TRUE/FALSE ____ 1. The First-in, First-out (FIFO) inventory method results in an ending inventory valued at the most recent cost. ____ 2. The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items. ____ 3. If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements. ____ 4. Under the lower of cost or market basis, market is defined as current replacement cost. ____ 5. If inventories are valued using the LIFO cost assumption, they should not be classified as a current asset on the balance sheet. ____ 6. If a company uses the FIFO cost assumption, the cost of goods sold for the period will be the same under a perpetual or periodic inventory system. ____ 7. The cost of ending inventory is added to the cost of goods available for sale to determine cost of goods sold. ____ 8. In a period of falling prices, the LIFO method results in a lower cost of goods sold than the FIFO method. ____ 9. The lower of cost or market basis is an example of the accounting concept of conservatism. ____ 10. Inventories are reported in the current assets section of the balance sheet immediately below receivables. ____ 11. Land improvements are generally charged to the Land account. ____ 12. In calculating depreciation, both plant asset cost and useful life are based on estimates. ____ 13. Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used. -2- ____ 14. Under the double-declining-balance method, the depreciation rate used each year remains constant. ____ 15. The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements. ____ 16. If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs. ____ 17. The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value. ____ 18. A plant asset must be fully depreciated before it can be removed from the books. ____ 19. If similar assets are exchanged, any gain on disposal should be deferred but any loss on disposal should be recognized. ____ 20. A loss on the exchange of plant assets occurs when the fair market value of the old asset is less than its book value. MULTIPLE CHOICE ____ 23. If goods in transit are shipped FOB destination a. the seller has legal title to the goods until they are delivered. b. the buyer has legal title to the goods until they are delivered. c. the transportation company has legal title to the goods while the goods are in transit. d. no one has legal title to the goods until they are delivered. -3- ____ 24. An auto manufacturer would classify vehicles in various stages of production as a. finished goods. b. merchandise inventory. c. raw materials. d. work in process. ____ 38. All of the following factors in computing depreciation are estimates except a. cost. b. residual value. c. salvage value. d. useful life. ____ 39. The balance in the Accumulated Depreciation account represents the a. cash fund to be used to replace plant assets. b. amount to be deducted from the cost of the plant asset to arrive at its fair market value. c. amount charged to expense in the current period. d. amount charged to expense since the acquisition of the plant asset. -6- ____ 40. The book value of an asset is equal to the a. assets market value less its historical cost. b. blue book value relied on by secondary markets. c. replacement cost of the asset. d. assets cost less accumulated depreciation. ____ 41. Depreciation is a process of a. asset devaluation. b. cost accumulation. c. cost allocation. d. asset valuation. ____ 42. Recording depreciation each period is necessary in accordance with the a. going concern principle. b. cost principle. c. matching principle. d. asset valuation principle. ____ 43. In computing depreciation, salvage value is a. the fair market value of a plant asset on the date of acquisition. b. subtracted from accumulated depreciation to determine the plan assets depreciable cost. c. an estimate of a plant assets value at the end of its useful life. d. ignored in all the depreciation methods. ____ 45. A truck was purchased for $90,000 and it was estimated to have an $18,000 salvage value at the end of its useful life. Monthly depreciation expense of $1,500 was recorded using the straight-line method. The annual depreciation rate is a. 20% b. 2% c. 8% d. 25% ____ 47. If a plant asset is retired before it is fully depreciated and no salvage value is received, a. a gain on disposal occurs. b. a loss on disposal occurs. c. either a gain or a loss can occur. d. neither a gain nor a loss occurs. ____ 48. The book value of a plant asset is the difference between the a. replacement cost of the asset and its historical cost. b. cost of the asset and the amount of depreciation expense for the year. c. cost of the asset and the accumulated depreciation to date. d. proceeds received from the sale of the asset and it original cost. ____ 49. If disposal of a plant asset occurs during the year, depreciation is a. not recorded for the year. b. recorded for the whole year. c. recorded for the fraction of the year to the date of the disposal. d. not recorded if the asset is scrapped. ____ 50. If similar assets are exchanged, any difference between the fair market value and the book value of the old plant asset is a. recorded as a gain or loss. b. recorded if a gain but is deferred if a loss. c. recorded if a loss but is deferred if a gain. d. deferred if either a gain or loss