Question 1

"Goods on Approval"

Accepted Answer

Goods on approval are still considered the property of the seller until the buyer decides to keep them and legal title passes to the buyer. Therefore, they should not be included in the buyer's inventory until ownership has actually passed to them.

Question 2

If inventories are valued using the retail inventory method, they should NOT be classified as a current asset on the balance sheet.

Accepted Answer

Inventories valued using the retail inventory method are still considered a current asset and should be classified as such on the balance sheet. The retail inventory method is a cost-flow assumption that estimates the cost of ending inventory based on the ratio of cost to retail price. This method is often used by retailers who sell a variety of products with different profit margins. Despite using a different valuation method, the inventory is still a current asset as it is expected to be sold in the normal course of business within a year.

Question 3

An employee assigned to counting computer monitors in boxes should

Accepted Answer

To ensure accuracy in inventory, the employee should physically verify the contents of each box to confirm it contains a computer monitor, rather than relying on external labels or records which may be incorrect.

Question 4

All of the following are examples of strong internal control when counting inventory EXCEPT

Accepted Answer

The inventory clerk should not control all of the inventory count sheets as it creates a potential conflict of interest and allows for the possibility of manipulation of inventory records. It is better to have another person or team control the count sheets. The other options are all examples of strong internal controls for counting inventory. Prenumbered inventory tags ensure that all items are accounted for, having employees who are not responsible for custody or record-keeping helps to prevent fraud or errors, and a second count by another employee or auditor provides a check and balance system.

Question 5

If goods in transit are shipped FOB shipping point by a carrier named by the buyer,

Accepted Answer

FOB shipping point means that the seller transfers legal title to the buyer when a public carrier accepts the goods from the seller at the shipping point. Therefore, the buyer has legal title to the goods when the carrier accepts them.

Question 6

A company just starting in business purchased three merchandise inventory items at the following prices: first purchase, $100; second purchase, $120; third purchase, $125. If the company sold two units for a total of $400 and used FIFO, the gross profit for the period would be

Accepted Answer

The answer of A company just starting in business purchased...

Question 7

If the physical inventory is less than the amount calculated using the retail method, then there may be a theft problem.

Accepted Answer

If the physical inventory is less than the amount calculated using the retail method, it means that the expected inventory value was higher than the actual inventory value. This could be caused by theft, damage, or other factors, but theft is definitely a possibility.

Question 8

Goods in transit should be included in the inventory of

Accepted Answer

Goods in transit should be included in the inventory of the company that has ownership of the goods. This means that if the ownership has already been transferred from the seller to the purchaser, then the purchaser should include it in their inventory. If ownership has not yet been transferred, then the seller should include it in their inventory. It does not matter who is responsible for paying the freight charges.

Question 9

The gross profit method of estimating inventory CANNOT be used if the gross profit margin has changed from the previous period.

Accepted Answer

The gross profit method can still be used if the gross profit margin has changed, but the new margin must be accurately estimated and applied to the current period's sales to estimate inventory.

Question 10

After the physical inventory is completed

Accepted Answer

The answer of After the physical inventory is completed
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Question 11

While goods purchased FOB destination, and shipped by train and then truck, are in transit, the goods should be included in the inventory of the

Accepted Answer

When goods are purchased FOB (Free On Board) destination, the title and risk of loss pass from the seller to the buyer only when the goods reach the buyer's location. Therefore, until the goods reach the destination, they are included in the seller's inventory.

Question 12

Under a consignment arrangement, the

Accepted Answer

Under a consignment arrangement, the consignor (the one who provides the goods) retains ownership until the goods are sold to a customer. The consignee (the one who sells the goods) is only responsible for selling the goods on behalf of the consignor and does not take ownership of them. Therefore, choice A is the best answer.

Question 13

If the physical inventory count shows an amount which is lower than the estimate from the calculation of the gross profit method of inventory estimation, the estimate should be used for the amount reported on the balance sheet.

Accepted Answer

If the physical count shows a lower amount than the estimate, it means that either the estimate was inaccurate or there has been theft, damage or other losses that have affected the inventory. In this case, the actual physical count should be used as the amount reported on the balance sheet to reflect the true value of the inventory.

Question 14

Per its January 31, 2017 physical inventory count, Pugwash Company has $24,500 in inventory on hand at year end. In addition, at year end the company has $1,200 in merchandise in transit purchased from a supplier shipped FOB destination. Included in its physical inventory is $900 in goods held on consignment for a local manufacturer. How much inventory should be reported on the company's January 31, 2017 balance sheet?

Accepted Answer

The inventory should exclude the $900 consigned goods and not include the $1,200 in transit since they are FOB destination. Thus, $24,500 - $900 = $23,600.

Question 15

The FIFO inventory cost formula assumes that the cost of the latest units purchased is

Accepted Answer

The FIFO (First-In, First-Out) inventory cost formula assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold, meaning the cost of the latest units purchased would be the last to be allocated to ending inventory.

Question 16

Independent internal verification of the physical inventory process occurs when

Accepted Answer

Independent internal verification occurs when a second employee counts the inventory and compares the result to the count made by the first employee. This ensures that the inventory count is accurate and reliable. A and D are not accurate descriptions of independent internal verification, and B only refers to comparing the counted items to the inventory account balance, which is not necessarily a form of independent internal verification.

Question 17

The retail inventory method is useful for estimating the amount of shrinkage due to breakage, loss, or theft.

Accepted Answer

Retail inventory method involves comparing the cost and retail value of inventory to estimate the amount of shrinkage. By subtracting the estimated value of inventory from the actual value of inventory, the amount of shrinkage can be determined. Therefore, it is useful for estimating shrinkage due to breakage, loss, or theft.

Question 18

The factor which determines whether or not goods should be included in a physical count of inventory is

Accepted Answer

Legal title determines whether or not goods should be included in a physical count of inventory because it indicates the ownership of the goods. If the legal title of the goods has passed to the entity, those goods should be included in the entity's inventory count, regardless of their physical location.

Question 19

If goods in transit are shipped FOB destination,

Accepted Answer

In an FOB (Free On Board) destination arrangement, the seller retains ownership and responsibility for the goods until they are delivered to the buyer's specified location. This means the seller has legal title to the goods until delivery is completed.

Question 20

The major disadvantage of the retail method is that it is an averaging technique.

Accepted Answer

The retail method averages the cost of goods sold over the total sales to calculate the cost of goods sold for a certain period. This can result in a misstatement of the inventory value if there are significant price fluctuations during the period.

Quiz 6: Inventory Costing