Question 1

An increase in accounts payable is added to net income when determining cash flows from operating activities.

Accepted Answer

An increase in accounts payable represents money that a company has not yet paid to its suppliers or creditors, effectively acting as a source of cash. Therefore, it is added back to net income in the calculation of cash flows from operating activities under the indirect method, as it indicates that less cash was paid out than the expenses recognized.

Question 2

An overstatement of the 2018 ending inventory results in an understatement of net income during 2019.

Accepted Answer

Overstating the ending inventory in 2018 would result in higher cost of goods sold (COGS) in 2019, which would in turn lower net income. This is because COGS is subtracted from revenue to determine gross profit, and then expenses are subtracted from gross profit to arrive at net income. Therefore, if COGS is overstated, gross profit and net income will be understated.

Question 3

When there is a $3,000,000 decrease in inventory and a $2,000,000 decrease in accounts payable,cash flow from operating activities increases by $1,000,000.

Accepted Answer

A decrease in inventory would increase cash flow as it indicates that less money has been spent on purchasing inventory. A decrease in accounts payable would also increase cash flow as it indicates that less money has been paid towards outstanding debts. Therefore, the given statement is true.

Question 4

The average days to sell inventory decreases as inventory turnover increases.

Accepted Answer

This statement is true as the inventory turnover ratio measures how quickly a company sells its inventory and the faster it sells, the shorter the average days to sell inventory will be.

Question 5

Which of the following would not be a component of the year-end inventory balance?

Accepted Answer

Inventory-related selling costs are not included in the year-end inventory balance because they are considered expenses that occur after the inventory has been sold. The other choices (A, B, and C) are all costs directly related to the acquisition and preparation of inventory and would therefore be included in the year-end inventory balance.

Question 6

An overstatement of the 2018 ending inventory results in an overstatement of stockholders' equity as of the end of 2019.

Accepted Answer

The answer of An overstatement of the 2018 ending inventory...

Question 7

Inventory turnover is calculated as cost of goods sold divided by average inventory.

Accepted Answer

This is the correct formula for calculating inventory turnover.

Question 8

In the year of an overstatement of ending inventory,cost of goods sold will be understated and net income will be overstated.

Accepted Answer

An overstatement of ending inventory means that the value of inventory recorded at the end of the accounting period is higher than the actual value. This results in a lower cost of goods sold, as the cost of goods sold is calculated by subtracting the value of ending inventory from the cost of goods available for sale. As a result, net income is overstated because expenses are lower (cost of goods sold is an expense) and revenue remains the same.

Question 9

Which of the following statements is incorrect?

Accepted Answer

The incorrect statement is D because if purchases are less than the cost of goods sold, it typically means that the company has used more of its inventory than it has purchased, leading to a decrease rather than an increase in ending inventory compared to beginning inventory.

Question 10

An understatement of ending inventory results in an overstatement of net income.

Accepted Answer

An understatement of ending inventory results in an understatement of net income because it causes the cost of goods sold to be overstated, reducing the net income.

Question 11

Which of the following costs is not included as inventory on the balance sheet?

Accepted Answer

Freight-out costs for finished goods sent to retailers are not included as inventory on the balance sheet. These costs are expensed on the income statement as cost of goods sold when the goods are sold and shipped to the retailers. Raw materials, work in process, and finished goods are all included as inventory on the balance sheet until they are sold, at which point they are expensed as cost of goods sold.

Question 12

In a period of increasing costs,the LIFO Reserve would be deducted from the ending inventory under LIFO costing to convert it to ending inventory under FIFO costing.

Accepted Answer

The answer of In a period of increasing costs,the LIFO...

Question 13

The LIFO Reserve represents the excess of FIFO inventory costs over LIFO inventory costs.

Accepted Answer

The LIFO Reserve is a contra-asset account that represents the difference between the inventory value calculated using the LIFO method versus the inventory value calculated using the FIFO method. Therefore, the LIFO Reserve represents the excess of FIFO inventory costs over LIFO inventory costs.

Question 14

Which of the following costs will not affect cost of goods sold?

Accepted Answer

Inventory-related selling costs do not affect the cost of goods sold (COGS) because COGS includes the direct costs attributable to the production of the goods sold by a company. Selling costs are considered operating expenses, not part of the cost of inventory.

Question 15

An overstatement of the 2019 ending inventory results in an overstatement of stockholders' equity as of the end of 2019.

Accepted Answer

Ending inventory is a component of the stockholders' equity formula, and an overstatement of ending inventory will lead to an overstatement of stockholders' equity as well.

Question 16

Coleman Company has provided the following information: beginning inventory,$100,000;cost of goods sold,$450,000;and ending inventory,$80,000.How much were Coleman's inventory purchases?

Accepted Answer

Inventory purchases can be calculated using the following formula:
Inventory purchases = Cost of goods sold + Ending inventory - Beginning inventory
Substituting the given values:
Inventory purchases = $450,000 + $80,000 - $100,000
Inventory purchases = $430,000
Therefore, the correct answer is choice C.

Question 17

An increase in inventory is subtracted from net income when determining cash flow from operating activities.

Accepted Answer

An increase in inventory represents cash that has been used to purchase goods that have not yet been sold, which is a use of cash and therefore subtracted from net income in the calculation of cash flow from operating activities in the indirect method.

Question 18

A company reported the following information for its most recent year of operation: purchases,$100,000;beginning inventory,$20,000;and cost of goods sold,$110,000.How much was the company's ending inventory?

Accepted Answer

The ending inventory can be calculated using the formula: Ending Inventory = Beginning Inventory + Purchases - Cost of Goods Sold. Plugging in the values: $20,000 + $100,000 - $110,000 = $10,000.

Question 19

LIFO liquidation results when a company has a lower level of inventory at the end of the year than it had at the beginning of the year.

Accepted Answer

LIFO (last in, first out) is an inventory valuation method where the most recently purchased inventory items are assumed to be sold first. If a company sells more inventory during a period than it purchases, it will be forced to dip into its older, cheaper inventory. This can lead to a phenomenon called LIFO liquidation, where the cost of goods sold (COGS) is calculated using older, cheaper inventory costs, resulting in an artificial profit boost. Therefore, if a company has a lower level of inventory at the end of the year than it had at the beginning of the year, it is more likely to experience a LIFO liquidation.

Question 20

Inventory turnover under LIFO is greater than inventory turnover under FIFO when unit costs are increasing.

Accepted Answer

Under LIFO, the most recent and therefore most expensive units are assumed to be sold first, resulting in lower ending inventory balances and a higher cost of goods sold. This leads to a higher inventory turnover ratio compared to FIFO when unit costs are increasing.

Quiz 7: Reporting and Interpreting Cost of Goods Sold and Inventory