ACCT 201 Principles of Financial

Accounting
Practice Exam - Chapter 5
Reporting & Analyzing Inventories
Dr. Fred Barbee
Part I: Multiple-Choice Questions
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1. Merchandise inventory includes:

a. All goods owned by a company and held for sale.

b. All goods in transit.
c. All goods on consignment.
d. Damaged goods only.
e. All of the above
2. Goods in transit are included in a purchaser's inventory:

a. At any time in transit.

b. When the purchaser is responsible for paying freight
charges.
c. When the supplier is responsible for freight charges.
d. If the goods are shipped FOB destination.
e. After the half-way point between the buyer and seller.
3. During a period of steadily rising costs, the inventory valuation method that yields the

lowest reported net income is:

a. Specification identification method.

b. Average cost method.
c. Weighted-average method.
d. FIFO method.
e. LIFO method.
4. If a period-end inventory amount is reported in error, it can cause a misstatement in:

a. Cost of goods sold

b. Gross profit
c. Net income
d. Current assets
e. All of the above
5. The understatement of the ending inventory balance causes:

a. Cost of goods sold to be overstated and net income to be

understated.
b. Cost of goods sold to be overstated and net income to be
overstated.
c. Cost of goods sold to be understated and net income to be
understated.
d. Cost of goods sold to be understated and net income to be
overstated.
e. Cost of goods sold to be overstated and net income to be
correct.

6. The inventory turnover ratio:

a. Is used to analyze profitability.

b. Is used to measure solvency.
c. Measures how quickly a company turns over its merchandise
inventory.
d. Validates the acid-test ratio.
e. Calculation depends on the company's inventory valuation
method.
7. Management must confront which of the following considerations when accounting for
inventory:

a. Costing (valuation) method.

b. Inventory system.
c. Items to be included and their cost.
d. Use of lower of cost or market.
e. All of the above.
8. The inventory valuation method that identifies the invoice cost of each item in ending
inventory to determine the cost assigned to that inventory is the:

a. Weighted-average inventory method.

b. First-in, First-out method.
c. Last-in, First-out method.
d. Specific identification method.
e. Retail inventory method.
9. A company had the purchases shown below during the current year. On December 31, there
were 26 units remaining in ending inventory. These 26 units consisted of 2 from January, 4

from February, 6 from May, 4 from September, and 10 from November. Using the specific
identification method, what is the cost of the ending inventory?
January
10 units @ $120
February

20 units @ $130

May

15 units @ $140

September

12 units @ $150

November

10 units @ $160

a. $3,500
b. $3,800
c. $3,960
d. $3,280
e. $3,640
10. A company normally sells its product for $20 per unit, which includes a profit margin of
25%. However, the selling price has fallen to $15 per unit. This company's current inventory
consists of 200 units purchased at $16 per unit. Replacement cost has now fallen to $13 per
unit. Calculate the value of this company's inventory at the lower of cost or market.

a. $2,550
b. $2,600
c. $2,700
d. $3,000
e. $3,200

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Part II: Short Problems

Short Problem #1
Evaluate each (separate) inventory error and determine whether it
overstates or understates each item.
Inventory Error

Cost of Goods
Sold

Net Income

Understates beginning
inventory
Understates ending
inventory
Overstates beginning
inventory
Overstates ending
inventory

Short Problem #2
A company reported the following data related to its ending inventory::
Product

Units

Cost

Market

849

100

$10

$11

842

75

16

14

847

60

14

13

860

40

16

20

Calculate the lower-of-cost-or-market on the: (a) Inventory as a whole;

and (b) Inventory applied separately to each product.

Short Problem #3
A company uses the retail inventory method and has the following
information available concerning its most recent accounting period:
At Cost At Retail
Beginning-of-period inventory
Net Purchases

$148,600 $245,200
677,400 1,229,800

Sales

1,200,000

Required:
1. What is the cost-to-retail ratio using the retail method?
2. What is the estimated cost of the ending inventory?

Part III: Problems

Smith Company reported the following current-year data for its only
product:
Jan. 1

Beginning
Inventory

200

Units @
$10

$2,000

Mar. 14

Purchase

350

Units @
$15

5,250

Jul. 30

Purchase

450

Units @
$20

9,000

Oct. 26

Purchase

700

Units @
$25

17,500

Units Available
Cost of Goods
Available for Sale

1,700 Units
$33,750

Smith resold its products at $40 per unit on the following dates:

Jan. 10

Sales

100 units

Mar. 15

Sales

150 units

Oct. 5

Sales

310 units

Total Sales

560 units

Smith uses a perpetual inventory system. Determine the costs assigned to

cost of goods sold and ending inventory using (a) FIFO and (b) LIFO.
Compute the gross margin for each method.

Answers to Multiple-Choice Questions

Here are the answers to Chapter 4 multiple choice questions. How did you
do? Any questions? If so, give me a call (786-1662), email me, or stop by
my office (BEB 307D).
1. a
2. b
3. e
4. e
5. a
6. c
7. e

8. d
9. b
10.b
\

Solution to Short-Problem #1

Short Problem #1
Evaluate each (separate) inventory error and determine whether it
overstates or understates each item.
Inventory Error

Cost of Goods
Sold

Net Income

Understates beginning
inventory
Understates ending
inventory
Overstates beginning
inventory
Overstates ending
inventory

Solution
Inventory Error

Cost of Goods
Sold

Net Income

Understates beginning
inventory

Understated

Overstated

Understates ending
inventory

Overstated

Understated

Overstates beginning
inventory

Overstated

Understated

Overstates ending
inventory

Understated

Overstated

Solution to Short-Problem #2

Short Problem #2
A company reported the following data related to its ending inventory::
Product

Units

Cost

Market

849

100

$10

$11

842

75

16

14

847

60

14

13

860

40

16

20

Calculate the lower-of-cost-or-market on the: (a) Inventory as a whole;

and (b) Inventory applied separately to each product.

Solution
Product

Units on
Hand

Per Unit
Market
Cost

Total
Cost

Total
Market

LCM by
Product

849

100

$10

$11

$1,000

$1,100

$1,000

842

75

16

14

1,200

1,050

1,050

847

60

14

13

840

780

780

860

40

16

20

640

800

640

$3,680

$3,730

$3,470

Solution to Short-Problem #3

Short Problem #3
A company uses the retail inventory method and has the following
information available concerning its most recent accounting period:
At Cost At Retail
Beginning-of-period inventory
Net Purchases
Sales

$148,600 $245,200
677,400 1,229,800
1,200,000

Required:
1. What is the cost-to-retail ratio using the retail method?
2. What is the estimated cost of the ending inventory?

Solution
1. What is the cost-to-retail ratio using the retail method?
Beginning Inventory
Net Purchases
Cost of Goods Available for
Sale

2.

$148,600 $245,200
677,400 1,229,800
$826,000 $1,475,000

The Cost-to-retail ratio is $826,000 / $1,475,000 = 56%.

3. What is the estimated cost of the ending inventory?

Sales

$1,200,000

Ending inventory at retail

Estimated cost of ending
inventory (56% x $275,000)

$275,000
$154,000

ACCT 201 Principles of Financial Accounting

Practice Exam - Chapter 1
Accounting Information For Business Decisions
Dr. Fred Barbee
Select your answer by clicking on the button next to each alternative. You will receive
immediate feedback. Note: Your browser must support JavaScript in order to use this
quiz. However, answers are provided for those of you with non javascript enabled
browsers.
1. Accounting is an information and measurement system that

a. Identifies economic activities

b. Records economic activities
c. Communicates economic information
d. All of the above.
2. Businesses can take the following form(s)

a. Sole Proprietorship.
b. Corporations.
c. Partnership.
d. All of the above.
3. Operating activities

a. Are the means organizations use to pay for resources like land,
buildings, and machines..
b. Involve using assets to reserach, develop, purchase, produce, distribute
and market products and services.
c. Involve acquiring assets that a business uses to sell its products or
services.
d. Are also called asset management.

4. External users of accounting information include

a. Shareholders.
b. Customers.
c. Creditors.
d. All of the above.
5. The primary objective of financial accounting is:

a. To help organizations keep track of financing activities.

b. To provide financial statements to help users analyze an organization's
activities.
c. To help an organization define its ideas, goals, and actions.
d. To help an organization keep track of its buying and selling of resources.
6. Ethics

a. Are beliefs that separate right from wrong.

b. And law often coincide.
c. Help to prevent conflicts of interest.
d. All of the above.
7. Expenses:

a. Are the amounts a business earns after subtracting all costs.

b. Are the amounts earned from selling products and services.
c. Are the costs incurred with generating sales.
d. Occur when costs are greater than sales.
8. Return on investment is:

a. Also called return on assets.

b. Is used to help evaluate return and risk.

c. Computed by dividing net income by average total assets.

d. All of the above.
9. The Statement of Cash Flows reports on cash flows for:

a. Operating activities.
b. Investing activities.
c. Planning activities.
d. A and B only.
10. The basic financial statements include the

a. Balance Sheet.
b. Income statement.
c. Statement of Cash Flows
d. All of the above.

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Part II: Short Problems

1. Beginning retained earnings totaled $15,000 and the business sustained a net loss of $5,000
during the period. No dividends were paid during the period. If the Common Stock account
balance is $40,000, what is the new balance of retained earnings and what is the end-of-period
total equity?

2 Match the following terms a through j with the appropriate definition

a. Investing Activities
b. Ethics
c. Recordkeeping
d. Audit
e. Internal Users
f. Accounting
g. Financing Activities
h. Social Responsibility
i. Operating Activities
j. External Users
1. An information and measurement system that identifies, records and communicates
relevant information to people to help them make better decisions.
2. The part of accounting that involves recording transactions and events, either
_____
electronically or manually.
3. Persons using accounting information who are not directly involved in the running of
_____
the organization.
4. Persons using accounting information who are directly involved in managing the
_____
organization.
5. The use of resources to carry out an organization's plans in the areas of research,
_____
dvelopment, purchasing, production, distribution, and marketing.
6. The buying and selling of resources that an organization uses to acquire its products
_____
and/or services.
7. The means organizations use to pay for resources such as land, buildings, and
_____
machines.
8. Conduct by which actions are judged as right or wrong, fair or unfair, honest, or
_____
dishonest.
9. Involves considering the impact of and being accountable for the effects that actions
_____
might have on society.
10. An analysis and report of an organization's accounting system and records using
_____
various tests.
_____

3. The characteristics below apply to at least one of the forms of business

a. Is a separate legal entity
b. Is allowed to be owned by one person only.
c. Owner or owners are personally liable for debts of the business.
d. Is a taxable entity.
e. Is created by a charter form a state or the federal government.
f. Is the most common of all types of businesses.
g. May have a contract specifying the division of profits among the owners.
h. Owner or owners are not personally liable for debts of the business.
i. Has an unlimited life
Use the following format to indicate (with a "yes" or "no") whether or not a characteristic
applies to each type of business organization.
Proprietorship

Partnership

a.
b.
c.
d.
e.
f.
g.
h.
i.

Part III: Problems

The following information is available for the XYZ Company:

Corporation

Assets
Cash inflows from operating activities
Cash outflows from financing activities
Cash outflows from investing activities
Costs and Expenses
Retained earnings, December 31, 2001
Retained earnings, December 31, 2002
Liabilities
Revenues
Dividends
Common stock

$152,000
105,000
(44,000)
(84,000)
43,000
12,000
???
28,000
135,000
(30,000)
50,000

Using the above information prepare an Income Statement, Statement of Retained

Earnings, and Statement of Cash Flows for the XYZ Company's calendar year 2002.
Also prepare its Balance Sheet at December 31, 2002. br>

Here are the answers to Chapter 1 multiple choice questions. How did you do? Any
questions? If so, give me a call (786-1662) or stop by my office (BEB 307D).
1. d
2. d
3. b
4. d
5. b
6. d
7. c
8. d
9. d
10.d

11. Solution to Short-Problem #1

Short Problem #1
1. Beginning retained earnings totaled $15,000 and the business sustained a net
loss of $5,000 during the period. No dividends were paid during the period. If
the Common Stock account balance is $40,000, what is the new balance of
retained earnings and what is the end-of-period total equity?

Solution
Calculation:
Beginning Retained Earnings of $15,000 - a net loss of $5,000 - $0
dividends = Ending Retained Earnings of $10,000. Stockholder equity is
$50,000 (Common Stock of $40,000 + Retained Earnings of $10,000.

Last Modified January 15, 2003

Solution to Short-Problem #2

Short Problem #2
2 Match the following terms a through j with the appropriate definition
a. Investing Activities

b. Ethics
c. Recordkeeping
d. Audit
e. Internal Users
f. Accounting
g. Financing Activities
h. Social Responsibility
i. Operating Activities
j. External Users
f

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

An information and measurement system that identifies, records and

communicates relevant information to people to help them make better
decisions.
The part of accounting that involves recording transactions and events, either
electronically or manually.
Persons using accounting information who are not directly involved in the
running of the organization.
Persons using accounting information who are directly involved in managing
the organization.
The use of resources to carry out an organization's plans in the areas of
research, dvelopment, purchasing, production, distribution, and marketing.
The buying and selling of resources that an organization uses to acquire its
products and/or services.
The means organizations use to pay for resources such as land, buildings,
and machines.
Conduct by which actions are judged as right or wrong, fair or unfair,
honest, or dishonest.
Involves considering the impact of and being accountable for the effects that
actions might have on society.
An analysis and report of an organization's accounting system and records
using various tests.

Solution to
ShortProblem #3
3. The characteristics below apply to at least one of the forms of business
a. Is a separate legal entity
b. Is allowed to be owned by one person only.
c. Owner or owners are personally liable for debts of the business.
d. Is a taxable entity.
e. Is created by a charter form a state or the federal government.
f. Is the most common of all types of businesses.
g. May have a contract specifying the division of profits among the owners.
h. Owner or owners are not personally liable for debts of the business.
i. Has an unlimited life
Use the following format to indicate (with a "yes" or "no") whether or not a characteristic
applies to each type of business organization.
Proprietorship

Partnership

Corporation

a.

No

No

Yes

b.

Yes

No

Yes

c.

Yes

Yes

No

d.

No

No

Yes

e.

No

No

Yes

f.

Yes

No

No

g.

No

Yes

No

h.

No

No

Yes

i.

No

No

Yes

Solution to Problem #1

The following information is available for the XYZ Company:

Assets
Cash inflows from operating activities
Cash outflows from financing activities
Cash outflows from investing activities
Costs and Expenses
Retained earnings, December 31, 2001
Retained earnings, December 31, 2002
Liabilities
Revenues
Dividends
Common stock

$152,000
105,000
(44,000)
(84,000)
43,000
12,000
???
28,000
135,000
(30,000)
50,000

Using the above information prepare an Income Statement, Statement of

Retained Earnings, and Statement of Cash Flows for the XYZ Company's
calendar year 2002. Also prepare its Balance Sheet at December 31,
2002.

Solution
XYZ Company
Income Statement
For the Year Ended December 31, 2002
Revenues
Costs and Expenses
Net Income

$135,000
43,000
$92,000

XYZ Company
Statement of Retained Earnings
For the Year Ended December 31, 2002
Retained Earnings December 31,

$12,000

2001
Add Net Income

92,000

Less Dividends

(30,000)

Retained Earnings December 31,

2002

$74,000

XYZ Company
Balance Sheet
December 31, 2002
Assets

$152,000

Liabilities
Common Stock
Retained Earnings
Total Liabilities and Equity

$28,000
$50,000
74,000 124,000
$152,000

XYZ Company
Statement of Cash Flows
For the Year Ended December 31, 2002
Cash Flows From Operating
Activities

$105,000

Cash Used by Investing

Activities

(84,000)

Cash Used by Financing

Activities

(44,000)

Net Decrease in Cash

$23,000