Deck 5: Inventories and Cost of Goods Sold

Question 1

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

Answer 1

False

Question 2

Finished goods for a manufacturer are the equivalent of merchandise inventory for a retailer or wholesaler in that both represent the inventory of goods held for sale.

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

With the periodic inventory system,the Inventory account is updated after each sale or purchase of merchandise.

Question 5

Purchase discounts decrease the total cost of merchandise acquired.

Question 6

Cost of goods sold represents an outflow of an asset,inventory,from the sale of products.

Question 7

The three forms of inventory for a manufacturer are direct materials,direct labor,and finished goods.

Question 8

Credit terms of n/30 mean that the net amount of the invoice,less any returns or allowances,is due within 30 days of the date of the invoice.

Question 9

Sales revenue is an inflow of assets.

Question 10

On the income statement of a merchandising company,cost of goods sold is added to net sales to arrive at gross margin,or gross profit.

Question 11

Net purchases equals purchases less purchase returns,allowances,and discounts plus transportation-in.

Question 12

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

Question 13

The distinction between inventory and an operating asset is the intent of the owner.

Question 14

When inventory is sold by a wholesaler or retailer,it is recorded in a different account on the income statement than a manufacturer would use.

Question 15

The three distinct types of costs to a manufacturer are direct materials,direct labor,and manufacturing overhead.

Question 16

Like sales revenue,cost of goods sold represents an inflow of assets.

Question 17

If a customer returns merchandise which has already been paid for,the retailer may give either a cash refund or a credit on account.

Question 18

Purchases is the temporary account used in a perpetual inventory system to record acquisitions of merchandise.

Question 19

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

Question 20

Cost of goods sold is the difference between cost of goods sold available for sale and beginning inventory.

Question 21

The primary determinant in selecting an inventory costing method should be the ability of the method to accurately reflect the cost of goods sold of the period.

Question 22

The LIFO conformity rule requires that if a company uses LIFO in reporting income to stockholders,it also must use LIFO on its tax return.

Question 23

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 24

Specific identification relies on matching unit costs with the actual units sold.

Question 25

Changing inventory methods to take advantage of the tax breaks offered by LIFO is not a valid justification for a change in methods.

Question 26

Under FIFO,the units in the ending inventory represent the oldest purchase of the period.

Question 27

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

Question 28

FIFO results in the least amount of income before taxes,assuming a period of rising prices.

Question 29

Cost of goods available for sale is equal to beginning inventory less cost of goods sold.

Question 30

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

Question 31

When merchandise is sold FOB shipping point,the buyer is responsible for the shipping costs.

Question 32

According to the IRS's LIFO conformity rule,a company that chooses LIFO to report net income to its stockholders may not use LIFO in preparing its tax return.

Question 33

Under LIFO,the units in the ending inventory represent the most recent purchase of the period.

Question 34

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

Question 35

The gross profit ratio is computed by dividing net sales by gross profit.

Question 36

The gross profit ratio is calculated as gross profit divided by net income.

Question 37

Assets are unexpired costs,and expenses are expired costs.

Question 38

The value assigned to an asset such as inventory on the balance sheet determines the amount eventually recognized as an expense on the income statement.

Question 39

It important that the proper amount be assigned to inventory because the amount assigned to inventory will affect the amount eventually recorded as net sales.

Question 40

One problem with the weighted average cost method is that it allows management to manipulate income.

Question 41

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

Question 42

If a company has a number of days' sales in inventory equal to 60,that means that it takes about two months on average to sell its inventory.

Question 43

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

Question 44

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

Question 45

If the direct method is used to prepare the Operating Activities category of the statement of cash flows,the amount of cash paid to suppliers of inventory is shown as an addition in this section of the statement.

Question 46

The adjustment to write down inventory to its market value results in a loss on the income statement.

Question 47

Both U.S.GAAP and international financial reporting standards (IFRS)require the use of the lower-of-cost-or-market rule to value inventories.

Question 48

Ending inventory valued under the FIFO method will be the same regardless of whether the periodic system or the perpetual system is used.

Question 49

Moving average is the name given to the use of an average cost method used with a periodic inventory system.

Question 50

Whether LIFO costing is applied at the time each sale is made or only at the end of the period,both the periodic and perpetual systems will yield the same ending inventory under LIFO.

Question 51

Which one of the following types of inventory accounts would be used by a wholesaler or retailer?

A)Raw Materials Inventory
B)Work-in-Process Inventory
C)Finished Goods Inventory
D)Merchandise Inventory

Question 52

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

Question 53

Many countries prohibit the use of LIFO for tax or financial reporting purposes.

Question 54

Under the indirect method of preparing the statement of cash flows,a decrease in inventory is added to net income to determine cash flow from operating activities.

Question 55

The effect of a misstatement of the year-end inventory is limited to the net income for that year.

Question 56

Under the indirect method of preparing the statement of cash flows,an increase in accounts payable is added to net income to determine cash flow from operating activities.

Question 57

The lower the inventory turnover ratio,the less time inventory resides in storage.

Question 58

If a change in accounts payable was added back to net income on the statement of cash flows prepared using the indirect method,then the amount owed to suppliers during the period had decreased.

Question 59

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

Question 60

A counterbalancing inventory error is one where the error on the balance sheet is offset by the same amount of error on the income statement.

Question 61

George's Department Store
George's Department Store is a merchandising company that uses the periodic inventory system.Selected account balances are listed below:
$$\begin{array} { l r } \text { Sales } & \$ 200,000 \\\text { Purchases } & 90,000 \\\text { Inventory (beginning) } & 23,000 \\\text { Inventory (ending) } & 17,000 \\\text { Purchase returns and allowances } & 3,000 \\\text { Purchase discounts } & 7,000 \\\text { Transportation-in } & 4,000 \\\text { Sales discounts } & 8,000 \\\text { Sales returns and allowances } & 5,000\end{array}$$

-Refer to the account information for George's Department Store. Calculate cost of goods purchased.

A)$ 84,000
B)$ 90,000
C)$ 103,000
D)$ 117,000

Question 62

Which of the following statements regarding inventory is true?

A)Wholesalers and retailers incur a single type of cost,the purchase price,of the inventory they sell.
B)It is not unusual for inventories to account for half the total assets of a manufacturer.
C)Wholesalers and retailers buy merchandise and transform the product before offering it to resale to customers.
D)The inventory of a manufacturer takes three distinct forms-direct materials,direct labor,and finished goods.

Question 63

Anthony's Shoe Company uses a perpetual inventory system.The beginning balance in its Inventory account is $1,500,and the ending balance is $1,000.Cost of goods sold is $6,500.What was the amount of inventory purchased during the year?

A)$500
B)$6,000
C)$7,000
D)$7,500

Question 64

George's Department Store
George's Department Store is a merchandising company that uses the periodic inventory system.Selected account balances are listed below:
$$\begin{array} { l r } \text { Sales } & \$ 200,000 \\\text { Purchases } & 90,000 \\\text { Inventory (beginning) } & 23,000 \\\text { Inventory (ending) } & 17,000 \\\text { Purchase returns and allowances } & 3,000 \\\text { Purchase discounts } & 7,000 \\\text { Transportation-in } & 4,000 \\\text { Sales discounts } & 8,000 \\\text { Sales returns and allowances } & 5,000\end{array}$$

-Refer to the account information for George's Department Store. ?
Calculate net sales.

A)$187,000
B)$192,000
C)$195,000
D)$200,000

Question 65

Ending inventory is equal to the cost of merchandise on hand plus

A)merchandise in transit sold to customers FOB shipping point.
B)merchandise in transit sold to customers FOB destination point.
C)the cost of all inventory purchased during the period.
D)merchandise purchased in transit with terms FOB destination point.

Question 66

George's Department Store
George's Department Store is a merchandising company that uses the periodic inventory system.Selected account balances are listed below:
$$\begin{array} { l r } \text { Sales } & \$ 200,000 \\\text { Purchases } & 90,000 \\\text { Inventory (beginning) } & 23,000 \\\text { Inventory (ending) } & 17,000 \\\text { Purchase returns and allowances } & 3,000 \\\text { Purchase discounts } & 7,000 \\\text { Transportation-in } & 4,000 \\\text { Sales discounts } & 8,000 \\\text { Sales returns and allowances } & 5,000\end{array}$$

-Refer to the account information for George's Department Store. Determine gross profit.

A)$93,000
B)$97,000
C)$103,000
D)None of these choices

Question 67

Travelli Co.sold merchandise to Trapani Co.on account,$17,000,terms 2/15,net 45.The cost of the merchandise sold is $15,400.Travelli Co.issued an allowance for $1,750 for merchandise returned that originally cost $1,400.Trapani Co.paid the invoice within the discount period.What is amount of net sales from the above transactions?

A)$17,000
B)$15,250
C)$14,945
D)None of these choices

Question 68

Which one of the following would appear on the income statement of a merchandising company,but not on the income statement of a service company?

A)Cost of goods sold
B)Selling and administrative expenses
C)Net sales
D)Income tax expense

Question 69

Which one of the following best explains the distinction between inventory and an operating asset?

A)ownership
B)intent
C)cost
D)purchase price

Question 70

A customer returned damaged goods and was given an allowance.Which of the seller's accounts decreases?

A)Purchase Returns
B)Accounts Receivable
C)Sales Returns
D)Sales Revenue

Question 71

A company using the periodic inventory system has the following account balances: Merchandise Inventory at the beginning of the year,$3,600;Transportation-In,$650;Purchases,$10,700;Purchase Returns and Allowances,$1,950;Purchase Discounts,$330.The cost of goods purchased is equal to

A)$12,670.
B)$9,070.
C)$8,420.
D)$17,230.

Question 72

Takenson Corp.
Takenson Corp.is a merchandising company that uses the periodic inventory system.Selected account balances are listed below:
$$\begin{array} { l r } \text { Sales } & \$ 500,000 \\\text { Purchases } & 225,000 \\\text { Inventory (beginning) } & 16,000 \\\text { Inventory (ending) } & 30,000 \\\text { Operating expenses } & 148,000 \\\text { Income tax expense } & 10,000 \\\text { Retained earnings (beginning) } & 53,000 \\\text { Dividends } & 15,000\end{array}$$

-Refer to the information for Takenson Corp. Calculate net income.

A)$289,000
B)$141,000
C)$131,000
D)$116,000

Question 73

Which one of the following is a common analytical tool used by merchandising companies,but not by service companies?

A)Gross profit ratio
B)Earnings per share
C)Current ratio
D)Working capital

Question 74

Takenson Corp.
Takenson Corp.is a merchandising company that uses the periodic inventory system.Selected account balances are listed below:
$$\begin{array} { l r } \text { Sales } & \$ 500,000 \\\text { Purchases } & 225,000 \\\text { Inventory (beginning) } & 16,000 \\\text { Inventory (ending) } & 30,000 \\\text { Operating expenses } & 148,000 \\\text { Income tax expense } & 10,000 \\\text { Retained earnings (beginning) } & 53,000 \\\text { Dividends } & 15,000\end{array}$$

-Refer to the information for Takenson Corp. ?
Calculate the cost of goods sold

A)$275,000
B)$259,000
C)$241,000
D)$211,000

Question 75

For what reason might retailers like Target select an accounting period that ends on or near the end of January?

A)The company originally started business operations on that date so it is required to use the date as fiscal year-end.
B)Business activity is in a slow period that is suited to the preparation of its financial statements at the end of the year.
C)The company's CPAs are attempting to spread out the workload.
D)The Internal Revenue Service requires merchandise companies to select such a date for their fiscal year.

Question 76

Using the following information,what is the amount of cost of goods sold? ?
?
$$\begin{array} { l r } \text { Purchases } & \$ 32,000 \\\text { Merchandise inventory, September } 1 & 5,700 \\\text { Merchandise inventory, September 30 } & 6,370 \\\text { Purchase returns and allowances } & 1,200 \\\text { Purchase discounts } & 960 \\\text { Transportation-in } & 1,040 \\\text { Sales } & 63,000 \\\text { Sales returns and allowances } & 910\end{array}$$

A)$26,900
B)$20,530
C)$28,130
D)$30,210

Question 77

Which of the following statements regarding cost of goods available for sale is true?

A)Cost of goods available for sale is an expense account.
B)Cost of goods available for sale is added to beginning inventory to determine cost of purchases during the period.
C)Cost of goods available for sale is subtracted from net sales to arrive at the gross margin.
D)Cost of goods available for sale is a "pool" of costs to be distributed between what was sold and what was not sold during a period.

Question 78

The account a manufacturer uses to record the cost of products completed and available for sale is called

A)Raw Materials Inventory.
B)Work in Process Inventory.
C)Finished Goods Inventory.
D)Merchandise Inventory.

Question 79

Which of the following accounts would not be found as an asset on the balance sheet of a manufacturer?

A)Raw Materials Inventory
B)Work in Process Inventory
C)Finished Goods Inventory
D)Merchandise Inventory

Question 80

Takenson Corp.
Takenson Corp.is a merchandising company that uses the periodic inventory system.Selected account balances are listed below:
$$\begin{array} { l r } \text { Sales } & \$ 500,000 \\\text { Purchases } & 225,000 \\\text { Inventory (beginning) } & 16,000 \\\text { Inventory (ending) } & 30,000 \\\text { Operating expenses } & 148,000 \\\text { Income tax expense } & 10,000 \\\text { Retained earnings (beginning) } & 53,000 \\\text { Dividends } & 15,000\end{array}$$

-Refer to the information for Takenson Corp. Calculate the gross profit.

A)$241,000
B)$275,000
C)$289,000
D)$425,000