INTERAMERICAN UNIVERSITY OF PUERTO RICO

BAYAMON CAMPUS

BUSINESS ADMINISTRATION DEPERTMENT- ACCOUNTING DIVISION

PROF. RAMON CRUZ DIAZ ACCT 1161 EXAM CHAPs 5-6-7

NAME ____________________STUDENT # ___________________________

DATE _______________________________________

I. TRUE OR FALSE

1. Under the periodic system, the purchases account is used to accumulate

all purchases of merchandise for resale.
A) True
B) False

2. The gross profit amount is generally considered to be more informative

than the gross profit rate.
A) True
B) False

3. Gross profit rate is computed by dividing cost of goods sold by net

sales.
A) True
B) False

4. Under the periodic system, when a customer returns goods, Purchases

Returns and Allowances is debited.
A) True
B) False

5. Under the periodic inventory system, acquisitions of merchandise are

not recorded in the Merchandise Inventory account.
A) True
B) False

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 6. The FIFO reserve is a required disclosure for companies that use
FIFO.
A) True
B) False

7. When the average cost method is applied in a perpetual inventory

system, the sale of goods will change the unit cost that remains in
inventory.
A) True
B) False

8. When the average cost method is applied to a perpetual inventory

system, a moving average cost per unit is computed with each purchase.
A) True
B) False

9. An error in the ending inventory of the current period will have a

similar effect on net income of the next accounting period.
A) True
B) False

10. An error that overstates the ending inventory will also cause net income
for the period to be overstated.
A) True
B) False

11. A basic principle of cash management is to increase the speed of paying

liabilities.
A) True
B) False

12. If a monthly cash budget is prepared properly, there will never be a

cash deficiency at the end of any month.
A) True
B) False

13. A cash budget contributes to more effective cash management.

A) True
B) False

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 14. A petty cash fund is used to pay relatively large amounts.
A) True
B) False

15. The petty cash fund eliminates the need for a bank checking account.
A) True
B) False

II- MULTIPLE CHOICE

16. United Services and Supplies reports net income of $50,000 and cost
of goods sold of $300,000. US&S's gross profit rate was 40%, net
sales were:
A) $500,000.
B) $750,000.
C) $83,333.
D) $550,000.

17. Erin Corporation purchases $400 of merchandise on credit. using the

periodic inventory approach, Erin would record this transaction as:
A) Merchandise Inventory 400
Accounts 400
Payable
B) Accounts Payable 400
Purchases 400
C) Purchases 400
Accounts 400
Payable
D) Accounts Payable 400
Merchandise 400
Inventory

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18. Crowder Corporation recorded the return of $150 of goods originally
sold on credit to Discount Industries. Using the periodic inventory
approach, Crowder would record this transaction as:
A) Merchandise Inventory 150
Accounts 150
Receivable
B) Sales Returns and Allowances 150
Accounts 150
Receivable
C) Accounts Payable 150
Sales Returns 150
and
Allowances
D) Accounts Receivable 150
Sales Returns 150
and
Allowances

19. Turner Corporation returned $110 of goods originally purchased on

credit form Morgan Industries. Using the periodic Inventory approach,
Turner would record this transaction as:
A) Merchandise Inventory 110
Accounts 110
Payable
B) Accounts Payable 110
Merchandise 110
Inventory
C) Purchase Returns and Allowances 110
Accounts 110
Payable
D) Accounts Payable 110
Purchase 110
Returns and
Allowances

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20. Ramos Company receives a payment on account from Martinez
Industries. Based on the original sale of $4,000 using the periodic
inventory approach, Ramos honors the 3% cash discount and records
the payment. Which of the following is the correct entry for Ramos to
record?
A) Cash 3,880
Sales Discounts 120
Merchandise Inventory 4,000

B) Accounts Receivable 4,000

Cash 3,880
Purchase Discounts 120

C) Cash 3,880
Sales Discounts 120
Accounts Receivable 4,000
D) Cash 3,880
Purchase Discounts 120
Accounts Payable 4,000

21. An error in the physical count of goods on hand at the end of a period
resulted in a $10,000 overstatement of the ending inventory. The
effect of this error in the current period is
Cost of Net
Goods Sold Income
A) Understated Understated
B) Overstated Overstated
C) Understated Overstated
D) Overstated Understated

22. If beginning inventory is understated by $10,000, the effect of this

error in the current period is
Cost of Net
Goods Sold Income
A) Understated Understated
B) Overstated Overstated
C) Understated Overstated
D) Overstated Understated

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23. A company uses the periodic inventory method and the beginning
inventory is overstated by $4,000 because the ending inventory in the
previous period was overstated by $4,000; the ending inventory for
this period is correct. The amounts reflected in the current end of the
period balance sheet are
Asset Stockholders' Equity
A) Overstated Overstated
B) Correct Correct
C) Understated Understated
D) Overstated Correct

24. An overstatement of the beginning inventory results in

A) no effect on the period's net income.
B) an overstatement of net income.
C) an understatement of net income.
D) a need to adjust purchases.

25. An overstatement of ending inventory in one period results in

A) no effect on net income of the next period.
B) an overstatement of net income of the next period.
C) an understatement of net income of the next period.
D) an overstatement of the ending inventory of the next period.

26. A $100 petty cash fund has cash of $12 and receipts of $84. The
journal entry to replenish the account would include a
A) debit to Cash for $84.
B) credit to Petty Cash for $84.
C) credit to Cash Over and Short for $4.
D) credit to Cash for $88.

27. A $100 petty cash fund has cash of $16 and receipts of $86. The
journal entry to replenish the account would include
A) debit to Cash for $86.
B) credit to Petty Cash for $86.
C) credit to Cash over and Short for $2.
D) credit to Cash for $86.

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 28. A petty cash fund of $100 is replenished when the fund contains $5 in
cash and receipts for $92. The entry to replenish the fund would
A) credit Cash Over and Short for $3.
B) credit Miscellaneous Revenue for $3.
C) debit Cash Over and Short for $3.
D) debit Miscellaneous Expense for $3.

29. A petty cash fund should be replenished

A) every day.
B) at the end of every accounting period.
C) once a year.
D) as soon as an expense is paid from the fund.

30. Entries are made to the Petty Cash account when

A) establishing the fund.
B) making payments out of the fund.
C) recording shortages in the fund.
D) replenishing the fund.

II. PROBLEMS

31. Presented here are the components in Rowland Company's income

statement. Determine the missing amounts.

Net
Cost of Gross Operating
Sales Goods Sold Profit Expenses Income
$75,000 $35,000 $40,000 $23,000 $17,000
(a) (b)
$120,00 $56,000 $64,000 $48,000 $16,000 (d)
0(c)

32. Horner Corporation reported net sales of $150,000, cost of goods sold
of $50,000, operating expenses of $60,000, other expenses of
$10,000, net income of $30,000.
Calculate the following values.
1) Profit margin ratio. 2) Gross profit rate.

$30,000 =0.02% ($150,000- $50,000) = 0.7%

$150,000 $150,000

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33. This information relates to Sherper Co.

1) On April 5 purchased merchandise from Newport Company for $20,000,

terms 2/10, n/10.
2) On April 6 paid freight costs of $900 on merchandise purchased from
Newport.
3) On April 7 purchased equipment on account for $26,000.
4) On April 8 returned some of April 5 merchandise to Newport Company which
cost $3,000.
5) On April 15 paid the amount due to Newport Company in full.

Instructions
(a) Prepare the journal entries to record the transactions listed above
on the books of Sherper Co. Sherper Co. uses a perpetual inventory
system.
(b) Assume that Sherper Co. paid the balance due to Newport
Company on May 4 instead of April 15. Prepare the journal entry to
record this payment.

Credit
No Date General Journal Debit

Inventory
1 Apr 5 $20,000

Accounts Payable $20,000

(To Record
Purchase of
Inventory)
2 Apr 6 Inventory $900
Accounts Payable $900
(To record
shipping cost)
3 Apr 7 Equipment $26,000
Accounts Payable $26,000
(To record
purchase of
equipment)
4 Apr 8 Accounts Payable $3,000
Inventory $3,000
(To record
purchase to
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 return)
5 Apr 15 Accounts Payable $17,000
Cash $17,000
Inventory
(2%*$17,000)
(To record
payment made
net discount)

34. The Entertainment Center accumulates the following cost and market
data at December 31.

Inventory Cost Market

Categories Data _ _ Data_
Camera $11,000 $10,200
Camcorders 8,000 8,500
DVDs 14,000 12,000

What is the lower-of-cost-or-market value of the inventory?

Value of inventory
10,200+8,000+12,000 = 30,000

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35. Grother Company uses the periodic inventory method and had the
following inventory information available:
Unit Total
Units Cost Cost
1/1 Beginning 100 $4 $ 400
Inventory
1/20 Purchase 500 $5 2,500
7/25 Purchase 100 $7 700
10/20 Purchase 300 $8 2,400
1,000 $6,000

A physical count of inventory on December 31 revealed that there were

325 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 $$2,575
EI= (25 x $7) + (300 x $8)=$2,575
2) Assume that the company uses the average cost method. The
value of the ending inventory on December 31 is $1,950
$6,000= $6 per unit. EI= 325 x $6= $1,950
1,000
3) Assume that the company uses the LIFO method. The value of
the ending inventory on December 31 is $1,525
EI= (100 x $4) + (225 x $5) = $1,525
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?

FIFO income- (100 x $4) + (500 x $5) + (75 x $7) = $3,425 income.
The income would have been less due to the fact that with LIFO the
expensive ones would have sold first and gained more income.

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36. Grayson Company sells many products. Gizmo is one of its popular
items. Below is an analysis of the inventory purchases and sales of
Gizmo for the month of March. Grayson Company uses the perpetual
inventory system.

Sales
Purchases
Units Unit Cost Units Selling
Price/Unit
3/1 Beginning 100 $55
inventory
3/3 Purchase 60 $60
3/4 Sales 60 $120
3/10Purchase 200 $65
3/16Sales 70 $130
3/19Sales 80 $130
3/25Sales 50 $130
3/30Purchase 40 $75

Instructions
(a) Using the FIFO assumption, calculate the amount charged to
cost of goods sold for March. (Show computations)
(b) Using the FIFO assumption, calculate the value of ending
inventory for March.
(c) Using the moving average cost method, calculate the amount
assigned to the inventory on hand on March 31. (Show computations)
(d) Using the LIFO assumption, calculate the amount assigned to the
inventory on hand on March 31. (Show computations)
(e) Using the LIFO assumption, calculate the amount charged to
cost of goods sold for March. (Show computations)

(A) Using FIFO- the earliest units purchased were the first sold.
3/1 100 @$55 = $5,500
3/3 60 @60 = 3,600
3/10 110 @65 = 7,150
270 units $16,250 the cost of good sold
(B) Using FIFO- the latest purchased units were left in inventory
3/30 40@ $75= $3,000
3/10 90@ $65= 5,850
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 130 $8,850
(C) Calculate the value ending inventory using the weighted average cost.
Date Purchases Cost of Good Sold Balance
3/1 Beginning (100 @ 55)
Inventory
3/3 (60 @ 60)
3/4 (60 @ 56.875) (100
@ 56.875)
3/10 (200 @ 65)
3/16 (90 @ 62.292) (210
@62.292)
3/19 (70 @ 62.292) (140
@ 62.292)
3/25 (50 @ 62.292) (90
@ 62.292)
3/30 (40 @ 75)

(D) There are 130 units in ending inventory. They are compromised of the first units
purchased prior to each sale when LIFO is assumed.
3/1 90@$55= $4,950
3/3 40@$75= 3,000
120 units $7,950 = Ending Inventory
(E) Using LIFO- the latest purchased units purchased prior to the sale were the
first sold.
3/3 60 @ $60 = $3,600
3/10 90 @ $65 = 5,850
3/10 80 @ $65 = 5,200
3/10 30 @ $65 = 1,950
3/1 10 @ $55 = 1,550
270 units $17,150

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37. Using the following information, prepare a bank reconciliation for Hintz
Company for July 31, 2010.

a. The bank statement balance is $3,506.

b. The cash account balance is $3,630
c. Outstanding checks totaled $1,085.
d. Deposits in transit are $1,170.
e. The bank service charge is $30.
f. A check for $98 for supplies was recorded as $89 in the ledger.

AMOUNT
Cash Balance as per bank statement 3,506
Add: deposit in transit 1,170
Less: Outstanding checks -1,085
Adjusted cash balance 3,591
Balance as per cash account 3,630
Less: error on check -9
Less: service charges -30
Adjusted cash balance 3,591

END

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