Deck 6: Cost of Goods Sold and Inventory

Question 1

For a merchandising company, the cost of goods sold is subtracted from net sales to arrive at gross profit.

Answer 1

True

Question 2

The difference between the FIFO, LIFO, and average cost methods is that each of these methods of inventory costing makes a specific assumption about the flow of costs.

Answer 2

True

Question 3

Cost of goods sold is the difference between costs of goods available for sale and ending inventory.

Answer 3

True

Question 4

The weighted average cost is calculated by adding the units' costs from each purchase and then dividing by the number of purchases.

Question 5

A LIFO reserve represents the amount by which cost of goods sold on a FIFO basis exceeds the cost of goods sold on a LIFO basis for the current year.

Question 6

A LIFO liquidation occurs when a company sells more units than it buys during the period.

Question 7

Sales discounts decrease the cost of inventory acquired.

Question 8

The buyer must include goods purchased FOB shipping point in its inventory account if the goods are still in transit.

Question 9

During periods of declining purchase prices, LIFO produces the lowest amount of ending inventory relative to the other inventory costing methods.

Question 10

The lower of cost or market (LCM)rule violates the historical cost principle.

Question 11

Under the FIFO method of inventory costing, the units in the ending inventory represent the oldest purchase(s).

Question 12

Under the periodic inventory system, a physical inventory must be taken to determine cost of goods sold.

Question 13

During periods of stable purchase prices, FIFO produces the highest ending inventory relative to the other inventory costing methods.

Question 14

Under the LIFO method of inventory costing, the units in the ending inventory represent the most recent purchase(s).

Question 15

When merchandise is sold FOB destination, the seller is responsible for the shipping costs.

Question 16

With the perpetual inventory system, the inventory account is updated after each sale or purchase.

Question 17

If cost of goods sold does not equal the cost of merchandise purchased during the period, an adjustment must be made to correct the error.

Question 18

Cost of goods sold represents an outflow of a resource, inventory, which is caused by the sale of products.

Question 19

A company using a periodic inventory system must total the selling prices of the units on hand at the end of the period in order to value the ending inventory.

Question 20

Under a perpetual inventory system, each time goods are purchased, the inventory account is transferred to sales revenue.

Question 21

A Purchases account is not needed under a periodic inventory system.

Question 22

Shipping terms of ____________________ mean that the buyer pays shipping costs.

Question 23

During periods of rising prices, the ____________________ method results in the cost of goods sold expense on the income statement being a close approximation of the replacement cost of the goods sold.

Question 24

The inventory turnover ratio is a measure of how many times during a period a company sells off its inventory.

Question 25

Under the periodic method, the information on sales can be combined within any period because all purchases are assumed to occur before any sales transactions.

Question 26

Shipping terms of FOB Destination means that the shipping costs are paid by the ______.

Question 27

The excess of an inventory's value stated on a FIFO basis over its value stated on a LIFO basis is called a(n)____________________.

Question 28

A loss in inventory value caused by application of the lower of cost or market (LCM)rule is recorded in a "Loss from Impairment" account.

Question 29

When the shipping terms are FOB destination, the buyer must record transportation costs as an additional cost of acquiring the inventory under the perpetual inventory system.

Question 30

If ending inventory is overstated, then net income is overstated as well.

Question 31

When a company using LIFO experiences a partial or complete liquidation of its older, lower-priced inventory, its gross margin will be ____________________ for the period.

Question 32

Cost of goods sold is equal to beginning inventory plus the net cost of purchases minus _____.

Question 33

Under the _______________ inventory system, the inventory account is updated after each purchase or sale.

Question 34

The _______________ method most closely approximates replacement cost of inventory on the balance sheet.

Question 35

The amount recognized on the balance sheet as the cost of inventory will ultimately be recognized as a(n)____________________.

Question 36

The weighted average cost per unit must be continually updated under the perpetual inventory system.

Question 37

The inventory of a(n)____________________ consists of three categories: raw materials, work-in-process, and finished goods.

Question 38

Under a periodic inventory system, the Purchases account accumulates the cost of the inventory acquired during the period.

Question 39

The inventory turnover ratio is defined as cost of goods sold divided by average inventory.

Question 40

If ending inventory is understated, then cost of goods sold is understated.

Question 41

A departure from the cost basis of accounting may be necessary when the ____________________ of the inventory is less than its cost to the company.

Question 42

MATCHING
Match the inventory-related accounts to costs that may be included in inventories for retailers and manufacturers.
a. merchandise inventory
d. finished goods
b. raw materials
e. cost of goods sold
c. work-in-process
Cost of ingredients used to make a product.

Question 43

MATCHING
Match the inventory-related accounts to costs that may be included in inventories for retailers and manufacturers.
a. merchandise inventory
d. finished goods
b. raw materials
e. cost of goods sold
c. work-in-process
Costs to purchase goods ready to sell.

Question 44

Under a periodic inventory system, the ____________________ account accumulates the cost of inventory acquired during the period.

Question 45

Match the terms with the descriptions related to merchandise sales and purchases.
a.Transportation-in
e.Cost of goods available for sale
b.Perpetual inventory system
f.Periodic inventory system
c.Net purchases
g.FOB shipping point
d.FOB destination
h.Delivery expense
Shipping costs paid to acquire merchandise.

Question 46

Match the terms with the descriptions related to merchandise sales and purchases.
a.Transportation-in
e.Cost of goods available for sale
b.Perpetual inventory system
f.Periodic inventory system
c.Net purchases
g.FOB shipping point
d.FOB destination
h.Delivery expense
Relies on a count of inventory on the last day of the year to determine the amount on hand.

Question 47

Under the periodic inventory system, all purchases are assumed to occur before any ______.

Question 48

Match the terms with the descriptions related to merchandise sales and purchases.
a.Transportation-in
e.Cost of goods available for sale
b.Perpetual inventory system
f.Periodic inventory system
c.Net purchases
g.FOB shipping point
d.FOB destination
h.Delivery expense
The buyer must pay the shipping costs.

Question 49

The ratio of a company's cost of goods sold to its average inventory is called its __________.

Question 50

A company can calculate its average days to sell inventory by dividing 365 days per year by its _____.

Question 51

MATCHING
Match the inventory-related accounts to costs that may be included in inventories for retailers and manufacturers.
a. merchandise inventory
d. finished goods
b. raw materials
e. cost of goods sold
c. work-in-process
Cost of completed, unsold items.

Question 52

MATCHING
Match the inventory-related accounts to costs that may be included in inventories for retailers and manufacturers.
a. merchandise inventory
d. finished goods
b. raw materials
e. cost of goods sold
c. work-in-process
Cost of material, labor, and other production-related costs incurred to date in unfinished goods.

Question 53

Match the terms with the descriptions related to merchandise sales and purchases.
a.Transportation-in
e.Cost of goods available for sale
b.Perpetual inventory system
f.Periodic inventory system
c.Net purchases
g.FOB shipping point
d.FOB destination
h.Delivery expense
Requires updating of the inventory account at the time of each purchase and each sale.

Question 54

Under a periodic inventory system, shipping costs are not charged to the inventory asset account. Instead, such costs are charged to the ____________________ account.

Question 55

Match the terms with the descriptions related to merchandise sales and purchases.
a.Transportation-in
e.Cost of goods available for sale
b.Perpetual inventory system
f.Periodic inventory system
c.Net purchases
g.FOB shipping point
d.FOB destination
h.Delivery expense
The seller is responsible for the cost of delivering the merchandise to the buyer.

Question 56

Under the periodic inventory system, Net purchases = Purchases + ______________ - Purchase Discounts - Purchase Returns and Allowances.

Question 57

The understatement of ending inventories in one period leads to a(n)____________________ of cost of goods sold in the same period.

Question 58

MATCHING
Match the inventory-related accounts to costs that may be included in inventories for retailers and manufacturers.
a. merchandise inventory
d. finished goods
b. raw materials
e. cost of goods sold
c. work-in-process
Costs of completed items that have been sold to customers.

Question 59

Accountants define the market value of inventory as its ____________________.

Question 60

An overstatement error in the inventory account in the current period will result in an understatement of ____________________ in the subsequent period.

Question 61

Identify which inventory costing method achieves the effect listed in the following items. (Choices may be used more than once.)
a.FIFO method
c.Average cost method
b.LIFO method
d.Specific identification method
Prices are rising; ending inventory best approximates replacement cost with this method.

Question 62

Deeter Company, which sells auto parts, uses a perpetual inventory system. Identify the effects on the accounting equation. (Choices may be used more than once.)
a.Increase in assets and liabilities
b.Decrease in assets and liabilities
c.Increase in assets and stockholders' equity
d.Decrease in assets and stockholders' equity
e.Increase in liabilities and decrease in stockholders' equity
f.Decrease in liabilities and increase in stockholders' equity
Purchased merchandise on credit.

Question 63

Deeter Company, which sells auto parts, uses a perpetual inventory system. Identify the effects on the accounting equation. (Choices may be used more than once.)
a.Increase in assets and liabilities
b.Decrease in assets and liabilities
c.Increase in assets and stockholders' equity
d.Decrease in assets and stockholders' equity
e.Increase in liabilities and decrease in stockholders' equity
f.Decrease in liabilities and increase in stockholders' equity
Sold merchandise on credit to customers.

Question 64

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
a.Add to inventory cost
c.Not an inventory cost
b.Subtract from inventory cost
Paid for purchased goods within the discount period.

Question 65

Identify which inventory costing method achieves the effect listed in the following items. (Choices may be used more than once.)
a.FIFO method
c.Average cost method
b.LIFO method
d.Specific identification method
Prices are rising; ending inventory is lower with this method.

Question 66

Deeter Company, which sells auto parts, uses a perpetual inventory system. Identify the effects on the accounting equation. (Choices may be used more than once.)
a.Increase in assets and liabilities
b.Decrease in assets and liabilities
c.Increase in assets and stockholders' equity
d.Decrease in assets and stockholders' equity
e.Increase in liabilities and decrease in stockholders' equity
f.Decrease in liabilities and increase in stockholders' equity
Paid for merchandise outside of the discount period.

Question 67

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
a.Add to inventory cost
c.Not an inventory cost
b.Subtract from inventory cost
Freight costs incurred by the seller to ship goods to its customers.

Question 68

Deeter Company, which sells auto parts, uses a perpetual inventory system. Identify the effects on the accounting equation. (Choices may be used more than once.)
a.Increase in assets and liabilities
b.Decrease in assets and liabilities
c.Increase in assets and stockholders' equity
d.Decrease in assets and stockholders' equity
e.Increase in liabilities and decrease in stockholders' equity
f.Decrease in liabilities and increase in stockholders' equity
Recorded cash sales for the day.

Question 69

Identify which inventory costing method achieves the effect listed in the following items. (Choices may be used more than once.)
a.FIFO method
c.Average cost method
b.LIFO method
d.Specific identification method
Prices are declining; ending inventory with this method falls between the amounts for the other two methods.

Question 70

Identify which inventory costing method achieves the effect listed in the following items. (Choices may be used more than once.)
a.FIFO method
c.Average cost method
b.LIFO method
d.Specific identification method
Prices are rising; cost of goods sold is lower with this method.

Question 71

Identify which inventory costing method achieves the effect listed in the following items. (Choices may be used more than once.)
a.FIFO method
c.Average cost method
b.LIFO method
d.Specific identification method
Prices are declining; income taxes are higher with this method.

Question 72

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
a.Add to inventory cost
c.Not an inventory cost
b.Subtract from inventory cost
Invoice price paid for resale goods.

Question 73

Identify which inventory costing method achieves the effect listed in the following items. (Choices may be used more than once.)
a.FIFO method
c.Average cost method
b.LIFO method
d.Specific identification method
Prices are rising; profits are higher under this method.

Question 74

Deeter Company, which sells auto parts, uses a perpetual inventory system. Identify the effects on the accounting equation. (Choices may be used more than once.)
a.Increase in assets and liabilities
b.Decrease in assets and liabilities
c.Increase in assets and stockholders' equity
d.Decrease in assets and stockholders' equity
e.Increase in liabilities and decrease in stockholders' equity
f.Decrease in liabilities and increase in stockholders' equity
Collected cash from a customer for payment within the discount period.

Question 75

Identify which inventory costing method achieves the effect listed in the following items. (Choices may be used more than once.)
a.FIFO method
c.Average cost method
b.LIFO method
d.Specific identification method
Prices are declining; gross margin is higher with this method.

Question 76

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
a.Add to inventory cost
c.Not an inventory cost
b.Subtract from inventory cost
Returned goods to the seller.

Question 77

Deeter Company, which sells auto parts, uses a perpetual inventory system. Identify the effects on the accounting equation. (Choices may be used more than once.)
a.Increase in assets and liabilities
b.Decrease in assets and liabilities
c.Increase in assets and stockholders' equity
d.Decrease in assets and stockholders' equity
e.Increase in liabilities and decrease in stockholders' equity
f.Decrease in liabilities and increase in stockholders' equity
Granted a customer a credit on its balance due for goods that were returned.

Question 78

Deeter Company, which sells auto parts, uses a perpetual inventory system. Identify the effects on the accounting equation. (Choices may be used more than once.)
a.Increase in assets and liabilities
b.Decrease in assets and liabilities
c.Increase in assets and stockholders' equity
d.Decrease in assets and stockholders' equity
e.Increase in liabilities and decrease in stockholders' equity
f.Decrease in liabilities and increase in stockholders' equity
Gave a customer a cash refund.

Question 79

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
a.Add to inventory cost
c.Not an inventory cost
b.Subtract from inventory cost
Freight costs incurred by the buyer to ship goods to its place of business.

Question 80

Identify which inventory costing method achieves the effect listed in the following items. (Choices may be used more than once.)
a.FIFO method
c.Average cost method
b.LIFO method
d.Specific identification method
Prices are declining; ending inventory is lower with this method.