Exam

Name___________________________________

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

1) The periodic inventory system is normally used for relatively inexpensive goods.

2) When a company uses the perpetual inventory method, the inventory account should stay current

at all times.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

3) In a periodic system, inventory balances and the cost of goods sold for the current period are

determined:

A) on a frequent basis.

B) on the first day of each year.

C) when a physical inventory count is taken.

D) at the time of sale.

4) What is the first step in the accounting cycle for a merchandising company?

A) The company delivers inventory to customers.

B) The company sells inventory to customers, creating accounts receivable.

C) The company buys inventory.

D) The company collects cash.

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

5) When a company uses the perpetual inventory method, it should NOT be necessary to conduct a

physical count of inventory.

6) The entry to close Sales discounts and Sales returns and allowances results in a debit to Income

summary.

7) If a physical count of inventory indicates that the Inventory account is overstated, an additional

adjusting entry is required.

8) The entry to close Cost of goods sold results in a debit to Income summary.

 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

9) The following pertains to periodic inventory: On a merchandising income statement, which would

NOT be found under the heading of Cost of goods sold?

A) Freight–in

B) Purchases

C) Supplies

D) Purchases returns and allowances

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

10) The consistency principle states that a business should use the same accounting methods from

period to period.

11) The lower–of–cost–or–market rule demonstrates accounting conservatism in action.

12) A company reports that it uses the FIFO method of inventory costing. This is an example of the

disclosure principle.

13) A company should NOT change the inventory costing method each period in order to maximize

net income. This is an example of the disclosure principle.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

14) A company purchased 100 units for $20 each on January 31. It purchased 100 units for $30 on

February 28. It sold 150 units for $45 each from March 1 through December 31. If the company uses

the First–In, First–Out inventory costing method, what is the amount of ending inventory on

December 31?

A) $1,000

B) $1,500

C) $1,250

D) $2,250

15) A company purchased 100 units for $20 each on January 31. It purchased 100 units for $30 on

February 28. It sold 150 units for $45 each from March 1 through December 31. If the company uses

the average–cost inventory costing method, what is the amount of ending inventory on December

31?

A) $1,000

B) $1,250

C) $1,500

D) $2,250

16) A company purchased 100 units for $20 each on January 31. It purchased 100 units for $30 on

February 28. It sold 150 units for $45 each from March 1 through December 31. If the company uses

the Last–In, First–Out inventory costing method, what is the amount of ending inventory on

December 31?

A) $1,250

B) $2,250

C) $1,000

D) $1,500

17) A company purchased 100 units for $20 each on January 31. It purchased 100 units for $30 on

February 28. It sold 150 units for $45 each from March 1 through December 31. If the company uses

the First–In, First–Out inventory costing method, what is the amount of Cost of goods sold on the

December 31 income statement?

A) $4,000

B) $3,750

C) $6,750

D) $3,500

18) A company purchased 100 units for $20 each on January 31. It purchased 100 units for $30 on

February 28. It sold 150 units for $45 each from March 1 through December 31. If the company uses

the average cost inventory costing method, what is the amount of Cost of goods sold on the

December 31 income statement?

A) $3,750

B) $6,750

C) $3,500

D) $4,000

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

19) An overstatement of ending inventory in the current period results in the understatement of Net

income in the current year.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

20) Ending inventory for the current year is overstated by $20,000. What effect will this error have on

the following year’s Net income?

A) The inventory overstatement will not affect Net income.

B) Net income will be understated by $40,000.

C) Net income will be understated by $20,000.

D) Net income will be overstated by $20,000.

21) Ending inventory for the current accounting period is overstated by $3,500. What will be effect of

this error?

A) Net income for the current period will be overstated by $3,500.

B) Ending inventory for the next period will be overstated by $3,500.

C) Equity at the end of the next accounting period will be overstated by $3,500.

D) Cost of goods sold for the current period will be overstated by $3,500.

22) Ending inventory for the current period is understated. What effect will this error have on equity?

A) Equity will be understated at the end of the current period, but it will be correct at the end of

the next period.

B) Equity will be overstated at the end of the current period, but it will be correct at the end of

the next period.

C) Equity will be overstated at the end of the current period and overstated at the end of the next

period.

D) Equity will be overstated at the end of the current period and understated at the end of the

next period.

23) Ending inventory for the current accounting period is understated by $2,700. What effect will this

error have on Cost of goods sold and Net income?

A) Cost of goods sold Net income

Understated Understated

B) Cost of goods sold Net income

Overstated Understated

C) Cost of goods sold Net income

Overstated Overstated

D) Cost of goods sold Net income

Understated Overstated

24) Ending inventory for the current accounting period is overstated by $2,700. What effect will this

error have on Cost of goods sold and Net income?

A) Cost of goods sold Net income

Understated Understated

B) Cost of goods sold Net income

Overstated Understated

C) Cost of goods sold Net income

Understated Overstated

D) Cost of goods sold Net income

Overstated Overstated

25) Which of the following are clues that a company may have been “cooking the books” by

fraudulently increasing their level of net sales?

A) Several company warehouses reported burglaries.

B) There was a high level of inventory purchases in the following period.

C) Several shipping clerks checked into hospitals from lifting heavy boxes.

D) There was a very high level of returned goods shortly after year–end.

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

26) Using the FIFO costing method will always produce the same results whether a company uses

perpetual or periodic inventory.

27) Using the LIFO costing method will always produce the same results whether a company uses

perpetual or periodic inventory.

28) When using periodic inventory, the closing process begins with closing out the Beginning

inventory to Cost of goods sold.

29) When using periodic inventory, the closing process begins with closing out the Beginning

inventory to Cost of goods sold. The second step is to set up the ending inventory by debiting Cost

of goods sold and crediting Inventory.

30) Under periodic inventory, the company first calculates Cost of goods sold for the period, and then

determines what the Ending inventory balance is.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

31) Samson Company had the following balances and transactions during 2012.

Beginning inventory 10 units at $70

March 10 Sold 8 units

June 10 Purchased 20 units at $80

October 30 Sold 15 units

What would the company’s Inventory amount be on the December 31, 2012 balance sheet if the

periodic FIFO costing method is used? (Answers are rounded to the nearest dollar.)

A) $554

B) $537

C) $490

D) $560

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

32) With a periodic inventory method, purchases, purchase discounts, and purchase returns and

allowances are recorded in separate accounts.

33) With a periodic inventory method, it is necessary to conduct a physical count of inventory to

determine cost of goods sold.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

34) Which of the following would appear on the income statement of a company that uses the periodic

inventory method, but would NOT appear on the income statement of a company that uses the

perpetual inventory method?

A) Cost of goods sold

B) Insurance expenses

C) Net sales

D) Cost of goods available for sale

35) A company uses the periodic inventory method. Which of the following entries would be made to

record a $1,200 purchase of inventory on account?

A) The accounting entry would be a $1,200 debit to Inventory and a $1,200 credit to Accounts

payable.

B) The accounting entry would be a $1,200 debit to Accounts payable and a $1,200 credit to

Inventory.

C) The accounting entry would be a $1,200 debit to Accounts payable and a $1,200 credit to

Purchases.

D) The accounting entry would be a $1,200 debit to Purchases and a $1,200 credit to Accounts

payable.

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

36) Under the Sarbanes–Oxley Act, the outside auditor must issue an internal control report.

37) The Public Company Oversight Board oversees the work of auditors of public companies.

38) Under the Sarbanes–Oxley Act, accounting firms are prohibited from both auditing a client and

providing certain consulting services for the same client.

39) Under the Sarbanes–Oxley Act, violators may be sentenced to prison for securities fraud.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

40) Which of the following is a requirement of the Sarbanes–Oxley Act?

A) The outside auditor must issue an internal control report for each public company.

B) Accounting firms may not both audit a public client and provide certain consulting services

for the same client.

C) The Public Company Oversight Board must create new accounting standards.

D) The Public Company Oversight Board must conduct audits of public companies.

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

41) The control environment is one of the five components by which a company can achieve its internal

control objectives.

42) Risk assessment is the “tone at the top” of a business, starting with the owner and the top managers.

43) External auditors monitor company controls to safeguard assets and ensure that employees are

following company policies.

44) Internal auditors evaluate company controls to ensure the accuracy of financial statements.

45) Mandatory vacations and job rotation improve internal control.

46) Separation of duties limits fraud and promotes the accuracy of the account records.

47) A point–of–sale terminal (cash register) provides control over cash in the form of a tape record of

sales which is compared to the count of the drawer.

48) As part of the internal control over cash receipts by mail, the mailroom sends both the customer

checks and the remittance advices to the accounting department.

49) Regarding controls over cash receipts by mail, the bank deposit slip should be compared to the

remittance advices by the accounting department.

50) For strong controls over cash receipts, the checks to be deposited should be sent to the treasurer and

the remittance advices should be sent to the accounting department.

51) As long as the same person deposits customer checks and records the deposits into the ledger, there

will be good internal control over cash receipts.

52) An accountant is under pressure to maximize the company’s net income at year–end. He is told to

delay orders of important services until the following year. This action would be considered

unethical because it is a misrepresentation of actual transactions.

53) An accountant is under pressure to maximize the company’s net income at year–end. He is told to

record expense payments made in December as if they were actually made the following January.

This action would be considered unethical because it is a misrepresentation of actual transactions.

54) A company makes a legitimate, properly authorized payment to a supplier. The accountant

changes the date of the transaction to shift it to a later time period. Because the transaction is

legitimate, this action would not be considered unethical.

55) A company urgently needs to repair its fire alarm system, which will cost $6,000. The two senior

managers who are authorized to approve payments over $5,000 are both on holiday and cannot be

reached. The office manager is only authorized to approve payments up to $5,000, but is concerned

about the risks and safety factors involved, and wants to have the repair work done immediately.

She asks if the contractor could split up the repair bill into two separate invoices, one for parts, and

one for labor, so that she could approve both of them separately, and get the work done right away.

This action would not be considered unethical, as long as the office manager does not violate

specific company rules, or deliberately misrepresent the facts of the situation.

56) The two major types of receivables are accounts receivable and notes receivable.

57) The creditor is the entity that signs a note.

58) The allowance method is a method of recording collection losses by estimating uncollectible

amounts.

59) The income statement approach computes uncollectible accounts expense as a percentage of net

credit sales.

60) The direct write–off method conforms to the matching principle better than the allowance method.

61) A company uses the direct write–off method to account for uncollectible receivables. Uncollectible

account expense will be estimated as a percentage of sales.

62) The direct write–off method is used primarily by large, publicly owned companies

63) Interest revenue must be reported for a note receivable that is outstanding at the end of the

accounting period.

64) The maturity value of a note is the sum of the principal plus interest due at maturity.

65) A note is dishonored when the maker of the note fails to pay the note at maturity.

66) The acid–test ratio appears in the current assets section of the balance sheet.

67) Accounts receivable amounts are generally shown on the balance sheet net of the allowance.

68) The acid–test ratio is computed as current assets divided by current liabilities.

69) When a business discounts a note receivable to a bank or financial broker, the business will

generally receive either more or less than the maturity value of the note.

70) When a business is holding a note receivable and wishes to collect cash prior to the maturity date of

the note, the business may sell the note to a bank or a financial broker. This process is called

discounting a note.