Question 1

In a periodic inventory system the ending inventory must be determined by physical count.

Accepted Answer

In a periodic inventory system, the quantity of inventory is not tracked continuously. Instead, a physical count is taken periodically (usually at the end of the accounting period) to determine the ending inventory. This is in contrast to a perpetual inventory system, where the quantity of inventory is updated continuously and the ending inventory can be calculated at any time.

Question 2

The choice of method for allocating the cost of goods available for sale between ending inventory and cost of goods sold represents the major issue in inventory accounting.

Accepted Answer

This statement is true. Allocating the cost of goods available for sale between ending inventory and cost of goods sold is important as it affects the calculation of gross profit and inventory valuation on the balance sheet. Various methods like first-in, first-out (FIFO), last-in, first-out (LIFO), and weighted average cost are used for allocating the cost of goods available for sale between ending inventory and cost of goods sold. The choice of method has a significant impact on the financial statements, and hence is a major issue in inventory accounting.

Question 3

A periodic inventory system is preferable if avoiding "stock-outs" is of paramount importance-for example in manufacturing firms that use just-in-time systems.

Accepted Answer

The statement is incorrect. A perpetual inventory system is preferable if avoiding stock-outs is of paramount importance as it provides real-time visibility into inventory levels and can trigger automatic reorders. A periodic inventory system, on the other hand, requires manual counts and updates, which can lead to delays and inaccuracies in inventory management.

Question 4

If the cost of inventory never changed,all three cost flow assumptions (i.e.,LIFO,FIFO and weighted average)would yield the same financial statement result.

Accepted Answer

If the cost of inventory remains the same, all three cost flow assumptions will result in the same cost of goods sold and ending inventory values, and thus the same financial statement result.

Question 5

Inventory carrying cost includes storage costs.

Accepted Answer

Inventory carrying cost includes storage costs, along with other costs such as insurance, obsolescence, and interest on capital.

Question 6

In the perpetual inventory system inventory losses must be recorded in the accounts.

Accepted Answer

In the perpetual inventory system, inventory losses or any other adjustments must be recorded in the accounts immediately to maintain accurate inventory records.

Question 7

Inventory carrying cost includes transportation costs paid by the purchaser.

Accepted Answer

Transportation costs paid by the purchaser are a part of the inventory carrying cost. This cost includes all the expenses associated with storing and carrying inventory, such as warehouse rent, insurance, taxes, and handling fees.

Question 8

Periodic inventory systems provide a greater degree of management control over inventory.

Accepted Answer

Periodic inventory systems do not provide a greater degree of management control over inventory. They only provide periodic updates on inventory levels and require manual counting and tracking of inventory. In contrast, perpetual inventory systems provide real-time updates on inventory levels and are more efficient in managing inventory.

Question 9

Under a periodic inventory system,no entry is made at the time of sale to reflect cost of goods sold.

Accepted Answer

Under periodic inventory system, the cost of goods sold is calculated at the end of the accounting period through a physical count of inventory on hand. No entry is made at the time of sale to reflect cost of goods sold.

Question 10

Cost of goods available for sale is always the same regardless of the inventory cost flow assumption in use.

Accepted Answer

While purchases for the period are not dependent upon the cost flow method,cost of goods available for sale = Beginning inventory + purchases and beginning inventory is affected by the cost flow assumption in use.

Question 11

A periodic system of inventory is used when inventory volumes are low and per unit costs are high.

Accepted Answer

A periodic system of inventory is typically used for items with relatively low per-unit costs and where inventory does not need to be tracked on a daily basis, not specifically for low inventory volumes and high per-unit costs.

Question 12

Under a periodic inventory system,cost of goods sold automatically includes the cost of inventory "shrinkage."

Accepted Answer

In a periodic inventory system, inventory shrinkage is accounted for in the cost of goods sold because the ending inventory is determined by a physical count, and any discrepancies (shrinkage) are reflected in the cost of goods sold calculation.

Question 13

The advent of widely used computerized optical scanning equipment has led to the adoption of perpetual systems in high-volume settings where such systems were previously not cost effective.

Accepted Answer

The statement is true, as computerized optical scanning equipment has significantly reduced the cost of implementing perpetual inventory systems in high-volume environments.

Question 14

Beginning inventory plus inventory purchases equals cost of goods sold.

Accepted Answer

Beginning inventory plus inventory purchases equals total inventory available for sale. Cost of goods sold is calculated by subtracting ending inventory from total inventory available for sale. Therefore, the correct formula is:
Beginning inventory + Inventory purchases - Ending inventory = Cost of goods sold.

Question 15

Under a periodic inventory system,purchases are debited to a purchases account.

Accepted Answer

Under a periodic inventory system, purchases are recorded in a separate account called purchases account which is debited whenever goods are purchased. At the end of the period, the cost of goods sold and ending inventory are determined through a physical inventory count, and the amounts are adjusted in the books.

Question 16

Inventory shipped on consignment is owned by the consignee.

Accepted Answer

Inventory shipped on consignment is owned by the consignor, not the consignee. The consignee simply holds the goods and sells them on behalf of the consignor. Ownership only transfers once the goods have been sold and the consignee has paid for them.

Question 17

Although many firms use the LIFO cost flow assumption,no examples exist in which the real physical flow of units sold is also last-in,first-out.

Accepted Answer

Quarries,whose inventory consists of rock piles,would certainly operate with a LIFO physical flow.

Question 18

All inventory items to which the firm has legal title should be included in the inventory account although most firms record inventory only when they physically receive it.

Accepted Answer

Inventory should include all items to which a firm has legal title, even if they haven't physically received the items yet. However, in practice, many firms record inventory upon physical receipt due to practicality and ease of tracking.

Question 19

Under a perpetual inventory system,purchases are debited to a purchases account.

Accepted Answer

Under a perpetual inventory system, purchases are debited directly to the inventory account, not to a purchases account.

Question 20

The input cost changes that occur after the purchase of inventory items in a current cost accounting system are recognized as unrealized holding gains.

Accepted Answer

In a current cost accounting system, changes in input costs after the purchase of inventory items are recorded as unrealized holding gains or losses until the items are sold. This is because the system values inventory at its current replacement cost, rather than the historical cost. As the replacement cost of inventory items increases, their value on the balance sheet also increases, resulting in unrealized holding gains. Conversely, if the replacement cost decreases, inventory is written down and unrealized holding losses are recognized.

Quiz 9: Inventories