Question 1

Regardless of the inventory costing system used, cost of goods available for sale must be allocated at the end of the period between
A) net purchases during the period and ending inventory.
B) beginning inventory and cost of goods sold.
C) ending inventory and beginning inventory.
D) ending inventory and cost of goods sold.
E) beginning inventory and net purchases during the period.

Accepted Answer

According to the formula for calculating cost of goods sold, we need to subtract the ending inventory from the cost of goods available for sale. Hence, the remaining amount would represent the cost of goods sold. Therefore, the allocation of cost of goods available for sale must be between ending inventory and cost of goods sold.

Question 2

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) Lower of cost or market.
B) Specific identification.
C) FIFO.
D) Weighted average.
E) LIFO.

Accepted Answer

FIFO (First-In, First-Out) assigns the oldest costs to the cost of goods sold and the most recent costs to ending inventory, which often approximates current cost and mimics the actual flow of goods for many businesses.

Question 3

The inventory valuation method that tends to smooth out erratic changes in costs is:
A) LIFO.
B) WIFO.
C) FIFO.
D) Weighted average.
E) Specific identification.

Accepted Answer

Weighted average method takes into account all costs incurred during a period and hence smooths out any erratic changes in costs.

Question 4

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

Accepted Answer

The full disclosure principle requires that any significant accounting policies and methods used by a company be fully disclosed in the financial statements. This includes any changes in these policies or methods, such as a change in inventory valuation method. So, the notes to the financial statements report the change from one inventory valuation method to another. Option A is incorrect because the consistency principle requires that companies use the same accounting method for inventory valuation period after period. Option B is incorrect because the full disclosure principle is subject to the consideration of materiality. Option D is incorrect because the consistency principle is different from the full disclosure principle. Option E is incorrect because the full disclosure principle applies to all companies, not just retailers and manufacturers.

Question 5

Merchandise inventory includes:
A) All goods in transit.
B) All goods on consignment.
C) Only damaged goods.
D) All goods owned by a company and held for sale.
E) Only non-damaged goods.

Accepted Answer

Merchandise inventory includes all goods owned by a company and held for sale. It does not include goods in transit or on consignment, nor does it specify whether the goods are damaged or non-damaged.

Question 6

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

Accepted Answer

An error in the period-end inventory is said to be self-correcting because the offsetting error will affect the next period's financial statements. This means the error will eventually correct itself and not have a long-term impact on managerial decision making.

Question 7

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

Accepted Answer

Consignment goods are goods shipped by the owner (consignor) to the consignee who sells the goods for the owner. In this case, the consignor retains ownership of the goods until they are sold, and the consignee acts as an agent for the consignor. Consignment goods are not paid for by the consignee until they are sold. Consignment goods should be reported as inventory in the consignor's books, but should not be included in the consignee's inventory since they do not own the goods.

Question 8

Costs included in the Merchandise Inventory account can include all of the following except:
A) Damaged inventory that cannot be sold.
B) Storage.
C) Invoice price minus any discount.
D) Insurance.
E) Transportation-in.

Accepted Answer

Damaged inventory that cannot be sold would be excluded from the Merchandise Inventory account as it is not saleable and should be classified as a loss.

Question 9

The consistency concept:
A) Is also called the full disclosure principle.
B) Is also called the matching principle.
C) Requires a company to use one method of inventory valuation exclusively.
D) 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.
E) Requires that all companies in the same industry use the same accounting methods of inventory valuation.

Accepted Answer

The consistency concept prescribes a company use the same accounting method of inventory valuation, with an exception being when a change from one method to another will improve its financial reporting. This means that a company should use one method consistently over time, but may make a change if it will result in more accurate financial reporting. Therefore, choice D is the correct answer.

Question 10

Internal controls that should be applied when a business takes a physical count of inventory should include all of the following except:
A) A manager confirms that all inventories are ticketed only once.
B) Counters of inventory should be those who are responsible for the inventory.
C) Counters confirm the validity of inventory existence, amounts, and quality.
D) Prenumbered inventory tickets.
E) Second counts by a different counter.

Accepted Answer

Counters of inventory should not be those who are responsible for the inventory to ensure objectivity and prevent potential conflicts of interest or manipulation.

Question 11

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

Accepted Answer

The LIFO conformity rule requires companies to use the same inventory costing method for tax reporting as they do for financial reporting, specifically disallowing the use of LIFO for financial reporting if it is not also used for tax reporting. This is an exception to the possibility of using different costing methods for these two types of reporting. The other choices are generally accepted accounting principles that companies should follow but do not directly address the issue of using different costing methods for financial and tax reporting.

Question 12

Physical counts of inventory:
A) Are necessary to adjust the Inventory account to the actual inventory available.
B) Requires the use of hand-held portable computers.
C) Are not necessary under the cost-to benefit constraint.
D) Are not necessary under the perpetual system.
E) Must be taken at least once a month.

Accepted Answer

Physical counts of inventory are necessary to adjust the Inventory account to the actual inventory available. This helps ensure the accuracy of the financial statements and is required for both periodic and perpetual inventory systems. Hand-held portable computers can be used to facilitate the counting process, but they are not always necessary. The frequency of physical counts depends on a company's internal control policies and procedures, but they should be taken at least once a year.

Question 13

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 weighted-average cost
B) FIFO and LIFO
C) Specific identification and FIFO
D) LIFO and weighted-average cost
E) LIFO and specific identification

Accepted Answer

The specific identification and FIFO methods will result in the same values for ending inventory and cost of goods sold under both perpetual and periodic systems because they track actual costs and the order of inventory usage, respectively.

Question 14

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^whichBedrock was the consignor. • ^The^ending^inventory^balance^of^$412,000^included^$22,000^of^office^supplies^that^were^storedⁱⁿthe 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) $318,000 C) $340,000 D) $390,000 E) $362,000

Accepted Answer

The correct ending inventory should exclude the consigned inventory ($72,000) and office supplies ($22,000) as they are not part of the inventory available for sale. Therefore, $412,000 - $72,000 - $22,000 = $318,000.

Question 15

The inventory valuation method that results in the lowest taxable income in a period of inflation is:
A) LIFO method.
B) FIFO method.
C) Specific identification method.
D) Weighted-average cost method.
E) Gross profit method.

Accepted Answer

In a period of inflation, the cost of goods sold (COGS) increases, leading to a lower taxable income. This is because the inventory valuation methods assume that the goods sold are the ones purchased most recently. Therefore, under the Last-In, First-Out (LIFO) method, the cost of goods sold will be higher, and the ending inventory value will be lower compared to the First-In, First-Out (FIFO) method. This causes a greater reduction in taxable income, making LIFO the most suitable method for reducing taxes in periods of inflation.

Question 16

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

Accepted Answer

FIFO method assumes that the first items purchased are the first ones sold, meaning that the cost of goods sold matches the oldest and lowest priced inventory. During a period of rising costs, using FIFO will result in lower cost of goods sold and higher net income, as it will include older, cheaper inventory in the calculation. Therefore, A) FIFO method yields the highest reported net income.

Question 17

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^werepurchased 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) $422,000 C) $460,000 D) $384,000 E) $438,000

Accepted Answer

The correct balance for ending inventory on December 31 can be calculated as follows:

Beginning inventory balance = $412,000 
Add: Cost of goods purchased on Dec. 28 = $48,000 
Subtract: Damaged goods at original cost = $38,000 
Subtract: Net loss from damaged goods = $28,000 ($38,000 - $10,000)

Ending inventory balance = $412,000 + $48,000 - $38,000 - $28,000 = $384,000

Therefore, the correct answer is D.

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^December²⁸^withshipping 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^FOBdestination 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^onconsignment from Carole Company. (Plunkett Company is the consignee.) • ^Plunkett's^ending^inventory^balance^of^$215,000^did^not^include^goods^costing^$95,000^that^wereshipped 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) $209,000 B) $156,000 C) $200,000 D) $171,000 E) $194,000

Accepted Answer

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

Question 19

If a period-end inventory amount is reported in error, it can cause a misstatement in all of the following except:
A) Gross profit.
B) Cost of goods sold.
C) Current assets.
D) Net sales.
E) Net income.

Accepted Answer

The period-end inventory amount is not directly related to net sales, therefore a misstatement in the inventory amount would not cause a misstatement in net sales. However, it would affect the calculation of cost of goods sold, gross profit, and current assets, all of which are dependent on the inventory amount. It would ultimately affect net income as well, as it is calculated by subtracting expenses (including cost of goods sold) from revenue.

Question 20

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) After the half-way point between the buyer and seller.
E) If the goods are shipped FOB destination.

Accepted Answer

Goods in transit are included in a purchaser's inventory when the purchaser is responsible for paying freight charges. This is because ownership of the goods passes from seller to buyer at this point, and the buyer has the risks and rewards of ownership. If the supplier is responsible for freight charges, the goods are not yet owned by the purchaser and therefore are not included in their inventory. FOB destination means that the supplier is responsible for freight charges but the goods are owned by the purchaser once they reach their destination.

Quiz 6: Inventories and Cost of Sales

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

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:

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

The full disclosure principle:

Merchandise inventory includes:

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

Consignment goods are:

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

The consistency concept:

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

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

Physical counts of inventory:

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?

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

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

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

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