Question 1

Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of the merchandise sold.

Accepted Answer

Under the periodic inventory system, a physical inventory is taken at the end of a certain period to determine the cost of the inventory on hand and the cost of the merchandise sold during that period.

Question 2

The average cost inventory method is the rarely used with a perpetual inventory system.

Accepted Answer

The average cost inventory method is typically used with a periodic inventory system, not a perpetual inventory system.

Question 3

One of the two internal control procedures over inventory is to properly report inventory on the financial statements.

Accepted Answer

Properly reporting inventory on financial statements is a crucial internal control procedure to ensure accurate and reliable financial reporting. It involves recording inventory at the appropriate cost, generally accepted accounting principles (GAAP), and valuing inventory at the lower of cost or market value. This helps prevent misstatements and manipulation of financial statements, which can have severe consequences, including legal and financial penalties.

Question 4

The three inventory costing methods will normally each yield different amounts of net income.

Accepted Answer

Each inventory costing method (FIFO, LIFO, and average cost) involves a different allocation of costs to goods sold and ending inventory, which will affect the amount of net income reported on the financial statements.

Question 5

The selection of an inventory costing method has no significant impact on the financial statements.

Accepted Answer

The selection of an inventory costing method (such as LIFO, FIFO, or weighted average) can have a significant impact on a company's financial statements, including its balance sheet, income statement, and cash flow statement. Different costing methods can lead to different amounts reported for inventory, cost of goods sold, and gross profit, which in turn affect key financial ratios and metrics such as inventory turnover, gross margin, and net income. Companies must disclose their inventory costing method in the footnotes to their financial statements, and should carefully consider the impact of different methods on their financial reporting and tax obligations.

Question 6

If the perpetual inventory system is used, the account entitled Merchandise Inventory is debited for purchases of merchandise.

Accepted Answer

In a perpetual inventory system, the Merchandise Inventory account is updated continuously to reflect the current balance of inventory on hand. When merchandise is purchased, the Merchandise Inventory account is debited to increase the balance of inventory.

Question 7

Under the periodic inventory system, the merchandise inventory account continuously discloses the amount of inventory on hand.

Accepted Answer

Under the periodic inventory system, the merchandise inventory account is only updated at the end of the accounting period (typically monthly or annually) to reflect the ending inventory balance. This means that the merchandise inventory account does not continuously disclose the amount of inventory on hand. Instead, the inventory balance is determined through a physical count and valuation at the end of the period.

Question 8

FIFO is the inventory costing method that follows the physical flow of the goods.

Accepted Answer

FIFO stands for First-In, First-Out, which means that the first items purchased are the first ones sold or used, and the cost of those items is the first one to be allocated to the cost of goods sold. This method follows the physical flow of goods, as it assumes that the oldest inventory is always used first.

Question 9

The specific identification inventory method should be used when the inventory consists of identical, low cost units that are purchased and sold frequently.

Accepted Answer

The specific identification method should be used when the inventory consists of higher cost, unique items such as artwork or jewelry. The first-in, first-out (FIFO) or weighted-average cost methods are more appropriate for identical, low-cost items that are frequently purchased and sold.

Question 10

When using the FIFO inventory costing method, the most recent costs are assigned to the cost of goods sold.

Accepted Answer

In the FIFO inventory costing method, the oldest costs are assigned to the cost of goods sold, while the most recent costs are assigned to the ending inventory.

Question 11

A purchase order establishes an initial record of the receipt of the inventory.

Accepted Answer

A purchase order is a document sent from a buyer to a supplier requesting goods or services, not a record of the receipt of inventory. The receipt of inventory is typically documented through a receiving report or goods received note.

Question 12

Of the three widely used inventory costing methods (FIFO, LIFO, and average cost), the LIFO method of costing inventory assumes costs are charged based on the most recent purchases first.

Accepted Answer

LIFO stands for "last in, first out," which means that the most recent inventory purchases are assumed to be sold first, and their costs are charged to cost of goods sold (COGS) before older inventory costs. This results in a lower taxable income because the most recent, and often higher, purchase costs are matched with revenue first, reducing profit margins.

Question 13

A perpetual inventory system is an effective means of control over inventory.

Accepted Answer

A perpetual inventory system involves continuous tracking and updating of inventory levels, which can provide real-time information on stock levels, reorder points, and inventory costs. This level of control can result in better inventory management and cost savings for businesses.

Question 14

A physical inventory should be taken at the end of every month.

Accepted Answer

A physical inventory should be taken periodically, but the frequency may vary depending on the business needs and size. Monthly might be too frequent for some businesses, while others might need to do it more often.

Question 15

During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO cost method.

Accepted Answer

This statement is true. During periods of increasing costs, the FIFO method assumes that the first units purchased are also the first units sold, resulting in a lower cost of goods sold and a higher net income compared to the LIFO method which assumes that the last units purchased are the first units sold, resulting in a higher cost of goods sold and a lower net income.

Question 16

Inventory controls start when the merchandise is shelved in the store area.

Accepted Answer

Inventory controls start before the merchandise is shelved in the store area, with activities such as ordering, receiving, and verifying the products.

Question 17

The average cost method will always yield results between FIFO and LIFO.

Accepted Answer

The average cost method takes the weighted average of the inventory cost and allocates it to each unit sold. Since it considers the cost of all units, not just the oldest or newest, it always falls between the results of FIFO and LIFO.

Question 18

Under the LIFO inventory costing method, the most recent costs are assigned to ending inventory.

Accepted Answer

Under the LIFO (Last In, First Out) inventory costing method, the most recent costs are assigned to the cost of goods sold, while the older costs remain in ending inventory.

Question 19

Safeguarding inventory and proper reporting of the inventory in the books are the reasons for controlling the inventory.

Accepted Answer

Controlling inventory helps to ensure that it is safeguarded from theft or damage, and also allows for accurate reporting of inventory levels and values in the accounting books.

Question 20

A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels.

Accepted Answer

A subsidiary inventory ledger can provide detailed information on inventory levels, allowing for easier monitoring and control of inventory levels to keep them at their optimal levels.

Quiz 7: Inventories