Question

1. If a company uses a periodic inventory system, it will use all of the following accounts during the year to record normal transactions  except: A. costs of goods sold; B. purchase returns; C. sales revenue; D. purchases.

2. Which of the following would be included in the Cost of Goods Sold account on a merchandising company's income statement? A. sales commissions; B. shipping costs from the manufacturer to the merchandiser; C. costs of advertising; D. sales taxes.

3. A manager of Company X gets a bonus if net income of a certain amount is achieved. If she had her 'druthers', she would love to use what method of inventory costing (in most situations and if permitted)? A. FIFO; B. LIFO; C. Specific identification; D. weighted-average

4. For most property, plant, and equipment, depreciation is caused by which of the following: A. changes in fair value; B. the process of valuation; C. obsolescence; D. setting aside cash to replace the assets when they wear out

5. Which of the following would not be included in the Machinery account? The cost of: A. freight costs; B. Tearing down a factory wall in order to get the large machine into the factory; C. Extra cost because the company didn't have the cash last year when machine prices were cheaper; D. Paying duty to American authorities for the American product

Answer 1

The following are the correct answers.

1. Correct answer A - Cost of goods sold.

Cost of Goods Sold is updated and calculated at the end of the period according to which inventory flow is used.(FIFO,LIFO,Weighted Avg.) Thus the value of ending inventory and Cost of goods sold is calculated.

2. Correct answer B - Shipping cost from the Manufacturer to Merchandiser.

This cost is incurred on product to become available for sale. So this should be charged to cost of goods sold.

All other costs given are selling expenses.

3. Correct answer A - FIFO (First In First Out )

Assuming the period is in rising prices, Cost of goods sold will be lower with FIFO than with other cost flow assumptions because the oldest,lowest -cost inventory will be assumed sold for each sale. consequently ,reported net income will be higher than it would be with other cost flow assumptions. But opposit happens during the period of falling prices ,when LIFO is suitable for increasing net income.

4. Correct answer C -  Obsolescence

The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation.

5. Correct answer C - Extra cost because the company didn't have the cash last year when machine prices were cheaper.

This cost would not be included in the machinery account as it does not directly relate to procurement ,transporting or installation cost of such machinery.