Quiz Questions for Chapter 5

1. Under the perpetual inventory method,

a. assets increase when inventory is purchased.
b. ignoring the effects of revenue recognition, assets decrease when inventory is
sold.
c. ignoring the effects of revenue recognition, equity increases when inventory is
sold.
d. A and B.
2. ABC Co. purchased $5,000 of inventory on account under terms 2/10, n/30. The
goods were delivered FOB shipping point. Freight costs were $200 and were paid
in cash. ABC paid for the goods within the discount period. Assuming a
beginning inventory balance of zero, what would be the balance in the inventory
account after the purchase and payment for inventory were recorded? ABC Co.
uses the perpetual inventory method.
a. $5,100.
b. $5,300.
c. $4,900.
d. $4,700.
3. X Co. purchased $2,000 of inventory on account. This inventory was sold for
$3,000 cash. The amount of gross margin shown on the income statement and
the amount of net cash inflow from operations shown on the cash flow statement
would be
a. $3,000 / $1,000.
b. $1,000 / $3,000.
c. $1,000 / $-0-.
d. $-0- / $1,000.
4. RST Co. sold inventory that cost $4,000 for $6,000. The inventory was sold under
terms 1/10, n/30. The receivable was collected within the discount period. The
goods were delivered FOB destination. Freight costs of $200 were paid in cash.
Based on this information alone, the amount of gross margin would be:
a. $1,940.
b. $1,740.
c. $1,800.
d. $2,000.
5. X Co. purchased $5,000 of inventory on account. Which of the following entries
would be required to record this transaction assuming that X Co. uses the
perpetual inventory method?
a. Debit inventory / credit accounts payable
b. Debit accounts payable / credit purchases
c. Debit accounts payable / credit inventory
d. Debit purchases / credit accounts payable
6. High Ridge Merchandising Co. sold inventory that cost $10,000 for $12,000 cash.
Assuming High Ridge uses the perpetual inventory method, the entries to record
this transaction would act to
a. increase assets by $2,000.
b. decrease equity by $10,000.
c. increase net income by $12,000.
d. increases expenses by $2,000.
The following information pertains to the next two questions. ABC Co. purchased inventory that cost
$5,000 under terms 2/10, n/30. The inventory was delivered under terms FOB destination. Freight costs
which were paid in cash amounted to $250. Payment was made for the inventory within ten days. The
goods were sold on account for $6,500 and delivered under terms FOB destination. Freight costs
amounting to $160 were paid in cash.
7. The amount of net income appearing on ABCs income statement would be
a. $1,190.
b. $1,350.

c. $1,440.
d. $1,600.
8. The amount of net cash inflow from operations appearing on ABCs statement of
cash flows would be
a. $1,440.
c.
$(4,900).
b. $1,600.
d.
$(5,060).
9. Identify the true statement.
a. Transportation-out is a product cost.
b. Sales allowances act to increase net income.
c. Purchase discounts act to decrease book value of inventory under the
perpetual inventory method.
d. FOB shipping point designates the seller as the party responsible for freight
costs.
10. Which of the following is not a period cost?
a. Advertising cost.
b. Salary of the company president.
c. Purchase of goods for resale.
d. Interest paid on a company note.
11. Which of the following statements is true?
a. The product costs associated with inventory are expensed when the inventory
is purchased.
b. Administrative salary is an example of a product cost.
c. All period costs are expensed in the period they are incurred.
d. Product costs are initially recorded as assets.
12. RST Company paid $500 cash for freight costs to have merchandise inventory
delivered to its customers. Which of the following answers shows how this event
will affect RSTs financial statements.

a.
b.
c.
d.

Assets

+
+

Liab.
n/a
n/a
n/a
+

+ Equity

+
n/a

Rev.
n/a
n/a
n/a
n/a

Exp.
+
+
n/a
n/a

= Net Inc.

n/a
n/a

Cash Flow
OA
FA
OA
+ FA

13. STU Company experienced an accounting event that affected its financial
statements as indicated below:
Assets
+

Liab.
n/a

+ Equity
n/a

Rev.
n/a

Exp.
n/a

= Net Inc.
n/a

Cash Flow
OA

Assuming STU uses the perpetual inventory method, which of the following events
could have caused these effects?
a.
b.
c.
d.

Purchased inventory on account.

Wrote down inventory to recognize a market value that was below cost.
Paid transportation-in costs.
Recognized a sales discount.

14. LMN Company experienced an accounting event that is recorded in the following
T-accounts:

Inventory
2,000

Accounts Payable
2,000

Which of the following choices accurately reflects how this event would affect the companys financial
statements? (Assume the perpetual inventory method.)

a.
b.
c.
d.

Assets
+
+
+
+

Solutions
Question Ch 5
1
D
2
A
3
B
4
A
5
A
6
A
7
C
8
D
9
C
10
C
11
D
12
A
13
C
14
D

Liab.
+
+
+
+

+ Equity
n/a
n/a
n/a
n/a

Rev.
n/a
n/a
n/a
n/a

Exp.
+
n/a
n/a
n/a

= Net Inc.

n/a
n/a
n/a

Cash Flow
n/a
OA
+ OA
n/a