Question 1

A $25,000 overstatement of the 2019 ending inventory was discovered after the financial statements for 2019 were prepared.Which of the following describes the effect of the inventory error on the 2019 financial statements?
A)Current assets were overstated and net income was understated.
B)Current assets were understated and net income was understated.
C)Current assets were overstated and net income was overstated.
D)Current assets were understated and net income was overstated.

Accepted Answer

An overstatement of ending inventory results in an overstatement of current assets (since inventory is a current asset) and an overstatement of net income (since the cost of goods sold is understated, leading to higher income).

Question 2

Abel Company must write down its inventory by $30,000 to the net realizable value of $450,000 at December 31,2019.What is the effect of this write-down on the year 2019 financial statements?
A)Decrease cost of goods sold.
B)Decrease ending inventory on the balance sheet.
C)Increase pretax income.
D)Decrease accounts payable.

Accepted Answer

The write-down of inventory will decrease the value of ending inventory on the balance sheet. It will not affect cost of goods sold, pretax income, or accounts payable.

Question 3

Which of the following is correct when,in the same year,beginning inventory is overstated by $1,300 and ending inventory is understated by $700?
A)Net income is understated by $600.
B)Net income is understated by $2,000.
C)Net income is overstated by $600.
D)Net income is overstated by $2,000.

Accepted Answer

The answer of Which of the following is correct when,in...

Question 4

The inventory turnover
A)reflects how many times,on average,that the inventory balance was sold during the year.
B)is increased when accounts receivable increases.
C)is decreased if inventory balances decrease from the beginning of the year to the end of the year.
D)is improved if cost of goods sold decreases and inventory balances increase from one year to the next.

Accepted Answer

The inventory turnover reflects how many times, on average, that the inventory balance was sold during the year. It is calculated by dividing the cost of goods sold by the average inventory balance. The higher the inventory turnover, the more efficient a company is at managing its inventory. Therefore, option A is the correct choice. Option B is incorrect because there is no relationship between inventory turnover and accounts receivable. Option C is incorrect because a decrease in inventory balances will increase the inventory turnover, not decrease it. Option D is incorrect because an increase in inventory balances will decrease the inventory turnover, not improve it.

Question 5

QV-TV,Inc.provided the following items in its notes to the financial statements for the year-end 2019: Cost of goods sold was $22 billion under FIFO costing and the inventory value under FIFO costing was $2.1 billion.The LIFO Reserve for year-end 2018 was $0.6 billion and at year-end 2019 it had increased to $0.8 billion.
- How much is the 2019 LIFO cost of goods sold?
A)$22.2 billion.
B)$19.8 billion.
C)$22.8 billion.
D)$19.2 billion.

Accepted Answer

The answer of QV-TV,Inc.provided the following items in its notes...

Question 6

An understatement of the ending inventory in Year 1,if not corrected,will cause which of the following?
A)The year 1 net income to be understated and Year 2 net income to be overstated.
B)The year 1 net income to be overstated and Year 2 net income to be overstated.
C)The year 1 net income to be overstated and Year 2 net income will be correct.
D)The year 1 net income to be overstated and Year 2 net income to be understated.

Accepted Answer

If the ending inventory is understated in Year 1, the cost of goods sold will be overstated, which will result in an understated net income for Year 1. If not corrected, the understated ending inventory will also affect Year 2 net income because the overstated cost of goods sold in Year 1 will lead to a lower beginning inventory for Year 2. Thus, Year 2 net income will be overstated.

Question 7

Tinker's cost of goods sold in the year of sale (2019)was $750,000 and 2018 cost of goods sold was $770,000.The inventory at the end of 2019 was $188,000 and at the end of 2018 the inventory was $208,000. Tinker's inventory turnover during 2019 was closest to:
A)3.99
B)3.79
C)3.84
D)3.89

Accepted Answer

The answer of Tinker's cost of goods sold in the...

Question 8

Barrington Company must write down its inventory from its cost of $260,000 to its net realizable value of $248,000 at December 31,2018.The inventory will all be sold in the year 2019.Which of the following provides a correct effect of the write-down?
A)The 2018 gross profit decreases by $12,000.
B)The 2019 cost of goods sold increases by $12,000.
C)The 2019 ending inventory increases by $12,000.
D)The 2019 gross profit is not affected if the inventory is sold during 2019.

Accepted Answer

The write-down of inventory decreases the 2018 gross profit by $12,000 because the loss is recognized in the year the write-down occurs.

Question 9

Wilmington Company reported pretax income of $25,000 during 2018 and $30,000 during 2019.Later it was discovered that the ending inventory for 2018 was understated by $2,000 (and not corrected in 2018).What is the correct pretax income for each year? 
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

The answer of Wilmington Company reported pretax income of $25,000...

Question 10

Hollander Company hired some students to help count inventory during their semester break.Unfortunately,the students added incorrectly and the 2019 ending inventory was overstated by $5,000.What would be the effect of this error in ending inventory?
A)2019 net income would be overstated.
B)2019 net income would be understated.
C)2019 ending retained earnings would be understated.
D)2019 cost of goods sold would be overstated.

Accepted Answer

An overstated ending inventory reduces the cost of goods sold, leading to an overstated net income for 2019.

Question 11

Tinker's cost of goods sold in the year of sale (2019)was $750,000 and 2018 cost of goods sold was $770,000.The inventory at the end of 2019 was $188,000 and at the end of 2018 the inventory was $208,000. Tinker's average number of days to sell its inventory during 2019 is closest to: (Use 365 days a year. )
A)96
B)92
C)95
D)94

Accepted Answer

The answer of Tinker's cost of goods sold in the...

Question 12

QV-TV,Inc.provided the following items in its notes to the financial statements for the year-end 2019: Cost of goods sold was $22 billion under FIFO costing and the inventory value under FIFO costing was $2.1 billion.The LIFO Reserve for year-end 2018 was $0.6 billion and at year-end 2019 it had increased to $0.8 billion. 
-What is the LIFO inventory value at year-end 2019?
A)$1.9 billion.
B)$2.9 billion.
C)$2.3 billion.
D)$1.3 billion.

Accepted Answer

The answer of QV-TV,Inc.provided the following items in its notes...

Question 13

During the audit of Montane Company's 2019 financial statements,the auditors discovered that the 2019 ending inventory had been overstated by $8,000 and that the 2019 beginning inventory was overstated by $5,000.Before the effect of these errors,2019 pretax income had been computed as $100,000.What should be reported as the correct 2019 pretax income before taxes?
A)$113,000.
B)$87,000.
C)$105,000.
D)$97,000.

Accepted Answer

To calculate the correct 2019 pretax income, we need to adjust for the inventory overstatements.

The overstatement of $8,000 in ending inventory means that the cost of goods sold was understated by $8,000. Similarly, the overstatement of $5,000 in beginning inventory means that the cost of goods sold was overstated by $5,000.

To adjust for these errors, we need to increase the cost of goods sold by $8,000 and decrease it by $5,000, resulting in a net increase of $3,000.

Therefore, the correct 2019 pretax income before taxes would be:

$100,000 (original income)
- $8,000 (overstatement of ending inventory)
+ $5,000 (overstatement of beginning inventory)
- $3,000 (adjustment for net effect of errors)

= $94,000

So, the correct answer is D) $97,000, which is the closest option to our calculated amount.

Question 14

If two companies each use different inventory accounting methods,the companies can be made comparable from information reported in the financial statements by
A)converting the FIFO Reserve to a LIFO inventory.
B)converting inventory at cost to inventory at lower of cost or market (net realizable value).
C)converting cost of goods sold to lower of cost or market (net realizable value).
D)converting inventory on a LIFO basis to a FIFO basis using the LIFO Reserve.

Accepted Answer

The best choice is converting inventory on a LIFO basis to a FIFO basis using the LIFO Reserve. This adjustment will make the inventory values of the two companies comparable. It will also help in comparing the cost of goods sold between the two companies. Converting the FIFO Reserve to a LIFO inventory, converting inventory at cost to inventory at lower of cost or market (net realizable value), and converting cost of goods sold to lower of cost or market (net realizable value) are not appropriate adjustments for comparing the financial statements of the two companies.

Question 15

A $25,000 overstatement of the 2018 ending inventory was discovered after the financial statements for 2018 were prepared.Which of the following describes the effect of the inventory error on the 2019 financial statements?
A)Net income and stockholders' equity are both understated.
B)Net income is understated and stockholders' equity is correct.
C)Net income and stockholders' equity are both overstated.
D)Net income and stockholders' equity are both unaffected.

Accepted Answer

The overstatement of ending inventory in 2018 caused an understatement of cost of goods sold and an overstatement of gross profit and net income. Since cost of goods sold flows into retained earnings and affects stockholders' equity, this error will result in an understatement of stockholders' equity for 2018. However, since the error was discovered in 2019, correcting the 2018 ending inventory will result in an adjustment to cost of goods sold for 2018, which will also affect net income for 2019 (because the error was discovered in 2019). Therefore, the 2019 financial statements will show an understatement of net income due to the adjustment, but stockholders' equity will be correct.

Question 16

A company using the periodic inventory system correctly recorded a purchase of merchandise,but the merchandise was not included in the physical inventory count at the end of the accounting period.The error caused which of the following?
A)An understatement of both net income and inventory.
B)An overstatement of inventory,purchases,and accounts payable.
C)An understatement of inventory,purchases,and accounts payable.
D)An overstatement of net income and inventory.

Accepted Answer

The error of not including the purchased merchandise in the physical inventory count would result in the inventory being understated because the goods that were bought were not counted. Consequently, the cost of goods sold (COGS) would be understated, leading to an overstatement of net income. However, since the purchase was correctly recorded, it does not affect purchases or accounts payable directly in terms of overstatement or understatement. Therefore, the correct impact is an understatement of both net income (due to the overstatement initially, but when corrected, it shows as an understatement) and inventory.

Question 17

On December 15,2019,Transport Company accepted delivery of merchandise that it purchased on credit.As of December 31,2019,the company had neither recorded the transaction nor included the merchandise in its ending inventory amount because the seller's invoice had not been received.The effect of this omission on its balance sheet at December 31,2019, (end of the accounting period)was that
A)inventory and net income were overstated but liabilities were correct.
B)net income was the only item affected by the omission.
C)inventory and accounts payable were understated but net income was correct.
D)assets and stockholders' equity were understated but liabilities were correct.

Accepted Answer

The omission of recording the purchased merchandise and accounts payable will result in the understatement of inventory and accounts payable. However, as the company has not recognized the expense related to the purchase, net income will remain correct. This will result in the understatement of assets and stockholders' equity and the correct presentation of liabilities on the balance sheet.

Question 18

At the end of 2019,a $5,000 understatement was discovered in the 2019 ending inventory as reflected in the inventory records.What were the 2019 effects of the $5,000 inventory error (before correction)?
A)Assets were understated by $5,000 and pretax income was understated by $5,000.
B)Assets were understated by $5,000 and pretax income was overstated by $5,000.
C)Cost of goods sold was understated by $5,000 and pretax income was understated by $5,000.
D)Cost of goods sold was overstated by $5,000 and pretax income was overstated by $5,000.

Accepted Answer

When ending inventory is understated by $5,000, assets (inventory) are understated by the same amount. This also causes cost of goods sold (COGS) to be overstated, leading to an understatement of pretax income by $5,000.

Question 19

Cranchey Company reported a LIFO ending inventory of $670,000 on its balance sheet at December 31,2019.Cranchey's disclosure notes to the financial statements reported that the LIFO Reserve at December 31,2018 was $32,000 and the LIFO Reserve at December 31,2019 was $40,000.Which of the following statements is correct for Cranchey Company for the effect of the LIFO Reserve in 2019 in converting LIFO amounts to FIFO amounts?
A)Cost of goods sold would have been higher by $40,000 under FIFO.
B)Pretax income would have been higher by $32,000 under FIFO.
C)Pretax income would have been higher by $8,000 under FIFO.
D)Cost of goods sold would have been higher by $8,000 under FIFO.

Accepted Answer

The LIFO reserve increased from $32,000 to $40,000, indicating an increase of $8,000. This increase would be added to the LIFO inventory to convert to FIFO, thus increasing pretax income by $8,000 under FIFO compared to LIFO.

Question 20

Which of the following is correct when,in the same year,beginning inventory is understated by $1,300 and ending inventory is understated by $700?
A)Net income is understated by $600.
B)Net income is understated by $2,000.
C)Net income is overstated by $600.
D)Net income is overstated by $2,000.

Accepted Answer

Beginning inventory understatement will affect Cost of Goods Sold, which will be overstated by $1,300. Ending inventory understatement will also affect Cost of Goods Sold, which will be understated by $700. Therefore, overall Cost of Goods Sold will be overstated by $600 ($1,300 - $700 = $600). Since Cost of Goods Sold is subtracted from revenue to calculate net income, overstating Cost of Goods Sold will result in understating net income by the same amount. Therefore, net income is understated by $600.

Quiz 7: Reporting and Interpreting Cost of Goods Sold and Inventory

A $25,000 overstatement of the 2019 ending inventory was discovered after the financial statements for 2019 were prepared.Which of the following describes the effect of the inventory error on the 2019 financial statements?

Abel Company must write down its inventory by $30,000 to the net realizable value of $450,000 at December 31,2019.What is the effect of this write-down on the year 2019 financial statements?

Which of the following is correct when,in the same year,beginning inventory is overstated by $1,300 and ending inventory is understated by $700?

The inventory turnover

An understatement of the ending inventory in Year 1,if not corrected,will cause which of the following?

Tinker's cost of goods sold in the year of sale (2019) was $750,000 and 2018 cost of goods sold was $770,000.The inventory at the end of 2019 was $188,000 and at the end of 2018 the inventory was $208,000. Tinker's inventory turnover during 2019 was closest to:

Barrington Company must write down its inventory from its cost of $260,000 to its net realizable value of $248,000 at December 31,2018.The inventory will all be sold in the year 2019.Which of the following provides a correct effect of the write-down?

Wilmington Company reported pretax income of $25,000 during 2018 and $30,000 during 2019.Later it was discovered that the ending inventory for 2018 was understated by $2,000 (and not corrected in 2018) .What is the correct pretax income for each year?

Hollander Company hired some students to help count inventory during their semester break.Unfortunately,the students added incorrectly and the 2019 ending inventory was overstated by $5,000.What would be the effect of this error in ending inventory?

If two companies each use different inventory accounting methods,the companies can be made comparable from information reported in the financial statements by

A $25,000 overstatement of the 2018 ending inventory was discovered after the financial statements for 2018 were prepared.Which of the following describes the effect of the inventory error on the 2019 financial statements?

A company using the periodic inventory system correctly recorded a purchase of merchandise,but the merchandise was not included in the physical inventory count at the end of the accounting period.The error caused which of the following?

At the end of 2019,a $5,000 understatement was discovered in the 2019 ending inventory as reflected in the inventory records.What were the 2019 effects of the $5,000 inventory error (before correction) ?

Which of the following is correct when,in the same year,beginning inventory is understated by $1,300 and ending inventory is understated by $700?