Question 1

What issues arise on the initial recognition and measurement of inventory?

Accepted Answer

Determining which expenditures to capitalize into the "inventory" account is crucial for initial recognition and measurement, as it affects the valuation of inventory on the balance sheet.

Question 2

What costs are not included in the cost of inventories?

Accepted Answer

Costs to ship goods to customers are not included in the cost of inventories; they are considered selling expenses.

Question 3

What journal entry is required when inventory is purchased under the perpetual inventory system?

Accepted Answer

Under the perpetual inventory system, the purchase of inventory is debited to the Inventory account and credited to the Accounts Payable account. This is because the perpetual inventory system maintains a continuous record of inventory levels and costs, and the Inventory account reflects the current balance of inventory on hand. The Cost of Goods Sold account is not affected until the inventory is sold. Option B is incorrect because it incorrectly credits the Purchases account, which is an intermediate account used to record the total purchases made during a period, and is not affected by the actual purchase of inventory. Options A and D are incorrect because they do not account for the acquisition of inventory properly.

Question 4

What is the meaning of the terms "F.O.B. destination point"?

Accepted Answer

"F.O.B. destination point" means the buyer gains ownership and responsibility for the goods only when they arrive at the destination.

Question 5

Identify whether the following are benefits of using a perpetual inventory system (in comparison to a periodic system).
$\begin{array} { | l | l | } 
\hline \text { Potential benefit } & \text { True/False } \
\hline \text { A perpetual system is less costly than a periodic system. } & \
\hline \text { A perpetual system helps to estimate expected amounts of inventory at year- } & \
\text { end. } & \
\hline \text { A perpetual system is required by IFRS and ASPE. } & \
\hline \text { A perpetual system helps to determine the amount of shrinkage. } & \
\hline
\end{array}$

Accepted Answer

The answer of Identify whether the following are benefits of...

Question 6

Which of the following is a potential journal entry required after the inventory count under the periodic inventory system?

Accepted Answer

The answer of Which of the following is a potential...

Question 7

What journal entry is required after the inventory count under the perpetual inventory system when shrinkage has been detected?

Accepted Answer

Shrinkage represents a loss of inventory due to theft, damage, or other reasons. Under the perpetual inventory system, the value of shrinkage is immediately recognized in the cost of goods sold account. Therefore, the journal entry to record shrinkage is to debit Cost of goods sold and credit Inventory.

Question 8

Which statement is not correct about the perpetual inventory system for inventory management?

Accepted Answer

Though the perpetual inventory system keeps continuous track of inventory levels, it is still necessary to conduct physical inventory counts periodically to ensure that the inventory records are accurate and to detect any discrepancies.

Question 9

Explain how a manufacturing company can manipulate earnings by including non-production costs in inventories. What does an auditor or financial statement user do to detect this type of manipulation?

Accepted Answer

The answer of Explain how a manufacturing company can manipulate...

Question 10

Explain how manufacturing companies can manipulate earnings through its production process. What should an auditor or financial statement user do to detect this type of manipulation?

Accepted Answer

The answer of Explain how manufacturing companies can manipulate earnings...

Question 11

What journal entry is required when inventory is purchased under the periodic inventory system?

Accepted Answer

Under the periodic inventory system, the inventory purchases are recorded with a debit to Purchases and a credit to Accounts Payable. It is not recorded directly into the inventory account until the end of the period when the physical count is made.

Question 12

Which goods in transit would be recorded in inventory at year end?

Accepted Answer

Goods purchased with terms F.O.B. shipping point that were received after year end would be recorded in inventory at year end. The title (ownership) of these goods was likely transferred to the buyer during transit, so they would not be included in inventory at year end if they were purchased with terms F.O.B. destination point. Goods sold with terms F.O.B. shipping point that were shipped before year end would be included in inventory at year end under the buyer's ownership, but goods sold with terms F.O.B. destination point that were shipped before year end would not be included in inventory at year end under the seller's ownership.

Question 13

What journal entry is required when inventory is sold during the year under the perpetual inventory system?

Accepted Answer

Under the perpetual inventory system, inventory is continuously updated through purchases and sales. When inventory is sold, the cost of those goods needs to be recognized as an expense in the period that they were sold. Therefore, the entry would be to debit Cost of Goods Sold and credit Inventory. This recognizes the expense of the goods sold and reduces the quantity and value of the inventory remaining on hand.

Question 14

What journal entry is required when inventory is sold during the year under the periodic inventory system?

Accepted Answer

Under the periodic inventory system, no journal entry is made to record the cost of goods sold at the time of sale. Instead, the cost of goods sold is calculated at the end of the period.

Question 15

Identify whether the following are benefits of using a perpetual inventory system (in comparison to a periodic system).
$$\begin{array} { | l | l | } 
\hline \text { Potential benefit } & \text { True/False } \
\hline \text { A perpetual system is less costly than a periodic system. } & \
\hline \text { A perpetual system produces information that is more useful for inventory } & \
\text { management. } & \
\hline \begin{array} { l } 
\text { A perpetual system allows a company to avoid conducting costly inventory } \
\text { counts. }
\end{array} & \
\hline \text { A perpetual system is required by IFRS and ASPE. } & \
\hline
\end{array}$$

Accepted Answer

The answer of Identify whether the following are benefits of...

Question 16

Using the following information, what amount of "shrinkage" would be identified under the periodic inventory system? $\begin{array}{|l|r}
\text { Inventory at the beginning of the year } & \$ 300,000 \
\hline \text { Inventory based on count at the end of the year } & \$ 650,000 \
\hline \text { Inventory purchases during the year } & \$ 1,000,000
\end{array}$

Accepted Answer

Shrinkage is the difference between the inventory at the beginning of the year and the inventory based on count at the end of the year. In this case, the shrinkage would be $650,000 - $300,000 = $350,000.

Question 17

Compare the perpetual inventory control system and the periodic inventory control system. Which system provides better information for inventory management?

Accepted Answer

The answer of Compare the perpetual inventory control system and...

Question 18

Which statement is correct for about inventory systems?

Accepted Answer

The final amounts reported in financial statements, such as the balance sheet and income statement, are the same under both the periodic and perpetual inventory systems. The difference between these systems lies in the timing and frequency of inventory updates and cost of goods sold calculations, not in the final reported amounts of inventory or cost of goods sold.

Question 19

Which statement is correct about the system used to account for inventories?

Accepted Answer

The perpetual and periodic inventory systems are both widely accepted methods for inventory control and accounting. The choice between them depends on the business's operational needs, size, and the level of detail required for inventory tracking. The perpetual system updates inventory and cost of goods sold continuously with each sale or purchase, while the periodic system updates these figures at the end of an accounting period based on a physical inventory count.

Question 20

Which statement is not correct about the periodic inventory system for inventory management?

Accepted Answer

The statement "The periodic inventory system keeps continuous information about the amount of inventory on hand" is not correct. In fact, the periodic inventory system only updates inventory records periodically, typically at the end of an accounting period, and does not keep continuous information about inventory levels.

Quiz 6: Inventories