Question 1

Stephan, Inc. 
Stephan, Inc. has an inventory turnover rate of 8 times.
-
Refer to the information provided for Stephan, Inc. If its cost of goods sold is $150,000, then the company:

Accepted Answer

The inventory turnover rate is calculated as Cost of Goods Sold divided by Average Inventory. With a turnover rate of 8 and COGS of $150,000, the average inventory is $150,000 / 8 = $18,750.

Question 2

Stephan, Inc. 
Stephan, Inc. has an inventory turnover rate of 8 times.
-
Refer to the information provided for Stephan, Inc. Calculate the company's days-in-inventory ratio.

Accepted Answer

The days-in-inventory ratio is calculated as 365 divided by the inventory turnover rate. For Stephan, Inc., it is 365 / 8 = 45.625 days.

Question 3

Augustus, Inc. buys designer clothing to sell in its retail stores. Since much of the merchandise comes from New York and Europe, Augustus must pay freight charges to get the merchandise shipped in. Which of the following statements must be true?

Accepted Answer

Under the periodic system, transportation-in (freight charges) is not immediately recorded as part of the cost of inventory. Instead, it is included in the total cost of purchases at the end of the accounting period, which is then used to determine the cost of goods sold. Therefore, D is the correct statement, and the other options are incorrect.

Question 4

Max's Tire Center Company 
Selected data from the financial statements of Max's Tire Center are provided below.

- Refer to the selected data provided for Max's Tire Center. What is Max's inventory turnover in 2012?

Accepted Answer

The answer of Max's Tire Center Company 
Selected data from...

Question 5

How are purchase returns and purchase discounts recorded by a company using the periodic inventory system?

Accepted Answer

Purchase returns and purchase discounts are recorded by creating contra-accounts to the Purchases account in the periodic inventory system. The contra-accounts are Purchase Returns and Allowances and Purchase Discounts. The contra-accounts allow the company to track the amount of returns and discounts separately from the total purchases.

Question 6

If the cost of an item of inventory is $50 and the market value is $57, the amount included in inventory according to the lower-of-cost-or-market is:

Accepted Answer

According to the lower-of-cost-or-market rule, inventory should be valued at the lower of its cost or market value. In this case, the cost is $50 and the market value is $57, but we use the lower value, which is $50. Therefore, the amount included in inventory is $50.

Question 7

Max's Tire Center Company 
Selected data from the financial statements of Max's Tire Center are provided below.
 
-Refer to the selected data provided for Max's Tire Center. Which of the following would result from a vertical analysis of Max's income statement in 2012?

Accepted Answer

Vertical analysis involves expressing each item in the income statement as a percentage of total sales. Therefore, option D correctly describes the cost of sales as 30.77% of total sales in 2012.

Question 8

When inventories are written down due to the application of the lower-of-cost-or-market (LCM) rule, which of the following is usually increased?

Accepted Answer

When inventories are written down due to the application of the lower-of-cost-or-market (LCM) rule, the cost of goods sold is usually increased to reflect the cost of the written-down inventory. The reduction in inventory value is considered a loss, which is recognized through an increase in cost of goods sold.

Question 9

Inventory turnover:

Accepted Answer

Inventory turnover measures the relationship between the volume of goods sold and the amount of inventory carried. It is calculated by dividing the cost of merchandise sold by the average inventory for a particular period. Option A is incorrect because it incorrectly divides average inventory by cost of merchandise sold. Option C is incorrect because inventory turnover does not directly relate to risks of loss from damaged merchandise. Option D is incorrect because it incorrectly averages beginning inventory and ending inventory.

Question 10

The lower-of-cost-or-market rule applies to the write-down of inventory values when market value exceeds cost. Why does this rule not allow for write-ups in inventory value?

Accepted Answer

The lower-of-cost-or-market rule is based on the conservatism principle, which states that losses should be recognized earlier than gains. Therefore, writing up inventory values to market value would be inconsistent with this principle as it would recognize gains prematurely. Additionally, write-ups in inventory value are more uncertain than write-downs and can create overvaluation of inventory, which is not consistent with prudence in financial reporting.

Question 11

Which of the following statements regarding the application of the lower-of-cost-or-market method is true?

Accepted Answer

The lower-of-cost-or-market method is an exception to the historical cost principle because it allows inventory to be written down to market value when it is lower than the cost, reflecting potential losses.

Question 12

Max's Tire Center Company 
Selected data from the financial statements of Max's Tire Center are provided below.

- Refer to the selected data provided for Max's Tire Center. What is Max's days-in-inventory ratio in 2012?

Accepted Answer

The days-in-inventory ratio is calculated by dividing the average inventory by the cost of goods sold and multiplying the result by 365 days. In 2012, Max's average inventory was $1,230,000, and its cost of goods sold was $8,000,000. Therefore, Max's days-in-inventory ratio in 2012 is 153.60 days.

Question 13

Medina Enterprises 
The following selected financial information is available for Medina for the year ended December 31, 2012.

- Refer to the information provided for Medina Enterprises. Calculate Medina's days-in-inventory ratio.

Accepted Answer

The answer of Medina Enterprises 
The following selected financial information...

Question 14

Max's Tire Center Company 
Selected data from the financial statements of Max's Tire Center are provided below.
 
-Refer to the selected data provided for Max's Tire Center. Which of the following would result from a vertical analysis of Max's balance sheet in 2012?

Accepted Answer

The answer of Max's Tire Center Company 
Selected data from...

Question 15

The days-in-inventory ratio:

Accepted Answer

The days-in-inventory ratio measures the number of days it takes for a company to acquire, sell and replace their inventory. It is calculated by dividing the average inventory by the cost of goods sold and multiplying by 365. Option B is incorrect because it calculates the average daily cost of inventory, not the days-in-inventory ratio. Option C is incorrect because it refers to the average collection period ratio rather than days-in-inventory. Option D is incorrect because the days-in-inventory ratio can vary significantly among industries depending on the nature of their goods and sales cycle.

Question 16

If the cost of an item of inventory is $60 and the market value is $50, the amount included in inventory according to the lower-of-cost-or-market is:

Accepted Answer

According to the lower-of-cost-or-market method, inventory is valued at the lower of its cost or market value. In this case, the market value of the inventory is $50 which is lower than its cost of $60. Therefore, the amount included in inventory would be $50.

Question 17

Max's Tire Center Company 
Selected data from the financial statements of Max's Tire Center are provided below.

- Refer to the selected data provided for Max's Tire Center. Which of the following would result from a horizontal analysis of Max's balance sheet?

Accepted Answer

Horizontal analysis involves comparing financial data over a period of time. Option A indicates a percentage increase in inventory over a specific year, which aligns with the concept of horizontal analysis.

Question 18

When the market value of inventory items has declined below their cost, which method would be the most appropriate in complying with GAAP?

Accepted Answer

GAAP requires that inventory be reported at cost or market value, whichever is lower. This means that if the market value of inventory items has declined below their cost, the lower-of-cost-or-market method should be used to report inventory values. This method compares the original cost of the inventory to its current market value and reports the lower of the two as the inventory value.

Question 19

Medina Enterprises 
The following selected financial information is available for Medina for the year ended December 31, 2012.

- Refer to the information provided for Medina Enterprises. What is the inventory turnover ratio for 2012?

Accepted Answer

The answer of Medina Enterprises 
The following selected financial information...

Question 20

Max's Tire Center Company 
Selected data from the financial statements of Max's Tire Center are provided below.

- Refer to the selected data provided for Max's Tire Center. Which of the following would result from a horizontal analysis of Max's income statement?

Accepted Answer

Horizontal analysis involves comparing financial data over a period of time. A 9.09% increase in cost of sales during 2012 indicates a year-over-year comparison, which is typical of horizontal analysis.

Quiz 7: Inventory

Stephan, Inc. Stephan, Inc. has an inventory turnover rate of 8 times. - Refer to the information provided for Stephan, Inc. If its cost of goods sold is $150,000, then the company:

Stephan, Inc. Stephan, Inc. has an inventory turnover rate of 8 times. - Refer to the information provided for Stephan, Inc. Calculate the company's days-in-inventory ratio.

Augustus, Inc. buys designer clothing to sell in its retail stores. Since much of the merchandise comes from New York and Europe, Augustus must pay freight charges to get the merchandise shipped in. Which of the following statements must be true?

Max's Tire Center Company Selected data from the financial statements of Max's Tire Center are provided below. - Refer to the selected data provided for Max's Tire Center. What is Max's inventory turnover in 2012?

How are purchase returns and purchase discounts recorded by a company using the periodic inventory system?

If the cost of an item of inventory is $50 and the market value is $57, the amount included in inventory according to the lower-of-cost-or-market is:

Max's Tire Center Company Selected data from the financial statements of Max's Tire Center are provided below. -Refer to the selected data provided for Max's Tire Center. Which of the following would result from a vertical analysis of Max's income statement in 2012?

When inventories are written down due to the application of the lower-of-cost-or-market (LCM) rule, which of the following is usually increased?

Inventory turnover:

The lower-of-cost-or-market rule applies to the write-down of inventory values when market value exceeds cost. Why does this rule not allow for write-ups in inventory value?

Which of the following statements regarding the application of the lower-of-cost-or-market method is true?

Max's Tire Center Company Selected data from the financial statements of Max's Tire Center are provided below. - Refer to the selected data provided for Max's Tire Center. What is Max's days-in-inventory ratio in 2012?

Medina Enterprises The following selected financial information is available for Medina for the year ended December 31, 2012. - Refer to the information provided for Medina Enterprises. Calculate Medina's days-in-inventory ratio.

Max's Tire Center Company Selected data from the financial statements of Max's Tire Center are provided below. -Refer to the selected data provided for Max's Tire Center. Which of the following would result from a vertical analysis of Max's balance sheet in 2012?

The days-in-inventory ratio:

If the cost of an item of inventory is $60 and the market value is $50, the amount included in inventory according to the lower-of-cost-or-market is:

Max's Tire Center Company Selected data from the financial statements of Max's Tire Center are provided below. - Refer to the selected data provided for Max's Tire Center. Which of the following would result from a horizontal analysis of Max's balance sheet?

When the market value of inventory items has declined below their cost, which method would be the most appropriate in complying with GAAP?

Medina Enterprises The following selected financial information is available for Medina for the year ended December 31, 2012. - Refer to the information provided for Medina Enterprises. What is the inventory turnover ratio for 2012?

Max's Tire Center Company Selected data from the financial statements of Max's Tire Center are provided below. - Refer to the selected data provided for Max's Tire Center. Which of the following would result from a horizontal analysis of Max's income statement?