Deck 7: Inventory

Question 1

If prices were rising and a Canadian company wanted to report a smaller amount of profit for tax purposes,they should use the weighted-average cost formula.

Answer 1

True

Question 2

The gross margin ratio is equal to gross margin divided by sales revenue.

Answer 2

True

Question 3

The cost formula used by a firm to value inventory must match the physical flow of units through the firm.

Answer 3

False

Question 4

Perpetual inventory systems are incapable of identifying inventory shrinkage.

Question 5

One way to estimate the cost of goods sold is to multiply the sales revenue for the period by the inventory turnover ratio.

Question 6

Under the FIFO inventory formula,the cost of ending inventory and cost of goods sold will be the same under both the perpetual and periodic inventory systems.

Question 7

COGS is equal to the inventory purchased for a given time period.

Question 8

FOB means "For only Buyers".

Question 9

The inventory turnover ratio is calculated as cost of goods sold divided by total inventory.

Question 10

Raw materials are the components or ingredients required to make a product.

Question 11

Just-in-time inventory systems are designed to reduce the cost of inventory storage and increase the amount of cash on hand.

Question 12

FOB shipping means the seller owns the inventory until it reaches the buyers premise.

Question 13

Perpetual inventory systems provide more timely information than periodic systems.

Question 14

The LCM rule is usually applied to groups of similar items.

Question 15

Gross margin is the difference between sales revenue and costs of goods available for sale.

Question 16

Periodic inventory systems provide more relevant and timely information to managers for decision making purposes than perpetual inventory systems do.

Question 17

If a company's inventory turnover ratio is 6.6,it takes them on average 55 days to sell their inventory.

Question 18

The Finished Goods account collects all the costs incurred as a product is being made.

Question 19

Once the manufacturing process is complete,the product is transferred from the Work-in-Process account to Raw Materials account.

Question 20

Companies that make products are known as retailers.

Question 21

Which of the following is NOT an inventory account in a manufacturing company?

A)Raw Material
B)Work-in-Process
C)Goods Available For Sale
D)Finished Goods

Question 22

Goods available for sale are found in

A)work-in-process inventory.
B)raw materials inventory.
C)finished goods inventory.
D)cost of goods sold.

Question 23

Propack Inc.purchases goods from a supplier FOB destination.This means that

A)while the goods are in transit Propack owns the items.
B)the supplier has paid for the shipping.
C)Propack has paid for the shipping.
D)None of the above apply.

Question 24

All of the following are manufacturing accounts EXCEPT for

A)Cost of Goods Available for Sale.
B)Raw Materials.
C)Finished Goods.
D)Work-in-Process.

Question 25

Which term describes a situation where the buyer is responsible for paying shipping and other costs incurred while goods are in transit from the seller's premise to the buyer's premises.

A)FOB shipping
B)FOB destination
C)FOB purchasing
D)FOB receiving

Question 26

The major difference between the periodic and perpetual inventory systems is that inventory must be physically counted in the periodic system to determine ending inventory.

Question 27

In a manufacturing process overhead costs are added to which inventory account?

A)Raw Materials
B)Finished Goods
C)Work-in-Process
D)Cost of Goods Sold

Question 28

When we calculate weighted-average using the periodic system,we recalculate a new weighted-average cost per unit after every sale.

Question 29

Customers become frustrated if a company does not have a product available when they order it.This is called

A)a sell out.
B)spoilage.
C)obsolescence.
D)a stockout.

Question 30

The cost of goods available for sale includes

A)just beginning inventory.
B)beginning inventory less ending inventory.
C)beginning inventory plus purchases less ending inventory.
D)beginning inventory plus purchases.

Question 31

The following amounts are always known under which inventory costing system? Current inventory Cost of goods sold Inventory shrinkage

A)Periodic Periodic Perpetual
B)Perpetual Perpetual Periodic
C)Perpetual Perpetual Perpetual
D)Periodic Periodic Periodic

Question 32

Which of the following would most likely use a perpetual inventory system?

A)hardware store
B)shoe store
C)car dealership
D)bookstore

Question 33

The longer the inventory remains unsold,the higher the risk of

A)spoilage.
B)damage.
C)obsolescence.
D)all of the above.

Question 34

Which of the following is the correct flow of costs in a manufacturing operation?

A)Raw materials to finished goods to COGS
B)Raw materials to COGS to finished goods to work-in-process
C)Raw materials to work-in-process to finished goods to COGS
D)Direct materials to work-in-process to finished goods to COGS

Question 35

The cost-to-sales ratio is a method used to estimate inventory instead of performing a physical count.

Question 36

A major consideration for a company when selecting a supplier is

A)supplier location
B)online presence
C)company profitability
D)inventory valuation

Question 37

Physical inventory counts are

A)only necessary for periodic systems.
B)only necessary for perpetual systems.
C)necessary for periodic and perpetual systems as part of internal control.
D)not necessary at all if a company has an appropriate accounting system.

Question 38

When a perpetual inventory system is used,

A)a physical inventory count must be taken to determine cost of goods sold.
B)inventory shrinkage is difficult to determine.
C)it eliminates the need for frequent inventory counts.
D)the timeliness of data is sacrificed for lower costs of operation.

Question 39

When a periodic inventory system is used

A)inventory shrinkage is impossible to calculate.
B)timely data is of utmost importance.
C)cost of goods sold is always known.
D)every inventory transaction is reflected in the inventory account.

Question 40

Which of the following would most likely use a periodic inventory system?

A)car dealership
B)heavy metal distributor
C)computer dealership
D)local handcrafted furniture store

Question 41

Which of the following statements about the weighted-average cost formula is true?

A)If prices are rising,companies prefer it because it lowers their tax liability.
B)It is the most popular method in Canada.
C)In times of rising prices,weighted-average will produce a higher net income than FIFO.
D)In time of rising prices,weighted-average produces an inventory cost per unit that is higher than the cost per unit of cost of goods sold.
Use the following information for questions 54-56.
K-tel Industries had the following activity with one of its inventory items during the current period:
Units Unit Cost
Beginning inventory 30 $8.00
Purchase December 5 80 10.50
Sale December 11 (40)
Purchase December 17 60 12.00
Sale December 26 (70)

Question 42

Which of the following is true under a periodic system?

A)A COGS expense is recognized each time a sale is made.
B)The inventory account is not updated with each purchase.
C)Inventory shrinkage is easily identified.
D)This system can be costly to implement.

Question 43

Use the following information for questions below
A company had the following inventory activity during April:
$$\begin{array}{l}\text { }\\\begin{array} { l l l l l} &&\text {units }&\text { unit cost}&\text { total cost}\\\text { beginning}&\text {inventory }&800&\$10.00&\$8,000\\\text { purchase}&\text {april 6 }&1,400&11.00&15,400\\\text {sale }&\text {april }&(1,500)\\\text {purchase }&\text {april 17}&900&10.50&9,450\\\text {sale }&\text {april 24 }&(900)\\\end{array}\end{array}$$

-If the company is using a perpetual system and the weighted-average cost formula,what is the ending inventory closest to?

A)$8,470
B)$7,777
C)$7,560
D)$7,391

Question 44

Use the following information for questions below
A company had the following inventory activity during April:
$$\begin{array}{l}\text { }\\\begin{array} { l l l l l} &&\text {units }&\text { unit cost}&\text { total cost}\\\text { beginning}&\text {inventory }&800&\$10.00&\$8,000\\\text { purchase}&\text {april 6 }&1,400&11.00&15,400\\\text {sale }&\text {april }&(1,500)\\\text {purchase }&\text {april 17}&900&10.50&9,450\\\text {sale }&\text {april 24 }&(900)\\\end{array}\end{array}$$

-If the company is using a perpetual system and the weighted-average cost formula,what is the cost of goods sold closest to?

A)$24,380
B)$24,840
C)$25,459
D)$25,631

Question 45

Use the following information for questions below
K-tel Industries had the following activity with one of its inventory items during the current period:
$$\begin{array}{l}\text { }\\\begin{array} { l l l l } &&\text {units }&\text { unit cost}\\\text { beginning}&\text {inventory }&30&\$8.00\\\text { purchase}&\text {december 5 }&8&10.5\\\text {sale }&\text {december 11 }&(40)\\\text {purchase }&\text {december 17}&60&12.00\\\text {sale }&\text {december 26 }&(70)\\\end{array}\end{array}$$

-Using a perpetual inventory system and the weighted-average cost formula,the cost of goods sold for the December 11 sale was closest to

A)$540.
B)$420.
C)$393.
D)$370.

Question 46

Use the following information for questions below
A company had the following inventory activity during April:
$$\begin{array}{l}\text { }\\\begin{array} { l l l l l} &&\text {units }&\text { unit cost}&\text { total cost}\\\text { beginning}&\text {inventory }&800&\$10.00&\$8,000\\\text { purchase}&\text {april 6 }&1,400&11.00&15,400\\\text {sale }&\text {april }&(1,500)\\\text {purchase }&\text {april 17}&900&10.50&9,450\\\text {sale }&\text {april 24 }&(900)\\\end{array}\end{array}$$

-If the company is using a perpetual system and the FIFO cost formula,what is the cost of goods sold closest to?

A)$25,700
B)$25,500
C)$25,200
D)$25,930

Question 47

Use the following information for questions below
K-tel Industries had the following activity with one of its inventory items during the current period:
$$\begin{array}{l}\text { }\\\begin{array} { l l l l } &&\text {units }&\text { unit cost}\\\text { beginning}&\text {inventory }&30&\$8.00\\\text { purchase}&\text {december 5 }&8&10.5\\\text {sale }&\text {december 11 }&(40)\\\text {purchase }&\text {december 17}&60&12.00\\\text {sale }&\text {december 26 }&(70)\\\end{array}\end{array}$$

-Using a perpetual inventory system and the FIFO cost formula,the ending inventory was valued at

A)$500.
B)$625.
C)$720.
D)$825.

Question 48

A small local convenience store is opening in your neighborhood.Inventory is limited and keeping initial start-up costs low is a priority.What type of inventory system would you recommend?

A)perpetual
B)periodic
C)specific identification
D)Company is so small one is not needed.

Question 49

Which of the following should be included in the cost of inventory?

A)the cost of keeping the inventory records
B)depreciation on the inventory warehouse
C)the salesperson's commission
D)receiving and inspection costs

Question 50

Which of the following would be most likely to use the specific identification method?

A)shoe store
B)car dealership
C)grocery store
D)bookstore

Question 51

Use of the FIFO cost formula means that

A)the perpetual costing system is used.
B)the ending inventory contains the oldest costs.
C)the periodic costing system is used.
D)the ending inventory contains the most recent costs.

Question 52

Management may use the cost formula decision tree when determining which cost formula to use.If goods are not interchangeable,management's options are

A)weighted-average.
B)FIFO.
C)Just-in-time.
D)specific identification.

Question 53

Which of the following cost formulas would be most appropriate when the inventory units are unique or costly?

A)FIFO
B)specific identification
C)just-in-time
D)weighted-average

Question 54

Which of the following cost formulas would be most appropriate for costing an inventory of liquids stored in tanks?

A)weighted-average
B)FIFO
C)periodic
D)perpetual

Question 55

Which of the following statements about the FIFO cost formula is true?

A)The same costs per unit are assigned to the ending inventory and the cost of goods sold.
B)Companies prefer to use FIFO because it lowers their tax liability.
C)In times of rising prices FIFO will produce a higher net income than weighted-average.
D)In time of rising prices FIFO produces an inventory cost per unit that is lower than the cost per unit of cost of goods sold.

Question 56

Use the following information for questions below
A company had the following inventory activity during April:
$$\begin{array}{l}\text { }\\\begin{array} { l l l l l} &&\text {units }&\text { unit cost}&\text { total cost}\\\text { beginning}&\text {inventory }&800&\$10.00&\$8,000\\\text { purchase}&\text {april 6 }&1,400&11.00&15,400\\\text {sale }&\text {april }&(1,500)\\\text {purchase }&\text {april 17}&900&10.50&9,450\\\text {sale }&\text {april 24 }&(900)\\\end{array}\end{array}$$

-If the company is using a perpetual system and the FIFO cost formula,what is the ending inventory closest to?

A)$7,100
B)$7,350
C)$7,650
D)$7,920

Question 57

When a company is evaluating whether or not to use a perpetual vs.a periodic inventory system the following statement is most accurate.

A)A perpetual inventory system provides far superior information and should be used at any cost.
B)A periodic system is inferior and should never be used if possible.
C)The cost of the system used should be measured against the benefits it provides.
D)Both systems are equally good.

Question 58

Use the following information for questions below
K-tel Industries had the following activity with one of its inventory items during the current period:
$$\begin{array}{l}\text { }\\\begin{array} { l l l l } &&\text {units }&\text { unit cost}\\\text { beginning}&\text {inventory }&30&\$8.00\\\text { purchase}&\text {december 5 }&8&10.5\\\text {sale }&\text {december 11 }&(40)\\\text {purchase }&\text {december 17}&60&12.00\\\text {sale }&\text {december 26 }&(70)\\\end{array}\end{array}$$

-Using a perpetual inventory system and the FIFO cost formula,the cost of goods sold was

A)$975.
B)$1,080.
C)$1,175.
D)$1,300.

Question 59

Which cost formula will produce the same results under both the periodic and perpetual inventory systems?

A)FIFO
B)weighted-average
C)They both produce the same results.
D)They both produce different results.

Question 60

An inventory of grocery items where the shelves are stocked from the back would be similar to which cost formula?

A)FIFO
B)specific identification
C)weighted-average
D)none of the above

Question 61

Use the following information for questions below
A company had the following inventory activity during May:
$\begin{array}{lrccc}&\text { Units }& \text { Unit Cost } & \text { Total Cost } & \text { Unit Price } \\\hlineBeginning~ inventory&100 & \$ 20.00 & \$ 2,000 & \\Purchase: ~November~3&900 & \$ 21.00 & 18,900 & \\Sale: \quad November ~5&(900) & & & \$ 30.00 \\Purchase: November ~15&1,000 & \$ 21.00 & 21,000 & \\Sale: \quad November~ 28&(900) & & & \$ 30.00\end{array}$

-If the company uses a perpetual system and the FIFO cost formula,what is the gross margin for the month?

A)$12,100
B)$16,200
C)$16,300
D)$17.100

Question 62

Carolina Company has a normal markup of 40%.Its cost-to-sales ratio is

A)71.4%.
B)67.5%.
C)60%.
D)Cannot be calculated.

Question 63

Tamarack Co.prepares its estimate of LCM using the net realizable value.Inventory item 101 cost $45 and its current replacement cost is $50.The item is currently selling in the market for $55 and selling costs are estimated to be $6.Tamarack expects to earn a profit of $4 on the sale of this item.In its year-end financial statements,Tamarack Co.should value this item at

A)$50.
B)$45.
C)$49.
D)$55.

Question 64

Effective inventory management would have one person place the order for new inventory,a second person check it against the purchase order when it arrives,and a third person record the receipt of inventory in the accounting records.The purpose of this system is

A)to reduce spoilage.
B)to reduce storage costs.
C)to guard against stockouts.
D)to guard against internal theft and collusion.

Question 65

The inventory writedown that results from the application of the LCM rule is often hidden in the

A)selling expense.
B)inventory account.
C)cost of goods sold.
D)loss due to market decline of inventory.

Question 66

In order to ensure that the inventory values presented on the statement of financial position at year end reflect the true economic benefits of the inventory,the company may need to

A)have an inventory fire sale.
B)use a perpetual inventory system.
C)use a JIT system.
D)prepare an inventory writedown.

Question 67

The inventory writedown incurred from applying the LCM rule to inventory is

A)not reflected on the Statement of Financial Position.
B)an adjustment to cost of goods sold.
C)not reflected on the Statement of Income.
D)not considered a permanent loss.
Use the following information to answer questions 70-71.
Pal Distributers Inc.values its inventory on an LCM basis.The following data came from the 2020 inventory,which consisted of two items:
Item # 2530 Item # 2533
Original cost $12,000 $15,000
Selling price 15,000 26,000
Estimated selling costs 5,000 10,000
Replacement cost 13,000 15,000
Normal profit margin 1,500 1,000

Question 68

Which of the following statements best describes net realizable value when applying the LCM rule?

A)Net realizable value is the selling price less the costs necessary to sell the item.
B)Net realizable value is the selling price plus the costs necessary to sell the item.
C)Net realizable value is the selling price plus the normal profit margin.
D)Net realizable value is the selling price less the normal profit margin.

Question 69

Use the following information to answer questions below
Pal Distributers Inc.values its inventory on an LCM basis.The following data came from the 2020 inventory,which consisted of two items:
$\begin{array}{lrc}&Item \# 2530&Item \# 2533\\\hline\text { Original cost } & \$ 12,000 & \$ 15,000 \\\text { Selling price } & 15,000 & 26,000 \\\text { Estimated selling costs } & 5,000 & 10,000 \\\text { Replacement cost } & 13,000 & 15,000 \\\text { Normal profit margin } & 1,500 & 1,000\end{array}$

-The appropriate carrying value for the entire inventory when applying the LCM rule using net realizable value on an item-by-item basis would be

A)$25,000.
B)$26,000.
C)$27,000.
D)$28,000.

Question 70

When using the LCM rule in Canada,the market value is most commonly

A)net present value.
B)selling price less profit margin.
C)replacement cost.
D)net realizable value.

Question 71

Argyle Company failed to include a number of inventory items in the inventory count at the end of the last period.Assuming no other inventory errors,the effect on the current period is

A)an overstatement of gross profit.
B)an understatement of COGS.
C)an overstatement of ending inventory.
D)an understatement of net income.

Question 72

One strategy managers use to reduce the holding costs of inventory is

A)separation of duties.
B)regular inventory counts.
C)electronic tags.
D)JIT delivery.

Question 73

Net realizable value is also known as the

A)replacement cost.
B)wholesale price.
C)estimated selling price.
D)liquidated price.

Question 74

Hanuv Corporation counts its ending inventory incorrectly in year 1,assuming no other inventory errors in future period,

A)the impact of the error effects the inventory account only.
B)the error effects profitability,net income and retained earnings for year 1 only.
C)the error extends in to future years indefinitely.
D)the error will self-correct by the end of year 2.

Question 75

Aubergine Industries had beginning inventory of $10,000 and purchased $75,000 of merchandise during 2020.The company had sales of $90,000 and has traditionally had a cost-to-sales ratio of 75%.Using the gross margin estimation method,the company estimates its ending inventory to be

A)$67,500.
B)$65,000.
C)$17,500.
D)$22,500.

Question 76

When applying the LCM,the following is true:

A)the inventory account remains at its original value.
B)a contra account to inventory is used.
C)COGS rises when ending inventory is reduced to market value.
D)LCM can only be applied to individual items.
Use the following information for questions 73-75.
A company had the following inventory activity during May:
Units Unit Cost Total Cost Unit Price
Beginning inventory 100 $20.00 $ 2,000
Purchase: November3 900 $21.00 18,900
Sale: November 5 (900)$30.00
Purchase: November 15 1,000 $21.00 21,000
Sale: November 28 (900)$30.00

Question 77

Use the following information for questions below
A company had the following inventory activity during May:
$\begin{array}{lrccc}&\text { Units }& \text { Unit Cost } & \text { Total Cost } & \text { Unit Price } \\\hlineBeginning~ inventory&100 & \$ 20.00 & \$ 2,000 & \\Purchase: ~November~3&900 & \$ 21.00 & 18,900 & \\Sale: \quad November ~5&(900) & & & \$ 30.00 \\Purchase: November ~15&1,000 & \$ 21.00 & 21,000 & \\Sale: \quad November~ 28&(900) & & & \$ 30.00\end{array}$

-If the company uses a perpetual system and the weighted-average cost formula,what is the gross margin on the November 5 sale?

A)$6,100
B)$8,100
C)$8,190
D)$8,550

Question 78

Use the following information for questions below
A company had the following inventory activity during May:
$\begin{array}{lrccc}&\text { Units }& \text { Unit Cost } & \text { Total Cost } & \text { Unit Price } \\\hlineBeginning~ inventory&100 & \$ 20.00 & \$ 2,000 & \\Purchase: ~November~3&900 & \$ 21.00 & 18,900 & \\Sale: \quad November ~5&(900) & & & \$ 30.00 \\Purchase: November ~15&1,000 & \$ 21.00 & 21,000 & \\Sale: \quad November~ 28&(900) & & & \$ 30.00\end{array}$

-If the company uses a perpetual system and the FIFO cost formula,what is the gross margin on the November 5 sale?

A)$6,100
B)$8,100
C)$8,200
D)$8,550

Question 79

Use the following information to answer questions below
Pal Distributers Inc.values its inventory on an LCM basis.The following data came from the 2020 inventory,which consisted of two items:
$\begin{array}{lrc}&Item \# 2530&Item \# 2533\\\hline\text { Original cost } & \$ 12,000 & \$ 15,000 \\\text { Selling price } & 15,000 & 26,000 \\\text { Estimated selling costs } & 5,000 & 10,000 \\\text { Replacement cost } & 13,000 & 15,000 \\\text { Normal profit margin } & 1,500 & 1,000\end{array}$

-The appropriate carrying value for the entire inventory when applying the LCM rule using net realizable value to the inventory as a whole would be

A)$25,000.
B)$26,000.
C)$27,000.
D)$28,000.

Question 80

Ariel Co.'s gross profit margin increased from 41.5% in 2020 to 44.3% in 2021.Possible reasons may include:

A)increased shipping costs
B)use of early payment discounts for merchandise purchases
C)cost of obsolete product passed on to the customer
D)reduced selling prices