Accounting Quiz 201 Exam Questions!

The FIFO (First-In, First-Out) method is an inventory costing method where the first costs into inventory are the first costs out to cost of goods sold. This means that the oldest inventory is sold first, while the newer inventory remains in stock. This method assumes that the costs of the oldest inventory are matched with the revenue from the earliest sales, resulting in a more accurate calculation of the cost of goods sold and ending inventory.

The cost of the inventory that the business has sold to customers is called Cost of Goods Sold. This represents the direct expenses incurred in producing the goods or services that were sold during a specific period. It includes the cost of raw materials, direct labor, and overhead costs directly attributable to production. By deducting the cost of goods sold from the revenue generated by sales, the business can calculate its gross profit.

The consistency principle in accounting states that a business should use the same accounting methods and procedures consistently from one period to another. This principle ensures that financial statements are comparable and can be relied upon by users. By maintaining consistency, businesses can provide accurate and reliable financial information, which is essential for making informed decisions. This principle also helps in maintaining transparency and reducing the risk of manipulation or bias in financial reporting.

Under a perpetual inventory system, a company continuously tracks its inventory levels and records all transactions related to inventory in real-time. When a sale is made, the company needs to record both the sale amount and the cost of goods sold. This is because the cost of goods sold represents the expense incurred by the company to produce or purchase the goods that were sold. Therefore, a journal entry is made to record both the sale and the cost of goods sold, ensuring accurate financial reporting and inventory management.

The cost of inventory includes the purchase price, freight-in, and sales taxes paid on the purchase. This means that when calculating the cost of inventory, these three factors need to be taken into account. The purchase price refers to the actual cost of acquiring the inventory, while freight-in represents the transportation costs associated with bringing the inventory to the business. Sales taxes paid on the purchase are also included in the cost of inventory, as they are directly related to the acquisition of the inventory. Advertising costs, sales commissions, and insurance while in transit are not included in the cost of inventory.

The balance in the inventory account as of September 30 would be equal to the 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. This is because the perpetual inventory system continuously updates the inventory account with each purchase and sale, and the balance at any given time represents the total value of inventory on hand. Therefore, the balance at September 30 would include the beginning inventory, all purchases made during the year, and deduct any items that have been sold.

Calculations: 32,000/8,000=4 per unit

The perpetual inventory system is the correct answer because it uses computer software to continuously track and update the inventory on hand in real-time. This system allows for accurate and up-to-date information about inventory levels, helping businesses to efficiently manage their inventory, minimize stockouts, and improve overall inventory control. Unlike the periodic inventory system, which requires physical counts of inventory at regular intervals, the perpetual system relies on technology to automatically update inventory records as sales and purchases occur. The cost of goods sold inventory system and hybrid inventory system are not accurate descriptions of the inventory system that uses computer software to keep a running record of inventory.

Freight-in is added to the purchase price of the inventory to determine net purchases. Freight-in refers to the cost of transporting the inventory from the supplier to the buyer's location. It is considered a part of the cost of acquiring the inventory and is therefore added to the purchase price. This allows for a more accurate calculation of the total cost of the inventory and helps in determining the profitability of the business.

The largest expense on the income statement for most merchandising companies is the cost of goods sold. This refers to the direct costs associated with producing or purchasing the products that are sold by the company. It includes expenses such as the cost of raw materials, manufacturing costs, and direct labor. This expense is significant because it directly impacts the company's gross profit and ultimately its net income. Administrative expenses and selling expenses are also important expenses for merchandising companies, but they are typically smaller in comparison to the cost of goods sold. Other expenses refer to miscellaneous expenses that do not fall into the other categories.

Exter Co. receives terms of 2/10, n/30 on all invoices from Garn Industries. This means that if Exter pays the invoice within 10 days, they can take a 2% discount. In this case, the invoice was paid on January 28, 2011, which is 13 days after the purchase date. Since this is beyond the 10-day discount period, Exter would not be eligible for any purchase discount. Therefore, the correct answer is $0.

The correct answer is "inventory, a current asset that appears on the balance sheet." This is because inventory refers to the goods or products that a company holds for sale in its normal course of business. It is considered a current asset because it is expected to be converted into cash within a year. The balance sheet is a financial statement that shows a company's assets, liabilities, and shareholders' equity at a specific point in time, and inventory is reported as a current asset on the balance sheet.

A merchandising company buys and sells goods, so it needs to track the cost of the goods it sells, which is recorded as the cost of goods sold. This account is not needed by a service company that does not have physical products to sell. Additionally, a merchandising company needs to track the value of its inventory, which represents the goods it has on hand for sale. This account is also not needed by a service company that does not have inventory. Therefore, the correct answer is cost of goods sold and inventory.

The choice of an inventory costing method will affect the ending inventory and cost of goods sold. This is because the inventory costing method determines how the cost of inventory is allocated between the ending inventory and the cost of goods sold. Different methods, such as FIFO (First In, First Out) or LIFO (Last In, First Out), will result in different values for ending inventory and cost of goods sold. Therefore, the choice of inventory costing method directly impacts these two financial measures.

Sales revenue is based on the selling price of the inventory, as it represents the total amount of money generated from the sales of goods or services. On the other hand, the cost of goods sold is based on the cost of the inventory, which includes all the expenses incurred in producing or acquiring the inventory. Therefore, the correct answer is "sales, cost".

Purchase returns, purchase allowances, and purchase discounts are subtracted from the purchase price of the inventory to determine net purchases. This is because these items represent reductions in the cost of the inventory. Purchase returns are goods that are returned to the supplier, purchase allowances are price reductions granted by the supplier, and purchase discounts are discounts offered for prompt payment. By subtracting these amounts from the purchase price, the company can calculate the net amount spent on purchasing inventory.

The formula used to calculate net purchases is Purchases less Purchase Returns and Allowances less Purchase Discounts plus freight-in. This formula takes into account the total purchases made, subtracts any returns or allowances given by the supplier, subtracts any discounts received, and adds any freight-in charges incurred. The resulting value represents the net amount spent on purchases after adjusting for these factors.

The average-cost method calculates the average cost per unit by dividing the cost of goods available for sale by the number of units available for sale. This method takes into account both the cost of goods that are sold and the cost of goods that remain in ending inventory. By dividing the total cost by the total number of units, it provides an average cost per unit that can be used to value the inventory.

The correct application of the lower-of-cost-or-market rule means that the ending inventory should be valued at the lower of its cost or its market value. In this case, the cost of replacing the ending inventory is $100,000, but the ending inventory balance is only $87,500. Therefore, the ending inventory balance will be $87,500. Additionally, the cost of goods sold should be the original cost of $60,000, as the lower-of-cost-or-market rule does not affect the cost of goods sold.

The cost-of-goods sold model is calculated by adding the beginning inventory to the purchases and then subtracting the ending inventory. This equation helps determine the total cost of goods sold during a specific period.

The correct answer is Cash, $1,000. When recording the sale of inventory for cash, the company would debit the Cash account to reflect the increase in cash received. Since the inventory was sold for $1,000 per unit, the Cash account would be debited for $1,000.

If the ending inventory for the year ended December 31, 2010, is overstated by $10,000, it means that the value of inventory on hand at the end of the year was higher than it actually was. This overstatement of inventory will result in a lower cost of goods sold for the year 2010. Since net income is calculated by subtracting expenses, including the cost of goods sold, from revenue, a lower cost of goods sold will result in a higher net income for 2010. However, since the ending inventory was overstated, it means that some of the inventory that was actually sold in 2010 was recorded as still being on hand. Therefore, in 2011, when the correct inventory value is recognized and deducted from the cost of goods sold, it will result in an understatement of net income by $10,000.

When a company purchases merchandise inventory on credit, it increases its inventory asset. Therefore, the journal entry to record the purchase of inventory would include a debit to the Inventory account. This debit entry reflects the increase in inventory value due to the purchase.

The FIFO (First-In, First-Out) costing method assumes that the first items purchased are the first ones sold. When inventory prices are increasing, the FIFO method will result in older, lower-cost items being sold first, which in turn leads to a lower cost of goods sold. On the other hand, the LIFO (Last-In, First-Out) method assumes that the last items purchased are the first ones sold. When inventory prices are increasing, the LIFO method will result in newer, higher-cost items being sold first, leading to a higher cost of goods sold. Therefore, the FIFO costing method will generally yield a cost of goods sold that is lower than the cost of goods sold under the LIFO method.

A periodic inventory system is used for inexpensive goods because it is not cost-effective to track each individual item. It is not expensive to maintain because it does not require sophisticated software or continuous monitoring. This system does not keep a running record of inventory on hand because it only requires periodic physical counts. Therefore, the correct answer is that a periodic inventory system is all of the above.

Purchase returns and allowances and purchase discounts both have a negative impact on net purchases. When there are purchase returns and allowances, it means that some of the purchased goods were returned or allowances were given, resulting in a decrease in the total purchases. Similarly, purchase discounts represent a reduction in the amount paid for the purchases, thus also decreasing the net purchases. Therefore, both purchase returns and allowances and purchase discounts are subtracted from purchases to calculate the net purchases.

After a company computes gross profit, it subtracts operating expenses on the income statement. Operating expenses include costs such as rent, utilities, salaries, and other expenses directly related to the day-to-day operations of the business. Subtracting these expenses from the gross profit gives the company its operating income or operating profit. This calculation helps determine the profitability of the company's core operations, excluding other factors like interest and taxes. Therefore, the correct answer is operating expenses.

If the ending inventory for 2010 is understated, it means that the value of inventory at the end of that year is recorded lower than it should be. This will result in a lower cost of goods sold for 2010, which in turn will increase net income for that year. However, since the error is carried forward to 2011, the beginning inventory for that year will be understated. As a result, the cost of goods sold for 2011 will be higher, leading to lower net income for that year. Therefore, the correct answer is 2010 understated; 2011 overstated.

Under a perpetual inventory system, the purchase of merchandise on credit is recorded by debiting the inventory account and crediting the accounts payable account. This entry reflects the increase in inventory due to the purchase and the increase in the liability to the supplier for the amount owed.

The cost of merchandise sold on credit would be recorded by debiting the cost of goods sold account and crediting the inventory account. This entry reflects the decrease in inventory as the goods are sold and the corresponding increase in the cost of goods sold.

When the ending inventory at cost is greater than the market value of the ending inventory, it indicates that the inventory is overvalued. To adjust for this difference, a debit entry is made to the Cost of Goods Sold (COGS) account and a credit entry is made to the Inventory account. This adjustment reduces the value of the inventory on the balance sheet and recognizes the lower market value of the inventory in the income statement through an increase in COGS.

Cos of Goods Sold 800
Inventory 800

Calculations: cost of goods sold per unit = 1,000*.80= 800
Total sales = 1,000*20 = 20,000
Total CGS= 800*20= 16,000
Gross profit = 20,000-16,000=4,000

When the FIFO (First-In, First-Out) method is used, ending inventory is assumed to consist of the most recently purchased units. This means that the units that were most recently acquired by the company are considered to be part of the ending inventory. This assumption is based on the idea that the units that were purchased most recently are likely to be sold first, leaving behind the older units in the inventory. Therefore, when valuing the ending inventory, the cost of the most recently purchased units is used.

When applying the lower-of-cost-or-market rule, market value generally refers to the current replacement cost. This means that the inventory should be valued at the cost to replace it with similar goods at the current market prices. This ensures that the inventory is not overvalued and reflects its true economic value. The other options, such as FIFO cost using the periodic method, LIFO cost using the periodic method, and current sales price of the inventory, do not necessarily reflect the current replacement cost and may not be accurate representations of the inventory's value.

The cost of inventory is the sum of all the costs incurred to bring the inventory to its intended use, less any discounts and allowances. This means that it includes all the expenses associated with acquiring, transporting, storing, and preparing the inventory for sale or use. Discounts and allowances are subtracted from the total cost, as they reduce the overall expense of acquiring the inventory. This answer implies that the cost of inventory is not just limited to the purchase price, but also includes other expenses related to its acquisition and preparation.

The lower-of-cost-or-market rule requires a company to report inventories at the lesser of historical cost or current replacement cost. This means that if the current replacement cost of an inventory item is lower than its historical cost, the company should report the inventory at the lower replacement cost. This rule ensures that inventories are reported at a conservative value, reflecting any declines in market value. It helps prevent overstatement of inventory values on the balance sheet, which could lead to misleading financial statements.

The gross profit rate is calculated by dividing the gross profit by the net sales revenue. This ratio helps to determine the profitability of a company's core operations. By dividing the gross profit (which is the revenue minus the cost of goods sold) by the net sales revenue, we get a percentage that represents the profit generated from each dollar of sales. This ratio is important for businesses to assess their pricing strategies, cost management, and overall financial performance.

When the LIFO (Last-In, First-Out) method is used and there is no LIFO liquidation, it means that the most recently purchased units are assumed to be sold first. This is because under the LIFO method, the cost of goods sold is based on the most recent inventory purchases. Therefore, the correct answer is that the cost of goods sold consists of the most recently purchased units.

The perpetual inventory system is a method of tracking inventory that provides a continuous record of inventory on hand. Unlike the periodic inventory system, which requires a physical count of the ending inventory, the perpetual system updates inventory levels in real-time as goods are bought or sold. This allows businesses to have an accurate and up-to-date understanding of their inventory levels at any given time. The perpetual system is a recommended practice and is commonly used by businesses to efficiently manage their inventory.

If year-end inventory is reduced from cost to a lower replacement cost, it means that the cost of goods sold will be increased. This is because the lower replacement cost will be used to calculate the cost of goods sold, resulting in a higher expense. Additionally, the ending inventory will be decreased by the same amount as the reduction in year-end inventory. This is because the reduction in year-end inventory is reflected in the ending inventory balance. Therefore, the correct answer is that the cost of goods sold is increased and the ending inventory is decreased by the same amount.