Deck 8: Cost-Based Inventories and Cost of Sales

Question 1

Work-in-Process inventories are not normally subject to lower of cost and net realizable value rules.

Answer 1

True

Question 2

Raw materials inventories are recorded at the lower of laid-down cost and net realizable value (NRV).

Answer 2

False

Question 3

A company has several inventory items with a total cost of $100. Their net realizable values total $80. Thus, a $20 write down is required.

Answer 3

False

Question 4

Once biological assets are ready for sale, they have effectively become inventory and are then measured at the lower of their cost and net realizable value (NRV).

Question 5

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 6

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.

Question 7

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 8

ASPE provides separate guidance for Biological Assets.

Question 9

Items purchased for resale are valued at their laid down cost before considering rebates when purchased.

Question 10

Under the Lower of Cost and NRV rules, inventory write-downs are irreversible.

Question 11

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 12

Items purchased for resale with a right of return must be presented separately from other inventories.

Question 13

Items purchased for resale with a right of return are valued at the lower of cost and net realizable value (NRV), as are regular inventories.

Question 14

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

Question 15

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 16

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

Question 17

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 18

Borrowing costs incurred on items routinely purchased for resale may be capitalized or expensed.

Question 19

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

Question 20

Borrowing costs on qualifying assets which require a substantial amount to construct and prepare for resale must be capitalized under IFRS.

Question 21

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 22

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

Question 23

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

Question 24

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 25

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

Question 26

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

Question 27

Items bought under repurchase agreements are recorded as liabilities by the purchasing company.

Question 28

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

Question 29

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

Question 30

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.

Question 31

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

Question 32

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.

Question 33

If ending inventories are overstated, net income is understated.

Question 34

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 35

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 36

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 37

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

Question 38

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

Question 39

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

Question 40

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 41

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 42

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 43

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

Question 44

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 45

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 46

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 47

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
C) Goods out on consignment
D) Goods held on consignment for sale on commission

Question 48

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

Question 49

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 50

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 51

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 52

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 53

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 54

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 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

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 57

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 58

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 59

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 60

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 61

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 62

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: $\begin{array} { | l | l | } \hline \text { Purchase price } & \$ 60,000 \\\hline \text { Delivery charges } & 2,500 \\\hline \text { Terms, on credit, } 5 / 30 , \mathrm { n } / 90 \text { Insurance premium paid } & 3,000 \\\hline \text { Cleaning and making ready for sale } & 250 \\\hline \text { Interest on purchase loan } & 7,200 \\\hline \text { Cost of permanent shed built to display the RV pending sale } & 3,750 \\\hline\end{array}$ 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 63

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 64

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 65

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 66

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 67

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 68

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 69

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. $\begin{array} { | l | l | } \hline \text { Beginning inventory (at net) } & \$ 160 \\\hline \text { Purchases (at invoice price) } & 200 \\\hline \text { Purchase terms, 5/10, n/30 Purchase returns (at invoice price) } & 20 \\\hline \text { Discounts lost } & 10 \\\hline \text { Ending inventory (at net) } & 66 \\\hline\end{array}$
What was the amount of 2013 cost of goods sold?

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

Question 70

The records of a company provided the following information at December 31, 2001: $\begin{array} { | l | c | } \hline \text { Invoice mailed } & \$ 70 \\\hline \text { Items purchased, FOB shipping point invoices mailed, items not yet en route } & 104 \\\hline \text { Items purchased, FOB destination, terms } 5 / 10 , \mathrm { n } / 30 , \text { received at warehouse } & 100 \\\hline \text { Items held on consignment from another company } & 50 \\\hline \text { Ending inventory } 12 / 31 / 2001 \text { (excluding above items) } & 80 \\\hline\end{array}$
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 71

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: $\begin{array} { | l | l | } \hline \text { Purchases, at invoice price } & \$ 135,000 \\\hline \text { Purchases returns, at invoice price } & 9,000 \\\hline \text { Ending inventory physical count, at net } &39,750 \\\hline \text { Inventory shortage, at net } & 1,800 \\\hline\end{array}$
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 72

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." $\begin{array} { | l | l | l | } \hline \text { (1) } & \text { tems counted in warehouse, May 31, 2001 } & \$ 70,000 \\\hline \text { (2) } & \text { tems shipped today*. FOB destination, invoice mailed to customer } & 70 \\\hline \text { (3) } & \text { Invoice received for goods ordered. FOB destination, goods not yet received } & 800 \\\hline \text { (4) } & \text { Items shipped today*. FOB shipping point, invoice mailed to customer } & 400 \\\hline\end{array}$ *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 73

The following items were included in a corporation's inventory account at December 31, 2013: $\begin{array} { | l | l | } \hline \text { Including } 40 \text { percent mark-up on selling price } & \$ 14,000 \\\hline \text { Goods purchased, in transit, shipped FOB shipping point } & 12,000 \\\hline \text { Goods held on consignment by the corporation } & 9,000 \\\hline\end{array}$
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 74

The following information was available from the inventory records of a company for July 2008: $\begin{array} { | l | l | l | l | } \hline & \text { Units } & \text { Unit Cost } & \text { Total Cost } \\\hline \text { Balance at July 1, 2008 } & 2,000 & \$ 19.55 & \$ 39,100 \\\hline \text { Purchases July 6, 2008 } & 1,500 & 20.60 & 30,900 \\\hline \text { July 16, 2008 } & 3,400 & 21.50 & 73,100 \\\hline \text { Sales July 7, 2008 } & ( 1,800 ) & & \\\hline \text { July 31, 2008 } & ( 3,200 ) & & \\\hline \text { Balance at July 31,2008 } & 1,900 & & \\\hline\end{array}$
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 75

A company completed the following transactions in the order given in its first year of operations: $\begin{array} { | l | l | l | } \hline \text { Transaction } & \text { Units } & \text { Unit Costs } \\\hline \text { Purchase } & 300 & \$ 4.00 \\\hline \text { Purchase } & 200 & 4.20 \\\hline \text { Sales (@ \$8.00) } & 280 & \\\hline \text { Purchase } & 400 & 4.40 \\\hline \text { Sales (@ \$8.00) } & 360 & \\\hline\end{array}$
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 76

The inventory records of a corporation provided the following information at the end of 2013: $\begin{array} { | l | l | } \hline \text { Cost per unit } & \$ 10,000 \\\hline \text { Insurance premium paid per unit } & 500 \\\hline \text { Financing expense per unit } & 600 \\\hline \text { Cost of permanent security system per unit (allocated) } & 1,500 \\\hline \text { Freight per unit (when purchased) } & 300 \\\hline \text { Cost of permanent reusable display case for this product only, per unit }& 400 \\\hline \text { Advertising expense per unit (allocated) } & 1,000 \\\hline\end{array}$ 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 77

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 78

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 79

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 80

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