BUS 251 Final Exam Questions and
Correct Detailed Answers.
What is FOB destination? - Answer ownership of the goods remains with the seller until the
goods reach the buyer
What is FOB shipping point? - Answer ownership of the goods passes to the buyer when the
public carrier accepts the goods from the seller
What are the benefits of perpetual inventory system? - Answer - provide up-to-date
information on ending inventory
- allow company to automatically reorder when inventory amounts reach pre-established levels
- quantify the amount of shrinkage or theft
- prevent stockout
Explain the reasons for valuing ending inventory at the lower of cost and net realizable value -
Answer Because inventories will be sold in the ordinary course of business, it is important that
they be valued on the statement of financial position at no more than the amount of cash they
will generate upon their sale. If the entity will realize more cash than the inventory's cost, it will
be valued at cost. However, if its net realizable value is less than its cost, then the lower, NRV is
reported.
What is accumulated other comprehensive income (OCI)? - Answer This includes unrealized
gains or losses resulting from revaluations rather than from a transaction with third parties
Why the company issue preferred shares? - Answer 1. Raise capital without having to dilute
the ownership interests of their common shareholders
2. Dividends can be postponed in periods of financial difficulty (not an option with interest on
bonds or other forms of debt)
3. Provide new capital to a company while improving the debt to equity ratio
4. Do not result in the dilution of future earnings because preferred shareholders would only be
entitled to their fixed or stated dividend amount regardless of any increase in earnings
Two conditions to declare dividends: - Answer retained earnings greater than or equal to the
amount of dividend + enough cash to be able to fund the dividend
Correct Detailed Answers.
What is FOB destination? - Answer ownership of the goods remains with the seller until the
goods reach the buyer
What is FOB shipping point? - Answer ownership of the goods passes to the buyer when the
public carrier accepts the goods from the seller
What are the benefits of perpetual inventory system? - Answer - provide up-to-date
information on ending inventory
- allow company to automatically reorder when inventory amounts reach pre-established levels
- quantify the amount of shrinkage or theft
- prevent stockout
Explain the reasons for valuing ending inventory at the lower of cost and net realizable value -
Answer Because inventories will be sold in the ordinary course of business, it is important that
they be valued on the statement of financial position at no more than the amount of cash they
will generate upon their sale. If the entity will realize more cash than the inventory's cost, it will
be valued at cost. However, if its net realizable value is less than its cost, then the lower, NRV is
reported.
What is accumulated other comprehensive income (OCI)? - Answer This includes unrealized
gains or losses resulting from revaluations rather than from a transaction with third parties
Why the company issue preferred shares? - Answer 1. Raise capital without having to dilute
the ownership interests of their common shareholders
2. Dividends can be postponed in periods of financial difficulty (not an option with interest on
bonds or other forms of debt)
3. Provide new capital to a company while improving the debt to equity ratio
4. Do not result in the dilution of future earnings because preferred shareholders would only be
entitled to their fixed or stated dividend amount regardless of any increase in earnings
Two conditions to declare dividends: - Answer retained earnings greater than or equal to the
amount of dividend + enough cash to be able to fund the dividend
