BUSINESS 420 CHAPTER 5 TEST PREP MULTIPLE CHOICE QUESTIONS

1. In applying LCM, market cannot be: a. Less than net realizable value minus a normal profit margin b. Net realizable value less reasonable completion and disposal costs c. Greater than net realizable value reduced by an allowance for normal profit margin. d. Less than cost Answer: A 2. When using the gross profit method to estimate ending inventory, it is not necessary to know: a. Beginning inventory b. Net purchases c. Cost of goods sold d. Net sales Answer: C 3. Under the conventional retail method, the denominator in the cost to retail percentage includes: a. Net marks ups and net mark downs b. Neither net mark ups nor net mark downs c. Net mark ups, but not net mark downs d. Net mark downs, but not net mark ups Answer: C 4. Under the retail inventory method: a. A company measures inventory on its balance sheet by converting retail prices to cost b. A company measures inventory on its balance sheet at current selling prices c. A company measures inventory on its balance sheet on a LIFO basis d. None of the above is correct Answer: A 5. Under the dollar-value LIFO retail method, to determine the value of a LIFO layer: a. Divide the LIFO layer by the layer-year price index and multiply by the layer-year cost-to- retail percentage. b. Multiply the LIFO layer by the base year price index and the current year cost-to-retail percentage. c. Multiply the LIFO layer by the layer-year price index and by the layer-year cost-to-retail percentage. d. Divide the LIFO layer by the layer-year cost-to-retail percentage and multiply by the layer- year price index. Answer: C 6. Property, plant, and equipment and intangible assets are: a. Created by the normal operation of the business and include accounts receivable. b. All assets except cash and cash equivalents c. Current and long-term assets used in the production of either goods or services d. Long-term revenue-producing assets. Answer: D 7. The capitalized cost of equipment excludes: a. Maintenance b. Sales tax c. Shipping d. Installation Answer: A 8. Assets acquired under multi-year deferred payment contracts are: a. Valued at their fair value on the date of the final payment. b. Values at the present value of the payments required by the contract. c. Valued at the sum of the payments required by the contract d. None of the above. Answer: B 9. Assets required by the issuance of equity securities are valued based on: a. Their fair values b. The fair value of the equity security c. A or B, whichever is more reasonably determinable d. A or B, whichever is smaller Answer: C 10. Interest is eligible to be capitalized as part of an asset’s cost, rather than being expensed immediately, when: a. The interest is incurred during the construction period of the asset b. The asset is a discrete construction project for sale or lease c. The asset is self-constructed, rather than acquired. d. All of the above are correct Answer: D 11. Interest is not capitalized for: a. Assets that are constructed as discrete projects for sale or lease b. Assets constructed for a company’s own use c. Inventories routinely and repetitively in large quantities d. Interest is capitalized for all of these items Answer: C 12. Average accumulated expenditure: a. Is an approximation of the average debt a firm would have outstanding if it financed all construction through debt. b. Is computed as a simple average if all construction expenditures are made at the end of the period c. Are irrelevant if the company’s total outstanding debt is less than total costs of construction d. All of the above are true statements Answer: A 13. The cost of self-constructed fixed assets should: a. Include allocated indirect costs just as they are for production of products b. Include only incremental indirect costs c. Include only specifically identifiable indirect costs d. Not include indirect costs Answer: A 14. Software development costs are capitalized if they are incurred: a. Prior to the point at which technological feasibility has been established b. After commercial production has begun c. After technological feasibility has been established but prior to the product availability date. d. None of the above is correct Answer: C 15. Research and development (R and D) costs: a. Generally pertain to activities that occur prior to the start of production b. May be expensed or capitalized, at the option of the reporting entity c. Must be capitalized and amortized d. None of the above is correct Answer: A 16. Research and development expense for a given period includes: a. The full cost of newly acquired equipment that has an alternative future use. b. Depreciation on a research and development facility c. Research and development conducted on a contract basis for another entity d. Patent filling and legal cos