Deck 8: Cost-Based Inventories and Cost of Sales

Question 1

Inventories are assets consisting of goods owned by the business and held for future sale or for use in the manufacture of goods for sale.

Answer 1

True

Question 2

The gross profit method may be used to estimate inventory during interim periods when a full physical count cannot be performed,or to test the reasonableness of a physical count.

Answer 2

True

Question 3

Under a periodic inventory system,cost of goods sold is a residual amount and,for all practical purposes,cannot be verified independently from the inventory records.

Answer 3

True

Question 4

Goods held on consignment from a supplier should be included in the ending inventory count of the retailer.

Question 5

Sales taxes paid by the purchaser that cannot be claimed back will usually become a part of the cost of the inventory.

Question 6

A valuation allowance account will be used when a company can apply the Lower of Cost & NRV rules on an item-by-item basis.

Question 7

Under the Lower of Cost and Market (LCM) rules,inventory write-downs are irreversible.

Question 8

If ending inventories are overstated,net income is understated.

Question 9

When a perpetual inventory system is used,the inventory account is usually a control account maintained in the general ledger.

Question 10

Under a periodic inventory system,the ending inventory balance is computed as a residual amount.

Question 11

The primary difference between the inventory system of a manufacturing company and a retail company is that a retail company uses a periodic system and a manufacturing firm uses a perpetual system.

Question 12

Goods held on consignment for sale on commission should not be included in the inventory at year end.

Question 13

ASPE provides separate guidance for Biological Assets.

Question 14

An increase in ending inventories from one period to the next will result in a decrease in cash flows from operating activities when the indirect method is applied to compute these cash flows.

Question 15

The harmonization of the provincial sales tax and GST effectively results in a value-added tax (VAT).

Question 16

The purchases account used in a periodic inventory system contains a running balance of the inventory during the accounting period.

Question 17

Counter-balancing inventory errors have no effect on the financial statements whatsoever.

Question 18

If Company A were to ship goods to Company B under the terms f.o.b.shipping point and if the goods were destroyed in transit,the loss incurred on these goods ordinarily would not accrue to Company
A.

Question 19

Ideally,the lower-of-cost and NRV technique should be applied an item-by-item basis or by category when this is not possible.

Question 20

Inventory cost includes the total outlay required to acquire goods plus the cost to prepare the goods for sale.

Question 21

The weighted-average inventory method rarely is used with periodic inventory procedures.

Question 22

Harris company has items that were incorrectly omitted from purchases made in 2013,but entered correctly in ending inventory.These would have overstated pre-tax income and understated liabilities.

Question 23

M Company should include the following items in its merchandise inventory:

A)Goods purchased FOB destination still en route.
B)Goods purchased FOB shipping point still en route.
C)Goods sold by M Company FOB shipping point still en route.
D)Goods held on consignment from the B Company to M Company.

Question 24

Which of the following items should not be included in the inventory at year-end?

A)Goods that are owned by a company B) Goods returned by a customer
B)Goods out on consignment
C)Goods held on consignment for sale on commission

Question 25

Use of a perpetual inventory system versus a periodic inventory system may affect the application of the inventory cost flow methods.

Question 26

FIFO will produce the same ending inventory result regardless of whether a periodic or perpetual inventory system is used.

Question 27

Gross margin rate,mark-up,and cost percentage,are different names for the same relationship.

Question 28

The allocation of the cost of goods available for sale during a reporting period involves the flow of costs rather than the flow of units.

Question 29

The average cost method of inventory valuation can be applied in exactly the same way by using either the periodic or perpetual inventory system.

Question 30

The allowance method and the direct reduction method of reporting the holding losses on lower-of-cost or NRV inventory valuation will produce the same cost of goods sold amount.

Question 31

Items on Harris's ledger for inventory that are purchased and correctly debited to 2013 purchases,but improperly included in 2013 ending inventory would have overstated both asset and pre-tax income of 2013.

Question 32

Using the direct reduction method of reporting a holding loss for lower-of-cost or NRV valuation of inventory,any holding loss is merged into the cost of goods sold amount.

Question 33

The difference between the gross margin percentage and cost ratio is usually called the mark-up rate.

Question 34

Which one of the following should be excluded from inventories?

A)Goods in transit to which title is held
B)Shop worn goods saleable at a price lower than the regular sale price
C)Goods out on consignment
D)Goods held on consignment

Question 35

On a particular date,which of the following should be included in a company's inventory?

A)Goods in the company's warehouse which have been received from another company for sale on consignment
B)Goods sold through a sales contract the terms of which have been completed, but the goods are being held for the customer to call for at his convenience
C)Goods purchased and in transit f.o.b.destination
D)Goods held for sale in the possession of an agent of the company

Question 36

Sales taxes are subject to input tax credits while value-added (VAT) taxes are not.

Question 37

The same inventory costing method must be used on the income tax return,on the income statement,and in the ledger accounts of the company.

Question 38

When using the moving average method of inventory flow,it is necessary to re-compute a new average each time units are issued from the inventory.

Question 39

If purchases made in one year are mistakenly recorded the following year,this error will counterbalance,that is,there will be no effect on income over a 2-year period.

Question 40

F Corporation should include the following in its inventory:

A)Goods purchased FOB destination, still en route.
B)Goods held for pick-up by the buyer.
C)Goods it sold FOB shipping point, still en route.
D)Goods out on consignment to the M Company.

Question 41

The records of a company provided the following information at December 31,2001: $\begin{array} {| l|l| } \hline \text {invoice mailed. }&\$70\\\hline \text { Items purchased, fo.b. shipping point invoices mailed, items not yet en route}&104\\\hline \text { Items purchased, fo.b. destination, terms \( 5 / 10, \mathrm{n} / 30 \), received at warehouse. }&100\\\hline \text {Items held on consignment from another company. }&50\\\hline \text {Ending inventory \( 12 / 31 / 2001 \) (excluding above items). }&80\\\hline\end{array}$
Items en route to customers,f.o.b.destination What December 31,2001,inventory cost should the company report?

A)$224
B)$230
C)$245
D)$404

Question 42

Listed below are some items of inventory for a company at May 31,2001.A substantial portion of the merchandise is stored in a separate warehouse and the company transfers damaged goods to a special inventory account.The company policy is "satisfied customers." $\begin{array} {| l|l| l| } \hline(1)& \text { Items counted in warehouse, May 31, 2001}&\$70,000\\\hline(2)& \text { Items shipped today*, \( \mathrm{FOB} \) destination, invoice maled to customer}&70\\\hline(3)& \text {Invoice received for goods ordered, FOB destination, goods not yet received. }&800\\\hline(4)& \text { Items shipped today*. FOB shipping point, invoice mailed to customer}&400\\\hline\end{array}$
*Shipped after the count in (1) was made. The correct inventory to be shown on the May 31,2001 balance sheet would be:

A)$69,600
B)$70,000
C)$70,070
D)$70,470

Question 43

Which of the following should be included in the inventory cost of an item purchased?

A)Purchase discounts lost
B)Insurance premium on item during transit
C)Costs incurred to build a permanent display cabinet for this, and similar items
D)Costs to train employees on a new computerized inventory control system

Question 44

Which of the following note disclosure are NOT required under ASPE with respect to inventories?

A)Accounting policies and cost flows.
B)Inventory write-downs.
C)Amount of inventory expensed through cost of sales.
D)Carrying values of inventory by category.

Question 45

The weighted-average cost inventory cost flow method can be described by all of the following except:

A)Is generally used with a perpetual inventory system.
B)Is not subject to income manipulation.
C)Assigns the same unit cost to cost of goods sold and to ending inventory.
D)Involves assignment of the total cost of goods available for sale to cost of goods sold and ending inventory only at the end of the period.

Question 46

The specific cost identification inventory cost flow method has all of the following characteristics except:

A)It is especially applicable when small and expensive items are handled in large quantities.
B)It relates cost flow to the specific flow of physical goods.
C)It identifies the cost of each physical item available for sale with either the ending inventory or cost of goods sold.
D)It is particularly susceptible to income manipulation.

Question 47

A corporation compiled the information given below for their auditor.The corporation uses a periodic inventory system. $\begin{array}{|l|l|l|}\hline &2001&2002\\\hline \text { Purchases................. } & \$ 240 & \$ 160 \\\hline \text { Goods out on consignment .... } & 0 & 80 \\\hline \text { Beginning inventory } & 900 & ? \\\hline \text { Ending inventory } & ? & ? \\\hline \text { Physical inventory count .................... } & \text { Unavailable } & 240 \\\hline \text { Cost of goods sold. ............. } & 360 & ?\\\hline \end{array}$ What was the amount of cost of goods sold for 2002?

A)$620
B)$700
C)$780
D)$900

Question 48

When a perpetual inventory system is used:

A)Cost of goods sold is not a residual amount and its amount essentially is verifiable in the inventory records.
B)Goods out on consignment are removed from inventory.
C)There is apt to be less inventory control than when a periodic inventory system is used.
D)One journal entry is made at the time merchandise is sold.

Question 49

When determining the unit cost of an inventory item,which of the following should not be included?

A)Interest on loans obtained to purchase the item
B)Commissions paid when purchased
C)Freight costs on the item when purchased
D)Storage fees prior to sale

Question 50

Assume that a company records purchases net of discount.If the company bought merchandise valued at $10,000 on credit terms 3/15,n/30,the entry to record a payment for half of the purchase within the discount period would include a debit to:

A)Accounts payable for $4,850 and a credit to cash for $4,850
B)Accounts payable for $5,000 and a credit to cash for $5,000
C)Accounts payable for $4,850 and to interest expense for $150, and a credit to cash for $5,000
D)Accounts payable for $5,000 and to interest revenue for $150 and to cash for $4,850

Question 51

Lost Discounts indicates that the recorded cost of an item purchased for inventory is its:

A)Invoice price.
B)Invoice price plus any purchase discount already lost.
C)Invoice price less any purchase discount already taken.
D)Invoice price less the purchase discount allowable whether or not taken to date.

Question 52

When a periodic inventory system is used:

A)Cost of goods sold is a residual amount.
B)Ending inventory is transferred to expense and the beginning inventory is transferred to assets.
C)Two entries must be made when goods are purchased.
D)A purchases account is not used; all inventory purchase entries are debits to the inventory account.

Question 53

The average inventory costing method,which results in a changed unit inventory,cost after each successive purchase is:

A)Weighted average.
B)Moving average.
C)Specific cost.
D)Simple average.

Question 54

Which of the following would not be included in the merchandise inventory amount reported on X Company's balance sheet?

A)Items out on consignment to another company
B)Items purchased from a supplier and en route directly to a customer of X Company; the term is FOB destination; invoice received but not yet paid
C)Items shipped today FOB shipping point, invoice has been mailed to the customer
D)Items in the receiving department of X Company, returned by the customer, invoice has been mailed

Question 55

Purchase discounts should be reported as a(n):

A)Deduction from the purchase cost of the goods.
B)Adjustment in full to the ending inventory amount.
C)Contra inventory account.
D)Adjustment in full to cost of goods sold.

Question 56

All of the following correctly describe the average cost inventory cost flow method except:

A)A moving average cost is used with a perpetual inventory system only.
B)The average cost methods are based on the view that the cost of inventory on hand and the cost of goods sold during a period should be representative of all purchase costs available for the period.
C)A weighted-average unit cost is used with a periodic inventory system only.
D)A moving average cost is used with either a periodic or a perpetual inventory system.

Question 57

Application of the FIFO inventory costing method means that:

A)A periodic inventory system is used.
B)Cost of goods sold should reflect the most recent prices.
C)The cost of the last item purchased should be included in ending inventory.
D)The cost of the first item purchased should be included in ending inventory.

Question 58

Choose the correct statement concerning periodic and perpetual inventory systems.

A)Only the periodic system requires a physical count once per year
B)The balance in the inventory account is known twice per fiscal year under the periodic system
C)Both systems provide a means of estimating shrinkage loss
D)Only the periodic system ever requires an adjusting entry at the end of each year after the physical count

Question 59

Which of the following is not a true statement concerning a perpetual inventory system:

A)Physical inventory is counted from time to time primarily to verify the inventory records.
B)Detailed subsidiary records are maintained and the inventory account is a control account.
C)Information concerning the physical quantity of goods on hand is available from the accounting records at any time.
D)Shrinkage cannot be measured directly.

Question 60

A company uses a perpetual inventory system,and follows GAAP in preparing its external financial statements.At the end of 2002,the balance in the inventory account was $66,000; $6,000 of those goods were purchased f.o.b.shipping point and did not arrive until 2013.Purchases in 2013 were $30,000.The perpetual inventory showed an ending inventory of $72,000 for 2013.A physical count of the goods on hand at the end of 2013 showed an inventory of $60,000.What should the company report on its 2013 income statement for cost of goods sold?

A)$24,000
B)$30,000
C)$36,000
D)$42,000

Question 61

If the cost ratio used in the retail inventory method were overstated (e.g.,80 percent instead of 70 percent),the estimated cost of ending inventory would be:

A)more than its retail value.
B)correctly stated.
C)overstated.
D)understated.

Question 62

Which of the following behaviours is NOT unethical?

A)Delaying the write-down of obsolete inventories due to competitive pressures.
B)Recording false sales and purchases.
C)Selectively assigning costs to inventory.
D)Changing a company's accounting policy to match that of its competitors for comparative purposes.

Question 63

The gross margin method is frequently used for all of the following except to:

A)Estimate replacement cost of ending inventory lost or damaged.
B)Test the reasonableness of an inventory valuation made by some other means.
C)Estimate ending inventory for interim financial reports.
D)Estimate the required inventory quantity needed for the next period.

Question 64

The primary basis of accounting for inventories is cost.A departure from the cost basis of pricing the inventory is required when:

A)The general price level has changed materially.
B)The FIFO method of inventory valuation is adopted.
C)There is evidence that the replacement cost of the goods at the date they are sold will be less than their cost when purchased.
D)There is evidence that the net realizable value of the goods has declined.

Question 65

DEF Inc.entered into a non-cancellable commitment to purchase raw materials in the amount of $30,000 on December 31^st,2010.Replacement cost was estimated at $25,000 on November 30^th,2010 and this amount was not expected to change.Which of the following statements is correct?

A)This is an onerous contract.A loss must be accrued in the amount of $5,000.
B)This is not an onerous contract.A loss must be accrued in the amount of $5,000.
C)This is an onerous contract.However, the $5,000 loss should only be disclosed in the financial statements and not accrued.
D)This is not an onerous contract.

Question 66

A company uses a periodic inventory system and records purchases using the net method.The following information applies to 2013,which was the first year of operations: $$\begin{array} { l r } \text { Purchases, at invoice price } & \$ 135,000 \\\hline \text { Purchases returns, at invoice price............ } & 9,000 \\\hline \text { Ending inventory physical count, at net... } & 39,750 \\\hline \text { Inventory shortage, at net. } & 1,800\end{array}$$ Purchase terms were: 3/10/60. All discounts were taken except for those on the first $22,500 shipped.Cost of goods sold for 2013 was:

A)$86,250
B)$84,450
C)$82,470
D)$80,670

Question 67

ABC Inc.had net sales of $120,000 during 2013.Its finished goods inventories were valued at $20,000 on January 1^st,2013.During the year,$60,000 of goods was purchased for resale.The company has a gross profit percentage of 40%.What was the company's estimated inventory at December 31^st,2013 under the Gross Profit method?

A)$8,000.
B)$72,000.
C)$48,000.
D)$60,000.

Question 68

Which of the following is not relevant to the gross margin method of inventory valuation?

A)Gross margin percentage
B)Mark-up on cost
C)Cost percentage
D)Profit margin

Question 69

The following costs were associated with the acquisition of an inventory item purchased by a firm (the item is to be resold by the firm): $\begin{array}{l|l}\hline\text { Freight costs, FOB shipping point } & \$ 2,000 \\\hline \text { Sales and excise taxes } & 800 \\\hline \text { Interest on debt used to purchase item } & 600 \\\hline \text { Special material added to item by firm } & 900 \\\hline \text { Labour costs to add the special material } & 400 \\\hline\text { Gross invoice price } & 90,000\\\hline\end{array}$ Terms: 3/10,n/30 Payment was made on the 12^th day after purchase
What is the proper inventoriable cost for this item of inventory?

A)$91,400
B)$94,100
C)$92,000
D)$90,100

Question 70

From a theoretical viewpoint,which of the following costs would be considered inventoriable? $$\begin{array} { | l | l | l | } \hline & \text { Freight-in } & \text { Warehousing } \\\hline 1 & \text { Yes } & \text { Yes } \\\hline 2 & \text { No } & \text { Yes } \\\hline 3 & \text { Yes } & \text { No } \\\hline 4 & \text { No } & \text { No } \\\hline\end{array}$$

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Question 71

A company buys large recreational vehicles ("RVS") and sells them on credit.The company uses a perpetual inventory system and always pays for purchases within the discount period by borrowing.Information about the latest purchase of an RV is: $\begin{array} { l } \text {Purchase price. }&\$60,000\\ \text { Delivery charges.}&2,500\\ \text {Terms, on credit, \( 5 / 30, \mathrm{n} / 90 \) Insurance premium paid. }&3,000\\ \text {Cleaning and making ready for sale. }&250\\ \text {Interest on purchase loan. }&7,200\\ \text {Cost of permanent shed built to display the RV pending sale. }&3,750\\\end{array}$
The cost that should be assigned to the RV for inventory purposes is:

A)$65,750
B)$62,750
C)$59,750
D)$60,000

Question 72

The inventory records of a corporation provided the following information at the end of 2013: $\begin{array} { l } \text {Cost per unit. }&\$10,000\\ \text {Insurance premium paid per unit. }&500\\ \text { Financing expense per unit.}&600\\ \text { Cost of permanent security system per unit (allocated).}&1,500\\ \text {Freight per unit (when purchased). }&300\\ \text {Cost of permanent reusable display case for this product only, per unit. }&400\\ \text {Advertising expense per unit (allocated). }&1,000\\\end{array}$
What unit cost should be used for valuing inventory on hand at the end of 2013?

A)$10,800
B)$12,200
C)$12,800
D)$13,700

Question 73

A company completed the following transactions in the order given in its first year of operations: $\begin{array} { |l|l|l| } \hline&& \text { unit}\\\hline \text { transaction}& \text {units }& \text {coasts }\\\hline \text { Purchase.}&300&\$4.00\\\hline \text { Purchase.}&200&4.20\\\hline \text { Sales (@ \$8.00)}&280\\\hline \text { Purchase.}&400&4.40\\\hline \text { Sales (@ \$8.00)}&360\\\hline\end{array}$
Using the weighted-average inventory cost method (rounding each calculation to the nearest cent) the gross margin would be:

A)$2,463.78
B)$2,422.84
C)$2,433.20
D)$2,376.00

Question 74

The gross margin method of estimating inventory is inappropriate when:

A)A general price decline occurred during the year.
B)Beginning inventory is zero.
C)Some of the inventory is destroyed.
D)Inventory increased by a material amount during the year.
E)Reporting in external financial statements.

Question 75

The balance in a company's accounts payable at December 31,2012 was $900,000 before any necessary year-end adjustment relating to the following: Goods were in transit from a vendor to the company on December 31,2012.The invoice cost was $50,000,and the goods were shipped f.o.b.shipping point on December 29,2012.The goods were received on January 4,2013.
Goods shipped f.o.b.shipping point on December 20,2012 from a vendor to the company were lost in transit.The invoice cost was $25,000.On January 5,2013,the company filed a $25,000 claim against the common carrier.
Goods shipped f.o.b.destination on December 21,2012 from a vendor to the company were received on January 6,2013.The invoice cost was $15,000.
What amount should the company report as accounts payable on its December 31,2012 balance sheet?

A)$925,000
B)$940,000
C)$950,000
D)$975,000

Question 76

ABC Inc.had net sales of $120,000 during 2013.Its finished goods inventories were valued at $20,000 on January 1^st,2013.During the year,$60,000 of goods was purchased for resale.The company has a gross profit percentage of 40%.What was the company's cost of goods sold for 2013?

A)$8,000.
B)$72,000.
C)$48,000.
D)$60,000.

Question 77

A manufacturing company recorded the following data pertaining to raw material X: $$\begin{array} { | l | l | l | } \hline & \text { Units } & \\& \text { Received } & \text { Cost } \\\hline 1 / 1 / 2001 \text { Inventory } \ldots \ldots \ldots \ldots \ldots \ldots & 400&\$1.00\\\hline 1 / 8 / 2001 \text { Purchase } \ldots \ldots \ldots \ldots \ldots \ldots & 600 & \$ 1.10 \\\hline 1 / 12 / 2001 \text { Issue } \ldots \ldots \ldots \ldots \ldots \ldots \ldots & 800 & \$ 2.00 \\\hline\end{array}$$ The weighted average unit cost of raw material X at January 12,2001 for use in costing is:

A)$1.00
B)$1.05
C)$1.06
D)$1.10

Question 78

The following items were included in a corporation's inventory account at December 31,2013: $\begin{array} { l } \text {Including 40 percent mark-up on selling price }&\$14,000\\\text { Goods purchased, in transit, shipped fo.b. shipping point }&12,000\\\text { Goods held on consignment by the corporation}&9,000\\\end{array}$
Merchandise out on consignment,at sale price, The corporation's inventory account at December 31,2013 should be reduced by:

A)$14,600
B)$17,400
C)$23,000
D)$35,000

Question 79

The following information was available from the inventory records of a company for July 2008: $\begin{array} {| l|l| l|l| } \hline&& \text {unit }& \text {total }\\\hline& \text {units }& \text { cost}& \text { costs}\\\hline \text { Balance at July 1, 2008 .}&2,000&\$19.55&\$39,100\\\hline \text {Purchases: July \( 6,2008 \). }&1,500&20.60&30,900\\\hline \text {July 16,2008 }&3,400&21.50&73,100\\\hline \text { Sales: July 7, 2008}&(1,800)\\\hline \text { July 31, 2008}&(3,200)\\\hline \text { Balance at July 31, 2008 .}&1,900\\\hline\end{array}$
Assuming that the company uses the periodic inventory system,what would be the inventory valuation at July 31,2008,using the weighted-average inventory method (rounded to the nearest dollar)?

A)$39,046
B)$39,406
C)$39,900
D)$39,996

Question 80

In 2013,a company's records contained the following information about inventory.The company uses a periodic inventory system and records purchases using the net method. $\begin{array} { l } \text { Beginning inventory (at net)}&\$160\\ \text { Purchases (at invoice price).}&200\\ \text { Purchase terms, \( 5 / 10, \mathrm{n} / 30 \) Purchase returns (at invoice price).}&20\\ \text {Discounts lost. }&10\\ \text {Ending inventory (at net). }&66\\\end{array}$
What was the amount of 2013 cost of goods sold?

A)$274
B)$265
C)$264
D)$255