Deck 7: Reporting and Interpreting Inventories and Cost of Goods Sold

Question 1

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

Answer 1

True

Question 2

The lower the inventory turnover ratio, the more efficiently the company manages its inventory, all other things equal.

Answer 2

False

Question 3

Companies that choose to use FIFO must report in the financial statement notes what their inventory balance would have been had they used LIFO.

Answer 3

False

Question 4

Merchandisers have inventories of finished goods only; manufacturers have inventories of raw materials only.

Question 5

In each accounting period, a manager can select the inventory costing method that yields the most positive net income.

Question 6

Specific identification is the best inventory costing method because it is least open to manipulation by unscrupulous managers.

Question 7

LIFO is preferred when costs are rising and managers have incentives to report higher income because of bonus plans and job security.

Question 8

When LIFO is used with the periodic inventory system, cost of goods sold is assigned cost using the most recent purchase at the point of each sale, rather than from the most recent purchase as of the end of the period.

Question 9

In applying the lower of cost or market rule to report inventory, "market" is defined as the current selling price.

Question 10

Inventories regularly rise and fall as the company buys and sells merchandise.

Question 11

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

Question 12

The choice of an inventory costing method can have a major impact on gross profit and cost of goods sold.

Question 13

Most changes in sales revenue have no effect on cost of goods sold.

Question 14

The cost assigned to cost of goods sold and to inventory under the FIFO method will be the same whether the perpetual or the periodic inventory system is used.

Question 15

Inappropriate inventory levels reduce a company's net income, either by increasing cost or reducing revenue.

Question 16

If inventory is sold with terms of FOB destination, the goods belong to the seller until they reach their destination.

Question 17

A company should always keep extra inventory on hand; it could be needed if demand increases and it has to be bought sooner or later so it adds nothing to cost.

Question 18

An error in the period-end inventory will cause an error in the calculation of cost of goods sold.

Question 19

An overstatement of ending inventory will cause an overstatement of assets and an understatement of stockholders' equity on the balance sheet.

Question 20

The assignment of costs to cost of goods sold and to inventory using the weighted average method usually yields different results depending on whether a perpetual or a periodic system was used.

Question 21

Which of the following statements is true?

A) The sales revenue is $1,000.
B) The gross profit is $1,000.
C) The cost of goods sold is $1,000.
D) The net income is $1,000.

Question 22

Which of the following would be in the work-in-process inventory of a company making cheese?

A) Milk and cream used to make the cheese.
B) Cheese that has been made but is curing before being ready to sell.
C) Cured cheese that is waiting to be shipped to retailers.
D) Cured cheese that has been sold to retailers

Question 23

Which of the following would be in the finished goods inventory of a company making cheese?

A) Milk and cream used to make the cheese.
B) Cheese that has been made but is curing before being ready to sell.
C) Cured cheese that is waiting to be shipped to retailers.
D) Cured cheese that has been sold to retailers.

Question 24

Which of the following statements regarding inventory calculations is true?

A) Beginning inventory + net purchases - ending inventory = cost of goods sold.
B) Goods available for sale + ending inventory = cost of goods sold.
C) Beginning inventory - cost of goods sold = goods available for sale.
D) Beginning inventory + purchases + purchase discounts + ending inventory = cost of goods sold.

Question 25

Which of the following statements is true?

A) The sales revenue is $2,500.
B) The gross profit is $2,500.
C) The cost of goods sold is $2,500.
D) The net income is $2,500.

Question 26

The understatement of beginning inventory balance causes cost of goods sold to be understated and net income to be understated.

Question 27

Which of the following is the equation for cost of goods sold?

A) Beginning inventory + net purchases - Ending inventory
B) Beginning inventory + net purchases + Ending inventory
C) Net purchases - Beginning inventory
D) Ending inventory + net purchases - Beginning inventory

Question 28

Which of the following statements regarding comparisons made in managing inventory is not true?

A) In making comparisons of financial statements, it is desirable to compare data calculated using the same inventory costing methods.
B) The inventory turnover ratio and days to sell measure will be affected by the cost flow assumptions used, which causes problems for financial statements users.
C) Because of the use of different costing methods, comparisons of different companies are more difficult.
D) An increase in inventory account balances always indicates a less favorable situation.

Question 29

Carrying insufficient quantities of inventory on hand:

A) can inadvertently lower a company's costs so much that its taxes become excessive.
B) can cause customers to go elsewhere to obtain the product.
C) has little effect on customer satisfaction.
D) will increase the costs of carrying inventory.

Question 30

Which of the following would be in the raw materials inventory of a company making cheese?

A) Milk and cream used to make the cheese.
B) Cheese that has been made but is curing before being ready to sell.
C) Cured cheese that is waiting to be shipped to retailers.
D) Partially processed cheese.

Question 31

Which of the following statements regarding inventory classifications is not true?

A) Inventory may include materials used in producing goods for sale.
B) Companies that are manufacturers list their finished goods, work-in-process and raw materials inventory separately.
C) Inventory is classified as a long-term asset on the balance sheet.
D) Merchandisers buy inventory in finished form ready for resale.

Question 32

Goods on consignment are goods shipped by the owner to another company that holds the goods and sells them for the owner.

Question 33

Which of the following statements regarding inventory measures is not true?

A) If the inventory turnover ratio increases, the days to sell measure decreases.
B) The days to sell measure can help managers make pricing and ordering decisions for inventory.
C) A higher inventory turnover ratio indicates that inventory is moving more quickly from purchase to sale.
D) It is rare for a company with a lower gross profit percentage to have a faster inventory turnover.

Question 34

The inventory costing method that identifies the invoice cost of each item in the ending inventory in order to determine the cost assigned to inventory is the specific identification method.

Question 35

Which of the following statements regarding inventory costing methods is true?

A) The LIFO method assumes that the costs for the newest goods (the last ones in) are used first and the older costs are left in ending inventory.
B) During a period of rising prices, LIFO results in a higher income tax expense than does FIFO.
C) Internal Financial Reporting Standards (IFRS) allow the use of LIFO but not FIFO.
D) In the U.S., if a company uses LIFO on the income tax return, it may use a different method for financial

Question 36

The inventory costing method that results in the lowest taxable income in a period of inflation is the LIFO
method.

Question 37

A merchandise company's beginning inventory plus merchandise purchases minus ending inventory equals:

A) ending inventory.
B) cost of goods sold.
C) goods available for sale.
D) sales level.

Question 38

How many of the following statements regarding inventory management is (are) true?
An increase in inventory levels is always a sign of inefficiency in inventory management.
The measurement of inventory affects both the balance sheet and the income statement within an accounting period.
The ending inventory of one accounting period becomes the beginning inventory of the next accounting period.

A) None
B) One
C) Two
D) Three

Question 39

A merchandise company's beginning inventory plus merchandise purchases equals:

A) ending inventory.
B) cost of goods sold.
C) goods available for sale.
D) sales level.

Question 40

Which of the following statements regarding the calculations used for the weighted average inventory costing method is true?

A) Under the weighted average cost method, if the goods in inventory were purchased at three different prices, the three different prices would be added and then divided by three to find the weighted average cost per unit.
B) When the weighted average inventory costing method is used, ending inventory and cost of goods sold are calculated using different costs per unit.
C) There is no difference in the calculations under the weighted average method whether a perpetual or periodic inventory system is used.
D) The weighted-average method will produce an inventory cost which is between the results of FIFO and LIFO

Question 41

If the company uses the weighted average method, what is the cost of its ending inventory (rounded to the nearest dollar)?

A) $38
B) $48
C) $67
D) $75

Question 42

If a company purchased 200 units of inventory at $9 per unit and 300 units at $10 per unit, its weighted average unit cost for this inventory would be:

A) $9.00.
B) $9.50.
C) $9.60.
D) $10.00.

Question 43

BetterBuy records $3,000 as the cost of goods sold. BetterBuy is using the:

A) Specific identification method.
B) LIFO method.
C) FIFO method.
D) Weighted average cost method. FIFO 2 @ $1,500 = $3,000

Question 44

The Acme Corporation buys 300 units of merchandise in January at $5 each. In February, Acme buys 500 units at $4 each and in March it buys 200 units at $6 each. Acme sells 150 units during this quarter. What is the cost of goods sold under the FIFO method?

A) $600
B) $934
C) $750
D) $900

Question 45

Maxell Company uses the periodic FIFO method to assign costs to inventory and cost of goods sold. Given the following information, what would be reported as the cost of goods sold (COGS) and ending inventory balances for the period?

A) Option A
B) Option B
C) Option C
D) Option D

Question 46

The specific identification method would probably be most appropriate for which of the following goods?

A) Boxes of brass 4-inch drywall screws at Home Depot.
B) Bottles of suntan lotion in Wal-Mart's central warehouse.
C) Sets of tires at the Goodyear plant.
D) Diamond necklaces at a Tiffany's & Co. jewelry store.

Question 47

Generally, which inventory costing method approximates most closely the current cost for each of the following?

A) Option A
B) Option B
C) Option C
D) Option D

Question 48

If the company uses the LIFO method, what is the cost of its ending inventory?

A) $24
B) $42
C) $58
D) $76

Question 49

Meanmocha Hardware has a periodic inventory system and uses the weighted average method. The company began the month of November with 150 large brass switch plates on hand at a cost of $4.00 each. These switch plates sell for $7.00 each. The following schedule sets forth the purchases of switch plates during November: If Meanmocha sells 570 switch plates for $7.00 each during November, what is the company's gross profit for November (rounded to the nearest dollar)?

A) $1,046.
B) $1,482.
C) $1,516.
D) $1,528.

Question 50

If BetterBuy uses the specific identification method, its cost of goods sold will be:

A) $3,000
B) $2,950
C) $3,200
D) $3,033

Question 51

If the company uses the specific identification method, what is the cost of its ending inventory?

A) $31
B) $69
C) $76
D) $100

Question 52

If the company uses the LIFO costing method, what is the cost of its ending inventory?

A) $1,365.
B) $1,494.
C) $1,620.
D) $2,835.

Question 53

If the company uses the weighted average inventory costing method, what is the cost of its ending inventory?

A) $4,200.
B) $2,700.
C) $1,400.
D) $1,365.

Question 54

During 2010, Shockglass Company recorded inventory purchases of $45,000 and cost of goods sold of $50,000. If inventory at the beginning of the year was $15,000, the ending inventory balance must have been:

A) $10,000.
B) $25,000.
C) $26,000.
D) $27,000.

Question 55

If BetterBuy uses the weighted average method, its cost of goods sold will be:

A) $2,900.
B) $2,950.
C) $3,040.
D) $3,033.

Question 56

If the company uses the FIFO method, what is the cost of its ending inventory?

A) $24
B) $42
C) $58
D) $76

Question 57

Which of the following statement is true?

A) The sales revenue is $1,500.
B) The gross profit is $1,500.
C) The cost of goods sold is $1,500.
D) The net income is $1,500.

Question 58

Which inventory costing method generally results in the most recent costs being assigned to ending inventory?

A) LIFO.
B) FIFO.
C) Weighted average cost.
D) Simple average cost.

Question 59

The 2011 records of Thompson Company showed beginning inventory, $6,000; cost of goods sold, $14,000; and ending inventory, $8,000. The cost of purchases for 2006 was:

A) $12,000.
B) $10,000.
C) $9,000.
D) $16,000.

Question 60

The LIFO inventory costing method assumes that the cost of the units most recently purchased is:

A) the last to be assigned to cost of goods sold.
B) the first to be assigned to ending inventory.
C) the first to be assigned to cost of goods sold.
D) not assigned to cost of goods sold or ending inventory.

Question 61

The Acme Corporation buys 300 units of merchandise in January at $5 each. Acme buys 500 units at $4 each in February and 200 units at $6 each in March. Acme sells 150 units during this quarter. Acme uses a periodic inventory system and had no beginning inventory. What is its cost of goods sold for the quarter using the LIFO method?

A) $600
B) $934
C) $750
D) $900

Question 62

When the lower of cost or market (LCM) rule requires an inventory adjustment:

A) the adjustment usually, but not always, reduces the book value of inventory.
B) the write-down is usually reported as a part of cost of goods sold.
C) the inventory adjustment is recorded in a contra-revenue account called sales allowances.
D) the write-down does not affect any of the financial statements.

Question 63

If the market value of goods in inventory falls to $26,000 below its cost, the company should:

A) do nothing, because assets are reported at their original purchase price.
B) credit inventory for $26,000.
C) debit inventory for $26,000 and credit accrued liabilities for $26,000.
D) use the weighted average cost method since that method provides a more accurate indicator of current value. The LCM rule requires a write-down of inventory when its replacement cost falls below its cost.

Question 64

A rising balance in the inventory account and a falling inventory turnover ratio implies that the inventory build up is occurring because:

A) goods are not selling as fast as they were in the past.
B) the company is expecting to sell more in the future.
C) goods are selling, but it is taking longer to collect payment.
D) goods cannot be shipped fast enough.

Question 65

When the replacement cost of inventory drops below the cost recorded in the financial records, applying the lower of cost or market (LCM) rule causes:

A) a decrease in cost of goods sold.
B) no change in net income, other things being equal.
C) a reduction in the book value of total assets.
D) an increase in net income.

Question 66

The process of buying and selling inventory is known as inventory:

A) circulation.
B) cost management.
C) turnover.
D) asset allocation.

Question 67

Which of the following statements is true with regard to all inventory costing methods?

A) The ending inventory balance and cost of goods sold move in the same direction.
B) The ending inventory balance and the cost of total assets move in the opposite direction.
C) The ending inventory balance and net income move in the same direction.
D) The ending inventory balance and net income move in the opposite direction.

Question 68

What is the inventory turnover ratio (rounded to one decimal place)?

A) 12.5
B) 13.4
C) 14.7
D) 2.2

Question 69

For a merchandiser, inventory turnover refers to how many times:

A) during the period the company replaces its raw materials inventory.
B) the company buys and sells its inventory of goods.
C) the company produces and delivers its inventory of goods to customers.
D) the company orders inventory.

Question 70

For a manufacturer, inventory turnover refers to how many times:

A) during the period the company replaces the raw materials inventory.
B) the company buys and sells its inventory of goods.
C) the company produces and delivers its inventory of goods to customers.
D) the company orders raw materials.

Question 71

Your company has 100 units in inventory, purchased at $16 per unit, that could be replaced for $14.

A) The company should credit cost of goods sold for $200.
B) The company should debit revenue for $200.
C) The company should credit inventory for $200.
D) The company should debit inventory for $200.

Question 72

Acme sells 150 units during this quarter. If Acme uses the weighted average method, what is its cost of goods sold for the quarter?

A) $600
B) $705
C) $750
D) $900

Question 73

A rising balance in the inventory account and a rising inventory turnover ratio would imply that the inventory build up is occurring because:

A) goods are not selling as fast as anticipated.
B) the company is expecting to sell more in the future.
C) goods are selling but it is taking longer to collect payment.
D) goods cannot be shipped fast enough.

Question 74

An adjustment to ending inventory under the lower of cost or market (LCM) rule would be least likely to be recorded by a company that sells:

A) a household staple like laundry detergent.
B) a fad product like bathing suits.
C) seasonal items like snow blowers.
D) high-tech goods like Personal Digital Assistants.

Question 75

Your company has 500 units in inventory that had been purchased for $12 each and that would currently cost $15 to replace. Your supplier has just announced the cost of these goods is rising to $16.50.

A) Your company should make no adjustments to the inventory account.
B) Your company should adjust the inventory account using the lower of the recent market values, which is $15.
C) Your company should adjust the inventory account using the higher of the recent market values, which is $16.50.
D) Your company should adjust the inventory account using the average of the recent market values, which is

Question 76

An adjustment to ending inventory under the lower of cost or market (LCM) rule would be most likely to be recorded by a company that sells:

A) Plastic storage containers.
B) Paper clips.
C) Body lotion.
D) Designer clothes.

Question 77

How long on average does it take to sell something from inventory after it is purchased?

A) 12.5 days
B) 24.8 days
C) 29.2 days
D) 165.9 days

Question 78

Inventory levels increase by 10% at your company during the fourth quarter. Based on this increase, which of the following statements is true?

A) This is always good news because inventories are an asset to the company.
B) This could be good news if the company is ordering more goods because sales appear to be rising.
C) This could be bad news if the company is ordering more goods because unit costs are falling.
D) This is always bad news because higher inventories mean higher costs.

Question 79

Acme sells 300 units during this quarter. If Acme uses the LIFO method, what is its cost of goods sold for the quarter?

A) $1,600
B) $1,400
C) $1,500
D) $1,800

Question 80

Which of the following statements is true?

A) When unit costs are steadily rising or falling, the weighted average cost method yields a cost of goods sold between that of FIFO and LIFO.
B) FIFO will lead to the highest net income if unit costs are falling.
C) LIFO will always yield a smaller net income than FIFO.
D) Specific identification is the most practical, but least accurate, measure of cost and net income.