Deck 17: Merchandise Inventory

Question 1

With the onset of universal product codes and bar-code scanners that track inventory purchased and sold,a physical inventory is no longer necessary to verify inventory on hand.

Answer 1

False

Question 2

The disclosure principle requires a company to reveal the costing method used to value inventory.

Answer 2

True

Question 3

In a period of rising prices,the LIFO method of inventory valuation results in a lower reported net income than the FIFO method.

Answer 3

True

Question 4

Inventory cannot be valued at the lower of cost or market if the inventory cost was determined using the FIFO methods.

Question 5

The FIFO method of inventory valuation focuses on the balance sheet;the most current costs are in ending inventory.

Question 6

In order to apply the matching concept,inventory costing methods,once selected,cannot be changed to an alternative method.

Question 7

Specific identification is an inventory costing method used to value inventory where the merchandise identified as sold or on hand is typically a high-priced or one-of-a-kind item.

Question 8

The LIFO method of inventory valuation assigns the cost of the most recent purchases to the ending inventory.

Question 9

The use of the FIFO method of inventory valuation results in a matching of current inventory costs against current sales revenue.

Question 10

Average costing is advantageous to use when a company's inventory is composed of many similar items that are not subject to significant price and style changes.

Question 11

Following the consistency principle,once a firm adopts a method of inventory valuation,it should use that method consistently from one period to the next.

Question 12

If a firm uses the FIFO method of inventory valuation for tax purposes,it must use the FIFO method for financial accounting.

Question 13

Under a periodic inventory system,cost of goods sold is calculated based on the cost of available-for-sale units less the cost of ending inventory as identified through a physical inventory.

Question 14

Under the gross profit method of estimating inventory,the ending inventory is determined by subtracting the estimated cost of goods sold from the cost of goods available for sale.

Question 15

Inventory costing methods are influenced by industry practice and the types of merchandise available for sale.

Question 16

Gross profit ratio is determined by dividing Net Sales by Gross Profit.

Question 17

Inventory valuation affects the net income or net loss reported on the income statement.

Question 18

In highly competitive businesses where inventory is subject to price fluctuations and model or style upgrades,it is desirable to utilize the weighted average method costing method.

Question 19

Point-of-sale cash registers and scanners assist in tracking inventory units purchased and sold under a periodic inventory system.

Question 20

The average cost method of inventory valuation will always result in the lowest reported net income.

Question 21

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

Question 22

A company has inventory with a sales value of $34,000,current market value of $22,000 and a total cost of $23,400.Since the sales value exceeds both cost and market,no write down in inventory value is required.

Question 23

To calculate the cost-to-retail ratio,the beginning inventory at cost is divided by the merchandise available for sale at retail.

Question 24

Under the retail inventory method,if the gross profit ratio is 40% and ending inventory at retail is $55,000,then estimated ending inventory is $33,000.

Question 25

Under the gross profit method,the cost of the ending inventory is determined by applying the gross profit ratio to net sales and then subtracting the cost of goods sold from the cost of goods available for sale.

Question 26

The fundamental assumption of the gross profit method of estimating inventory is that the rate of gross profit on sales is about the same from period to period.

Question 27

When the replacement cost of an item is below its original purchase cost,it is necessary to value the inventory at market price in order to reflect the lower current value in the firm's financial records.

Question 28

Under the retail inventory method,if the cost-to-retail ratio is 60% and ending inventory at retail is $105,000,then estimated ending inventory is $63,000.

Question 29

A business is required to apply the lower of cost or market rule by comparing and reporting inventory values on an item-by-item basis.

Question 30

Many retail stores take a periodic inventory at retail values,using the sales price marked on the merchandise.

Question 31

The lower of cost or market rule requires a business to report inventory at original cost or its current replacement cost,whichever is lower.

Question 32

The most conservative method of applying the lower of cost or market rule is to use the lower of total cost or total market by groups.

Question 33

In periods of rising prices,the LIFO method of inventory valuation gives a lower taxable income and thus provides a tax advantage.

Question 34

The lower of cost or market rule can be applied on an item-by-item basis,by group or by comparing total inventory at cost to total inventory valued at market.

Question 35

In applying the lower of cost or market rule,market is defined as the current replacement cost.

Question 36

Inventory valuation is very important in computing federal income tax because the value placed on the inventory determines the net income reported.

Question 37

Under the retail inventory method,if the gross profit ratio is 40% and ending inventory at retail is $45,000,then estimated ending inventory is $18,000.

Question 38

To calculate the cost-to-retail ratio,merchandise available for sale at retail prices is divided by the merchandise available for sale at cost.

Question 39

Under the gross profit method,the cost of the ending inventory is determined by applying the gross profit ratio to net sales and then subtracting the gross profit calculated from the cost of goods available for sale.

Question 40

The gross profit method of estimating inventory enables managers to prepare budgets and proforma (forecast or anticipated)financial statements.

Question 41

In the ____________________ method of inventory valuation,inventory cost is determined by multiplying the number of units in inventory by a unit cost,which is calculated by dividing the cost of goods available for sale by the units of merchandise available for sale.

Question 42

The lower the ending inventory valuation,the ____________________ the reported net income.

Question 43

The lower the ending inventory valuation,the ____________________ the cost of goods sold.

Question 44

The ________________ method of inventory costing must be used for financial accounting purposes if it is chosen for federal income tax purposes.

Question 45

Under a periodic inventory system,the _________________________ account is the one account that appears on both the balance sheet and the income statement.

Question 46

For internal control,unit figures used to compute the inventory should be verified through spot checks.

Question 47

In periods of rising prices,the inventory valuation procedure that results in the highest net income is

A) the lower of cost or market method.
B) the LIFO method.
C) the average cost method.
D) the FIFO method.

Question 48

When the ____________________ method is used,the cost of the ending inventory is computed by using the cost of the latest purchases.

Question 49

A price reduction below the original markon is a ________________.

Question 50

A physical inventory should be taken at least annually to verify the goods on hand.

Question 51

In periods of rising prices,use of the ____________________ method of inventory valuation results in the lowest inventory cost on the balance sheet.

Question 52

A firm that sells a single product had a beginning inventory of 4,000 units with a total cost of $28,000.Early in the year,10,000 units were purchased at $9 each.Using FIFO,what is the value of the ending inventory of 3,000 units?

A) $27,000
B) $24,000
C) $21,000
D) $36,000

Question 53

When inventory is valued at the lower of cost or market,the accountant is applying the principle or convention called ___________________.

Question 54

A merchant who deals in one-of-a-kind items with large unit costs may account for inventory by the _________________________ method.

Question 55

The ____________________ method of inventory valuation is a procedure developed for charging the current costs of goods against current sales prices.

Question 56

The ____________________ method of estimating inventory requires the use of data about both cost and selling prices.

Question 57

If other items remain the same,the larger the ending inventory valuation,the

A) higher the cost of goods sold.
B) higher the reported net income.
C) lower the reported gross profit on sales.
D) lower the reported net income.

Question 58

The ____________________ method of estimating ending inventory involves estimating the cost of goods sold by applying a company's cost/sales ratio to its sales for the current period.

Question 59

Net Sales minus Gross Profit equals ___________________.

Question 60

The price the business would have to pay to buy an item of inventory through usual channels in usual quantities is either market price or __________________ cost.

Question 61

The firm had a beginning inventory of 50 units with a unit cost of $10.Purchases during the year were as follows: March-50 units with a unit cost of $12;July-60 units with a unit cost of $15.If the average cost method is used,the value of the ending inventory of 45 units is

A) $675.
B) $563.
C) $450.
D) $555.

Question 62

The use of the LIFO method of inventory valuation

A) assigns the cost of the most recent purchases to the ending inventory.
B) results in the same valuation as the specific identification method in a time of rising prices.
C) results in the lowest reported net income in a time of rising prices.
D) results in the highest reported net income in a time of rising prices.

Question 63

A firm that sells a single product had a beginning inventory of 4,000 units with a total cost of $16,000.Early in the year,8,000 units were purchased at $6 each.Using LIFO,what is the value of the ending inventory of 2,000 units?

A) $12,000
B) $10,000
C) $8,000
D) $24,000

Question 64

The price a business would pay for its inventory is

A) assessed value.
B) sales price.
C) replacement cost.
D) discount price.

Question 65

The use of the FIFO method of inventory valuation

A) results in a matching of current inventory costs against sales revenue.
B) results in the most current costs in ending inventory.
C) results in a lowest reported net income in a time of rising prices.
D) results in a highest reported net income in a time of falling prices.

Question 66

Inventory valuation methods acceptable internationally include all of the following except:

A) Specific identification
B) Weighted average
C) FIFO
D) LIFO

Question 67

The accountant for a company whose inventory was destroyed by fire determined from undamaged records that the cost of goods available for sale was $100,000 and the net sales were $80,000 up to the date of the fire.The accountant also determined that the company's normal gross profit rate is 40 percent of net sales.From this data,the accountant estimated the cost of the inventory destroyed by the fire to be

A) $60,000.
B) $52,000.
C) $32,000.
D) $20,000.

Question 68

Which of the following inventory costing procedures requires a physical count of merchandise a minimum of once a year at yearend?

A) the retail method
B) the average cost method
C) the gross profit method
D) the lower of cost or market method

Question 69

The modifying convention of conservatism requires that inventory be presented on the balance sheet at

A) cost.
B) market value.
C) either cost or market value,whichever is lower.
D) average cost during the period.

Question 70

The merchandise available for sale cost a company $90,000 and was marked to sell at a retail price of $125,000.Sales during the period totaled $80,000.If the retail method is used,the estimated cost of the ending inventory is

A) $32,400.
B) $12,600.
C) $22,400.
D) $45,000.

Question 71

Which inventory valuation method mimics the actual flow of goods for most businesses?

A) the specific identification method
B) the average cost method
C) the FIFO method
D) the LIFO method

Question 72

The steps and proper order for estimating EI cost using the gross profit method are as follows:

A) determine COGA,estimate COGS,subtract COGS from COGA.
B) determine COGA,estimate COGS,subtract COGA from COGS.
C) estimate COGS,determine COGA,subtract COGA from COGS.
D) estimate COGS,determine COGA,subtract COGS from COGA.

Question 73

The Lower of Cost or Market rule is based on which accounting principle?

A) conservatism
B) revenue recognition
C) matching
D) full disclosure

Question 74

The company's gross profit ratio is 40%.With beginning inventory of $54,000,additional purchases of $21,000 and net sales for the quarter of $85,000,the controller estimated ending inventory values at:

A) $51,000.
B) $41,000.
C) $34,000.
D) $24,000.

Question 75

The gross profit method of determining ending inventory cost

A) can be used without taking a physical count of merchandise.
B) provides accurate information about the number of units in inventory.
C) requires that a firm keep inventory and purchases data at retail value as well as at cost.
D) requires that the inventory be classified into groups of items of about the same rate of markon.

Question 76

A matching of the most recent costs to revenue results from the use of

A) the LIFO method.
B) the FIFO method.
C) the average cost method.
D) the lower of cost or market method.

Question 77

The cost of the earliest merchandise purchased is assigned to ending inventory when a company uses

A) the LIFO method.
B) the FIFO method.
C) the average cost method.
D) the lower of cost or market method.

Question 78

The weighted average cost of an inventory item is calculated by

A) dividing the sum of the unit cost on the purchase invoices by the number of units purchased.
B) dividing the cost of goods available for sale by the number of units on the ending inventory.
C) dividing the cost of goods available for sale by the number of units available during the period.
D) dividing the cost of goods sold by the number of units available during the period.

Question 79

The inventory valuation method which tends to smooth out periodic fluctuations in cost is:

A) the LIFO method
B) the weighted average cost method
C) the FIFO method
D) the specific identification method

Question 80

Which of the following is NOT a way to apply the lower of cost or market rule?

A) by item
B) by size
C) in total
D) by group