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Department
Accounting
Course
ACCT-201
Professor
Davenport
Semester
Fall

Description
Practice Exam 2 Student: ___________________________________________________________________________ 1. Costs of selling inventory are product costs. True False 2. The ending Merchandise Inventory plus Cost of Goods Sold equals the Cost of Goods Available for Sale during the period. True False 3. A purchase allowance is treated as a decrease in expenses by the company that purchased the goods. True False 4. The term "FOB shipping point" indicates that the seller is responsible for transportation costs. True False 5. A multistep income statement separates routine operating results from peripheral or non-operating items. True False 6. Common size financial statements are prepared by converting dollar amounts to percentages. True False 7. In most businesses, the physical flow of goods occurs on a FIFO basis, but a different cost flow method is allowed under generally accepted accounting principles. True False 8. A company's gross margin reported on the income statement is not affected by the inventory cost flow method it uses. True False 9. During a period of rising prices the FIFO cost flow method will result in higher total assets than LIFO. True False 10. If a company applies the lower-of-cost-or-market rule on an aggregate basis, its write-down of inventory is likely to be lower than if it applies the rule to individual items of inventory. True False 1 Singh Company's perpetual inventory records included the following information: 11. If Singh uses the LIFO cost flow method, its ending inventory would be $1,620. True False 12. If Singh uses the FIFO cost flow method, its cost of goods sold would be $4,130. True False 13. If Singh uses the weighted-average cost flow method, its weighted-average cost per unit would be $8.00. True False 14. Which of the following would be considered as primarily a merchandising business? A. West Consulting B. Baker's Jewelry Store C. Sandridge and Associates Law Offices D. KPM Accounting and Tax Service 15. Which of the following is considered a product cost? A. Utility expense for the current month. B. Transportation cost on goods received from suppliers. C. Salaries paid to employees of a retailer. D. Transportation cost on goods shipped to customers. 16. Which of the following statements is true about period costs? A. Operating expenses are not period costs. B. Period costs are expensed when the products associated with these costs are sold. C. Period costs are usually recorded as assets. D. Most period costs are expensed in the period the costs are incurred. 2 17. Lonestar Company paid the amount due on a purchase of merchandise on account. Lonestar uses the perpetual inventory system. Which of the following answers reflects the effect of the payment on the financial statements? A. Option A B. Option B C. Option C D. Option D 18. Greencroft Company sold merchandise costing $1,800 for $2,600 cash. The merchandise was later returned by the customer for a refund. If the perpetual inventory method is used, what effect will the sales return have on the accounting equation? A. Total assets and total equity increase by $800. B. Total assets decrease by $2,600 and total equity is decreased by $1,800. C. Total assets and total equity decrease by $2,600. D. Total assets and total equity decrease by $800. 19. Andrews Company sold merchandise with a cost of $500 to a customer for $800 on account. Due to an error, this sale was never recorded in the accounting records. What effect will the failure to make the necessary entries have on the company's accounting equation? A. Total assets and total equity will be understated. B. Total assets will be overstated and total equity will be understated. C. Total assets and total equity will be overstated. D. The accounting equation will not be affected. 20. Which accounts would affect operating income? A. Account numbers 2, 4, and 9. B. Account numbers 3, 5, 7, and 9. C. Account numbers 3, 4, 7, and 9. D. Account numbers 3, 4, 7, 8 and 9. 3 21. Benson Company purchased two identical inventory items. The item purchased first cost $14.00, and the item purchased second cost $15.00. Benson sold one of the items for $24.00. Which of the following statements is true? A. Ending inventory will be lower if Benson uses weighted average than if FIFO were used. B. Cost of goods sold will be higher if Benson uses FIFO than if weighted average were used. C. The dollar amount assigned to ending inventory will be the same no matter which cost flow method is used. D. Gross margin will be higher if Benson uses LIFO than it would be if FIFO were used. 22. When prices are falling: A. LIFO will result in lower income and a lower inventory valuation than will FIFO. B. LIFO will result in lower income and a higher inventory valuation than will FIFO. C. LIFO will result in higher income and a lower inventory valuation than will FIFO. D. LIFO will result in higher income and a higher inventory valuation than will FIFO. 23. Kitchen Company uses the perpetual inventory method. On January 1, 2013, the company's first day of operations, Kitchen purchased 400 units of inventory that cost $2.50 each. On January 10, 2013, the company purchased an additional 600 units of inventory that cost $3.00 each. If Kitchen uses a weighted average cost flow method and sells 550 units of inventory, the amount of inventory appearing on balance sheet following the sale will be approximately: A. $1,540. B. $1,513. C. $1,260. D. $1,238. 24. Signal Company uses the perpetual inventory method. On January 1, 2013, Signal purchased 400 units of inventory that cost $2.00 each. On January 10, 2013, the company purchased an additional 600 units of inventory that cost $2.25 each. If Signal uses a weighted average cost flow method and sells 700 units of inventory for $4.00 each, the amount of gross margin reported on the income statement will be: A. $1,313. B. $1,295. C. $1,225. D. $1,505. 4 25. Torres Company purchased 2,000 units of inventory that cost $2.00 each on January 1, 2013. An additional 3,000 units of inventory were purchased on January 12, 2013 at a cost of $2.10 each. Torres Company sold 4,000 units of inventory on January 20, 2013. Which of the following entries would be required to recognize the cost of goods sold assuming that Torres Co. uses the perpetual inventory method and a FIFO cost flow method? A. Option A B. Option B C. Option C D. Option D 26. The lower-of-cost-or-market rule can be applied to A. major classes or categories of inventory. B. the entire stock of inventory in aggregate. C. each individual inventory item. D. any of these. 27. What is meant by "market" in lower-of-cost-or-market calculations? A. The amount of gross margin earned by selling merchandise. B. The amount the goods were sold for during the period. C. The amount that would have to be paid to replace the merchandise. D. The amount originally paid for the merchandise. 5 28. The Bristol Company was recently required to record an inventory write-down of $5,215 because the market value of its inventory was less than cost. Assuming the amount of the write-down is not material (the total inventory was over $9,750,000), which of the following is the appropriate journal entry? A. Option A B. Option B C. Option C D. Option D 29. Phillips Corporation overstated its ending inventory on December 31, 2013. Which of the following answers correctly identifies the effect of the error on 2014 financial statements? A. Gross margin overstated. B. Cost of goods sold is overstated. C. Ending inventory is understated. D. Net income is overstated. 30. When preparing its quarterly financial statements, Patterson Co. uses the gross margin method to estimate ending inventory. The following information is available for the 1 quarter of 2013: What was Patterson's estimated inventory on March 31, 2013? A. $412,500 B. $577,500 C. $472,500 D. $517,500 Assume the perpetual inventory method is used. 1) The company purchased $12,000 of merchandise on account under terms 2/10, n/30. 2) The company returned $1,500 of merchandise to the supplier before payment was made. 3) The liability was paid within the discount period. 4) All of the merchandise purchased was sold for $18,000 cash. 6 31. What effect will the return of merchandise to the supplier have on the accounting equation? A. Assets and equity are reduced by $1,500. B. Assets and liabilities are reduced by $1,470. C. Assets and liabilities are reduced by $1,500. D. None. It is an asset exchange transaction. 32. The amount of gross margin from the four transactions is: A. $7,710. B. $7,740. C. $6,000. D. $5,880. 33. The net cash flow from operating activities as a result of the four transactions is: A. $5,880. B. $7,740. C. $7,710. D. $6,000. Use the following account numbers and corresponding account titles to answer 34. Which accounts would appear on the income statement? A. Account numbers 3, 4, 7, 8, and 9. B. Account numbers 3, 4, 5, 7, and 9. C. Account numbers 2, 3, 7, 8, and 9. D. Account numbers 3, 5, 7, and 8. 7 35. Which accounts would appear on the balance sheet? A. Account numbers 1, 2, 4, and 5. B. Account numbers 1, 3, 7, and 8. C. Account numbers 1, 2, and 6. D. Account numbers 3, 4, 8, and 9. The inventory records for Ramirez Co. reflected the following 36. Determine the weighted average cost per unit for May. A. $2.23 B. $1.45 C. $2.45 D. $3.17 37. Determine the amount of cost of goods sold assuming the LIFO cost flow method. A. $2,160 B. $2,050 C. $1,180 D. $1,800 38. Determine the amount of ending inventory assuming the FIFO cost flow method. A. $480 B. $470 C. $400 D. None of the above 39. Determine the amount of gross margin assuming the weighted average cost flow method. A. $1,503 B. $2,160 C. $1,305 D. $657 8 40. Determine the amount of gross margin assuming the FIFO cost flow method. A. $1,460 B. $1,710 C. $1,980 D. $1,530 41. On June 1, Jefferson Co. had one unit in beginning inventory that cost $5.00. During June, Jefferson paid cash to purchase two additional inventory items. Jefferson purchased the first item for cash at a cost $5.00, and the second at a cost of $6.00. Jefferson Co. sold two inventory items for $12.00 each, receiving cash. Based on this information alone, indicate whether each of the following items is true or false. _____ a) The amount of ending inventory will be $5 assuming the LIFO cost flow was used. _____ b) Cost of goods sold would be $11 assuming the weighted average cost flow was used. _____ c) Cash flow from operating activities in June would be $14 assuming a FIFO cost flow was used. _____ d) Cash flow from operating activities in June would be $13 independent of what cost flow assumption was used. _____ e) The amount of gross margin would be $14 assuming the FIFO cost flow was used. 42. Indicate whether each of the following statements is true or false. _____ a) The FIFO cost flow method may only be used if the company actually rotates inventory so that the oldest inventory is sold first. _____ b) In a period of rising prices, LIFO gives higher cost of goods sold than FIFO. _____ c) Under the weighted average cost flow method, the cost per unit of ending inventory is equal to the cost per unit of inventory sold. _____ d) In a period of declining prices, LIFO will result in lower income tax expense than FIFO. _____ e) In a period of rising prices, FIFO gives higher ending inventory than LIFO does. 9 43. On February 2, 2013, a fire destroyed the entire inventory of Blue Co. The following information was found in accounting records: Purchases, $280,000; Sales $460,000; beginning inventory, $80,000; average gross margin percentage during the past five years, 30%. Based on the above information, indicate whether each of the following statements is true or false. _____ a) The cost of goods available for sale is $360,000. _____ b) The cost of goods sold as a percent of sales is 70%. _____ c) The estimated cost of goods sold is $202,000. _____ d) Estimated inventory lost in the fire is $44,000. _____ e) Estimated gross margin for the period up to the date of the fire was $138,000. 10 44. During November 2013, Cortez Company sold 125 units @ $450 each. Cash selling and administrative expenses for the year were $22,000. All transactions were cash transactions. The following information is also available: The company's income tax rate is 30%. Required: a) Prepare an income statement for Cortez Company for 2013 assuming: 1) FIFO inventory cost flow 2) LIFO inventory cost flow b) Prepare the operating activities section of the statement of cash flows for 2013 assuming: 1) FIFO invent
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