ACCY 111: Accounting Exam! Quiz

1. Alison's dress shop buys dresses from McGuire Manufacturing. Alison purchased dresses from McGuire on July 17, and received an invoice with a list price amount of $6,200 and payment terms of 3/10, n/30. Alison uses the net method to record purchases. Alison should record the purchase at:

$3,007

$6,386

$6,014

$6,200

$6,200 × 97% = $6,014

Explanation

$6,200 × 97% = $6,014

2. The inventory method that will always produce the same amount for the cost of goods sold in a periodic inventory system as in a perpetual inventory system would be:

FIFO

LIFO

Weighted Average

None of these

FIFO (First-In, First-Out) is the inventory method that will always produce the same amount for the cost of goods sold in a periodic inventory system as in a perpetual inventory system. This is because FIFO assumes that the first items purchased are the first ones sold, regardless of the actual order of sales. In both periodic and perpetual systems, the cost of goods sold is calculated by multiplying the cost of the oldest inventory items by the quantity sold. Therefore, FIFO will yield the same result in both inventory systems.

Explanation

FIFO (First-In, First-Out) is the inventory method that will always produce the same amount for the cost of goods sold in a periodic inventory system as in a perpetual inventory system. This is because FIFO assumes that the first items purchased are the first ones sold, regardless of the actual order of sales. In both periodic and perpetual systems, the cost of goods sold is calculated by multiplying the cost of the oldest inventory items by the quantity sold. Therefore, FIFO will yield the same result in both inventory systems.

3. Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made the following purchases (listed in chronological order of acquisition):
• 40 units at $110 • 72 units at $78 • 170 units at $56
Sales for the year totaled 271 units, leaving 11 units on hand at the end of the year.
Ending inventory using the LIFO method is

$666.

$616

$1,210

$762

11 units × $110 = $1,210.

Explanation

11 units × $110 = $1,210.

4. The use of LIFO in accounting for a firm's inventory:

Usually matches the physical flow of goods through the business

Is usually used for internal mgmt purposes

Usually provides a better match of expenses with revenues

None of these is correct

The use of LIFO (Last-In, First-Out) in accounting for a firm's inventory usually provides a better match of expenses with revenues. This is because under the LIFO method, the most recent or last inventory purchases are assumed to be sold first. As a result, the cost of goods sold reflects the current or recent costs, which better aligns with the revenues generated from the sale of those goods. This helps in accurately matching the expenses incurred in producing the goods with the corresponding revenues earned from their sale.

Explanation

The use of LIFO (Last-In, First-Out) in accounting for a firm's inventory usually provides a better match of expenses with revenues. This is because under the LIFO method, the most recent or last inventory purchases are assumed to be sold first. As a result, the cost of goods sold reflects the current or recent costs, which better aligns with the revenues generated from the sale of those goods. This helps in accurately matching the expenses incurred in producing the goods with the corresponding revenues earned from their sale.

5. The primary reason for the popularity of LIFO is that it:

Simplifies record keeping

Saves income taxes currently

Provides better matching of physical flow and cost flow

Provides a permanent reduction of income taxes

The popularity of LIFO is primarily due to its ability to save income taxes currently. LIFO, or Last-In, First-Out, assumes that the most recently acquired inventory is sold first. This results in higher costs being matched with current revenues, which reduces taxable income and ultimately lowers the amount of income tax owed. This tax-saving advantage makes LIFO an attractive choice for businesses, especially those with fluctuating inventory costs.

Explanation

The popularity of LIFO is primarily due to its ability to save income taxes currently. LIFO, or Last-In, First-Out, assumes that the most recently acquired inventory is sold first. This results in higher costs being matched with current revenues, which reduces taxable income and ultimately lowers the amount of income tax owed. This tax-saving advantage makes LIFO an attractive choice for businesses, especially those with fluctuating inventory costs.

6. Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made the following purchases (listed in chronological order of acquisition):
• 40 units at $90 • 70 units at $83 • 171 units at $60
Sales for the year totaled 272 units, leaving 9 units on hand at the end of the year.
Ending inventory using the FIFO method is:

$590

$810

$540

$630

9 units × $60 = $540.

Explanation

9 units × $60 = $540.

7. In a periodic inventory system, the cost of inventories sold is:

Not recorded at the time of sale

Debited to cost of goods sold

Debited to accounts receivable

Credited to cost of goods sold

In a periodic inventory system, the cost of inventories sold is not recorded at the time of sale. This is because in a periodic inventory system, the cost of goods sold is determined at the end of the accounting period through a physical count of inventory. Therefore, the cost of inventories sold is not immediately debited to any specific account at the time of sale. Instead, it is recorded later when the physical count is conducted and the cost of goods sold is calculated.

Explanation

In a periodic inventory system, the cost of inventories sold is not recorded at the time of sale. This is because in a periodic inventory system, the cost of goods sold is determined at the end of the accounting period through a physical count of inventory. Therefore, the cost of inventories sold is not immediately debited to any specific account at the time of sale. Instead, it is recorded later when the physical count is conducted and the cost of goods sold is calculated.

8. Nu Company reported the following pretax data for its first year of operations.

Net sales	2,990
Cost of goods available for sale	2,330
Operating expenses	860
Effective tax rate	40%
Ending inventories:
If LIFO is elected	950
If FIFO is elected	1,160

What is Nu's gross profit ratio if it elects LIFO? (Round your answer to the nearest whole percentage.)

19%

61%

54%

66%

Net sales $2,990
Cost of goods sold ($2,330 – $950) 1,380
Gross profit 1,610
Gross profit ratio:
$1,610/$2,990 = 54%

Explanation

Net sales $2,990
Cost of goods sold ($2,330 – $950) 1,380
Gross profit 1,610
Gross profit ratio:
$1,610/$2,990 = 54%

9. Thompson TV and Appliance reported the following in its 2009 financial statements:

	2009
Sales	$436,000
Cost of goods sold:
Inventory, January 1	75,000
Net purchases	329,000
Goods available for sale	404,000
Inventory, December 31	86,000
Cost of goods sold	318,000
Gross profit	$118,000

Thompson's 2009 inventory turnover ratio is

3.7

5.07

3.95

5.42

$318,000 ÷ [($75,000 + 86,000) ÷ 2] = 3.95

Explanation

$318,000 ÷ [($75,000 + 86,000) ÷ 2] = 3.95

10. In a perpetual inventory system, the cost of inventory sold is

Credit to Cost of Goods Sold

Debited to Accounts Receivable

Debited to Cost of Goods Sold

Not recorded at the time

In a perpetual inventory system, the cost of inventory sold is debited to the Cost of Goods Sold account. This means that the cost of the goods that were sold is recorded as an expense in the accounting records. By debiting the Cost of Goods Sold account, the company is able to accurately track the cost of the goods that were sold and calculate its gross profit. This information is important for financial reporting and decision-making purposes.

Explanation

In a perpetual inventory system, the cost of inventory sold is debited to the Cost of Goods Sold account. This means that the cost of the goods that were sold is recorded as an expense in the accounting records. By debiting the Cost of Goods Sold account, the company is able to accurately track the cost of the goods that were sold and calculate its gross profit. This information is important for financial reporting and decision-making purposes.

11. When reported in financial statements, a LIFO allowance account usually:

Indicates the effect on insome if LIFO were not used

Is shown in the firm's income statement

Is added to LIFO cost to indicate what the inventory would cost on a FIFO bases

Shows the current rate of inflation for tha asset

The LIFO allowance account is used to adjust the LIFO (last-in, first-out) cost of inventory to reflect what it would cost on a FIFO (first-in, first-out) basis. This adjustment is necessary because LIFO assumes that the most recently acquired inventory is sold first, which can result in a lower cost of goods sold and higher ending inventory. By adding the LIFO allowance to the LIFO cost, the financial statements can show what the inventory would have cost if it was sold on a FIFO basis, providing a more accurate representation of the company's financial position.

Explanation

The LIFO allowance account is used to adjust the LIFO (last-in, first-out) cost of inventory to reflect what it would cost on a FIFO (first-in, first-out) basis. This adjustment is necessary because LIFO assumes that the most recently acquired inventory is sold first, which can result in a lower cost of goods sold and higher ending inventory. By adding the LIFO allowance to the LIFO cost, the financial statements can show what the inventory would have cost if it was sold on a FIFO basis, providing a more accurate representation of the company's financial position.

12. Nu Company reported the following pretax data for its first year of operations.

Net sales	2,810
Cost of goods available for sale	2,370
Operating expenses	800
Effective tax rate	30%
Ending inventories:
If LIFO is elected	930
If FIFO is elected	1,160

What is Nu's net income if it elects FIFO?

$1,600

$399

$560

$800

Feedback: Net sales $2,810
Cost of goods sold ($2,370 – $1,160) 1,210
Gross profit 1,600
Operating expenses 800
Income before taxes 800
Income tax ($800 × 30%) 240
Net income $560

Explanation

Feedback: Net sales $2,810
Cost of goods sold ($2,370 – $1,160) 1,210
Gross profit 1,600
Operating expenses 800
Income before taxes 800
Income tax ($800 × 30%) 240
Net income $560

13. If a company uses LIFO, a LIFO liquidation is problematic for a company's income taxes:

Whether inventory purchase costs are declining or rising

LIFO liquidations are not problematic for a company's income taxes

When inventory purchase costs are rising

When inventory purchase costs are declining

When inventory purchase costs are rising, a LIFO liquidation becomes problematic for a company's income taxes. This is because LIFO (Last-In, First-Out) assumes that the most recently purchased inventory is sold first. In a rising cost environment, this means that older, lower-cost inventory is being sold, resulting in higher profits and higher taxable income. However, if a LIFO liquidation occurs, it means that the company is selling its older inventory that was purchased at lower costs. This leads to a reduction in the cost of goods sold and artificially inflates the profits, resulting in higher taxable income and potentially higher taxes for the company.

Explanation

When inventory purchase costs are rising, a LIFO liquidation becomes problematic for a company's income taxes. This is because LIFO (Last-In, First-Out) assumes that the most recently purchased inventory is sold first. In a rising cost environment, this means that older, lower-cost inventory is being sold, resulting in higher profits and higher taxable income. However, if a LIFO liquidation occurs, it means that the company is selling its older inventory that was purchased at lower costs. This leads to a reduction in the cost of goods sold and artificially inflates the profits, resulting in higher taxable income and potentially higher taxes for the company.

14. Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made the following purchases (listed in chronological order of acquisition):
• 45 units at $106 • 75 units at $72 • 175 units at $51
Sales for the year totaled 273 units, leaving 22 units on hand at the end of the year.
Ending inventory using the average cost method is

$1,424.

$1,172

$1,122

$2,332

[(45 × $106) + (75 × $72) + (175 × $51)] = $19,095 ÷ 295 units = $64.73 per unit
22 units × $64.73 = $1,424 (rounded)

Explanation

[(45 × $106) + (75 × $72) + (175 × $51)] = $19,095 ÷ 295 units = $64.73 per unit
22 units × $64.73 = $1,424 (rounded)

15. Bond Company adopted the dollar-value LIFO inventory method on January 1, 2009. In applying the LIFO method, Bond uses internal cost indexes and the multiple-pools approach. The following data were available for Inventory Pool No. 3 for the two years following the adoption of LIFO:

Ending Inventory
At Current		At Base
Year	Cost	Year Cost	Cost index
1/1/09	$303,500	$303,500	1
12/31/09	351,540	325,500	1.08
12/31/10	420,000	350,000	1.2

Under the dollar-value LIFO method the inventory at December 31, 2010, should be

$356,660

$350,000

$351,760

None of these

Base layer: $303,500 × 1 = $303,500
2009 layer: $22,000 × 1.08 = 23,760
2010 layer: $24,500 × 1.2 = 29,400
=$356,660

Explanation

Base layer: $303,500 × 1 = $303,500
2009 layer: $22,000 × 1.08 = 23,760
2010 layer: $24,500 × 1.2 = 29,400
=$356,660

16. Nu Company reported the following pretax data for its first year of operations.

Net sales	2,820
Cost of goods available for sale	2,490
Operating expenses	740
Effective tax rate	30%
Ending inventories:
If LIFO is elected	820
If FIFO is elected	1,080

$287

$469

$410.

$670

Feedback: Net sales $2,820
Cost of goods sold ($2,490 – 820) 1,670
Gross profit 1,150
Operating expenses 740
Income before taxes 410
Income tax ($410 × 30%) 123
Net income $287

Explanation

Feedback: Net sales $2,820
Cost of goods sold ($2,490 – 820) 1,670
Gross profit 1,150
Operating expenses 740
Income before taxes 410
Income tax ($410 × 30%) 123
Net income $287

17. Northwest Fur Co. started 2009 with $97,000 of merchandise inventory on hand. During 2009, $440,000 in merchandise was purchased on account with credit terms of 1/15, n/45. All discounts were taken. Purchases were all made f.o.b. shipping point. Northwest paid freight charges of $9,500. Merchandise with an invoice amount of $3,000 was returned for credit. Cost of goods sold for the year was $376,000. Northwest uses a perpetual inventory system.
What is ending inventory assuming Northwest uses the gross method to record purchases?

$163,070

$167,500

$170,500

$163,130

Beginning inventory $97,000
Inventory purchased 440,000
Freight 9,500
Merchandise returned (3,000 )
Discounts [($440,000 – 3,000) × 1%)] (4,370 )
Cost of goods available for sale $539,130
Cost of goods sold 376,000
Ending inventory $163,130

Explanation

Beginning inventory $97,000
Inventory purchased 440,000
Freight 9,500
Merchandise returned (3,000 )
Discounts [($440,000 – 3,000) × 1%)] (4,370 )
Cost of goods available for sale $539,130
Cost of goods sold 376,000
Ending inventory $163,130

18. Nueva Company reported the following pretax data for its first year of operations.

Net sales	7,380
Cost of goods available for sale	5,690
Operating expenses	1,708
Effective tax rate	40%
Ending inventories:
If LIFO is elected	618
If FIFO is elected	812

What is Nueva's gross profit ratio if it elects FIFO? (Round your answer to two decimal places e.g., .1234 as 12.34%.)

62.54%

31.27%

57.05%

33.9%

Net sales $7,380
Cost of goods sold ($5,690 – $812) 4,878
Gross profit 2,502
Gross profit ratio:
$2,502/$7,380 = 33.9%

Explanation

Net sales $7,380
Cost of goods sold ($5,690 – $812) 4,878
Gross profit 2,502
Gross profit ratio:
$2,502/$7,380 = 33.9%

19. Thompson TV and Appliance reported the following in its 2009 financial statements:

	2009
Sales	$424,000
Cost of goods sold:
Inventory, January 1	62,000
Net purchases	330,000
Goods available for sale	392,000
Inventory, December 31	102,000
Cost of goods sold	290,000
Gross profit	$134,000

Thompson's 2009 gross profit ratio is

None of these is correct

22%

31%

32%

$134,000 ÷ $424,000 = 32%

Explanation

$134,000 ÷ $424,000 = 32%

20. Anthony Thomas Candies (ATC) reported the following financial data for 2009 and 2008:

The average days inventory for ATC for 2009 is:

151 days

Less than 100 days

114 days

132 days

The average days inventory for ATC in 2009 is 132 days. This means that, on average, it takes ATC 132 days to sell its inventory. This is an important metric for businesses as it indicates the efficiency of their inventory management. A lower number of days indicates that the company is able to sell its inventory quickly, while a higher number suggests that it takes longer for the company to sell its products. In this case, 132 days falls within a reasonable range and suggests that ATC is able to effectively manage its inventory.

Explanation

The average days inventory for ATC in 2009 is 132 days. This means that, on average, it takes ATC 132 days to sell its inventory. This is an important metric for businesses as it indicates the efficiency of their inventory management. A lower number of days indicates that the company is able to sell its inventory quickly, while a higher number suggests that it takes longer for the company to sell its products. In this case, 132 days falls within a reasonable range and suggests that ATC is able to effectively manage its inventory.