Deck 6: Inventory Costing and Valuation

Question 1

The advantage of FIFO is that it assigns the most recent costs to cost of goods sold, and better matches current costs with revenues on the income statement.

Answer 1

False

Question 2

Goods in transit are automatically included in inventory.

Answer 2

False

Question 3

In a period of inflation, FIFO usually gives a lower taxable income and thus a tax advantage.

Answer 3

False

Question 4

Incidental costs added to the value of inventory include import duties, transportation-in, storage, and insurance.

Question 5

Net realizable value for damaged or obsolete goods is sales price plus the cost of making the sale.

Question 6

Damaged goods are not counted in inventory if they cannot be sold.

Question 7

One of the most important decisions in accounting for inventory is determining the per-unit costs assigned to inventory items.

Question 8

A business that has inventory items that are ordinarily interchangeable may use either the FIFO or moving weighted average methods to assign costs to inventory.

Question 9

The total dollar value of inventory on hand is determined by: (1) estimating the units on hand, (2) multiplying the count by cost per unit, and (3) adding the costs for all products.

Question 10

A business that has inventory items that are ordinarily interchangeable is required to use the specific identification method of assigning costs to inventory.

Question 11

Goods on consignment are goods shipped by their owner, called the consignee, to another party called the consignor.

Question 12

If obsolete or damaged goods can be sold, they will be included in inventory at their net realizable value if it is less than cost.

Question 13

The three methods of inventory valuation that are most often used in Canada are specific identification, FIFO, and (moving) weighted average.

Question 14

The principle of faithful representation is used by some companies to justify allocating incidental inventory costs to cost of goods sold.

Question 15

When taking a physical count of inventory, the use of pre-numbered inventory tickets assists in the control process.

Question 16

The cost of an inventory item includes its invoice price plus any added or incidental costs necessary to put it in a place and condition for sale.

Question 17

An advantage of the moving weighted-average method is that it tends to smooth out price changes.

Question 18

All material incidental costs of inventory acquisition and handling are assigned to inventory.

Question 19

If the supplier pays freight charges, then ownership of inventory passes when goods arrive at their destination.

Question 20

The consistency principle allows companies to use different inventory valuation methods period to period as long as the changes are fully disclosed.

Question 21

The necessary financial statement disclosure is accomplished if the amount presented is properly calculated.

Question 22

The assignment of costs to cost of goods sold and inventory using (moving) weighted average usually gives different results depending on whether a perpetual or periodic system is used.

Question 23

The consistency principle means that one costing method, such as FIFO or moving weighted average, has to be used exclusively.

Question 24

When preparing the financial statements, management can choose the inventory cost flow assumption it will use for a particular year in order to impact the reported net income.

Question 25

The inventory cost flow assumption that assigns the highest cost to cost of goods sold in a period of rising prices is FIFO.

Question 26

The FIFO method assumes that costs for the most recently purchased items are recovered first.

Question 27

The inventory cost flow assumption that is used cannot have a material impact on the financial statements.

Question 28

An error in valuing inventory will cause an error in the amount of cost of goods sold.

Question 29

The necessary financial statement disclosure is accomplished if the amount disclosed is properly calculated and the costing method used is stated.

Question 30

When purchase prices do not change, the choice of an inventory costing method is unimportant.

Question 31

The decline in merchandise inventory from cost to NRV is recorded in an adjusting entry at the end of the period.

Question 32

Trekking Company has inventory with a net realizable value of $217,000 and a cost of $241,000. According to the guidance provided by the principle of faithful representation, the inventory should be written down to $217,000.

Question 33

In applying LCNRV, net realizable value is defined as the sales price less costs incurred to make the sale.

Question 34

Trekking Company's total cost of inventory was $305,000. The net realizable value is $297,000. Under LCNRV, the amount reported should be $305,000.

Question 35

The consistency principle helps ensure that financial statements are comparable across periods.

Question 36

The materiality principle requires that the inventory valuation method follow the flow of goods.

Question 37

The principle of faithful representation requires that information be complete, neutral and free from error so that assets and income are not overstated and liabilities and expenses are not understated.

Question 38

Trekking Company's cost of inventory was $317,500. Due to phenomenal demand the net realizable value has increased to $323,000. Trekking Company should write up the value of inventory under the LCNRV rule.

Question 39

The choice of an inventory cost flow assumption can have a dramatic impact on amounts in financial statements.

Question 40

The inventory cost flow assumption that assigns the highest cost to ending inventory in a period of rising prices is moving weighted average.

Question 41

Errors in inventory valuation only affect the current period's records and financial statements.

Question 42

If the cost to retail ratio is 60% and ending inventory at retail is $45,000, then estimated ending inventory at cost is $27,000.

Question 43

When businesses apply the lower of cost and net realizable value rule on an item by item basis, they will report the lowest inventory value possible.

Question 44

The gross profit ratio measures how much of each dollar of gross sales is gross profit.

Question 45

If your inventory is destroyed by fire you can estimate the amount of inventory destroyed if you know: beginning inventory, purchases, net sales, and gross profit ratio.

Question 46

The retail amount of inventory refers to its dollar amount measured using selling prices of inventory items.

Question 47

All businesses should take an inventory count once each year to avoid inventory errors or shortages.

Question 48

An understatement of beginning inventory will understate cost of goods sold and overstate net income.

Question 49

To avoid the time-consuming process of taking an inventory each month, some companies use the gross profit method to estimate ending inventory.

Question 50

Because an inventory error causes an offsetting error in the next period, it is sometimes said to be self-correcting.

Question 51

Trekking Company's inventory in its River Oaks store was destroyed by a flood. Its gross profit ratio was 65% and net sales were $30,000. The estimated cost of goods available for sale was $32,500. The estimated value of the lost inventory was $18,000.

Question 52

The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.

Question 53

Because inventory errors are self-correcting in following accounting periods, managers will be able to make correct decisions based on changes in net income and cost of goods sold.

Question 54

All businesses should take an inventory count once each year to identify inventory errors or shortages.

Question 55

In applying the faithful representation principle, an accountant should choose the most realistic value available, so that the inventory value is not overstated.

Question 56

The gross profit ratio measures how much of each dollar of net sales is gross profit.

Question 57

Most businesses use expected sales price minus the cost of making the sale as the definition of net realizable value.

Question 58

The principle of faithful representation provides the guidance in reporting inventory at net realizable value when net realizable value is lower than cost.

Question 59

An understatement of ending inventory will understate cost of goods sold and overstate net income.

Question 60

Most businesses apply the lower of cost and net realizable value rule to groups of similar or related items.

Question 61

Management must include which of the following considerations when accounting for inventory

A) Costing method
B) Inventory system
C) Items to be included and their cost
D) Use of lower of cost and net realizable value
E) All of the above

Question 62

Costs included in the value of inventory are

A) Purchase price less discounts
B) Transportation-in
C) Storage
D) Insurance
E) All of the above

Question 63

The merchandise turnover ratio is calculated by dividing average merchandise inventory by cost of goods sold.

Question 64

Merchandise inventory includes

A) All goods owned by a company and held for sale
B) Goods in transit
C) Goods on consignment
D) Damaged goods
E) All of the above

Question 65

The retail inventory method of estimating inventory can be used to estimate the amount of inventory shortage if a physical count is also done.

Question 66

The merchandise turnover ratio is used to measure profitability.

Question 67

Damaged or obsolete goods

A) Are not counted as saleable inventory
B) Are counted at full cost
C) Are included in inventory at net realizable value if that is less than cost
D) Are not counted as saleable inventory or are counted at full cost
E) Are not counted as saleable inventory and are included in inventory at net realizable value if that is less than cost

Question 68

The days' sales in inventory ratio is calculated by dividing ending inventory by cost of goods sold and multiplying the result by 365.

Question 69

Toys "R" had cost of goods sold of $6,900 million. Its ending inventory was $2,000 million. Therefore, its days' sales in inventory was 90 days.

Question 70

The retail inventory method of estimating inventory uses the ratio of goods available for sale at cost to goods available for sale at retail.

Question 71

Trekking Company's cost of goods sold was $15,550. Its average merchandise inventory was $4,575. Its merchandise turnover was 3.4.

Question 72

Goods in transit are included in inventory

A) At any time in transit
B) When the purchaser is responsible for paying freight charges
C) When the supplier pays the freight charges
D) When ownership has passed to the purchaser
E) When the purchaser is responsible for paying freight charges and when ownership has passed to the purchaser

Question 73

Physical counts of inventory

A) Are not necessary under the perpetual system
B) Are necessary to adjust for shrinkage
C) Should be taken at least once a month
D) Are necessary to adjust for shrinkage and should be taken at least once a month
E) Are not necessary under the perpetual system and should be taken at least once a month

Question 74

Incidental costs of inventory

A) Can be assigned to every unit
B) May be immaterial
C) Can be allocated to cost of goods sold
D) Are subject to the materiality principle
E) All of the above

Question 75

Goods on consignment

A) Are goods shipped by the owner to the consignee who sells the goods for the owner
B) Are reported in the consignee's books as inventory
C) Are reported on the consignor's books as inventory
D) Are goods shipped by the owner to the consignee who sells the goods for the owner and are reported in the consignee's books as inventory
E) Are goods shipped by the owner to the consignee who sells the goods for the owner and are reported on the consignor's books as inventory

Question 76

The accepted method for valuing inventory includes

A) Counting the units of each product on hand
B) Multiplying the count for each product by its cost per unit
C) Adding the costs for all products
D) Counting the units of each product on hand and multiplying the count for each product by its cost per unit
E) All of the above

Question 77

A company's ability to pay its short-term obligations depends on how quickly it sells its merchandise inventory.

Question 78

A form attached to the counted items in the process of taking a physical inventory is a(n)

A) Sales tag
B) Subsidiary record
C) Inventory ticket
D) Credit invoice
E) Sales receipt

Question 79

There is no difference in the amount of inventory calculated by the periodic and perpetual inventory systems when using FIFO or weighted average cost flow assumptions.

Question 80

There is no difference in the amount of inventory calculated by the periodic and perpetual inventory systems when using the FIFO cost flow assumption.