Deck 5: Inventory and Cost of Goods Sold

Question 1

Which of the following would be included in the Cost of Goods Sold account on a merchandising company's income statement?

A) shipping costs from the manufacturer to the merchandiser
B) sales taxes
C) sales commissions
D) costs of advertising

Answer 1

A

Question 2

Cash received from the sale of inventory is shown on a cash flow statement as:

A) a financing activity
B) an operating activity
C) an investing activity
D) either an operating activity or a financing activity

Answer 2

B

Question 3

Sales Company Ltd. paid $10 wholesale for one unit of inventory for resale in the retail market. The same inventory can now be purchased for $9. The retail sales price of the inventory is $13,
However, it normally costs $2 to sell each unit. Using the lower-of-cost-and-net-realizable-value rule the inventory would be reported on Sales Company Ltd.'s balance sheet at:

A) $13
B) $11
C) $9
D) $10

Answer 3

D

Question 4

If ending inventory for the year ended December 31, 2019, is overstated by $25,000:

A) ending inventory for 2020 will be understated by $25,000
B) beginning inventory for 2020 will be understated by $25,000
C) net income for 2020 will be overstated by $25,000
D) net income for 2020 will be understated by $25,000

Question 5

When the FIFO method is used, cost of goods sold is assumed to consist of:

A) the oldest units
B) the units with the lowest per unit cost
C) the units with the highest per unit cost
D) the most recently purchased units

Question 6

In a merchandising business, gross profit is equal to sales revenue minus:

A) the sum of cost of goods sold and sales commissions
B) cost of goods sold
C) the sum of cost of goods sold, operating expenses, and prepaid expenses
D) the sum of cost of goods sold and operating expenses

Question 7

The following data are for Upholstery Limited for January 2020:
$\begin{array} { l r } \text { Beginning inventory } & \$ 25,000 \\\text { Net sales revenue } & 85,000 \\\text { Net purchases } & 35,000 \\\text { Gross profit percentage } & 30 \%\end{array}$

A) $15,000
B) $42,000
C) $59,500
D) $25,500

Question 8

Under a periodic inventory system, which of the following entries would record the purchase of merchandise on credit?

A) Debit Inventory and credit Accounts Payable
B) Credit Sales and debit Accounts Receivable
C) Debit Purchases and credit Accounts Payable
D) Credit Purchases and debit Cost of Goods Sold

Question 9

King Size International buys beds from a manufacturer for sale overseas. A shipment of beds to King Size was received slightly damaged. The manufacturer agreed to take an extra 10% off of its invoice price to King Size if it will keep and sell the beds to its customers. In this situation, King Size has received a:

A) purchase allowance
B) sales allowance
C) purchase return
D) purchase discount

Question 10

On December 2, a customer returned merchandise, with a selling price of $1,200 purchased on account, to a department store. Ignoring cost of goods sold, which journal entry should the department store prepare? Assume no sales discount was offered for early payment.

A) Debit Sales Revenue for $1,200 and credit Sales Returns and Allowances for $1,200.
B) Debit Sales Revenue for $1,200 and credit Accounts Receivable for $1,200.
C) Debit Sales Returns and Allowances for $1,200 and credit Accounts Receivable for $1,200.
D) Debit Sales Revenue for $1,200 and credit Cash for $1,200.

Question 11

Payment for the acquisition of inventory is shown on a cash flow statement as a(n):

A) financing activity
B) investing activity
C) operating activity
D) does not appear on a cash flow statement

Question 12

Using a perpetual inventory system, which of the following entries would record the cost of

A) Debit Cost of Goods Sold and credit Purchases
B) Debit Cost of Goods Sold and credit Inventory
C) Debit Inventory and credit Cost of Goods Sold
D) Credit Sales and debit Accounts Receivable

Question 13

FIFO tends to decrease cost of goods sold when:

A) taxes are decreasing
B) costs are increasing
C) costs are constant
D) costs are decreasing

Question 14

Perpetual inventory records provide information helpful in making all the following decisions except:

A) when to reorder
B) how quickly items of merchandise are selling
C) whether to extend credit to a customer
D) whether immediate delivery of merchandise is possible

Question 15

Given the following data, calculate the cost of goods sold for the 11/15 sale using the weighted-average method for a perpetual inventory system, rounding to the nearest dollar. (Do not round in the process of your calculations, only round your final answer.)
$\begin{array} { l l l } 1 / 1 & \text { Beginning inventory } & 50 \text { units at } \$ 10 \text { per unit } \\3 / 5 & \text { Purchases } & 30 \text { units at } \$ 14 \text { per unit } \\4 / 15 & \text { Sale } & 20 \text { units at } \$ 30 \text { per unit } \\5 / 30 & \text { Purchases } & 50 \text { units at } \$ 15 \text { per unit } \\11 / 15 & \text { Sale } & 60 \text { units at } \$ 32 \text { per unit } \\12 / 31 & \text { Ending inventory } & 50 \text { units }\end{array}$

A) $771
B) $1,920
C) $785
D) $720

Question 16

If a company uses a periodic inventory system, it will maintain all of the following accounts except:

A) Cost of Goods Sold
B) Inventory
C) Purchases
D) Sales

Question 17

Which of the following would be included in the Inventory account on a merchandising company's balance sheet?

A) sales commissions
B) shipping costs from the manufacturer to the merchandising company
C) delivery costs
D) advertising costs

Question 18

Note disclosure relating to inventory requires that management prepare financial reports thatdisclose all of the following types of information except:

A) forecasts of expected future earnings to help investors decide whether to invest in the company
B) information that facilitates comparison with other companies' financial reports
C) information that is relevant to decision making
D) the method of inventory costing used

Question 19

An error in the ending inventory for the year ended December 31, 2019:

A) has no effect on the 2019 financial statements but will create an error in the 2020 financial statements
B) affects only the 2019 financial statements
C) automatically creates errors in cost of goods in the 2019 and 2020 financial statements
D) automatically creates errors in the ending inventory balance in the 2019 and 2020 financial statements

Question 20

Data for Flat Panel Ltd. for the year ended December 31, 2020, are as follows:
$\begin{array} { l r } \text { Sales revenue } & \$ 130,000 \\\text { Cost of goods sold } & 90,000 \\\text { Beginning inventory } & 35,000 \\\text { Ending inventory } & 40,000\end{array}$

A) 2.25
B) 1.07
C) 2.40
D) 3.47

Question 21

The gross profit percentage is one of the most closely watched profitability measures. It can be calculated by:

A) dividing gross profit by net sales revenue
B) dividing gross profit by net accounts receivable
C) dividing cost of goods sold by average inventory
D) dividing cost of goods sold by net sales revenue

Question 22

One of the most common ways to "cook the books" with inventory is to:

A) overstate ending inventory
B) understate ending inventory unit prices
C) overstate cost of goods sold
D) understate ending inventory

Question 23

The largest expense category on the income statement of most merchandising companies is:

A) other expenses
B) cost of goods sold
C) selling expenses
D) administrative expenses

Question 24

Given the following data, what is the cost of purchases?
$\begin{array} { l r } \text { Sales revenue } & \$ 725,000 \\\text { Cost of goods sold } & 345,000 \\\text { Ending inventory } & 250,000 \\\text { Beginning inventory } & 120,000\end{array}$

A) $595,000
B) $465,000
C) $475,000
D) $370,000

Question 25

Average inventory is equal to:

A) cost of goods sold plus purchases divided by two
B) beginning inventory plus cost of goods sold divided by two
C) ending inventory plus cost of goods sold divided by two
D) beginning inventory plus ending inventory divided by two

Question 26

The journal entry to write inventory up to the net realizable value would be:

A) a credit to Losses
B) a credit to Inventory
C) a debit to COGS
D) a debit to Inventory

Question 27

Under a perpetual inventory system, which of the following entries would record the purchase of merchandise on credit?

A) Debit Inventory and credit Accounts Payable
B) Credit Purchases and Debit Cost of Goods Sold
C) Debit Purchases and credit Accounts Payable
D) Credit Sales and debit Accounts Receivable

Question 28

Computer software used in a perpetual inventory system:

A) still requires an inventory count on hand annually
B) makes journal entries for the cost of goods sold unnecessary
C) completely eliminates the need to physically count inventory
D) makes journal entries for inventory purchases unnecessary

Question 29

Given the following data, calculate the cost of ending inventory using the FIFO costing method:
$\begin{array} { l l l } 1 / 1 & \text { Beginning inventory } & 45 \text { units at } \$ 10 \text { per unit } \\2 / 25 & \text { Purchases } & 40 \text { units at } \$ 12 \text { per unit } \\6 / 15 & \text { Purchases } & 30 \text { units at } \$ 13 \text { per unit } \\9 / 20 & \text { Purchases } & 25 \text { units at } \$ 14 \text { per unit } \\12 / 31 & \text { Ending inventory } & 40 \text { units }\end{array}$

A) $560
B) $480
C) $545
D) $400

Question 30

If year-end inventory is reduced from cost to a lower net realizable value, which of the following accurately depicts the results?

A) The capital account balance is increased and beginning inventory of the next period is reduced by the same amount.
B) Cost of goods sold is increased and beginning inventory of the next period is decreased by the same amount.
C) Cost of goods sold is reduced and beginning inventory of the next period is reduced by the same amount.
D) Year-end inventory is reduced and cost of goods sold is reduced by the same amount.

Question 31

Victory Stables Ltd. for the year ended December 31, 2020, are as follows:
$\begin{array} { l r } \text { Sales revenue } & \$ 550,000 \\\text { Cost of goods sold } & 110,000 \\\text { Beginning inventory } & 80,000 \\\text { Ending inventory } & 60,000\end{array}$

A) 1.57
B) 0.20
C) 1.83
D) 0.80

Question 32

Inventory turnover is calculated by:

A) subtracting ending inventory from cost of goods sold
B) multiplying average inventory by cost of goods sold
C) dividing average inventory by cost of goods sold
D) dividing cost of goods sold by average inventory

Question 33

method for a periodic inventory system, rounding to the nearest dollar. (Do not round in the process of your calculations, only round your final answer.)
$\begin{array} { l l l } 1 / 1 & \text { Beginning inventory } & 50 \text { units at } \$ 10 \text { per unit } \\3 / 5 & \text { Purchases } & 30 \text { units at } \$ 14 \text { per unit } \\5 / 30 & \text { Purchases } & 25 \text { units at } \$ 15 \text { per unit } \\10 / 25 & \text { Purchases } & 20 \text { units at } \$ 16 \text { per unit } \\12 / 31 & \text { Ending inventory } & 45 \text { units }\end{array}$

A) $581
B) $720
C) $619
D) $450

Question 34

If ending inventory is overstated, then:

A) cost of goods sold will be overstated and ending inventory will be understated
B) cost of goods sold and ending inventory will both be understated
C) cost of goods sold and ending inventory will both be overstated
D) cost of goods sold will be understated and ending inventory will be overstated

Question 35

A business offers credit terms of 2/15, n/30. These terms indicate that:

A) the buyer can take a 2% discount if the bill is paid within 30 days of the invoice date
B) the total amount of the invoice must be paid within 15 days of the invoice date
C) a discount of 2% can be taken if the invoice is paid within 15 days of the invoice date
D) no discount is offered for early payment

Question 36

A company has gross revenue of $502,000; sales discounts of $2,900; and sales returns and allowances of $3,300. Net revenue is:

A) $502,000
B) $499,100
C) $495,800
D) $498,700

Question 37

If a company is using a perpetual inventory system, the balance in its inventory account three-quarters of the way through an accounting period would be equal to:

A) the amount of goods purchased during the period
B) the inventory on hand at the beginning of the period
C) the amount of inventory on hand at that date
D) the total of the beginning inventory plus goods purchased during the accounting period

Question 38

If ending inventory on December 31, 2019, is overstated, then:

A) gross profit for the year ended December 31, 2020, will be understated
B) gross profit for the year ended December 31, 2019, will be understated
C) cost of goods sold for the year ended December 31, 2019, will be overstated
D) cost of goods sold for the year ended December 31, 2020, will be understated

Question 39

Given the following data, calculate the cost of goods sold for the period using the weighted-average method for a periodic inventory system, rounding to the nearest dollar. (Do not round in the process of your calculations, only round your final answer.)
$\begin{array} { l l l } 1 / 1 & \text { Beginning inventory } & 40 \text { units at } \$ 12 \text { per unit } \\3 / 5 & \text { Purchases } & 20 \text { units at } \$ 14 \text { per unit } \\4 / 15 & \text { Sale } & 30 \text { units at } \$ 30 \text { per unit } \\5 / 30 & \text { Purchases } & 40 \text { units at } \$ 11 \text { per unit } \\11 / 15 & \text { Sale } & 50 \text { units at } \$ 32 \text { per unit } \\12 / 31 & \text { Ending inventory } & 20 \text { units }\end{array}$

A) $966
B) $2,500
C) $960
D) $980

Question 40

The gross profit rate is equal to:

A) net sales revenue minus gross profit on sales
B) cost of goods sold divided by net sales revenue
C) gross profit divided by net sales revenue
D) net sales revenue minus cost of goods sold

Question 41

An understatement in ending inventory results in an overstatement of gross profit.

Question 42

A company may use more than one type of inventory method. For example it may use specific identification for one type of inventory and FIFO for another.

Question 43

FIFO tends to increase cost of goods sold when:

A) costs are increasing
B) costs are constant
C) costs are declining
D) FIFO will always yield the lowest possible cost of goods sold

Question 44

The specific identification cost method is frequently used for items with common characteristics, such as gallons of paint.

Question 45

Inventory errors counter balance in two consecutive periods.

Question 46

Consider the following data:

$\begin{array} { l r } \text { Ending inventory at cost } & \$ 115,000 \\\text { Ending inventory at market } & 119,000 \\\text { Cost of goods sold (before consideration of LCNRV rule) } & 165,000\end{array}$

A) Ending Inventory balance will be $115,000.
B) Ending Inventory balance will be $119,000.
C) Cost of Goods Sold will be $161,000.
D) Cost of Goods Sold will be $169,000.

Question 47

An error in the valuation of beginning inventory in the current period will affect the following year's net income.

Question 48

FIFO income typically is less realistic compared to the net income under weighted-average cost.

Question 49

When applying the lower-of-cost-or-net-realizable-value rules to ending inventory valuation, net realizable value generally refers to the cost at which the company could sell a unit of inventory.

Question 50

A firm can change their inventory costing method if it provides more reliable and relevant information.

Question 51

Given the following data, what is the cost of beginning inventory?
$\begin{array} { l r } \text { Sales revenue } & \$ 1,450,000 \\\text { Cost of goods sold } & 845,000 \\\text { Ending inventory } & 310,000 \\\text { Purchases } & 950,000\end{array}$

A) $415,000
B) $1,485,000
C) $205,000
D) $1,035,000

Question 52

The gross profit percentage can be calculated by dividing cost of goods sold by net sales revenue.

Question 53

All of the following are deducted from the purchase price of inventory in determining cost of goods sold except:

A) purchase returns
B) freight in
C) purchase discounts
D) purchase allowances

Question 54

If ending inventory for the year ended December 31, 2019, is understated, this error will cause shareholders' equity to be:

A) understated at the end of 2019 and overstated at the end of 2020
B) overstated at the end of 2019 and understated at the end of 2020
C) correctly stated at the end of 2019 and overstated at the end of 2020
D) understated at the end of 2019 and correctly stated at the end of 2020

Question 55

FIFO uses "old" inventory costs for revenue.

Question 56

When using the weighted-average cost method to determine the cost of inventory sold, the weighted-average cost per unit is calculated as the:

A) cost of goods available for sale divided by the number of units available for sale
B) cost of goods in ending inventory divided by the number of units in ending inventory
C) cost of goods sold divided by the number of units sold
D) cost of goods sold divided by the average number of units in inventory

Question 57

A perpetual inventory system offers all the following advantages except:

A) it enhances internal control
B) it is less expensive than a periodic system
C) it helps salespeople determine whether there is a sufficient supply of inventory on hand to fill customer orders
D) inventory balances are always current

Question 58

Given the following data, what is cost of goods sold as determined under the FIFO method?
$\begin{array} { l } \text { \text { Sales revenue }}& 350 \text { units at } \$ 35\\ \text {per unit Beginning inventory }&120\text { units } \\ \text {at \( \$ 15 \) per unit Purchases }&400 \\ \text { units at \( \$ 20 \) per unit }& \\\end{array}$

A) $6,400
B) $7,000
C) $4,600
D) $5,250

Question 59

inventory system rounded to the nearest whole dollar? (Do not round in the process of your calculations, only round your final answer.)
$\begin{array} { l l } \text { Sales revenue } & 100 \text { units at } \$ 15 \text { per unit } \\\text { Beginning inventory } & 40 \text { units at } \$ 9 \text { per unit } \\\text { Purchases } & 80 \text { units at } \$ 10 \text { per unit }\end{array}$

A) $180
B) $200
C) $300
D) $193

Question 60

In a time of increasing inventory costs, FIFO gives us a higher COGS number compared to the weighted average method.

Question 61

Inventory errors can be ignored because they counterbalance.

Question 62

When using the weighted-average cost method to determine the cost of inventory sold, the weighted-average cost per unit is calculated as the cost of goods available for sale divided by the number of units available for sale.

Question 63

A sharp decrease in the gross profit percentage is a potential indicator of trouble.

Question 64

Previously written down inventory does not need to be reassessed as it is at its lowest value.

Question 65

Understating ending inventory in the current period will understate cost of goods sold in the following period.

Question 66

Freight-in is the transportation cost, paid by the buyer, to move goods from the seller to the buyer.

Question 67

Sales taxes (GST/HST) paid by a merchandising company on its sales are normally included in the cost of goods sold account.

Question 68

Historically, perpetual inventory systems have been used to account for inventory items with a low unit cost.

Question 69

A purchase allowance is a decrease in the cost of purchases because the purchaser returned goods to the supplier.

Question 70

In a perpetual inventory system, businesses maintain a continuous record for each inventory item.

Question 71

The lower-of-cost-or-net-realizable-value rule applies only when a company uses the FIFO
inventory valuation method.

Question 72

Sales commissions are not normally included in the cost of goods sold account.

Question 73

Ending inventory under FIFO reflects the cost of goods most recently acquired.

Question 74

Inventory turnover is calculated by dividing average inventory by cost of goods sold.

Question 75

If a company makes an error when counting ending inventory in 2019, the effect of the error will cancel out at the end of 2020.

Question 76

In a merchandising business, gross profit is the difference between sales revenue and the cost of goods sold.

Question 77

Comparability in accounting means that a company must strictly perform proper accounting only for items and transactions that are significant to the financial statements of a business.

Question 78

Companies are required to disclose the inventory accounting methods in the notes as well as the substance of all material transactions that affect the proper valuation of the inventory.

Question 79

Overstating ending inventory in the current period will understate the following year's net income.