Question 1

Inventory errors can be ignored because they counterbalance.

Accepted Answer

Inventory errors should not be ignored as they can have significant financial impacts and may also lead to inaccurate financial statements. Even if some errors seem to counterbalance, it is important for businesses to maintain accurate inventory records and make necessary adjustments to prevent future errors.

Question 2

When using the weighted-average cost method to determine the cost of inventory sold, the weighted-average cost per unit is calculated as the cost of goods available for sale divided by the number of units available for sale.

Accepted Answer

This is the correct method for calculating the weighted-average cost per unit.

Question 3

A sharp decrease in the gross profit percentage is a potential indicator of trouble.

Accepted Answer

A sharp decrease in gross profit percentage means that either the cost of goods sold has increased or the sales revenue has decreased. In either case, it indicates a potential problem with the company's operations or market conditions.

Question 4

Previously written down inventory does not need to be reassessed as it is at its lowest value.

Accepted Answer

Previously written down inventory still needs to be reassessed in case there have been any further declines in value.

Question 5

Understating ending inventory in the current period will understate cost of goods sold in the following period.

Accepted Answer

Ending inventory is carried over to the next period as the beginning inventory. If ending inventory is understated in the current period, it will result in a lower beginning inventory in the following period, which will ultimately result in an understatement of cost of goods sold in the following period.

Question 6

Freight-in is the transportation cost, paid by the buyer, to move goods from the seller to the buyer.

Accepted Answer

Freight-in is also known as inbound freight, and it is the responsibility of the buyer to pay for this cost, rather than the seller.

Question 7

Sales taxes (GST/HST) paid by a merchandising company on its sales are normally included in the cost of goods sold account.

Accepted Answer

Sales taxes (GST/HST) paid by a merchandising company on its sales are collected from customers and remitted to the government, not included in the cost of goods sold.

Question 8

Historically, perpetual inventory systems have been used to account for inventory items with a low unit cost.

Accepted Answer

Perpetual inventory systems are systems where inventory levels are continuously tracked and updated in real-time. They are commonly used for high-cost inventory items, as the cost of implementing and maintaining a perpetual system may not be justifiable for low-value items.

Question 9

A purchase allowance is a decrease in the cost of purchases because the purchaser returned goods to the supplier.

Accepted Answer

A purchase allowance is a reduction in the cost of purchases due to a minor issue with the goods received, where the buyer agrees to keep the goods in exchange for a discount, rather than returning them.

Question 10

In a perpetual inventory system, businesses maintain a continuous record for each inventory item.

Accepted Answer

In a perpetual inventory system, businesses maintain a continuous record of each inventory item's quantity and value. This allows for real-time tracking of inventory levels and cost of goods sold.

Question 11

The lower-of-cost-or-net-realizable-value rule applies only when a company uses the FIFO
inventory valuation method.

Accepted Answer

The lower-of-cost-or-net-realizable-value rule applies to all inventory valuation methods, not just FIFO.

Question 12

Sales commissions are not normally included in the cost of goods sold account.

Accepted Answer

Sales commissions are typically considered operating expenses and are not included in the cost of goods sold (COGS), which primarily consists of direct materials, direct labor, and manufacturing overhead related to the production of goods.

Question 13

Ending inventory under FIFO reflects the cost of goods most recently acquired.

Accepted Answer

Under FIFO (first-in, first-out), the inventory is assumed to be sold in the order it was acquired, meaning that the cost of goods most recently acquired will be reflected in the ending inventory.

Question 14

Inventory turnover is calculated by dividing average inventory by cost of goods sold.

Accepted Answer

Inventory turnover is calculated by dividing the cost of goods sold by the average inventory.

Question 15

If a company makes an error when counting ending inventory in 2019, the effect of the error will cancel out at the end of 2020.

Accepted Answer

An error in ending inventory in one year affects the cost of goods sold and net income for that year, but the error reverses in the following year as the beginning inventory is incorrect by the same amount, thus canceling out the effect over two years.

Question 16

In a merchandising business, gross profit is the difference between sales revenue and the cost of goods sold.

Accepted Answer

This statement is true. Gross profit is calculated by subtracting the cost of goods sold from the total sales revenue generated by a merchandising business.

Question 17

Comparability in accounting means that a company must strictly perform proper accounting only for items and transactions that are significant to the financial statements of a business.

Accepted Answer

Comparability in accounting means that a company must perform proper accounting for all items and transactions, regardless of their significance to the financial statements. This allows for consistent and reliable financial information that can be compared over time and between companies.

Question 18

Companies are required to disclose the inventory accounting methods in the notes as well as the substance of all material transactions that affect the proper valuation of the inventory.

Accepted Answer

This statement is true according to generally accepted accounting principles (GAAP). The disclosure of inventory accounting methods and material transactions affecting inventory valuation is necessary for financial statement users to have a clear understanding of the company's financial position and profitability.

Question 19

Overstating ending inventory in the current period will understate the following year's net income.

Accepted Answer

Overstating ending inventory increases current period net income, but it decreases the cost of goods sold in the following year, leading to understated net income in that year.

Quiz 5: Inventory and Cost of Goods Sold