Question 1

For the year ended December 31, Depot Max's cost of merchandise sold was $56,900. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Depot Max's days' sales in inventory is closest to
A) 42
B) 46
C) 8
D) 44

Accepted Answer

The formula to calculate days' sales in inventory is: $ \frac{Average Inventory}{Cost of Goods Sold} \times 365 $. First, calculate the average inventory: $ \frac{$6,540 + $7,250}{2} = $6,895 $. Then, divide the cost of merchandise sold by the average inventory and multiply by 365: $ \frac{$6,895}{$56,900} \times 365 \approx 44 $ days.

Question 2

If a company values inventory at the lower of cost or market, which of the following is the value of merchandise inventory on the balance sheet? Apply the lower-of-cost-or-market method to inventory as a whole. $$\begin{array} { | l | c | c | c | } 
\hline  { \text { Item } } & \text { Inventory Quantity } & \text { Unit Cost Price } & \text { Unit Market Price } \
\hline \text { Product C } & 420 & \$ 6 & \$ 5 \
\hline \text { Froduct D } & 370 & 12 & 14 \
\hline
\end{array}$$
A) $6,960
B) $7,700
C) $6,540
D) $7,280

Accepted Answer

The lower of cost or market for Product C is $5, and the lower of cost or market for Product D is $12. Therefore, the total value of merchandise inventory on the balance sheet is $5 x 420 + $12 x 370 = $6,960.

Question 3

The days' sales in inventory measures the
A) length of time it takes to acquire, sell, and replace the inventory
B) length of time it takes to acquire and receive payment for the inventory
C) number of days inventory is on hand prior to sale
D) number of days inventory takes to arrive after ordering

Accepted Answer

The days' sales in inventory measures the average number of days it takes for a company to turn its inventory into sales, which involves acquiring, selling, and replacing the inventory.

Question 4

Merchandise inventory at the end of the year is overstated. Which of the following statements correctly states the effect of the error?
A) Owner's equity is overstated.
B) Cost of merchandise sold is overstated.
C) Gross profit is understated.
D) Net income is understated.

Accepted Answer

When merchandise inventory at the end of the year is overstated, it means that the cost of goods sold (COGS) is understated because the ending inventory is subtracted from goods available for sale to calculate COGS. This understatement of COGS leads to an overstatement of gross profit and, consequently, net income. Since net income contributes to owner's equity, an overstatement of net income results in an overstatement of owner's equity.

Question 5

For the year ended December 31, Depot Max's cost of merchandise sold was $56,900. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Compute Depot Max's inventory turnover for the year.
A) 8.7
B) 7.8
C) 8.3
D) 44.0

Accepted Answer

Inventory turnover is calculated as: Cost of Merchandise Sold / Average Inventory

Average inventory is calculated as: (Beginning Inventory + Ending Inventory) / 2

Using the figures given:

Average inventory = ($6,540 + $7,250) / 2 = $6,895

Inventory turnover = $56,900 / $6,895 = 8.25

Therefore, the correct choice is C.

Question 6

If a company mistakenly counts more items during a physical inventory than actually exist, how will the error affect its bottom line?
A) There will be no change to net income.
B) Net income will be overstated.
C) Net income will be understated.
D) Only gross profit will be affected.

Accepted Answer

If a company mistakenly counts more items than actually exist, the value of inventory on the balance sheet will be overstated, leading to an overstatement of net income. This is because the cost of goods sold will be lower (due to the overstated inventory valuation) and therefore gross profit will be higher, resulting in a higher net income.

Question 7

If the estimated rate of gross profit is 30%, what is the estimated cost of the merchandise inventory on September 30, based on the following data?? Sept. 1 Merchandise inventory (at cost)$~~~~~~~~~~~~~~\$ 125,000$
Sept. 1-30 Purchases, net (at cost)$~~~~~~~~~~~~~~~~~~~~~~~300,000$
Sept. 1-30 Sales$~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~150,000$
A) $320,000
B) $192,500
C) $275,000
D) $105,000

Accepted Answer

The estimated cost of the merchandise inventory on September 30 is $192,500. This is calculated by taking the beginning inventory of $125,000, adding the net purchases of $300,000, and subtracting the sales of $150,000. The estimated rate of gross profit is 30%, which means that the cost of goods sold is 70% of sales. Therefore, the cost of goods sold is $150,000 x 70% = $105,000. The ending inventory is then $192,500 - $105,000 = $87,500.

Question 8

If a company mistakenly counts less items during a physical inventory than actually exist, how will the error affect the cost of merchandise sold?
A) understated
B) overstated
C) no change
D) only inventory will be affected

Accepted Answer

If fewer items are counted, the ending inventory will be understated, leading to an overstatement of the cost of goods sold.

Question 9

Merchandise inventory at the end of the year was understated. Which of the following statements correctly states the effect of the error?
A) Net income is understated.
B) Net income is overstated.
C) Cost of merchandise sold is understated.
D) Merchandise inventory reported on the balance sheet is overstated.

Accepted Answer

When merchandise inventory is understated, the cost of goods sold is overstated, leading to an understatement of net income.

Question 10

Which of the following measures the length of time it takes to acquire, sell, and replace inventory?
A) inventory turnover
B) days' sales in inventory
C) retail method of inventory costing
D) gross profit method of inventory costing

Accepted Answer

Days' sales in inventory measures the length of time it takes to acquire, sell, and replace inventory by dividing the average inventory balance by the cost of goods sold, and multiplying the result by the number of days in the period. A lower number indicates a faster turnover of inventory, which is generally preferred.

Question 11

The method of estimating inventory that uses records of the selling prices of the merchandise is called the
A) retail method
B) gross profit method
C) inventory turnover method
D) average cost method

Accepted Answer

The retail method is a widely used technique for estimating the value of ending inventory based on the cost-to-retail percentage relationship. It uses records of selling prices and markdowns to arrive at the estimated cost of inventory. The gross profit method uses past financial data to calculate an estimated cost of sales and then subtracts that figure from net sales to estimate the ending inventory. The inventory turnover method is used to identify the rate at which a company sells inventory and needs to reorder. The average cost method calculates inventory value based on the average cost of the inventory items during a specific period. However, none of these methods primarily use records of selling prices to estimate inventory, making A the best choice.

Question 12

Which of the following measures the relationship between cost of merchandise sold and the amount of inventory carried during the period?
A) inventory turnover
B) fixed asset turnover
C) retail method of inventory costing
D) gross profit method of inventory costing

Accepted Answer

Inventory turnover measures the relationship between the cost of merchandise sold and the average inventory during a specific period. It indicates how quickly a company sells its inventory and can be used to assess the efficiency of inventory management. Options B, C, and D do not measure the relationship between cost of merchandise sold and the amount of inventory carried during the period.

Question 13

​Excess inventory results in all of the following except
A) ​tied-up funds that could be used to improve operations
B) ​lost sales
C) ​increased storage expense
D) ​increased risk of loss due to damage

Accepted Answer

Excess inventory may lead to tied-up funds, increased storage expense, and increased risk of loss due to damage, but it does not result in lost sales. In fact, excess inventory may even lead to discounted sales to remove the excess stock.

Question 14

Which of the following is used to analyze the efficiency and effectiveness of inventory management?
A) inventory turnover only
B) days' sales in inventory only
C) both inventory turnover and days' sales in inventory
D) neither inventory turnover nor days' sales in inventory

Accepted Answer

Both inventory turnover and days' sales in inventory are used to analyze the efficiency and effectiveness of inventory management. Inventory turnover measures how many times inventory is sold and replaced in a given period, while days' sales in inventory measures the number of days it takes for inventory to be sold. Together, these metrics provide a comprehensive analysis of how well a company is managing its inventory levels.

Question 15

On the basis of the following data, what is the estimated cost of the merchandise inventory on May 31 using the retail method?? $\begin{array}{llrr}&&\text { Cost } & \text { Retail } \
\text { May 1 } & \text { Merchandise inventory } & \$ 125,000 & \$ 166,667 \
\text { May 1-31 } & \text { Purchases } & 235,000 & 313,333 \
\text { May 1-31 } & \text { Sales } & & 230,000
\end{array}$
A) $250,000
B) $360,000
C) $172,500
D) $187,500

Accepted Answer

To estimate the cost of the merchandise inventory on May 31 using the retail method, first, calculate the cost-to-retail ratio: $\frac{\$125,000 + \$235,000}{\$166,667 + \$313,333} = \frac{\$360,000}{\$480,000} = 0.75$. Then, calculate the ending inventory at retail by subtracting sales from the total retail value of goods available for sale: \$480,000 - \$230,000 = \$250,000. Finally, apply the cost-to-retail ratio to the ending inventory at retail: \$250,000 * 0.75 = \$187,500.

Question 16

Determine the total value of the merchandise using net realizable value. $$\begin{array} { | l | c | c | c | } 
\hline  { \text { Item } } & \text { Quantity } & \text { Selling Price } & \text { Commission } \
\hline \text { Doll } & 10 & \$ 7 & \$ 2 \
\hline \text { Horse } & 5 & 9 & 3 \
\hline
\end{array}$$
A) $35
B) $80
C) $115
D) $25

Accepted Answer

The answer of Determine the total value of the merchandise...

Question 17

If the cost of an item of inventory is $60 and the current replacement cost is $75, the amount included in inventory according to the lower of cost or market is
A) $15
B) $60
C) $75
D) $135

Accepted Answer

The lower of cost or market rule dictates that inventory should be reported at the lower value between its original cost and its current market price. In this case, the original cost is $60 and the current replacement cost is $75, so the inventory should be reported at $60, the lower amount.

Question 18

Too much inventory on hand
A) ties up funds that could be used to improve operations
B) increases the cost to safeguard the assets
C) increases the losses due to price declines
D) All of these choices

Accepted Answer

Too much inventory on hand can tie up funds that could be used to improve operations, increase the cost to safeguard the assets, and increase the losses due to price declines. Therefore, all of these choices are correct.

Question 19

During the taking of its physical inventory on December 31, Barry's Bike Shop incorrectly counted its inventory as $350,000 instead of the correct amount of $280,000. The effect on the balance sheet and income statement would be
A) assets overstated by $70,000; retained earnings understated by $70,000; and net income statement understated by $70,000
B) assets overstated by $70,000; retained earnings understated by $70,000; and no effect on the income statement
C) assets, retained earnings, and net income all overstated by $70,000
D) assets and retained earnings overstated by $70,000 and net income understated by $70,000

Accepted Answer

Overstating inventory by $70,000 would increase assets by the same amount. Since ending inventory is overstated, the cost of goods sold would be understated, leading to an overstatement of net income. This, in turn, would cause retained earnings to be overstated by $70,000, as they are directly affected by the net income figure.

Question 20

Kristin's Boutique has identified the following items for possible inclusion in its December 31 inventory. Which of the following would not be included in the year-end inventory?
A) Merchandise purchased FOB shipping point was picked up by the freight company but had still not arrived at Kristin's Boutique as of December 31.
B) Kristin's has in its warehouse merchandise on consignment from Abby Co.
C) Kristin's has sent merchandise to various retailers on a consignment basis.
D) Kristin's has merchandise on hand that has been returned by customers because of wrong size.

Accepted Answer

Merchandise on consignment from Abby Co. is owned by Abby Co., not Kristin's Boutique, and therefore should not be included in Kristin's year-end inventory.

Quiz 7: Inventories

For the year ended December 31, Depot Max's cost of merchandise sold was $56,900. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Depot Max's days' sales in inventory is closest to

The days' sales in inventory measures the

Merchandise inventory at the end of the year is overstated. Which of the following statements correctly states the effect of the error?

For the year ended December 31, Depot Max's cost of merchandise sold was $56,900. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Compute Depot Max's inventory turnover for the year.

If a company mistakenly counts more items during a physical inventory than actually exist, how will the error affect its bottom line?

If a company mistakenly counts less items during a physical inventory than actually exist, how will the error affect the cost of merchandise sold?

Merchandise inventory at the end of the year was understated. Which of the following statements correctly states the effect of the error?

Which of the following measures the length of time it takes to acquire, sell, and replace inventory?

The method of estimating inventory that uses records of the selling prices of the merchandise is called the

Which of the following measures the relationship between cost of merchandise sold and the amount of inventory carried during the period?

​Excess inventory results in all of the following except

Which of the following is used to analyze the efficiency and effectiveness of inventory management?

If the cost of an item of inventory is $60 and the current replacement cost is $75, the amount included in inventory according to the lower of cost or market is

Too much inventory on hand

During the taking of its physical inventory on December 31, Barry's Bike Shop incorrectly counted its inventory as $350,000 instead of the correct amount of $280,000. The effect on the balance sheet and income statement would be

Kristin's Boutique has identified the following items for possible inclusion in its December 31 inventory. Which of the following would not be included in the year-end inventory?

Excess inventory results in all of the following except