Question 1

Items on Harris's ledger for inventory that are purchased and correctly debited to 2013 purchases, but improperly included in 2013 ending inventory would have overstated both asset and pre-tax income of 2013.

Accepted Answer

If the items are incorrectly included in 2013 ending inventory, it would actually understate pre-tax income for 2013 because the cost of goods sold would be understated. Additionally, it would overstate the value of the ending inventory asset.

Question 2

The purchases account used in a periodic inventory system contains a running balance of the inventory during the accounting period.

Accepted Answer

The purchases account in a periodic inventory system tracks only the cost of goods purchased during the accounting period, not the actual inventory balance. The balance of inventory is determined by taking physical inventory at the end of the period.

Question 3

Counter-balancing inventory errors have no effect on the financial statements whatsoever.

Accepted Answer

Counter-balancing inventory errors can have significant impacts on the financial statements, such as misreported profits, assets, and liabilities. These errors occur when two or more mistakes cancel each other out, giving the impression that everything is correct when, in fact, it is not. Therefore, it is essential to identify and correct these errors to ensure financial statements' accuracy and reliability.

Question 4

The average cost method of inventory valuation can be applied in exactly the same way by using either the periodic or perpetual inventory system.

Accepted Answer

The average cost method can be applied under both the periodic and perpetual inventory systems, but the calculation and application differ. In a periodic system, the average cost is calculated at the end of the period based on the goods available for sale during the entire period. In a perpetual system, the average cost is recalculated after each purchase, continuously updating the average cost of inventory throughout the accounting period.

Question 5

The weighted-average inventory method rarely is used with periodic inventory procedures.

Accepted Answer

The weighted-average inventory method is commonly used with periodic inventory procedures because it simplifies the calculation of the cost of goods sold and ending inventory by averaging the costs of all goods available for sale during the period.

Question 6

Sales taxes paid by the purchaser that cannot be claimed back will usually become a part of the cost of the inventory.

Accepted Answer

Sales taxes paid by the purchaser that cannot be claimed back will increase the cost of inventory since they are not deductible, therefore, they become a part of the cost of the inventory.

Question 7

Items bought under repurchase agreements are recorded as liabilities by the purchasing company.

Accepted Answer

Items bought under repurchase agreements are typically recorded as assets by the purchasing company, not liabilities. The cash paid for these items is recorded as a liability.

Question 8

When a perpetual inventory system is used, the inventory account is usually a control account maintained in the general ledger.

Accepted Answer

In a perpetual inventory system, the inventory account is updated continuously as goods are bought and sold. This account is usually maintained in a separate subsidiary ledger and serves as a detailed record of the movements of inventory. The balance in the subsidiary ledger is then periodically reconciled with the balance in the general ledger control account. Therefore, the inventory account is indeed a control account maintained in the general ledger.

Question 9

FIFO will produce the same ending inventory result regardless of whether a periodic or perpetual inventory system is used.

Accepted Answer

The FIFO (first in, first out) method is a consistent inventory valuation method that assumes the oldest goods are sold first. Regardless of whether a periodic or perpetual inventory system is used, the same FIFO method will result in the same ending inventory valuation.

Question 10

The gross profit method may be used to estimate inventory during interim periods when a full physical count cannot be performed, or to test the reasonableness of a physical count.

Accepted Answer

The gross profit method is commonly used to estimate inventory during interim periods when a full physical count cannot be performed, or to test the reasonableness of a physical count. This method estimates inventory by using historical gross profit percentages to calculate the cost of goods sold and then subtracting it from net sales to arrive at an estimate of ending inventory. However, it is important to note that this method is only an estimate and may not provide a completely accurate picture of actual inventory levels.

Question 11

Sales taxes are subject to input tax credits while value-added (VAT) taxes are not.

Accepted Answer

Sales taxes are levied on the final consumer, while VAT is levied on businesses at each stage of the production and distribution process. Input tax credits allow businesses to deduct the VAT they have paid on their purchases from the VAT they owe on their sales.

Question 12

Under a periodic inventory system, cost of goods sold is a residual amount and, for all practical purposes, cannot be verified independently from the inventory records.

Accepted Answer

In periodic inventory system, cost of goods sold is calculated as a residual amount by subtracting ending inventory from the cost of goods available for sale. Since there is no continuous record keeping of inventory levels and transactions, it's difficult to verify the accuracy of cost of goods sold independently from the inventory records.

Question 13

If ending inventories are overstated, net income is understated.

Accepted Answer

If ending inventories are overstated, the cost of goods sold will be understated, which in turn will lead to an overstatement of net income.

Question 14

The allocation of the cost of goods available for sale during a reporting period involves the flow of costs rather than the flow of units.

Accepted Answer

The cost of goods available for sale includes both the cost of goods sold and the cost of ending inventory. Allocating the cost involves assigning the cost to the units sold and units remaining in inventory, not the other way around. Therefore, the flow of costs is more important than the flow of units.

Question 15

Harris company has items that were incorrectly omitted from purchases made in 2013, but entered correctly in ending inventory. These would have overstated pre-tax income and understated liabilities.

Accepted Answer

If the items were omitted from purchases but correctly included in ending inventory, it would appear as though less was purchased and more was sold, leading to higher income and lower liabilities. Including the omitted items in purchases would decrease income and increase liabilities, correcting the overstatement and understatement.

Question 16

If purchases made in one year are mistakenly recorded the following year, this error will counterbalance, that is, there will be no effect on income over a 2-year period.

Accepted Answer

The error will overstate expenses in the year the purchases are mistakenly recorded and understate expenses in the year they should have been recorded, but over a 2-year period, the total expenses and income will be correctly stated, thus counterbalancing the mistake.

Question 17

The harmonization of the provincial sales tax and GST effectively results in a value-added tax (VAT).

Accepted Answer

Harmonization of the provincial sales tax and GST results in a combined tax system that is similar to a value-added tax (VAT) commonly used in other countries. This is because both taxes are combined and applied to the final consumer price, with businesses able to claim back any input tax credits. Therefore, the statement is true.

Question 18

Use of a perpetual inventory system versus a periodic inventory system may affect the application of the inventory cost flow methods.

Accepted Answer

Due to the constant updating of inventory records in a perpetual inventory system, it is easier to track the cost flow of each item and apply methods such as FIFO or LIFO. In a periodic inventory system, cost flow methods are typically applied on a periodic basis and rely on physical counts of inventory. Therefore, the choice of inventory system can impact the application of cost flow methods.

Question 19

Under a periodic inventory system, the ending inventory balance is computed as a residual amount.

Accepted Answer

Under a periodic inventory system, the ending inventory balance is determined by subtracting the cost of goods sold from the total cost of goods available for sale. Therefore, it is a residual amount.

Question 20

The same inventory costing method must be used on the income tax return, on the income statement, and in the ledger accounts of the company.

Accepted Answer

Companies often use different inventory costing methods for financial reporting and tax purposes due to differences in accounting standards and tax regulations.

Quiz 8: Cost-Based Inventories and Cost of Sales