Question 1

Goods on consignment:

Accepted Answer

Goods on consignment are shipped by the owner (consignor) to the consignee, who then sells the goods on behalf of the owner. The consignee does not own the goods but acts as an agent for the consignor.

Question 2

Internal controls that should be applied when a business takes a physical count of inventory should include all of the following except:

Accepted Answer

The manager should confirm that all inventories are ticketed once, and only once, so option B is not a proper internal control that should be applied during a physical count of inventory. All other options are essential internal controls that should be in place during a physical inventory count. Prenumbered inventory tickets assist in tracking and provide transparency in the inventory count process; confirming the validity of inventory existence, amounts, and quality helps to identify any errors and discrepancies; second counts by a different counter assist in ensuring that the count is accurate, and counters of inventory should not be those who are responsible for the inventory as this may create a conflict of interest.

Question 3

If a period-end inventory amount is reported in error, it can cause a misstatement in all of the following except:

Accepted Answer

Net sales are primarily affected by the number of units sold and the selling price per unit, not by the inventory amount. Inventory errors impact cost of goods sold, gross profit, current assets, and net income, but not the net sales figure directly.

Question 4

The full disclosure principle:

Accepted Answer

The full disclosure principle requires companies to disclose all information that could potentially affect users' decisions. This includes changes in accounting methods and their effects on financial statements, which must be reported in the notes to the financial statements. Choice B is incorrect because full disclosure does not require companies to use the same accounting method for inventory valuation period after period. Choice C is incorrect because full disclosure is subject to materiality, which means that information does not have to be disclosed if its omission would not affect users' decisions. Choice D is incorrect because the full disclosure principle applies to all companies, not just retailers. Choice E is incorrect because the consistency principle refers to the use of the same accounting methods and principles from one period to the next, while full disclosure is about disclosing all relevant information.

Question 5

The understatement of the ending inventory balance causes:

Accepted Answer

When ending inventory is understated, it means that more goods are being recorded as sold than actually were, which increases the cost of goods sold. Since the cost of goods sold is an expense, increasing it reduces the net income. Therefore, the cost of goods sold is overstated, and net income is understated.

Question 6

Regardless of the inventory costing system used, cost of goods available for sale must be allocated between

Accepted Answer

The cost of goods available for sale is the total cost of beginning inventory plus net purchases during the period. This cost needs to be allocated between the inventory that remains at the end of the period (ending inventory) and the inventory that was sold during the period (cost of goods sold). Therefore, the correct choice is D where the allocation occurs between ending inventory and cost of goods sold.

Question 7

The inventory valuation method that has the advantages of assigning an amount to inventory on the balance sheet that approximates its current cost, and also mimics the actual flow of goods for most businesses is:

Accepted Answer

FIFO (First-In, First-Out) assigns an amount to inventory on the balance sheet that approximates its current cost because it assumes that the oldest items are sold first, leaving the most recently purchased or produced items in inventory. This method often mimics the actual flow of goods for many businesses, especially those dealing with perishable goods, making it advantageous for reflecting both the cost of goods sold and the value of ending inventory.

Question 8

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

Accepted Answer

Weighted average takes into account all costs incurred over a period of time, which smooths out any sudden changes in cost. FIFO and LIFO may result in drastic changes in valuation depending on the order in which inventory items are sold or assigned costs. Specific identification only assigns costs to specific units of inventory, which may not be practical or feasible for some businesses. WIFO is not a commonly used inventory valuation method.

Question 9

Gotham Company reported a December 31 ending inventory balance of $412,000. The following additional information is also available: The ending inventory balance of $412,000 included $72,000 of consigned inventory for which Gotham was the consignor.
The ending inventory balance of $412,000 included $22,000 of office supplies that were stored in the warehouse and were to be used by the company's supervisors and managers during the coming year.
The ending inventory balance of $412,000 did not include goods costing $48,000 that were purchased by Gotham on December 28 and shipped FOB destination on that date. Gotham did not receive the goods until January 2 of the following year.
The ending inventory balance of $412,000 included damaged goods at their original cost of $38,000. The net realizable value of the damaged goods was $10,000.
The ending inventory balance of $412,000 included $43,000 of consigned inventory for which Gotham was the consignee.
Based on this information, the correct balance for ending inventory on December 31 is:

Accepted Answer

The answer of Gotham Company reported a December 31 ending...

Question 10

The understatement of the beginning inventory balance causes:

Accepted Answer

Understating the beginning inventory balance would result in a lower cost of goods sold calculation, which would increase the net income. Therefore, net income would be overstated.

Question 11

Which of the following inventory costing methods will always result in the same values for ending inventory and cost of goods sold regardless of whether a perpetual or periodic inventory system is used?

Accepted Answer

Specific identification and FIFO are the inventory costing methods that will always result in the same values for ending inventory and cost of goods sold regardless of whether a perpetual or periodic inventory system is used. Specific identification tracks the actual cost of specific items sold and remaining in inventory, while FIFO (First-In, First-Out) assumes that the oldest items are sold first, both of which lead to consistent outcomes in both perpetual and periodic systems.

Question 12

The consistency concept:

Accepted Answer

The consistency concept requires a company to consistently apply the same accounting method of inventory valuation, but allows for an exception when a change from one method to another will improve its financial reporting. This ensures comparability of financial information between different periods.

Question 13

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

Accepted Answer

An error in the period-end inventory affects both the income statement and balance sheet accounts. However, it is sometimes said to be self-correcting because the impact of the error will reverse in the next period. However, managers should still investigate and correct the error to ensure accurate financial reporting.

Question 14

Physical counts of inventory:

Accepted Answer

Physical counts of inventory are necessary to adjust the Inventory account to the actual inventory available. This is because the perpetual system relies on regular updates to the Inventory account based on transactions, while a physical count provides an accurate reflection of the actual inventory on hand.

Question 15

Costs included in the Merchandise Inventory account can include all of the following except:

Accepted Answer

Damaged inventory that cannot be sold would not be included in the Merchandise Inventory account as it is not salable inventory.

Question 16

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

Accepted Answer

LIFO (last in, first out) method assumes that the last items purchased are the first items sold, which means that the cost of goods sold will reflect the most recent, and typically higher, price levels. Therefore, during a period of steadily rising costs, LIFO will result in a lower reported net income because the cost of goods sold will be higher, reducing the gross profit and net income.

Question 17

Thelma Company reported cost of goods sold for Year 1 and Year 2 as follows:  Thelma Company made two errors: 1) ending inventory at the end of Year 1 was understated by $15,000 and 2) ending inventory at the end of Year 2 was overstated by $6,000. Given this information, the correct cost of goods sold figure for Year 2 would be:

Accepted Answer

The answer of Thelma Company reported cost of goods sold...

Question 18

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

Accepted Answer

LIFO method assumes that the last items purchased are the first to be sold, resulting in a higher cost of goods sold and a lower ending inventory value. This lowers taxable income in periods of inflation when prices are increasing.

Question 19

On December 31 of the current year, Hewett Company reported an ending inventory balance of $215,000. The following additional information is also available: Hewett sold goods costing $38,000 to Trump Enterprises on December 28 and shipped the goods on that date with shipping terms of FOB shipping point. The goods were not included in the ending inventory amount of $215,000 because they were not in Hewett's warehouse.
Hewett purchased goods costing $44,000 on December 29. The goods were shipped FOB destination and were received by Hewett on January 2 of the following year. The shipment was a rush order that was supposed to arrive by December 31. These goods were included in the ending inventory balance of $215,000.
Hewett's ending inventory balance of $215,000 included $15,000 of goods being held on consignment from Rumsfeld Company. (Hewett Company is the consignee.)
Hewett's ending inventory balance of $215,000 did not include goods costing $95,000 that were shipped to Hewett on December 27 with shipping terms of FOB destination and were still in transit at year-end.
Based on the above information, the correct balance for ending inventory on December 31 is:

Accepted Answer

The answer of On December 31 of the current year,...

Question 20

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

Accepted Answer

Goods in transit are included in a purchaser's inventory when the purchaser is responsible for paying freight charges, indicating that the purchaser has assumed ownership and risk of loss during transit. This is typically associated with FOB (Free On Board) shipping point terms.

Quiz 6: Inventories and Cost of Sales