Deck 6: Reporting and Analyzing Inventory

Question 1

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

Answer 1

True

Question 2

The inventory cost formula that best matches cost and revenues is FIFO.

Answer 2

True

Question 3

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 writedown in value should be reversed.

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

A company just starting in business purchased three merchandise inventory items at the following prices.March 2, $150; March 7, $160; and March 15, $180.If the company sold two units for $250 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)$200.
(b)$190.
(c)$180.
(d)$150.

Question 22

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 23

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 24

The results under FIFO in a perpetual inventory system are the same as in a periodic inventory system.

Question 25

Use the following information for questions
A company just starting its 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 formula, the cost of the ending inventory on June 30 is
(a)$645.
(b)$695.
(c)$1,650.
(d)$1,700.

Question 26

Use the following information for questions
A company just starting its 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 formula, the amount of the cost of goods sold for June is
(a)$645.
(b)$695.
(c)$1,650.
(d)$1,700.

Question 27

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

Question 28

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

Question 29

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

Question 30

A company just starting a business purchased three inventory items at the following prices: March 2, $150; March 7, $160; and March 15, $180.If the company sold one unit for $230 on March 10 and one unit for $250 on March 20 and uses the average cost formula in a perpetual inventory system, what is the cost of ending inventory?
(a)$163.34
(b)$167.50
(c)$180.00
(d)$250.00

Question 31

Goods in transit shipped
(a)FOB shipping point should be included in the buyer's ending inventory.
(b)FOB destination should not be excluded from the buyer's ending inventory.
(c)FOB shipping point should not be included in the buyer's ending inventory.
(d)FOB destination should not be included in the seller's ending inventory.

Question 32

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

Question 33

In periods of falling prices
(a)FIFO will result in a higher ending inventory valuation than the average cost formula.
(b)FIFO will result in a higher cost of goods sold than the average cost formula.
(c)the average cost formula will result in a higher cost of goods sold than the FIFO cost formula.
(d)the average cost formula will result in a lower ending inventory valuation than the FIFO cost formula.

Question 34

In the average cost formula 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 35

The factor that 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 36

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 37

The specific identification cost formula may be used when:
(a)goods are interchangeable.
(b)goods are not unique.
(c)goods can not be distinguished from one another.
(d)goods are individually identifiable.

Question 38

Cost of goods available for sale is:
(a)beginning inventory + cost of goods sold.
(b)cost of goods sold + purchases.
(c)purchases + ending inventory.
(d)ending inventory + cost of goods sold.

Question 39

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 40

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

Question 41

Use the following information for the month of July for questions
ABC Inc.uses the FIFO cost formula 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 42

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

Question 43

Use the following information for the month of July for questions
ABC Inc.uses the FIFO cost formula in a perpetual inventory system.

If ABC Inc.used the average cost formula instead of FIFO, gross profit from the July 8 sale would be
(a)higher.
(b)lower.
(c)the same.
(d)cannot be determined.

Question 44

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.

Question 45

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 46

Use the following information for the month of July for questions
ABC Inc.uses the FIFO cost formula 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 47

Use the following information for the month of July for questions
ABC Inc.uses the FIFO cost formula 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 48

Use the following information for questions
A company just starting its 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 49

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 50

Anderson's Used Cars uses the specific identification formula of costing inventory.During March, Anderson purchased three cars: a Honda Civic for $6,200, a Chevy Malibu for $7,300, and a Ford Pinto $8,400, respectively.During March, two cars are sold for $8,600 each.Anderson determines that at March 31, the Ford Pinto is still on hand.What is Anderson's cost of goods sold for March?
(a)$8,400
(b)$13,500
(c)$15,700
(d)$17,200

Question 51

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)$2,934.96.
(c)$2,946.24.
(d)$2,994.80.

Question 52

Use the following information for questions
A company just starting its 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 formula, the cost of the ending inventory on June 30 is
(a)$670.00.
(b)$690.50.
(c)$1,645.55.
(d)$1,675.00.

Question 53

Mandy Corp.purchased inventory as follows: On March 5, Mandy sold 600 units for $18 each.The average unit cost to be used for the cost of goods sold on March 5, in a perpetual inventory system, is
(a)$18.80.
(b)$19.40.
(c)$25.00.
(d)$16.67.

Question 54

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 55

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

Question 56

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 57

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

Question 58

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 59

Use the following information for the month of July for questions
ABC Inc.uses the FIFO cost formula in a perpetual inventory system.

Ending inventory at July 31 is
(a)$2,330.
(b)$720.
(c)$680.
(d)$550.

Question 60

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 61

The specific identification formula 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 62

Selection of an inventory cost formula by management should be influenced most by the
(a)fiscal year end.
(b)physical flow of goods.
(c)goal of reporting inventory at its lowest cost.
(d)income tax effects.

Question 63

The specific identification formula of inventory costing
(a)always maximizes a company's net income.
(b)always minimizes a company's net income.
(c)has no effect on a company's net income.
(d)may enable management to manipulate net income.

Question 64

Which cost formula smooths the effects of price changes?
(a)specific identification
(b)FIFO
(c)average cost
(d)lower of cost and net realizable value

Question 65

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 66

Which cost formula provides the better (1) statement of income and (2) statement of financial position valuations, respectively?
(a)(1)average and (2)FIFO
(b)(1)FIFO and (2)average
(c)(1)FIFO and (2)FIFO
(d)(1)average and (2)average

Question 67

The cost of goods available for sale is allocated between
(a)beginning inventory and ending inventory.
(b)beginning inventory and cost of goods on hand.
(c)beginning inventory and cost of goods purchased.
(d)ending inventory and cost of goods sold.

Question 68

During a period of inflation, using ___ will approximate a company's current cost of ending inventory.
(a)the average cost formula
(b)FIFO
(c)the lower of cost and net realizable value
(d)both FIFO and the average cost formula

Question 69

The inventory cost formula 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 70

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 71

Which of the following is not a guideline when choosing between whether to use FIFO or the average cost method?
(a)Use the same cost formula for all inventories of a similar nature and use.
(b)Select the cost formula that best matches costs and revenues.
(c)Report an inventory cost on the statement of financial position that is close to the inventory's recent cost.
(d)Choose a cost formula that corresponds as closely as possible to the physical flow of goods.

Question 72

In a period of inflation (prices are rising), which inventory cost formula will result in higher net income?
(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 net income.

Question 73

The managers of Winning Ways Ltd.receive performance bonuses based on the company's net income.Which inventory cost formula are they likely to favour in periods of declining prices?
(a)FIFO
(b)average cost
(c)They would have no preference.
(d)Need more information to answer.

Question 74

The consistent application of an inventory cost formula is essential for
(a)neutrality.
(b)accuracy.
(c)comparability.
(d)relevance.

Question 75

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

Question 76

In a period of rising prices, which of the following inventory cost formulas generally results in the lowest net income 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 77

What is the impact on cost of goods sold, gross profit, net income before taxes and retained earnings, respectively, if inventory is understated?
(a)overstated; understated; understated; understated.
(b)understated; overstated; understated; overstated.
(c)overstated; understated; overstated; overstated.
(d)understated; overstated; overstated; overstated.

Question 78

An error
(a)in the ending inventory of the current period will have no effect on net income of the next accounting period.
(b)that understates the ending inventory will cause net income for the period to be overstated.
(c)that understates the ending inventory will cause assets to be understated.
(d)that understates the ending inventory will cause the cost of goods sold for the period to be understated.

Question 79

The specific identification method of inventory cost formula 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 80

Cost of goods available for sale consists of the
(a)cost of beginning inventory plus the cost of ending inventory.
(b)cost of ending inventory plus the cost of goods purchased during the year.
(c)cost of beginning inventory plus the cost of goods purchased during the year.
(d)difference between the cost of goods purchased and the cost of goods sold during the year.