Deck 6: Reporting and Analyzing Inventory

Question 1

When using the perpetual system, the average cost method relies on a simple average calculation.

Answer 1

False

Question 2

An inventory count should be done by the employees who keep track of the stock.

Answer 2

False

Question 3

Once goods leave the premises of the seller, they should never be added to the seller's physical inventory count.

Answer 3

False

Question 4

The physical inventory count determines the number of units on hand.

Question 5

In order to remove the cost of items sold from inventory, a unit cost must be determined.

Question 6

Identify the effects of inventory errors on the financial statements.

Question 7

Goods that have been purchased FOB destination, but are in transit, should be excluded from the buyer's ending inventory.

Question 8

Inventory cost methods such as FIFO and average deal more with the flow of costs than with the flow of goods.

Question 9

If prices never changed, there would be no need for alternative inventory cost methods.

Question 10

Explain the effects on the financial statements of choosing each of the inventory cost determination methods.

Question 11

A company may use more than one inventory cost determination method if it has different types of inventory.

Question 12

Goods in transit shipped FOB shipping point should be included in the buyer's ending inventory.

Question 13

Describe the steps in determining inventory quantities.

Question 14

The specific identification method is desirable when a company sells a large number of low-unit-cost items.

Question 15

Demonstrate the presentation and analysis of inventory.

Question 16

Apply the methods of cost determination using specific identification, FIFO, and average cost under a perpetual inventory system.

Question 17

Consigned goods are held for sale by one party although ownership of the goods is retained by another party.

Question 18

The first-in, first-out (FIFO) inventory cost method results in an ending inventory valued at the most recent cost.

Question 19

If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the unit cost assigned to the cost of goods sold will be the same under FIFO and average cost formulas.

Question 20

A system of internal control is not needed when a company regularly takes a physical inventory.

Question 21

In periods of falling prices, FIFO will result in a higher ending inventory valuation than the average cost formula.

Question 22

An inventory write down from cost to net realizable value should not be made in the period in which the price decline occurs.

Question 23

The FIFO inventory cost formula agrees closely to the actual physical movement of goods in most businesses.

Question 24

All three methods of inventory cost determination will produce the same cumulative cost of goods sold over the life cycle of the business.

Question 25

When the value of inventory is lower than its cost, the inventory is written down to its net realizable value.

Question 26

In periods of falling prices, FIFO will result in a higher cost of goods sold than the average cost formula.

Question 27

Inventory that originally cost $100 had been written down to its net realizable value (NRV) of $75.Subsequently, the NRV of the inventory recovered to equal its cost of $100.In this situation, the amount of the $25 ($100 - $75) prior write-down in value should be reversed.

Question 28

An error that understates the ending inventory will cause the cost of goods sold for the period to be understated.

Question 29

An error that understates the ending inventory will cause assets to be understated.

Question 30

An error in the ending inventory of the current period will have a similar but inverse effect on profit of the next accounting period.

Question 31

A change in the method of cost determination for inventory must be disclosed in the financial statements.

Question 32

If net realizable value of the inventory is lower than its cost, the total assets on the statement of financial position and profit on the income statement will be reduced.

Question 33

In the average cost method used in a periodic inventory system, the same weighted average cost per unit is used to calculate all of the goods sold during the period.

Question 34

A high inventory turnover ratio indicates that minimal funds are tied up in inventory.

Question 35

The cost formula a company chooses should correspond as closely as possible to the actual physical flow of goods.

Question 36

Approximating the physical flow of inventory is not important when selecting an inventory cost formula.

Question 37

The method of inventory cost determination that best matches cost and revenues is FIFO.

Question 38

An error that overstates the ending inventory will cause profit for the period to be understated.

Question 39

A low inventory turnover ratio could mean a company is at risk of experiencing inventory shortages.

Question 40

The lower of cost and net realizable value should be applied to the total inventory, rather than to individual inventory items.

Question 41

A company just starting in business purchased three merchandise inventory items at the following prices.March 2, $75; March 7, $80; and March 15, $90.If the company sold two units for $125 each on March 10 and March 20, and used the FIFO cost formula in a perpetual inventory system, the gross profit for March would be
(a)$100.
(b)$95.
(c)$90.
(d)$75.

Question 42

Use the following information for questions
A company just starting business made the following four inventory purchases in June: On June 25, the company made its first sale when a local customer purchased 500 units for $3,500.The company uses a perpetual inventory system.
Using the FIFO cost method, the cost of the ending inventory on June 30 is
(a)$645.
(b)$695.
(c)$1,650.
(d)$1,700.

Question 43

To ensure the accuracy of the inventory during a physical inventory count,
(a)the employee is required to count all items twice for the sake of verification.
(b)the items counted are compared to the inventory account balance.
(c)a second employee or auditor counts the inventory and compares the result to the count made by the first employee.
(d)pre-numbered inventory tags need not be used.

Question 44

Use the following information for the month of July for questions
ABC Inc.uses the FIFO cost method in a perpetual inventory system.
Ending inventory at July 31 is
(a)$2,330.
(b)$720.
(c)$680.
(d)$550.

Question 45

Goods held on consignment are
(a)never owned by the consignee.
(b)included in the consignee's ending inventory.
(c)kept for sale on the premises of the consignor.
(d)not included in anyone's ending inventory.

Question 46

Inventory cost methods make assumptions about the flow of
(a)costs.
(b)goods.
(c)resale prices.
(d)fair values.

Question 47

A company just starting a business purchased three inventory items at the following prices: March 2, $75; March 7, $80; and March 15, $90.If the company sold one unit for $115 on March 10 and one unit for $125 on March 20 and uses the average cost method in a perpetual inventory system, what is the cost of ending inventory?
(a)$81.67
(b)$83.75
(c)$90.00
(d)$125.00

Question 48

Which of the following should not be included in an inventory count?
(a)goods taken home by a customer on approval
(b)purchased goods shipped FOB shipping point still in transit from a supplier
(c)consigned goods
(d)consigned goods and goods taken home by a customer on approval

Question 49

Use the following information for the month of July for questions
ABC Inc.uses the FIFO cost method in a perpetual inventory system.
If ABC Inc.used the average cost method instead of FIFO, gross profit from the July 8 sale would be
(a)higher.
(b)lower.
(c)the same.
(d)cannot be determined.

Question 50

Use the following information for questions
A company just starting business made the following four inventory purchases in June: On June 25, the company made its first sale when a local customer purchased 500 units for $3,500.The company uses a perpetual inventory system.
Using the average cost method, the cost of the ending inventory on June 30 is
(a)$670.00.
(b)$690.45.
(c)$1,645.55.
(d)$1,675.00.

Question 51

Average Corp.purchased inventory as follows: March 3 300 units at $9
March 4 200 units at $10
March 7 100 units at $11
On March 5, Average sold 400 units for $17 each.The average unit cost to be used for the cost of goods sold on March 5, in a perpetual inventory system, is
(a)$9.40.
(b)$9.50.
(c)$9.67.
(d)$17.00.

Question 52

Use the following information for questions
A company just starting business made the following four inventory purchases in June: On June 25, the company made its first sale when a local customer purchased 500 units for $3,500.The company uses a perpetual inventory system.
Using the FIFO cost method, the amount of the cost of goods sold for June is
(a)$645.
(b)$695.
(c)$1,650.
(d)$1,700.

Question 53

The factor which determines whether or not goods should be included in a physical count of inventory is
(a)physical possession.
(b)ownership.
(c)management's judgement.
(d)whether or not the purchase price has been paid.

Question 54

To accurately determine inventory quantities, a company must
(a)use the perpetual inventory system.
(b)employ an independent company to conduct inventory counts.
(c)rely on the warehouse records.
(d)take a physical inventory.

Question 55

Use the following information for the month of July for questions
ABC Inc.uses the FIFO cost method in a perpetual inventory system.
The cost of goods sold for the July 8 sale was
(a)$950.
(b)$980.
(c)$989.
(d)$1,000.

Question 56

Use the following information for the month of July for questions
ABC Inc.uses the FIFO cost method in a perpetual inventory system.
Total cost of goods sold for the month of July is
(a)$2,330.
(b)$2,530.
(c)$2,830.
(d)$2,880.

Question 57

If goods in transit are shipped FOB destination,
(a)the seller has legal title to the goods until they are delivered.
(b)the buyer has legal title to the goods during transit.
(c)the transportation company has legal title to the goods while the goods are in transit.
(d)no one has legal title to the goods until they are delivered.

Question 58

Westcom Corporation's goods in transit at December 31 include (1) sales made FOB destination, (2) sales made FOB shipping point, (3) purchases made FOB destination, and (4) purchases made FOB shipping point.Which items should be included in Westcom's inventory at December 31?
(a)(2) and (3)
(b)(1) and (4)
(c)(1) and (3)
(d)(2) and (4)

Question 59

Use the following information for the month of July for questions
ABC Inc.uses the FIFO cost method in a perpetual inventory system.
The cost of goods sold for the July 9 sale was
(a)$475.
(b)$480.
(c)$495.
(d)$500.

Question 60

Use the following information for questions
A company just starting business made the following four inventory purchases in June: On June 25, the company made its first sale when a local customer purchased 500 units for $3,500.The company uses a perpetual inventory system.
The inventory cost formula that results in the highest gross profit for June is
(a)FIFO.
(b)average.
(c)Gross profit is the same under both cost formulas.
(d)not determinable.

Question 61

Gene's Used Cars uses the specific identification method of costing inventory.During March, Gene purchased three cars for $5,000, $6,500, and $8,000, respectively.During March, two cars are sold for $7,500 each.Gene determines that at March 31, the $8,000 car is still on hand.What is Gene's cost of goods sold for March?
(a)$8,000
(b)$11,500
(c)$14,500
(d)$15,000

Question 62

Which of the following statements regarding inventories is correct?
(a)FIFO assumes that the costs of the earliest goods acquired are the last to be sold.
(b)It is generally good business management to sell the most recently acquired goods first.
(c)Under FIFO, the ending inventory is based on the latest units purchased.
(d)FIFO seldom coincides with the actual physical flow of inventory.

Question 63

The specific identification method of costing inventories is used when the
(a)physical flow of units cannot be determined.
(b)company sells large quantities of relatively homogeneous items.
(c)company has sophisticated technology to account for its inventory.
(d)company sells a small number of expensive, easily distinguishable items.

Question 64

Two companies report the same cost of goods available for sale but each employs a different inventory cost formula.If the price of goods has increased during the period, then the company using
(a)FIFO will report lower ending inventory.
(b)Average cost will report lower ending inventory.
(c)FIFO will report higher cost of goods sold.
(d)Average cost will report lower cost of goods sold.

Question 65

Of the following businesses, which one would not be likely to use the specific identification method for inventory costing?
(a)piano store
(b)car dealership
(c)antique shop
(d)grocery store

Question 66

Management may be able to manipulate profit using
(a)the FIFO cost formula.
(b)specific identification.
(c)the average cost formula.
(d)need more information to answer.

Question 67

The selection of an appropriate inventory cost formula for a company is made by:
(a)external auditors.
(b)Canada Revenue Agency (CRA).
(c)industry standards.
(d)management.

Question 68

Use the following information for the month of June for questions
XYZ Inc.uses the average cost formula in a perpetual inventory system.
(Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)
The cost of goods sold for the June 10 sale is
(a)$545.60.
(b)$549.96.
(c)$550.00.
(d)$557.75.

Question 69

Which of the following statements regarding inventory cost determination methods is correct?
(a)A company may use more than one inventory cost determination method.
(b)A company should use the method that is easiest.
(c)A company must use the method that allows them to manage profit.
(d)A company may never change its inventory cost method once it has chosen it.

Question 70

A problem with the specific identification method is that
(a)inventories can be reported at actual costs.
(b)management can manipulate profit.
(c)matching is not achieved.
(d)lower of cost and net realizable value cannot be applied.

Question 71

The inventory cost determination method that results in the inventory value on the statement of financial position that is closest to its actual cost is
(a)FIFO.
(b)specific identification.
(c)average cost.
(d)either FIFO or average cost.

Question 72

Use the following information for the month of June for questions
XYZ Inc.uses the average cost formula in a perpetual inventory system.
(Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)
XYZ Inc.has an ending inventory on June 30 of
(a)$1,370.00
(b)$1,418.56.
(c)$1,429.90.
(d)$1,450.15.

Question 73

In a period of rising prices, which of the following inventory cost methods generally results in the lowest profit figure?
(a)average cost
(b)FIFO
(c)The inventory cost formula only affects the statement of financial position.
(d)Need more information to answer.

Question 74

The specific identification method of inventory cost determination must be used
(a)for goods that are produced and segregated for specific projects.
(b)when goods are not ordinarily interchangeable.
(c)when high priced goods are purchased.
(d)for goods that are produced and segregated for specific projects, and/or when goods are not ordinarily interchangeable.

Question 75

Use the following information for the month of June for questions
XYZ Inc.uses the average cost formula in a perpetual inventory system.
(Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)
The cost of goods sold for the June 8 sale is
(a)$1,480.00.
(b)$1,505.00.
(c)$1,527.68.
(d)$1,540.00.

Question 76

Which of the following should a business consider when choosing between the FIFO and average cost formulas?
(a)whether the method closely follows the physical flow of goods
(b)whether the method reports an inventory cost that approximates recent cost
(c)using the same method for inventory of similar nature and use
(d)all of the above.

Question 77

Use the following information for the month of June for questions
XYZ Inc.uses the average cost formula in a perpetual inventory system.
(Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)
Total cost of goods sold for the month of June is
(a)$2,914.65.
(b)$2,934.90.
(c)$2,946.24.
(d)$2,994.80.

Question 78

In a period of inflation (prices are rising), which inventory cost formula will result in higher profit?
(a)FIFO
(b)average cost
(c)Cost of goods sold for the period will be the same under both formulas.
(d)There would be no effect on profit.

Question 79

In a period of declining prices, which of the following inventory cost formulas generally results in the lowest inventory figure on the statement of financial position?
(a)average cost
(b)FIFO
(c)The figure would be the same under both FIFO and average cost.
(d)Need more information to answer.

Question 80

XYZ Inc.uses the average cost formula in a perpetual inventory system. (Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.) If XYZ Inc.was using the FIFO cost formula instead of average, gross profit from the June 8 sale would be
(a)higher.
(b)lower.
(c)the same.
(d)cannot be determined.