Exam2ch58Libby7edKey

1.WhichofthefollowingtasksdoestheFinancialAccountingStandardsBoard(FASB)perform?
A.OverseeingtheworkoftheSecurities&ExchangeCommission(SEC).
B.OverseeingtheworkofthePublicCompanyAccountingOversightBoard(PCAOB).
C.Theresponsibilityforprotectinginvestorsandmaintainingtheintegrityofthesecuritiesmarkets.
D.Thedevelopmentofgenerallyacceptedaccountingprinciples.

TheFASBdevelopsgenerallyacceptedaccountingprinciples.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Medium
LearningObjective:0501Recognizethepeopleinvolvedintheaccountingcommunicationprocess(regulators;managers;directors;auditors;information
intermediaries;andusers);theirrolesintheprocess;andtheguidancetheyreceivefromlegalandprofessionalstandards.
LibbyChapter05#32
TopicArea:PlayersInTheAccountingCommunicationProcess

2.Whichofthefollowingisnotaresponsibilityofthechiefexecutiveofficer(CEO)andthechieffinancial
officer(CFO)?
A.Theresponsibilitytooverseethefinancialstatementexternalaudit.
B.ToensuretheaccuracyandcompletenessofallreportsprovidedtotheSecurities&ExchangeCommission
(SEC).
C.Thecertificationofthestrengthoftheinternalcontrolsystem.
D.Thedisclosuretotheauditorcommitteeofanyfraudstheyareawareof.

Theexternalauditorsarehiredbytheboardofdirectorsandareresponsibleforoverseeingtheirownaudit.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Medium
LearningObjective:0501Recognizethepeopleinvolvedintheaccountingcommunicationprocess(regulators;managers;directors;auditors;information
intermediaries;andusers);theirrolesintheprocess;andtheguidancetheyreceivefromlegalandprofessionalstandards.
LibbyChapter05#34
TopicArea:PlayersInTheAccountingCommunicationProcess

3.Foraccountinginformationtobeuseful,itmustbewhichofthefollowing?
A.Itmustbeconsistentandcomparable.
B.Itmustberelevantandreliable.
C.Itmustbecomparableandreliable.
D.Itmustberelevantandconsistent.

Relevanceandreliabilityarethecharacteristicswhichallowaccountinginformationtobeuseful.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Medium
LearningObjective:0501Recognizethepeopleinvolvedintheaccountingcommunicationprocess(regulators;managers;directors;auditors;information
intermediaries;andusers);theirrolesintheprocess;andtheguidancetheyreceivefromlegalandprofessionalstandards.
LibbyChapter05#37
TopicArea:PlayersInTheAccountingCommunicationProcess

4.Conservatismrequiresthatspecialcaremustbetakentoavoidwhichofthefollowing?
A.Overstatingassetsandliabilitiesandunderstatingrevenuesandexpenses.
B.Understatingassetsandliabilitiesandoverstatingrevenuesandexpenses.
C.Overstatingassetsandrevenuesandunderstatingliabilitiesandexpenses.
D.Understatingassetsandrevenuesandoverstatingliabilitiesandexpenses.

Conservatismisconcernedwithoverstatingrevenuesandassetsandwithunderstatingexpensesandliabilities.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Medium
LearningObjective:0501Recognizethepeopleinvolvedintheaccountingcommunicationprocess(regulators;managers;directors;auditors;information
intermediaries;andusers);theirrolesintheprocess;andtheguidancetheyreceivefromlegalandprofessionalstandards.
LibbyChapter05#38
TopicArea:PlayersInTheAccountingCommunicationProcess

5.Whichofthefollowingwouldnotbeclassifiedasacurrentasset?
A.Accountsreceivable
B.Patents
C.Merchandiseinventory
D.Cash

Apatentisanintangibleasset.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Easy
LearningObjective:0503Recognizeandapplythedifferentfinancialstatementanddisclosureformatsusedbycompaniesinpractice.
LibbyChapter05#44
TopicArea:ACloserLookAtFinancialStatementFormatAndNotes

6.Whichofthefollowingarethecriteriausedtodeterminewhetheranitemisextraordinary?
A.Itisunusualinnatureandoccursfrequently.
B.Itisunusualinnatureandoccursinfrequently.
C.Itisunusualinnatureoroccursinfrequently.
D.Itisinfrequentinoccurrenceonly.

Extraordinaryitemsoccurinfrequentlyandareunusualinnature.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Easy
LearningObjective:0503Recognizeandapplythedifferentfinancialstatementanddisclosureformatsusedbycompaniesinpractice.
LibbyChapter05#47
TopicArea:ACloserLookAtFinancialStatementFormatAndNotes

7.Whichofthefollowingjournalentriesiscorrectwhencommonstockissoldforcashatapricegreaterthan
parvalue?

A.

B.

C.

D.

Commonstockandadditionalpaidincapitalarebothcreditedwhencommonstockissoldformorethanpar
value.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Easy
LearningObjective:0503Recognizeandapplythedifferentfinancialstatementanddisclosureformatsusedbycompaniesinpractice.
LibbyChapter05#48
TopicArea:ACloserLookAtFinancialStatementFormatAndNotes

8.Whichofthefollowingstatementsisfalse?
A.Thecommonstockaccounthasacreditbalance.
B.Theadditionalpaidincapitalaccounthasacreditbalance.
C.Contributedcapitalconsistsofcommonstockandadditionalpaidincapital.
D.Theparvalueofastockrepresentsthestock'sfairvalue.

Theparvaluerepresentstheminimumamountastockholdermustcontribute.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Easy
LearningObjective:0503Recognizeandapplythedifferentfinancialstatementanddisclosureformatsusedbycompaniesinpractice.
LibbyChapter05#49
TopicArea:ACloserLookAtFinancialStatementFormatAndNotes

9.Whichofthefollowingbestdescribesincomefromoperations?
A.Itincludestheresultsofdiscontinuedoperations.
B.Itincludesextraordinaryitems.
C.Itissalesminuscostofgoodssoldandincometaxexpense.
D.Itisnetsalesminuscostofgoodssoldandoperatingexpenses.

Incomefromoperationsequalsnetsalesminuscostofgoodssoldandoperatingexpenses.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Easy
LearningObjective:0503Recognizeandapplythedifferentfinancialstatementanddisclosureformatsusedbycompaniesinpractice.
LibbyChapter05#51
TopicArea:ACloserLookAtFinancialStatementFormatAndNotes

10.TheCallieCompanyhasprovidedthefollowinginformation:

Operatingexpenseswere$231,000;
Costofgoodssoldwas$376,000;
Netsaleswere$940,000;
Interestexpensewas$32,000;
Gainonsaleofabuildingwas$76,000;
Incometaxexpensewas$151,000.

WhatwasCallie'sincomefromoperations?
A.$333,000
B.$188,000
C.$156,000
D.$232,000

Incomefromoperations($333,000)equalsnetsales($940,000)minusthesumofcostofgoodssold($376,000)
andoperatingexpenses($231,000).

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0503Recognizeandapplythedifferentfinancialstatementanddisclosureformatsusedbycompaniesinpractice.
LibbyChapter05#53
TopicArea:ACloserLookAtFinancialStatementFormatAndNotes

11.Whichofthefollowingwouldnottypicallybedisclosedinthenotestothefinancialstatements?
A.Additionaldetailregardingreportednumbers.
B.Asummaryofsignificantaccountingpolicies.
C.Revenuesreportedbybusinesssegments.
D.Thenetincomeearnedbythebusinesstodate.

Thenetincomeearnedbythebusinesstodateisincludedwithinretainedearnings.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Medium
LearningObjective:0503Recognizeandapplythedifferentfinancialstatementanddisclosureformatsusedbycompaniesinpractice.
LibbyChapter05#62
TopicArea:ACloserLookAtFinancialStatementFormatAndNotes

12.Superiorhasprovidedthefollowinginformationforitsrecentyearofoperation:

Thecommonstockaccountbalanceatthebeginningoftheyearwas$20,000andtheyearendbalancewas
$25,000.
Theadditionalpaidincapitalaccountbalanceincreased$2,500duringtheyear.
Theretainedearningsbalanceatthebeginningoftheyearwas$75,000andtheyearendbalancewas$91,000.
Netincomewas$26,000.

HowmuchdidSuperiorsellitscommonstockforduringtheyear?
A.$5,000.
B.$2,500.
C.$7,500.
D.$25,000.

Theincreaseinthecommonstockaccount($5,000)plustheincreaseinadditionalpaidincapital($2,500)
equalsthesellingpriceofthecommonstock($7,500).

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0503Recognizeandapplythedifferentfinancialstatementanddisclosureformatsusedbycompaniesinpractice.
LibbyChapter05#71
TopicArea:ACloserLookAtFinancialStatementFormatAndNotes

13.Centex,Inc.issued50,000sharesofits$1parvaluecommonstockfor$20pershare.Thejournalentryto
recordthestockissuewouldincludewhichofthefollowing?
A.Acredittocashfor$1,000,000.
B.Acredittoadditionalpaidincapitalfor$1,000,000.
C.Acredittoadditionalpaidincapitalfor$50,000.
D.Acredittocommonstockfor$50,000.

Thecredittocommonstockisfortheparvalueofthesharesissued.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Easy
LearningObjective:0503Recognizeandapplythedifferentfinancialstatementanddisclosureformatsusedbycompaniesinpractice.
LibbyChapter05#79
TopicArea:ACloserLookAtFinancialStatementFormatAndNotes

14.Acompanysellsmagazinesandcollectssubscriptionfeespriortothepublicationanddistributionofthe
magazine.Whichofthefollowingcorrectlydescribestheimpactonthefinancialstatementswhencashis
receivedinadvancefromcustomers?
A.Currentassetsincreaseandgrossprofitincreases.
B.Currentliabilitiesaren'taffectedandstockholders'equityisn'taffected.
C.Currentassetsincreaseandstockholders'equityincreases.
D.Currentliabilitiesincreaseandgrossprofitisnotaffected.

Receivingpaymentsinadvanceofprovidinggoodsand/orservicescreatesandliabilityanddoesnotcreate
revenueorgrossprofit.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Hard
LearningObjective:0602Analyzetheimpactofcreditcardsales;salesdiscounts;andsalesreturnsontheamountsreportedasnetsales.
Chapter06
Libby #28
TopicArea:AccountingForSalesRevenue

15.NewarkCompanyhasprovidedthefollowinginformation:

Cashsales,$450,000
Creditsales,$1,350,000
Sellingandadministrativeexpenses,$330,000
Salesreturnsandallowances,$90,000
Depreciationexpense,$101,000
Grossprofit,$1,360,000
Increaseinaccountsreceivable,$55,000
Baddebtexpense,$33,000
Salesdiscounts,$43,000

HowmuchisNewark'scostofgoodssold?
A.$307,000
B.$252,000
C.$440,000
D.$340,000

Netsales($450,000+$1,350,000$90,000$43,000)minuscostofgoodssold($307,000)equalsgrossprofit
($1,360,000).

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Hard
LearningObjective:0602Analyzetheimpactofcreditcardsales;salesdiscounts;andsalesreturnsontheamountsreportedasnetsales.
LearningObjective:0603Analyzeandinterpretthegrossprofitpercentage.
Chapter06
Libby #29
TopicArea:AccountingForSalesRevenue,MeasuringAndReportingReceivables

16.FlyerCompanyhasprovidedthefollowinginformation:

Cashsales,$150,000
Creditsales,$450,000
Sellingandadministrativeexpenses,$110,000
Salesreturnsandallowances,$30,000
Grossprofit,$490,000
Accountsreceivable,$110,000
Salesdiscounts,$14,000
Allowancefordoubtfulaccountscreditbalance,$1,200

Howmuchisbaddebtexpenseassumingthat5%ofaccountsreceivableisestimatedtobeuncollectible?
A.$5,500
B.$6,700
C.$4,240
D.$4,300

Baddebtexpense($4,300)=5%ofaccountsofaccountsreceivable(5%$110,000)allowancefordoubtful
accountscreditbalance($1,200).

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0604Estimate;report;andevaluatetheeffectsofuncollectibleaccountsreceivable(baddebts)onfinancialstatements.
Chapter06
Libby #32
TopicArea:MeasuringAndReportingReceivables

17.FlyerCompanyhasprovidedthefollowinginformation:

Cashsales,$150,000
Creditsales,$450,000
Sellingandadministrativeexpenses,$110,000
Salesreturnsandallowances,$30,000
Grossprofit,$290,000
Accountsreceivable,$110,000
Salesdiscounts,$14,000
Allowancefordoubtfulaccountscreditbalance,$1,200

Flyerestimatesbaddebtexpenseassumingthat1.5%ofcreditsalesareuncollectible.Whatisthebalanceinthe
allowancefordoubtfulaccountsafterbaddebtexpenseisrecorded?
A.$7,950
B.$6,750
C.$5,550
D.$7,800

Theallowancefordoubtfulaccounts($7,950)=Baddebtexpense(1.5%$450,000)plustheallowancefor
doubtfulaccountscreditbalance($1,200).

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0604Estimate;report;andevaluatetheeffectsofuncollectibleaccountsreceivable(baddebts)onfinancialstatements.
Chapter06
Libby #34
TopicArea:MeasuringAndReportingReceivables

18.Whichofthefollowingjournalentriescorrectlyrecordsbaddebtexpense?

A.

B.

C.

D.

Thejournalentrytorecordbaddebtexpenseinvolvesadebittobaddebtexpenseandacredittoallowancefor
doubtfulaccounts.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Easy
LearningObjective:0604Estimate;report;andevaluatetheeffectsofuncollectibleaccountsreceivable(baddebts)onfinancialstatements.
Chapter06
Libby #38
TopicArea:MeasuringAndReportingReceivables

19.Whichofthefollowingjournalentriescorrectlyrecordsthewriteoffofanuncollectibleaccount
receivable?

A.

B.

C.

D.

Thejournalentrytowriteoffanaccountreceivablerequiresadebittoallowancefordoubtfulaccountsanda
credittoaccountsreceivable.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Medium
LearningObjective:0604Estimate;report;andevaluatetheeffectsofuncollectibleaccountsreceivable(baddebts)onfinancialstatements.
Chapter06
Libby #39
TopicArea:MeasuringAndReportingReceivables

20.Whichofthefollowingjournalentriescorrectlyrecordsthecollectionofanaccountreceivableforwhicha
1%salesdiscountwasrecordedatthetimeofcollection?

A.

B.

C.

D.

Thejournalentryinvolvesadebittobothcashandsalesdiscountsandacredittoaccountsreceivable.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0602Analyzetheimpactofcreditcardsales;salesdiscounts;andsalesreturnsontheamountsreportedasnetsales.
Chapter06
Libby #45
TopicArea:AccountingForSalesRevenue

21.Whichofthefollowingcorrectlydescribescredittermsof2/10,n/30?
A.Atwopercentdiscountforearlypaymentisavailableiftheinvoiceispaidbeforethetenthdayofthemonth
followingthemonththesale.
B.Atwopercentdiscountforearlypaymentisavailablewithintendaysofthedateofsale.
C.Atenpercentdiscountforearlypaymentisavailableiftheinvoiceispaidwithintwodaysofthedateofthe
invoice.
D.Atwopercentdiscountforearlypaymentisavailableiftheinvoiceispaidafterthetenthday,butbeforethe
thirtiethdayoftheinvoicedate.

Thecreditterm2/10impliesthata2%discountisavailablewithintendaysofthedateofsaleandthetermn/30
impliesthatthefullsalespriceisduewithin30daysofthesale.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0602Analyzetheimpactofcreditcardsales;salesdiscounts;andsalesreturnsontheamountsreportedasnetsales.
Chapter06
Libby #48
TopicArea:AccountingForSalesRevenue

22.Acustomerpurchasedandreceived$5,000ofgoodsoncreditfromDiscountPaperSupplyonSeptember1.
ThecustomerreceivedthebillonSeptember13andmaileda$5,000checkonSeptember30.DiscountPaper
SupplyreceivedthecheckonOctober4.OnwhichofthefollowingdatesshouldDiscountPaperSupplyrecord
salesrevenue?
A.September1
B.September13
C.September30
D.October4

Salesrevenueshouldberecordedonthedateofsale.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Medium
LearningObjective:0601Applytherevenueprincipletodeterminetheacceptedtimetorecordsalesrevenuefortypicalretailers;wholesalers;manufacturers;and
servicecompanies.
Chapter06
Libby #49
TopicArea:AccountingForSalesRevenue

23.OakwoodCompanyhadaccountsreceivableof$750,000andanallowancefordoubtfulaccountsofthe
$21,500justpriortowritingoffasworthlessanaccountreceivableforHylandCompanyof$5,000.Thenet
realizablevalueofaccountsreceivableasshownbytheaccountingrecordsbeforeandafterthewriteoffwasas
follows:

A.OptionA
B.OptionB
C.OptionC
D.OptionD

Writingoffanuncollectibleaccountinvolvesadebittoallowancefordoubtfulaccounts(acontraasset
account)andacredittoaccountsreceivable(anassetaccount).Thereforethenetrealizablevalue(accounts
receivableminusallowancefordoubtfulaccounts)doesnotchange;itis$728,500bothbeforeandafterthe
writeoff.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Medium
LearningObjective:0604Estimate;report;andevaluatetheeffectsofuncollectibleaccountsreceivable(baddebts)onfinancialstatements.
Chapter06
Libby #58
TopicArea:MeasuringAndReportingReceivables

24.TheTannerCompany'sApril1,2010prereconciliationcashbalanceontheirbookswas$35,000.While
preparingtheApril1bankreconciliation,Tannerdeterminedthatoutstandingcheckstotal$11,000,depositsin
transittotal$7,000,andbankservicechargesare$50.HowmuchwasTanner'sApril1,2010cashbalanceper
thebankstatement?
A.$31,000
B.$30,950
C.$38,950
D.$39,000

Bankcashbalance($38,950)=Correctedbookbalance($35,000$50)+Outstandingchecks($11,000)
Depositsintransit($7,000).

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Hard
LearningObjective:0606Report;control;andsafeguardcash.
Chapter06
Libby #64
TopicArea:ReportingAndSafeguardingCash

25.Whenadepositorreceivesabankstatementindicatingthattherewasa"NSFcheck",thedepositorshould
dowhichofthefollowing?
A.Reducethecashaccountperthebooksfortheamountofthe"NSFcheck".
B.Reducethecashaccountperthebankstatementfortheamountofthe"NSFcheck".
C.Creditallowancefordoubtfulaccountsfortheamountofthecheck.
D.Increasethesalesreturnsandallowancesaccount.

NSFchecksaredeductedfromthebookcashbalancewhenpreparingabankreconciliation.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Remember
Difficulty:Medium
LearningObjective:0606Report;control;andsafeguardcash.
Chapter06
Libby #67
TopicArea:ReportingAndSafeguardingCash

26.ColemanCompanyhasprovidedthefollowinginformation:beginninginventory,$100,000;costofgoods
sold,$450,000;andendinginventory,$80,000.HowmuchwereColeman'sinventorypurchases?
A.$450,000
B.$410,000
C.$430,000
D.$420,000

Costofgoodssold($450,000)=Beginninginventory($100,000)+Purchases($430,000)Endinginventory
($80,000)

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0701Applythecostprincipletoidentifytheamountsthatshouldbeincludedininventoryandthematchingprincipletodeterminecostofgoods
soldfortypicalretailers;wholesalers;andmanufacturers.
Chapter07
Libby #32
TopicArea:NatureOfInventoryAndCostOfGoodsSold

27.LauerCorporationusestheperiodicinventorysystemandhasprovidedthefollowinginformationaboutone
oftheirlaptopcomputers:

Duringtheyear,750laptopcomputersweresold.
WhatwasendinginventoryusingtheFIFOcostflowassumption?
A.$60,000
B.$52,500
C.$52,000
D.$40,000

Endinginventory($52,500)=($1,05050)

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0702Reportinventoryandcostofgoodssoldusingthefourinventorycostingmethods.
Chapter07
Libby #38
TopicArea:InventoryCostingMethods

28.LauerCorporationusestheperiodicinventorysystemandhasprovidedthefollowinginformationaboutone
oftheirlaptopcomputers:

Duringtheyear,750laptopcomputersweresold.
WhatwascostofgoodssoldusingtheLIFOcostflowassumption?
A.$717,500
B.$730,000
C.$703,125
D.$725,500

Costofgoodssold($730,000)=(200$1,050)+(300$1,000)+(200$900)+(50$800)

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0702Reportinventoryandcostofgoodssoldusingthefourinventorycostingmethods.
Chapter07
Libby #40
TopicArea:InventoryCostingMethods

29.Whichofthefollowingstatementsiscorrectwheninventorypricesaredecreasing?
A.LIFOwillresultinlowernetincomeandahigherinventoryvaluationthanwillFIFO.
B.LIFOwillresultinhighernetincomeandahigherinventoryvaluationthanwillFIFO.
C.FIFOwillresultinhighernetincomeandahigherinventoryvaluationthanwillLIFO.
D.FIFOwillresultinhighernetincomeandalowerinventoryvaluationthanwillLIFO.

LIFOreportsalowercostofgoodssoldandahighernetincomewhenpricesaredecreasing.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0702Reportinventoryandcostofgoodssoldusingthefourinventorycostingmethods.
Chapter07
Libby #45
TopicArea:InventoryCostingMethods

30.Acorporationhasprovidedthefollowinginformationaboutoneoftheirproducts:

Duringtheyear,400unitsweresold.
Whatisendinginventoryusingtheaveragecostmethod?
A.$48,000
B.$64,000
C.$50,000
D.$62,000

Averagecost($160)={(200$140)+(400$160)+(100$200)}700unitsEndinginventory($48,000)=
Averagecost($160)300units

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0702Reportinventoryandcostofgoodssoldusingthefourinventorycostingmethods.
Chapter07
Libby #48
TopicArea:InventoryCostingMethods

31.MooreCompanypurchasedanitemforinventorythatcost$20perunitandwaspricedtosellat$30.Itwas
determinedthatthereplacementcostis$18perunit.Usingthelowerofcostormarketrule,whatamount
shouldbereportedonthebalancesheetforinventory?
A.$18
B.$20
C.$12
D.$30

Inventoryisreportedonthebalancesheetatreplacementcostwhenitislessthancost.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Remember
Difficulty:Easy
LearningObjective:0704Reportinventoryatthelowerofcostofmarket(LCM).
Chapter07
Libby #51
TopicArea:ValuationAtLowerOfCostOrMarket

32.Tinker's2011costofgoodssoldwas$750,000and2010costofgoodssoldwas$770,000.Theinventoryat
theendof2011was$188,000and$208,000attheendof2010.WhatwasTinker'sinventoryturnoverduring
2011?
A.3.79
B.3.99
C.3.84
D.3.89

Inventoryturnover(3.79)=Costofgoodssold($750,000)Averageinventory($188,000+$208,000)2

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0705Evaluateinventorymanagementusingtheinventoryturnoverratioandanalyzetheeffectsofinventoryoncashflows.
Chapter07
Libby #55
TopicArea:EvaluatingInventoryManagement

33.Tinker's2011costofgoodssoldwas$750,000and2010costofgoodssoldwas$770,000.Theinventoryat
theendof2011was$188,000and$208,000attheendof2010.WhatisTinker'saveragenumberofdaystosell
theirinventoryduring2011?
A.96.3
B.91.5
C.95.1
D.93.8

Inventoryturnover(3.79)=Costofgoodssold($750,000)Averageinventory($188,000+$208,000)2
Averagedaystosellinventory(96.3)=365daysInventoryturnover(3.79)

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0705Evaluateinventorymanagementusingtheinventoryturnoverratioandanalyzetheeffectsofinventoryoncashflows.
Chapter07
Libby #56
TopicArea:EvaluatingInventoryManagement

34.A$25,000overstatementofthe2010endinginventorywasdiscoveredafterthefinancialstatementsfor
2010wereprepared.Whichofthefollowingdescribestheeffectoftheinventoryerroronthe2010financial
statements?
A.Currentassetswereoverstatedandnetincomewasunderstated.
B.Currentassetswereunderstatedandnetincomewasunderstated.
C.Currentassetswereoverstatedandnetincomewasoverstated.
D.Currentassetswereunderstatedandnetincomewasoverstated.

Anoverstatementofendinginventoryoverstatescurrentassetsandunderstatescostofgoodssoldandtherefore
overstatesnetincome.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Hard
LearningObjective:0707Understandmethodsforcontrollingandkeepingtrackofinventoryandanalyzetheeffectsofinventoryerrorsonfinancialstatements.
Chapter07
Libby #59
TopicArea:ControlOfInventory

35.Acompanyusingtheperiodicinventorysystemcorrectlyrecordedapurchaseofmerchandise,butthe
merchandisewasnotincludedinthephysicalinventorycountattheendoftheaccountingperiod.Theerror
causedwhichofthefollowing?
A.Anunderstatementofbothnetincomeandassets.
B.Anoverstatementofinventory,purchases,andaccountspayable.
C.Anunderstatementofinventory,purchases,andaccountspayable.
D.Anoverstatementofnetincomeandassets.

Theunderstatementoftheendinginventorycausesbothnetincomeandassetstobeunderstated.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Hard
LearningObjective:0707Understandmethodsforcontrollingandkeepingtrackofinventoryandanalyzetheeffectsofinventoryerrorsonfinancialstatements.
Chapter07
Libby #66
TopicArea:ControlOfInventory

36.OnMarch15,2010,RyanCompanypurchased$10,000ofmerchandiseoncreditsubjecttotermsof2/10,
n/30.RyanCompanyrecordsitspurchasesusingthegrossamount.Theperiodicinventorysystemisused.
WhichofthefollowingjournalentriesiscorrectwhenRyanCompanypaysforthesegoodsonMarch20,
2010?

A.

B.

C.

D.

Thepaymentwaswithin10days,sothe2%discountcanbetaken.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Medium
LearningObjective:0701Applythecostprincipletoidentifytheamountsthatshouldbeincludedininventoryandthematchingprincipletodeterminecostofgoods
soldfortypicalretailers;wholesalers;andmanufacturers.
Chapter07
Libby #76
TopicArea:NatureOfInventoryAndCostOfGoodsSold

37.WhichofthefollowingwouldnotbeincludedinLatimerCompany'sendinginventory?
A.GoodsshippedfromasupplierwithtermsofFOBshippingpoint.
B.GoodsshippedtocustomerswithtermsofFOBdestination.
C.SamplesprovidedtoacustomerwiththeunderstandingthattheywouldbereturnedtoLatimeratthe
beginningofthenextyear.
D.GoodsshippedtocustomerswithtermsofFOBshippingpoint.

TitlepassestothecustomerwhenthegoodsareshippedFOBshippingpoint.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Medium
LearningObjective:0701Applythecostprincipletoidentifytheamountsthatshouldbeincludedininventoryandthematchingprincipletodeterminecostofgoods
soldfortypicalretailers;wholesalers;andmanufacturers.
Chapter07
Libby #86
TopicArea:NatureOfInventoryAndCostOfGoodsSold

38.Whichofthefollowingaccountswouldnotbeconsideredatangibleasset?
A.Buildings
B.Land
C.Equipment
D.Patents

Tangibleassetshavephysicalsubstance,whereasintangibleassetslackphysicalsubstance.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Easy
LearningObjective:0801Define;classify;andexplainthenatureoflonglivedproductiveassetsandinterpretthefixedassetturnoverratio.
LibbyChapter08#33
TopicArea:AcquisitionAndMaintenanceOfPlantAndEquipment

39.Whichofthefollowingaccountswouldnotbeconsideredanintangibleasset?
A.Goodwill
B.Patents
C.Researchanddevelopmentcosts
D.Trademarks

Tangibleassetshavephysicalsubstance,whereasintangibleassetslackphysicalsubstance.Researchand
developmentcostsareexpensedasincurred.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Easy
LearningObjective:0801Define;classify;andexplainthenatureoflonglivedproductiveassetsandinterpretthefixedassetturnoverratio.
LibbyChapter08#34
TopicArea:AcquisitionAndMaintenanceOfPlantAndEquipment

40.TheWilsonCompanyhasprovidedthefollowinginformation:

Netsales,$100,000;
Netoperatingincome,$40,000;
Netincome,$20,000;
Averagetotalassets,$120,000;
Averagenetfixedassets;$80,000.

WhatisWilson'sfixedassetturnoverratio?
A.0.83
B.1.25
C.0.25
D.0.50.

Fixedassetturnoverratio(1.25)=Netsales($100,000)Averagenetfixedassets($80,000)

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0801Define;classify;andexplainthenatureoflonglivedproductiveassetsandinterpretthefixedassetturnoverratio.
LibbyChapter08#39
TopicArea:AcquisitionAndMaintenanceOfPlantAndEquipment

41.SalviaCompanyrecentlypurchasedatruck.Thepricenegotiatedwiththedealerwas$40,000.Salviaalso
paidsalestaxof$2,000onthepurchase,shippingandpreparationcostsof$3,000,andinsuranceforthefirst
yearofoperationof$4,000.Atwhatamountshouldthetruckberecordedonthebalancesheetpriorto
recordingdepreciationexpense?
A.$40,000
B.$42,000
C.$43,000
D.$45,000

$45,000=$40,000+$2,000+$3,000

AACSB:Application
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0802Applythecostprincipletomeasuretheacquisitionandmaintenanceofproperty;plant;andequipment.
LibbyChapter08#43
TopicArea:AcquisitionAndMaintenanceOfPlantAndEquipment

42.WhichofthefollowingiscorrectforSmithCompanywhenSmithissues10,000sharesof$10parvalue
commonstockandpays$20,000cashinexchangeforabuilding?ThemarketpriceoftheSmithstockonthe
exchangedatewas$35pershareandthebuilding'sbookvalueonthebooksofthesellerwas$200,000.
A.Totalassetsincrease$350,000.
B.Stockholders'equityincreases$200,000.
C.Stockholders'equityincreases$330,000.
D.Totalassetsincrease$330,000.

Thebuildingaccountincreases$370,000{(10,000$35)+$20,000}andthecashaccountdecreases$20,000.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0802Applythecostprincipletomeasuretheacquisitionandmaintenanceofproperty;plant;andequipment.
LibbyChapter08#46
TopicArea:AcquisitionAndMaintenanceOfPlantAndEquipment

43.WhichofthefollowingisincorrectforSmithCompanywhenSmithissues10,000sharesof$10parvalue
commonstockandpays$20,000cashinexchangeforabuilding?ThemarketpriceoftheSmithstockonthe
exchangedatewas$35pershareandthebuilding'sbookvalueonthebooksofthesellerwas$200,000.
A.Thecommonstockaccountincreasesby$100,000.
B.Thebuildingaccountincreasesby$350,000.
C.Stockholders'equityincreases$350,000.
D.Theadditionalpaidincapitalaccountincreasesby$250,000.

Thebuildingaccountincreases$370,000{(10,000$35)+$20,000}.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0802Applythecostprincipletomeasuretheacquisitionandmaintenanceofproperty;plant;andequipment.
LibbyChapter08#47
TopicArea:AcquisitionAndMaintenanceOfPlantAndEquipment

44.Whichofthefollowingbestdescribestheobjectiveofdepreciation?
A.Toallocatethecostofatangibleassettotheperiodsinwhichitsusecontributestoearningrevenue.
B.Toestimatetheremainingusefullifeoftheasset.
C.Toreporttheassetonthebalancesheetattheestimatedamountforwhichtheassetcouldbesoldonthe
balancesheetdate.
D.Toestimatethecurrentreplacementcostoftheasset.

Depreciationisanallocationprocess,notavaluationprocess.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Medium
LearningObjective:0803Applyvariouscostallocationmethodsasassetsareheldandusedovertime.
LibbyChapter08#56
TopicArea:Use,Impairment,AndDisposalOfPlantAndEquipment

45.Whichofthefollowingdescribestheeffectofrecordingdepreciationexpenseatyearend?
A.Netincomedecreasesandtotalassetsaren'taffected.
B.Totalassetsdecreaseandstockholders'equityisnotaffected.
C.Netincomedecreasesandtotalassetsdecrease.
D.Stockholders'equityisnotaffectedandnetincomedecreases.

Thejournalentryincreasesexpenses,whichdecreasesbothnetincomeandtotalassets.Totalassetsdecrease
becausethecontraaccountaccumulateddepreciationisincreased.

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0803Applyvariouscostallocationmethodsasassetsareheldandusedovertime.
LibbyChapter08#58
TopicArea:Use,Impairment,AndDisposalOfPlantAndEquipment

46.Whyisthecontinuityassumptionimportantwithrespecttotheaccountingforlonglivedtangibleassets?
A.Ithelpsacompanydecidewhethertousestraightlinedepreciationoranaccelerateddepreciationmethod.
B.Itjustifiesdepreciatingtheassetoveritsexpectedusefullife,withoutanticipatingthatthebusinesswill
liquidateinthenearfuture.
C.Itprovidesjustificationforincludingresidualvaluesincalculatingdepreciation.
D.Itisconsistentwithmaintainingassetsintheaccountingrecordsatmarketvalueratherthanacquisitioncost.

Thejustificationforallocatinganasset'scostoveritsusefullifeisthatthebusinessentityisagoingconcern.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Remember
Difficulty:Medium
LearningObjective:0803Applyvariouscostallocationmethodsasassetsareheldandusedovertime.
LibbyChapter08#59
TopicArea:Use,Impairment,AndDisposalOfPlantAndEquipment

47.WarrenCompanyplanstodepreciateanewbuildingusingthedoubledecliningbalancedepreciation
method.Thebuildingcost$800,000.Theestimatedresidualvalueofthebuildingis$50,000andithasan
expectedusefullifeof25years.Assumingthefirstyear'sdepreciationexpensewasrecordedproperly,what
wouldbetheamountofdepreciationexpenseforthesecondyear?
A.$30,720
B.$32,000
C.$58,880
D.$64,000

Year1depreciationexpense($64,000)=$800,0002/25
Year2depreciationexpense($58,880)=($800,000$64,000)2/25

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0803Applyvariouscostallocationmethodsasassetsareheldandusedovertime.
LibbyChapter08#63
TopicArea:Use,Impairment,AndDisposalOfPlantAndEquipment

48.OnJanuary1,2010,WassonCompanypurchasedadeliveryvehiclecosting$40,000.Thevehiclehasan
estimated6yearlifeanda$4,000residualvalue.Wassonestimatesthatthevehiclewillbedriven100,000
miles.Whatisthevehicle'sbookvalueasofDecember31,2011assumingWassonusestheunitsofproduction
depreciationmethodandthevehiclewasdriven10,000milesduring2010and18,000milesduring2011?
A.$29,920
B.$28,800
C.$24,800
D.$25,920

Depreciationexpensepermile($0.36)=($40,000$4,000)100,000
December31,2011accumulateddepreciationbalance($10,080)=$0.3628,000
December31,2011bookvalue($29,920)=$40,000$10,080

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0803Applyvariouscostallocationmethodsasassetsareheldandusedovertime.
LibbyChapter08#71
TopicArea:Use,Impairment,AndDisposalOfPlantAndEquipment

49.WhichofthefollowingstatementsabouttheModifiedAcceleratedCostRecoverySystem(MACRS)is
correct?
A.Itissimilartotheunitsofproductiondepreciationmethod.
B.ItisappliedusinglongerassetlivesthantheestimatedusefullivesrequiredbyGAAP.
C.Itprovidesashorttermtaxbenefitbecauseofthehigherdepreciationexpensereportedintheearlyyearsof
anasset'slife.
D.Itisacceptableforusewhenpreparingfinancialstatements.

MACRSisanaccelerateddepreciationmethod,whichresultsinhigheramountsofdepreciationexpenseand
lesstaxableincomeduringtheearlieryearsofanasset'slife.

AACSB:ReflectiveThinking
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Understand
Difficulty:Medium
LearningObjective:0803Applyvariouscostallocationmethodsasassetsareheldandusedovertime.
LibbyChapter08#76
TopicArea:Use,Impairment,AndDisposalOfPlantAndEquipment

50.CarterCompanydisposedofanassetattheendoftheeighthyearofitsestimatedlifefor$10,000cash.The
asset'slifewasoriginallyestimatedtobe10years.Theoriginalcostwas$50,000withanestimatedresidual
valueof$5,000.Theassetwasbeingdepreciatedusingthestraightlinemethod.Whatwasthegainorlosson
thedisposal?
A.$1,000loss
B.$4,000loss
C.$5,500gain
D.$10,000gain

Annualstraightlinedepreciationexpense($4,500)=($50,000$5,000)10;
Endofyeareightbookvalue($14,000)=$50,000($4,5008);A$4,000lossoccursbecausethesellingprice
($10,000)islessthanbookvalue($14,000).

AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Reporting,Measurement
Blooms:Apply
Difficulty:Medium
LearningObjective:0805Analyzethedisposalofproperty;plant;andequipment.
LibbyChapter08#83
TopicArea:Use,Impairment,AndDisposalOfPlantAndEquipment

Exam2ch58Libby7edSummary

Category #ofQ
uestio
ns
AACSB:Analytic 26
AACSB:Application 1
AACSB:ReflectiveThinking 23
AICPABB:CriticalThinking 50
AICPAFN:Measurement 3
AICPAFN:Reporting 20
AICPAFN:Reporting,Measurement 27
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Apply 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 2
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Remember 1
Blooms:Understand 1
Difficulty:Easy 10
Difficulty:Hard 5
Difficulty:Medium 35
LearningObjective:0501Recognizethepeopleinvolvedintheaccountingcommunicationprocess(regulators;managers;directors;aud 4
itors;informationintermediaries;andusers);theirrolesintheprocess;andtheguidancetheyreceivefromlegalandprofessionalstandar
ds.
LearningObjective:0503Recognizeandapplythedifferentfinancialstatementanddisclosureformatsusedbycompaniesinpractice. 9
LearningObjective:0601Applytherevenueprincipletodeterminetheacceptedtimetorecordsalesrevenuefortypicalretailers;whole 1
salers;manufacturers;andservicecompanies.
LearningObjective:0602Analyzetheimpactofcreditcardsales;salesdiscounts;andsalesreturnsontheamountsreportedasnetsales. 4
LearningObjective:0603Analyzeandinterpretthegrossprofitpercentage. 1
LearningObjective:0604Estimate;report;andevaluatetheeffectsofuncollectibleaccountsreceivable(baddebts)onfinancialstateme 5
nts.
LearningObjective:0606Report;control;andsafeguardcash. 2
LearningObjective:0701Applythecostprincipletoidentifytheamountsthatshouldbeincludedininventoryandthematchingprincip 3
letodeterminecostofgoodssoldfortypicalretailers;wholesalers;andmanufacturers.
LearningObjective:0702Reportinventoryandcostofgoodssoldusingthefourinventorycostingmethods. 4
LearningObjective:0704Reportinventoryatthelowerofcostofmarket(LCM). 1
LearningObjective:0705Evaluateinventorymanagementusingtheinventoryturnoverratioandanalyzetheeffectsofinventoryoncas 2
hflows.
LearningObjective:0707Understandmethodsforcontrollingandkeepingtrackofinventoryandanalyzetheeffectsofinventoryerrors 2
onfinancialstatements.
LearningObjective:0801Define;classify;andexplainthenatureoflonglivedproductiveassetsandinterpretthefixedassetturnoverra 3
tio.
LearningObjective:0802Applythecostprincipletomeasuretheacquisitionandmaintenanceofproperty;plant;andequipment. 3
LearningObjective:0803Applyvariouscostallocationmethodsasassetsareheldandusedovertime. 6
LearningObjective:0805Analyzethedisposalofproperty;plant;andequipment. 1
LibbyChapter05 13
12
LibbyChapter06
12
LibbyChapter07
LibbyChapter08 13
TopicArea:ACloserLookAtFinancialStatementFormatAndNotes 9
TopicArea:AccountingForSalesRevenue 4
TopicArea:AccountingForSalesRevenue,MeasuringAndReportingReceivables 1
TopicArea:AcquisitionAndMaintenanceOfPlantAndEquipment 6
TopicArea:ControlOfInventory 2
TopicArea:EvaluatingInventoryManagement 2
TopicArea:InventoryCostingMethods 4
TopicArea:MeasuringAndReportingReceivables 5
TopicArea:NatureOfInventoryAndCostOfGoodsSold 3
TopicArea:PlayersInTheAccountingCommunicationProcess 4
TopicArea:ReportingAndSafeguardingCash 2
TopicArea:Use,Impairment,AndDisposalOfPlantAndEquipment 7
TopicArea:ValuationAtLowerOfCostOrMarket 1