Name ____________________________________________________ Date _____________

Accounting 2301Exam # 4
Summer 2010
True/False (5 Points)
1. The major difference between the balance sheets of a service company and a merchandising
company is inventory. True
2. Sales Allowances and Sales Discounts are both designed to encourage customers to pay their
accounts promptly. False
3. A company's unadjusted balance in Merchandise Inventory will usually not agree with the
actual amount of inventory on hand at year-end. True
4. The first-in, first-out (FIFO) inventory method results in an ending inventory valued at the
most recent cost. True
5. Goods that have been purchased FOB destination but are in transit, should be excluded from
a physical count of goods. True
Multiple Choice (5 Points)
6. Two categories of expenses for merchandising companies are
a.
b.
c.
d.

cost of goods sold and financing expenses.

operating expenses and financing expenses.
cost of goods sold and operating expenses.
sales and cost of goods sold.

7. Which of the following expressions is incorrect?

a.
b.
c.
d.

Gross profit operating expenses = operating income

Sales cost of goods sold operating expenses = operating income
Operating income + operating expenses = gross profit
Operating expenses cost of goods sold = gross profit

8. Detailed records of goods held for resale are not maintained under a
a.
b.
c.
d.

perpetual inventory system.

periodic inventory system.
double entry accounting system.
single entry accounting system.

9. Which of the following statements is correct with respect to inventories?

a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold.
b. It is generally good business management to sell the most recently acquired goods first.
c. Under FIFO, the ending inventory is based on the latest units purchased.

d. FIFO seldom coincides with the actual physical flow of inventory.

10. The accounting principle that requires that the cost flow assumption be consistent with the
physical movement of goods is
a. called the matching principle.
b. called the consistency principle.
c. nonexistent; that is, there is no accounting requirement.
d. called the physical flow assumption.
Problems (90 Points)
11. On October 1, Taylor Bicycle Store had an inventory of 20 ten speed bicycles at a cost of
$200 each. During the month of October, the following transactions occurred.
Oct. 4 Purchased 30 bicycles at a cost of $200 each from Mann Bicycle Company, terms
2/10, n/30.
6 Sold 18 bicycles to Team America for $300 each, terms 2/10, n/30.
7 Received credit from Mann Bicycle Company for the return of 2 defective bicycles.
13 Issued a credit memo to Team America for the return of a defective bicycle.
14 Paid Mann Bicycle Company in full, less discount.
Instructions
Prepare the journal entries to record the transactions assuming the company uses a perpetual
inventory system.
Oct. 4
6

7
13

14

Merchandise Inventory..........................................................
Accounts Payable..........................................................

6,000

Accounts Receivable..............................................................
Sales..............................................................................

5,400

Cost of Goods Sold................................................................

Merchandise Inventory.................................................

3,600

Accounts Payable...................................................................
Merchandise Inventory.................................................

400

Sales Returns and Allowances...............................................

Accounts Receivable.....................................................

300

Merchandise Inventory..........................................................
Cost of Goods Sold.......................................................

200

Accounts Payable ($6,000 $400)........................................

Cash ($5,600.98).......................................................
Merchandise Inventory ($5,600.02).........................

5,600

6,000
5,400
3,600
400
300
200
5,488
112

12. Prepare the necessary journal entries to record the following transactions, assuming Barone
Company uses a perpetual inventory system.
(a) Purchased $30,000 of merchandise on account, terms 2/10, n/30.
(b) Returned $500 of damaged merchandise for credit.
(c) Paid for the merchandise purchased within 10 days.
(a)
Merchandise Inventory ................................................................... 30,000
Accounts Payable.................................................................
30,000
(b)
Accounts Payable........................................................................... 500
Merchandise Inventory .........................................................

500

(c)
Accounts Payable ($30,000 $500) .............................................. 29,500
Merchandise Inventory ($29,500 .02) ...............................
Cash ($29,500 $590).........................................................

13. For each of the following, determine the missing amounts.

Operating
Sales
Profit
Expenses Net Income
1.
$100,000
________
_________
________
$95,000
$120,000

1. Gross Profit = $25,000 + $10,000 = $35,000

Cost of Goods Sold = $100,000 $35,000 =$65,000
2. Sales = $95,000 + $120,000 = $215,000

590
28,910

Goods Sold

Cost of
Gross

$25,000
________

$10,0002.
$80,000

Operating Expenses = $120,000 $80,000 = $40,000

14. The following information is available for Harold Company:

Beginning inventory
purchase
Second purchase

600 units at $5First

900 units at $6
500 units at $7

Assume that Harold uses a periodic inventory system and that there are 700 units left at the end
of the month.
InstructionsCompute the cost of ending inventory under the
(a) FIFO method.
(b) LIFO method.
(a)
FIFO Ending Inventory Cost:
500 $7 = $3,500
200 $6 = 1,200
$4,700
(b)
LIFO Ending Inventory Cost:
600 $5 =
$3,000
100 $6 =
600
$3,600

15. Morton Company uses the periodic inventory method and had the following inventory
information available:
Units
Unit Cost Total Cost
1/1 Beginning Inventory
100
$4
$ 400
1/20 Purchase
400
$5
2,000
7/25 Purchase
200
$7
1,400
10/20 Purchase
300
$8
2,400
1,000
$6,200
A physical count of inventory on December 31 revealed that there were 400 units on hand.

Instructions
Answer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the FIFO method. The value of the ending inventory at
December 31 is $3,100.
300 units @ $8 =
100 units @ $7 =
400 units

$2,400
700
$3,100

2. Assume that the company uses the Average-Cost method. The value of the ending inventory
on December 31 is $2,480.
$6,200 1,000 = $6.20 per unit 400 units = $2,480

3. Assume that the company uses the LIFO method. The value of the ending inventory on
December 31 is $1,900.
100 units @ $4 = $ 400
300 units @ $5 = 1,500
400 units
$1,900

4. Determine the difference in the amount of income that the company would have reported if it
had used the FIFO method instead of the LIFO method. Would income have been greater or
less?
Income would have been $1,200 ($4,300 vs. $3,100) greater if the company used FIFO instead of LIFO
FIFO: Cost of goods sold $3,100
100 units @ $4 = $ 400
400 units @ $5 = 2,000
100 units @ $7 = 700
600 units
$3,100

LIFO: Cost of goods sold $4,300

300 units @ $8 = $2,400
200 units @ $7 = 1,400
100 units @ $5 = 500
600 units
$4,300

16. Yenn Company uses the periodic inventory system to account for inventories. Information
related to Yenn Company's inventory at October 31 is given below:
October

1
Beginning inventory
8
Purchase
16
Purchase
24
Purchase
Total units and cost

400
800
600
200
2,000

units @ $10.00 = $ 4,000

units @ $10.40 =
8,320
units @ $10.80 =
6,480
units @ $11.60 =
2,320
units
$21,120

Instructions
1. Show computations to value the ending inventory using the FIFO cost assumption if 550
units remain on hand at October 31.

Under FIFO, the units remaining in inventory are the ones purchased most recently.
10/24 200 units @ $11.60 =
$2,320
10/16 350 units @ 10.80 =
3,780
550 units
$6,100

2. Show computations to value the ending inventory using the weighted-average cost method
If 550 units remain on hand at October 31.
Under average cost method, the weighted average cost per unit must be computed.

$21,120 2,000 units = $10.56

550 units $10.56 =
$5,808

3. Show computations to value the ending inventory using the LIFO cost assumption if 550
units remain on hand at October 31.
Under LIFO, the units remaining are the ones purchased earliest.
10/1 400 units @ $10.00 =
10/8 150 units @ 10.40 =
550 units

$4,000
1,560
$5,560