Deck 6: Inventory Cost of Goods Sold

Question 1

Inventory on the balance sheet is based on the cost of the units that have been sold.

Answer 1

False

Question 2

Inventory is presented on the balance sheet at the selling price of the item.

Answer 2

False

Question 3

To document approval of purchase returns, a company will issue a debit memorandum.

Answer 3

True

Question 4

Inventory is an asset and cost of goods sold is an expense.

Question 5

Operating expenses are subtracted from sales to determine gross profit.

Question 6

The cost of the inventory that the business has sold to customers is called:

A) inventory.
B) cost of goods sold.
C) purchases.
D) gross profit.

Question 7

The cost of inventory that is still on hand and has not been sold to customers is called:

A) cost of goods sold, an expense that appears on the balance sheet.
B) inventory, a current asset that appears on the income statement.
C) inventory, a current asset that appears on the balance sheet.
D) purchases, an expense that appears on the income statement.

Question 8

To determine net purchases, freight-in is added to the cost of the purchase price of the inventory.

Question 9

Under the perpetual inventory system, inventory shifts from an asset to an expense when the seller delivers the goods to the buyer.

Question 10

Sales revenue is based on the ________ price of the inventory, while cost of goods sold is based on the ________ of the inventory.

A) cost, sales
B) cost, cost
C) sales, sales
D) sales, cost

Question 11

The financial statements of a merchandising company will show:

A) the same accounts as the financial statements of a service company.
B) gross profit after net income on the income statement.
C) inventory as a current asset on the balance sheet.
D) cost of goods sold as an operating expense on the income statement.

Question 12

A company will include goods they hold on consignment in their ending inventory.

Question 13

In a perpetual inventory system, a business maintains a continuous record for each inventory item.

Question 14

Another term for gross profit is:

A) gross income.
B) gross sales.
C) gross margin.
D) gross operating income.

Question 15

To record the cost of inventory sold under a perpetual inventory, a debit to Cost of Goods Sold and a credit to Inventory is required.

Question 16

Since a perpetual inventory system continuously updates the inventory account, a physical inventory count is not necessary to prove the inventory records.

Question 17

Service entities will have both a cost of goods sold and an inventory account.

Question 18

A purchase allowance increases the cost of the inventory.

Question 19

For a merchandising company:

A) the balance sheet reports the cost of the inventory that was on hand at the beginning of the period.
B) the income statement reports the cost of the inventory sold during the period.
C) ending inventory can be an asset or an expense.
D) inventory is generally not a significant factor in their operations.

Question 20

Two accounts that would appear on the financial statements of a merchandising company that are not needed by a service company are:

A) cost of goods sold and depreciation.
B) cost of goods sold and net income.
C) cost of goods sold and inventory.
D) inventory and depreciation.

Question 21

When inventory is shipped from the seller to the buyer with shipping terms of FOB destination:

A) title passes from the seller to the buyer when the goods leave the seller's shipping dock.
B) the goods will be included in the inventory of the seller until they reach their destination.
C) the buyer owns the goods while they are in transit.
D) the goods will be included in the inventory of the buyer and the seller while they are in transit.

Question 22

Which is the correct order for items to appear on the income statement?

A) Sales revenue, operating expenses, gross profit, net income
B) Sales revenue, gross profit, net income, operating expenses
C) Sales revenue, gross profit, cost of goods sold, operating expenses
D) Sales revenue, cost of goods sold, gross profit, net income

Question 23

Martson and Co. made the following journal entries: What is Martson's gross profit from this sale?

A) $10,000
B) $15,000
C) $25,000
D) $35,000

Question 24

A company purchased inventory for $800 per unit. The company later sold the inventory for $1,000 per unit. The entries to record the sale for cash and cost of goods sold would include debits to which of the following accounts?

A) Sales, $1,000; Inventory, $800
B) Cash, $1,000; Cost of Goods Sold, $800
C) Cash, $800; Cost of Goods Sold, $1,000
D) Sales, $800; Inventory, $800

Question 25

How do purchase returns and allowances and purchase discounts affect gross purchases?

A) Both are added to purchases.
B) Both are subtracted from purchases.
C) Purchase returns and allowances are added to purchases; purchase discounts are subtracted from purchases.
D) Purchase returns and allowances are subtracted from purchases; purchase discounts are added to purchases.

Question 26

A periodic inventory system:

A) is used for inexpensive goods.
B) is not expensive to maintain.
C) does not keep a running record of inventory on hand.
D) is all of the above.

Question 27

Using a perpetual inventory system, which of the following entries would record the sale of merchandise sold on credit?

A)
B)
C)
D)

Question 28

If Martson and Co. make the following journal entries, they are using the ________ inventory system.

A) periodic
B) perpetual
C) FIFO
D) LIFO

Question 29

Using a perpetual inventory system, which of the following entries would record the cost of merchandise sold on credit?

A)
B)
C)
D)

Question 30

Under a perpetual inventory system, the journal entry to record the purchase of inventory will include a:

A) debit to Accounts Receivable.
B) debit to Inventory.
C) debit to Accounts Payable.
D) debit to Cost of Goods Sold.

Question 31

ABC Company purchases inventory from XYZ Company with the shipping terms FOB shipping point. This means that:

A) XYZ Company owns the goods while they are in transit.
B) legal title passes to ABC Company when they receive the inventory.
C) XYZ Company will pay the freight on this transaction.
D) ABC Company will include the goods in their inventory as soon as they leave the shipping dock.

Question 32

A purchase:

A) allowance increases the cost of the inventory.
B) discount increases the cost of the inventory.
C) allowance has no effect on the cost of the inventory.
D) return decreases the cost of the inventory.

Question 33

The inventory system that uses computer software to keep a running record of inventory on hand is the:

A) cost of goods sold inventory system.
B) periodic inventory system.
C) perpetual inventory system.
D) hybrid inventory system.

Question 34

Under a perpetual inventory system:

A) there must be a physical count to determine the amount of the ending inventory.
B) there must be a physical count to determine the cost of goods sold.
C) the inventory records must be updated manually.
D) it can be readily determined if there is a sufficient supply of inventory on hand.

Question 35

Which of the following is a correct statement regarding shipping terms and freight costs?

A) Freight-out paid by the seller under shipping terms FOB destination is part of the cost of inventory.
B) Freight-out is added to the purchase price of the inventory.
C) Freight-out is the transportation cost paid by the buyer under the shipping terms FOB shipping point.
D) Freight-out paid by the seller is a delivery expense and not part of the cost of the inventory.

Question 36

Under a perpetual inventory system, when a sale is made, the company:

A) makes a journal entry to record the sale only.
B) makes a journal entry to record only the cost of goods sold.
C) makes a journal entry to record the sale and the cost of goods sold.
D) does not need to make a journal entry.

Question 37

BMX Co. sells item XJ15 for $1,000 per unit, and has a cost of goods sold percentage of 80%. The gross profit to be found for selling 20 items:

A) is $4,000.
B) is $16,000.
C) is $20,000.
D) cannot be determined.

Question 38

Which of the following is NOT used to determine net purchases?

A) Freight-out
B) Freight-in
C) Purchase returns
D) Purchase discounts

Question 39

A small ________ would most likely use a perpetual inventory system.

A) automobile dealership
B) fabric store
C) restaurant
D) flower shop

Question 40

Company A has inventory out on consignment and held for sale by Company B. Which Company will include the goods in their inventory?

A) Company A
B) Company B
C) Either Company A or Company B
D) Cannot be determined from the facts

Question 41

Journalize the following transactions for ABC, Inc.

A) Purchases of inventory on account, $74,500
B) Sales on account, $110,000
C) Cost of goods sold (perpetual inventory system), $50,500
D) Collections on account, $48,310

Question 42

The specific unit cost method is used for inventory items that have common characteristics.

Question 43

Alberta Company has net purchases of $75,000, purchase returns of $7,000 and purchase discounts of $4,000. Alberta's gross purchases were:

A) $64,000.
B) $72,000.
C) $78,000.
D) $86,000.

Question 44

The inventory cost under the average cost per unit method will generally fall in between the inventory cost using the LIFO and FIFO methods.

Question 45

From the data below, calculate the net purchases:

Question 46

The FIFO method assigns the most recent inventory cost to expense.

Question 47

Company A purchased inventory for $100,000. In addition they had purchase returns of $7,000 and paid freight-in of $8,000.Company A's net purchases would be:

A) $ 85,000.
B) $ 99,000.
C) $101,000.
D) $115,000.

Question 48

Michelle Industries has the following information available for February 2012:
Required:
1. Prepare the journal entries necessary to record the above items.
2. Calculate the ending inventory balance.

Question 49

When prices are rising, a company using the FIFO costing method will generally pay less taxes than if the company had been using the LIFO method.

Question 50

Ulra Company has sales revenue of $88,000, sales returns and allowances of $1,000, and sales discounts of $1,500. Ulra's net sales are:

A) $85,500.
B) $86,500.
C) $87,000.
D) $90,500.

Question 51

Mary Sue is the controller for Sue's Flowers, Inc. and needs your help. Mary Sue has the following information for the month of April:
Prepare an income statement for Hedgehog for the month ending April 30.

Question 52

In a period of rising prices, FIFO and LIFO will produce the same cost for ending inventory.

Question 53

The cost of inventory is the:

A) purchase price.
B) sum of all the costs incurred to bring the inventory to its intended use.
C) sum of all the costs incurred to bring the inventory to its intended use, plus any discounts and allowances.
D) sum of all the costs incurred to bring the inventory to its intended use, less any discounts and allowances.

Question 54

Samantha Puff is the controller for Hedgehog, Inc. Samantha has gathered the following information for the month of July:
Determine Hedgehog, Inc.'s:
a. Net sales
b. Net purchases

Question 55

A company purchased 400 units at $75 per unit. The company sold 385 units. What is the cost of goods sold and ending inventory?

A) $10,000 and $9,625.
B) $40,000 and $28,875.
C) $28,875 and $1,125.
D) $28,875 and $10,000.

Question 56

The choice of an inventory costing method does not impact company's balance sheet.

Question 57

The following transactions occurred for Melissa's Fine Jewelry Store during the year:
a. Purchased 10 exquisite necklaces on account at $5,000 apiece
b. Sold three of the necklaces on account at $8,000 each
c. Melissa paid off the accounts payable
d. Melissa collected all of the accounts receivable
Required:
1. Journalize these transactions for Melissa's Fine Jewelry Store, which uses the perpetual inventory system.
2. What will Melissa's Fine Jewelry Store report for inventory at the end of the year?
3. Compute the gross profit for Melissa's Fine Jewelry Store.

Question 58

A company must use the same method of pricing inventories for tax purposes that they use for financial reporting purposes.

Question 59

The weighted-average cost per unit is calculated as the cost of goods sold divided by the number of units actually sold.

Question 60

LIFO allows managers to manipulate net income by timing the purchases of inventory.

Question 61

When a LIFO liquidation occurs:

A) the company must dip into the older layers of inventory cost to compute the cost of goods sold.
B) and prices are rising, newer, higher, costs are shifted into cost of goods sold.
C) net income decreases.
D) income taxes decrease.

Question 62

When inventory prices are increasing, the FIFO costing method will generally yield a cost of goods sold that is:

A) higher than cost of goods sold under the LIFO method.
B) lower than cost of goods sold under the LIFO method.
C) equal to the gross profit under the LIFO method.
D) equal to cost of goods sold under the LIFO method.

Question 63

Under the ________ method, ending inventory is based on the costs of the most recent purchases.

A) average-cost
B) FIFO
C) LIFO
D) specific-identification

Question 64

The specific-unit-cost method:

A) will produce the highest net income.
B) is also known as the specific identification method.
C) will produce the same ending inventory as the average cost method.
D) is also known as the cost-of-goods sold model.

Question 65

To determine cost of goods sold under the FIFO method:

A) the first costs into inventory are the first costs assigned to cost of goods sold.
B) the last costs into inventory are the first costs assigned to cost of goods sold.
C) the average cost of the inventory must be determined.
D) the company must first determine the specific units sold.

Question 66

If the cost to purchase a unit of inventory does not change, ending inventory:

A) will be the highest under FIFO.
B) will be the highest under LIFO.
C) cannot be computed using the average-cost method.
D) will be the same under LIFO and FIFO.

Question 67

When inventory costs are increasing and there has been no LIFO liquidation:

A) FIFO cost of goods sold will be higher than LIFO cost of goods sold.
B) FIFO ending inventory will be lower than LIFO ending inventory.
C) FIFO cost of goods sold will be lower than LIFO cost of goods sold.
D) FIFO and LIFO will result in the same cost of goods sold and ending inventory.

Question 68

When inventory prices are falling, the LIFO costing method will generally result in:

A) a lower gross profit than under FIFO.
B) a higher gross profit than under FIFO.
C) a lower inventory value than under FIFO.
D) the same inventory value as FIFO.

Question 69

When comparing the FIFO and LIFO inventory methods:

A) LIFO values inventory at the newest costs.
B) LIFO reports the most up-to-date inventory cost on the balance sheet.
C) FIFO results in the most realistic net income figure.
D) FIFO matches old inventory costs against revenue.

Question 70

When comparing the results of LIFO and FIFO when inventory costs are decreasing:

A) cost of goods sold will be the lowest using FIFO.
B) ending inventory will be the highest using FIFO.
C) cost of goods sold will be the highest using LIFO.
D) ending inventory will be the highest using LIFO.

Question 71

The use of the FIFO method generally increases taxable income:

A) when prices are constant.
B) when prices are declining.
C) when prices are increasing.
D) under all circumstances.

Question 72

To determine the average cost per unit:

A) the beginning inventory is divided by the number of units available.
B) the cost of goods available is divided by the number of units sold.
C) the purchases for the period are divided by the number of units available.
D) the cost of goods available is divided by the number of units available.

Question 73

The Bios Company purchased inventory for $75,000. It also paid freight-in of $750, sales tax of $3,750 and insurance while the inventory was in transit of $210. The cost of the inventory is:

A) $75,000.
B) $75,750.
C) $78,750.
D) $79,710.

Question 74

Deciding on which inventory method a company should use affects:

A) the profits to be reported.
B) the income taxes to be paid.
C) the values of ratios reported from the balance sheet.
D) all of the above.

Question 75

All of the following costs would be included in inventory EXCEPT for:

A) freight-in.
B) advertising.
C) taxes paid on the purchase price.
D) insurance while in transit.

Question 76

ABC Auto Sales sells new Lexus vehicles. ABC will most likely use the ________ method to cost its ending inventory.

A) First-in, first-out
B) Last-in, first-out
C) Specific-unit-cost
D) Weighted-average

Question 77

When determining the international aspects of inventory valuation:

A) IFRS permits the use of LIFO.
B) it can be difficult to compare a U.S. company against a foreign company if different inventory methods are used.
C) inventory valuation is the only major difference between GAAP and IFRS.
D) IFRS prohibits the use of FIFO.

Question 78

Which of the following is true regarding the LIFO method of inventory costing?

A) A company can use LIFO for tax purposes and FIFO for financial reporting purposes.
B) Very few U.S. companies use the LIFO method.
C) If a LIFO liquidation occurs, income tax expense will decrease.
D) When prices are rising, income taxes are the lowest when the LIFO method is used.

Question 79

A LIFO ________ occurs when inventory quantities fall below the level of the previous period.

A) adjustment
B) failure
C) liquidation
D) materiality

Question 80

If prices are rising and a company is using LIFO, large purchases of inventory near the end of the year will:

A) increase income taxes paid.
B) decrease income taxes paid.
C) not change the amount of income taxes paid.
D) cannot be determined.