Question 1

"Market," as used in the phrase "lower of cost or market" for valuing inventory,refers to the price at which the inventory is being offered for sale by its owner.

Accepted Answer

"Market," in this context, refers to the current replacement cost or net realizable value of the inventory, rather than the price at which it is offered for sale by its owner.

Question 2

Of the three widely used inventory costing methods (FIFO,LIFO,and average),the FIFO method of costing inventory is based on the assumption that costs are charged against revenues in the order in which they were incurred.

Accepted Answer

FIFO stands for "First-In, First-Out" and assumes that the first items purchased or produced are the first ones sold or used. This means that the cost of goods sold (COGS) is based on the oldest costs first, while ending inventory reflects the newest costs.

Question 3

Receivables are usually a significant portion of:
A)total current liabilities.
B)total sales.
C)total current assets.
D)total stockholders' equity.

Accepted Answer

Receivables represent amounts owed to a company by its customers or clients, and they are considered part of the current assets section of the balance sheet. Although they are not as liquid as cash or marketable securities, they are expected to be converted into cash within the current operating cycle of the business, typically within one year. Receivables do not affect current liabilities, stockholders' equity or sales directly; however, they do impact cash flow and net income indirectly.

Question 4

In valuing damaged merchandise for inventory purposes,net realizable value is the estimated selling price less any direct cost of disposal.

Accepted Answer

Net realizable value is calculated by subtracting any direct cost of disposal (such as repair costs or discounts) from the estimated selling price of damaged merchandise. This value is used to value the damaged merchandise in inventory.

Question 5

A note receivable due in 90 days is listed on the balance sheet under:
A)long-term liabilities.
B)fixed assets.
C)current liabilities.
D)current assets.

Accepted Answer

A note receivable due in 90 days is a short-term asset that will be converted into cash within one year, and thus should be listed under current assets on the balance sheet.

Question 6

During inflationary periods,the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO method of costing inventory.

Accepted Answer

During inflation, the cost of goods sold using FIFO will be lower than using LIFO, resulting in a higher gross profit and therefore a greater amount of net income.

Question 7

Lower-of-cost-or-market is a method of inventory valuation.

Accepted Answer

Lower-of-cost-or-market is a generally accepted inventory valuation method where inventory is reported at the lower of its cost or market value.

Question 8

Average cost is a method of inventory valuation.

Accepted Answer

Average cost calculates the average cost of all items in inventory, and assigns that cost to each individual item. It is a commonly used method of inventory valuation.

Question 9

The balance of the allowance for doubtful accounts is added to accounts receivable on the balance sheet.

Accepted Answer

The allowance for doubtful accounts is a contra asset account that is subtracted from accounts receivable on the balance sheet to present the net realizable value of accounts receivable.

Question 10

A note receivable due in five years is listed on the balance sheet under the caption:
A)investments.
B)current assets.
C)fixed assets.
D)stockholders' equity.

Accepted Answer

A note receivable due in five years is considered a long-term investment and should be listed under the investments section on the balance sheet. Current assets are assets that are expected to be converted into cash within one year or the operating cycle, whichever is longer. Fixed assets are long-term assets used in the production of goods or services, such as property, plant, and equipment. Stockholders' equity represents the residual interest in the assets of the company after deducting liabilities.

Question 11

A written promise to pay a sum of money on demand or at a definite time is called a(n):
A)letter of credit.
B)deferred note.
C)credit memorandum.
D)promissory note.

Accepted Answer

A promissory note is a written promise to pay a sum of money on demand or at a definite time. A letter of credit is a document issued by a bank guaranteeing payment to a seller. A deferred note is not a commonly used term and may refer to a note with delayed payment terms. A credit memorandum is a document used to record a reduction in a customer's account balance due to a return or adjustment.

Question 12

During deflationary periods,the use of the LIFO method of costing inventory will result in a greater amount of net income than would result from the use of the FIFO method of inventory costing.

Accepted Answer

The answer of During deflationary periods,the use of the LIFO...

Question 13

The use of the lower-of-cost-or-market method of inventory valuation increases the gross profit for the period in which the inventory replacement price declined.

Accepted Answer

The lower-of-cost-or-market method of inventory valuation results in a decrease in the ending inventory value and an increase in the cost of goods sold when the market value declines, which in turn decreases gross profit for the period.

Question 14

Merchandise Inventory is presented on the balance sheet in the current assets section.

Accepted Answer

Merchandise Inventory is a current asset, therefore it is presented on the balance sheet in the current assets section.

Question 15

During inflationary periods,the use of the LIFO method of costing inventory will result in a lesser amount of net income than would result from the use of the average method of inventory costing.

Accepted Answer

LIFO method assumes that the most recent inventory items are sold first, resulting in the use of higher cost items in COGS during inflationary periods. This results in a lower net income compared to using the average method, which averages the cost of all inventory items.

Question 16

In reference to a promissory note,the person who makes the promise to pay is called the:
A)maker.
B)payee.
C)seller.
D)receiver.

Accepted Answer

The maker of a promissory note is the person who makes the promise to pay, while the payee is the person who will receive the payment. The seller and receiver are not necessarily involved in a promissory note.

Question 17

The net realizable value is used for purposes of valuing out of date merchandise in inventory.

Accepted Answer

Net realizable value is the estimated selling price of inventory minus any estimated selling costs. When inventory becomes obsolete or out of date, its selling price may decrease, and so the net realizable value becomes a useful tool for valuing such inventory.

Question 18

During inflationary periods,the value of inventory that appears on the balance sheet using FIFO method will be more than its current replacement cost.

Accepted Answer

During inflationary periods, the FIFO (First In, First Out) method results in the oldest costs being allocated to the cost of goods sold, leaving the most recent, higher costs in inventory. Therefore, the value of inventory on the balance sheet will be closer to current replacement cost or possibly even higher, not less.

Question 19

The FIFO method of costing inventory is based on the assumption that costs should be charged against revenues in the order in which they were incurred.

Accepted Answer

The statement is correct. FIFO (First-in, First-out) assumes that the first items purchased or produced are the first ones sold, and thus the costs associated with those items should be charged against the corresponding revenues first.

Question 20

Credit purchase is taken into account while calculating accounts receivable turnover ratio.

Accepted Answer

Credit purchase is not considered in the accounts receivable turnover ratio; this ratio is calculated by dividing net credit sales by the average accounts receivable, focusing on the efficiency of collecting receivables, not on purchases.

Quiz 6: Receivables and Inventories