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Under a perpetual inventory system: - When a company purchases goods for resale, purchases on account are debited to the Inventory account, not Purchases or Purchase Returns and Allowances. Freight costs are also debited to Inventory. - Beginning inventory + Purchases - Purchase discounts - Purchase returns and allowances + Freight-in = Cost of goods available for sale. - An increase in cost of goods sold would affect the gross profit rate, assuming sales remain constant. Other expenses like advertising, depreciation, and insurance would not affect the gross profit rate.

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Act Questions

Under a perpetual inventory system: - When a company purchases goods for resale, purchases on account are debited to the Inventory account, not Purchases or Purchase Returns and Allowances. Freight costs are also debited to Inventory. - Beginning inventory + Purchases - Purchase discounts - Purchase returns and allowances + Freight-in = Cost of goods available for sale. - An increase in cost of goods sold would affect the gross profit rate, assuming sales remain constant. Other expenses like advertising, depreciation, and insurance would not affect the gross profit rate.

Uploaded by

justjammin3000
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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2.

(LO 2)
Under a perpetual inventory system, when goods are purchased for resale by
a company:

(a)
purchases on account are debited to Inventory.

(b)
purchases on account are debited to Purchases.

(c)
purchase returns are debited to Purchase Returns and Allowances.

(d)
freight costs are debited to Freight-Out.

(a)
purchases on account are debited to Inventory.

Under a perpetual inventory system, when a company purchases goods


for resale, purchases on account are debited to the Inventory account, not
(b) Purchases or (c) Purchase Returns and Allowances. Choice (d) is
incorrect because freight costs are also debited to the Inventory account,
not the Freight-Out account.
10.
(LO 5)
Bufford Corporation had reported the following amounts at December 31,
2017: sales revenue $184,000, ending inventory $11,600, beginning
inventory $17,200, purchases $60,400, purchase discounts $3,000, purchase
returns and allowances $1,100, freight-in $600, and freight-out $900.
Calculate the cost of goods available for sale.

(a)
$69,400.

(b)
$74,100.

(c)
$56,900.

(d)
$197,700.

(b)
$74,100.

Beginning inventory ($17,200)+Purchases ($60,400)Purchases


discounts ($3,000)Purchase returns and

allowances ($1,100)+Freight-in ($600)=Cost of goods available for


sale ($74,100).The other choices are therefore incorrect.
11.
(LO 6)
Which of the following would affect the gross profit rate? (Assume sales
remains constant.)

(a)
An increase in advertising expense.

(b)
A decrease in depreciation expense.

(c)
An increase in cost of goods sold.

(d)
A decrease in insurance expense.

(c)
An increase in cost of goods sold.

Gross profit rate=Gross profitNet sales. Therefore, any changes in


sale revenue, sales returns and allowances, sales discounts, or cost of
goods sold will affect the ratio. Changes in (a) advertising expense, (b)
depreciation expense, or (d) insurance expense will not affect the
computation of the gross profit rate.
15.
(LO 7)
When goods are purchased for resale by a company using a periodic
inventory system:

(a)
purchases on account are debited to Inventory.

(b)
purchases on account are debited to Purchases.

(c)
purchase returns are debited to Purchase Returns and Allowances.

(d)
freight costs are debited to Purchases.

(b)
purchases on account are debited to Purchases.
Purchases for resale are debited to the Purchases account. The other
choices are incorrect because (a) purchases on account are debited to

Purchases, not Inventory; (c) Purchase Returns and Allowances are always
credited; and (d) freight costs are debited to Freight-In, not Purchases.
(LO 1)
When is a physical inventory usually taken?

(a)
When the company has its greatest amount of inventory.

(b)
When a limited number of goods are being sold or received.

(c)
At the end of the company's fiscal year.

(d)
Both (b) and (c).

(d)
Both (b) and (c).
A physical inventory is usually taken when a limited number of goods are
being sold or received, and at the end of the company's fiscal year. Choice
(a) is incorrect because a physical inventory count is usually taken when
the company has the least, not greatest, amount of inventory. Choices (b)
and (c) are correct, but (d) is the better answer.

7.
(LO 2)
In periods of rising prices, LIFO will produce:

(a)
higher net income than FIFO.

(b)
the same net income as FIFO.

(c)
lower net income than FIFO.

(d)
higher net income than average-cost.

(c)
lower net income than FIFO.
In periods of rising prices, LIFO will produce lower net income than FIFO,
not (a) higher than FIFO or (b) the same as FIFO. Choice (d) is incorrect
because in periods of rising prices, LIFO will produce lower net income
than average-cost. LIFO therefore charges the highest inventory cost
against revenues in a period of rising prices.

11.
(LO 3)
Which of these would cause inventory turnover to increase the most?

(a)
Increasing the amount of inventory on hand.

(b)
Keeping the amount of inventory on hand constant but increasing sales.

(c)
Keeping the amount of inventory on hand constant but decreasing sales.

(d)
Decreasing the amount of inventory on hand and increasing sales.

(d)
Decreasing the amount of inventory on hand and increasing sales.

13.
(LO 3)
Norton Company purchased 1,000 widgets and has 200 widgets in its ending
inventory at a cost of $91 each and a current replacement cost of $80 each.
The ending inventory under lower-of-cost-or-market is:

(a)
$91,000.

(b)
$80,000.

(c)
$18,200.

(d)
$16,000.

(d)
$16,000.

Under the LCM basis, market is defined as the current replacement cost.
Therefore, ending inventory would be valued
at 200 widgets$80 each=$16,000, not (a) $91,000, (b) $80,000, or
(c) $18,200.
15.
(LO 4)
In a perpetual inventory system:

(a)
LIFO cost of goods sold will be the same as in a periodic inventory system.

(b)
average costs are based entirely on unit-cost simple averages.

(c)
a new average is computed under the average-cost method after each
sale.

(d)
FIFO cost of goods sold will be the same as in a periodic inventory system.

(d)
FIFO cost of goods sold will be the same as in a periodic inventory system.

7.
(LO 2)
Permitting only designated personnel such as cashiers to handle cash
receipts is an application of the principle of:

(a)
segregation of duties.

(b)
establishment of responsibility.

(c)
independent internal verification.

(d)
human resource controls.

(b)
establishment of responsibility.
Permitting only designated personnel to handle cash receipts is an
application of the principle of establishment of responsibility, not (a)
segregation of duties, (c) independent internal verification, or (d) human
resource controls.

15.
(LO 4)
Which of the following is not one of the sections of a cash budget?

(a)
Cash receipts section.

(b)
Cash disbursements section.

(c)
Financing section.

(d)
Cash from operations section.

(d)
Cash from operations section.

1.
(LO 1)
A receivable that is evidenced by a formal instrument and that normally
requires the payment of interest is:

(a)
an account receivable.

(b)
a trade receivable.

(c)
a note receivable.

(d)
a classified receivable.

(c)
a note receivable.

7.
(LO 2)
An analysis and aging of the accounts receivable of Raja Company at
December 31 reveal these data:
Accounts receivable
$800,00
0
Allowance for doubtful accounts per books before adjustment
(credit)

50,000

Amounts expected to become uncollectible


65,000
What is the cash realizable value of the accounts receivable at December 31,
after adjustment?

(a)
$685,000.

(b)
$750,000.

(c)
$800,000.

(d)

$735,000.

(d)
$735,000.

The cash realizable value of the accounts receivable is Accounts


Receivable ($800,000) less the expected ending balance in Allowance for
Doubtful Accounts after adjustments ($65,000)=$735,000, not (a)
$685,000, (b) $750,000, or (c) $800,000.
11.
(LO 2)
Hughes Company has a credit balance of $5,000 in its Allowance for Doubtful
Accounts before any adjustments are made at the end of the year. Based on
review and aging of its accounts receivable at the end of the year, Hughes
estimates that $60,000 of its receivables are uncollectible. The amount of
bad debt expense which should be reported for the year is:

(a)
$5,000.

(b)
$55,000.

(c)
$60,000.

(d)
$65,000.

(b)
$55,000.

By crediting Allowance for Doubtful Accounts for $55,000, the new


balance will be the required balance of $60,000. This adjusting entry
debits Bad Debt Expense for $55,000 and credits Allowance for Doubtful
Accounts for $55,000, not (a) $5,000, (c) $60,000, or (d) $65,000.
12.
(LO 2)
Use the same information as in Question 11, except that Hughes has a debit
balance of $5,000 in its Allowance for Doubtful Accounts before any
adjustments are made at the end of the year. In this situation, the amount of
bad debt expense that should be reported for the year is:

(a)
$5,000.

(b)
$55,000.

(c)
$60,000.

(d)
$65,000.

(d)
$65,000.

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