Question 1

At the time inventory is sold,cost of goods sold is recorded under the perpetual inventory system.

Accepted Answer

In a perpetual inventory system, cost of goods sold is recorded at the time of sale. This allows for real-time tracking of inventory levels and cost of goods sold.

Question 2

The LIFO conformity rule requires a company that uses LIFO for tax reporting to use FIFO for financial reporting.

Accepted Answer

The LIFO conformity rule requires a company that uses LIFO for tax reporting to also use LIFO for financial reporting, not FIFO.

Question 3

The gross profit ratio measures the amount by which the sale price of inventory exceeds its cost per dollar of sales.

Accepted Answer

The gross profit ratio formula is: (Gross Profit / Net Sales) x 100. It measures the profitability of a company's core business activities by expressing the gross profit as a percentage of net sales.

Question 4

The LIFO difference (reserve)is the additional amount of inventory a company would report if it used FIFO instead of LIFO.

Accepted Answer

The LIFO difference (reserve) represents the additional amount of inventory a company would report if it used FIFO (first-in, first-out) instead of LIFO (last-in, first-out). This is because LIFO assumes that the most recently acquired inventory is sold first, which can result in higher costs of goods sold and lower ending inventory balance. The LIFO reserve is the difference between the reported inventory balance under LIFO and the inventory balance that would be reported under FIFO.

Question 5

When the market value of inventory falls below its cost,no adjustment to the accounting records is needed.

Accepted Answer

When the market value of inventory falls below its cost, an adjustment to the accounting records is needed. This adjustment is called a write-down or write-off and it reduces the value of inventory on the balance sheet to its lower market value. Failure to make this adjustment can result in overstating the value of inventory and the company's profit margins.

Question 6

The use of the lower-of-cost-or-market method to report inventory is an example of conservatism in financial reporting.

Accepted Answer

The lower-of-cost-or-market method is a conservative approach in financial reporting as it values inventory at the lower of its original cost or current market value. This method ensures that inventory is not overstated on the balance sheet, which is in line with the principle of conservatism that encourages caution in financial reporting.

Question 7

One of the primary benefits of using FIFO when inventory costs are rising is that it results in greater tax savings.

Accepted Answer

FIFO (first in, first out) assumes that the items purchased first are the first items sold. When inventory costs are rising, using FIFO results in higher cost of goods sold and lower profits, which reduces tax savings. LIFO (last in, first out) typically results in lower taxable income and therefore greater tax savings when inventory costs are rising.

Question 8

Using a perpetual inventory system,the purchase of inventory is recorded with a debit to the Purchases account,which is a temporary account closed to cost of goods sold at the end of the period.

Accepted Answer

In a perpetual inventory system, inventory purchases are recorded directly in the Inventory account, not in a Purchases account.

Question 9

The inventory turnover ratio equals cost of goods sold divided by average inventory.

Accepted Answer

The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory.

Question 10

A periodic inventory system does not continually modify inventory amounts,but instead adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand.

Accepted Answer

This statement correctly describes a periodic inventory system.

Question 11

The adjustment to write down inventory from cost to its lower market value includes a debit to Cost of Goods Sold and a credit to Inventory.

Accepted Answer

This is correct accounting treatment for writing down inventory to its lower market value. The debit to Cost of Goods Sold reduces the company's net income, while the credit to Inventory reduces the value of inventory on the balance sheet.

Question 12

When the value of inventory falls below its cost,companies have the option of recording the inventory at cost or the lower market value.

Accepted Answer

Companies are required to record inventory at the lower of cost or market value, not as an option. This is in accordance with the lower of cost or market (LCM) rule in accounting.

Question 13

Using LIFO,the amount reported for ending inventory does not differ depending on whether a company uses a periodic system or a perpetual system.

Accepted Answer

The amount reported for ending inventory under LIFO method can differ depending on whether a company uses a periodic system or a perpetual system. In a periodic system, the ending inventory is calculated at the end of the accounting period based on physical count, whereas in a perpetual system, the ending inventory is calculated continuously through the use of the system's tracking feature. As a result, the ending inventory amounts can differ depending on the system used.

Question 14

Overstating ending inventory in the current year causes net income in the current year to be overstated.

Accepted Answer

This is because ending inventory is a part of current year's cost of goods sold calculation. Overstating the ending inventory will decrease the cost of goods sold and increase the gross profit, which in turn will increase the net income.

Question 15

Freight-in is included in the cost of inventory.

Accepted Answer

Freight-in makes up a part of the cost of inventory, therefore it should be included in the cost of inventory.

Question 16

For inventory that is shipped FOB shipping point,title transfers from the seller to the buyer once the seller ships the inventory.

Accepted Answer

This is because in FOB shipping point, the buyer takes responsibility for any damages or losses that occur during transportation, and therefore the ownership transfers to the buyer once the seller ships the inventory.

Question 17

A company that has average inventory of $500 and cost of goods sold of $2,000 would have an inventory turnover ratio of 0.25.

Accepted Answer

Inventory turnover ratio is calculated by dividing cost of goods sold by average inventory. So, in this case, the inventory turnover ratio would be 4 (2000/500), not 0.25.

Question 18

Generally,a higher inventory turnover ratio reflects positively on a company's ability to manage its inventory.

Accepted Answer

A higher inventory turnover ratio means that the company is able to sell off its inventory quickly and efficiently, which is a good sign for its overall management of inventory.

Question 19

For inventory that is shipped FOB destination,title transfers from the seller to the buyer once the seller ships the inventory.

Accepted Answer

For inventory that is shipped FOB destination, title transfers from the seller to the buyer once the inventory reaches the buyer's destination, not when the seller ships the inventory.

Question 20

Generally,a lower gross profit ratio reflects positively on a company's ability to manage its inventory.

Accepted Answer

A higher gross profit ratio reflects positively on a company's ability to manage its inventory, as it indicates that the company is able to sell its inventory at a higher profit margin. A lower gross profit ratio may indicate that the company is having difficulty selling its inventory or that it is carrying too much inventory.

Quiz 6: Inventory and Cost of Goods Sold