True or False

1. In the gross method, sales discounts are reported as a deduction from sales.
2. The net amount reported for short-term receivables is not affected when a specific account receivable
is determined to be uncollectible.
3. The percentage-of-receivables approach of estimating uncollectible accounts emphasizes matching
over valuation of accounts receivable.
4. The percentage-of-sales method results in a more accurate valuation of receivables on the balance
sheet.
5. Companies record and report long-term notes receivable at the present value of the cash they expect
to collect.
6. When the stated rate of interest exceeds the effective rate, the present value of the note receivable
will be less than its face value.
7. A manufacturing concern would report the cost of units only partially processed as inventory in the
balance sheet.
8. Both merchandising and manufacturing companies normally have multiple inventory accounts.
9. When using a perpetual inventory system, freight charges on goods purchased are debited to Freight-
In.
10. If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier delivers the
goods to the common carrier.
11. If ending inventory is understated, then net income is understated.
12. The gross profit method can be used to approximate the dollar amount of inventory on hand.
13. In most situations, the gross profit percentage is stated as a percentage of cost.
14. A disadvantage of the gross profit method is that it uses past percentages in determining the markup.
15. When the conventional retail method includes both net markups and net markdowns in the cost-to-
retail ratio, it approximates a lower-of-cost-or-market valuation.
16. Assets classified as Property, Plant, and Equipment can be either acquired for use in operations, or
acquired for resale.
17. Assets classified as Property, Plant, and Equipment must be both long-term in nature and possess
physical substance.
18. When land with an old building is purchased as a future building site, the cost of removing the old
building is part of the cost of the new building.
19. Insurance on equipment purchased, while the equipment is in transit, is part of the cost of the
equipment.
20. Special assessments for local improvements such as street lights and sewers should be accounted
for as land improvements.
Multiple Choice

1. Plant assets may properly include

a. deposits on machinery not yet received.
b. idle equipment awaiting sale.
c. land held for possible use as a future plant site.
d. none of these.

2. Which of the following is not a major characteristic of a plant asset?

a. Possesses physical substance
b. Acquired for resale
c. Acquired for use
d. Yields services over a number of years

3. Which of these is not a major characteristic of a plant asset?

a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a plant asset.

4. Cotton Hotel Corporation recently purchased Emporia Hotel and the land on which it is located with
the plan to tear down the Emporia Hotel and build a new luxury hotel on the site. The cost of the
Emporia Hotel should be
a. depreciated over the period from acquisition to the date the hotel is scheduled to be torn
down.
b. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.

5. The cost of land does not include

a. costs of grading, filling, draining, and clearing.
b. costs of removing old buildings.
c. costs of improvements with limited lives.
d. special assessments.

6. When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of the term
"market"?
a. Net realizable value
b. Net realizable value less a normal profit margin
c. Current replacement cost
d. Discounted present value

7. In no case can "market" in the lower-of-cost-or-market rule be more than

a. estimated selling price in the ordinary course of business.
b. estimated selling price in the ordinary course of business less reasonably predictable costs of
completion and disposal.
c. estimated selling price in the ordinary course of business less reasonably predictable costs of
completion and disposal and an allowance for an approximately normal profit margin.
d. estimated selling price in the ordinary course of business less reasonably predictable costs of
completion and disposal, an allowance for an approximately normal profit margin, and an
adequate reserve for possible future losses.

8. Designated market value

a. is always the middle value of replacement cost, net realizable value, and net realizable value
less a normal profit margin.
b. should always be equal to net realizable value.
c. may sometimes exceed net realizable value.
d. should always be equal to net realizable value less a normal profit margin.

9. Lower-of-cost-or-market
a. is most conservative if applied to the total inventory.
b. is most conservative if applied to major categories of inventory.
c. is most conservative if applied to individual items of inventory.
d. must be applied to major categories for taxes.
10. An item of inventory purchased this period for $15.00 has been incorrectly written down to its current
replacement cost of $10.00. It sells during the following period for $30.00, its normal selling price, with
disposal costs of $3.00 and normal profit of $12.00. Which of the following statements is not true?
a. The cost of sales of the following year will be understated.
b. The current year's income is understated.
c. The closing inventory of the current year is understated.
d. Income of the following year will be understated.

11. Which of the following inventories carried by a manufacturer is similar to the merchandise inventory of
a retailer?
a. Raw materials.
b. Work-in-process.
c. Finished goods.
d. Supplies.

12. Where should raw materials be classified on the balance sheet?

a. Prepaid expenses.
b. Inventory.
c. Equipment.
d. Not on the balance sheet.

13. Which of the following accounts is not reported in inventory?

a. Raw materials.
b. Equipment.
c. Finished goods.
d. Supplies.

14. Why are inventories included in the computation of net income?

a. To determine cost of goods sold.
b. To determine sales revenue.
c. To determine merchandise returns.
d. Inventories are not included in the computation of net income.

15. Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to a Purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in inventory.

16. Travel advances should be reported as

a. supplies.
b. cash because they represent the equivalent of money.
c. investments.
d. none of these.

17. All of the following may be included under the heading of "cash" except
a. currency.
b. money market funds.
c. checking account balance.
d. savings account balance.

18. In which account are post-dated checks received classified?

a. Receivables.
b. Prepaid expenses.
c. Cash.
d. Payables.

19. In which account are postage stamps classified?

a. Cash.
b. Office supplies.
c. Receivables.
d. Inventory.

20. What is a compensating balance?

a. Savings account balances.
b. Margin accounts held with brokers.
c. Temporary investments serving as collateral for outstanding loans.
d. Minimum deposits required to be maintained in connection with a borrowing arrangement.