When purchase costs of inventory regularly decline, which method of inventory costing will yield the lowest cost of goods sold?
2. Some companies choose to avoid assigning incidental costs of acquiring merchandise to inventory by recording them as expenses when incurred. The argument that supports this is called:
The matching principle.
The materiality constraint.
The cost principle.
The conservation constraint principle.
The lower of cost or market principle.
3. An error in the period-end inventory causes an offsetting error in the next period and therefore:
Managers can ignore the error.
It is sometimes said to be self-correcting.
It affects only income statement accounts.
If affects only balance sheet accounts.
Is immaterial for managerial decision making.
4. Management decisions in accounting for inventory cost include all of the following except:
Inventory system (perpetual or periodic).
Customer demand for inventory.
Use of market values or other estimates.
Items included in inventory and their costs.
5. Generally accepted accounting principles require that the inventory of a company be reported at:
Lower of cost or market.
6. In applying the lower of cost or market method to inventory valuation, market is defined as:
Current replacement cost.
Current sales price.
7. The inventory valuation method that has the advantages of assigning an amount to inventory on the balance sheet that approximates its current cost, and also mimics the actual flow of goods for most businesses is:
All of the inventory valuation methods accomplish this.
8. Internal controls that should be applied when a business takes a physical count of inventory should include all of the following except:
Prenumbered inventory tickets.
A manager does not confirm that all inventories are ticketed once, and only once.
Counters must confirm the validity of inventory existence, amounts, and quality.
Second counts by a different counter.
Counters of inventory should not be those who are responsible for the inventory.
9. Damaged and obsolete goods that can be sold:
Are never counted as inventory.
Are included in inventory at their full cost.
Are included in inventory at their net realizable value.
Should be disposed of immediately.
Are assigned a value of zero.
10. Costs included in the Merchandise Inventory account can include all of the following except:
Invoice price minus any discount.
Damaged inventory that cannot be sold.
11. The operating cycle for a merchandiser that sells only for cash moves from:
Purchases of merchandise to inventory to cash sales.
Purchases of merchandise to inventory to accounts receivable to cash sales.
Inventory to purchases of merchandise to cash sales.
Accounts receivable to purchases of merchandise to inventory to cash sales.
Accounts receivable to inventory to cash sales.
12. The gross margin ratio:
Is also called the net profit ratio.
Measures a merchandising firm’s ability to earn a profit from the sale of inventory.
Is also called the profit margin.
Is a measure of liquidity.
Should be greater than 1.
13. An account used in the periodic inventory system that is not used in the perpetual inventory system is
Sales Returns and Allowances
14. The current period’s ending inventory is:
The next period’s beginning inventory.
The current period’s cost of goods sold.
The prior period’s beginning inventory.
The current period’s net purchases.
The current period’s beginning inventory.
15. Liquidity problems are likely to exist when a company’s acid-test ratio:
Is less than the current ratio.
Is 1 to 1.
Is higher than 1 to 1.
Is substantially lower than 1 to 1.
Is higher than the current ratio.
16. The following statements regarding gross profit are true except:
Gross profit is also called gross margin.
Gross profit less other operating expenses equals income from operations.
Gross profit is not calculated on the multiple-step income statement.
Gross profit must cover all operating expenses to yield a return for the owner of the business.
Gross profit equals net sales less cost of goods sold.
17. A debit memorandum is:
Required whenever a journal entry is recorded.
The source document for the purchase of merchandise inventory.
Required when a purchase discount is granted.
The document a buyer issues to inform the seller of a debit made to the seller’s account in the buyer’s records.
Not necessary in a perpetual inventory system.
18. All of the following statements related to U.S. GAAP and IFRS are true except:
Accounting for basic inventory transactions is the same under the two systems.
The closing process for merchandisers is the same under both systems.
U.S. GAAP offers little guidance about the presentation order of expenses.
Neither system requires separate disclosure of items when their size, nature, or frequency are important for proper interpretation.
Neither system defines operating income.
19. Beginning inventory plus net purchases is:
Cost of goods sold.
Merchandise available for sale.
Shown on the balance sheet.
20. All of the following statements regarding sales returns and allowances are true except:
Sales returns and allowances can include a reduction is the selling price because of damaged merchandise.
Sales returns and allowances do not reflect the possibility of lost future sales.
Sales returns and allowances are recorded in a separate contra-revenue account.
Sales returns and allowances are rarely disclosed in published financial statements.
Sales returns and allowances are closed to the Income Summary account.
21. A columnar working paper used to prepare a company’s unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements, and which is an optional tool in the accounting process is a(n):
Adjusted trial balance.
Post-closing trial balance.
Unadjusted trial balance.
22. An error is indicated if the following account has a balance appearing on the post-closing trial balance:
Accumulated Depreciation-Office Equipment.
Depreciation Expense-Office Equipment.
Ted Nash, Capital.
23. Which of the following statements is true?
Owner’s capital must be closed each accounting period.
A post-closing trial balance should include only permanent accounts.
Information on the work sheet can be used in place of preparing financial statements.
By using a work sheet to prepare adjusting entries you need not post these entries to the ledger accounts.
Closing entries are only necessary if errors have been made.
24. The special account used only in the closing process to temporarily hold the amounts of revenues and expenses before the net difference is added to (or subtracted from) the owner’s capital account is the:
Income Summary account.
Balance column account.
25. If in preparing a work sheet an adjusted trial balance amount is mistakenly sorted to the wrong work sheet column. The Balance Sheet columns will balance on completing the work sheet but with the wrong net income, if the amount sorted in error is:
An expense amount placed in the Balance Sheet Credit column.
A revenue amount placed in the Balance Sheet Debit column.
A liability amount placed in the Income Statement Credit column.
An asset amount placed in the Balance Sheet Credit column.
A liability amount placed in the Balance Sheet Debit column.
26. A post-closing trial balance reports:
All ledger accounts with balances, none of which can be temporary accounts.
All ledger accounts with balances, none of which can be permanent accounts.
All ledger accounts with balances, which include some temporary and some permanent accounts.
Only revenue and expense accounts.
Only asset accounts.
27. The balances in the unadjusted columns of a work sheet will agree with:
the balances reflected in the company’s financial statements.
the balances reflected in the company’s unadjusted trial balance.
whatever balances management has decided to report.
the balances in the company’s post-closing trial balance.
the balances management budgeted for the accounting period.
28. Temporary accounts include all of the following except:
29. Another name for temporary accounts is:
Balance column accounts.
30. A trial balance prepared after the closing entries have been journalized and posted is the:
Unadjusted trial balance.
Post-closing trial balance.
Adjusted trial balance.
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