Deck 6: Inventory and Cost of Goods Sold

Question 1

The gross profit rate is calculated as:

A)gross profit divided by net sales revenue.
B)net sales revenue minus gross profit on sales.
C)cost of goods sold divided by net sales revenue.
D)net sales revenue minus cost of goods sold.

Answer 1

A

Question 2

Deciding on which inventory method a company should use affects:

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

Answer 2

D

Question 3

The following data are for Tina's Candle Store for January 2006: What is the company's estimated cost of goods sold for the month?

A)$224,500
B)$297,500
C)$184,500
D)$432,500

Answer 3

B

Question 4

If ending inventory on December 31, 2007, is overstated, then:

A)cost of goods sold for the year ended December 31, 2008, will be understated.
B)gross profit for the year ended December 31, 2008, will be understated.
C)cost of goods sold for the year ended December 31, 2007, will be overstated.
D)gross profit for the year ended December 31, 2007, will be understated.

Question 5

Beginning inventory for the year ended December 31, 2008, is understated. How will this error affect net income for 2008 and 2009?

A)2008 overstated; 2009 no effect
B)2008 understated; 2009 overstated
C)2008 understated; 2009 no effect
D)2008 overstated; 2009 understated

Question 6

How do purchase returns and allowances and purchase discounts affect net 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 7

When using the average- cost method to determine the cost of inventory, the average cost per unit is calculated as the cost of goods:

A)in ending inventory divided by the number of units in ending inventory.
B)sold divided by the number of units sold.
C)sold divided by the average number of units in inventory.
D)available for sale divided by the number of units available for sale.

Question 8

Inventory turnover is calculated as:

A)average inventory multiplied by cost of goods sold.
B)cost of goods sold minus ending inventory.
C)cost of goods sold divided by average inventory.
D)average inventory divided by cost of goods sold.

Question 9

A widely used method for estimating the value of ending inventory is the:

A)lower- of- cost- or- market method.
B)gross profit method.
C)perpetual method.
D)periodic method.

Question 10

If year- end inventory is reduced from cost to a lower replacement cost, which of the following accurately depicts the results?

A)Cost of goods sold is increased and beginning inventory of the next period is decreased by the same amount.
B)The capital account balance is increased and beginning inventory of the next period is reduced by the same amount.
C)Cost of goods sold is reduced and beginning inventory of the next period is reduced by the same amount.
D)Year- end inventory is reduced and cost of goods sold is reduced by the same amount.

Question 11

Happy House Corporation reported net sales of $425,000 for the current year. After the financial statements had been prepared, it was discovered that ending inventory had been understated by $25,000. If the tax rate is 40%, after the error has been corrected, net income will:

A)decrease by $25,000.
B)increase by $15,000.
C)decrease by $15,000.
D)increase by $25,000.

Question 12

Given the following data, by how much would taxable income change if LIFO is used rather than FIFO?

A)Decrease by $15,000
B)Decrease by $19,000
C)Increase by $19,000
D)Increase by $15,000

Question 13

Charles Scrab Inc. has beginning inventory of $15,000, purchases of $25,000, and ending inventory of $10,000, sales of $75,000, operating expenses of $30,000, and a tax rate of 40% for 2008. An accounting clerk input the ending inventory as $12,000. What is the effect on 2008 cost of goods sold?

A)Cost of Goods Sold will be $2,000 lower.
B)Cost of Goods Sold will be $2,000 higher.
C)Cost of Goods Sold will be $1,200 higher.
D)Cost of Goods Sold will be $1,200 lower.

Question 14

Given the following data, what is the cost of beginning inventory?

A)$205,000
B)$1,485,000
C)$415,000
D)$1,035,000

Question 15

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 is:

A)$ 4,000.
B)$20,000.
C)$16,000.
D)No gross margin can be calculated with a cost of goods sold percentage greater than 50%.

Question 16

A company purchased inventory for $800 per unit. The inventory was marked up to sell for $1,000 per unit. The entries to record the sale and the cost of a unit of inventory would include debits to which of the following accounts?

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

Question 17

Wonkie Company's ending inventory at cost)was $75,000. The market value of the ending inventory was $65,000. How will this affect the reported ending inventory and cost of goods sold?

A)It will increase both ending inventory and cost of goods sold by $10,000.
B)It will increase ending inventory by $10,000 and have no effect on cost of goods sold.
C)It will have no effect on either ending inventory or cost of goods sold.
D)It will decrease ending inventory by $10,000 and increase cost of goods sold by $10,000.

Question 18

The use of the FIFO method increases taxable income:

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

Question 19

Given the following data, what is the value of cost of goods sold as determined by the FIFO method?

A)$4,500
B)$2,912
C)$2,940
D)$2,880

Question 20

Which inventory method gives the most realistic net income?

A)Average- cost, because it averages old and recent costs
B)FIFO, because it uses cost in the order in which they were incurred
C)LIFO, because it includes the most recent costs in cost of goods sold
D)The answer depends on whether prices are rising or falling.

Question 21

The largest expense category on the income statement of most merchandising companies is:

A)administrative expenses.
B)cost of goods sold.
C)selling expenses.
D)other expenses.

Question 22

An error in the ending inventory for the year ended December 31, 2009:

A)has no effect on the 2009 financial statements, but will create an error in the 2010 financial statements.
B)automatically creates errors in cost of goods in the 2009 and 2010 financial statements.
C)automatically creates errors in the ending inventory balance in the 2009 and 2010 financial statements.
D)affects only the 2009 financial statements.

Question 23

If ending inventory for the year ended December 31, 2007, is understated, this error will cause owners' equity to be:

A)understated at the end of 2007 and overstated at the end of 2008.
B)overstated at the end of 2007 and understated at the end of 2008.
C)understated at the end of 2007 and correctly stated at the end of 2008.
D)overstated at the end of 2007 and correctly stated at the end of 2008.

Question 24

When the LIFO method is used, cost of goods sold is assumed to consist of:

A)units with the lowest per unit cost.
B)oldest units.
C)units with the highest per unit cost.
D)most recently purchased units.

Question 25

The conservatism principle in accounting means that a company should:

A)use the same accounting methods and procedures from period to period.
B)report enough information in its financial statements for outsiders to make knowledgeable decisions about the company.
C)perform strictly proper accounting for items and transactions that are significant to the company's financial statements.
D)report items in the financial statements at amounts that lead to the most pessimistic immediate financial results.

Question 26

Char Daniels, controller for Chaka Inc., has the following items: Inventory turnover is:

A)4.00.
B)2.12.
C)2.00.
D)2.40.

Question 27

The lower- of- cost- or- market rule requires a company to report inventories at the lesser of:

A)current replacement cost or sales invoice price.
B)historical cost or current replacement cost.
C)historical cost or current sales price.
D)FIFO cost or LIFO cost.

Question 28

Ace Company began the current accounting period with 9,000 units of inventory purchased for $100 per unit. Ace sells its units at $300 per unit. Ace would experience a LIFO liquidation if:

A)the level of ending inventory falls below 9,000 units.
B)the sales price falls below $300 per unit.
C)the purchase price falls below $100 per unit.
D)any of the above scenarios happened.

Question 29

When the FIFO method is used, ending inventory is assumed to consist of the:

A)units with the lowest per unit cost.
B)most recently purchased units.
C)units with the highest per unit cost.
D)oldest units.

Question 30

Pat and Company's ending inventory at cost)was $87,500. The company would have had to pay $100,000 to replace the ending inventory. Before consideration of the lower- of- cost- or- market rule, the company's cost of goods sold was $60,000. Which of the following statements reflect the correct application of the LCM rule?

A)The Ending Inventory balance will be $87,500, and Cost of Goods Sold will be $60,000.
B)Ending Inventory balance will be $100,000, and Cost of Goods Sold will be $72,500.
C)The Ending Inventory balance will be $87,500, and Cost of Goods Sold will be $72,500.
D)The Ending Inventory balance will be $100,000, and Cost of Goods Sold will be $72,500.

Question 31

Exter Co. receives terms of 2/10, n/30 on all invoices from Garn Industries. On January 15, 2008, Exter purchased items from Garn for $4,200, excluding taxes and shipping costs. What amount would Exter use as the purchase discount if the invoice was paid on January 28, 2008?

A)$ 84
B)$4,200
C)$4,116
D)$ 0

Question 32

A company mistakenly destroys a unit of inventory that originally cost $12. The company included the cost of the destroyed unit in cost of goods sold on the income statement, rather than recognizing it as a loss. This action is justifiable based on:

A)the materiality concept.
B)the revenue concept.
C)accounting conservatism.
D)none of the above answers. All of them are incorrect; according to GAAP, a separate loss must be recognized.

Question 33

Happy House Corporation reported net income of $425,000 for the current year. After the financial statements had been prepared, it was discovered that ending inventory had been overstated by $25,000. The correct net income was:

A)$300,000.
B)$450,000.
C)$425,000.
D)$400,000.

Question 34

The following data are for the Bi- Star Technologies for the year ended December 31, 2006: 0
What is the estimated ending inventory?

A)$635,000
B)$ 10,000
C)$167,500
D)$840,000

Question 35

Charles Scrab Inc has beginning inventory of $15,000, purchases of $25,000, and ending inventory of $10,000, sales of $75,000, operating expenses of $30,000, and a tax rate of 40% for 2008. An accounting clerk input the ending inventory as $12,000. What is the effect on 2009 net income?

A)Net income for 2009 will be $10,200.
B)Net income for 2009 will be $1,200 higher than 2008.
C)Net income for 2009 will be $1,200 lower than 2008.
D)Net income for 2009 cannot be calculated with the information given.

Question 36

Char Daniels, controller for Chaka Inc., has the following items: The gross profit rate is:

A)20%.
B)60%.
C)50%.
D)40%.

Question 37

Given the following data, by how much would taxable income change if FIFO is used rather than LIFO?

A)Decrease by $20,000
B)Increase by $19,000
C)Increase by $20,000
D)Decrease by $19,000

Question 38

Given the following data, what would the net income be if the company uses LIFO?

A)$ 8,960
B)$12,720
C)$ 6,800
D)$13,440

Question 39

Given the following data, calculate the dollar amount of goods available for sale of using the average- cost method.

A)$ 283.90
B)$14.19512
C)$ 851.71
D)$1,164.00

Question 40

In a merchandising business, gross profit is equal to sales revenue minus:

A)cost of goods sold and operating expenses combined.
B)cost of goods sold and sales commissions combined.
C)cost of goods sold only.
D)cost of goods sold, operating expenses, and prepaid expenses combined.

Question 41

On July 16, 2009, Martson and Co. made the following journal entry: Martson and Co. is using the Inventory system.

A)LIFO
B)FIFO
C)Periodic
D)Perpetual

Question 42

Tonga Industries reported the following: The net income is:

A)$ 18,000.
B)$ 12,000.
C)$ 30,000.
D)$180,000.

Question 43

The purchasing manager for East Coast Hoggs is attempting to determine how much inventory to purchase for the upcoming month. The following information has been collected: The manager wishes to end the month with ending inventory of $25,000. How much inventory must the company purchase?

A)$82,000
B)$67,000
C)$85,000
D)$73,000

Question 44

When applying the lower- of- cost- or- market rule, market value generally refers to:

A)LIFO cost using the periodic method.
B)FIFO cost using the periodic method.
C)current sales price of the inventory.
D)current replacement cost.

Question 45

John's Appliances has the following items for 2008 and 2009: What is the inventory amount for 2009?

A)$49,000
B)$29,000
C)$85,000
D)$ 7,000

Question 46

The disclosure principle requires that management prepare financial reports that disclose all of the following types of information EXCEPT:

A)information that facilitates comparison with other companies' financial reports.
B)information that is relevant to decision making.
C)forecasts of expected future earnings to help investors decide whether to invest in the company.
D)the method of inventory used.

Question 47

Harmon Fraiser Industries had beginning inventory of 20,000 candles and an ending inventory of 15,000 candles. Harmon originally paid $1.80 each when it purchased the candles. The current replacement cost of the candles is $2.20 each. Each candle retails for $3.00. Harmon uses the LIFO method to account for its inventory. How did the LIFO liquidation affect the company's taxable income?

A)Taxable income increased because of the liquidation.
B)Taxable income remained the same despite the liquidation.
C)Taxable income decreased because of the liquidation.
D)Taxable income is indeterminable with the given data.

Question 48

A company whose inventory consists of very unique items would probably use which inventory method?

A)Specific unit cost
B)Weighted- average of only the unique items
C)F- in, first- out
D)Last- in, first- out

Question 49

In a merchandising company's income statement, which of the following would NOT be included in the Cost of Goods Sold calculation?

A)Sales taxes on inventory purchases, as shown on the invoices
B)Sales commissions
C)Returns of inventory purchases
D)Shipping costs from the manufacturer to the merchandiser

Question 50

Max from Darnel Inc. has the following items: Inventory turnover is:

A)4.31.
B)2.15.
C)6.15.
D)4.00.

Question 51

Given the following data, what is the cost of goods sold?

A)$1,210,000
B)$1,300,000
C)$1,280,000
D)$1,290,000

Question 52

Ending inventory for the year ended December 31, 2008, is understated. How will this error affect net income for 2008 and 2009?

A)2008 overstated; 2009 understated
B)2008 overstated; 2009 no effect
C)2008 understated; 2009 overstated
D)2008 understated; 2009 no effect

Question 53

A perpetual inventory system offers which of the following advantages?

A)This system helps to determine if there is a sufficient supply of inventory on hand to fill customer orders, just by reviewing the inventory records.
B)This system is more expensive than a periodic system.
C)This system is used for inexpensive goods.
D)Inventory balances have to be counted to be accurate.

Question 54

Given the following data, what would the income tax amount be if the company uses FIFO?

A)$13,440
B)$ 8,960
C)$10,200
D)$ 6,80

Question 55

Charles Scrab Inc. has beginning inventory of $15,000, purchases of $25,000, and ending inventory of $10,000, sales of $75,000, operating expenses of $30,000, and a tax rate of 40% for 2008. An accounting clerk input the ending inventory as $12,000. What is the effect on 2008 net income?

A)Net income will be $2,000 lower.
B)Net income will be $1,200 lower.
C)Net income will be $1,200 higher.
D)Net income will be $2,000 higher.

Question 56

Unlike the periodic inventory system, the perpetual inventory system:

A)does not require a physical count of the ending inventory.
B)provides a continuous record of inventory on hand.
C)includes only the inventory purchased for cash.
D)is not required by GAAP.

Question 57

The following data was collected from the accounting records of Ambrose, Inc., which currently uses the FIFO method of valuing inventory. What would have been the difference in Ambrose's ending inventory under the LIFO costing method?

A)Ending inventory is the same under both methods.
B)Ending inventory would have been $120 higher.
C)Ending inventory would have been $120 lower.
D)The difference cannot be determined using this information.

Question 58

A company purchased merchandise inventory on credit for $600 per unit, and later sold the inventory for $800 per unit. The journal entry to record the purchase of inventory included a debit to:

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

Question 59

All of the following are reasons for choosing the FIFO versus the LIFO costing method EXCEPT:

A)FIFO reports the most up- to- date inventory values on the balance sheet.
B)FIFO uses more current costs in calculating the value of ending inventory.
C)FIFO generally results in higher income taxes paid.
D)FIFO is generally more conservative.

Question 60

Papa Gene's has the following information: Papa Gene's average inventory is:

A)$104,167.
B)$ 83,333.
C)$125,000.
D)$ 62,500.

Question 61

Tonga Industries reported the following: The gross profit percentage is:

A)32%.
B)80%.
C)20%.
D)60%.

Question 62

The following data was extracted from the records of Winsam Company: Winsam's most recent balance sheet showed ending inventory of $800. Which method was used for valuing inventory?

A)LIFO
B)Specific identification
C)FIFO
D)Average- cost

Question 63

Given the following data, calculate the cost of ending inventory using the LIFO costing method.

A)$545
B)$720
C)$915
D)$740

Question 64

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

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

Question 65

What is the formula used to calculate net purchases?

A)Purchases less Purchase Returns and Allowances plus Purchase Discounts
B)Purchases less Purchase Returns and Allowances less Purchase Discounts
C)Purchases plus Purchase Returns and Allowances less Purchase Discounts
D)Beginning Inventory less Purchases

Question 66

Happy House Corporation reported net sales of $425,000 for the current year. After the financial statements had been prepared, it was discovered that ending inventory had been understated by $25,000. If the tax rate is 40%, after the error has been corrected, net income will:

A)never be correct, unless there is a correcting entry.
B)be correct in the present year.
C)not be corrected for two years.
D)be correct in the next year.

Question 67

The following data was extracted from the records of Winsam Company: Winsam's most recent income statement showed cost of goods sold of $8,800. Which method was used for valuing inventory?

A)Average- cost
B)Specific identification
C)LIFO
D)FIFO

Question 68

Barney Google Industries has a Beginning inventory of 50 units, Net purchases of 450 units and Sales of 350 units. What is the dollar amount of the Ending inventory, if each unit costs $10?

A)$4,500
B)$3,500
C)$2,500
D)$1,500

Question 69

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

A)lower owners' equity balance than under FIFO.
B)lower inventory value than under FIFO.
C)higher gross profit than under FIFO.
D)lower gross profit than under FIFO.

Question 70

For a company using FIFO-and assuming rising prices-large purchases of inventory near the end of the year will:

A)increase the value of ending inventory.
B)increase income taxes paid.
C)increase gross profit.
D)result in all of the above.

Question 71

Given the following data, what is the value of the gross profit as determined by the LIFO method?

A)$1,560
B)$2,940
C)$1,620
D)$2,880

Question 72

A company using a perpetual inventory system will use which of the following accounts?

A)Inventory Returns
B)Sales Returns and Allowances
C)Cost of Goods Purchases
D)Inventory

Question 73

Given the following data, calculate the gross profit using the average- cost method, if the selling price was $20 per unit.

A)$634.78
B)$851.71
C)$283.90
D)$359.90

Question 74

The lower- of- cost- or- market rule is based on accounting:

A)the materiality concept.
B)conservatism.
C)disclosure.
D)revenue concept.

Question 75

Bonz, Inc. is using a perpetual inventory system with a December 31 year end date. The balance in this company's inventory account as of September 30 would be equal to:

A)beginning inventory as of January 01 plus all purchases from the beginning of the year through September 30 less all items sold from the beginning of the year through September 30.
B)beginning inventory as of January 01 plus all purchases from the beginning of the year through September 30.
C)beginning inventory as of January 01.
D)all purchases from the beginning of the year through September 30.

Question 76

Ending inventory for the year ended December 31, 2008, is overstated by $10,000. How will this affect net income for 2009?

A)Net income for 2009 will be understated by $20,000.
B)Net income for 2009 will be understated by $10,000.
C)Net income for 2009 will be overstated by $10,000.
D)Net income for 2009 will be overstated by $20,000.

Question 77

Given the following data, what is the cost of purchases?

A)$465,000
B)$370,000
C)$475,000
D)$595,000

Question 78

On July 16, 2009, Martson and Co. made the following journal entry: What is the Gross Profit from this sale?

A)$25,000
B)$15,000
C)$ 0
D)$10,000

Question 79

The following data was extracted from the records of Winsam Company: What is the gross profit using the FIFO method?

A)$8,800
B)$8,600
C)$7,150
D)$6,950

Question 80

Given the following data, calculate the value of ending inventory using the average- cost method.

A)$ 851.71
B)$1,164.00
C)$14.19512
D)$ 283.90