ACCOUNTING INFORMATION AND EMPLOYMENT PRACTICE TEST

Which of the following is NOT considered a business transaction?

• A company purchases a new office building for $500,000.

• A company sells inventory to a customer on credit.

• A company records a loss due to a lawsuit judgment.

• A company hires a new Chief Financial Officer (CFO).

Answer explanation

A business transaction is an economic event that can be measured in monetary terms and affects the financial position of a company, resulting in a change in assets, liabilities, or equity.

1. Hiring a new CFO: This is not a business transaction because it does not immediately involve a monetary exchange or impact the company's financial position. It is an operational event, not a financial one.

A warehouse clerk counted an item in the ending inventory twice while taking a physical count. As a result:

• net profit will be understated.

• beginning inventory for the next period will be understated

• cost of goods available for sale will be overstated.

• cost of goods sold will be understated.

Answer explanation

Double-counting ending inventory means the recorded ending inventory value is higher than the actual value.

Impact on COGS:

• COGS = Beginning Inventory + Purchases - Ending Inventory

• Since ending inventory is overstated, COGS will be understated.

Impact on other options:

• Net profit: Understated COGS leads to overstated gross profit, which can potentially overstate net profit.

• Beginning inventory for the next period: This is unaffected by the current period's ending inventory error.

• Cost of goods available for sale: This is the sum of beginning inventory and purchases, which remains unchanged by the ending inventory error.

Alfa Company has the following information relating to its inventory activity in 2023:

                                                           December 31, 2023                                 December 31, 2022

Inventory                                              €25,000                                                          €28,000

If Alfa purchased €60,000 worth of inventory in 2023, what was its cost of goods sold for the year ending December 31, 2023?

• €28,000

• €60,000

• €63,000

• €92,000

Answer explanation

COGS = Beginning Inventory + Purchases - Ending Inventory

Given:

• Beginning Inventory = €28,000

• Purchases = €60,000

• Ending Inventory = €25,000

Plugging these values into the formula:

COGS = €28,000 + €60,000 - €25,000 = €63,000

 Which system is the best method for matching most recent inventory costs with current revenues?

• FIFO

• LIFO

• Weighted average

• None of the above

Answer explanation

The best method for matching most recent inventory costs with current revenues is b) LIFO (Last-In, First-Out).

Here's a breakdown of why LIFO is the best choice for this purpose:

LIFO:

• Matches recent costs with recent revenues: Under LIFO, the most recently purchased inventory items are assumed to be sold first. This means that the cost of goods sold (COGS) will reflect the most recent purchase prices, aligning closely with current revenue.

• Better reflects current economic conditions: In inflationary environments, LIFO can provide a more accurate representation of the current cost of goods sold, as it uses the most recent, higher costs.

FIFO (First-In, First-Out):

• Matches older costs with recent revenues: FIFO assumes that the oldest inventory items are sold first. This can lead to a mismatch between older costs and current revenues, especially in inflationary periods.

Weighted Average:

• Blends costs: This method calculates the average cost of all inventory items and assigns this average cost to each unit sold. While it provides a smoother cost flow, it doesn't directly match recent costs with recent revenues.

In conclusion, LIFO is generally the most suitable method for aligning inventory costs with current revenues, particularly in inflationary environments.

In times of inflation (rising prices), which of the following statements is most likely to be true?

• LIFO may result in a higher net profit than

  FIFO

•  FIFO may result in a higher net profit than

  LIFO

• FIFO may result in a higher cost of goods sold

  than LIFO

•  LIFO may result in a lower cost of goods sold

  than FIFO

Answer explanation

In times of inflation, the cost of inventory increases over time.

• FIFO (First-In, First-Out): This method assumes that the oldest inventory items are sold first. In an inflationary environment, this means that the cost of goods sold (COGS) will be based on older, lower-cost inventory. This results in a lower COGS, higher gross profit, and potentially higher net profit.

• LIFO (Last-In, First-Out): This method assumes that the newest inventory items are sold first. In an inflationary environment, this means that COGS will be based on newer, higher-cost inventory. This results in a higher COGS, lower gross profit, and potentially lower net profit.

Therefore, in inflationary periods, FIFO generally leads to higher net profits compared to LIFO.

The inventory data for an item for the month of May are as follows:

May 1           Inventory                       20 units at €50

May 5           Sold                                             15 units

May 10        Purchased                    30 units at €55

May 20        Sold                                             30 units

May 29        Purchased                    20 units at €60

 

What is the cost of the merchandise inventory of 25 units on May 31, using the LIFO-method?

• €1,750

• €1,275

• €1,450

• €1,700

Answer explanation

To calculate the cost of the inventory on May 31st using the LIFO method, we need to assume that the most recently purchased items are sold first.

Here's the breakdown:

1. May 29 Purchase: 20 units at €60 each.

2. May 10 Purchase: 5 units remaining from the 30 units purchased at €50 each.

So, the total cost of the 25 units on May 31st is:

(20 units €60/unit) + (5 units €50/unit) = €1200 + €250 = €1450.

Therefore, the correct answer is c) €1,450.

Damaged merchandise that can be sold only at prices below cost should be valued at

• net realizable value

• LIFO

• FIFO

• weighted average cost

Answer explanation

Net realizable value is the estimated selling price less estimated costs of completion and disposal. In the case of damaged merchandise, it represents the best estimate of the amount that can be recovered from the sale of the goods.

B started a consulting firm, B Consulting Services. During its first month of operations, the following transactions occurred: 1. B invested $40,000 in the business, receiving common stock in return.

2. The business purchased office supplies costing $5,000 in cash.

3. The business provided consulting services on account, earning $15,000 in revenue.

4. The business paid rent of $6,000 for the month.

5. The business collected $10,000 in cash from customers for services rendered earlier on account.

6. The business borrowed $20,000 from a local bank, signing a note payable.

• $59,000

• $39,000

• $74,000

• $85,000

Answer explanation

1. Invested $40,000 cash: This increases cash.

2. Purchased supplies for $5,000 cash: This decreases cash.

3. Provided services on account: This doesn't directly affect cash.

4. Paid rent of $6,000: This decreases cash.

5. Collected $10,000 cash from customers: This increases cash.

6. Borrowed $20,000 cash: This increases cash.

Now, let's calculate the net effect on cash:

• Cash inflows: $40,000 (investment) + $10,000 (collected from customers) + $20,000 (borrowed) = $70,000

• Cash outflows: $5,000 (supplies) + $6,000 (rent) = $11,000

Ending cash balance: $70,000 - $11,000 = $59,000

Therefore, the ending cash balance is $59,000.

9 A company recorded a $2,500 debit to Accounts Receivable as $250. The credit to Sales Revenue was correctly posted as $2,500. Is the trial balance out of balance? Group of answer choices:

• No

• Yes, by $250

• Yes, by $2,250

• Yes, by $2,500

Answer explanation

The trial balance will be out of balance.

Here's why:

• The total debits should equal the total credits for the trial balance to be in balance.

• In this case, the debits are under-recorded by $2,250 ($2,500 - $250).

• The credits are correctly recorded at $2,500.

Therefore, the trial balance will be out of balance by $2,250.

A tutor provided a month of lessons in January and received payment for the lessons in February. Under accrual accounting, when should the tutor recognize revenue? Group of answer choices:

• In January

• In February

• In either January or February

• At a time that cannot be determined from the facts

Answer explanation

The tutor should recognize revenue in January.

Under accrual accounting, revenue is recognized when it is earned, regardless of when the cash is received. In this case, the service (tutoring lessons) was provided in January, so the revenue should be recognized in that month.