Deck 5: Reporting and Analyzing Inventories

Question 1

If damaged and obsolete goods cannot be sold,they are not included in inventory.

Answer 1

True

Question 2

Not many companies take a physical count of inventory each year as they rely primarily on inventory records alone to determine the inventory value.

Answer 2

False

Question 3

LIFO is the preferred inventory costing method when costs are rising and managers have incentives to report higher income.When income is higher,managers may earn bonuses and have more job security and a better reputation.

Answer 3

False

Question 4

All incidental costs of inventory acquisition and handling,whether necessary or not,are assigned to inventory.

Question 5

If the seller is responsible for paying freight charges,then ownership of inventory passes when goods arrive at their destination.

Question 6

Incidental costs most commonly added to the costs of inventory include import duties,freight,storage,and insurance.

Question 7

The Inventory account is a controlling account for the inventory subsidiary ledger that contains a separate record for each individual product.

Question 8

When taking a physical count of inventory,the use of prenumbered inventory tickets assists in the control process.

Question 9

The matching principle is used by some companies to avoid allocating incidental inventory costs to cost of goods sold.

Question 10

An advantage of the weighted average inventory method is that it tends to smooth out the effects of price changes.

Question 11

Whether prices are rising or falling,FIFO always will yield the highest gross profit and net income.

Question 12

A company can change its inventory costing method without mentioning this change in its financial statements since it is a decision made by internal management.

Question 13

In a period of rising prices,FIFO usually gives a lower taxable income,which leads to an advantage when it comes to paying income tax.

Question 14

If obsolete or damaged goods can be sold,they will be included in inventory at their net realizable value.

Question 15

The cost of an inventory item includes its invoice cost and any added or incidental costs necessary to make it saleable less any discount.

Question 16

LIFO inventory value is often less than the inventory's replacement cost because LIFO inventory is valued using the oldest purchase cost.

Question 17

Goods in transit are automatically included in a company's inventory account.

Question 18

Net realizable value for damaged or obsolete goods is equal to the sales price plus the cost of making the sale.

Question 19

Goods on consignment are goods shipped by their owner,called the consignee,to another party called the consignor.

Question 20

The consistency concept requires a company to use the same accounting methods period after period,so that financial statements are comparable across periods.

Question 21

The four methods of inventory valuation are SIFO,FIFO,LIFO,and average cost.

Question 22

Managers are able to make important decisions correctly using erroneous inventory balances because inventory errors are self-correcting and,as a result,are less serious.

Question 23

There is no simple rule for inventory turnover,except that a high ratio is preferable provided inventory is adequate to meet demand.

Question 24

An overstatement of ending inventory will cause an overstatement of assets and an understatement of equity on the balance sheet.

Question 25

The inventory turnover ratio is computed by dividing average merchandise inventory by cost of goods sold.

Question 26

An advantage of LIFO is that it assigns the most recent costs to cost of goods sold and does a better job of matching current costs with revenues on the income statement.

Question 27

A company's cost of goods sold was $15,500 and its average merchandise inventory was $4,500.Its inventory turnover equals 3.4.

Question 28

It can be expected that companies that sell perishable goods have higher inventory turnover than companies that sell nonperishable goods.

Question 29

According to IRS requirements,companies are allowed to use FIFO for financial reporting and LIFO for tax reporting.

Question 30

An inventory error is sometimes said to be self-correcting because it causes an offsetting error in the next period.

Question 31

One of the most important decisions in accounting for inventory is determining the unit costs assigned to each inventory item.

Question 32

The days' sales in inventory ratio is computed by dividing ending inventory by cost of goods sold and multiplying the result by 365.

Question 33

GAAP and IFRS differ on the rules regarding LIFO as GAAP allows LIFO to assign costs to inventory and IFRS does not.

Question 34

Neither GAAP nor IFRS allow inventory to be adjusted upward beyond the original cost.

Question 35

A company's ability to pay its short-term obligations depends on many factors including how quickly it is able to sell its merchandise inventory.

Question 36

Errors in the period-end inventory balances only have an impact on the current period's records and financial statements.

Question 37

Toys "R" Us had cost of goods sold of $8,321 million and ending inventory of $2,027 million.Based on this,its days' sales in inventory is equal to 89 days.

Question 38

An understatement of the ending inventory balance will understate cost of goods sold and overstate net income.

Question 39

The full disclosure principle requires that the notes to the financial statements report a change in accounting method for inventory costing.

Question 40

An understatement of ending inventory will cause an understatement of assets and equity on the balance sheet.

Question 41

When LIFO is used with the periodic inventory system,cost of goods sold is assigned costs from the most recent purchases at the point of each sale,rather than from the most recent purchases for the period.

Question 42

A company has inventory with a market value of $217,000 and a cost of $241,000.According to the lower of cost or market,the inventory should be written down to $217,000.

Question 43

LIFO assumes that inventory costs flow in the order they were incurred.

Question 44

The FIFO inventory method assumes that costs for the most recently purchased items are the first to be charged to the cost of goods sold.

Question 45

Under LIFO,the most recent costs are assigned to ending inventory.

Question 46

Three key variables determine the dollar value of inventory: (1) inventory quantity, (2) costs of inventory,and (3) cost flow assumption.

Question 47

When units are purchased at different costs over time,it is simple to determine the cost per unit assigned to inventory.

Question 48

A company's cost of inventory was $317,500.Due to phenomenal demand for this product,the market value of its inventory increased to $323,000.According to the consistency principle,this company should write up the value of its inventory.

Question 49

The assignment of costs to the cost of goods sold and to inventory under FIFO is the same for both the perpetual and periodic inventory systems.

Question 50

In applying the lower of cost or market method to inventory valuation,market is defined as the current selling price.

Question 51

The conservatism constraint requires that when more than one estimate of the amounts that are to be received or paid in the future exist and these estimates are about equally likely,then the less optimistic amount is used.

Question 52

The choice of an inventory valuation method can have a major impact on gross profit and cost of sales.

Question 53

The dollar value assigned to goods purchased will differ under the different inventory valuation methods of specific identification,FIFO,LIFO,and weighted average.

Question 54

In applying the lower of cost or market method to inventory valuation,market is defined as the current replacement cost.

Question 55

The assignment of costs to cost of goods sold and to inventory using specific identification is the same for both the perpetual and periodic systems.

Question 56

The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.

Question 57

The lower of cost or market rule for inventory valuation must be applied to each individual unit separately and not to major categories of inventory or to the entire inventory.

Question 58

The assignment of costs to cost of goods sold and inventory using weighted average usually yields different results depending on whether a perpetual or periodic system is used

Question 59

The matching principle requires that the inventory valuation method follow the physical flow of inventory.

Question 60

Monthly or quarterly statements are called interim statements because they are prepared between the traditional annual statement dates.

Question 61

An error in the period-end inventory causes an offsetting error in the next period and therefore:

A)Managers can ignore the error.
B)It is sometimes said to be self-correcting.
C)It affects only income statement accounts.
D)If affects only balance sheet accounts.
E)Is immaterial for managerial decision making.

Question 62

Goods on consignment:

A)Are goods shipped by the owner to the consignee who sells the goods for the owner.
B)Are reported in the consignee's books as inventory.
C)Are goods shipped to the consignor who sells the goods for the owner.
D)Are not reported in the consignor's inventory since they do not have possession of the inventory.
E)Are always paid for by the consignee when they take possession of the goods.

Question 63

The understatement of the ending inventory balance causes:

A)Cost of goods sold to be overstated and net income to be understated.
B)Cost of goods sold to be overstated and net income to be overstated.
C)Cost of goods sold to be understated and net income to be understated.
D)Cost of goods sold to be understated and net income to be overstated.
E)Cost of goods sold to be overstated and net income to be correct.

Question 64

Which inventory valuation method assigns a value to the inventory on the balance sheet that approximates current cost and also mimics the actual flow of goods for most businesses?

A)FIFO
B)Weighted average
C)LIFO
D)Specific identification
E)First in still here

Question 65

The reliability of the gross profit method depends on a good estimate of the gross profit ratio.

Question 66

Physical inventory counts:

A)Are not necessary under the perpetual system.
B)Are necessary to measure and adjust for inventory shrinkage.
C)Must be taken at least once a month.
D)Require the use of hand-held portable computers.
E)Are not necessary under the cost-to benefit constraint.

Question 67

Using the retail inventory method,if the cost to retail ratio is 60% and ending inventory at retail is $45,000,then estimated ending inventory at cost is $27,000.

Question 68

During a period of steadily rising costs,the inventory valuation method that yields the lowest reported net income is:

A)Specific identification method
B)Average cost method
C)Weighted average method
D)FIFO method
E)LIFO method

Question 69

To avoid the time-consuming process of taking an inventory each year,the majority of companies use the gross profit method to estimate ending inventory.

Question 70

The inventory valuation method that tends to smooth out erratic changes in costs is:

A)FIFO
B)Weighted average
C)LIFO
D)Specific identification
E)WIFO

Question 71

Given the following items and costs as of the balance sheet date,determine the value of Light Company's merchandise inventory. - $2,000 goods sold by Light to another company.The goods are in transit and shipping terms are FOB shipping point.
- $3,000 goods sold by another company to Light.The goods are in transit and shipping terms are FOB shipping point.
- $4,000 owned by Light but in the possession of another company,the consignee.
- Damaged goods owned by Light that originally cost $5,000 but now have an $800 net realizable value.

A)$7,000
B)$7,800
C)$9,800
D)$9,000
E)$6,800

Question 72

Damaged and obsolete goods:

A)Are never included in inventory.
B)Are included in inventory at their full cost.
C)Are included in inventory at their net realizable value.
D)Should be disposed of immediately.
E)Are assigned a value of zero.

Question 73

The inventory valuation method that results in the lowest taxable income in a period of inflation is:

A)LIFO method
B)FIFO method
C)Weighted average cost method
D)Specific identification method
E)Gross profit method

Question 74

Given the following items and costs as of the balance sheet date,determine the value of Faltron Company's merchandise inventory. - $1,000 goods sold by Faltron to another company.The goods are in transit and shipping terms are FOB destination.
- $2,000 goods sold by another company to Faltron.The goods are in transit and shipping terms are FOB destination.
- $3,000 owned by Faltron but in the possession of another company,the consignee.
- Damaged goods owned by Faltron that originally cost $4,000 but now have a $500 net realizable value.

A)$10,000
B)$6,500
C)$5,500
D)$5,000
E)$4,500

Question 75

Goods in transit are included in a purchaser's inventory:

A)At any time during transit.
B)When the purchaser is responsible for paying freight charges.
C)When the supplier is responsible for freight charges.
D)If the goods are shipped FOB destination.
E)After the halfway point between the buyer and seller.

Question 76

The consistency concept:

A)Requires a company to consistently use the same accounting method of inventory valuation unless a change will improve financial reporting.
B)Requires a company to use one method of inventory valuation exclusively.
C)Requires that all companies in the same industry use the same accounting methods of inventory valuation.
D)Is also called the full disclosure concept.
E)Is also called the matching concept

Question 77

In the retail inventory method of inventory valuation,the retail amount of inventory refers to the dollar amount measured by looking at the selling prices of inventory items.

Question 78

Merchandise inventory includes:

A)All goods owned by a company and held for sale.
B)All goods in transit.
C)All goods on consignment.
D)Only damaged goods.
E)Only items that are on the shelf.

Question 79

The full disclosure principle:

A)Requires that when a change in inventory valuation method is made,the notes to the financial statements report the type of change,why it was made,and its effect on net income.
B)Requires that companies use the same accounting method for inventory valuation period after period.
C)Is not subject to the materiality principle.
D)Is only applied to retailers.
E)Is also called the consistency principle.

Question 80

The reasoning behind the retail inventory method is that if an accurate estimate of the cost-to-retail ratio is made,it can be multiplied by the ending inventory at retail to estimate ending inventory at cost.