Deck 6: Inventories and Cost of Sales

Question 1

Most companies do not take a physical count of inventory each year, but rather rely on inventory records to determine the inventory value.

Answer 1

False

Question 2

The expense recognition (matching) principle is used to determine how much of the cost of goods available for sale is deducted from sales and how much is carried forward as inventory.

Answer 2

True

Question 3

The cost of an inventory item includes its invoice cost minus any discount, plus any added or incidental costs necessary to put it in a place and condition for sale.

Answer 3

True

Question 4

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

Question 5

One application of internal control when taking a physical count of inventory is the use of pre-numbered inventory tickets.

Question 6

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

Question 7

An advantage of the weighted average inventory method is that it tends to smooth out erratic changes in costs.

Question 8

The LIFO method of inventory valuation can result in a company's ending inventory being valued at less than the inventory's replacement cost because LIFO inventory leaves the oldest costs in inventory.

Question 9

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

Question 10

Goods in transit are automatically included in inventory regardless of whether title has passed to the buyer.

Question 11

Incidental costs for acquiring merchandise inventory, such as import duties, freight, storage, and insurance, should not be added to the cost of inventory.

Question 12

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

Question 13

FIFO is preferred when purchase costs are rising and managers have incentives to report higher income for reasons such as bonus plans, job security, and reputation.

Question 14

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

Question 15

In a period of rising purchase costs, LIFO usually gives a lower taxable income and therefore, yields a tax advantage.

Question 16

The consistency concept allows a company to use different accounting methods from period to period in order to maximize profits.

Question 17

An advantage of FIFO 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 18

A company must disclose any change in its inventory costing method in its financial statements.

Question 19

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

Question 20

If obsolete or damaged goods can be sold, they will be included in inventory at their original cost.

Question 21

Underwood had cost of goods sold of $8 million and its ending inventory was $2 million. Therefore, its days' sales in inventory equals 25 days.

Question 22

A merchandiser's ability to pay its short-term obligations depends on many factors including how quickly it sells its merchandise inventory.

Question 23

Determining the unit costs assigned to inventory items is one of the most important decisions in accounting for inventory.

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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 29

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

Question 30

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

Question 31

LIFO assumes that inventory costs flow in the order incurred.

Question 32

According to IRS guidelines, companies may use FIFO for financial reporting and LIFO for tax reporting.

Question 33

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

Question 34

Overstating beginning inventory will understate cost of goods sold and net income.

Question 35

Errors in the period-end inventory balance only affect the current period's records and financial statements.

Question 36

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

Question 37

An error in the period-end inventory balance will cause an error in the calculation of cost of goods sold.

Question 38

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

Question 39

The simple rule for inventory turnover is that a low ratio is preferable.

Question 40

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 41

Accounting principles require that inventory be reported at the market value (cost) of replacing inventory when cost is lower than market value.

Question 42

The lower of cost or market rule for inventory valuation is always applied to individual units separately rather than to major categories of inventory or to the entire inventory.

Question 43

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

Question 44

A company has inventory with a selling price of $451,000, a market value of $223,000 and a cost of $241,000. According to the lower of cost or market, the inventory should be written down to
$223,000.

Question 45

The costs of goods purchased will vary under the different inventory methods of specific identification, FIFO, LIFO, and weighted average.

Question 46

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

Question 47

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 48

Accounting principles require that inventory be reported at the market value (cost) of replacing inventory when market value is lower than cost.

Question 49

Damaged and obsolete goods that can be sold:

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

Question 50

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

Question 51

A company's total cost of inventory was $329,000 and its current replacement cost is $307,000. Under the lower cost or market, the amount reported should be $329,000.

Question 52

The reasoning behind the retail inventory method is that if we can get a good estimate of the cost-to-retail ratio, we can multiply ending inventory at retail by this ratio to estimate ending inventory at cost.

Question 53

Using the retail inventory method, if the cost to retail ratio is 70% and ending inventory at retail is
$145,000, then estimated ending inventory at cost is $207,143.

Question 54

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

Question 55

A company's cost of inventory was $219,500. Due to phenomenal demand the market value of its inventory increased to $221,700. This company should record the inventory at its market value.

Question 56

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

Question 57

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

Question 58

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

Question 59

The choice of an inventory valuation method has little to no impact on gross profit and cost of sales.

Question 60

In the retail inventory method of inventory valuation, the retail amount of inventory refers to its dollar amount measured using selling prices of inventory items.

Question 61

Regardless of the inventory costing system used, cost of goods available for sale must be allocated at the end of the period between

A) net purchases during the period and ending inventory.
B) beginning inventory and cost of goods sold.
C) ending inventory and beginning inventory.
D) ending inventory and cost of goods sold.
E) beginning inventory and net purchases during the period.

Question 62

The inventory valuation method that has the advantages of assigning an amount to inventory on the balance sheet that approximates its current cost, and also mimics the actual flow of goods for most businesses is:

A) Lower of cost or market.
B) Specific identification.
C) FIFO.
D) Weighted average.
E) LIFO.

Question 63

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

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

Question 64

The full disclosure principle:

A) Requires that companies use the same accounting method for inventory valuation period after period.
B) Is not subject to the consideration of materiality.
C) Prescribes that the notes to the financial statements report the change from one inventory valuation method to another.
D) Is also called the consistency principle.
E) Is only applied to retailers and manufacturers.

Question 65

Merchandise inventory includes:

A) All goods in transit.
B) All goods on consignment.
C) Only damaged goods.
D) All goods owned by a company and held for sale.
E) Only non-damaged goods.

Question 66

Since an error in the period-end inventory causes an offsetting error in the next period:

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

Question 67

Consignment goods are:

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

Question 68

Costs included in the Merchandise Inventory account can include all of the following except:

A) Damaged inventory that cannot be sold.
B) Storage.
C) Invoice price minus any discount.
D) Insurance.
E) Transportation-in.

Question 69

The consistency concept:

A) Is also called the full disclosure principle.
B) Is also called the matching principle.
C) Requires a company to use one method of inventory valuation exclusively.
D) Prescribes a company use the same accounting method of inventory valuation, an exception being when a change from one method to another will improve its financial reporting.
E) Requires that all companies in the same industry use the same accounting methods of inventory valuation.

Question 70

Internal controls that should be applied when a business takes a physical count of inventory should include all of the following except:

A) A manager confirms that all inventories are ticketed only once.
B) Counters of inventory should be those who are responsible for the inventory.
C) Counters confirm the validity of inventory existence, amounts, and quality.
D) Prenumbered inventory tickets.
E) Second counts by a different counter.

Question 71

Companies can and often do use different costing methods for financial reporting and tax reporting. An exception to this is the:

A) FIFO inventory valuation method.
B) Matching principle.
C) Consistency concept.
D) LIFO conformity rule.
E) Full disclosure principle.

Question 72

Physical counts of inventory:

A) Are necessary to adjust the Inventory account to the actual inventory available.
B) Requires the use of hand-held portable computers.
C) Are not necessary under the cost-to benefit constraint.
D) Are not necessary under the perpetual system.
E) Must be taken at least once a month.

Question 73

Which of the following inventory costing methods will always result in the same values for ending inventory and cost of goods sold regardless of whether a perpetual or periodic inventory system is used?

A) FIFO and weighted-average cost
B) FIFO and LIFO
C) Specific identification and FIFO
D) LIFO and weighted-average cost
E) LIFO and specific identification

Question 74

Bedrock Company reported a December 31 ending inventory balance of $412,000. The following additional information is also available:
• ^{The ending inventory balance of $412,000 included $72,000 of consigned inventory for which} Bedrock was the consignor.
• ^{The ending inventory balance of $412,000 included $22,000 of office supplies that were stored in} the warehouse and were to be used by the company's supervisors and managers during the coming year.
Based on this information, the correct balance for ending inventory on December 31 is:

A) $412,000
B) $318,000
C) $340,000
D) $390,000
E) $362,000

Question 75

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

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

Question 76

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

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

Question 77

Buffalo Company reported a December 31 ending inventory balance of $412,000. The following additional information is also available:
• ^{The ending inventory balance of $412,000 did not include goods costing $48,000 that were} purchased by Buffalo on December 28 and shipped FOB destination on that date. Buffalo did not receive the goods until January 2 of the following year.
• ^{The ending inventory balance of $412,000 included damaged goods at their original cost of}
$38,000. The net realizable value of the damaged goods was $10,000.
Based on this information, the correct balance for ending inventory on December 31 is:

A) $374,000
B) $422,000
C) $460,000
D) $384,000
E) $438,000

Question 78

On December 31 of the current year, Plunkett Company reported an ending inventory balance of $215,000. The following additional information is also available:
• ^{Plunkett sold and shipped goods costing $38,000 to Savannah Enterprises on December 28 with} shipping terms of FOB shipping point. The goods were not included in the ending inventory amount of $215,000.
• ^{Plunkett purchased goods costing $44,000 on December 29. The goods were shipped FOB} destination and were received by Plunkett on January 2 of the following year. The shipment was a rush order that was supposed to arrive by December 31. These goods were included in the ending inventory balance of $215,000.
• ^{Plunkett's ending inventory balance of $215,000 included $15,000 of goods being held on} consignment from Carole Company. (Plunkett Company is the consignee.)
• ^{Plunkett's ending inventory balance of $215,000 did not include goods costing $95,000 that were} shipped to Plunkett on December 27 with shipping terms of FOB destination and were still in transit at year-end.
Based on the above information, the amount that Plunkett should report in ending inventory on December 31 is:

A) $209,000
B) $156,000
C) $200,000
D) $171,000
E) $194,000

Question 79

If a period-end inventory amount is reported in error, it can cause a misstatement in all of the following except:

A) Gross profit.
B) Cost of goods sold.
C) Current assets.
D) Net sales.
E) Net income.

Question 80

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) After the half-way point between the buyer and seller.
E) If the goods are shipped FOB destination.