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Accounting 201 - Chapter 6

41 Questions
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Chapter 6 study guide

Questions and Answers
  • 1. 
    The largest expense on the income statement for most merchandising companies is:
    • A. 

      Administrative expenses.

    • B. 

      Selling expenses.

    • C. 

      Cost of goods sold.

    • D. 

      Other expenses.

  • 2. 
    The cost of the inventory that the business has sold to customers is called:
    • A. 

      Inventory.

    • B. 

      Cost of Goods Sold.

    • C. 

      Purchases

    • D. 

      Gross Profit.

  • 3. 
    The cost of inventory that is still on hand and has NOT been sold to customers is called:
    • A. 

      Cost of goods sold, and it appears on the balance sheet.

    • B. 

      Inventory, a current asset that appears on the income statement.

    • C. 

      Inventory, a current asset that appears on the balance sheet.

    • D. 

      Cost of goods sold, and it appears on the income statement.

  • 4. 
    Two accounts that would appear on the financial statements of a merchandising company that are not needed by a service company are:
    • A. 

      Cost of goods sold and depreciation.

    • B. 

      Cost of goods sold and net income.

    • C. 

      Cost of goods sold and inventory.

    • D. 

      Inventory and depreciation.

  • 5. 
    Sales revenue is based on the _________ price of the inventory, while cost of goods sold is based on the __________ of the inventory.
    • A. 

      Cost, sales

    • B. 

      Cost, cost

    • C. 

      Sales, sales

    • D. 

      Sales, cost

  • 6. 
    On the income statement, after a company computes gross profit, it subtracts:
    • A. 

      Cost of goods sold.

    • B. 

      Inventory.

    • C. 

      Operating expenses.

    • D. 

      All of the above.

  • 7. 
    A periodic inventory system:
    • A. 

      Is used for inexpensive goods.

    • B. 

      Is not expensive to maintain.

    • C. 

      Does not keep a running record of inventory on hand.

    • D. 

      Is all of the above.

  • 8. 
    The inventory system that uses computer software to keep a running record of inventory on hand is the:
    • A. 

      Cost of goods sold inventory system.

    • B. 

      Periodic inventory system.

    • C. 

      Perpetual inventory system.

    • D. 

      Hybrid inventory system.

  • 9. 
     Under a perpetual inventory system, when a sale is made:
    • A. 

      The company makes a journal entry to record the sale only.

    • B. 

      The company makes a journal entry to record only the cost of goods sold.

    • C. 

      The company makes a journal entry to record the sale and the cost of goods sold.

    • D. 

      No journal entry needs to be made.

  • 10. 
    How do purchase returns and allowances and purchase discounts affect net purchases?
    • A. 

      Both are added to purchases.

    • B. 

      Both are subtracted from purchases.

    • C. 

      Purchase returns and allowances are added to purchases; purchase discounts are subtracted from purchases.

    • D. 

      Purchase returns and allowances are subtracted from purchases; purchase discounts are added to purchases.

  • 11. 
    Exter Co. receives terms of 2/10, n/30 on all invoices from Garn Industries. On January 15, 2011, Exter purchased items from Garn for $4,200, excluding taxes and shipping costs. What amount would Exter use as the purchase discount if the invoice was paid on January 28, 2011?
    • A. 

      $ $0 13 DAYS

    • B. 

      $ 84

    • C. 

      $4,116

    • D. 

      $4,200

  • 12. 
    What is the formula used to calculate net purchases?
    • 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 Purchases

  • 13. 
    Unlike the periodic inventory system, the perpetual inventory system:
    • A. 

      Does not require a physical count of the ending inventory.

    • B. 

      Provides a continuous record of inventory on hand.

    • C. 

      Provides a continuous record of inventory on hand.

    • D. 

      Is not required by GAAP.

  • 14. 
    • A. 

      Sales discounts accounts payable

    • B. 

      Cost of goods sold purchase discounts

    • C. 

      Cost of goods sole inventory

    • D. 

      Inventory cost of goods sold

  • 15. 
    • A. 

      Purchases account payable

    • B. 

      Inventory account payable

    • C. 

      Purchases cost of goods sold

    • D. 

      Sales accounts receivable

  • 16. 
    A company purchased inventory for $800 per unit.  The inventory was marked up to sell for $1,000 per unit.    The entry to record the cost of a unit of inventory would include debits to which of the following accounts?
    • A. 

      Inventory, $800

    • B. 

      Cost of Goods Sold, $800

    • C. 

      Cost of Goods Sold, $1,000

    • D. 

      Inventory, $800

  • 17. 
    BMX Co. sells item XJ15 for $1,000 per unit, and has a cost of goods sold percentage of 80%.  The gross   profit to be found for selling 20 items:
    • A. 

      Is $20,000.

    • B. 

      Is $16,000.

    • C. 

      Is $ 4,000.

    • D. 

      Cannot be calculated with a cost of goods sold percentage greater than 50%.

  • 18. 
    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:
    • A. 

      Accounts Receivable.

    • B. 

      Inventory.

    • C. 

      Accounts Payable.

    • D. 

      Cost of Goods Sold.

  • 19. 
     Which of the following is added to the purchase price of the inventory to determine net purchases?
    • A. 

      Freight-out

    • B. 

      Freight-in

    • C. 

      Purchase returns

    • D. 

      Purchase discounts

  • 20. 
    Which of the following are subtracted from the purchase price of the inventory to determine net purchases?
    • A. 

      Freight-out and freight-in

    • B. 

      Purchase returns, purchase allowances and freight-in

    • C. 

      Purchase returns, purchase allowances, and purchase discounts

    • D. 

      None of the above

  • 21. 
    Bonz, Inc. is using a perpetual inventory system with a December 31 year end date.  The balance in this company’s inventory account as of September 30 would be equal to:
    • A. 

      Beginning inventory as of January 01.

    • B. 

      Beginning inventory as of January 01 plus all purchases from the beginning of the year through September 30, less all items sold from the beginning of the year through September 30.

    • C. 

      Beginning inventory as of January 01 plus all purchases from the beginning of the year through September 30.

    • D. 

      All purchases from the beginning of the year through September 30.

  • 22. 
    The cost of inventory is the:
    • A. 

      Purchase price.

    • B. 

      Sum of all the costs incurred to bring the inventory to its intended use.

    • C. 

      Sum of all the costs incurred to bring the inventory to its intended use, plus any discounts and allowances.

    • D. 

      Sum of all the costs incurred to bring the inventory to its intended use, less any discounts and allowances.

  • 23. 
    The choice of an inventory costing method will affect:
    • A. 

      The ending inventory.

    • B. 

      The cost of goods sold.

    • C. 

      The ending inventory and cost of goods sold.

    • D. 

      None of the above

  • 24. 
    When the FIFO method is used, ending inventory is assumed to consist of the:
    • A. 

      Units with the lowest per unit cost.

    • B. 

      Units with the highest per unit cost.

    • C. 

      Oldest units.

    • D. 

      Most recently purchased units.

  • 25. 
    When the LIFO method is used and there is no LIFO liquidation, the cost of goods sold is assumed to consist of:
    • A. 

      Units with the lowest per unit cost.

    • B. 

      Units with the highest per unit cost.

    • C. 

      Oldest units.

    • D. 

      Most recently purchased units.

  • 26. 
    When inventory prices are increasing, the FIFO costing method will generally yield a cost of goods sold that is:
    • A. 

      Higher than cost of goods sold under the LIFO method.

    • B. 

      Lower than cost of goods sold under the LIFO method.

    • C. 

      Equal to the gross profit under the LIFO method.

    • D. 

      Equal to cost of goods sold under the LIFO method.

  • 27. 
    The inventory costing method by which the first costs into inventory are the first costs out to cost of goods sold is the:
    • A. 

      Average-cost method.

    • B. 

      FIFO method.

    • C. 

      LIFO method.

    • D. 

      Specific-identification method.

  • 28. 
    When using the average-cost method to determine the cost of inventory, the average cost per unit is calculated as the cost of goods:
    • A. 

      In ending inventory, divided by the number of units in ending inventory.

    • B. 

      Sold, divided by the number of units sold.

    • C. 

      Cost of goods available for sale, divided by the number of units available for sale.

    • D. 

      Sold, divided by the average number of units in inventory.

  • 29. 
    The accounting principle that states that a business should use the same accounting methods and procedures from period to period is the:
    • A. 

      Consistency principle.

    • B. 

      Historical cost principle.

    • C. 

      Disclosure principle.

    • D. 

      Conservatism principle.

  • 30. 
    The lower-of-cost-or-market rule requires a company to report inventories at the lesser of:
    • A. 

      Historical cost or current sales price.

    • B. 

      Historical cost or current replacement cost.

    • C. 

      Current replacement cost or sales invoice price.

    • D. 

      FIFO cost or LIFO cost.

  • 31. 
    When applying the lower-of-cost-or-market rule, market value generally refers to:
    • 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.

  • 32. 
    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:
    • A. 

      Is $40.

    • B. 

      Is $4.

    • C. 

      Is $8.

    • D. 

      Cannot be determined from the data.

  • 33. 
    The cost of inventory includes the:
    • A. 

      Purchase price, advertising costs and sales commissions.

    • B. 

      Purchases price, freight-in and sales taxes paid on the purchase.

    • C. 

      Purchase price, advertising costs and insurance while in transit.

    • D. 

      Purchase price, delivery costs and sales commissions.

  • 34. 
    A company purchased inventory for $800 per unit.  The inventory was marked up to sell for $1,000 per unit.  The entry to record the sale for cash would include a debit to which of the following accounts?
    • A. 

      Sales, $1,000

    • B. 

      Cash, $1,000

    • C. 

      Cash, $800

    • D. 

      Sales, $800

  • 35. 
    Pat and Company’s ending inventory (at cost) was $87,500.  The company would have had to pay $100,000 to replace the ending inventory.  Before consideration of the lower-of-cost-or-market rule, the company’s cost of goods sold was $60,000. Which of the following statements reflect the correct application of the lower-of-cost-or-market rule?
    • A. 

      The Ending Inventory balance will be $100,000, and Cost of Goods Sold will be $72,500.

    • 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.

  • 36. 
    If year-end inventory is reduced from cost to a lower replacement cost, which of the following accurately depicts the results?
    • A. 

      The capital account balance is increased and beginning inventory of the next period is reduced by the same amount.

    • B. 

      Cost of goods sold is reduced and beginning inventory of the next period is reduced by the same amount.

    • C. 

      Year-end inventory is reduced and cost of goods sold is reduced by the same amount.

    • D. 

      Cost of goods sold is increased and ending inventory is decreased by the same amount.

  • 37. 
    Bronx Company’s ending inventory (at cost) was greater than the market value of the ending inventory.  What adjusting entry is required to account for this difference?              Debit                            credit
    • A. 

      Cost of goods sold sales

    • B. 

      Inventory cost of goods sold

    • C. 

      Cost of goods sold inventory

    • D. 

      No adjusting entry is required.

  • 38. 
    The gross profit rate is calculated as:
    • A. 

      Cost of goods sold divided by net sales revenue.

    • B. 

      Net sales revenue minus gross profit on sales.

    • C. 

      Net sales revenue minus cost of goods sold.

    • D. 

      Gross profit divided by net sales revenue.

  • 39. 
    The cost-of-goods sold model is:
    • A. 

      Beginning inventory, plus purchases, plus ending inventory equals cost of goods sold.

    • B. 

      Beginning inventory, less purchases, less ending inventory equals cost of goods sold.

    • C. 

      Beginning inventory, plus purchases, less ending inventory equals cost of goods sold.

    • D. 

      Beginning inventory, less purchases, plus ending inventory equals cost of goods sold

  • 40. 
    Ending inventory for the year ended December 31, 2010, is overstated by $10,000.  How will this affect net income for 2011?
    • A. 

      Net income for 2011 will be understated by $10,000.

    • B. 

      Net income for 2011 will be overstated by $10,000.

    • C. 

      Net income for 2011 will be understated by $20,000.

    • D. 

      Net income for 2011 will be overstated by $20,000.

  • 41. 
    Ending inventory for the year ended December 31, 2010, is understated.  How will this error affect net income for 2010 and 2011?
    • A. 

      2010 overstated; 2011 understated

    • B. 

      2010 understated; 2011 overstated

    • C. 

      2010 overstated; 2011 no effect

    • D. 

      2010 understated; 2011 no effect