Question 1

Excess inventory results in all of the following except

Accepted Answer

Excess inventory typically leads to increased costs and risks, such as tied-up funds, higher storage expenses, and a greater risk of loss due to damage. However, it does not lead to lost sales; instead, lost sales are more often a result of insufficient inventory.

Question 2

The method of estimating inventory that uses records of the selling prices of the merchandise is called

Accepted Answer

The retail method estimates inventory value by calculating the cost of goods sold as a percentage of the selling price. It is based on the assumption that the merchandise will be sold at the marked-up price. This method is commonly used in retail industries such as clothing, electronics, and jewelry. It is also easy to use and can be applied to both initial and periodic inventory counts. Therefore, option A is the correct choice.

Question 3

If a company mistakenly counts less items during a physical inventory than actually exist, how will the error affect the cost of goods sold?

Accepted Answer

When a company counts fewer items than actually exist, it reports lower inventory levels. This leads to a higher cost of goods sold because the cost of the uncounted inventory is not subtracted from the total cost of goods available for sale.

Question 4

Which of the following is used to analyze the efficiency and effectiveness of inventory management?

Accepted Answer

Both inventory turnover and number of days' sales in inventory are used to analyze the efficiency and effectiveness of inventory management. Inventory turnover measures how many times a company sells and replaces its inventory within a given period, while number of days' sales in inventory measures the number of days it takes for a company to sell its inventory. Together, these metrics can provide insights into how well a company is managing its inventory levels and turning inventory into sales.

Question 5

A company will most likely use an estimated method of determining inventory when

Accepted Answer

The answer of A company will most likely use an...

Question 6

During the taking of its physical inventory on December 31, 2014, Barry's Bike Shop incorrectly counted its inventory as $350,000 instead of the correct amount of $280,000. The effect on the balance sheet and income statement would be

Accepted Answer

Overstating inventory by $70,000 would increase assets by the same amount. Since ending inventory is overstated, cost of goods sold would be understated, leading to an overstatement of net income. This, in turn, would cause retained earnings to be overstated by the same amount.

Question 7

Garrison Company uses the retail method of inventory costing. It started the year with an inventory that had a retail cost of $45,000. During the year, Garrison purchased an inventory with a retail sales value of $300,000. After performing a physical inventory, Garrison calculated the inventory at retail to be $80,000. The markup is 100% of cost. Determine the ending inventory at its estimated cost.

Accepted Answer

As the markup is 100% of cost, the ratio of cost to retail is 50%.
Ending inventory at cost = Ending inventory at retail × Ratio of cost to retail = $80,000 × 50% = $40,000

Question 8

For the year ended December 31, Depot Max's cost of goods sold was $56,900. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Depot Max's number of days' sales in inventory is closest to

Accepted Answer

Number of Days' Sales in Inventory = Average Inventory / Average Daily Cost of Goods Sold = [($6,540 + $7,250) ÷ 2] ÷ [$56,900 ÷ 365] = $6,895 ÷ 156 = 44?

Question 9

Too much inventory on hand

Accepted Answer

Too much inventory on hand ties up funds that could be used to improve operations, increases the cost to safeguard the assets, and increases the losses due to price declines. Therefore, all of these options are valid choices for why having too much inventory on hand can be a problem.

Question 10

All of the following are reasons to use an estimated method of costing inventory except ​

Accepted Answer

Maintaining purchase records is essential for both actual and estimated methods of costing inventory. The absence of purchase records would not be a reason to use an estimated method, as these records are crucial for estimating the cost of inventory as well.

Question 11

Which of the following measures the length of time it takes to acquire, sell, and replace inventory?

Accepted Answer

Number of days' sales in inventory measures the average number of days it takes for a company to sell its inventory. It is calculated by dividing the average inventory by the cost of goods sold per day. This measure includes the time it takes to acquire and replace inventory, as well as the time it takes to sell it. Inventory turnover (A) only measures the number of times inventory is sold and replaced during a period, and does not take into account the time it takes to sell the inventory. The retail method of inventory costing (C) and the gross profit method of inventory costing (D) are inventory valuation methods and do not measure the length of time it takes to acquire, sell, and replace inventory.

Question 12

If a company mistakenly counts more items during a physical inventory than actually exist, how will the error affect their bottom line?

Accepted Answer

If a company mistakenly counts more items during a physical inventory than actually exist, the inventory on the books will be overstated. This results in an overstatement of the cost of goods sold, which leads to an overstatement of expenses and a corresponding understatement of net income.

Question 13

Which of the following measures the relationship between cost of goods sold and the amount of inventory carried during the period?

Accepted Answer

Inventory turnover measures the number of times a company sells and replaces its inventory during a period, indicating how efficiently the company is managing its inventory. It is calculated by dividing cost of goods sold by average inventory during the same period.

Question 14

Stevens Company started the year with an inventory cost of $145,000. During the month of January, Stevens purchased inventory that cost $53,000. January sales totaled $140,000. Estimated gross profit is 35%. The estimated ending inventory as of January 31 is

Accepted Answer

Estimated cost of goods sold = Sales for January - Estimated gross profit = $140,000 - ($140,000 × 35%) = $140,000 - $49,000 = $91,000
Estimated inventory, January 31 = Merchandise available for sale - Estimated cost of goods sold = ($145,000 + 53,000) - $91,000 = $107,000
?

Question 15

Kristin's Boutiques has identified the following items for possible inclusion in its December 31 inventory. Which of the following would not be included in the year-end inventory?

Accepted Answer

Merchandise on consignment from Abby Co. is not owned by Kristin's Boutiques and should not be included in its inventory.

Question 16

For the year ended December 31, Depot Max's cost of goods sold was $56,900. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Compute Depot Max's inventory turnover for the year.

Accepted Answer

Inventory Turnover = Cost of Goods Sold / Average Inventory = $56,900 ÷ [(6,540 + 7,250) ÷ 2] = $56,900 ÷ 6,895 = 8.3?

Question 17

If the estimated rate of gross profit is 30%, what is the estimated cost of the inventory on September 30, based on the following data? $$\begin{array} { l l r } 
\text { Sep. } 1 & \text { Inventory (at cost) } & \$ 125,000 \
\text { Sep. 1-30 } & \text { Purchases, net (at cost) } & 300,000 \
\text { Sep. 1-30 } & \text { Sales } & 150,000
\end{array}$$

Accepted Answer

The estimated cost of the inventory on September 30 is $275,000. This is calculated by multiplying the estimated rate of gross profit (30%) by the sales for the period ($150,000) and then subtracting the result from the cost of goods sold ($300,000).

Question 18

On the basis of the following data, what is the estimated cost of the inventory on May 31 using the retail method? $$\begin{array} { l l r r } 
& & \text { Cost } & \text { Retail } \
\text { May 1 } & \text { Inventory } & \$ 125,000 & \$ 166,667 \
\text { May 1-31 } & \text { Purchases } & 235,000 & 313,333 \
\text { May 1-31 } & \text { Sales } & & 230,000
\end{array}$$

Accepted Answer

The retail method estimates the ending inventory value by using a cost-to-retail price ratio. First, calculate the cost and retail value of goods available for sale: Cost = $125,000 (beginning inventory) + $235,000 (purchases) = $360,000. Retail = $166,667 (beginning inventory) + $313,333 (purchases) = $480,000. Next, calculate the cost-to-retail ratio: $360,000 / $480,000 = 0.75. Then, subtract sales from the total retail value to find the ending inventory at retail: $480,000 - $230,000 = $250,000. Finally, apply the cost-to-retail ratio to estimate the ending inventory at cost: $250,000 * 0.75 = $187,500.

Question 19

If the cost of an item of inventory is $60 and the current replacement cost is $75, the amount included in inventory according to the lower of cost or market is

Accepted Answer

The lower of cost or market (LCM) rule states that inventory should be reported at the lower of its cost or its market value. In this case, the cost of an item is $60 and the replacement cost is $75. Since the replacement cost is higher than the cost, market value is not used. Therefore, the amount included in inventory according to the lower of cost or market is $60, which is the cost. Answer choice A and C are incorrect because they do not take into account the LCM rule. Answer choice D is incorrect because it uses the replacement cost instead of the cost.

Question 20

The number of days' sales in inventory measures

Accepted Answer

The number of days' sales in inventory measures the average time it takes to sell and replace the inventory, reflecting the efficiency of inventory management.

Quiz 6: Inventories