Deck 6: Inventory and Cost of Goods Sold

Question 1

During periods of rising costs,LIFO generally results in a higher cost of goods sold.

Answer 1

True

Question 2

A multiple-step income statement reports multiple levels of profitability,such as gross profit,operating income,income before income taxes,and net income.

Answer 2

True

Question 3

If a company has beginning inventory of $15,000,purchases during the year of $75,000,and ending inventory of $20,000,cost of goods sold equals $70,000.

Answer 3

True

Question 4

Companies are not allowed to report inventory costs by assuming which units of inventory are sold and which units still remain on hand.Companies can assume which inventory units are sold and still remain on hand using a variety of methods (FIFO,LIFO,and weighted-average cost).

Question 5

Income before income taxes equals operating income plus nonoperating revenues less nonoperating expenses.

Question 6

Using the weighted-average cost method,the average cost of inventory is calculated as the average unit cost of inventory purchased during the year.The average is a weighted-average cost which includes both beginning inventory and purchases and is equal to total cost of goods available for sale divided by the total number of units available for sale.

Question 7

Sales revenue minus cost of goods sold is referred to as operating income.Sales revenue minus cost of goods sold equals gross profit.

Question 8

Cost of goods sold is an expense reported in the income statement and represents the cost of inventory sold during the period.

Question 9

Accountants often call FIFO the balance sheet approach because the amount it reports for ending inventory better approximates the current cost of inventory.

Question 10

During periods of rising costs,LIFO generally results in a higher ending inventory balance.During periods of rising costs,LIFO generally results in a lower ending inventory balance.

Question 11

Gross profit equals net sales of inventory less cost of goods sold.

Question 12

Using the first-in,first-out method (FIFO),the first units purchased are assumed to be the first ones sold.

Question 13

Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported in the income statement.Cost of goods sold is an expense reported in the income statement and inventory is an asset reported in the balance sheet.

Question 14

During periods of rising costs,FIFO generally results in a higher ending inventory balance.

Question 15

If a company has ending inventory of $25,000,purchases during the year of $95,000,and beginning inventory of $30,000,cost of goods sold equals $90,000.Beginning Inventory ($30,000)+ Purchases ($95,000)- Ending Inventory ($25,000)= Cost of Goods Sold ($100,000).

Question 16

Merchandising companies purchase inventories that are primarily in finished form for resale to customers.

Question 17

Companies are free to choose FIFO,LIFO,or weighted-average cost to report inventory and cost of goods sold.

Question 18

During periods of rising costs,FIFO generally results in a higher cost of goods sold.During periods of rising costs,FIFO generally results in a lower cost of goods sold.

Question 19

Inventory is usually reported as a long-term asset in the balance sheet.Inventory is typically reported as a current asset because companies expect to convert it to cash in the near term.

Question 20

For most companies,actual physical flow of their inventory follows LIFO.Most often,the actual physical flow of goods follows FIFO.

Question 21

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

Question 22

Using LIFO,the amount reported for ending inventory does not differ depending on whether a company uses a periodic system or a perpetual system.The amount reported for ending inventory (or cost of goods sold)will differ.

Question 23

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

Question 24

The use of the lower of cost and net realizable value to report inventory is an example of conservatism in financial reporting.

Question 25

When the net realizable value of inventory falls below its cost,no adjustment to the accounting records is needed.Companies are required to record an adjustment when net realizable value falls below cost.The adjustment has the effect of reducing assets and increasing expenses.

Question 26

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

Question 27

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.

Question 28

When the value of inventory falls below its cost,companies other than those that use LIFO have the option of recording the inventory at cost or the lower net realizable value.Companies must report inventory at the lower of cost and net realizable value.

Question 29

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.The inventory turnover ratio equals cost of goods sold ($2,000)divided by average inventory ($500),which equals 4.0 in this example.

Question 30

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

Question 31

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

Question 32

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

Question 33

Freight-in is included in the cost of inventory.

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

Generally,a lower gross profit ratio reflects positively on a company's ability to manage its inventory.A higher ratio is generally a stronger signal about the company's successful management of inventory.

Question 39

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.The debit is to the Inventory account.

Question 40

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

Question 41

A manufacturer's inventory consists of what type of inventory?

A)Raw materials.
B)Finished goods.
C)Work-in-process.
D)All of the other answers are included in a manufacturer's inventory.

Question 42

The cost of inventory sold during the current year classified as a(n)______ in the ______.

A)Assets;Balance sheet
B)Expense;Income statement
C)Liability;Balance sheet

Question 43

The type of income statement that reports a series of subtotals such as gross profit,operating income,and income before taxes is a ______ income statement.

A)Single-step
B)Subtotaled
C)Multiple-step

Question 44

The type of income statement that classifies items as operating and nonoperating is the ______ income statement.

A)Consolidated
B)Multiple-step
C)Classified

Question 45

Cost of Goods Sold is:

A)An asset account.
B)A revenue account.
C)An expense account.

Question 46

Cost of goods sold equals:

A)Beginning inventory - net purchases + ending inventory.
B)Beginning inventory - accounts payable - net purchases.
C)Net purchases + ending inventory - beginning inventory.
D)Beginning inventory + net purchases - ending inventory.

Question 47

Tyler Toys has beginning inventory for the year of $18,000.During the year,Tyler purchases inventory for $230,000 and has cost of goods sold equal to $233,000.Tyler's ending inventory equals:

A)$15,000.
B)$18,000.
C)$21,000.

Question 48

What type of company purchases raw materials and makes goods to sell?

A)Wholesaler.
B)Retailer.
C)Merchandiser.
D)Manufacturer.

Question 49

Beginning inventory is $40,000.Purchases of inventory during the year are $200,000.Ending inventory is $100,000.What is cost of goods sold?

A)$340,000.
B)$240,000.
C)$260,000.
D)$140,000.

Question 50

The balance of the Cost of Goods Sold account at the end of the year represents:

A)The cost of inventory not sold in the current year.
B)The total sales revenue to customers.
C)The cost of inventory sold in the current year.

Question 51

Understating ending inventory in the current year causes cost of goods sold in the current year to be understated.Understating ending inventory in the current year will cause cost of goods sold in the current year to be overstated.

Question 52

The primary distinction between operating activities and nonoperating activities in a multiple-step income statement is whether the activity is:

A)A large or small dollar amount.
B)Part of primary business operations.
C)Related to current versus long-term assets.

Question 53

Inventory does not include:

A)Materials used in the production of goods to be sold.
B)Assets intended to be sold in the normal course of business.
C)Equipment used in the manufacturing of assets for sale.

Question 54

The cost of the goods that a company sold during a period is shown in its financial statements as ___________ and the cost of the goods that a company still has on hand at the end of the year is shown in the financial statements as ____________.

A)Cost of goods sold;inventory
B)Goods on hand;inventory expense
C)Inventory;cost of goods sold

Question 55

The largest expense on a retailer's income statement is typically:

A)Salaries.
B)Cost of goods sold.
C)Income tax expense.

Question 56

The cost of unsold inventory at the end of the year is classified as a(n)______ in the ______.

A)Assets;Balance sheet
B)Expense;Income statement
C)Liability;Balance sheet

Question 57

Beginning inventory is $30,000.Purchases of inventory during the year are $50,000.Cost of goods sold is $60,000.What is ending inventory?

A)$20,000.
B)$30,000.
C)$10,000.

Question 58

The distinction between operating and nonoperating income relates to:

A)Continuity of income.
B)Principal activities of the reporting entity.
C)Consistency of income stream.

Question 59

Baker Fine Foods has beginning inventory for the year of $12,000.During the year,Baker purchases inventory for $150,000 and ends the year with $20,000 of inventory.Baker will report cost of goods sold equal to:

A)$150,000.
B)$158,000.
C)$142,000.

Question 60

One of the major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for:

A)Current assets.
B)Inventory.
C)Selling expenses.

Question 61

Which of the following items may be classified as nonoperating revenues and expenses?

A)Interest expense.
B)Loss on the sale of equipment.
C)Interest revenue.
D)All of the other answers are classified as nonoperating revenues and expenses.

Question 62

Which measure reflects profitability from normal operations and a key performance measure for predicting the future profit-generating ability of a company?

A)Gross profit.
B)Operating income.
C)Income before income taxes.

Question 63

LeGrand Corporation reported the following amounts in its income statement: What was LeGrand's operating income?
$$\begin{array} { | l | r | } \hline \text { Sales revenue } & \$ 440,000 \\\hline \text { Advertising expense } & 60,000 \\\hline \text { Interest expense } & 10,000 \\\hline \text { Salaries expense } & 55,000 \\\text { Utilities expense } & 25,000 \\\hline \text { Income tax expense } & 45,000 \\\hline \text { Cost of goods sold } & 180,000 \\\hline\end{array}$$

A)$120,000.
B)$260,000.
C)$110,000.

Question 64

The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method.

A)Weighted-average.
B)Specific identification.
C)Actual cost.

Question 65

The inventory cost flow assumption that is least likely to match the physical flow of inventory for most companies is:

A)FIFO.
B)LIFO.
C)Weighted-average.

Question 66

Given the information in the table below,what is the company's gross profit? $$\begin{array} { | l | r | } \hline \text { Sales revenue } & \$ 360,000 \\\hline \text { Accounts receivable } & \$ 280,000 \\\hline \text { Ending inventory } & \$ 230,000 \\\hline \text { Cost of goods sold } & \$ 180,000 \\\hline \text { Sales returns } & \$ 50,000 \\\hline \text { Sales discount } & \$ 20,000 \\\hline\end{array}$$

A)$280,000.
B)$170,000.
C)$50,000.
D)$100,000.

Question 67

The inventory cost flow assumption that results in a random mixture of goods being included in the balance of inventory and cost of goods sold is:

A)FIFO.
B)LIFO.
C)Weighted-average.

Question 68

A company is most likely to utilize the specific identification method if its inventory consists of:

A)Unique products.
B)Very expensive products.
C)A relatively small number of products.
D)All of the other answers are reasons to utilize the specific identification method.

Question 69

The inventory cost flow assumption that generally best matches the physical flow of inventory is:

A)FIFO.
B)LIFO.
C)Weighted-average.

Question 70

Operating income is calculated as net sales minus.

A)Utilities expense.
B)Salaries expense.
C)Cost of goods sold.
D)All of the other answers are subtracted from net sales to calculate operating income.

Question 71

Wildwood,an outdoors clothing store,reports the following information for June: What is Wildwood's gross profit for June?
$$\begin{array} { | l | r | l | r | } \hline \text { Sales revenue } & \$ 104,000 & \begin{array} { l } \text { Income tax } \\\text { expense }\end{array} & \$ 11,000 \\\hline \begin{array} { l } \text { Operating } \\\text { expenses }\end{array} & 22,000 & \begin{array} { l } \text { Cost of goods } \\\text { sold }\end{array} & 65,000 \\\hline \begin{array} { l } \text { Deferred } \\\text { revenues }\end{array} & \$ 15,000 & \begin{array} { l } \text { Nonoperating } \\\text { revenues }\end{array} & 12,000 \\\hline\end{array}$$

A)$18,000.
B)$39,000.
C)$104,000.

Question 72

The following information relates to inventory for Shoeless Joe Inc.At what amount would Shoeless report cost of goods sold using the weighted-average cost flow assumption? (Round your answer to the nearest dollar) $$\begin{array} { | l | l | c | r | } \hline \text { Date } & & \text { Quantity } & \text { Price } \\\hline \text { March 1 } & \text { Beginning Inventory } & 20 & \$ 2 \\\hline \text { March 7 } & \text { Purchase } & 15 & 3 \\\hline \text { March 11 } & \text { Sale } & 30 & 7 \\\hline \text { March 12 } & \text { Purchase } & 15 & 6 \\\hline\end{array}$$

A)$110.
B)$73.
C)$70.
D)$105.

Question 73

The following information relates to inventory for Shoeless Joe Inc.At what amount would Shoeless report gross profit using LIFO cost flow assumptions? $$\begin{array} { | l | l | c | r | } \hline \text { Date } & & \text { Quantity } & \text { Price } \\\hline \text { March 1 } & \text { Beginning Inventory } & 20 & \$ 2 \\\hline \text { March 7 } & \text { Purchase } & 15 & 3 \\\hline \text { March 11 } & \text { Sale } & 25 & 7 \\\hline \text { March 12 } & \text { Purchase } & 20 & 4 \\\hline\end{array}$$

A)$105.
B)$80.
C)$175.

Question 74

LeGrand Corporation reported the following amounts in its income statement: What was LeGrand's gross profit?
$$\begin{array} { | l | r | } \hline \text { Sales revenue } & \$ 440,000 \\\hline \text { Advertising expense } & 60,000 \\\hline \text { Interest expense } & 10,000 \\\hline \text { Salaries expense } & 55,000 \\\text { Utilities expense } & 25,000 \\\hline \text { Income tax expense } & 45,000 \\\hline \text { Cost of goods sold } & 180,000 \\\hline\end{array}$$

A)$260,000.
B)$180,000.
C)$220,000.

Question 75

Ravens Inc.has net sales of $200,000,cost of goods sold of $120,000,selling expenses of $6,000,and nonoperating expenses of $2,000.What is the company's gross profit?

A)$76,000.
B)$80,000.
C)$74,000.

Question 76

Gross profit is calculated as net sales minus:

A)Nonoperating expenses and income tax expense.
B)Operating expenses.
C)Cost of goods sold.

Question 77

Given the information below,what is the gross profit? $$\begin{array} { | l | r | } \hline \text { Sales revenue } & \$ 320,000 \\\hline \text { Accounts receivable } & 50,000 \\\hline \text { Ending inventory } & 100,000 \\\hline \text { Cost of goods sold } & 250,000 \\\hline \text { Sales Returns } & 20,000 \\\hline\end{array}$$

A)$250,000.
B)$70,000.
C)$220,000.
D)$50,000.

Question 78

The following information relates to inventory for Shoeless Joe Inc.At what amount would Shoeless report ending inventory using FIFO cost flow assumptions? $$\begin{array} { | l | l | c | r | } \hline \text { Date } & & \text { Quantity } & \text { Price } \\\hline \text { March 1 } & \text { Beginning Inventory } & 20 & \$ 2 \\\hline \text { March 7 } & \text { Purchase } & 15 & 3 \\\hline \text { March 11 } & \text { Sale } & 25 & 7 \\\hline \text { March 12 } & \text { Purchase } & 20 & 4 \\\hline\end{array}$$

A)$55.
B)$170.
C)$110.

Question 79

LeGrand Corporation reported the following amounts in its income statement: What was LeGrand's net income?
$$\begin{array} { | l | r | } \hline \text { Sales revenue } & \$ 440,000 \\\hline \text { Advertising expense } & 60,000 \\\hline \text { Interest expense } & 10,000 \\\hline \text { Salaries expense } & 55,000 \\\text { Utilities expense } & 25,000 \\\hline \text { Income tax expense } & 45,000 \\\hline \text { Cost of goods sold } & 180,000 \\\hline\end{array}$$

A)$120,000.
B)$60,000.
C)$110,000.
D)$65,000.

Question 80

Consider the following year-end information for Spitzer Corporation: What amount will Spitzer report for operating income?
$$\begin{array} { | l | r | } \hline \text { Cost of goods sold } & \$ 420,000 \\\hline \text { Sales revenue } & 800,000 \\\hline \text { Nonoperating expenses } & 10,000 \\\hline \text { Operating expenses } & 170,000 \\\hline \text { Income tax expense } & 80,000 \\\hline\end{array}$$

A)$200,000.
B)$210,000.
C)$380,000.