Deck 6: Inventories and Cost of Sales

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

When taking a physical count of inventory, the use of prenumbered inventory tickets is an application of internal control.

Answer 3

True

Question 4

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

Question 5

LIFO 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 6

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

Question 7

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

Question 8

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 9

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 10

Few companies take a physical count of inventory each year, and rely on inventory records alone to determine the inventory value.

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

A company can change its inventory costing method without mentioning this change in its financial statements because it is an internal management decision.

Question 19

Goods in transit are automatically included in inventory.

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

LIFO assumes that inventory costs flow in the order incurred.

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

Companies are allowed to use FIFO for financial reporting and LIFO for tax reporting, according to IRS requirements.

Question 34

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

Question 35

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 36

Tops had cost of goods sold of $8,321 million and its ending inventory was $2,027 million. Therefore its days' sales in inventory equals 89 days.
2,027/8,321*365 = 89

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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 42

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 43

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 44

Damaged and obsolete goods that can be sold:

A) Are never counted as 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 45

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 46

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

Question 47

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

Question 48

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

Question 49

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 non-damaged goods.

Question 50

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.
$45,000 * .60 = $27,000

Question 51

The conservatism constraint requires that when more than one estimate of the amounts to be received or paid in the future exists 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

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

Question 54

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

Question 55

A company's total cost of inventory was $305,000 and its market value is $297,000. Under the lower cost or market, the amount reported should be $305,000.

Question 56

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

Question 57

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 58

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

Question 59

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 60

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

Question 61

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.

Question 62

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

A) Prenumbered inventory tickets.
B) A manager does not confirm that all inventories are ticketed once, and only once.
C) Counters must confirm the validity of inventory existence, amounts, and quality.
D) Second counts by a different counter.
E) Counters of inventory should not be those who are responsible for the inventory.

Question 63

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

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

Question 64

The full disclosure principle:

A) Prescribes that when a change in inventory valuation method is made, the notes to the statements report the type of change, its justification 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 65

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 66

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

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

Question 67

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) FIFO.
B) Weighted average.
C) LIFO.
D) Specific identification.
E) All of these.

Question 68

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 69

Gotham 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 Gotham 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.
The ending inventory balance of $412,000 did not include goods costing $48,000 that were purchased by Gotham on December 28 and shipped FOB destination on that date. Gotham 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.
The ending inventory balance of $412,000 included $43,000 of consigned inventory for which Gotham was the consignee.
Based on this information, the correct balance for ending inventory on December 31 is:

A) $247,000
B) $341,000
C) $362,000
D) $309,000
E) $319,000

Question 70

The understatement of the beginning inventory balance causes:

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

Question 71

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

Question 72

The consistency concept:

A) Prescribes a company to consistently apply the same accounting method of inventory valuation, an exception being when a change from one method to another will improve its 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 principle.
E) Is also called the matching principle.

Question 73

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 74

Physical counts of inventory:

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

Question 75

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

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

Question 76

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 77

Thelma Company reported cost of goods sold for Year 1 and Year 2 as follows: Thelma Company made two errors: 1) ending inventory at the end of Year 1 was understated by $15,000 and 2) ending inventory at the end of Year 2 was overstated by $6,000. Given this information, the correct cost of goods sold figure for Year 2 would be:

A) $291,000
B) $276,000
C) $264,000
D) $285,000
E) $249,000

Question 78

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 79

On December 31 of the current year, Hewett Company reported an ending inventory balance of $215,000. The following additional information is also available: Hewett sold goods costing $38,000 to Trump Enterprises on December 28 and shipped the goods on that date with shipping terms of FOB shipping point. The goods were not included in the ending inventory amount of $215,000 because they were not in Hewett's warehouse.
Hewett purchased goods costing $44,000 on December 29. The goods were shipped FOB destination and were received by Hewett 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.
Hewett's ending inventory balance of $215,000 included $15,000 of goods being held on consignment from Rumsfeld Company. (Hewett Company is the consignee.)
Hewett's ending inventory balance of $215,000 did not include goods costing $95,000 that were shipped to Hewett on December 27 with shipping terms of FOB destination and were still in transit at year-end.
Based on the above information, the correct balance for ending inventory on December 31 is:

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

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