. $5,000.
c. $4,060.
d. $4,350.

The manager of Wyatt Company is given a bonus based on income before


income taxes. Net income, after taxes, is $4,200 for FIFO and $3,780 for LIFO.
The tax rate is 30%. The bonus rate is 20%. How much higher is the
manager's bonus if FIFO is adopted instead of LIFO?
a. $150.
b. $200.
c. $120.
d. $420.

The consistent application of an inventory costing method is essential for


a. conservatism.
b. accuracy.
c. comparability.
d. efficiency.

60.
Which costing method cannot be used to determine the cost of inventory
items before
lower of cost or market is applied?
a. Specific identification
b. FIFO
c. LIFO
d. All of these methods can be used.

Inventory is reported in the financial statements at


a. cost.
b. market.
c. the higher of cost or market.
d. the lower of cost or market.

The lower of cost or market basis of valuing inventories is an example of


a. comparability.
b. the cost principle.
c. conservatism.
d. consistency.

Under the lower of cost or market basis in valuing inventory, market is


defined as
a. current replacment cost.
b. selling price.
c. historical cost plus 10%.
d. selling price less markup.

61.
The lower of cost or market (LCM) basis may be be used with all of the
following methods except
a. average cost.
b. FIFO.
c. LIFO.
d. The LCM basis may be used with all of these.

Isaac Company developed the following information about its inventories in


applying the
lower of cost or market (LCM) basis in valuing inventories:
Product Cost Market
A $55,000 $60,000
B 40,000 38,000
C 80,000 81,000
If Isaac applies the LCM basis, the value of the inventory reported on the
balance sheet
would be
a. $175,000.
b. $171,000.
c. $173,000.
d. $181,000.

Understating beginning inventory will understate


a. assets.
b. cost of goods sold.
c. net income.
d. owner's equity.

An error in the physical count of goods on hand at the end of a period


resulted in a
$10,000 overstatement of the ending inventory. The effect of this error in the
current
period is
Cost of Goods Sold Net Income
a. Understated Understated
b. Overstated Overstated
c. Understated Overstated
d. Overstated Understated

62.
If beginning inventory is understated by $10,000, the effect of this error in
the current
period is
Cost of Goods Sold Net Income
a. Understated Understated
b. Overstated Overstated
c. Understated Overstated
d. Overstated Understated

A company uses the periodic inventory method and the beginning inventory
is overstated by $4,000 because the ending inventory in the previous period
was overstated by $4,000.
The amounts reflected in the current end of the period balance sheet are
Assets Owner’s Equity
a. Overstated Overstated
b. Correct Correct
c. Understated Understated
d. Overstated Correct

Overstating ending inventory will overstate all of the following except


a. assets.
b. cost of goods sold.
c. net income.
d. owner's equity.

Disclosures about inventory should include each of the following except the
a. basis of accounting.
b. costing method.
c. quantity of inventory.
d. major inventory classifications.

63.
Inventory turnover is calculated by dividing cost of goods sold by
a. beginning inventory.
b. ending inventory.
c. average inventory.
d. 365 days.

The following information is available for Tye Company at December 31,


2005: beginning inventory $80,000; ending inventory $120,000; cost of
goods sold $1,200,000; and sales $1,600,000. Tye’s inventory turnover in
2005 is
a. 16 times.
b. 15 times.
c. 12 times.
d. 10 times.

A new average cost is computed each time a purchase is made in the


a. average cost method.
b. moving-average cost method.
c. weighted-average cost method.
d. all of these methods.
When valuing ending inventory under a perpetual inventory system, the
a. valuation using the LIFO assumption is the same as the valuation using the
LIFO
assumption under the periodic inventory system.
b. moving average requires that a new average be computed after every
sale.
c. valuation using the FIFO assumption is the same as under the periodic
inventory
system.
d. earliest units purchased during the period using the LIFO assumption are
allocated to
the cost of goods sold when units are sold.

64.
The Jansen Company uses the perpetual inventory system and the moving
average
method to value inventories. On August 1, there were 10,000 units valued at
$30,000 in
the beginning inventory. On August 10, 20,000 units were purchased for $6
per unit. On
August 15, 24,000 units were sold for $12 per unit. The amount charged to
cost of goods
sold on August 15 was
a. $80,000.
b. $120,000.
c. $144,000.
d. $108,000.
Under the gross profit method, each of the following items are estimated
except for the
a. cost of ending inventory.
b. cost of goods sold.
c. cost of goods purchased.
d. gross profit.
Under the retail inventory method, the estimated cost of ending inventory is
computed by
multiplying the cost-to-retail ratio by
a. net sales.
b. goods available for sale at retail.
c. goods purchased at retail.
d. ending inventory at retail.
Inventories are estimated
a. more frequently under a periodic inventory system than a perpetual
inventory system.
b. using the wholesale inventory method.
c. more frequently under a perpetual inventory system than the periodic
inventory
system.
d. using the net method.

65.
Nolan Department Store estimates inventory by using the retail inventory
method. The
following information was developed:
At Cost At Retail
Beginning inventory $212,000 $500,000
Goods purchased 600,000 900,000
Net sales 800,000
The estimated cost of the ending inventory is
a. $464,000.
b. $348,000.
c. $588,000.
d. $600,000.

Watson Department Store utilizes the retail inventory method to estimate its
inventories. It calculated its cost to retail ratio during the period at 75%.
Goods available for sale at retail amounted to $200,000 and goods were sold
during the period for $125,000. The
estimated cost of the ending inventory is
a. $75,000.
b. $150,000.
c. $56,250.
d. $100,000.

Farr Company prepares monthly financial statements and uses the gross
profit method to estimate ending inventories. Historically, the company has
had a 40% gross profit rate. During June, net sales amounted to $40,000; the
beginning inventory on June 1 was $12,000; and the cost of goods purchased
during June amounted to $18,000. The
estimated cost of Farr Company's inventory on June 30 is
a. $6,000.
b. $24,000.
c. $10,000
d. $16,000.

Goods in transit should be included in the inventory of the buyer when the
a. public carrier accepts the goods from the seller.
b. goods reach the buyer.
c. terms of sale are FOB destination.
d. terms of sale are FOB shipping point.

66.
Inventory items on an assembly line in various stages of production are
classified as
a. Finished goods.
b. Work in process.
c. Raw materials.
d. Merchandise inventory.

The cost flow method that often parallels the actual physical flow of
merchandise is the
a. FIFO method.
b. LIFO method.
c. average cost method.
d. gross profit method.

Rudolf Diesel Company's inventory records show the following data:


Units Unit Cost
Inventory, January 1 5,000 $9.00
Purchases: June 18 4,500 8.00
November 8 3,000 7.00
A physical inventory on December 31 shows 4,000 units on hand. Under the
FIFO
method, the December 31 inventory is
a. $28,000.
b. $29,000.
c. $32,000.
d. $36,000.

In a period of inflation, the cost flow method that results in the lowest income
taxes is the
a. FIFO method.
b. LIFO method.
c. average cost method.
d. gross profit method.

67.
In a period of rising prices, FIFO will have
a. lower net income than LIFO.
b. lower cost of goods sold than LIFO.
c. lower income tax expense than LIFO.
d. lower net purchases than LIFO.

Under the LCM approach, the market value is defined as


a. FIFO cost.
b. LIFO cost.
c. current replacement cost.
d. selling price.

Euler Company made an inventory count on December 31, 2005. During the
count, one of the clerks made the error of counting an inventory item twice.
For the balance sheet at
December 31, 2005, the effects of this error are
Assets Liabilities Owner’s Equity
a. overstated understated overstated
b. understated no effect understated
c. overstated no effect overstated
d. overstated overstated understated

The inventory turnover ratio is computed by dividing cost of goods sold by


a. beginning inventory.
b. ending inventory.
c. average inventory.
d. 365 days.

68.
Pearson Company's records indicate the following information for the year:
Merchandise inventory, 1/1 $ 440,000
Purchases 1,800,000
Net Sales 2,400,000
On December 31, a physical inventory determined that ending inventory of
$480,000 was in the warehouse. Pearson's gross profit on sales has remained
constant at 30%. Pearson suspects some of the inventory may have been
taken by some new employees. At December 31, what is the estimated cost
of missing inventory?
a. $80,000.
b. $160,000.
c. $240,000.
d. $560,000.

In order to minimize errors when taking a physical inventory, each inventory


counter
should be required to establish the authenticity of each inventory item. This
is an
application of the internal control principle of
a. documentation procedures.
b. independent internal verification.
c. segregation of duties.
d. establishment of responsibility.
Which statement is false regarding the lower of cost or market (LCM) method
of
inventory?
a. Market is defined as current replacement cost, not selling price.
b. LCM is an example of the accounting concept of conservatism.
c. LCM is applied to individual items listed on the inventory summary sheets.
d. All of the above are true regarding LCM.

Proponents of LIFO, as opposed to FIFO, point out that LIFO results in


a. lower income taxes in a period of deflation.
b. a more current cost of goods sold.
c. lower net income in a period of deflation.
d. higher net income in periods of inflation.