Chapter 7-9 Exam

Question 1

If inventory is sold with terms of FOB destination, the goods belong to the seller until they reach their destination.

Answer 1

TRUE The title to the goods transfers to the buyer at the destination when the terms are FOB destination

Question 2

7. In each accounting period, a manager can select the inventory costing method that yields the most positive net income. 


Answer 2

FALSE A change in inventory method is allowed only if it will improve the accuracy with which financial results and financial position are measured.

Question 3

A company’s ability to pay its short-term obligations depends on many factors including how quickly it sells its inventory. 


Answer 3

TRUE How quickly inventory is sold to customers and cash is collected are factors in determining a company’s ability to pay its short-term obligations.

Question 4

18. The choice of an inventory costing method can have a major impact on gross profit and cost of goods sold.

Answer 4

TRUE The four inventory costing methods produce different results for cost of goods sold, and as a result, can have a major impact on gross profit.

Question 5

23. The understatement of beginning inventory balance causes cost of goods sold to be understated and net income to be understated. 


Answer 5

FALSE Beginning inventory is added in the equation to determine cost of goods sold, so if it is understated, then cost of goods sold is understated. If the cost of goods sold expense on the Income Statement is understated, then net income will be overstated.

Question 6

33. Carrying insufficient quantities of inventory on hand: 
A. can inadvertently lower a company’s costs so much that its taxes become excessive.
B. can cause customers to go elsewhere to obtain the product.
C. has little effect on customer satisfaction.
D. will increase the costs of carrying inventory.

Answer 6

B. can cause customers to go elsewhere to obtain the product.
 Customers’ needs will not be satisfied by the company so they will go elsewhere.

Question 7

35. The primary goals of inventory management do not include: 
A. maintaining a sufficient quantity of inventory to keep customers satisfied.
B. maintaining sufficient quality of inventory to keep customers satisfied.
C. minimizing the costs associated with maintaining inventories.
D. purchasing inventory that will not be sold soon after they are acquired

Answer 7

D. purchasing inventory that will not be sold soon after they are acquired

Question 8

37. Which of the following is the equation for cost of goods sold? 
A. Beginning inventory + net purchases - Ending inventory
B. Beginning inventory + net purchases + Ending inventory
C. Net purchases - Beginning inventory
D. Ending inventory + net purchases - Beginning inventory

Answer 8

A. Beginning inventory + net purchases - Ending inventory Beginning inventory + net purchases = goods available for sale
Goods available for sale - Ending inventory = Cost of goods sold

Question 9

38. A merchandise company’s beginning inventory plus merchandise purchases equals: 
A. ending inventory.
B. cost of goods sold.
C. goods available for sale.
D. sales level.

Answer 9

C. goods available for sale. Goods available for sale = Beginning inventory + Net purchases

Question 10

39. A merchandise company’s beginning inventory plus merchandise purchases minus ending inventory equals: 
A. ending inventory.
B. cost of goods sold.
C. goods available for sale.
D. sales level.

Answer 10

B. cost of goods sold. Beginning inventory + net purchases = goods available for sale Goods available for sale - Ending inventory = Cost of goods sold

Question 11

57. If a company purchased 200 units of inventory at $9 per unit and 300 units at $10 per unit, its weighted average unit cost for this inventory would be: 
A. $9.00.
B. $9.50.
C. $9.60.
D. $10.00.

Answer 11

C. $9.60.



Question 12

105. Which of the following accounts would normally have a credit balance? 
A. Inventory
B. Cost of goods sold
C. Sales
D. Sales returns & allowances

Answer 12

C. Sales

Sales is a revenue account which has a normal credit balance.

Question 13

106. If a firm’s beginning inventory is $35,000, goods purchased during the period cost $120,000, and the cost of goods sold for the period is $140,000, what is the amount of the ending inventory? 
A. $45,000
B. $20,000
C. $25,000
D. $15,000

Answer 13

D. $15,000

Question 14

2. The aging of accounts receivable method is based upon the principle that the longer an account is overdue, the higher the risk of nonpayment. 


Answer 14

TRUE

Historical experience has shown that the longer an account remains unpaid, the higher the probability that it will never be paid.

Question 15

5. The receivables turnover ratio is calculated using the average net receivables. 


Answer 15

TRUE

Receivables turnover ratio = Net Sales/Average Net Receivables.

Question 16

6. Allowance for doubtful accounts is a temporary account which is closed to retained earnings at the end of the accounting period. 


Answer 16

FALSE

The allowance for doubtful accounts is a permanent account.

Question 17

14. The use of the Allowance method is required under the matching principle. 


Answer 17

TRUE

An estimate of the amount of accounts receivable which will not be collected is necessary to achieve matching of revenues and expenses.

Question 18

21. Neither GAAP nor IFRS allow the use of the direct write-off method. 


Answer 18

TRUE

GAAP and IFRS do not approve the use of the direct write-off method.

Question 19

23. The percentage of credit sales method, also called the income statement approach, estimates bad debts based on a historical percentage of sales that lead to bad debt losses. 


Answer 19

TRUE

Bad debts expense is calculated as a % of credit sales reported on the income statement.

Question 20

32. A company extends credit to customers because it expects the: 
A. rise in sales revenue to be greater than the rise in cost of extending credit.
B. delay in receiving cash to cost more than the increase in wage costs.
C. tax savings from a lower net income to be greater than the cost of extending credit.
D. bad debts expense to be less than the additional wage costs.

Answer 20

A. rise in sales revenue to be greater than the rise in cost of extending credit.


A company extends credit if it believes the additional revenues will exceed the additional costs.

Question 21

33. If a company did not extend credit to customers: 
A. gross revenue would rise.
B. costs would rise but so would its revenue.
C. costs would fall but so would its revenue.
D. gross profit would rise.

Answer 21

C. costs would fall but so would its revenue.


Extending credit to customers generally increases sales and introduces additional costs such as increased wage costs and bad debt costs; therefore, a company that does not extend credit will have less revenue and fewer costs.

Question 22

40. An allowance for doubtful accounts is a contra-account paired with: 
A. expenses.
B. cash.
C. net income.
D. accounts receivable.

Answer 22

D. accounts receivable.

The balance sheet reports net accounts receivable in the asset section which is calculated as accounts receivable minus the allowance for doubtful accounts.

Question 23

49. Net accounts receivable is: 
A. gross accounts receivable minus cost of goods sold.
B. also known as net pretax income.
C. gross accounts receivable minus allowance for doubtful accounts.
D. also known as net after-tax income.

Answer 23

C. gross accounts receivable minus allowance for doubtful accounts.


Accounts receivable minus the contra-asset account, Allowance for doubtful accounts, equals net accounts receivable.

Question 24

62. On the balance sheet, the allowance for doubtful accounts: 
A. is included in current liabilities.
B. increases the reported net value of accounts receivable.
C. appears under the heading “Other Assets.”
D. is deducted from accounts receivable.

Answer 24

D. is deducted from accounts receivable.

The balance sheet assets include net accounts receivable which is accounts receivable minus the allowance for doubtful accounts.

Question 25

104. The direct write-off method: 
A. ignores the matching principle.
B. is an acceptable alternative method of recognizing bad debt expense under GAAP.
C. results in higher bad debt expense for most companies.
D. may only be used by companies that do not extend credit to their customers.

Answer 25

A. ignores the matching principle.
 GAAP does not allow the use of the direct write-off method because it does not follow the matching principle. Bad Debt Expense is only recorded when a specific account is identified as uncollectible which may not be in the same period the revenue is earned.

Question 26

116. What is the amount due on the maturity date of a $5,000, 3-month, 10% note receivable? 
A. $5,125
B. $5,500
C. $6,500
D. $5,000

Answer 26

A. $5,125 The amount due at maturity is the principal amount of the note plus interest.
$5,000 + ($5,000 x .10 x 3/12) = $5,125.

Question 27

128. When the direct write-off method is used to account for uncollectible accounts, which of the following accounts would not be used? 
A. Bad Debt Expense
B. Accounts Receivable
C. Allowance for Doubtful Accounts
D. Notes Receivable

Answer 27

C. Allowance for Doubtful Accounts
 The direct write-off method does not use an allowance for doubtful accounts because no estimate for uncollectible accounts is made. Bad debt expense is recorded only when a specific account is determined to be uncollectible.

Question 28

1. When assets are purchased as a group, the total cost must be divided up and allocated to each asset in proportion to the market value of the assets as a whole. 


Answer 28

TRUE ## Footnote The asset cost is divided up among the individual assets acquired in the group based on their relative market values.

Question 29

2. Extraordinary repairs, replacements, and additions are added to the appropriate asset accounts rather than being recorded as expenses. 


Answer 29

TRUE ## Footnote These are capital expenditures that increase an asset's usefulness in the future. They are recorded as an increase to the appropriate asset account, not as an expense.

Question 30

3. The useful life of an asset is always measured in years. 


Answer 30

FALSE ## Footnote Useful life of an asset can be measured in years, units of output, hours of operation, etc.

Question 31

4. Assuming no additions, replacements, or extraordinary repairs, the book value of any long-lived asset with a limited life is always less than or equal to its acquisition cost. 


Answer 31

TRUE ## Footnote Book value = Acquisition cost - Accumulated deprecation.

Question 32

5. If a company produces the same number of units per period over an asset's useful life, straight-line depreciation expense per period will be the same as the depreciation expense recorded using the units-of-production method. 


Answer 32

TRUE ## Footnote Straight-line depreciation allocates the same amount of depreciation each period over the asset's useful life. Units-of-production deprecation is based on the amount of asset production, but both methods will result in the same amount of depreciation expense per period if the same number of units is produced each period over the same useful life.

Question 33

11. Depreciation measures the actual decline in the market value of an asset. 


Answer 33

FALSE ## Footnote Depreciation is a rational, systematic method of allocating the cost of an asset to expense over the period of its use.

Question 34

12. Accumulated depreciation represents funds set aside to buy new assets. 


Answer 34

FALSE ## Footnote Accumulated depreciation is the amount of depreciation that has been recorded to date.

Question 35

14. Residual value is the estimate of the asset's value at the end of its useful life. 


Answer 35

TRUE ## Footnote Residual value (also called salvage value) is the estimate of the amount the company will receive when it disposes of the asset.

Question 36

15. Accumulated depreciation is classified as an expense. 


Answer 36

FALSE ## Footnote Accumulated depreciation is a contra-asset account.

Question 37

16. The calculation for depletion of natural resources is similar to the calculation for units-of-production depreciation. 


Answer 37

TRUE ## Footnote Depletion is calculated based on units extracted which is comparable to the units-of-production depreciation of tangible plant & equipment.

Question 38

18. The periodic allocation of a natural resource's cost over the period of its extraction or harvesting is called amortization. 


Answer 38

FALSE ## Footnote Allocation of the cost of a natural resource is called depletion.

Question 39

19. The exclusive right to use a certain name or symbol is called a trademark. 


Answer 39

TRUE ## Footnote Trademarks are intangible assets which represent the right to use a special name or slogan.

Question 40

20. If an asset is depreciated with the straight-line method and it has a salvage (residual) value, the depreciation will be a level amount over the asset's life until the last year when it will be lower. 


Answer 40

FALSE ## Footnote Straight-line depreciation provides a level amount of depreciation over the asset's useful life. The amount depreciated is the cost - salvage (residual) value.

Question 41

23. Trademarks and Goodwill are intangible assets that are not amortized. 


Answer 41

TRUE ## Footnote Trademarks and Goodwill are intangible assets with unlimited or indefinite lives and are not amortized.

Question 42

28. Which of the following statements regarding the nature of long-lived assets is true? 
A. Long-lived assets are assets that never decline in value.
B. Another name for a tangible long-lived asset is a fixed asset.
C. Long-lived assets have useful lives between 10 and 20 years.
D. Long-lived assets are defined as assets that are no longer being depreciated. ## Footnote

Answer 42

B. Another name for a tangible long-lived asset is a fixed asset.
 Tangible long-lived assets are often referred to as fixed assets. Long-lived assets may appreciate in value or decline in value over their useful lives. The useful life will depend on the expected service life of the asset to the present owner. Long-lived assets are depreciated over their useful life.

Question 43

29. Which of the following statements regarding capitalization is correct? 
A. Capitalizing costs refers to the process of converting assets to expenses.
B. If a company builds its own facility, only the cost of materials is capitalized.
C. Capitalizing a cost means to record it as an asset.
D. Capitalization is an immediate decrease in net income. ## Footnote

Answer 43

C. Capitalizing a cost means to record it as an asset. To capitalize a cost means to record it as an asset rather than an expense.

Question 44

30. Which of the following statements regarding straight-line depreciation is correct? 
A. Straight-line depreciation is by far the most common method of depreciation used in the U.S.
B. When the straight-line method is used to compute depreciation, an asset's carrying value remains constant over the life of the asset.
C. Straight-line depreciation is an approved method to allocate the cost of an asset to expense and it serves as a measure of the physical decline in the asset.
D. The straight line method of depreciation results in a straight-line increase of depreciation expense over the life of an asset. ## Footnote

Answer 44

A. Straight-line depreciation is by far the most common method of depreciation used in the U.S.


Question 45

31. Which of the following statements regarding long-lived assets is not correct? 
A. Depreciation and maintenance are expenses associated with the use of tangible long-lived assets.
B. Assuming no additions, replacements, or extraordinary repairs, the carrying value of a long-lived asset is never more than its original cost.
C. The cost of a long-lived asset minus the accumulated amortization is called the carrying value of the asset.
D. All tangible and intangible long-lived assets are depreciated as they are used in the business.

Answer 45

D. All tangible and intangible long-lived assets are depreciated as they are used in the business. ## Footnote Tangible long-lived assets are depreciated; intangible assets are amortized.

Question 46

37. Which of McGraw-Hill's intangible assets gives it the legal right to prevent you from borrowing a textbook from a friend and photocopying all of it? 
A. Patent
B. Trademark
C. Franchise agreement
D. Copyright

Answer 46

D. Copyright ## Footnote Protection to the authors from someone copying without permission is provided by a copyright.

Question 47

38. The right to exclude others from making or using an invention is a 
A. patent.
B. copyright
C. franchise.
D. licensing right.

Answer 47

A. patent.
 A patent is an exclusive right granted by the federal government which declares the owner to be the only one who can make or use an invention.

Question 48

42. The primary difference between ordinary repairs and extraordinary repairs is: 
A. ordinary repairs cost less.
B. ordinary repairs are expenditures for routine maintenance and upkeep, whereas extraordinary repairs increase an assets economic usefulness in the future through increased efficiency, capacity, or longer life.
C. extraordinary repairs only maintain the asset for a short time, whereas ordinary repairs increase the usefulness of assets beyond their original condition.
D. extraordinary repairs are expenditures, not expenses.

Answer 48

B. ordinary repairs are expenditures for routine maintenance and upkeep, whereas extraordinary repairs increase an assets economic usefulness in the future through increased efficiency, capacity, or longer life.


Question 49

43. If a company capitalizes costs that should be expensed, how is its income statement for the current period impacted? 
A. Net income will be lower than it should be.
B. Revenues will be lower than they should be.
C. Expenses will be lower than they should be.
D. Assets will be lower than they should be. ## Footnote

Answer 49

C. Expenses will be lower than they should be.


Question 50

56. If the double-declining balance method were used to depreciate a building that has a 10-year useful life and a residual value equal to 10% of the building's original cost, what depreciation rate would be used? 
A. 9%
B. 10%
C. 18%
D. 20%

Answer 50

D. 20% ## Footnote Double-declining rate is twice the straight-line rate.
DDB depreciation rate = 2/useful life; 2/10 = 20%

Question 51

90. Which of the following statements is true? 
A. Depreciation allocates the cost of tangible assets over their useful lives.
B. Depreciation allocates the cost of intangible assets over their useful lives.
C. Amortization allocates the cost of tangible assets over their useful lives.
D. The term "depreciation" relates to all long-lived assets whereas "amortization" relates only to intangible assets.

Answer 51

A. Depreciation allocates the cost of tangible assets over their useful lives.


Question 52

111. The straight-line depreciation method and the double-declining-balance depreciation method 
A. produce the same total depreciation over the asset's useful life
B. produce the same amount of depreciation expense each year.
C. produce the same book value each year.
D. are the only acceptable methods of depreciation for financial reporting

Answer 52

A. produce the same total depreciation over the asset's useful life
 Both straight-line and declining-balance methods are acceptable methods of depreciation. They will produce the same total depreciation over the asset's useful life, but the amount of depreciation expense and book value will differ from year-to-year.

Question 53

116. Extraordinary repairs 
A. are revenue expenditures.
B. extend an asset's life beyond the original estimate.
C. are expensed as incurred.
D. are credited to accumulated depreciation.

Answer 53

B. extend an asset's life beyond the original estimate.
 Extraordinary repairs are not normal maintenance; they extend the life of an asset and are capitalized.

Question 54

123. Shipping costs incurred when a long-lived asset is purchased should generally be 
A. expensed in the period incurred.
B. deducted from the accumulated depreciation account.
C. added to the cost of the asset.
D. not recorded in the accounts.

Answer 54

C. added to the cost of the asset.
 Shipping costs are necessary and reasonable costs of acquiring an asset and should be added to the cost of the asset.

Question 55

128. Accumulated depreciation is classified as a(an) 
A. expense.
B. contra-asset.
C. liability.
D. stockholders' equity.

Answer 55

B. contra-asset. Accumulated depreciation is a contra account to the long-lived asset account.

Question 56

129. The book value of a depreciable asset can never be less than its 
A. historical cost.
B. market value.
C. capitalized cost.
D. residual value.

Answer 56

D. residual value. ## Footnote An asset is not depreciation below its residual value.

Question 57

125. Furniture with a $3,000 sticker price is purchased for $2,500 on account. Which of the following entries would properly record this purchase?
  
A. Option: A
B. Option: B
C. Option: C
D. Option: D

Answer 57

C. Option: C
 Assets are recorded at the cost to acquire them.