Revision for the whole semester

1. How many of the following statements is/are true

regarding cost of goods sold?
– Cost of goods sold represents the cost that a company
incurred to purchase or produce inventory in the
current period.
– Cost of goods sold is an expense on the income
statement.
– Cost of goods sold is affected by the inventory method
selected by a company (FIFO, LIFO, etc.).
A. None
B. One
C. Two
D. Three
2. The inventory costing method selected by a
company can affect:
A. The Balance Sheet
B. The Income Statement
C. Neither statement
D. Both statement
3. An overstatement of ending inventory will affect
reported net income in which periods?
A. The period of the overstatement
B. The subsequent period.
C. The period of the overstatement and the subsequent
period
D. None of the above
4. In each period, the cost of goods available for sale is
allocated between:
A. Assets and liabilities.
B. Assets and expenses.
C. Assets and revenues.
D. Expenses and liabilities.

5. If costs are rising, which of the following will be true?

A. The cost of goods sold will be higher if LIFO is used
rather than weighted average.
B. The cost of ending inventory will be higher if FIFO is
used rather than LIFO.
C. The gross profit will be higher if FIFO is used rather
than LIFO.
D. All of the above are true.
6. A New York bridal dress retailer purchased three
units of the same dress as follows: January 4: $170,
January 12: $180, January 18: $190. It sold one
dress on January 21 andone on January 29. What
was cost of goods sold during the month of January
using FIFO, LIFO, and weighted average costing
methods?
A. FIFO: $370, LIFO: $350, weighted average: $360.
B. FIFO: $170, LIFO: $190, weighted average: $180.
C. FIFO: $350, LIFO: $370, weighted average: $360.
D. None of the above.
7. Which inventory method provides a better matching
of current costs with sales revenue on the income
statement but also results in older values being
reported for inventory on the balance sheet?
A. FIFO
B. LIFO
C. Weighted Average
D. Specific Identification

8. Which of the following is true regarding companies

that report their inventories on a LIFO basis?
A. They will always have a higher income tax expense.
B. They will always have a higher inventory balance.
C. Both of the above.
D. None of the above.
9. Assume ending inventory included the following
items, and the lower of cost or market rule for
inventory was applied. What amount would be
reported as ending inventory?

A. $2,700
B. $2,600
C. $2,500
D. $2,400
10. Which of the following is false regarding a perpetual
inventory system?
A. Physical counts are never needed since records are
maintained on a transaction-by-transaction basis.
B. The balance in the inventory account is updated with each
inventory purchase and sale transaction.
C. Cost of goods sold is increased as sales are recorded.
D. The account Purchases is not used as inventory is acquired.
11. Which of the following describes how payments to
suppliers made within the purchase discount period are
recorded in a perpetual inventory system?
A. Reduce Cash, reduce Accounts Payable.
B. Reduce Cash, reduce Accounts Payable, reduce Inventory.
C. Reduce Cash, reduce Accounts Payable, increase Purchase
Discounts.
D. Reduce Cash, reduce Accounts Payable, decrease Purchase
Discounts.
12. Which of the following describes proper accounting for the
costs of transporting purchased goods from the seller to the
purchaser (freight-in) that is paid for by the purchaser?
A. The amount is included in the cost of inventory by the
purchaser.
B. The amount is recorded as an other operating expense by
the purchaser.
C. The amount is recorded as part of cost of goods sold by the
seller.
D. None of the above.

13. Which of the following is not a component of net sales?

A. Sales returns and allowances. B. Cost of goods sold.
C. Sales discounts. D. Sales revenue.
14. The Gap, Inc., is a specialty retailer that operates stores
selling clothes under the trade names Gap, Forth and Towne,
Banana Republic, and Old Navy.
Assume you are employed as a stock analyst and your boss has
just completed a review of the Gap annual report for the year
ended January 28, 2006. She provided you with her notes, but
they are missing some information that you need.
Her notes show that the ending inventory for Gap in the
current year was $1,696,000,000 and in the previous year was
$1,814,000,000. Net sales for the current year were
$16,023,000,000. Gross profit was $5,869,000,000 and net
income was $1,113,000,000.
For your analysis, you determine that you need to know the
amount of purchases and cost of goods sold for the year. How
much were they?
15. Which of the following should be capitalized when a
piece of production equipment is acquired for a factory?
A. Decommissioning costs.
B. Transportation costs (F.O.B. Destination).
C. Installation costs.
D. All of the above.

16. When recording depreciation, which of the following

statements is true?
A. Total assets increase and owners’ equity increases.
B. Total assets decrease and total liabilities increase.
C. Total assets decrease and owners’ equity increases.
D. None of the above is true.
17. Under what depreciation method(s) is an asset’s book
value used to calculate depreciation each year?
A. Straight-line method.
B. Units-of-production method.
C. Declining-balance method.
D. All of the above.

18. Barber, Inc., followed the practice of depreciating its

building on a straight-line basis. Barber purchased a building
on January 1, 2010, that had an estimated useful life of 20
years and a residual value of $20,000. The company’s
depreciation expense for 2010 was $20,000 on the building.
What was the original cost of the building?
A. $360,000. C. $400,000.
B. $380,000. D. $420,000.
18. Under which depreciation method is partial-year
depreciation not calculated by multiplying the annual
depreciation by the fraction of the year for which the
asset has been used?
A. Straight line. C. Declining balance.
B. Units of production. D. None of the above.

19. What assets should be amortized using the straight-

line method?
A. Land.
B. Intangible assets with limited useful lives.
C. Intangible assets with unlimited (or indefinite) lives.
D. All of the above.
20. The Simon Company and the Allen Company each bought a
new delivery truck on January 1, 2009. Both companies paid
exactly the same cost, $30,000, for their respective vehicles. As
of December 31, 2010, the book value of Simon’s truck was
less than the Allen Company’s book value for the same vehicle.
Which of the following are acceptable explanations for the
difference in book value?
A. Both companies elected straight-line depreciation, but the
Simon Company used a longer estimated life.
B. The Simon Company estimated a lower residual value, but
both estimated the same useful life and both elected
straight-line depreciation.
C. Because GAAP specifies rigid guidelines regarding the
calculation of depreciation, this situation is not possible.
D. None of the above explains the difference in book value.
21. Conover Company ordered equipment on January 1, 2009,
at a purchase price of $30,000. On date of delivery, January 2,
2009, the company paid $8,000 for the equipment and signed
a note payable for the balance. On January 3, 2009, it paid
$250 for freight on the equipment. On January 5, Conover paid
$1,500 cash for installation costs relating to the equipment. On
December 31, 2009 (the end of the accounting period),
Conover recorded depreciation on the equipment using the
straight-line method with an estimated useful life of 10 years
and an estimated residual value of $2,750.
Required:
1. Record journal entries, if any, that would be required on
January 1, 2, 3, and 5.
2. Compute the acquisition cost of the equipment.
3. Compute the depreciation expense to be reported for 2009,
and show the journal entry to record it.
4. What should be the book value of the equipment at the end
of 2010?
22. Which of the following is not a primary objective of
external users who read a company’s financial statements?
A. Understanding the company’s current financial state.
B. Assessing the company’s contribution to social and
environmental policies.
C. Predicting the company’s future financial performance.
D. Evaluating the company’s ability to generate cash from
sales.

23. Which of the following is not one of the four basic financial
statements?
A. Balance sheet
B. Audit report
C. Income statement
D. Statement of cash flows
23. The income statement reports:
A. Net earnings or losses for a period of time.
B. Revenues, expenses, and liabilities.
C. Only revenue for which cash was received at the point of
sale.
D. Financial position of a business at a specific point in time.

24. Which of the following is false regarding the balance sheet?

A. The accounts shown on a balance sheet represent the basic
accounting equation for a particular business.
B. The owner’s equity balance shown on the balance sheet
must agree to the ending owner’s equity balance shown on
the statement of owner’s equity.
C. The balance sheet summarizes the net changes in specific
account balances over a period of time.
D. The balance sheet reports the amount of assets, liabilities,
and owner’s equity of a business at a point in time.
25. Which of the following is not one of the items required
to be shown in the heading of a financial statement?
A. The financial statement preparer’s name.
B. The title of the financial statement.
C. The financial reporting date or period.
D. The name of the business entity.

26. A company reported assets of $130,000, liabilities of

$20,000, expenses of $220,000, and net income of
$40,000. Revenues and owner’s equity would be reported
as:
Revenues Owner’s Equity
A. $110,000 $180,000
B. $180,000 $110,000
C. $260,000 $110,000
D. $260,000 $150,000
27. Lian Company purchased property with a warehouse
and parking lot for $1,500,000. An appraiser valued the
components of the property if purchased separately as
follows:
Land $400,000
Land improvements $200,000
Building $1,000,000
Total $1,600,000

Determine the cost to be assigned to each component.

28. On November 1, 2015, L.L. Bean received an order
from Michelle Sylvester for one pair of L.L. Bean 8” boots
(aka “duck boots.”) The selling price of the boots is $109.
These boots are on backorder; L.L. Bean actually ships the
boots to Sylvester on January 2, 2016. Sylvester’s credit
card is charged when the boots ship; L.L. Bean treats the
credit card sale as cash since it can deposit the credit card
receipts into its bank account immediately. For the sake of
simplicity, ignore credit card fees and sales tax. Assume
that L.L. Bean’s cost of these boots is $44.
Required:
a) Determine the type of the sale.
b) Determine the date of revenue recognition and the
amount of revenue.
29. On March 10, 2016, L.L. Bean sells one pair of L.L. Bean
8” boots (aka “duck boots”) to Dana Smith in its Lyndhurst,
Ohio, store. The selling price of the boots is $109; Smith
pays cash at the time of sale. During the month of March,
L.L. Bean is running a promotion that awards $20 in L.L.
Bean Dollars for every $100 spent in its stores. Accordingly,
Smith receives $20 in L.L. Bean Dollars at the time of
purchase. These L.L. Bean Dollars can be used the same as
cash at any future date at any L.L. Bean store or its Website.
For the sake of simplicity, ignore sales tax.
Required:
a) Determine the type of the sale.
b) Determine the date of revenue recognition and the
amount of revenue.