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110 Cards in this Set
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35. The only condition required for control over receivables to be surrendered is that the transferred assets should be beyond the reach of the transferor and its creditors.
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FALSE
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51. Net realizable value of receivables is gross receivables minus
A. bad debt expense and sales returns. B. bad debt expense and estimated returns and allowances. C. estimated uncollectibles, returns and allowances. D. proven uncollectibles and estimated returns and allowances. |
C
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52. The matching principle requires that bad debts be treated as an expense in the year
A. the sale is made. B. the customer files bankruptcy. C. in which the debt becomes six months past due. D. a court declares it to be uncollectible. |
A
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53. The allowance for uncollectibles account is
A. added to gross accounts receivable. B. added to net accounts receivable. C. subtracted from gross accounts receivable. D. subtracted from net account receivable. |
C
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54. If Edsel uses the sales revenue approach for estimating bad debt expense, the income statement should show an expense of
A. $10,000 B. $12,000 C. $14,000 D. $20,000 |
B
Sales $600,000 expense rate 2% = $12,000 |
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55. If Edsel uses the gross accounts receivable approach for estimating bad debt expense, the income statement will show an expense of
A. $2,100 B. $3,600 C. $5,100 D. $8,500 |
A
A/R $180,000 rate 2% = $3,600 - allowance balance $1,500 = $2,100 |
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56. If Edsel uses the sales revenue approach for estimating bad debt expense, the allowance for uncollectibles account after the proper adjustments to the accounts are recorded, should show a balance of
A. $11,500 B. $13,500 C. $15,500 D. $21,500 |
B
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57. If Edsel uses the gross accounts receivable approach for estimating bad debt expense, the allowance for uncollectibles account after the proper adjustments to the accounts are recorded, should show a balance of
A. $2,600 B. $3,600 C. $5,600 D. $6,200 |
A/R $180,000 rate 2% = $3,600
B |
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58. When a specific account receivable is written off, the entry
A. increases net income. B. decreases net income. C. can either decrease or increase net income. D. has no effect on net income. |
D
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59. Management must periodically assess the reasonableness of the allowance for uncollectibles if it uses the
A. direct write-off method. B. percent of sales method only. C. percent of gross receivables method only. D. percent of sales or the percent of gross receivables method. |
D
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60. Echo Company's 2008 beginning and ending accounts receivable balances were $72,500 and $41,250 respectively. During 2008, the company's sales (all on credit) amounted to $857,250. Per Echo's 2008 cash flow statement, $873,500 was collected from customers while $18,750 related to uncollectible accounts was listed among the "non-cash expenses." If Echo's beginning balance in the allowance for uncollectibles was $17,600, the ending balance in this account must be
A. $15,000 B. $21,350 C. $36,350 D. The required "allowance for uncollectibles" balance cannot be determined from the data given. |
B
Beginning A/R + Credit sales - Cash collections - Write-offs = Ending A/R = $72,500 + $857,250 - $873,500 - X (write-offs) = $41,250. X = $15,000. Beginning Allowance for uncollectibles + Bad debt expense - write-offs = Ending Allowance for uncollectibles = $17,600 + $18,750 - $15,000 = $21,350 |
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61. Sales returns and allowances account is
A. a contra-asset account. B. a contra-revenue account. C. on the balance sheet. D. on the statement of shareholders' equity. |
B
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62. Smith Company is a manufacturer of medical devices and has an excellent quality control department, thus defective product returns are rare. In 2008, Smith reported sales of $276,344,000. The company did, however, have two returns in 2008 related to the wrong product model being shipped. Smith's journal entry to record a $37,500 return from Foxtrot Medical would be
A. B. C. D. |
A
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63. Which one of the following explanations for the growth of accounts receivable outstripping the growth of sales presents a red flag?
A. The firm adopts new credit terms that lengthen the payment terms to the industry average. B. The firm adopts an aggressive revenue recognition policy. C. The firm develops an attractive credit policy for first time buyers. D. The firm changes its timing of revenue recognition to a more conservative approach. |
B
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64. Which one of the following is an example of an aggressive revenue recognition policy?
A. A firm recognizes revenue at time of collection. B. A firm recognizes revenue at the expiration of the return period. C. A firm with a liberal return policy recognizes revenue at shipment. D. A firm with a liberal return policy recognizes revenue at shipment with a corresponding allowance for returns and allowances. |
C
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65. Notes receivable are recorded in the accounts at
A. fair market value. B. present value. C. maturity value. D. net realizable value. |
B
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66. Non-interest bearing notes are initially recorded at
A. historical cost. B. maturity value because they bear no interest. C. present value, based on the prevailing interest for loans of this type. D. future value, based on the prevailing interest for loans of this type. |
C
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Table 8-2
The Palmer Corporation sells to its customers on a note basis with 10% credit terms with interest payable quarterly. All notes are due in one year. Palmer makes the following sales on July 1, 2006: To encourage sales, Berg was given a special deal on interest. Additional information: Future value of $100,000 in one year (quarterly interest) is $110,381. Present value of $100,000 for one year (quarterly interest) is $90,595. 67. What amount will Palmer use to record the sale to Perez? A. $90,000 B. $90,595 C. $100,000 D. $110,381 |
C
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Table 8-2
The Palmer Corporation sells to its customers on a note basis with 10% credit terms with interest payable quarterly. All notes are due in one year. Palmer makes the following sales on July 1, 2006: To encourage sales, Berg was given a special deal on interest. Additional information: Future value of $100,000 in one year (quarterly interest) is $110,381. Present value of $100,000 for one year (quarterly interest) is $90,595. 68. What amount will Palmer use to record the sale to Berg? A. $90,000 B. $90,595 C. $100,000 D. $110,382 |
B
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Table 8-2
The Palmer Corporation sells to its customers on a note basis with 10% credit terms with interest payable quarterly. All notes are due in one year. Palmer makes the following sales on July 1, 2006: To encourage sales, Berg was given a special deal on interest. Additional information: Future value of $100,000 in one year (quarterly interest) is $110,381. Present value of $100,000 for one year (quarterly interest) is $90,595. 69. At the end of the first quarter, which one of the following entries will be made to record the interest earned by Palmer on the Perez note? A. B. C. D. |
Principal $100,000 rate 10% 3/12 = $2,500
B |
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Table 8-2
The Palmer Corporation sells to its customers on a note basis with 10% credit terms with interest payable quarterly. All notes are due in one year. Palmer makes the following sales on July 1, 2006: To encourage sales, Berg was given a special deal on interest. Additional information: Future value of $100,000 in one year (quarterly interest) is $110,381. Present value of $100,000 for one year (quarterly interest) is $90,595. 70. At the end of the first quarter, which one of the following entries will be made to record the interest earned by Palmer on the Berg note? A. B. C. D. |
C
Principal $90,595 rate 10% 3/12 = $2,264 |
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On January 2, 2008, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no explicit interest, but rather requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided instead to let Jensen hold the note.
71. What amount will Jensen recognize as interest income during 2008? A. $4,356 B. $4,704 C. $5,111 D. $0 |
Interest = Carrying value at beginning of year implicit interest rate = $54,447 .08 = $4,356
A |
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On January 2, 2008, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no explicit interest, but rather requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided instead to let Jensen hold the note.
72. What amount will Jensen recognize as interest income during 2009? A. $4,356 B. $4,704 C. $5,111 D. $0 |
Interest = Carrying value at beginning of year implicit interest rate = $58,803 .08 = $4,704
B |
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On January 2, 2008, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no explicit interest, but rather requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided instead to let Jensen hold the note.
73. What will be the balance in the Notes Receivable—Lewisburg Fabricators account at the end of 2009? A. $54,447 B. $58,802 C. $63,507 D. $80,000 |
C
Note balance at end of 2009 = Original note balance + 2008 interest + 2009 interest = $54,447 + $4,356 + $4,704 = $63,507 |
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74. Accounting for long-term credit sales transactions utilizing notes receivable
A. ignores interest unless an interest rate is specified in the note. B. makes it difficult to assess the degree to which a company's overall earnings are due to profitable credit sales versus profitable customer financing. C. achieves a clear separation between income from credit sales and interest earned. D. is controversial because it necessitates use of an assumed interest rate. |
C
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75. The sale of receivables to a third party is called
A. factoring. B. collateralizing. C. discounting. D. securitization. |
A
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76. With a loan collateralized by receivables,
A. the bank makes the loan without recourse. B. the bank has recourse against the accounts receivable customers. C. a company receives cash and is not responsible for repaying the loan. D. a company receives cash and is responsible for repaying the loan. |
D
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Frank Ritter, Inc. enters into an arrangement with Hisker Enterprises whereby Hisker will assume $100,000 of Ritter's receivables for a 6% fee.
77. Assuming that the transaction was a factoring arrangement without recourse, which one of the following entries will Ritter make? A. B. C. D. |
C
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Frank Ritter, Inc. enters into an arrangement with Hisker Enterprises whereby Hisker will assume $100,000 of
Ritter's receivables for a 6% fee. 78. Assuming that the transaction was a factoring arrangement with recourse and included a holdback of $9,000, which one of the following entries will Ritter make to record this transaction? A. B. C. D. |
B
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Frank Ritter, Inc. enters into an arrangement with Hisker Enterprises whereby Hisker will assume $100,000 of Ritter's receivables for a 6% fee.
79. Assuming that the transaction was a collateralized loan, which one of the following entries will Ritter make to record this transaction? A. B. C. D. |
C
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Harry Jones accepted a six-month, 8% $40,000 note receivable from a customer on July 1, 2008. Jones has an arrangement with the National Bank to discount selected customer notes at 10%.
80. On August 1, 2008, Jones discounted the note under the arrangement with National Bank. How much were the proceeds of the discounted note? A. $38,267 B. $39,867 C. $40,000 D. $41,600 |
Maturity value = Principle + Interest = $40,000 + ($40,000 8% 6/12) = $41,600. Proceeds = Maturity value - discount = $41,600 - ($41,600 .10 5/12 = $1,733) = $39,867
B |
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Harry Jones accepted a six-month, 8% $40,000 note receivable from a customer on July 1, 2008. Jones has an arrangement with the National Bank to discount selected customer notes at 10%.
81. If the note were discounted on August 1 under the terms of agreement with National Bank, which one of the following journal entries would Jones record? A. B. C. D. |
C
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82. If a note receivable is discounted with recourse and the customer defaults at final payment, the seller
A. has no obligation to the bank. B. must repay the full amount of the note plus interest to the bank. C. must refund the proceeds of the discounting to the bank. D. must repay the principal only to the bank. |
B
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83. According to SFAS No. 140, the determination of whether a transfer of receivables is a sale or collateralized borrowing hinges on whether the
A. transfer was with or without recourse. B. transferor collects payments directly from the customer. C. transferor surrenders control over the receivable. D. customer ultimately defaults. |
C
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84. When receivables are bundled together and transferred to another organization which issues securities collateralized by the transferred receivables, the arrangement is
A. collateralization. B. discounting. C. factoring. D. securitization |
D
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85. Reasons why companies might accelerate cash collections include the following except:
A. The company may have an immediate need for cash but be short of it. B. Generally accepted accounting principles permit "off-balance sheet" treatment of factored receivables and collateralized borrowings, thus enabling management to "window dress" the company's financial position. C. There may be an imbalance between the credit terms of the company's suppliers and the time required to collect customer receivables. D. Competitive conditions require credit sales but the company is unwilling to bear the cost of processing and collecting receivables. |
B
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86. Jones Co. sells on credit and maintains an allowance for doubtful accounts equal to 2% of the company's $3,450,000 receivables balance. Due to a cash shortfall, Jones sells $275,000 of its receivables with recourse to Ninth National Bank, and the bank withholds $12,000 from the factoring proceeds to cover possible noncollections. If the noncollections eventually amount to $15,000, the entry on Jones' books when notified of this fact would be:
A. B. C. D. |
D
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87. Ambiguity can arise as to whether receivables have been sold or instead are being used as collateral for a loan whenever certain obligations, duties, or rights regarding the transferred receivables are retained by the transferor. In distinguishing between sales and collateralized borrowings using receivables, the critical issue
A. is whether the terms regarding the transfer were initiated by the transferor or transferee. B. is whether the transferor surrenders control over the receivables. C. comes down to how clearly the rights, etc. being retained are specified in the transfer agreement. D. is whether any gain or loss related to the transfer is recognized in earnings. |
B
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88. If a transfer of receivables is really a borrowing but is erroneously treated as a sale
A. then both assets and liabilities are understated. B. then both assets and liabilities are overstated. C. then both assets and equity are understated. D. then ratios like debt-to-equity are consequently distorted by the overstatements. |
A
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89. If a bank sells a mortgage portfolio at a price that yields the purchasers a return that is lower than that yielded, on average, by the mortgages in the portfolio, the selling price
A. is equal to the carrying value of the mortgages on the bank's books. B. is lower than the carrying value of the mortgages on the bank's books. C. is higher than the carrying value of the mortgages on the bank's books. D. cannot be determined by examining the carrying value of the mortgages on the bank's books because the selling price is determined purely by the market. |
C
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90. Securitizations, when carefully designed to enable the transferor to avoid consolidating the special purpose entity (SPE), must meet all of the following conditions except:
A. The SPE is demonstrably distinct from the transferor. B. The SPE's activities are narrowly limited. C. The SPE holds only rigidly defined types of assets. D. The SPE has some latitude regarding disposal of assets under its control. |
D
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91. When a company transfers receivables with recourse
A. SFAS No. 5 requires footnote disclosure of the contingent liability. B. the transferee is responsible for uncollected receivables. C. there is no contingent liability so no disclosure is required. D. the transfer may be reported in a variety of ways as GAAP provides no specific reporting guidance related to such transactions. |
A
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Corona Industries purchased a stamping machine on January 2, 2008, for $100,000. It paid $20,000 down and financed the balance over 5 years at State Bank. Terms of the loan were 10% interest payable on December 31 each year with a required $16,000 principal payment. 2011 proves to be a difficult year and on December 1, Corona negotiates a debt restructure with State Bank. The settlement calls for cash payment of accrued interest plus $4,000 on December 1 and the transfer of 200 acres of land held by Corona that cost $15,000. The land has a current market value of $22,000.
92. On December 1, 2011, how much interest is accrued on this loan? A. $2,933 B. $3,200 C. $6,933 D. $18,933 |
Accrued interest @ 12/1/2011 = Loan balance @ 1/1/2011 rate time = ($100,000 - down payment $20,000 - payments ($16,000 3)) = $32,000 10% 11/12 = $2,933
A |
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Corona Industries purchased a stamping machine on January 2, 2008, for $100,000. It paid $20,000 down and financed the balance over 5 years at State Bank. Terms of the loan were 10% interest payable on December 31 each year with a required $16,000 principal payment. 2011 proves to be a difficult year and on December 1, Corona negotiates a debt restructure with State Bank. The settlement calls for cash payment of accrued interest plus $4,000 on December 1 and the transfer of 200 acres of land held by Corona that cost $15,000. The land has a current market value of $22,000.
93. Which one of the following entries will Corona make to adjust the land just prior to transfer? A. B. C. D. |
Land fair value $22,000 - land cost $15,000 = gain on disposal $7,000
C |
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Corona Industries purchased a stamping machine on January 2, 2008, for $100,000. It paid $20,000 down and financed the balance over 5 years at State Bank. Terms of the loan were 10% interest payable on December 31 each year with a required $16,000 principal payment. 2011 proves to be a difficult year and on December 1, Corona negotiates a debt restructure with State Bank. The settlement calls for cash payment of accrued interest plus $4,000 on December 1 and the transfer of 200 acres of land held by Corona that cost $15,000. The land has a current market value of $22,000.
94. What is the amount of the restructuring gain or loss to Corona? A. $6,000 loss B. $6,000 gain C. $8,933 loss D. $13,000 gain |
B
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95. What is the amount of the receivable restructuring gain or loss to State Bank?
A. $6,000 loss B. $6,000 gain C. $13,000 loss D. $8,933 gain |
Cash received $6,933 + land $22,000 - N/R $32,000 - interest due $2,933 = $6,000 loss
A |
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96. The determining factor for accounting treatment of troubled debt restructures when there is a continuation with modification of terms is whether
A. there is a gain or loss on the transaction to the debtor. B. there is a gain or loss on the transaction to the lender. C. the undiscounted sum of the future cash flows under the restructured note is above or below the note's book value (including accrued interest) at the restructuring date. D. the discounted sum of the future cash flows under the restructured note is above or below the note's book value (including accrued interest) at the restructuring date. |
C
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97. When the sum of the future cash flows of a restructured note is above the current note's book value, the debtor recognizes
A. a gain on the debt restructure. B. a loss on the debt restructure. C. neither a gain nor a loss on the debt restructure. D. both a restructure gain and an early extinguishment loss. |
C
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Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest on October 1, 2008. Island and Mutual Bank enter into an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 2010.
98. Island will record this transaction to recognize A. an extraordinary debt restructure gain of $20,000. B. an extraordinary debt restructure loss of $20,000. C. an ordinary debt restructure gain of $20,000. D. neither a gain nor a loss from debt restructuring. |
D
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Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest on October 1, 2008. Island and Mutual Bank enter into an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 2010.
99. What will be Island's carrying value of the restructured note? A. $100,000 B. $108,000 C. $118,000 D. $128,000 |
Principal $100,000 + interest due $8,000 = $108,000
B |
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Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest on October 1, 2008. Island and Mutual Bank enter into an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 2010.
100. What effective interest rate will Island use for the restructured note? A. 8.7% B. 8.9% C. 10.0% D. 13.1% |
Final payment $128,000/note book value $108,000 = (1 + r)2 = 1.185185 r = 8.9%
B |
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Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest on October 1, 2008. Island and Mutual Bank enter into an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 2010.
101. If the present value interest factor for two years at 10% is .82645, what will be the new note receivable balance for Mutual Bank? A. $89,256 B. $105,786 C. $108,000 D. $128,000 |
Final payment $128,000 present value interest factor .82645 = $105,786
B |
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Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest on October 1, 2008. Island and Mutual Bank enter into an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 2010.
102. Mutual Bank will record this transaction to recognize A. an extraordinary receivable restructure gain of $2,214. B. an extraordinary debt restructure loss of $2,214. C. neither a gain nor a lost from debt restructuring. D. an ordinary debt restructure loss of $2,214. |
D
Principal $100,000 + interest $8,000 - new note $105,786 = $2,214 loss |
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Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest on October 1, 2008. Island and Mutual Bank enter into an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 2010.
103. What effective interest rate will Mutual Bank use for the restructured note? A. 8.7% B. 8.9% C. 10.0% D. 13.1% |
C
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104. A restructured loan can differ from the original loan in any of the several ways listed below except:
A. Scheduled interest and principle payments may be reduced or eliminated B. The repayment schedule may be extended over a longer time period. C. The loan terms remain the same, but the amount of collateral securing the loan is increased. D. The customer and lender can settle the loan. |
C
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105. When troubled debt is restructured via continuation with modification of debt terms, the original loan is
A. continued but interest and principle payments may be reduced or eliminated. B. continued but the repayment schedule may be extended over a longer time period. C. continued but the amount of collateral securing the loan is increased. D. cancelled and a new loan agreement is signed. |
D
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76. In a periodic inventory system the ending inventory and cost of goods sold must be determined by
A. external auditors. B. physical count. C. a certification of inventory. D. reference to a running inventory balance. |
B
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77. A periodic system of inventory
A. reduces record keeping. B. increases record keeping. C. increases the cost of maintaining inventory. D. eliminates the need for a physical count. |
A
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78. The use of perpetual inventory systems is preferred where a
A. large number of expensive inventory units exist. B. small number of expensive inventory units exist. C. large number of inexpensive inventory units exist. D. small number of inexpensive inventory units exist. |
B
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79. A perpetual inventory system
A. usually maintains inventory records only in terms of physical units on hand. B. uses a purchases account to record additions to inventory. C. eliminates the need to periodically take a physical inventory count. D. keeps a running record of the amount of inventory on hand. |
D
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80. Goods held on consignment are included in the inventory of
A. the consignor. B. the consignee. C. both the consignor and the consignee. D. neither the consignor nor the consignee. |
A
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81. Manufacturing costs not considered to be closely associated with production are called
A. period costs. B. product costs. C. absorption costs. D. variable costs. |
A
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82. The carrying cost of inventory should include all of the following costs except
A. purchase costs. B. sales taxes and transportation costs paid by the purchaser. C. general administrative costs associated with the purchase of inventory. D. insurance and storage costs. |
C
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83. The inventory accounts of a manufacturer would include all of the following accounts except
A. raw materials inventory. B. work-in-process inventory. C. finished goods inventory. D. sold goods awaiting shipment inventory. |
D
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84. Variable costing is also referred to as
A. direct costing. B. full costing. C. variable costing. D. fixed costing. |
A
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85. When a company uses absorption costing
A. only fixed costs are inventoried. B. only variable costs are inventoried. C. all production costs are inventoried. D. fixed costs are expensed as incurred. |
C
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86. Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported income tends to
A. increase. B. decrease. C. remain the same. D. become highly volatile. |
A
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87. Examples of variable costs include all of the following except
A. raw materials costs. B. the plant manager's salary. C. direct labor costs. D. electricity used in running production machinery. |
B
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88. The mechanics of absorption costing can lead to year-to-year income changes
A. whenever inventory levels remain fairly constant. B. if the productivity of factory workers improves. C. whenever production and sales are not in balance. D. when raw material prices are increasing. |
C
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89. Analysts must recognize that the use of the specific identification method to value inventory has a serious deficiency because it
A. allows manipulation of income. B. allows manipulation of period costs. C. allows manipulation of selling expenses. D. allows manipulation of administrative expenses. |
A
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90. Goods available for sale needs to be allocated between
A. beginning inventory and inventory purchases. B. beginning inventory and ending inventory. C. ending inventory and cost of goods sold. D. inventory purchases and cost of goods sold. |
C
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91. Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to
A. match current costs with current revenues. B. match current costs with oldest revenues. C. match oldest costs with current revenues. D. match oldest costs with oldest revenues. |
A
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92. The input cost changes that occur after the purchase of inventory items in a current cost accounting system are recognized as
A. realized gains and losses. B. unrealized holding gains and losses. C. extraordinary gains and losses. D. costs of goods sold. |
B
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93. In a periodicinventory system, the ending LIFO inventory is
A. $1,624. B. $1,655. C. $1,678. D. $1,733. |
A
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94. In a periodic inventory system, the LIFO cost of goods sold is
A. $4,952. B. $4,967. C. $4,993. D. $5,006. |
D
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95. In a periodic inventory system, the FIFO cost of goods sold is
A. $4,952. B. $4,967. C. $4,993. D. $5,006. |
A
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96. In a periodicinventory system, the ending FIFO inventory is
A. $1,624. B. $1,655. C. $1,678. D. $1,733. |
C
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97. The Wheat Company has used the LIFO method for inventory valuation since the start of business 15 years ago. The current year ending inventory is $375,000. If the FIFO method of inventory had been used, the inventory would be $450,000. If Wheat Company had used the FIFO inventory method, income before income taxes would have been
A. $75,000 higher over the 15 year period. B. $75,000 lower over the 15 year period. C. $75,000 higher in the current year. D. $75,000 lower in the current year. |
A
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98. The LIFO reserve disclosure is required because LIFO inventory costs are
A. higher than FIFO inventory costs. B. lower than FIFO inventory costs. C. equal to FIFO inventory costs. D. usually of no consequence. |
B
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99. The conversion of a LIFO inventory to approximate the inventory at FIFO is accomplished through application of which one of the following formulas?
A. FIFO inventory = LIFO inventory LIFO reserve B. FIFO inventory = LIFO inventory LIFO reserve C. FIFO inventory = LIFO inventory - LIFO reserve D. FIFO inventory = LIFO inventory + LIFO reserve |
D
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100. The formula to convert the cost of goods sold LIFO to an estimate of the cost of goods sold FIFO is
A. cost of goods sold LIFO + increase in LIFO reserve = cost of goods sold FIFO B. cost of goods sold LIFO - increase in LIFO reserve = cost of goods sold FIFO C. cost of goods sold LIFO - decrease in LIFO reserve = cost of goods sold FIFO D. cost of goods sold LIFO + beginning LIFO reserve = cost of goods sold FIFO |
B
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101. The Xano Company reported merchandise inventory at LIFO of $450,000 on the year-end financial statements. The company also reported a LIFO reserve of $34,000. An estimate of the inventory balance if the inventory had been reported using the FIFO assumption is
A. $382,000. B. $416,000. C. $461,000. D. $484,000. |
D
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102. The Skone Corporation reported at the end of the year a LIFO reserve of $25,000. The beginning LIFO reserve was $20,000. The cost of goods sold was $197,500 under LIFO. The cost of goods sold under FIFO should be
A. $192,500. B. $197,500. C. $202,500. D. $222,500. |
A
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103. The Mick Company reported a LIFO cost of goods sold for the year of $100,000. The LIFO reserve decreased by $30,000 for the year. An estimate of the cost of goods sold under FIFO is
A. $70,000. B. $130,000. C. $160,000. D. $200,000. |
B
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104. The Johnson Corporation reported at the end of the year a LIFO reserve of $45,000. The beginning LIFO reserve was $60,000. The cost of goods sold was $260,000 under LIFO. The cost of goods sold under FIFO should be
A. $245,000. B. $260,000. C. $275,000. D. $305,000. |
C
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105. As a firm liquidates old LIFO layers of inventory, the lower costs of the LIFO layers are matched against current sales dollars resulting in a profit margin that is
A. inflated. B. deflated. C. lower than normal. D. always the same as under FIFO. |
A
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106. Current ratio distortion under LIFO inventory costing may be adjusted by
A. adding the LIFO reserve to current assets. B. subtracting the LIFO reserve from current assets. C. adding the LIFO reserve to current liabilities. D. subtracting the LIFO reserve from current liabilities. |
A
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107. Inventory turnover distortion under LIFO inventory costing may be adjusted by
A. adding the LIFO reserve amounts to cost of goods sold and adjusting beginning and ending inventory for LIFO liquidation profits whenever LIFO dipping occurs. B. subtracting the LIFO reserve amounts from cost of goods sold and adjusting beginning and ending inventory for LIFO liquidation profits whenever LIFO dipping occurs. C. adding the LIFO reserve amounts to beginning and ending inventory and adjusting cost of goods sold for LIFO liquidation profits whenever LIFO dipping occurs. D. subtracting the LIFO reserve amounts from beginning and ending inventory and adjusting cost of goods sold for LIFO liquidation profits whenever LIFO dipping occurs. |
C
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108. When the income effect of a LIFO liquidation is material, the SEC requires that the 10-K report disclose
A. the dollar impact of LIFO dipping on both a before- and after-tax basis. B. the dollar impact of LIFO dipping on the year-end inventory balance. C. this fact following a prescribed format. D. the dollar impact of LIFO dipping on income. |
D
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109. For a firm using LIFO, the numerator of the inventory turnover ratio is predominantly current period costs
A. and the denominator consists of old LIFO costs. B. thus it must be adjusted to conform to the old LIFO costs in the denominator. C. thus the denominator must be adjusted by adding the LIFO reserve to ending inventory. D. thus the denominator must be adjusted by subtracting the LIFO reserve from both beginning and ending inventory. |
A
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110. The LIFO conformity rule states that
A. if LIFO is used for tax purposes, the external financial statements must also use LIFO. B. if FIFO is used for tax purposes, the external financial statements must also use FIFO. C. if LIFO is used for tax purposes, the external financial statements must also use FIFO. D. if FIFO is used for tax purposes, the external financial statements must also use LIFO |
A
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111. Firms that use FIFO inventory cost assumptions always include some realized holding gains in reported income in periods of
A. level prices. B. deflation. C. falling prices. D. rising prices. |
D
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112. The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on the rapidity of the inventory turnover and the
A. change in accounts receivable turnover. B. divergence of total asset turnover from previous periods. C. severity of input cost change. D. rapidity of fixed asset turnover. |
C
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113. If the proper correcting entries were made at the end of 2006, how much will 2007 income before taxes be overstated or understated?
A. $2,000 understated B. $2,000 overstated C. $10,000 understated D. $10,000 overstated |
D
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114. If no correcting entries were made at the end of 2006, by how much will retained earnings be overstated or understated at the end of 2007? Ignore tax consequences.
A. $2,000 understated B. $2,000 overstated C. $10,000 understated D. $10,000 overstated |
A
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115. The use of the lower of cost or market method to value inventory for reporting purposes is a departure from the accounting principle of
A. going concern. B. conservatism. C. matching. D. historical cost. |
D
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116. TAD, Inc. uses the lower of cost or market method to value inventory. If the inventoryvalue is replacement cost, which one of the following statements is true?
A. Historical cost is less than replacement cost. B. Replacement cost is greater than net realizable value less a normal profit margin. C. Replacement cost is greater than historical cost. D. Net realizable value is greater than historical cost. |
B
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117. When applying the lower of cost or market method, market value cannot exceed the
A. floor. B. net realizable value. C. net realizable value less a normal profit margin. D. replacement cost. |
B
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118. The use of the lower of cost or market method to value inventory indicates a probable loss sustained. This is an application of the accounting principle of
A. matching. B. going concern. C. conservatism. D. consistency. |
C
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119. The use of the lower of cost or market method to value inventory for reporting purposes employs the accounting principle of
A. cost-benefit. B. matching. C. historical cost. D. conservatism. |
D
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120. The maximum limit for market value of product L-19 is
A. $36. B. $38. C. $48. D. $50. |
Net realizable value (ceiling) = selling price $50 - cost of completion $2 = $48
C |
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121. The minimum limit for market value of product M-23 is
A. $42. B. $46. C. $56. D. $60. |
Floor = selling price $60 - cost of completion $4 - normal profit $14 = $42
A |
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122. The lower of cost or market for product N-05 is
A. $20. B. $22. C. $24. D. $28. |
Cost = $20; market = $24 (replacement $24, ceiling $28, floor $22); LCM = $20
A |
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123. The lower of cost or market for item M-23 is
A. $40. B. $42. C. $46. D. $52. |
Cost = $52; market = $42 (replacement $40, ceiling $56, floor $42); LCM = $42
B |
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124. The "market" value for item N-05 is
A. $20. B. $24. C. $28. D. $30. |
Market = $24 (replacement $24, ceiling $28, floor $22)
B |
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125. ABC Company has elected to adopt the dollar-value LIFO inventory method when the inventory is valued at $125,000. The adoption takes place as of January 1, 2008 when the entire inventory represents a single pool. ABC Company determined that the inventory at December 31, 2008 was $144,375 at current year cost and $131,250 at base year cost using a relevant price index of 1.10. The inventory at December 31, 2008 under dollar value LIFO is
A. $131,250. B. $131,875. C. $138,125. D. $144,375. |
B
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126. The inventory at the end of Year 2 under dollar-value LIFO is
A. $238,095. B. $240,000. C. $250,000. D. $262,500. |
B
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127. The inventory under dollar-value LIFO at the end of Year 3 is
A. $274,075. B. $276,800. C. $278,856. D. $300,000. |
C
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128. The inventory under dollar-value LIFO at the end of Year 4 is
A. $240,000. B. $263,657. C. $274,074. D. $286,000. |
B
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129. LIFO layers are more likely to be liquidated when inventory records are kept on
A. an inventory group basis. B. a total inventory basis. C. an item-by-item basis. D. a specific identification basis. |
C
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