FAR 5 - Lecture notes 9 PDF

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Statement 1: Buying and selling are the only activities of a merchandising business. Statement 2: there is only one ledger account to be maintained as Merchandise Inventory for beginning and ending. a. Only Statement 1 is correct. b. Only Statement 2 is correct. c. Both are statements are correct. d...

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LA SALLE UNIVERSITY COLLEGE OF BUSINESS AND ACCOUNTANCY Second Semester of A.Y. 2019-2020 INTEGRATED ENHANCEMENT COURSE FOR ACCOUNTANCY FAR: Financial Accounting and Reporting by Lowelle C. Pacot, CPA, MMA MULTIPLE CHOICE 1.

Statement 1: Buying and selling are the only activities of a merchandising business. Statement 2: there is only one ledger account to be maintained as Merchandise Inventory for beginning and ending. a. Only Statement 1 is correct. b. Only Statement 2 is correct. c. Both are statements are correct. d. Neither of the statements are correct.

9.

What is the method of accounting for inventory in which the cost of goods sold is recorded each time a sale is made? a. Professional inventory system b. Periodic inventory system c. Perpetual inventory system d. Planned inventory system

10. Which of the following is a characteristic of a perpetual inventory system? a. Inventory purchases are debited to a purchases account. b. Inventory records are not kept for every item. c. Cost of goods sold is recorded with each sale. d. Cost of goods sold is determined as the amount of purchases less the change in inventory. 11. Which of the following is not true of the perpetual inventory method? a. Purchases are recorded as debit to the inventory account. b. The entry to record a sale includes a debit to cost of goods sold and a credit to inventory. c. After a physical inventory count, inventory is credited for any missing inventory. d. Purchase returns are recorded by debiting accounts payable and crediting purchase returns and allowances.

2.

The normal balance of an account Sales Discounts is – a. Debit balance c. In-balance b. Credit balance d. Out of balance

3.

A merchandising business which have just started its operation doesn’t have – a. Business to operate c. Books of accounts b. Beginning inventory d. Supplies to be used

4.

Which of the following generally would not be separately accounted for in the computation of cost of goods sold? a. Trade discounts applicable to purchases b. Cash discounts taken during the period c. Purchase returns and allowances during the period d. Cost of transportation for merchandise purchased

5.

Which of the following should be included in inventory at the end of reporting period? a. Goods in transit which were purchased FOB shipping point b. Goods in transit which were purchased FOB destination c. Goods received from another entity on consignment d. Goods in transit to a customer which were sold to the customer FOB shipping point

12. A discount given to a customer for purchasing a large volume of merchandise is typically referred to as a. Trade discount c. Size discount b. Quantity discount d. Cash discount

6.

Goods shipped FOB shipping point on the last day of the year should ordinarily be included in a. The buyer’s inventory balance b. The seller’s inventory balance c. Neither the buyer’s nor the seller’s inventory balance d. Both the buyer’s and the seller’s inventory balance

14. In a periodic inventory system, the beginning inventory is a. Net purchases minus cost of goods sold b. Net purchases minus ending inventory c. Total goods available for sale minus net purchases d. Total goods available for sale minus cost of goods sold

7.

Goods shipped FOB destination that are in transit at the end of the year should be included in the inventory of a. Seller c. Buyer b. Common carrier d. Bank

8.

Goods on consignment shall be included in the inventory of a. The consignor but not the consignee b. The consignee but not the consignor c. .Both the consignor and the consignee d. Neither the consignor nor the consignee

15. Cost of goods sold is equal to a. The cost of inventory at the end of a period plus net purchases minus the cost of inventory at the beginning of a period b. The cost of inventory at the beginning of a period minus net purchases plus the cost of inventory at the end of a period c. The cost of inventory at the beginning of a period plus net sales minus the cost of inventory at the end of a period d. The cost of inventory at the beginning of a period plus net purchases minus the cost inventory at the end of a period

13. Which of the following terms represents the deduction from the invoice price of purchased goods granted by suppliers for each payment? a. Sales discount c. Trade discount b. Purchase discount d. Purchase returns

FAR 5 1 INVENTORIES

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16. When the current year’s ending inventory is overstated a. The current year’s cost of goods sold is overstated b. The current year’s total assets are understated c. The current year’s net income is overstated d. The next year’s income is overstated

25. The entry to record the return of goods from a customer to a supplier will include – a. A debit to accounts payable b. A credit to accounts payable c. A debit to sales returns and allowances d. A credit to accounts receivable

17. If an entity ended a period with a larger inventory that it had at the beginning of the period, which of the following statement is true? a. The cost of goods sold was greater than net purchases b. Net income was greater than gross profit c. The cost of goods available for sale was smaller than cost of goods sold d. The cost of goods sold was smaller than net purchases

26. Which of the following is not a component of Cost of Sales? a. Purchase Returns & Allowances b. Sales Discounts c. Purchases d. Freight-in

18. The cost of inventory shall be measured using a. FIFO b. Average method c. Either FIFO or average method d. LIFO 19. Which of the following inventory method reports most closely the current cost of inventory? a. FIFO b. Specific identification c. Weighted average d. LIFO 20. In a period of falling prices, the use of which inventory cost flow method would typically result in the highest cost of goods sold? a. FIFO b. LIFO c. Specific identification d. Weighted average 21. This cost formula assumes that the items of the inventory that were purchased or produced first are sold first and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. a. FIFO b. LIFO c. Weighted average d. Moving average 22. If the gross profit is based on sales, the cost of goods sold is computed as a. Net sales times cost ratio b. Gross sales times cost ratio c. Net sales divided by sales ratio d. Gross sales divided by sales ratio 23. Where do we present Input Tax in the financial statements? a. Balance Sheet b. Income Statement c. Statement of Changes in Equity d. Statement of Cash Flows 24. Which of the following is not included in computing cost of sales – a. Freight out b. Purchase discounts c. Merchandise Inventory, end d. Freight-in

FAR 5.1: INVENTORIES

27. Which of the following is an expense account? a. Freight-in c. Sales discounts b. Freight-out d. Purchase discounts 28. To establish merchandise inventory at the end of the period is to – a. Credit, Cost of sales b. Debit, Merchandise inventory, end c. Credit, Merchandise inventory, end d. Debit, Merchandise inventory, beg. 29. When merchandise inventory at the end is overstated, the effect would be – a. Gross profit is understated b. Profit closed to capital is overstated c. Profit closed to capital is understated d. No effect 30. Which of the following accounts is closed by a credit? a. Sales c. Freight-in b. Purchase Returns d. Purchase Discounts 31. The perpetual inventory system is used most commonly by companies that sell a. Low-priced, high-volume merchandise b. Low-priced, low-volume merchandise c. High-priced, low-volume merchandise d. High-priced, high-volume merchandise 32. A sale on March 21 with terms of n/10 EOM is due to be collected by a. March 31 c. April 10 b. April 1 d. April 30 33. The amount of cost of goods sold during the year depends on the amounts of a. Beginning merchandise inventory and cost of goods sold b. Beginning merchandise inventory, net purchases, and ending merchandise inventory c. Beginning merchandise inventory, cost of goods sold, and ending merchandise inventory d. Beginning merchandise inventory and net purchases 34. The shipping term wherein the seller shoulders the freight on shipment of merchandise – a. F.O.B. shipping point c. C.O.D. freight collect b. F.O.B. destination d. C.O.D. freight prepaid 35. Gross profit is arrived at – a. By adding profit and operating expenses b. By adding cost of sales and operating expenses c. By adding cost of sales and sales d. By deducting operating expense from cost of sales Page 2 of

36. Which statement is incorrect regarding cost formulas? a. Specific identification of cost means that specific costs are attributed to identified inventory b. The FIFO formula assumes that the items of inventory that were purchased or produced last are sold first, and consequently the items remaining in inventory at the end of the period are those earlier purchased or produced c. Under the weighted average cost formula, the cost of each item is determined from weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period d. The average method may be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances of the entity 37. When determining the unit cost of an inventory item, which of the following should not included? a. Interest on loan obtained to purchase the item b. Commission paid when purchased c. Labor cost of the item when manufactured d. Depreciation of plant equipment used in manufacturing the item 38. Merchandise shipped FOB shipping point on the last day of the year should ordinarily be include in a. The buyer’s inventory balance b. The seller’s inventory balance c. Neither the buyer’s nor seller’s inventory balance d. Both the buyer’s and the seller’s inventory balance 39. Which of the following would not be reported as inventory? a. Land acquired for resale by a real estate firm. b. Stock and bonds held for resale by a brokerage firm. c. Partially completed goods held by a manufacturing company. d. Machinery acquired by a manufacturing company for use in the production process. 40. In period of falling prices, the use of which of the following inventory cost flow methods would result in the highest cost of goods sold? a. Last-in, first-out b. First-in, first-out c. Weighted average d. Specific identification 41. Which of the following is incorrect when using a perpetual inventory system? a. No Purchases account is used. b. A Cost of Goods Sold account is used. c. Two entries are required to record a sale. d. It is not necessary for to conduct a physical count. 42. Which of the following items should be included in a company’s inventory at the balance sheet date? a. Goods in transit that were purchased F.O.B. destination. b. Goods in transit that were purchased F.O.B. shipping point. c. Goods received from another company for sale on consignment. d. Goods sold to a customer, which are being held for the customer to call for his or her convenience. FAR 5.1: INVENTORIES

43. The use of a Discounts Lost account implies that the recorded cost of a purchased inventory 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. 44. During 2017, B Corporation transferred inventory to Y Corporation and agreed to repurchase the merchandise early in 2018. Y then used the inventory as collateral to borrow from Bank of Philippine Islands, remitting the proceeds to B. In 2018 when B repurchased the inventory, Y used the proceeds to repay its bank loan. a. Consignment. b. Installment sale. c. Product financing arrangement. d. Assignment for the benefit of creditors. 45. What is the method of accounting for inventory in which the cost of goods sold is not recorded each time a sale is made? a. Professional inventory system b. Periodic inventory system c. Perpetual inventory system d. Planned inventory system 46. Which of the following terms represents the deduction from the invoice price of sold goods granted to customers for early payment? a. Sales discount b. Purchase discount c. Trade discount d. Purchase return and allowance 47. Inventories shall be measured at a. Cost b. Net realizable value c. Lower of cost and net realizable value d. Higher of cost and net realizable value 48. How should cash discounts be dealt with when valuing inventories at the lower of cost and net realizable value? a. Added to cost b. Ignored c. Deducted in arriving at NRV d. Deducted from cost 49. The trial balance of Cindy Company showed inventories of ₱164,000. The inventories include some goods that have a production cost of ₱18,000. These goods have a manufacturing defect that will cost ₱6,000 to correct. The normal selling price for these goods would be ₱25,000, but after the remedial work they will be sold through an agent as refurbished goods at a discount of 20% on the normal selling price. The agent will receive a commission of 10% of the reduced selling price. In relation to the defective goods, the company will recognize a loss on inventory write down of a. ₱6,000 c. ₱4,000 b. ₱1,000 d. Nil

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50. Linkin Park Corporation reported ₱70,000 of inventory on December 31, 2017, based on physical count. Additional information was given as follows: I. Included in the physical count were goods billed to a customer, FOB shipping point, on December 31, 2017. The goods had a cost of ₱3,000 and have been billed at ₱5,000. The shipment is ready for pick-up by the delivery contractor. II. Goods were in transit from a vendor. The invoice cost was ₱8,000 and goods were shipped FOB shipping point on December 31, 2017. III. Work in process costing ₱500 was sent to an outside processor for finishing on December 30, 2017. IV. Goods out on consignment amounted to ₱4,600 (sales price); shipping costs, ₱120 (markup is 15% on cost). The correct amount of inventory onDecember 31, 2017 is a. ₱79,620 c. ₱82,620 b. ₱85,500 d. ₱82,500 51. Crook Company provided the following data with respect to its inventory: Items counted in the bodega ₱4,000,000 Items included in the count specifically segregated per sale contract 100,000 Items in receiving department, returned by 50,000 customer, in good condition Items ordered and in the receiving 400,000 department, invoice not received Items ordered, invoice received but goods not received. Freight is on account of 300,000 seller. Items shipped today, invoice mailed, FOB 250,000 shipping point Items shipped today, invoice mailed, FOB 150,000 destination Items currently being used for window 200,000 display 800,000 Items on counter for sale Items in receiving department, refused by 180,000 Crook Company because of damage Items included in count, damaged and unsalable 50,000 Items in the shipping department 250,000 What is the correct amount of inventory? a. ₱5,150,000 c. ₱5,700,000 b. ₱5,800,000 d. ₱6,000,000 52. Katipo Company is a wholesaler of office supplies. The activity for inventory of calculators during October is shown below: Units Cost ₱36.00 October 1 Inventory 20,000 7 Purchase 30,000 37.20 12 Sale 36,000 21 Purchase 48,000 38.00 22 Sale 38,000 29 Purchase 16,000 38.60 If Katipo Company uses a FIFO periodic inventory system, what is the ending inventory on October 31? a. ₱1,500,800 c. ₱1,501,600 b. ₱1,522,880 d. ₱1,529,600

FAR 5.1: INVENTORIES

53. The inventory on hand on December 31, 2017 for Rheine Company is valued at a cost of ₱950,000. The following items were not included in this inventory account: • Purchased goods in transit, shipped FOB destination, invoice price ₱30,000 which includes freight charge of ₱1,500. • Goods held on consignment by Rheine Company at a sales price of ₱28,000, including sales commission of 20% of the sales price. • Goods sold to Way Company, under terms FOB destination, invoiced for ₱18,500 which includes ₱1,000 freight charge to deliver the goods. Goods are in transit. The entity’s selling price is 140% of cost. • Purchased goods in transit, terms FOB shipping point, invoice price ₱50,000, freight cost, ₱2,500. • Goods out on consignment to Charms Company, sales price ₱35,000, shipping cost of ₱2,000. What is the adjusted cost of the inventory on December 31, 2017? a. ₱1,040,000 c. ₱1,042,000 b. ₱1,043,000 d. ₱1,073,500 54. The following information has been extracted from the records of Cedilla Company about one of its products. Cedilla Company uses the periodic system. Units Jan. Feb. Mar. Apr.

1 6 5 5 8 10 30

Beginning balance Purchase Sale Purchase Purchase return Sale Sale return

8,000 3,000 10,000 11,000 800 7,000 300

Unit cost 70.00 70.50

Total cost 560,000 211,500

73.50 73.50

808,500 58,800

If the FIFO cost flow method is used, what is the cost of the inventory on April 30? a. ₱315,000 c. ₱329,360 b. ₱330,750 d. ₱433,876 55. Lothario Company manufactures bath towels. The production comprises 60% of “Class A” which sells for ₱500 per dozen and 40% of “Class B” which sells for ₱250 a dozen. During the current year, 60,000 dozens were produced at an average cost of ₱360 a dozen. The inventory at the end of the current year was as follows: 2,200 dozens “Class A” ₱ 792,000 1,080,000 3,000 dozens “Class B” Total inventory ₱1,872,000 Using the relative sales value method which management considers as a more equitable basis for cost distribution, what is the measurement of the inventory? a. ₱1,170,000 c. ₱1,665,000 b. ₱1,872,000 d. ₱2,340,000 56. A company buys merchandise costing ₱25,000 and returns ₱5,000 cost of merchandise. If the term is 2/10, n/30 and the company pays within the discount period, how much it should pay the seller if no VAT is being recognized? a. ₱19,600 c. ₱21,000 b. ₱20,000 d. ₱24,500

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