ACC 301 Chapter 9 Quiz

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

____ 1. The gross profit method of inventory valuation is invalid when

a. there is substantial increase in the quantity of inventory during the year.
b. there is substantial increase in the cost of inventory during the year.
c. the gross margin percentage changes significantly during the year.
d. all ending inventory is destroyed by fire before it can be counted.
____ 2. An overstatement of ending inventory in Period 1 would result in income of Period 2 being
a. overstated.
b. understated.
c. correctly stated.
d. The answer cannot be determined from the information given.
____ 3. What is the maximum amount at which inventory can be valued when the goods have experienced a
permanent decline in value?
a. Historical cost
b. Sales price
c. Net realizable value
d. Net realizable value reduced by a normal profit margin
____ 4. Hardy Company is a wholesale electronics distributor. On December 31, 2005, it prepared the following
partial income statement:

Gross sales ............................... $600,400

Sales discounts ........................... 400
Net sales ................................. $600,000
Cost of goods sold:
Beginning inventory ..................... $200,000
Net purchases ........................... 300,000

Given this information, if Hardy Company's gross margin is 30 percent of net sales, what is the correct ending
inventory balance?
a. $80,000
b. $120,000
c. $180,000
d. $500,000
____ 5. The following information is available for the Becca Company for the three months ended June 30 of this
year:

Inventory, April 1 of this year ...................... $1,200,000

Purchases ............................................ 4,500,000
Freight-in ........................................... 300,000
Sales ................................................ 6,400,000

The gross margin was 25 percent of sales. What is the estimated inventory balance at June 30?
a. $880,000
b. $933,000
c. $1,200,000
d. $1,500,000
____ 6. The following information appears in Olsen Company's records for the year ended December 31:

Inventory, January 1 .................................. $ 325,000

Purchases ............................................. 1,150,000
Purchase returns ...................................... 40,000
Freight-in ............................................ 30,000
Sales ................................................. 1,700,000
Sales discounts ....................................... 10,000
Sales returns ......................................... 15,000

On December 31, a physical inventory revealed that the ending inventory was only $210,000. Olsen's gross
profit on net sales has remained constant at 30 percent in recent years. Olsen suspects that some inventory
may have been pilfered by one of the company's employees. At December 31, what is the estimated cost of
missing inventory?
a. $75,000
b. $82,500
c. $210,000
d. $292,500
____ 7. A company sells four products: I, II, III, and IV. The company values all inventories using the lower-of-cost-
or-market procedure. The company has consistently experienced a profit margin of 20 percent of sales and
expects this rate to hold for the future. Additional information, shown below, is available for the most recent
year as of December 31.

Original Cost to Estimated Cost Expected Selling

Product Cost Replace to Sell Prices
I $60 $70 $10 $100
II 70 90 20 120
III 80 60 10 60
IV 90 80 20 90

Using the lower-of-cost-or-market procedure, what is the reported inventory value at December 31 for one
unit of Product I?
a. $60
b. $70
c. $80
d. $90
____ 8. The Garrett Corporation uses the lower-of-cost-or-market method to value inventory. Data regarding the
items in work-in-process inventory are presented below.

Markers Pens Highlighters

Historical cost ................ $24,000 $18,880 $30,000
Selling price .................. 36,000 36,000 36,000
Estimated cost to complete ..... 4,800 4,800 6,800
Replacement cost ............... 20,800 16,800 31,800
Normal profit margin as a
percentage of selling price .... 25% 25% 10%

The value for cost to be used in the lower-of-cost-or-market comparison for the markers is
a. $20,800.
b. $23,400.
c. $24,000.
d. $31,200.
____ 9. Elrond Company began operations in 2003. During the first two years of operations, Elrond made
undiscovered errors in taking its year-end inventories that understated 2003 ending inventory by $40,000 and
overstated 2004 ending inventory by $50,000. The combined effect of these errors on reported income is

2003 2004 2005

a. understated $40,000 overstated $50,000 not affected

b. understated $40,000 overstated $10,000 not affected
c. understated $40,000 overstated $90,000 understated
$50,000
d. overstated $40,000 understated $50,000 overstated $10,000
____ 10. The term LIFO reserve refers to
a. a cost flow assumption for valuing inventory.
b. a special fund set aside to cover LIFO liquidations.
c. inventory pools used in the dollar-value LIFO method.
d. the difference between the ending inventory amount under LIFO and the ending inventory
amount under another inventory cost flow assumption.
____ 11. If a company experiences a liquidation of a LIFO inventory layer in the second quarter that is expected to be
restored by the end of the annual financial
reporting period, the company should
a. treat the layer as if it were liquidated and include in cost of goods sold the expected
replacement cost of the inventory sold.
b. deplete the LIFO layer as if the interim period were an annual period.
c. change to an alternative inventory cost method, such as FIFO, so that the problem of LIFO
liquidation is not encountered.
d. delay the recognition of both revenue and cost of goods sold on the inventory involved
until a final determination of the LIFO inventory can be made at the end of the annual
period.
____ 12. Western Manufacturing Company uses a perpetual inventory system for its raw materials. The inventory
records reflect a raw materials balance of $378,500 at December 31. A physical inventory taken on that date
revealed raw materials of $375,750. How will the $2,750 difference affect raw materials inventory and cost of
goods sold, assuming it is attributed to normal shrinkage?

Raw Materials Cost of Goods Sold

a. Increase Decrease
b. Decrease No effect
c. Decrease Increase
d. No effect Increase
____ 13. The use of a discounts lost account implies that the recorded cost of a purchased inventory item is its
a. invoice price.
b. invoice price plus the purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.
____ 14. If goods shipped FOB destination are in transit at the end of the year, they should be included in the inventory
balance of the
a. seller.
b. common carrier.
c. buyer.
d. bank.
____ 15. Goods in transit at year-end purchased FOB shipping point were appropriately recorded in the purchases
account but were incorrectly excluded from the ending inventory. What effect will this omission have on the
company's assets, liabilities, and retained earnings at year-end?
a. No effect, no effect, overstated
b. No effect, no effect, understated
c. Understated, no effect, overstated
d. Understated, no effect, understated
____ 16. On August 1, Stephan Company recorded purchases of inventory of $80,000 and $100,000 under credit terms
of 2/15, net 30. The payment due on the $80,000 purchase was remitted on August 14. The payment due on
the $100,000 purchase was remitted on August 29. Under the net method and the gross method, these
purchases should be included at what respective net amounts in the determination of cost of goods available
for sale?

Net Method Gross Method

a. $178,400 $176,400
b. $176,400 $176,400
c. $176,400 $178,400
d. $180,000 $176,400
____ 17. With LIFO, cost of goods sold is $195,000, and ending inventory is $45,000. If FIFO ending inventory is
$65,000, how much is FIFO cost of goods sold?
a. $215,000
b. $195,000
c. $175,000
d. $65,000
____ 18. Holdaway Co., a manufacturer, had inventories at the beginning and end of its current year as follows:

Beginning End
Raw materials ............................. $11,000 $15,000
Work in process ........................... 20,000 24,000
Finished goods ............................ 12,500 9,000

During the year, the following costs and expenses were incurred:

Raw materials purchased ............................... $150,000

Direct labor cost ..................................... 60,000
Indirect factory labor ................................ 30,000
Taxes and depreciation on factory building ............ 10,000
Taxes and depreciation on sales room and office ....... 7,500
Sales salaries ........................................ 20,000
Office salaries ....................................... 12,000
Utilities (60% applicable to factory, 20% to sales room,
and 20% to office) .................................... 25,000

Holdaway's cost of goods sold for the year is

a. $257,000.
b. $260,500.
c. $261,000.
d. $269,500.
____ 19. Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators during August is shown
below:
 Balance/
Date Transaction Units Cost
August 1 Inventory 2,000 $36.00
7 Purchase 3,000 37.20
12 Sales 3,600
21 Purchase 4,800 38.00
22 Sales 3,800
29 Purchase 1,600 38.60

If Miller Inc. uses a FIFO periodic inventory system, the ending inventory of Model III calculators at August
31 is reported as
a. $150,080.
b. $150,160.
c. $152,288.
d. $152,960.
____ 20. Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators during August is shown
below:

Balance/
Date Transaction Units Cost
August 1 Inventory 2,000 $36.00
7 Purchase 3,000 37.20
12 Sales 3,600
21 Purchase 4,800 38.00
22 Sales 3,800
29 Purchase 1,600 38.60

If Miller Inc. uses a LIFO cost perpetual inventory system, the ending inventory of Model III calculators at
August 31 is reported as
a. $146,400.
b. $150,080.
c. $150,160.
d. $152,960.