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Question #1 (AICPA.


On December 30, 2004, Astor Corp. sold merchandise for $75,000 to Day Co.
The terms of the sale were net 30, FOB shipping point. The merchandise was shipped on
December 31, 2004, and arrived at Day on January 5, 2005. Due to a clerical error, the sale
was not recorded until January 2005 and the merchandise, sold at a 25% markup, was
included in Astor's inventory at December 31, 2004.
As a result, Astor's cost of goods sold for the year ended December 31, 2004, was
A. Understated by $75,000.
B. Understated by $60,000.
The merchandise should be included in 2004 cost of goods
sold, not ending 2004 inventory, because the goods were
shipped before the year-end, and the terms were FOB
shipping point. This means that the title to the goods passed
to Day at the shipping point, before the end of the year.
Thus, the cost of this sale should be included in cost of
goods sold.
To determine the cost of the items to be included in cost of
goods sold, the $75,000 of sales must be deflated to cost.
The markup is 25%. The question does not specify how
markup is computed: on cost or on sales. Only one of the
possibilities is represented in the answer alternatives:
markup on cost. The candidate may have to try both
possibilities in order to find the correct answer.
$75,000 = sales = cost + markup
$75,000 = cost + .25(cost)
$75,000 = 1.25(cost)
$75,000/1.25 = cost = $60,000.
Therefore, 2004 cost of goods sold is understated $60,000.
C. Understated by $15,000.
D. Correctly stated.
Question #2 (AICPA.051171FARFA)

Foster Co. adjusted its allowance for uncollectible accounts at year end. The general ledger
balances for the accounts receivable and the related allowance account were $1,000,000
and $40,000, respectively. Foster uses the percentage-of-receivables method to estimate
its allowance for uncollectible accounts. Accounts receivable were estimated to be 5%
uncollectible. What amount should Foster record as an adjustment to its allowance for
uncollectible accounts at year end?
A. $10,000 decrease.
B. $10,000 increase.
When the recognition of uncollectible accounts is based on
receivables, the required ending balance in the allowance
account is computed based on ending receivables. In this

case, the required ending balance is $50,000 (.05 x

$1,000,000). The adjustment is the amount needed to bring
the allowance up to the required value. With an existing
balance of $40,000 in the account, only $10,000 of bad debt
expense is recognized, along with a corresponding increase
in the allowance account.
C. $50,000 decrease.
D. $50,000 increase.
Question #3 (AICPA.921115FARTH-FA)

Jones Wholesalers stocks a changing variety of products.

Which inventory costing method will be most likely to give Jones the lowest ending
inventory when its product lines are subject to specific price increases?
A. Specific identification.
B. Weighted average.
C. Dollar-value LIFO.
LIFO (any variation) yields an inventory valuation that
reflects the earliest purchase prices. If specific prices have
been increasing, then the inventory reflects the lowest
purchase prices.
D. FIFO periodic.
Question #4 (AICPA.930537FARP1-FA)

Fenn Stores, Inc. had sales of $1,000,000 during December 2004. Experience has shown
that merchandise equaling 7% of sales will be returned within 30 days and an additional
3% will be returned within 90 days. Returned merchandise is readily resalable. In addition,
merchandise equaling 15% of sales will be exchanged for merchandise of equal or greater
What amount should Fenn report for net sales in its income statement for the month of
December 2004?
A. $900,000
Gross sales


Less estimated sales returns: .10($1,000,000)


Equals net sales for December

$ 900,000

When sales returns are estimable, they must be recognized

in the month of sale, as is the case here. The timing of the
actual returns does not affect the timing of recognition. The
estimated future exchanges do not reduce current sales
because net sales is not reduced by these exchanges.
Exchanges are for items of equal or greater value.
B. $850,000
C. $780,000

D. $750,000
Question #5 (AICPA.930519FARP1-FA)

During January 2004, Metro Co., which maintains a perpetual inventory system, recorded
the following information pertaining to its inventory:

Balance on 1/1/04
Purchased on 1/7/04
Sold on 1/20/04
Purchased on 1/25/04

Unit Cost


Total Cost

Units on Hand





Under the LIFO method, what amount should Metro report as inventory at January 31,
A. $1,300
B. $2,700
Under the perpetual system, sales are costed with the most
recently acquired goods on hand.
Thus the 1/25 purchase is assumed to remain in inventory at
the end of January because there were no sales after that
date. Thus, the $2,000 of that purchase is included in ending
inventory. The 1/7 purchase is assumed sold on 1/20, along
with 300 units of beginning inventory, leaving 700 of
beginning inventory or $700. Combined with the 1/25
purchase yields $2,700 of inventory at the end of January.
C. $3,900
D. $4,100
Question #6 (AICPA.920518FARP1-FA)

Anders Co. uses the moving-average method to determine the cost of its inventory. During
January 2005, Anders recorded the following information pertaining to its inventory:
Balance on 1/1/05


Sold on 1/17/05


Purchased on 1/28/05


Unit cost

Total cost



What amount of inventory should Anders report in its January 31, 2005, balance sheet?
A. $200,000

B. $185,000
The moving average method computes a new average after
each purchase and applies that to each sale until another
purchase is made.
The cost of the sale is 35,000($5) = $175,000 because all
units carry a $5 unit cost at the time of the sale. Ending
inventory is the cost of goods available less cost of sales:
$200,000 + $160,000 - $175,000 = $185,000.
C. $162,500
D. $150,000
Question #7 (AICPA.911128FARTH-FA)

When the double extension approach to the dollar-value LIFO inventory method is used, the
inventory layer added in the current year is multiplied by an index number.
Which of the following correctly states how components are used in the calculation of this
index number?
A. In the numerator, the average of the ending inventory at
base-year cost and at current-year cost.
B. In the numerator, the ending inventory at current-year cost,
and, in the denominator, the ending inventory at base-year cost.
In DV LIFO, the inventory increment for the current period
is first computed in terms of base-year cost. This allows an
identification of the increase in inventory independent of
price level changes each year. The increment in base-year
cost is then converted to an increase measured in current
period cost by multiplying that base increment by an
index. The index must convert the base cost measurement
to current cost measurement because under LIFO each
year's layer is added at the prices in effect that year.
The denominator of the index must be the ending
inventory at base-year cost so that the base-year
measurement is cancelled with the base-year
measurement in the increment for the year. The numerator
must be the current cost of ending inventory, in order to
value the increment at current cost. (Increment at baseyear cost)(index) = increment at current cost.
C. In the numerator, the ending inventory at base-year cost, and,
in the denominator, the ending inventory at current-year cost.
D. In the denominator, the average of the ending inventory at
base-year cost and at current-year cost.
Question #8 (AICPA.08211242FARII.C)

Fireworks, Inc. had an explosion in its plant that destroyed most of its inventory. Its
records show that beginning inventory was $40,000. Fireworks made purchases of
$480,000 and sales of $620,000 during the year. Its normal gross profit percentage is 25%.

It can sell some of its damaged inventory for $5,000. The insurance company will reimburse
Fireworks for 70% of its loss. What amount should Fireworks report as loss from the
A. $50,000
B. $35,000
C. $18,000
D. $15,000
The gross profit method of estimating the ending inventory
at the time of loss is applied in this situation. The equation is
BI (beginning inventory) + PUR (purchases) = CGS (cost of
goods sold) EI (ending inventory). The cost to sales ratio is
75% (1 - gross margin percentage of 25%). CGS therefore
equals .75 x $620,000 sales = $465,000. Entering the
amounts into the equation yields: $40,000 $480,000 =
$465,000 EI. Solving for EI yields $55,000. This is an
estimate of the cost of inventory lost. However, the value of
the inventory remaining is $5,000. The loss before insurance
reimbursement equals $50,000 ($55,000 - $5,000). The
reimbursement shortfall is 30% of $50,000 or $15,000. This
is the loss to the firm.

Question #9 (AICPA.082110FARII.C)

(NOTE: This is a CPAexcel simulated Exam Question, not AICPA licensed Material)
When the dollar-value LIFO (DV LIFO) retail method is used, what is the first step in the
A. Apply DV LIFO to cost amounts.
B. Apply the retail method to cost amounts.
C. Apply the retail method to retail amounts.
D. Apply DV LIFO to retail amounts.
The advantage of the retail inventory method, in general,
is its use of retail dollars as the basis for the inventory
count. The conversion to cost eliminates the need to keep
track of cost by inventory item. An additional advantage
is afforded when the DV LIFO approach is applied to retail
dollars eliminating the need to keep track of individual
items at retail. This first step yields the layer added
during the period in retail dollars measured at prices
associated with the period. Then, the appropriate cost to
retail ratio is applied to this retail layer, yielding the layer
measured at cost, which is added to beginning inventory
at DV LIFO cost resulting in ending inventory at cost.
Question #10 (AICPA.08211241FARIIA)

Smith Co. has a checking account at Small Bank and an interest-bearing savings account at
Big Bank. On December 31, year 1, the bank reconciliations for Smith are as follows:

Big Bank
Bank balance
Deposit in transit
Book balance
Small Bank
Bank balance
Outstanding checks
Book balance


What amount should be classified as cash on Smith's balance sheet at December 31, year 1?
A. $148,000
B. $151,000
C. $155,000
The Only the Big account is included in cash per the balance
sheet. The Small account is negative and represents an
overdraft, an amount owed the bank to be reported in
current liabilities.
D. $156,000
Question #11 (AICPA.082109FARII.B)

(NOTE: This is a CPAexcel simulated Exam Question, not AICPA licensed Material)
At the end of the current year (calendar-fiscal year), a creditor firm's 6% note receivable
balance is $10,000. Two years remain in the note term. Interest is due each December 31.
The debtor's financial position has deteriorated causing the creditor to reevaluate the note.
After careful consideration, the creditor believes that only 60% of the principal ($10,000)
will be collected at the end of the term. The only interest expected to be received is 2% of
the original principal for one year, also to be collected at the end of the term. At the end of
the current year, what amount of expense or loss is recognized by the creditor for this loan
impairment? The present value of $1 two years hence at 6% is .89, and at 2% is .961.
A. $4,042
B. $5,958
C. $4,482
The new book value, after recording the impairment, is the
present value of expected future cash inflows discounted at
6%, the original rate. This amount is (.89) x [(.60)
($10,000) + $200] = $5,518. The $4,482 expense or loss
recognized is the difference between the $10,000 current
book value and the $5,518 new book value.
D. $5,518
Question #12 (AICPA.920549FARP1-FA)

Hutch, Inc. uses the conventional retail inventory method to account for inventory. The
following information relates to 2004 operations:



Beginning inventory
$600,000 $920,000
and purchases
Net markups


Net markdowns




What amount should be reported as cost of sales for 2004?

A. $480,000
B. $487,500
C. $520,000
D. $525,000
Conventional retail is the application of LCM to the retail
This question requires the use of the average method
because beginning inventory and purchases are merged
together. To attain an approximation to LCM, the net
markdowns are not included in the computation of the cost
to retail percentage. That percentage is: $600,000/
($920,000 + $40,000) = .625. The ending inventory at
retail is $120,000 ($920,000 + $40,000 - $60,000 $780,000). Therefore, the ending inventory at cost is
$75,000 ($120,000 x .625).
The cost of sales is computed as (equation is in cost
beginning inventory + net

= ending


= $75,000

+ cost of

(? = $525,000)
Question #13 (AICPA.061228FAR)
Trans Co. uses a periodic inventory system. The following are inventory transactions for the
month of January:
Beginning inventory
10,000 units at $3
5,000 units at $4
5,000 units at $5
Sales at $10 per units
10,000 units
Trans uses the average pricing method to determine the value of its inventory. What
amount should Trans report as cost of goods sold on its income statement for the month of

A. $ 30,000
B. $ 37,500
The average costing method uses the average cost per unit
for all items available for sale during the period to cost
ending inventory and cost of goods sold. The total cost of
goods available is computed as: 10,000($3) + 5,000($4) +
5,000($5) = $75,000. There were 20,000 units available for
sale (beginning inventory + the two purchases). The
resulting unit cost = $75,000/20,000 = $3.75. The firm
sold 10,000 units.
Therefore, cost of goods sold is $3.75(10,000) = $37,500.
C. $ 40,000
D. $100,000
Question #14 (AICPA.940513FARFA)

At December 31, 2004, Kale Co. had the following balances in the accounts it maintains at
First State Bank:
Checking account #101


Checking account #201


Money market account


90-day certificate of deposit, due 2-28-05


180-day certificate of deposit, due 3-15-05


Kale classifies investments with original maturities of three months or less as cash
equivalents. In its December 31, 2004 balance sheet, what amount should Kale report as
cash and cash equivalents?
A. $190,000
B. $200,000
C. $240,000
Each of the listed items qualifies as either cash or cash
equivalent except for the 180-day CD which had an original
maturity of 180 days (exceeds three months).
The net sum of the first four items in the list is $240,000,
which is the amount of cash and cash equivalents to be
reported. Although, as of the balance sheet date, the 180day CD will mature in less than three months, classification
in cash equivalents requires the ORIGINAL maturity to be
three months or less.
D. $320,000

Question #15 (AICPA.950507FARFA)

Gar Co. factored its receivables without recourse with Ross Bank. Gar received cash as a
result of this transaction, which is best described as a
A. Loan from Ross collateralized by Gar's accounts receivable.
B. Loan from Ross to be repaid by the proceeds from Gar's
accounts receivable.
C. Sale of Gar's accounts receivable to Ross, with the risk of
uncollectible accounts retained by Gar.
D. Sale of Gar's accounts receivable to Ross, with the risk of
uncollectible accounts transferred to Ross.
The factoring of accounts receivable without recourse
passes the risk of uncollectible accounts to the factor (the
firm buying the receivables).
The buyer (Ross) cannot require Gar to pay for an
uncollectible receivable. Ross has no recourse against Gar
for uncollectibles. Factoring without recourse is accounted
for as a sale because control has passed to the buyer. The
receivables are removed from the seller's books and a loss
is recorded. The seller has no further involvement with the

Question #16 (AICPA.070765FAR)

A material overstatement in ending inventory was discovered after the year-end financial
statements of a company were issued to the public. What effect did this error have on the
year-end financial statements?
Gross profit




If ending inventory is overstated, current assets are overstated. With ending inventory
overstated, cost of goods sold is understated, resulting in gross profit being




Question #17 (AICPA.0821126FAR


The following costs pertain to Den Co.'s purchase of inventory:

700 units of product A
Cost of materials and labor incurred to bring product A to saleable condition
Insurance cost during transit of purchased goods
What amount should Den record as the cost of inventory as a result of this purchase?
A. $3,925


B. $4,650
C. $4,825
D. $4,925
All costs necessary to bring an item to its salable condition
are capitalized to the inventory account. All four listed
costs meet this requirement. Until the goods are ready for
sale, the cost of all efforts to achieve that goal are treated
as product costs rather than period costs.
Question #18 (AICPA.070786FAR)
Loft Co. reviewed its inventory values for proper pricing at year-end. The following
summarizes two inventory items examined for the lower of cost or market:
Inventory item #1
Inventory item #2
Original cost
Replacement cost
Net realizable value
Net realizable value
less profit margin
What amount should Loft include in inventory at year-end, if it uses the total of the
inventory to apply the lower of cost or market?
A. $520,000
B. $610,000
Ceiling = 650,000; Floor = 613,000; Replacement cost at
520,000 is less than the floor. Thus, the Floor or Net
Realizable less profit margin = Market which equals
$613,000 (the middle of the three potential market values).
Cost is $610,000, which is less than market. Loft will
include this amount in inventory at year-end.
C. $613,000
D. $650,000
Question #19 (AICPA.930520FARP2-FA)

On January 1, 2004, Card Corp. signed a three-year, noncancelable purchase contract,

which allows Card to purchase up to 500,000 units of a computer part annually from Hart
Supply Co. at $.10 per unit and guarantees a minimum annual purchase of 100,000 units.
During 2004, the part unexpectedly became obsolete. Card had 250,000 units of this
inventory at December 31, 2004 and believes these parts can be sold as scrap for $.02 per
What amount of probable loss from the purchase commitment should Card report in its
2004 income statement?
A. $24,000
B. $20,000
C. $16,000
The firm is committed to purchase a minimum of 100,000
units in each of the next two years (2005,06--2004 was the
first year covered by the contract).

Thus, they are committed to pay $20,000 ($.10 x 200,000)

over the next two years. The units can be sold for $.02
scrap per unit or a total of $4,000 ($.02 x 200,000). Thus,
the next expected loss to be reported in the 2004 income
statement is $16,000 ($20,000 - $4,000).
D. $8,000
Question #20 (AICPA.901109FARP2-FA)

Mill Co.'s allowance for uncollectible accounts was $100,000 at the end of 2005 and
$90,000 at the end of 2004. For the year ended December 31, 2005, Mill reported bad debt
expense of $16,000 in its income statement.
What amount did Mill debit to the appropriate account in 2005 to write off actual bad debts?
A. $6,000
When accounts are written off under the allowance method, the allowance account is
debited (reduced). An analysis of the allowance account identifies the amount of
accounts written off:
Beginning allowance

bad debt expense

write offs

ending allowance



write offs



write offs

B. $10,000
C. $16,000
This answer is bad debt expense, one of the events that affects the allowance account.
The question asks for the amount of the other event affecting the allowance account:
write offs.
The amount of write offs can be found by analyzing the change in the allowance
Beginning allowance

bad debt expense

write offs

ending allowance



write offs



write offs

D. $26,000