Deck 3: The Accounting Information System

Question 1

A periodic inventory system:

A) allows for the determination of cost of goods sold after each sale.
B) requires a physical inventory count to determine the cost of goods on hand.
C) requires that detailed inventory records be kept.
D) requires the use of a cost of goods sold account.

Answer 1

B

Question 2

Which of the following items would appear in the income statement of both a merchandising company and a service company?

A) Cost of goods sold.
B) Gross profit.
C) Operating expenses.
D) Sales.

Answer 2

C

Question 3

The inventory turnover ratio is computed by dividing:

A) cost of goods sold by average inventory.
B) cost of goods sold by ending inventory.
C) sales by ending inventory.
D) sales by average inventory.

Answer 3

A

Question 4

Goods in transit should be included in the inventory of the:

A) buyer when the terms are FOB destination.
B) buyer when the terms are FOB shipping point.
C) transportation company when the terms are FOB destination.
D) seller when the terms are FOB shipping point.

Question 5

Vintner Company's ending inventory is understated by $3,000. The effect of this error on the current year's cost of goods sold and net income, respectively, are:

A) overstated and understated.
B) overstated and overstated.
C) understated and overstated.
D) understated and understated.

Question 6

Freight terms of FOB destination mean that the:

A) buyer must bear the freight costs.
B) seller must debit freight out.
C) goods are placed free on board at the buyer's place of business.
D) it is not decided who will pay the freight costs.

Question 7

In accordance with the revenue recognition principle, sales revenues are recorded when:

A) earned, which typically occurs when the goods are transferred from the seller to the buyer.
B) cash is received from the customer for items already delivered.
C) an order is received from a customer with delivery of the product expected to take place within the next thirty days.
D) the accountant determines which period's income statement "needs" more revenue.

Question 8

Which statement is false regarding the lower-of-cost-or-market (LCM) method of inventory?

A) LCM is an example of the revenue recognition principle.
B) Market is defined as current replacement cost, not selling price.
C) LCM is an example of an accounting concept of conservatism.
D) Inventory is written down to its market value in the period in which the price decline occurs.

Question 9

Credit terms of 3/10, n/30 mean that a(n):

A) ten percent cash discount may be taken if payment is made immediately; a three percent discount if paid within thirty days.
B) three percent cash discount may be taken if payment is made within ten days of the invoice date; otherwise the full amount is due within thirty days.
C) three percent cash discount may be taken if payment is made within ten days of the invoice date; otherwise the full amount is due at the end of the month.
D) additional amount equal to three percent of the invoice price must be paid if payment is not received within ten days; the account is overdue after thirty days.

Question 10

The Sales Returns and Allowances account:

A) normally has a credit balance.
B) should not be closed at the end of the period.
C) is a contra account to Accounts Receivable.
D) is a contra revenue account.

Question 11

With regard to accounting for a merchandising company versus a service company, which of the following is false?

A) Additional accounts and entries are typically required for a merchandising company.
B) Both retailers and wholesalers are merchandising companies.
C) The operating cycle of a merchandising company is shorter than that of a service company.
D) Inventory is an added asset account for a merchandising company.

Question 12

When a customer returns goods for credit, the seller should:

A) credit Accounts Payable.
B) credit Accounts Payable.
C) debit Accounts Receivable.
D) debit Merchandise Inventory.

Question 13

Given the following information, compute the amount of cash finally remitted by the customer. Feb. 22-Sale on credit, terms of 2/10, n/30-$3,000
Feb) 27-Allowance granted due to some items being damaged-$400
Feb) 28-Payment in full received from customer-$?

A) $2,600
B) $2,940
C) $2,548
D) $2,522

Question 14

In periods of rising prices, LIFO will produce:

A) lower net income than FIFO.
B) higher net income than FIFO.
C) higher net income than average costing.
D) cannot be determined.

Question 15

An entry debiting Accounts Payable and crediting Purchase Returns and Allowances indicates a:

A) sale on account to a customer.
B) LCM is an example of the revenue recognition principle.
C) return of goods originally sold on account to a customer.
D) return of goods originally purchased on account to the supplier.