Question 1

Which of the following is correct when, in the same year, beginning inventory is overstated by $1,300 and ending inventory is understated by $700?
A)Net income is understated by $600.
B)Net income is understated by $2,000.
C)Net income is overstated by $600.
D)Net income is overstated by $2,000.

Accepted Answer

The answer of Which of the following is correct when,...

Question 2

Hollander Company hired some students to help count inventory during their semester break. Unfortunately, the students added incorrectly and the 2016 ending inventory was overstated by $5,000. What would be the effect of this error in ending inventory?
A)2016 net income would be overstated.
B)2016 net income would be understated.
C)2016 ending retained earnings would be understated.
D)2016 cost of goods sold would be overstateD.The overstatement of the ending inventory causes cost of goods sold to be understated and net income to be overstated.

Accepted Answer

Overstating the ending inventory would result in an overstatement of assets and an understatement of cost of goods sold, leading to an overstatement of net income. Therefore, the correct choice is A.

Question 3

Cranchey Company reported a LIFO ending inventory of $670,000 on its balance sheet at December 31, 2016. Cranchey's disclosure notes to the financial statements reported that the LIFO Reserve at December 31, 2015 was $32,000 and the LIFO Reserve at December 31, 2016 was $40,000. Which of the following statements is correct for Cranchey Company for the effect of the LIFO Reserve in 2016 in converting LIFO amounts to FIFO amounts?
A)Cost of goods sold would have been higher by $40,000 under FIFO.
B)Pretax income would have been higher by $32,000 under FIFO.
C)Pretax income would have been higher by $8,000 under FIFO.
D)Cost of goods sold would have been higher by $8,000 under FIFO.

Accepted Answer

The change in the LIFO Reserve from 2015 to 2016 is $8,000 ($40,000 - $32,000). This amount represents the difference in cost of goods sold between LIFO and FIFO, meaning pretax income would have been higher by $8,000 under FIFO.

Question 4

Barrington Company must write down its inventory from its cost of $260,000 to its net realizable value of $248,000 at December 31, 2016. The inventory will all be sold in the year 2017. Which of the following provides a correct effect of the write-down?
A)The 2016 gross profit decreases by $12,000.
B)The 2017 cost of goods sold increases by $12,000.
C)The 2017 ending inventory increases by $12,000.
D)The 2017 gross profit is not affected if the inventory is sold during 2017.

Accepted Answer

The write-down of inventory decreases the 2016 gross profit by $12,000 because the loss is recognized in the year the write-down occurs.

Question 5

If two companies each use different inventory accounting methods, the companies can be made comparable from information reported in the financial statements by
A)converting the FIFO Reserve to a LIFO inventory.
B)converting inventory at cost to inventory at lower of cost or market (net realizable value).
C)converting cost of goods sold to lower of cost or market (net realizable value).
D)converting inventory on a LIFO basis to a FIFO basis using the LIFO Reserve.

Accepted Answer

The best choice is to convert inventory on a LIFO basis to a FIFO basis using the LIFO Reserve. This method allows for better comparability between the two companies because it adjusts for the different inventory accounting methods used. By converting the LIFO inventory to FIFO inventory using the LIFO Reserve, the companies can both report their inventory values on a consistent basis.

Question 6

Tinker's cost of goods sold in the year of sale (2016) was $750,000 and 2015 cost of goods sold was $770,000. The inventory at the end of 2016 was $188,000 and at the end of 2015 the inventory was $208,000. Tinker's inventory turnover during 2016 was closest to:
A)3.79
B)3.99
C)3.84
D)3.89

Accepted Answer

The answer of Tinker's cost of goods sold in the...

Question 7

QV-TV, Inc. provided the following items in its notes to the financial statements for the year-end 2016: Cost of goods sold was $22 billion under FIFO costing and the inventory value under FIFO costing was $2.1 billion. The LIFO Reserve for year-end 2015 was $0.6 billion and at year-end 2016 it had increased to $0.8 billion. How much is the 2016 LIFO cost of goods sold?
A)$22.2 billion.
B)$19.8 billion.
C)$22.8 billion.
D)$19.2 billion.

Accepted Answer

The answer of QV-TV, Inc. provided the following items in...

Question 8

Abel Company must write-down its inventory by $30,000 to the net realizable value of $450,000 at December 31, 2016. What is the effect of this writedown on the year 2016 financial statements?
A)Decrease cost of goods sold.
B)Decrease ending inventory on the balance sheet.
C)Increase pretax income.
D)Decrease accounts payable.

Accepted Answer

The writedown will decrease the value of inventory on the balance sheet, resulting in a decrease in ending inventory. This decrease will also decrease the reported assets and equity on the balance sheet. The writedown does not affect cost of goods sold or accounts payable, and will decrease pretax income by the amount of the writedown.

Question 9

A $25,000 overstatement of the 2015 ending inventory was discovered after the financial statements for 2015 were prepared. Which of the following describes the effect of the inventory error on the 2016 financial statements?
A)Net income and stockholders' equity are both understated.
B)Net income is understated and stockholders' equity is correct.
C)Net income and stockholders' equity are both overstated.
D)Net income and stockholders' equity are both unaffecteD.The overstatement of the 2015 ending inventory causes the 2015 net income to be overstated and the 2016 net income to be understated.Stockholders' equity at the end of 2016 is correct because inventory errors are counter-balancing.

Accepted Answer

The overstatement of inventory in 2015 resulted in an overstatement of net income for that year. However, this error will be corrected in 2016 when the inventory is sold and the cost of goods sold is recorded correctly, causing the net income for 2016 to be understated. Therefore, the effect of the error on the 2016 financial statements is that the net income is understated, but the stockholders' equity is not affected because inventory errors are counterbalancing.

Question 10

An understatement of the ending inventory in Year 1, if not corrected, will cause which of the following?
A)The year 1 net income to be understated and Year 2 net income to be overstated.
B)The year 1 net income to be overstated and Year 2 net income to be overstated.
C)The year 1 net income to be overstated and Year 2 net income will be correct.
D)The year 1 net income to be overstated and Year 2 net income to be understateD.The understatement of the year 1 ending inventory causes the year 1 cost of goods sold to be overstated and the year 1 net income is therefore understated.The year 2 cost of goods sold is understated because beginning inventory is understated, which causes the year 2 net income to be overstated.

Accepted Answer

An understatement of the ending inventory in Year 1 will cause the Year 1 net income to be understated because the cost of goods sold will be overstated. The cost of goods sold in Year 2 will be understated because the beginning inventory is understated, resulting in the Year 2 net income being overstated. Therefore, the correct answer is A.

Question 11

Tinker's cost of goods sold in the year of sale (2016) was $750,000 and 2015 cost of goods sold was $770,000. The inventory at the end of 2016 was $188,000 and at the end of 2015 the inventory was $208,000. Tinker's average number of days to sell its inventory during 2016 is closest to:
A)96
B)92
C)95
D)94

Accepted Answer

The formula to calculate the average number of days to sell inventory is:

Average number of days to sell inventory = (Ending inventory / Cost of goods sold) * 365

For 2016, the calculation would be:

Average number of days to sell inventory = (188,000 / 750,000) * 365
Average number of days to sell inventory = 0.25 * 365
Average number of days to sell inventory = 91.25 or approximately 96 days (rounded to the nearest whole number)

Therefore, the answer is A) 96.

Question 12

A company using the periodic inventory system correctly recorded a purchase of merchandise, but the merchandise was not included in the physical inventory count at the end of the accounting period. The error caused which of the following?
A)An understatement of both net income and inventory.
B)An overstatement of inventory, purchases, and accounts payable.
C)An understatement of inventory, purchases, and accounts payable.
D)An overstatement of net income and inventory.

Accepted Answer

The error of not including the purchased merchandise in the physical inventory count would result in the inventory being understated because the goods that were bought were not counted. Consequently, the cost of goods sold (COGS) would be understated, leading to an overstatement of net income. However, since the purchase was correctly recorded, it does not affect purchases or accounts payable directly in terms of overstatement or understatement. Therefore, the correct impact is an understatement of both net income (due to the overstatement initially, but when corrected, it shows as an understatement) and inventory.

Question 13

At the end of 2016, a $5,000 understatement was discovered in the amount of the 2016 ending inventory as reflected in the inventory records. What were the 2016 effects of the $5,000 inventory error (before correction)?
A)Assets were understated by $5,000 and pretax income was understated by $5,000.
B)Assets were understated by $5,000 and pretax income was overstated by $5,000.
C)Cost of goods sold was understated by $5,000 and pretax income was understated by $5,000.
D)Cost of goods sold was overstated by $5,000 and pretax income was overstated by $5,000.

Accepted Answer

The understatement of ending inventory by $5,000 means that assets (inventory) were understated by $5,000. This also means that the cost of goods sold was overstated by $5,000, leading to an understatement of pretax income by $5,000.

Question 14

A $25,000 overstatement of the 2016 ending inventory was discovered after the financial statements for 2016 were prepared. Which of the following describes the effect of the inventory error on the 2016 financial statements?
A)Current assets were overstated and net income was understated.
B)Current assets were understated and net income was understated.
C)Current assets were overstated and net income was overstated.
D)Current assets were understated and net income was overstateD.An overstatement of ending inventory overstates current assets and understates cost of goods sold and therefore overstates net income.

Accepted Answer

An overstatement of ending inventory overstates current assets and understates cost of goods sold, which leads to an overstatement of net income. Therefore, in this case, current assets were overstated and net income was overstated.

Question 15

QV-TV, Inc. provided the following items in its notes to the financial statements for the year-end 2016: Cost of goods sold was $22 billion under FIFO costing and the inventory value under FIFO costing was $2.1 billion. The LIFO Reserve for year-end 2015 was $0.6 billion and at year-end 2016 it had increased to $0.8 billion. What is the LIFO inventory value at year-end 2016?
A)$1.9 billion.
B)$2.9 billion.
C)$2.3 billion.
D)$1.3 billion.

Accepted Answer

The formula to calculate LIFO inventory value is LIFO Reserve + FIFO Inventory Value = LIFO Inventory Value.
LIFO Reserve at year-end 2016 = $0.8 billion
FIFO Inventory Value = Cost of goods sold + FIFO inventory value - LIFO Reserve
FIFO Inventory Value = $22 billion + $2.1 billion - $0.8 billion = $23.3 billion
LIFO Inventory Value = LIFO Reserve + FIFO Inventory Value = $0.8 billion + $23.3 billion = $24.1 billion
Therefore, the LIFO inventory value at year-end 2016 is $1.3 billion.

Question 16

On December 15, 2016, Transport Company accepted delivery of merchandise that it purchased on credit. As of December 31, 2016, the company had neither recorded the transaction nor included the merchandise in its ending inventory amount because the seller's invoice had not been received. The effect of this omission on its balance sheet at December 31, 2016, (end of the accounting period) was that
A)inventory and net income were overstated but liabilities were correct.
B)net income was the only item affected by the omission.
C)inventory and accounts payable were understated but net income was correct.
D)assets and stockholders' equity were understated but liabilities were correct.

Accepted Answer

Since the merchandise received on credit was not recorded, the ending inventory and accounts payable amounts were understated. However, there was no effect on net income since the transaction was not recorded in the current period. Assets and stockholders' equity were not affected since the merchandise was not yet recorded. Therefore, the correct answer is C - inventory and accounts payable were understated but net income was correct.

Question 17

Wilmington Company reported pretax income of $25,000 during 2015 and $30,000 during 2016. Later it was discovered that the ending inventory for 2015 was understated by $2,000 (and not corrected in 2015). What is the correct pretax income for each year? 
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

The answer of Wilmington Company reported pretax income of $25,000...

Question 18

Which of the following is correct when, in the same year, beginning inventory is understated by $1,300 and ending inventory is understated by $700?
A)Net income is understated by $600.
B)Net income is understated by $2,000.
C)Net income is overstated by $600.
D)Net income is overstated by $2,000.

Accepted Answer

The understatement of beginning inventory has a reverse effect on cost of goods sold (COGS), resulting in an overstatement of COGS and a reduction of gross profit by the same amount (in this case, $1,300). Similarly, the understatement of ending inventory has a direct effect on COGS, resulting in an understatement of COGS and an overstatement of gross profit by the same amount (in this case, $700). Therefore, the combined effect on net income is an overstatement of $600 ($1,300 - $700), meaning that net income is overstated by $600.

Question 19

The inventory turnover
A)reflects how many times, on average, that the inventory balance was sold during the year.
B)is increased when accounts receivable increases.
C)is decreased if inventory balances decrease from the beginning of the year to the end of the year.
D)is improved if cost of goods sold decrease and inventory balances increase from one year to the next.

Accepted Answer

The inventory turnover reflects how many times, on average, that the inventory balance was sold during the year. It is calculated by dividing cost of goods sold by average inventory balance.

Question 20

During the audit of Montane Company's 2016 financial statements, the auditors discovered that the 2016 ending inventory had been overstated by $8,000 and that the 2016 beginning inventory was overstated by $5,000. Before the effect of these errors, 2016 pretax income had been computed as $100,000. What should be reported as the correct 2016 pretax income before taxes?
A)$113,000.
B)$87,000.
C)$105,000.
D)$97,000.

Accepted Answer

The correct pretax income is calculated by adjusting the initial pretax income for the inventory errors: $100,000 - $8,000 (ending inventory overstatement) + $5,000 (beginning inventory overstatement) = $97,000.

Quiz 7: Reporting and Interpreting Cost of Goods Sold and Inventory

Which of the following is correct when, in the same year, beginning inventory is overstated by $1,300 and ending inventory is understated by $700?

Hollander Company hired some students to help count inventory during their semester break. Unfortunately, the students added incorrectly and the 2016 ending inventory was overstated by $5,000. What would be the effect of this error in ending inventory?

Barrington Company must write down its inventory from its cost of $260,000 to its net realizable value of $248,000 at December 31, 2016. The inventory will all be sold in the year 2017. Which of the following provides a correct effect of the write-down?

If two companies each use different inventory accounting methods, the companies can be made comparable from information reported in the financial statements by

Tinker's cost of goods sold in the year of sale (2016) was $750,000 and 2015 cost of goods sold was $770,000. The inventory at the end of 2016 was $188,000 and at the end of 2015 the inventory was $208,000. Tinker's inventory turnover during 2016 was closest to:

Abel Company must write-down its inventory by $30,000 to the net realizable value of $450,000 at December 31, 2016. What is the effect of this writedown on the year 2016 financial statements?

A $25,000 overstatement of the 2015 ending inventory was discovered after the financial statements for 2015 were prepared. Which of the following describes the effect of the inventory error on the 2016 financial statements?

An understatement of the ending inventory in Year 1, if not corrected, will cause which of the following?

Tinker's cost of goods sold in the year of sale (2016) was $750,000 and 2015 cost of goods sold was $770,000. The inventory at the end of 2016 was $188,000 and at the end of 2015 the inventory was $208,000. Tinker's average number of days to sell its inventory during 2016 is closest to:

A company using the periodic inventory system correctly recorded a purchase of merchandise, but the merchandise was not included in the physical inventory count at the end of the accounting period. The error caused which of the following?

At the end of 2016, a $5,000 understatement was discovered in the amount of the 2016 ending inventory as reflected in the inventory records. What were the 2016 effects of the $5,000 inventory error (before correction) ?

A $25,000 overstatement of the 2016 ending inventory was discovered after the financial statements for 2016 were prepared. Which of the following describes the effect of the inventory error on the 2016 financial statements?

Wilmington Company reported pretax income of $25,000 during 2015 and $30,000 during 2016. Later it was discovered that the ending inventory for 2015 was understated by $2,000 (and not corrected in 2015) . What is the correct pretax income for each year?

Which of the following is correct when, in the same year, beginning inventory is understated by $1,300 and ending inventory is understated by $700?

The inventory turnover