Question 1

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.

Accepted Answer

Weighted average takes into account all costs incurred during a period and divides it by the number of units sold, thus smoothing out any erratic changes in costs.

Question 2

An error in ending inventory causes an error in the next period's:
A)Sales.
B)Beginning inventory.
C)Accounts payable.
D)Accounts receivable.
E)Shipping costs.

Accepted Answer

An error in ending inventory will affect the beginning inventory of the next period because it is carried over as the starting point for the calculation of ending inventory in the next period. This will affect the cost of goods sold and subsequently the net income of the period. The error will not directly affect sales, accounts payable, accounts receivable, or shipping costs.

Question 3

The selected inventory costing method impacts:
A)Gross profit and ending inventory.
B)Sales.
C)The physical flow of goods.
D)Amount of inventory on hand.
E)The shipping terms to the buyer.

Accepted Answer

The inventory costing method (such as FIFO, LIFO, or weighted average) affects the cost of goods sold and, consequently, the gross profit and the value of ending inventory. It does not directly impact sales, the physical flow of goods, the amount of inventory on hand, or the shipping terms to the buyer.

Question 4

On December 31 of the current year,Plunkett Company reported an ending inventory balance of $215,000.The following additional information is also available: 
•Plunkett sold and shipped goods costing $38,000 to Savannah Enterprises on December 28 with shipping terms of FOB shipping point.The goods were not included in the ending inventory amount of $215,000.
•Plunkett purchased goods costing $44,000 on December 29.The goods were shipped FOB destination and were received by Plunkett 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.
•Plunkett's ending inventory balance of $215,000 included $15,000 of goods being held on consignment from Carole Company.(Plunkett Company is the consignee.)
•Plunkett's ending inventory balance of $215,000 did not include goods costing $95,000 that were shipped to Plunkett on December 27 with shipping terms of FOB destination and were still in transit at year-end.
Based on the above information,the amount that Plunkett should report in ending inventory on December 31 is:
A)$194,000
B)$209,000
C)$200,000
D)$171,000
E)$156,000

Accepted Answer

The answer of On December 31 of the current year,Plunkett...

Question 5

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)Lower of cost or market.

Accepted Answer

FIFO (First-In, First-Out) assigns an amount to inventory that approximates its current cost because the oldest costs are assigned to the cost of goods sold, leaving the newest costs in inventory. It also mimics the actual flow of goods for most businesses, as it assumes that the first items purchased are the first ones sold.

Question 6

Consignment goods are:
A)Goods shipped by the owner to the consignee who sells the goods for the owner.
B)Reported in the consignee's books as inventory.
C)Goods shipped to the consignor who sells the goods for the owner.
D)Not reported in the consignor's inventory since they do not have possession of the inventory.
E)Always paid for by the consignee when they take possession.

Accepted Answer

Consignment goods are goods that are sent by the owner (consignor) to the seller (consignee), who sells the goods on behalf of the owner. The consignor retains legal ownership of the goods until they are sold. The consignee reports the goods as inventory in their books, but the consignor does not, as they do not have possession of the inventory. The consignee only pays for the goods when they are sold.

Question 7

Buffalo 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 did not include goods costing $48,000 that were purchased by Buffalo on December 28 and shipped FOB destination on that date.Buffalo 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.
Based on this information,the correct balance for ending inventory on December 31 is:
A)$374,000
B)$384,000
C)$460,000
D)$422,000
E)$438,000

Accepted Answer

The correct ending inventory balance is calculated by starting with the reported balance of $412,000, subtracting the cost of damaged goods at their original cost ($38,000) and adding their net realizable value ($10,000), and not adjusting for the goods in transit since they were shipped FOB destination and not received by December 31. Thus, $412,000 - $38,000 + $10,000 = $384,000.

Question 8

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 confirms that all inventories are ticketed only once.
C)Counters confirm the validity of inventory existence,amounts,and quality.
D)Second counts by a different counter.
E)Counters of inventory should be those who are responsible for the inventory.

Accepted Answer

Counters of inventory should not be those who are responsible for the inventory as this could lead to potential conflicts of interest and compromise the accuracy and integrity of the count. It is better to have outsiders or employees from different departments who are not involved in inventory management to conduct the physical count. All other options listed - prenumbered tickets, confirmation of inventory tickets, validation of existence/amounts/quality, and second counts - are recommended internal controls for ensuring accuracy and completeness of the physical count.

Question 9

During a period of steadily rising costs,the inventory valuation method that yields the highest reported net income is:
A)Specific identification method.
B)Average cost method.
C)Weighted-average method.
D)FIFO method.
E)LIFO method.

Accepted Answer

During periods of steadily rising costs, the FIFO (First-In, First-Out) method yields the highest reported net income. This is because the oldest, and typically cheaper, costs are recorded as the cost of goods sold, while the newer, more expensive inventory remains on the balance sheet. This results in lower cost of goods sold and higher reported net income compared to other methods.

Question 10

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

Accepted Answer

Specific identification and FIFO inventory costing methods will result in the same values for ending inventory and cost of goods sold regardless of whether a perpetual or periodic inventory system is used. Specific identification directly tracks the cost of specific items, and FIFO (First-In, First-Out) assumes that the oldest inventory items are sold first, both of which are unaffected by the timing of inventory system updates.

Question 11

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.

Accepted Answer

Merchandise inventory includes all goods owned by a company and held for sale, whether they are in the company's possession or on consignment, in transit, or are damaged or non-damaged.

Question 12

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.

Accepted Answer

Net sales are primarily affected by the number of units sold and the selling price per unit, not by the cost of goods sold or inventory amounts. Misstatements in period-end inventory impact cost of goods sold, gross profit, current assets, and net income, but not the net sales figure.

Question 13

Regardless of the inventory costing system used,cost of goods available for sale must be allocated at the end of the period 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.

Accepted Answer

Cost of goods available for sale is the total cost of inventory that a company had available for selling to customers during the period, regardless of whether they actually sold all of it. This includes the cost of beginning inventory plus the cost of net purchases made during the period. Therefore, the cost of goods available for sale must be allocated between ending inventory and cost of goods sold. This is typically done using the formula: Cost of goods available for sale = Ending inventory + Cost of goods sold.

Question 14

Companies can and often do use different costing methods for financial reporting and tax reporting.An exception to this is the:
A)Full disclosure principle.
B)Consistency concept.
C)FIFO inventory valuation method.
D)LIFO conformity rule.
E)Matching principle.

Accepted Answer

The LIFO (Last In, First Out) conformity rule is an exception to the general allowance for companies to use different costing methods for financial reporting and tax reporting. This rule requires that if a company uses the LIFO method for tax purposes, it must also use LIFO for financial reporting purposes.

Question 15

Goods in transit are included in a purchaser's inventory:
A)At any time during transit.
B)When the goods are shipped FOB shipping point.
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.

Accepted Answer

Goods in transit are included in a purchaser's inventory when they are shipped FOB (Free On Board) shipping point because the title to the goods passes to the buyer at the point of shipment, making the buyer responsible for the goods during transit.

Question 16

The LIFO conformity rule:
A)Requires when LIFO is used for tax reporting,it is also used for 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 taxation principle.
E)Is only applicable to the automotive industry.

Accepted Answer

The LIFO conformity rule requires that if a company uses LIFO for tax reporting purposes, it must also use LIFO for financial reporting. This ensures consistency and comparability in financial statements.

Question 17

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.

Accepted Answer

Damaged inventory that cannot be sold would not be included in the Merchandise Inventory account as it is no longer considered part of the inventory that can be sold. The other options (A, B, C, and D) are all costs that would be included in the Merchandise Inventory account.

Question 18

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.

Accepted Answer

In periods of inflation, LIFO (Last In, First Out) method results in a lower taxable income compared to other inventory valuation methods because it assumes that the most recently purchased inventory is sold first, resulting in higher cost of goods sold and lower ending inventory values. As a result, LIFO method produces a lower taxable income, which is beneficial for tax purposes.

Question 19

Bedrock 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 Bedrock 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.
Based on this information,the correct balance for ending inventory on December 31 is:
A)$412,000
B)$340,000
C)$318,000
D)$362,000
E)$390,000

Accepted Answer

The answer of Bedrock Company reported a December 31 ending...

Question 20

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.

Accepted Answer

Physical counts of inventory are necessary to adjust the Inventory account to the actual inventory available. This is particularly important for businesses that use the periodic inventory system, as they do not maintain up-to-date records of inventory levels. Despite the perpetual inventory system providing real-time updates of inventory, physical counts are still helpful to ensure the accuracy of the records and identify any discrepancies or errors. Taking physical counts of inventory does not require the use of hand-held portable computers and does not need to be taken monthly; the frequency of physical counts depends on the specific needs and operations of the business. While cost-to-benefit constraints are important to consider, physical counts of inventory are necessary for proper inventory management and financial reporting.

Quiz 5: Inventories and Cost of Sales

The inventory valuation method that tends to smooth out erratic changes in costs is:

An error in ending inventory causes an error in the next period's:

The selected inventory costing method impacts:

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:

Consignment goods are:

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

During a period of steadily rising costs,the inventory valuation method that yields the highest reported net income is:

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?

Merchandise inventory includes:

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

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

Companies can and often do use different costing methods for financial reporting and tax reporting.An exception to this is the:

Goods in transit are included in a purchaser's inventory:

The LIFO conformity rule:

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

The inventory valuation method that results in the lowest taxable income in a period of inflation is:

Physical counts of inventory: