Question 1

To avoid the time-consuming process of taking an inventory each year, the majority of companies use the gross profit method to estimate ending inventory.

Accepted Answer

The gross profit method is not commonly used for annual inventory estimation due to its inaccuracy; it is typically used for interim financial statements or when inventory records are destroyed.

Question 2

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

Accepted Answer

LIFO (last in, first out) method assumes that the most recent inventory purchases are sold first, thereby assigning the highest cost of goods sold to the current period, resulting in the lowest taxable income during a period of rising costs. This is because the older, lower-cost inventory remains on the balance sheet, which is valued at an earlier cost basis. Therefore, LIFO is the best choice to minimize tax liability during inflationary periods.

Question 3

Using the retail inventory method, if the cost to retail ratio is 60% and ending inventory at retail is $45,000, then estimated ending inventory at cost is $27,000.
45,000 × .6 = 27,000

Accepted Answer

This is correct because the retail inventory method involves calculating the estimated cost of ending inventory by multiplying the ending inventory at retail by the cost to retail ratio. In this case, $45,000 x 0.6 (or 60%) equals $27,000. Therefore, the estimated ending inventory at cost is $27,000.

Question 4

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

Accepted Answer

An error in the period-end inventory (balance sheet account) can result in an offsetting error in the next period's cost of goods sold (income statement account). This is sometimes said to be self-correcting because the error in one period will balance out the error in the next period. However, managers should still correct the error to ensure accurate financial statements and decision-making in the long term.

Question 5

The reasoning behind the retail inventory method is that if an accurate estimate of the cost-to-retail ratio is made, ending inventory at retail can be multiplied by the ratio to estimate ending inventory at cost.

Accepted Answer

This is correct. The retail inventory method is based on the assumption that there is a consistent relationship between the cost and retail prices of goods, and that this relationship can be used to estimate the cost of ending inventory based on its retail value. By multiplying ending inventory at retail by the cost-to-retail ratio, we can obtain an estimate of the ending inventory at cost.

Question 6

Merchandise inventory includes:
A)All goods a company owns and holds for sale.
B)All goods in transit.
C)All goods on consignment.
D)Only damaged goods.
E)Only items that are on the shelf.

Accepted Answer

Merchandise inventory includes all goods a company owns and holds for sale. This includes goods that are already in the company's possession as well as those that are owned but not yet received or shipped. Goods on consignment or in transit are not considered merchandise inventory until they are under the company's control. Damaged goods may or may not be included in merchandise inventory, depending on the company's policy. Items that are on the shelf are typically included in merchandise inventory, but this is not the only category of goods that is included.

Question 7

In the retail inventory method of inventory valuation, the retail amount of inventory refers to the dollar amount measured using selling prices of inventory items.

Accepted Answer

In the retail inventory method, the inventory is valued based on the selling prices of the items, known as the retail value. This is because the method involves calculating the cost of the inventory based on a percentage of its selling price. Therefore, the retail amount refers to the dollar amount measured using selling prices of inventory items.

Question 8

The full disclosure principle:
A)Is also called the consistency principle.
B)Prescribes that companies use the same accounting method for inventory valuation period after period.
C)Is not subject to the materiality principle.
D)Is only applied to retailers.
E)Prescribes that the notes to the financial statements report when a change in inventory valuation method is made, its justification and its effect on net income.

Accepted Answer

The full disclosure principle prescribes that companies report any material information that could impact a user's understanding of the financial statements. This includes reporting changes in accounting policies, such as inventory valuation, and their impact on net income. Therefore, the correct answer is E.

Question 9

The consistency concept:
A)Prescribes that a company use the same accounting method period after period except when a change of method will improve financial reporting.
B)Requires a company to use a single method of inventory valuation for all categories of inventory.
C)Requires that all companies in the same industry use the same method of inventory valuation.
D)Is also called the full disclosure concept.
E)Is also called the matching concept.

Accepted Answer

The consistency concept prescribes that a company use the same accounting method period after period except when a change of method will improve financial reporting. This ensures that financial statements are comparable over time and facilitates decision-making by users of the financial statements.

Question 10

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

Accepted Answer

Physical inventory counts are necessary to verify the accuracy of the Inventory account balance and to identify any discrepancies between the actual inventory available and the recorded balance. This is important to ensure that financial statements accurately reflect the company's true financial position. While physical inventory counts may not be required as frequently under the perpetual system compared to periodic system, they are still necessary at least once a year. Hand-held portable computers may be used to facilitate the process, but they are not a requirement. Cost-to-benefit constraint may be considered in deciding the frequency and scope of physical inventory counts, but they are still necessary.

Question 11

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

Accepted Answer

Goods on consignment are shipped by the owner (consignor) to the consignee, who sells the goods on behalf of the owner. The goods remain the property of the consignor until sold.

Question 12

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

Accepted Answer

LIFO (Last-in, First-out) method assumes that the most recently purchased inventory items are sold first, which means that the cost of the oldest inventory is assigned to cost of goods sold. During a period of steadily rising costs, the oldest (cheaper) inventory items will be consumed first, which leads to a higher cost of goods sold and a lower reported net income. Therefore, LIFO yields the lowest reported net income compared to other inventory valuation methods.

Question 13

Given the following items and costs as of the balance sheet date, determine the value of Light Company's merchandise inventory. 
A)$7,000
B)$7,800
C)$9,800
D)$9,000
E)$6,800

Accepted Answer

The answer of Given the following items and costs as...

Question 14

The reliability of the gross profit method depends on an accurate and stable estimate of the gross profit ratio.

Accepted Answer

The reliability of the gross profit method is based on the accuracy and consistency of the gross profit ratio estimate used in the calculation. If this estimate is not stable or reliable, the results of the method will not be accurate. Therefore, an accurate and consistent estimate of the gross profit ratio is essential for the reliability of the gross profit method.

Question 15

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

Accepted Answer

Goods in transit should be included in the purchaser's inventory when the purchaser is responsible for paying freight charges. This is because the purchaser has legal ownership of the goods during transit and therefore should include them in their inventory.

Question 16

Given the following items and costs as of the balance sheet date, determine the value of Faltron Company's merchandise inventory. 
A)$10,000
B)$6,500
C)$5,500
D)$5,000
E)$4,500

Accepted Answer

The answer of Given the following items and costs as...

Question 17

Which inventory valuation method assigns a value to the inventory on the balance sheet that approximates current cost and also mimics the actual flow of goods for most businesses?
A)FIFO
B)Weighted average
C)LIFO
D)Specific identification
E)First in still here

Accepted Answer

FIFO (First-In, First-Out) assigns a value to inventory that approximates current cost and mimics the actual flow of goods for most businesses, as it assumes the oldest inventory items are sold first.

Question 18

Upon taking a physical count of its inventory, Damber Corp. determines that $5,500 of goods have become damaged due to a water leak in the warehouse. It is decided that $2,300 of the goods are not sellable and the remainder can be sold at a reduced price of $2,750. The cost incurred to sell the goods will be $800. The damaged goods should be included in inventory at a value of:
A)$3,200
B)$3,550
C)$5,050
D)$1,950
E)$450

Accepted Answer

The sellable portion of the damaged goods is valued at the reduced selling price of $2,750 minus the cost to sell of $800, resulting in a net realizable value of $1,950. The unsellable portion is not included in inventory.

Question 19

Damaged and obsolete goods:
A)Are never included in inventory.
B)Are included in inventory at their full cost.
C)Are included in inventory at their net realizable value.
D)Should be disposed of immediately.
E)Are assigned a value of zero.

Accepted Answer

Damaged and obsolete goods are included in inventory at their net realizable value, which is the estimated selling price less any costs of completion, disposal, and transportation. This reflects the true value of the goods and is required by generally accepted accounting principles (GAAP). Including them at full cost or assigning a value of zero would result in overstating or understating the inventory value. Disposing of them immediately may also not be the best course of action, as there may still be some value that can be salvaged through alternative uses or sales channels.

Question 20

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

Accepted Answer

Weighted average takes into account all units and their respective costs over a period of time, therefore smoothing out any erratic changes in costs.

Quiz 5: Reporting and Analyzing Inventories

To avoid the time-consuming process of taking an inventory each year, the majority of companies use the gross profit method to estimate ending inventory.

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

Using the retail inventory method, if the cost to retail ratio is 60% and ending inventory at retail is $45,000, then estimated ending inventory at cost is $27,000. 45,000 × .6 = 27,000

An error in the period-end inventory causes an offsetting error in the next period and therefore:

The reasoning behind the retail inventory method is that if an accurate estimate of the cost-to-retail ratio is made, ending inventory at retail can be multiplied by the ratio to estimate ending inventory at cost.

Merchandise inventory includes:

In the retail inventory method of inventory valuation, the retail amount of inventory refers to the dollar amount measured using selling prices of inventory items.

The full disclosure principle:

The consistency concept:

Physical inventory counts:

Goods on consignment:

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

Given the following items and costs as of the balance sheet date, determine the value of Light Company's merchandise inventory.

The reliability of the gross profit method depends on an accurate and stable estimate of the gross profit ratio.

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

Given the following items and costs as of the balance sheet date, determine the value of Faltron Company's merchandise inventory.

Which inventory valuation method assigns a value to the inventory on the balance sheet that approximates current cost and also mimics the actual flow of goods for most businesses?

Damaged and obsolete goods:

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