Question 1

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 inventory amount. Inventory errors impact cost of goods sold, gross profit, current assets, and net income, but not the net sales figure.

Question 2

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 and spreads them out evenly over the units in inventory, which helps to smooth out any sudden changes in costs. This makes it a good choice for businesses that experience fluctuating inventory costs.

Question 3

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 under the perpetual system to adjust the Inventory account to the actual inventory available. Even though perpetual inventory systems update inventory records continuously throughout the accounting period, physical inventory counts are still required periodically to reconcile any discrepancies and ensure the accuracy of the inventory balance in the system.

Question 4

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 should not be included in the Merchandise Inventory account because it does not have value or contribute to the company's ability to generate revenue.

Question 5

The consistency concept:
A) Prescribes a company use the same accounting method of inventory valuation, an exception being when a change from one method to another will improve its 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 full disclosure principle.
E) Is also called the matching principle.

Accepted Answer

The consistency concept prescribes that a company use the same accounting method of inventory valuation, an exception being when a change from one method to another will improve its financial reporting. This ensures that financial statements are comparable over time and allows for easier analysis and decision-making.

Question 6

Since an error in the period-end inventory causes an offsetting error in the next period:
A) Managers can ignore the error.
B) It is said to be self-correcting.
C) It affects only income statement accounts.
D) If affects only balance sheet accounts.
E) Is immaterial for managerial decision making.

Accepted Answer

An error in period-end inventory is said to be self-correcting since the overstated/understated inventory balance at the end of one period will offset the opposite effect in the beginning of the next accounting period. Therefore, managers need not take any corrective action to rectify it. However, it may affect both the income statement and balance sheet accounts, and the materiality of the error needs to be considered for managerial decision-making.

Question 7

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, as it assumes that the oldest items are sold first, leaving the most recently purchased or produced items in inventory. This method often mimics the actual flow of goods for many businesses, where older stock is used or sold before newer stock.

Question 8

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. This includes both damaged and non-damaged goods, as well as goods in transit and on consignment.

Question 9

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

Start with beginning inventory of $412,000. The information in the first bullet point was handled correctly since inventory should include consigned goods for which the subject company is the consignor. No adjustment. With respect to the second bullet point, inventory should not include office supplies held for use. Subtract $22,000. Ending inventory should be $412,000 - $22,000 = $390,000.

Question 10

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

Start with beginning inventory of $412,000. The information in the first bullet point was handled correctly since inventory should not include goods shipped FOB destination that have not yet been received by the buyer. With respect to the second bullet point, damaged goods should not be included in inventory at their original cost if the net realizable value is materially below cost. Subtract $28,000 ($38,000 - $10,000). Ending inventory should be $412,000 - $28,000 = $384,000.

Question 11

The full disclosure principle:
A) Prescribes that the notes to the financial statements report the change from one inventory valuation method to another.
B) Requires that companies use the same accounting method for inventory valuation period after period.
C) Is not subject to the consideration of materiality.
D) Is only applied to retailers and manufacturers.
E) Is also called the consistency principle.

Accepted Answer

The full disclosure principle requires that all material information that may influence the decision-making of users of the financial statements should be disclosed. This includes changes in accounting policies or methods, such as the change from one inventory valuation method to another, which must be disclosed in the notes to the financial statements. Therefore, option A is the correct answer. Option B is incorrect because the consistency principle requires the company to use the same accounting method for a given item from one period to another. Option C is incorrect because materiality is always considered when applying the full disclosure principle. Option D is incorrect because the full disclosure principle applies to all types of businesses, not just retailers and manufacturers. Option E is incorrect because the consistency principle is sometimes referred to as the principle of regularity.

Question 12

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 are the inventory costing methods that 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. 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 lead to consistent outcomes in both perpetual and periodic systems.

Question 13

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

Question 14

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

During periods of inflation, the cost of inventory increases over time. Therefore, the LIFO (last-in, first-out) method assumes that the most recently acquired inventory is sold first, resulting in higher cost of goods sold (COGS) and lower taxable income. This makes LIFO the best choice for reducing taxable income during inflationary periods.

Question 15

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

The cost of goods available for sale (which includes beginning inventory and net purchases) must be allocated between ending inventory and cost of goods sold. Therefore, the correct choice is D, ending inventory and cost of goods sold.

Question 16

Goods in transit are included in a purchaser's inventory:
A) At any time during transit.
B) When the purchaser is responsible for paying freight charges.
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 should be included in the purchaser's inventory when the purchaser is responsible for paying the freight charges since the ownership and title of the goods have been transferred to the purchaser at that point. If the supplier is responsible for freight charges, then the goods are still considered part of the supplier's inventory until they are received by the purchaser. Choice D (if the goods are shipped FOB destination) is also a valid answer, as this term indicates that the seller is responsible for the goods until they reach their destination and ownership/title transfer to the purchaser. However, choice B is more comprehensive as it covers any situation where the purchaser is responsible for freight charges, regardless of the shipping terms. Choices A, C, and E are incorrect.

Question 17

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 be independent of those responsible for the inventory to ensure objectivity and reduce the risk of collusion or fraud.

Question 18

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

Start with beginning inventory of $215,000. The information in the first bullet point was handled correctly. No adjustment is needed for that merchandise. For the second bullet point, the $44,000 of goods should not have been included in ending inventory since the goods were shipped FOB destination. Subtract $44,000. For the third bullet point, ending inventory should not include goods held on consignment from another company. Subtract $15,000. The information in the fourth bullet point was handled correctly. No adjustment is needed. $215,000 - $44,000 - $15,000 = $156,000.

Question 19

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 indeed goods shipped by the owner (consignor) to the consignee, who then sells the goods on behalf of the owner. The consignee does not own the goods but acts as an agent for the consignor.

Question 20

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 a period of steadily rising costs, FIFO (first-in, first-out) method yields the highest reported net income among the inventory valuation methods because it assumes that the oldest items in inventory are sold first, which results in lower cost of goods sold and higher ending inventory value.

Quiz 5: Inventories and Cost of Sales

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

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

Physical counts of inventory:

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

The consistency concept:

Since an error in the period-end inventory causes an offsetting error in the next period:

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:

Merchandise inventory includes:

The full disclosure principle:

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?

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

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

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

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

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

Consignment goods are:

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