Question 1

An increase in accounts payable is added to net income when determining operating activities cash flows.

Accepted Answer

An increase in accounts payable means that some inventory purchases haven't been paid for.

Question 2

Which of the following statements is incorrect?
A)Ending inventory exceeds beginning inventory when purchases are greater than cost of goods sold.
B)Cost of goods sold exceeds purchases when ending inventory is less than beginning inventory.
C)Cost of goods available for sale will always be equal to or greater than cost of goods sold.
D)Ending inventory is greater than beginning inventory when purchases are less than cost of goods sold.

Accepted Answer

Ending inventory decreases when purchases are less than cost of goods sold.

Question 3

A company reported the following information for its most recent year of operation:
Purchases,$100,000; beginning inventory,$20,000; and cost of goods sold,$110,000.How much was the company's ending inventory?
A)$10,000
B)$20,000
C)$15,000
D)$30,000

Accepted Answer

Cost of goods sold ($110,000) = Beginning inventory ($20,000) + Purchases ($100,000) - Ending inventory ($10,000)

Question 4

A company provided the following data:
Sales,$500,000; beginning inventory,$40,000; ending inventory,$45,000; and gross margin,$150,000.What was the amount of inventory purchased during the year?
A)$370,000
B)$355,000
C)$348,000
D)$341,000

Accepted Answer

Sales ($500,000) - Cost of goods sold ($350,000) = Gross margin ($150,000)Cost of goods sold ($350,000) = Beginning inventory ($40,000) + Purchases ($355,000) - Ending inventory ($45,000)

Question 5

Which of the following costs will not affect cost of goods sold?
A)Inventory inspection costs.
B)Inventory preparation costs.
C)Inventory related selling costs.
D)Freight charges incurred to acquire inventory.

Accepted Answer

Selling costs are operating costs and don't affect cost of goods sold.

Question 6

Lauer Corporation uses the periodic inventory system and has provided the following information about one of their laptop computers:

$$\begin{array}{ll}
\begin{array} { ll } 
\text { Date } & \text { Transaction } \
1 / 1 & \text { Beginning Inventory } \
5 / 5 & \text { Purchase } \
8 / 10 & \text { Purchase } \
10 / 15 & \text { Purchase }
\end{array}
\begin{array} { l l} 
\text { Number of Units } & \text { Cost per Unit } \
100& \$ 800 \
200 & \$ 900 \
300 & \$ 1,000 \
200 & \$ 1,050
\end{array}
\end{array}$$
 During the year,750 laptop computers were sold. What was ending inventory using the FIFO cost flow assumption?
A)$60,000
B)$52,500
C)$52,000
D)$40,000

Accepted Answer

The answer of Lauer Corporation uses the periodic inventory system...

Question 7

Which of the following statements is incorrect for a manufacturing entity?
A)Inventory is transferred from work in process to finished goods.
B)Raw materials used are transferred to work in process.
C)Finished goods inventory eventually becomes cost of goods sold.
D)Cost of goods sold is recognized when the manufacturing process is complete.

Accepted Answer

Cost of goods sold is recognized when the inventory is taken from finished goods and sold to the customer.

Question 8

An overstatement of the 2011 ending inventory results in an overstatement of stockholders' equity as of the end of 2012.

Accepted Answer

The overstatement of the 2011 ending inventory causes the 2011 net income to be overstated, the 2012 beginning inventory to be overstated and the 2012 net income to be understated. Stockholders' equity as of the end of 2012 is correct because the 2011 net income overstatement is counter-balanced by the understatement of the 2012 net income.

Question 9

Coleman Company has provided the following information:
Beginning inventory,$100,000; cost of goods sold,$450,000; and ending inventory,$80,000.How much were Coleman's inventory purchases?
A)$450,000
B)$410,000
C)$430,000
D)$420,000

Accepted Answer

Cost of goods sold ($450,000) = Beginning inventory ($100,000) + Purchases ($430,000) - Ending inventory ($80,000)

Question 10

Which of the following costs is not included as inventory on the balance sheet?
A)Raw materials currently being used in the manufacturing process.
B)Work in process.
C)Finished goods.
D)Storage costs for finished goods.

Accepted Answer

Finished goods storage costs are not reported as inventory. They are a component of operating expenses.

Question 11

Lauer Corporation uses the periodic inventory system and has provided the following information about one of their laptop computers:

$$\begin{array}{ll}
\begin{array} { ll } 
\text { Date } & \text { Transaction } \
1 / 1 & \text { Beginning Inventory } \
5 / 5 & \text { Purchase } \
8 / 10 & \text { Purchase } \
10 / 15 & \text { Purchase }
\end{array}
\begin{array} { l l} 
\text { Number of Units } & \text { Cost per Unit } \
100& \$ 800 \
200 & \$ 900 \
300 & \$ 1,000 \
200 & \$ 1,050
\end{array}
\end{array}$$
 During the year,750 laptop computers were sold. What was cost of goods sold using the LIFO cost flow assumption?
A)$717,500
B)$730,000
C)$703,125
D)$725,500

Accepted Answer

The answer of Lauer Corporation uses the periodic inventory system...

Question 12

In a period of rising costs,the LIFO Reserve account would be deducted from the ending inventory under LIFO costing to convert it to ending inventory under FIFO costing.

Accepted Answer

LIFO's ending inventory is less than FIFO's ending inventory when prices are increasing. Therefore the LIFO Reserve would be added to the FIFO ending inventory.

Question 13

An increase in inventory is deducted from net income when determining operating activities cash flows.

Accepted Answer

An increase in inventory means that inventory purchases exceed cost of goods sold.

Question 14

An overstatement of the 2011 ending inventory results in an understatement of net income during 2012.

Accepted Answer

The overstatement of the 2011 ending inventory causes the 2012 beginning inventory and cost of goods sold to be overstated and 2012 net income to be understated.

Question 15

When a company using the LIFO inventory method reduces its inventory levels at the end of the year,it can lead to LIFO liquidation.

Accepted Answer

LIFO liquidation will occur when inventory levels decrease and older inventory becomes a part of cost of goods sold.

Question 16

The average days to sell inventory decreases as inventory turnover increases.

Accepted Answer

Average days to sell inventory is calculated by dividing 365 by inventory turnover. So an increasing inventory turnover will result in a decreased average days to sell inventory.

Question 17

Lauer Corporation uses the periodic inventory system and has provided the following information about one of their laptop computers:

$$\begin{array}{ll}
\begin{array} { ll } 
\text { Date } & \text { Transaction } \
1 / 1 & \text { Beginning Inventory } \
5 / 5 & \text { Purchase } \
8 / 10 & \text { Purchase } \
10 / 15 & \text { Purchase }
\end{array}
\begin{array} { l l} 
\text { Number of Units } & \text { Cost per Unit } \
100& \$ 800 \
200 & \$ 900 \
300 & \$ 1,000 \
200 & \$ 1,050
\end{array}
\end{array}$$
 During the year,750 laptop computers were sold. What was cost of goods sold using the FIFO cost flow assumption?
A)$717,500
B)$730,000
C)$703,125
D)$725,500

Accepted Answer

FIFO (First-In, First-Out) assumes that the first units purchased are the first units sold. Therefore, the cost of goods sold for the 750 units sold would be:100 units @ $800 = $80,000200 units @ $900 = $180,000300 units @ $1,000 = $300,000150 units @ $1,050 = $157,500Total cost of goods sold = $717,500

Question 18

Cash flow from operations increases by $1,000,000 when there is a $3,000,000 decrease in inventory and a $2,000,000 decrease in accounts payable.

Accepted Answer

The decrease in inventory ($3,000,000) is added to net income and the decrease in accounts payable ($2,000,000) is subtracted from net income when calculating cash flow from operations.

Question 19

An understatement of ending inventory results in an overstatement of net income.

Accepted Answer

An understatement of ending inventory results in an increase in cost of goods sold and therefore a decrease in net income.

Question 20

The LIFO Reserve is a contra-asset account which represents the excess of FIFO inventory costs over LIFO inventory costs.

Accepted Answer

The LIFO Reserve is reported in the notes to the financial statements and is the adjustment to the LIFO inventory reported on the balance sheet.

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

An increase in accounts payable is added to net income when determining operating activities cash flows.

Which of the following statements is incorrect?

A company reported the following information for its most recent year of operation: Purchases,$100,000; beginning inventory,$20,000; and cost of goods sold,$110,000.How much was the company's ending inventory?

A company provided the following data: Sales,$500,000; beginning inventory,$40,000; ending inventory,$45,000; and gross margin,$150,000.What was the amount of inventory purchased during the year?

Which of the following costs will not affect cost of goods sold?

Which of the following statements is incorrect for a manufacturing entity?

An overstatement of the 2011 ending inventory results in an overstatement of stockholders' equity as of the end of 2012.

Coleman Company has provided the following information: Beginning inventory,$100,000; cost of goods sold,$450,000; and ending inventory,$80,000.How much were Coleman's inventory purchases?

Which of the following costs is not included as inventory on the balance sheet?

In a period of rising costs,the LIFO Reserve account would be deducted from the ending inventory under LIFO costing to convert it to ending inventory under FIFO costing.

An increase in inventory is deducted from net income when determining operating activities cash flows.

An overstatement of the 2011 ending inventory results in an understatement of net income during 2012.

When a company using the LIFO inventory method reduces its inventory levels at the end of the year,it can lead to LIFO liquidation.

The average days to sell inventory decreases as inventory turnover increases.

Cash flow from operations increases by $1,000,000 when there is a $3,000,000 decrease in inventory and a $2,000,000 decrease in accounts payable.

An understatement of ending inventory results in an overstatement of net income.

The LIFO Reserve is a contra-asset account which represents the excess of FIFO inventory costs over LIFO inventory costs.