Deck 13: Accounting for Merchandise Inventory

Question 1

A widely used method of allocating merchandise cost that assumes the first merchandise bought is the first merchandise sold is called the first-in, first-out method.

Answer 1

True

Question 2

If merchandise is shipped FOB shipping point, the merchandise is the property of the selling company until it is received by the buying company.

Answer 2

False

Question 3

The principle of conservatism states that gains should not be anticipated but that all potential losses should be recognized.

Answer 3

True

Question 4

A method of assigning merchandise cost that requires that each item sold and each item remaining in inventory be separately identified with respect to its purchase cost is called last-in, first-out.

Question 5

If market value is less than cost, the difference between the cost and market value of inventory is considered a loss due to holding inventory and should be reported on the income statement as an expense.

Question 6

The natural business year is a fiscal year that starts and ends at the time the stock of merchandise is normally at its lowest level.

Question 7

Errors in the ending inventory have a direct effect on net income for the period.

Question 8

A method of allocating merchandise costs that assumes the sales in the period were made from the most recently purchased merchandise and the earliest merchandise bought remain in inventory is called the first-in, first-out method.

Question 9

Under the perpetual system of accounting for inventory, the merchandise inventory account is debited for the cost of all merchandise bought.

Question 10

The difference between the cost and market value is considered a loss due to holding inventory.

Question 11

Understating the ending inventory causes the cost of goods sold to be overstated and net income to be understated.

Question 12

The term "LIFO" relates to the merchandise in inventory at the end of the accounting period, not to the merchandise sold during the period.

Question 13

The loss due to write-down of inventory should be reported on the income statement as an expense.

Question 14

A method of allocating merchandise cost that is based on the average cost of identical units is known as weighted-average cost or average cost.

Question 15

Last-in, first-out costing matches the most current cost of items purchased against the current sales revenue.

Question 16

The "FIFO" and "LIFO" inventory costing methods are based on assumed cost flows that are not required to reflect the actual physical movement of merchandise within the company.

Question 17

When prices are rising, net income calculated by using the first-in, first-out method is smaller than the amount determined from using either the last-in, first-out or the weighted-average method.

Question 18

Exact inventory amounts are not necessary for accounting purposes because an error in inventory will "wash out" over a two-year period.

Question 19

First-in, first-out costing assigns the most recent purchase cost to the ending inventory shown on the balance sheet.

Question 20

The specific identification method of inventory is generally practical only for businesses in which sales volume is relatively low and inventory unit value is relatively high.

Question 21

Costs of goods sold may include all of the following EXCEPT

A) the actual cost of the item.
B) shipping costs.
C) insurance.
D) management salaries.

Question 22

Under the periodic system of accounting for inventory, the merchandise inventory account is debited for the cost of all merchandise purchased.

Question 23

The term "FIFO" relates to the merchandise in inventory at the end of the accounting period, not to the merchandise sold during the period.

Question 24

If a difference is found between the physical count and the amount in the perpetual inventory records, the records must be corrected by an appropriate adjusting entry.

Question 25

When merchandise is acquired on account and the perpetual system of inventory is used, the journal entry for the purchase would include

A) debiting Purchases and crediting Accounts Payable.
B) debiting Accounts Payable and crediting Merchandise Inventory.
C) debiting Merchandise Inventory and crediting Accounts Payable.
D) debiting Accounts Payable and crediting Purchases.

Question 26

The gross profit (inventory valuation) method is appropriate if a firm's normal gross profit on sales has been relatively stable over time and for estimating the cost of inventory that was destroyed by casualty.

Question 27

Under the periodic inventory system, no entries are made to the merchandise inventory or cost of goods sold accounts during the year.

Question 28

Under the periodic inventory system, the merchandise inventory and the cost of goods sold for the current periods are determined

A) when a physical inventory is taken.
B) on a daily basis.
C) on a quarterly basis.
D) once a year.

Question 29

When each unit of inventory can be specifically identified, the specific identification method can be used.

Question 30

Under conditions of rising prices, the FIFO inventory method provides the lowest gross profit because the most recent purchase costs are matched against sales revenue.

Question 31

Firms should report a loss due to write-down of inventory in the cost of goods sold account on the income statement.

Question 32

When perpetual inventory records are kept, the merchandise inventory account in the general ledger is usually a control account.

Question 33

The gross profit method estimates the ending inventory and cost of goods sold by using the firm's normal gross profit as a percentage of net sales.

Question 34

The amount by which cost exceeds market value is considered a loss due to holding inventory and normally is charged to an account such as Loss on Write-Down of Inventory.

Question 35

Under the retail (inventory valuation) method, the amount of sales during the period is reduced by the normal profit percentage to determine the estimated cost of merchandise sold.

Question 36

The retail method of inventory is preferred by businesses such as department and clothing stores because they compute inventory values at wholesale prices.

Question 37

Under the perpetual inventory system, the balance in the merchandise inventory account is merely a record of the most recent physical inventory account.

Question 38

In the perpetual inventory system, no year-end adjusting entry is necessary, as long as the physical inventory agrees with the amount reported in the merchandise inventory account.

Question 39

The increasing use of computers and optical scanning devices at the point-of-sale probably will cause more businesses to switch from periodic to perpetual inventories.

Question 40

The gross profit (inventory valuation) method requires keeping records on both the cost and the selling prices of merchandise purchased.

Question 41

The inventory system whereby the merchandise inventory account balance is merely a record of the most recent physical inventory count is called

A) perpetual.
B) LIFO.
C) FIFO.
D) periodic.

Question 42

Match the terms with the definitions.a.average cost
b.conservatism
c.perpetual inventory system
d.market value
e.consignor
f.consistency
g.cost
h.first-in, first-out method
i.gross profit method
j.last-in, first-out method
k.inventory sheet
A method of estimating inventory in which a business's normal gross profit percentage is used to estimate the cost of goods sold and ending inventory.

Question 43

Match the terms with the definitions.a.average cost
b.conservatism
c.perpetual inventory system
d.market value
e.consignor
f.consistency
g.cost
h.first-in, first-out method
i.gross profit method
j.last-in, first-out method
k.inventory sheet
The cost to replace inventory at the prevailing purchase price.

Question 44

When merchandise is sold and the perpetual system of inventory is used, the journal entry for a sale would include

A) debiting Accounts Receivable and crediting Sales.
B) debiting Accounts Receivable and crediting Merchandise Inventory.
C) debiting Accounts Receivable and crediting Cost of Goods Sold.
D) debiting Cost of Goods Sold and crediting Sales.

Question 45

Match the terms with the definitions.a.average cost
b.conservatism
c.perpetual inventory system
d.market value
e.consignor
f.consistency
g.cost
h.first-in, first-out method
i.gross profit method
j.last-in, first-out method
k.inventory sheet
The accounting practice that states that we should never anticipate gains, but always anticipate and account for losses.

Question 46

The merchandise costing method that matches the most current cost of items purchased against the current sales revenue is called the

A) last-in, first-out method.
B) first-in, first-out method.
C) specific identification method.
D) weighted-average method.

Question 47

The inventory system that uses the merchandise inventory account as an active account is called

A) perpetual.
B) LIFO.
C) FIFO.
D) periodic.

Question 48

A method of allocating merchandise cost requiring each item sold and each item remaining in inventory to be separately identified with respect to its purchase cost is called the

A) last-in, first-out method.
B) first-in, first-out method.
C) specific identification method.
D) weighted-average method.

Question 49

Match the terms with the definitions.a.average cost
b.conservatism
c.perpetual inventory system
d.market value
e.consignor
f.consistency
g.cost
h.first-in, first-out method
i.gross profit method
j.last-in, first-out method
k.inventory sheet
A method of allocating merchandise cost which assumes that the sales in the period were made from the most recently purchased goods. Therefore, the earliest goods purchased remain in inventory.

Question 50

Assigning of the lower-of-cost-or-market to the items that comprise the inventory of merchandise at the end of the account period is an application of which of the following concepts?

A) materiality
B) conservatism
C) reliability
D) full disclosure

Question 51

A method of allocating merchandise cost that assumes the first merchandise bought was the first merchandise sold is called the

A) last-in, first-out method.
B) first-in, first-out method.
C) specific identification method.
D) average cost method.

Question 52

Match the terms with the definitions.a.average cost
b.conservatism
c.perpetual inventory system
d.market value
e.consignor
f.consistency
g.cost
h.first-in, first-out method
i.gross profit method
j.last-in, first-out method
k.inventory sheet
A method of allocating merchandise cost which assumes that the first goods purchased were the first goods sold and, therefore, that the latest goods purchased remain in inventory.

Question 53

An error in the reported inventory will cause errors in all of the following EXCEPT

A) the balance sheet.
B) the statement of owner's equity.
C) the following year's financial statements.
D) the cash account.

Question 54

A method of allocating merchandise cost that assumes the sales in the period were made from the recently purchased merchandise and its earliest merchandise bought remains in the inventory is called the

A) last-in, first-out method.
B) first-in, first-out method.
C) specific identification method.
D) weighted-average method.

Question 55

A method of allocating merchandise cost that assigns the most recent purchased costs to the ending inventory shown on the balance sheet is called the

A) last-in, first-out method.
B) first-in, first-out method.
C) specific identification method.
D) weighted-average method.

Question 56

Match the terms with the definitions.a.average cost
b.conservatism
c.perpetual inventory system
d.market value
e.consignor
f.consistency
g.cost
h.first-in, first-out method
i.gross profit method
j.last-in, first-out method
k.inventory sheet
Under this system, cost of goods sold and the amount of merchandise inventory on hand are updated when merchandise is bought and sold.

Question 57

Match the terms with the definitions.a.average cost
b.conservatism
c.perpetual inventory system
d.market value
e.consignor
f.consistency
g.cost
h.first-in, first-out method
i.gross profit method
j.last-in, first-out method
k.inventory sheet
The principle that states that a business should use the same accounting methods from period to period. This improves the comparability of the financial statements over time.

Question 58

When a fiscal year that starts and ends at the time the stock of merchandise is normally at its lowest level is selected, it is known as a(n)

A) natural business year.
B) calendar year.
C) base year.
D) accounting cycle.

Question 59

Match the terms with the definitions.a.average cost
b.conservatism
c.perpetual inventory system
d.market value
e.consignor
f.consistency
g.cost
h.first-in, first-out method
i.gross profit method
j.last-in, first-out method
k.inventory sheet
The owner of the merchandise that is held by another business.

Question 60

Lower-of-cost-or-market (for tax purposes) may be used with all of the following merchandise costing methods EXCEPT

A) the last-in, first-out method.
B) the first-in, first-out method.
C) the weighted-average method.
D) the specific identification method.

Question 61

Match the terms with the definitions.a.average cost
b.weighted-average method
c.consignee
d.consigned goods
e.specific identification method
f.retail method
g.cost
h.physical inventory
i.periodic inventory system
j.in transit
k.inventory sheet
l.natural business year
m.lower-of-cost-or-market method
Under this system, the ending inventory and cost of goods sold are determined at the end of the accounting period, when a physical inventory is taken.

Question 62

Match the terms with the definitions.a.average cost
b.weighted-average method
c.consignee
d.consigned goods
e.specific identification method
f.retail method
g.cost
h.physical inventory
i.periodic inventory system
j.in transit
k.inventory sheet
l.natural business year
m.lower-of-cost-or-market method
A fiscal year that starts and ends at the time the stock of goods is normally at its lowest level.

Question 63

Match the terms with the definitions.a.average cost
b.weighted-average method
c.consignee
d.consigned goods
e.specific identification method
f.retail method
g.cost
h.physical inventory
i.periodic inventory system
j.in transit
k.inventory sheet
l.natural business year
m.lower-of-cost-or-market method
An inventory valuation method under which inventory is valued at cost or replacement cost, whichever is lower.

Question 64

Match the terms with the definitions.a.average cost
b.weighted-average method
c.consignee
d.consigned goods
e.specific identification method
f.retail method
g.cost
h.physical inventory
i.periodic inventory system
j.in transit
k.inventory sheet
l.natural business year
m.lower-of-cost-or-market method
A method of allocating merchandise cost in which each unit of inventory is recognized at its purchase price.

Question 65

Match the terms with the definitions.a.average cost
b.weighted-average method
c.consignee
d.consigned goods
e.specific identification method
f.retail method
g.cost
h.physical inventory
i.periodic inventory system
j.in transit
k.inventory sheet
l.natural business year
m.lower-of-cost-or-market method
A variation of the gross profit method that is used by many retail businesses, to estimate the cost of goods sold and ending inventory.

Question 66

Match the terms with the definitions.a.average cost
b.weighted-average method
c.consignee
d.consigned goods
e.specific identification method
f.retail method
g.cost
h.physical inventory
i.periodic inventory system
j.in transit
k.inventory sheet
l.natural business year
m.lower-of-cost-or-market method
Counting the goods on hand at the end of the period to allocate merchandise costs between sold and unsold goods.

Question 67

Match the terms with the definitions.a.average cost
b.weighted-average method
c.consignee
d.consigned goods
e.specific identification method
f.retail method
g.cost
h.physical inventory
i.periodic inventory system
j.in transit
k.inventory sheet
l.natural business year
m.lower-of-cost-or-market method
A method of allocating merchandise cost based on the average cost of identical units. The average cost of identical units is determined by dividing the total cost of units available for sale by the total number of units available for sale.

Question 68

Match the terms with the definitions.a.average cost
b.weighted-average method
c.consignee
d.consigned goods
e.specific identification method
f.retail method
g.cost
h.physical inventory
i.periodic inventory system
j.in transit
k.inventory sheet
l.natural business year
m.lower-of-cost-or-market method
Goods that are in the process of being shipped between the seller and the buyer.

Question 69

Match the terms with the definitions.a.average cost
b.weighted-average method
c.consignee
d.consigned goods
e.specific identification method
f.retail method
g.cost
h.physical inventory
i.periodic inventory system
j.in transit
k.inventory sheet
l.natural business year
m.lower-of-cost-or-market method
Goods that are held by one business for sale but that are owned by another business.

Question 70

Match the terms with the definitions.a.average cost
b.weighted-average method
c.consignee
d.consigned goods
e.specific identification method
f.retail method
g.cost
h.physical inventory
i.periodic inventory system
j.in transit
k.inventory sheet
l.natural business year
m.lower-of-cost-or-market method
The company holding the merchandise of another business to be sold.