Financial Accounting: A Business Process Approach, 3e (Reimers)

Chapter 5 The Purchase and Sale of Inventory

Learning Objective 5-1

5-1) The operating cycle for a merchandising firm is ________.

A) obtain cash from stockholders, invest cash in equipment, earn more cash

B) borrow cash from lenders, earn cash from customers, repay lenders

C) start with cash, buy inventory, sell inventory to customers, collect cash from customers

D) issue stock to owners, earn a profit, pay dividends to owners

5-2) Which statement below best describes how to account for the costs of purchasing inventory?

A) The costs are initially recorded as expenses and depreciated over the estimated useful life.

B) Inventory costs are initially reported as assets and then maintained in the asset accounts for the life of the business.

C) The costs are initially recorded as assets and become expenses when the inventory has an increase in market value.

D) The costs are initially recorded as assets and become expenses when the inventory is sold.

5-3) Inventory consists of items that ________.

A) are purchased for resale to customers as a normal operating activity

B) are purchased, and will be sold to customers only if they go up in market value

C) are intangible in nature

D) can be stored indefinitely and will be held in the business

5-4) A purchase requisition is a document that is ________.

A) sent to a supplier or vendor requesting that an item be shipped

B) used internally to request that something be purchased

C) used internally to approve a payment for inventory

D) sent to a supplier along with payment for inventory purchased

5-5) A purchase order is a document that is ________.

A) sent to a supplier or vendor requesting that an item be shipped

B) used internally to request that something be purchased

C) used internally to approve a payment for inventory

D) sent to a supplier along with payment for inventory purchased

5-6) Which statement below best explains the credit terms of 2/10, n/30?

A) The buyer will receive a 2 percent discount if it pays within ten days of the purchase.

B) The buyer will receive a 10 percent discount if it pays within two days.

C) The buyer will receive a 10 percent discount if it pays within thirty days.

D) The buyer will receive a 2 percent discount if it pays within thirty days.

5-7) Which of the following costs should be included in the inventory account when inventory is purchased FOB shipping point?

A) insurance while the merchandise is in transit

B) the cost of the warehouse

C) the advertising costs

D) the cost of merchandise returned

5-8) The following information is provided for PO Company:

Purchased 100 units of merchandise for $20 each

Paid $50 of freight costs for the merchandise received

Paid $1,200 for an advertising campaign related to the merchandise

Returned 10 of the units purchased because they were broken

Paid the purchasing manager's monthly salary of $3,000

Determine the cost of PO's inventory at the end of the period.

A) $1,850

B) $3,050

C) $1,800

D) $4,800

5-9) Up-a-Creek Company had ending inventory of $60,000, purchases of $200,000, beginning accounts payable of $100,000, ending accounts payable of $80,000 and cost of goods sold of $150,000. What was the amount of beginning inventory?

A) $90,000

B) $10,000

C) $30,000

D) $150,000

5-10) Souper Bowls sold $500 of merchandise to a customer for cash. The sales tax was 5%. How much cash did Souper Bowls receive?

A) $525

B) $371

C) $329

D) $210

5-11) Which of the following is inventory for an office supply store such as Office Max?

A) paper used to maintain Office Maxs accounting records

B) paper available to sell to Office Maxs customers

C) paper used in Office Maxs employee washroom

D) office supply storage costs

5-12) A company reports its unsold merchandise inventory on the ________.

A) balance sheet as a current asset

B) balance sheet as part of Property, plant & equipment

C) balance sheet as a current liability

D) income statement as an expense

5-13) If a company uses a periodic inventory system, it most likely updates its inventory records at the time of every ________.

A) purchase

B) sale

C) return

D) physical inventory count

5-14) A company with a perpetual inventory system purchases inventory on account. What is the effect of this transaction on the accounting equation?

A) increase one asset and decrease another asset

B) increase an asset and decrease retained earnings

C) increase an asset and decrease a liability

D) increase an asset and increase a liability

5-15) If the terms of purchase are FOB shipping point, title to the goods passes from the vendor to the buyer ________.

A) when the merchandise leaves the vendors warehouse

B) halfway between the vendors warehouse and the buyers warehouse

C) when the merchandise reaches the buyers warehouse

D) when the merchandise is sold to the end user

Financial Accounting: A Business Process Approach, 3e (Reimers)

Chapter 6 Acquisition and Use of Long-Term Assets

Learning Objective 6-1

6-1) Depreciation is ________.

A) the loss in market value of an asset

B) the allocation of a long-term assets cost to an expense account over the assets life

C) an increase in an assets value over time or usage

D) the revenue earned by a long-term asset over its useful life

6-2) When a company uses cash to purchase a machine, recording the purchase will ________.

A) decrease shareholders equity

B) increase expenses

C) exchange one asset for another

D) increase assets, depreciation expense, and liabilities

6-3) Which of the following is typically a long-term asset?

A) an intangible asset such as a patent or copyright

B) cash

C) common stock

D) depreciation expense

6-4) All of the following costs would be included in the Equipment account when equipment is purchased EXCEPT ________.

A) the initial invoice amount

B) costs to have the equipment delivered

C) costs incurred to install the equipment

D) costs to maintain the operating condition of the equipment

6-5) All of the following costs would be included in the Land account when land is purchased EXCEPT ________.

A) the costs associated with paving a parking lot on the land

B) the realtors fee

C) costs to prepare the land for use such as removing a tree stump

D) the fee paid to transfer title to the land

6-6) Cost is ________.

A) only the amount of cash paid to buy an asset

B) the amount of an asset consumed during a period

C) the cash plus cash equivalent amount paid to buy an asset

D) the decreases in shareholders equity when an asset is purchased

6-7) Which statement below is true about the cost principle?

A) The cost principle says that all costs associated, directly or indirectly, with buying and using a long-term asset should be permanently capitalized.

B) The cost principle says that all costs reasonable and necessary to place an asset into a working condition should be capitalized.

C) The cost principle says that all costs associated with purchasing a long-term asset should be expensed in the period of the purchase.

D) The cost principle says that only the cash paid to acquire a long-term asset should be capitalized.

6-8) Which of the following expenditures should NOT be capitalized?

A) the costs of testing a new machine to get it ready for use

B) purchasing factory equipment with an estimated useful life of 7 years

C) purchasing a used truck with an estimated 40,000 miles of service life remaining

D) the costs of changing the oil in the companys fleet of delivery trucks

6-9) Tango Company purchased land and a building for $350,000. If the assets had been purchased separately, the company would have paid $170,000 for the land and $210,000 for the building. What amount should be recorded for the building?

A) $210,000

B) $199,000

C) $193,421

D) $188,901

6-10) Tango Company purchased land and a building for $350,000. If the assets had been purchased separately, the company would have paid $170,000 for the land and $210,000 for the building. What amount should be recorded for the land?

A) $156,579

B) $169,405

C) $170,000

D) $187,321

6-11) Cranberry Company purchased two pieces of equipment from a Canadian vendor for $400,000. If the assets had been purchased separately, the company would have paid $90,000 for the first piece of equipment and $360,000 for the second piece of equipment. What amount should be recorded for the first piece of equipment?

A) $80,000

B) $90,000

C) $360,000

D) $320,000

6-12) Cranberry Company purchased two pieces of equipment from a Canadian vendor for $400,000. If the assets had been purchased separately, the company would have paid $90,000 for the first piece of equipment and $360,000 for the second piece of equipment. What amount should be recorded for the second piece of equipment?

A) $80,000

B) $90,000

C) $360,000

D) $320,000

6-13) All of the following account titles are found in the computerized accounting system of GTV Company. Identify the account that would be a long-term asset.

A) cash

B) accounts receivable

C) building

D) inventory

6-14) Perfuncto, Inc. built a machine. The costs for the new machine were:

Parts for the machine $80,000

Delivery costs for the machine parts 2,000

Labor costs to build the machine 20,000

Maintenance cost incurred to keep the machine running 10,000

What should Perfuncto, Inc. record as the cost of the machine?

6-15) Basquets, Inc. purchased land and two factories at a total cost of $800,000. To the right of the appraised values below, show the amount Basquets should record as the cost of each asset:

Asset Appraised values Recorded Values

1. Land $100,000 $__________

2. Factory 1 300,000 $__________

3. Factory 2 600,000 $__________