Deck 9: Working Capital

Question 1

The principle for cost inclusion is that the balance sheet amount for inventory should include all costs incurred to acquire goods but not to prepare them for sale.

Answer 1

False

Question 2

Market value generally means replacement cost, the amount the firm would have to pay to replace the inventory.

Answer 2

True

Question 3

The current-noncurrent distinction refers to whether a firm will convert an asset to cash, or consume it, or sell it within one operating cycle and whether a firm will pay or otherwise settle a liability within one operating cycle.

Answer 3

True

Question 4

LIFO is like a stack of trays in a cafeteria: the last tray deposited on the stack is the first one taken off, and the lowest tray in the stack remains there as long as any trays remain.

Question 5

The measurement of cash is the present value of future cash flows of the instruments included in this category.

Question 6

The U.S.taxing authorities permit a firm to use LIFO for tax purposes as long as it also uses LIFO for financial reporting purposes.

Question 7

U.S.GAAP and IFRS requires firms to use specific identification for inventory valuation and cost-of-goods-sold whenever feasible.

Question 8

FIFO is like a conveyor belt: the first items put on the conveyor belt come off first for use or sale, while the last items put on the conveyor belt remain there at the end of the period.

Question 9

U.S.GAAP and IFRS permit firms to remeasure inventories upward to an amount exceeding their acquisition cost.

Question 10

IFRS permits firms to reverse previous impairments, up to the amount of the original acquisition cost of the inventory, if the circumstances that caused the inventory impairment no longer exist.

Question 11

The current ratio, also called the working capital ratio, is current assets divided by current liabilities.

Question 12

U.S.GAAP and IFRS requires firms to use a cost-flow assumption that matches the actual physical flow of units within the firm.

Question 13

Working capital is the difference between a firm's current assets and its current liabilities.

Question 14

Both U.S.GAAP and IFRS require firms to write down inventories when their replacement cost, or market value, declines below acquisition cost.

Question 15

The accountant's definition of working capital is the same as the definition often used in finance.

Question 16

The accounting procedures for the marketing and administrative costs of manufacturing firms resemble those for merchandising firms.

Question 17

IFRS prohibits use of the LIFO cost-flow assumption.

Question 18

An impediment to U.S.companies switching from U.S.GAAP to IFRS may come from the IFRS prohibition of LIFO which has negative income tax implications.

Question 19

U.S.GAAP specifies that, in the context of inventories, market means replacement cost, except that market may not exceed net realizable value and may not be less than net realizable value reduced by a normal profit margin.

Question 20

One year is the conventional cutoff for distinguishing a current and a noncurrent asset or liability, because the operating cycle for most firms is one year or less.

Question 21

The weighted-average cost-flow assumption falls between the other two in its effects, but it resembles FIFO more than LIFO in its effects on the financial statements.

Question 22

Expenditures to satisfy warranty claims affect net income during the period of servicing the warranty.

Question 23

A firm with assets that will convert to cash within the next 12 months, less than its obligations to pay cash in this same interval, has

A)positive working capital and a current ratio that is less than one.
B)positive working capital and a current ratio that exceeds one.
C)negative working capital and a current ratio that exceeds one.
D)negative working capital and a current ratio that is less than one.
E)a serious liquidity problem.

Question 24

Of the three cost-flow assumptions, FIFO results in the least fluctuation in gross margins in businesses in which selling prices tend to change as acquisition costs of inventories change.

Question 25

Under U.S.GAAP, firms recognize restructuring costs when the firm has committed to and
approved a restructuring plan that management will control.

Question 26

The journal entry to record the cost of warranty repairs that were incurred during the current period, but related to sales made in prior years, includes a debit to Warranty Expense.

Question 27

A firm with assets that will convert to cash within the next 12 months, in excess of its obligations to pay cash in this same interval, has

A)positive working capital and a current ratio that is less than one.
B)positive working capital and a current ratio that exceeds one.
C)negative working capital and a current ratio that exceeds one.
D)negative working capital and a current ratio that is less than one.
E)a serious liquidity problem.

Question 28

Examples of restructuring activities include selling or closing divisions or plants, combining offices, moving operations from one location to another, terminating employees or leases, and selling assets.

Question 29

Many firms provide similar types of airline services with similar types of assets.They each received unqualified opinions from their independent auditors.Yet, Flash Airlines appears to apply its accounting principles more aggressively in income-enhancing ways relative to its competitors.The choices for Flash Airlines in applying generally accepted accounting principles under the accrual basis of accounting include:

A)depreciable lives for buildings and equipment.
B)estimated uncollectibles for accounts receivable.
C)estimated warranty costs.
D)all of the above.
E)none of the above.

Question 30

A deferred performance liability arises when a firm agrees to provide a warrantyfor service or repairs for some period after a sale.

Question 31

_____ provide information about liquidity-a firm's ability to meet short-term obligations as they come due.

A)Working capital, only
B)Current ratio, only
C)Working capital and current ratio
D)Positive leverage ratio
E)Cash flows ratio

Question 32

Of the three cost-flow assumptions, FIFO results in balance sheet figures that are closest to current cost because the latest purchases dominate the ending inventory amounts.

Question 33

U.S.disclosure rules require that a LIFO firm must disclose ending inventory either at its current cost or on a FIFO cost-flow basis.

Question 34

During the first year of operations, a company granted warranties on its products.The estimated cost of the product warranty liability at the end of the year is $8,500.The product warranty expense of $8,500 should be recorded in the years the expenditures to repair the products covered by the warranty will be paid.

Question 35

As time passes, firms gain information about both actual warranty usage and actual warranty
expenditures.

Question 36

IFRS requires that firms accrue the warranty expense and the related warranty liability when they can "reasonably estimate" the amount, while U.S.GAAP does not.

Question 37

Of the three cost-flow assumptions, FIFO usually results in the smallest net income when inventory costs are rising and the largest net income when inventory costs are falling.

Question 38

The longer a firm uses LIFO, the greater will be the difference between inventories based on LIFO and FIFO cost-flow assumptions.

Question 39

The accounting for warranties resembles the allowance method for uncollectible accounts
receivable.

Question 40

Of the three cost-flow assumptions, LIFO has the highest cost of goods sold when inventory costs are rising and the lowest cost of goods sold when inventory costs are falling.

Question 41

Sparkle Industries began a period with 2,000 pounds of sugar and purchased 4,500 pounds during the period.Sparkle used 5,300 pounds during the period. How many pounds of sugar were available for sale or use during the period?

A)5,000 pounds of sugar
B)5,500 pounds of sugar
C)6,500 pounds of sugar
D)7,000 pounds of sugar
E)7,500 pounds of sugar

Question 42

Cash includes:

A)currency.
B)money orders.
C)bank checks.
D)checking accounts and time deposits.
E)all of the above.

Question 43

Which of the following is/are false regarding a merchandising firm?

A)A merchandising firm purchases inventory for resale.
B)A merchandising firm does not change the physical form of the inventory.
C)A merchandising firm performs no incremental work on the inventory.
D)A merchandising firm adds nothing to the acquisition cost of the inventory after it is purchased.
E)None of the above are false regarding a merchandising firm.

Question 44

Which of the following is/are not true regarding the Raw Materials Inventory account?

A)The Raw Materials Inventory account includes the cost of raw materials purchased but not yet transferred to the factory floor.
B)The merchandising firm records purchases of raw materials as debits to the Raw Materials Inventory account.
C)When the manufacturer physically transfers raw materials to the factory floor, it also transfers the cost of the raw materials from the Raw Materials Inventory account to the Work-in-Process Inventory account.
D)When the manufacturer physically transfers raw materials to the factory floor, it records this transfer as a credit to the Raw Materials Inventory account for the cost of the raw materials transferred and a debit to the Work in Process Inventory account.
E)all of the above

Question 45

Which of the following is/are not true regarding a manufacturing firm?

A)A manufacturing firm incurs costs as it produces goods by changing the physical form of raw materials.
B)The product costs for a manufacturing firm are the costs incurred in manufacturing goods for sale.
C)The costs to produce finished goods inventory for a manufacturing firm do not become expenses until the firm sells the product.
D)Prior to sale, the production costs of a a manufacturing firm represent the transformation of assets from one form into another.
E)Product costs for a manufacturing firm are treated as period costs during the period that the inventory is finished and ready for sale.

Question 46

The inventory equation describes changes in inventory.The following equation measures all quantities in physical units:

A)Beginning Inventory + Additions + Withdrawals = Ending Inventory
B)Beginning Inventory - Additions - Withdrawals = Ending Inventory
C)Beginning Inventory + Additions x Withdrawals = Ending Inventory
D)Beginning Inventory x Additions - Withdrawals = Ending Inventory
E)Beginning Inventory + Additions - Withdrawals = Ending Inventory

Question 47

The acquisition cost of manufactured inventories does not include which category of costs?

A)Administrative
B)Manufacturing Overhead
C)Raw Materials
D)Direct Materials
E)Direct Labor

Question 48

Which of the following is not true regarding the Work-in-Process Inventory account?

A)The Work-in-Process Inventory account accumulates the cost of raw materials transferred to the factory floor.
B)The Work-in-Process Inventory account accumulates the cost of direct labor used in production.
C)The Work-in-Process Inventory account accumulates the manufacturing overhead costs.
D)The Work-in-Process Inventory account accumulates the administrative costs.
E)The Work-in-Process Inventory account is credited for the manufacturing costs assigned to the finished units transferred to the finished goods storeroom.

Question 49

The sales manager of Sebastian Company failed to record a valid sale on account of merchandise that had been shipped to a customer prior to the end of the current year; however, the company uses a periodic method of accounting for inventory and the merchandise had been properly excluded from inventory at the end of the current year.As a result of this error, Sebastian Company's

A)total assets are overstated for the current year.
B)total expenses are understated for the current year.
C)net income is overstated for the current year.
D)total assets are understated at the end of the current year.
E)none of the above.

Question 50

For manufacturing firms, the cost of completed products remains on the balance sheet as __________ assets until the firm sells the products; upon sale, the cost of the assets becomes a cost of goods sold expense.

A)Direct Materials Inventory
B)Work-in Progress Inventory
C)Finished Goods Inventory
D)Cost of Products Ready for Sale
E)none of the above

Question 51

Which of the following is/are true regarding the Work-in-Process Inventory account?

A)The Work-in-Process Inventory account accumulates the cost of raw materials transferred to the factory floor.
B)The Work-in-Process Inventory account accumulates the cost of direct labor used in production.
C)The Work-in-Process Inventory account accumulates the manufacturing overhead costs.
D)The Work-in-Process Inventory account is credited for the manufacturing costs assigned to the finished units transferred to the finished goods storeroom.
E)all of the above

Question 52

Sparkle Industries began a period with 2,000 pounds of sugar and purchased 4,500 pounds during the period.Sparkle used 5,300 pounds during the period. How many pounds of sugar remain at the end of the period?

A)800 pounds of sugar
B)1,000 pounds of sugar
C)1,200 pounds of sugar
D)1,400 pounds of sugar
E)1,600 pounds of sugar

Question 53

Which of the following is/are not true regarding a merchandising firm?

A)Inventory appears on the merchandiser's balance sheet initially as an asset.
B)Inventory is measured at acquisition cost.
C)When a sale takes place, the firm recognizes the cost of the inventory as an expense (cost of goods sold) on the income statement.
D)When a sale takes place, the firm recognizes the inventory reduction on the statement of cash flows.
E)All of the above are false regarding a merchandising firm.

Question 54

_____ firms acquire inventory items in a physical condition ready for sale.

A)Merchandising
B)Manufacturing
C)Technology
D)Production
E)Health Care

Question 55

Which of the following is/are not true regarding inventory?

A)Inventory refers to goods and other items that a firm owns and holds for sale or for further processing as part of its operations.
B)Inventory is called "stock" in some countries.
C)When the firm sells inventory, the carrying amount of that inventory becomes an expense.
D)Inventories are a major asset for merchandising and manufacturing firms.
E)The following equation measures all quantities in physical units: Beginning Inventory - Additions + Withdrawals = Ending Inventory

Question 56

Which of the following is/are true regarding the Raw Materials Inventory account?

A)The Raw Materials Inventory account includes the cost of raw materials purchased but not yet transferred to the factory floor.
B)The manufacturing firm records purchases of raw materials as debits to the Raw Materials Inventory account.
C)When the manufacturer physically transfers raw materials to the factory floor, it also transfers the cost of the raw materials from the Raw Materials Inventory account to the Work-in-Process Inventory account.
D)When the manufacturer physically transfers raw materials to the factory floor, it records this transfer as a credit to the Raw Materials Inventory account for the cost of the raw materials transferred and a debit to the Work in Process Inventory account.
E)all of the above

Question 57

Cash equivalents includes short-term,

A)highly liquid investments with maturities of three months or less.
B)highly liquid investments with maturities of six months or less.
C)highly liquid investments with maturities of one year months or less.
D)investments with maturities of three months or less.
E)investments with maturities of six months or less.

Question 58

The principle for cost inclusion is that the balance sheet amount for inventory should include all costs incurred to

A)acquire goods, only.
B)prepare the goods for sale, only.
C)acquire goods and prepare them for sale.
D)acquire goods, prepare them for sale, and transport them to the buyer.
E)acquire goods, prepare them for sale, and sales commissions.

Question 59

_____ firms transform raw materials, purchased parts, and components into finished products in their factories.

A)Merchandising
B)Manufacturing
C)Consulting
D)Staffing
E)Health Care

Question 60

Which of the following is/are true regarding inventory?

A)Inventory refers to goods and other items that a firm owns and holds for sale or for further processing as part of its operations.
B)Inventory is called "stock" in some countries.
C)When the firm sells inventory, the carrying amount of that inventory becomes an expense.
D)Inventories are a major asset for merchandising and manufacturing firms.
E)all of the above

Question 61

Which of the following is/are not true regarding inventories when their replacement cost declines below acquisition cost?

A)Both U.S.GAAP and IFRS require firms to write down inventories when their replacement cost, or market value, declines below acquisition cost.
B)Accountants refer to the inventory as impaired and to this valuation as the lower-of-cost-or-market basis.
C)The journal entry to record the inventory impairment results in a loss and a new balance sheet carrying value that is the lower of cost or market value.
D)U.S.GAAP permits firms to recognize subsequent value increases, as long as the new value remains less than the original acquisition cost.
E)IFRS permits firms to reverse previous impairments, up to the amount of the original acquisition cost of the inventory, if the circumstances that caused the inventory impairment no longer exist.

Question 62

For manufacturing firms, the balance sheet reports the costs of incomplete items as

A)Raw Materials Inventory.
B)Work-in-Process Inventory.
C)Finished Goods Inventory.
D)Cost of goods ready for sale.
E)none of the above.

Question 63

Mystical Duds estimates that unsold women's clothing with a carrying value of $500 million has minimal market value given a change in fashion.To reflect the minimal market value of the merchandise, Mystical Duds

A)would record an impairment loss of $500 million, reducing the carrying value of this inventory to zero.
B)would recognize zero cost of goods sold and a gross margin of $100 million on the sale, for a net margin of -$400 (=-$500 + $100) million over the two periods, if the firm sells the clothes for $100 million in a subsequent accounting period.
C)would record an impairment loss of $400 million, reducing the carrying value of this inventory to $100 million.
D)would recognize $100 million of cost of goods sold and a gross margin of zero on the sale, for a net margin of -$400 (=-$500 + $100) million over the two periods, if the firm sells the clothes for $100 million in a subsequent accounting period, if the firm sells the clothes for $100 million in a subsequent accounting period.
E)would record/recognize choices a and b.

Question 64

Manufacturing overhead includes:

A)costs that the firm cannot associate with particular products.
B)expenditures for factory utilities, property taxes, insurance, and depreciation on manufacturing plant and equipment.
C)expenditures for supervisors' salaries.
D)costs that jointly benefit all goods produced during the period, not any one particular item.
E)all of the above.

Question 65

Which of the following is not true regarding the lower-of-cost-or-market basis for inventory valuation?

A)It is a conservative accounting policy.
B)It recognizes losses from decreases in market value before a sale occurs.
C)It recognizes gains from increases in market value above original acquisition cost only when a sale occurs.
D)It reports inventories on the balance sheet at amounts that are never greater, but may be less, than acquisition cost.
E)It reports inventories on the balance sheet at amounts that are equal to the acquisition cost less a normal profit margin.

Question 66

City Bicycle City Bicycle , a cycling store has a beginning inventory of one bi-level touring bicycle 1, for which it paid $2,500.Suppose that during the period the store purchases bi-level touring bicycle 2 for $2,900 and bi-level touring bicycle 3 for $3,000, and that it sells one bicycle for $5,500.The three bicycles are physically identical; the store acquired them at different times as their acquisition costs changed, so only their costs differ.
Using the City Bicycle example, suppose the cycling store uses the specific identification system, and uses serial numbers or product bar codes to identify bi-level touring bicycle 2 as the unit sold.The cost of goods sold is _____, and the ending inventory is _____.

A)$2,900; $5,500
B)$2,500; $5,900
C)$3,000; $5,400
D)$2,800; $5,600
E)cannot be determined with the information given

Question 67

Flower Company had beginning inventory of $19,000, purchases were $100,000, and ending inventory had a cost of $25,000 and a market value of $20,000.Which of the following is/are not true?

A)Cost of Goods Sold is $5,000 larger when the firm records ending inventory at lower of cost or market than when it records the inventory at acquisition cost.
B)The loss of $5,000 increases Cost of Goods Sold by $5,000 and therefore reduces net income by $5,000, compared to the acquisition cost basis.
C)The firm should disclose the existence of large write-downs included in Cost of Goods Sold in the notes so that users of financial statements understand the components of the Cost of Goods Sold account.
D)The firm should disclose the existence of large write-downs included in Cost of Goods Sold in Managements' Discussion and Analysis so that users of financial statements understand the scope of the asset impairment.
E)none of the above

Question 68

Why might inventories increase in market value subsequent to acquisition?

A)a shortage of a key raw material
B)a competitor may introduce a technologically superior product
C)a product may include materials found to contain a health hazard
D)the introduction of a lower-cost raw material
E)all of the above

Question 69

Forgone Company had beginning inventory of $19,000, purchases were $100,000, and ending inventory had a cost of $25,000 and a market value of $20,000.The same inventory increased $3,000 in market value in the subsequent period.Which of the following is/are not true?

A)Under U.S.GAAP, the firm would continue to record the inventory at $20,000, the lower of cost or market.
B)Under IFRS, the firm would reverse a portion of its previous impairment.
C)If Forgone Company is in an industry that frequently experience inventory price fluctuations, the firm may use an allowance account to record lower-of-cost-or-market adjustments.
D)The firm should disclose the existence of large inventory write-ups in Managements' Discussion and Analysis so that users of financial statements understand the reversal of the previous asset impairment.
E)none of the above

Question 70

City Bicycle City Bicycle , a cycling store has a beginning inventory of one bi-level touring bicycle 1, for which it paid $2,500.Suppose that during the period the store purchases bi-level touring bicycle 2 for $2,900 and bi-level touring bicycle 3 for $3,000, and that it sells one bicycle for $5,500.The three bicycles are physically identical; the store acquired them at different times as their acquisition costs changed, so only their costs differ.
Using the City Bicycle example, suppose the cycling store uses the FIFO cost-flow assumption.The cost of goods sold is _____, and the ending inventory is _____.

A)$2,900; $5,500
B)$2,500; $5,900
C)$3,000; $5,400
D)$2,800; $5,600
E)cannot be determined with the information given

Question 71

City Bicycle City Bicycle , a cycling store has a beginning inventory of one bi-level touring bicycle 1, for which it paid $2,500.Suppose that during the period the store purchases bi-level touring bicycle 2 for $2,900 and bi-level touring bicycle 3 for $3,000, and that it sells one bicycle for $5,500.The three bicycles are physically identical; the store acquired them at different times as their acquisition costs changed, so only their costs differ.
Suppose the cycling store uses the LIFO cost-flow assumption.The cost of goods sold is _____, and the ending inventory is _____.

A)$2,900; $5,500
B)$2,500; $5,900
C)$3,000; $5,400
D)$2,800; $5,600
E)cannot be determined with the information given

Question 72

The market value for inventory valuation purposes generally means

A)replacement cost.
B)sellers bid price.
C)buyers offer price.
D)the mean between the sellers bid price and the buyers offer price.
E)present value of future cash flows.

Question 73

U.S.GAAP specifies that, in the context of inventories, market means

A)replacement cost, only.
B)net realizable value, only.
C)replacement cost, except that market may not exceed net realizable value and may not be less than net realizable value reduced by a normal profit margin.
D)replacement cost, except that market may not exceed net realizable value and may not be less than present value of future cash flows.
E)replacement cost, except that market may not exceed net realizable value and may not be less than the total amount of undiscounted future cash flows.

Question 74

The lower-of-cost-or-market basis for inventory valuation

A)is a conservative accounting policy.
B)recognizes losses from decreases in market value before a sale occurs.
C)recognizes gains from increases in market value above original acquisition cost only when a sale occurs.
D)reports inventories on the balance sheet at amounts that are never greater, but may be less, than acquisition cost.
E)all of the above

Question 75

Brussels Products began its Belgian operations on January 1. The following is the journal entry for the total payroll for January of €60,000: €40,000 paid to factory workers and €20,000 paid to marketing and administrative personnel:

A)Direct Labor Inventory ......................................40,000 Salaries Expense.......................... .................20,000
Cash.........................................................60,000
B)Salaries Expense.......................... .................60,000 Cash.........................................................60,000
C)Work-in-Process Inventory....................................60,000 Cash.........................................................60,000
D)Work-in-Process Inventory....................................40,000 Salaries Expense.......................... .................20,000
Cash.........................................................60,000
E)Work-in-Process Inventory ...................................20,000 Salaries Expense ........................ ..................40,000
Cash.........................................................60,000

Question 76

Brussels Products began its Belgian operations on January 1.The following is the journal entry for the issuance, to producing departments of raw materials costing €20,000:

A)Work-in-Process Inventory................................. 20,000 Cash .................................................... ..20,000
B)Work-in-Process Inventory................................. 20,000 Finished Goods Inventory ................................... ..20,000
C)Finished Goods Inventory................................... 20,000 Raw Materials Inventory ................................... ..20,000
D)Work-in-Process Inventory................................. 20,000 Raw Materials Inventory ................................... ..20,000
E) Raw Materials Inventory.................................. 20,000 Work-in-Process Inventory .................................. ..20,000

Question 77

Which of the following is true regarding the remeasurement of inventories upward to an amount exceeding their acquisition cost?

A)Acquisition cost leads to a more conservative measure of inventories and net income during the periods prior to sale.
B)An increase in the market value of inventory likely permits the firm to raise its selling price.
C)The firm realizes the benefit of that increase in the period of sale when the firm actually obtains a higher selling price.
D)Both U.S.GAAP and IFRS delay recognition of any increase in inventory valuation in net income until the period of sale.
E)all of the above

Question 78

City Bicycle City Bicycle , a cycling store has a beginning inventory of one bi-level touring bicycle 1, for which it paid $2,500.Suppose that during the period the store purchases bi-level touring bicycle 2 for $2,900 and bi-level touring bicycle 3 for $3,000, and that it sells one bicycle for $5,500.The three bicycles are physically identical; the store acquired them at different times as their acquisition costs changed, so only their costs differ.
Using the City Bicycle example, suppose the cycling store uses the weighted-average cost-flow assumption.The cost of goods sold is _____, and the ending inventory is _____.

A)$2,900; $5,500
B)$2,500; $5,900
C)$3,000; $5,400
D)$2,800; $5,600
E)cannot be determined with the information given

Question 79

IFRS specifies that, in the context of inventories, market means

A)replacement cost, only.
B)net realizable value, only.
C)replacement cost, except that market may not exceed net realizable value and may not be less than net realizable value reduced by a normal profit margin.
D)replacement cost, except that market may not exceed net realizable value and may not be less than present value of future cash flows.
E)replacement cost, except that market may not exceed net realizable value and may not be less than the total amount of undiscounted future cash flows.

Question 80

Which of the following is/are true regarding the Finished Goods Inventory account?

A)This account measures the total manufacturing cost of units completed but not yet sold.
B)The sale of manufactured goods to customers results in a transfer of their cost from the Finished Goods Inventory account to Cost of Goods Sold.
C)The journal entry for the sale of the inventory to a customer is a debit to Cost of Goods Sold and a credit to Finished Goods Inventory.
D)all of the above
E)none of the above