Ch6 Reporting and Analyzing Inventory Test Bank Answers

CHAPTER 6

REPORTING AND ANALYZING INVENTORY

CHAPTER LEARNING OBJECTIVES

1. Discuss how to classify and determine inventory. Merchandisers need only one inventory classification, merchandise inventory, to describe the different items that make up total inventory. On the other hand, manufacturers usually classify inventory into three categories: raw materials, work in progress and finished goods. To determine inventory quantities, manufacturers (1) take a physical inventory of goods on hand and (2) determine the ownership of goods in transit or on consignment.

2. Apply inventory cost flow methods and discuss their financial effects. The primary basis of accounting for inventories is cost. Cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale. Cost of goods available for sale includes (a) cost of beginning inventory and (b) cost of goods purchased. The inventory cost flow methods are: specific identification and three assumed cost flow methods—FIFO, LIFO, and average-cost.

The cost of goods available for sale may be allocated to cost of goods sold and ending inventory by specific identification or by a method based on an assumed cost flow. When prices are rising, the first-in, first-out (FIFO) method results in lower cost of goods sold and higher net income than the average-cost and the last-in, first-out (LIFO) methods. The reverse is true when prices are falling. In the balance sheet, FIFO results in an ending inventory that is closest to the current value, whereas the inventory under LIFO is the farthest from the current value. LIFO results in the lowest income taxes (because of lower taxable income).

3. Explain the statement presentation and analysis of inventory. Companies use the lower-of-cost-or-net realizable-value (LCNRV) basis when the net-realizable-value (NRV) is less than cost. Under LCNRV, companies recognize the loss in the period in which the price decline occurs.

Inventory turnover is calculated as cost of goods sold divided by average inventory. It can be converted to average days in inventory by dividing 365 days by the inventory turnover. A higher inventory turnover or lower average days in inventory suggests that management is trying to keep inventory levels low relative to its sales level.

The LIFO reserve represents the difference between ending inventory using LIFO and ending inventory if FIFO were employed instead. For some companies, this difference can be significant and ignoring it can lead to inappropriate conclusions when using the current ratio or inventory turnover.

*4. Apply the inventory cost flow methods to perpetual inventory records. Under FIFO, the cost of the earliest goods on hand prior to each sale is charged to cost of goods sold. Under LIFO, the cost of the most recent purchase prior to sale is charged to cost of goods sold. Under the average-cost method, a new weighted-average unit cost is computed after each purchase.

*5. Indicate the effects of inventory errors on the financial statements. In the income statement of the current year: (1) An error in beginning inventory will have a reverse effect on net income (e.g. overstatement of inventory results in an understatement of net income, and vice versa). (2) An error in ending inventory will have a similar effect on net income (e.g. overstatement of inventory results in an overstatement of net income). If ending inventory errors are not corrected in the following period, their effect on net income for that period is reversed, and total net income for the two years will be correct. In the balance sheet: Ending inventory errors will have the same effect on total assets and total stockholders’ equity and no effect on liabilities.

Difficulties:

Easy: 112

Medium: 138

Hard: 3

Question List by Section

• Classifying and Determining Inventory: 245
  • Classifying Inventory: 1, 2, 44, 61, 234, 235, 237
  • Determining Inventory Quantities: 7, 8, 45, 55, 56, 57, 58, 59, 60, 210, 211, 212, 252
    • Taking a Physical Inventory: 47, 48, 49, 50, 62
    • Determining Ownership of Goods: 51, 200, 201
      • Goods in Transit: 3, 4, 5, 6, 46, 52, 53, 236
      • Consigned Goods: 9, 10, 54, 238, 253
• Inventory Methods and Financial Effects: 245
  • Specific Identification: 15, 18, 87, 95, 96, 97, 107, 136, 137, 240
  • Cost Flow Assumptions: 11, 12, 14, 16, 22, 29, 63, 65, 88, 89, 90, 98, 99, 100, 102, 108, 124, 140, 202, 213, 214, 215, 216, 217, 218, 219, 220, 239, 241, 246
    • First-In, First-Out (FIFO): 17, 68, 72, 77, 78, 83, 84, 92, 94, 101, 103, 104, 120, 125, 127, 203
    • Last-In, First-Out (LIFO): 24, 38, 64, 67, 71, 79, 80, 81, 85, 86, 91, 93, 105, 106, 109, 126, 204, 205
    • Average-Cost: 13, 69, 74, 75, 76, 82, 121, 122, 123
  • Financial statement and Tax Effects of Cost Flow Methods: 66, 114, 205, 247, 248
    • Income Statement Effects: 21, 23, 26, 28, 30, 31, 70, 73, 110, 111, 112, 113, 115, 116, 117, 118, 119, 130, 135, 138, 139, 141, 143, 145
    • Balance Sheet Effects: 19, 25, 128, 129, 131, 132, 133, 146, 249
    • Tax Effects: 134, 142, 223
  • Using Inventory Cost Flow Methods Consistently: 20, 27, 144
• Inventory Presentation and Analysis: 245
  • Presentation: 39
  • Lower-of-Cost-or-Net Realizable Value: 32, 33, 34, 35, 148, 149, 150, 151, 152, 153, 154, 155, 206, 221, 250
  • Financial Analysis and Data Analytics: 147, 157, 158, 159, 160, 161, 164, 165, 207, 208, 222, 224, 225, 242, 243
    • Inventory Turnover: 36, 37, 156, 162, 163, 166, 167, 168, 169, 170, 171, 172, 173, 174
  • Adjustments for LIFO Reserve: 175, 176, 177, 178, 179, 180, 181, 182, 183, 184, 185, 186, 187, 244, 251
• Inventory Cost Flow Methods in Perpetual Inventory Systems:
  • First-In, First-Out (FIFO): 40, 226, 227, 228
  • Last-In, First-Out (LIFO): 188, 189, 190, 191, 226, 227, 228
  • Average-Cost: 41, 192, 227, 228
• Effects of Inventory Errors:
  • Income Statement Effects: 42, 43, 193, 194, 198, 199, 209, 229, 230, 231, 232, 233
  • Balance Sheet Effects:195, 196, 197, 230, 233

TRUE-FALSE STATEMENTS

1. Raw materials inventories are the goods that a manufacturing company has completed and are ready to be sold to customers.

2. A manufacturer’s inventory consists of raw materials, work in process, and finished goods.

3. When the terms of sale are FOB shipping point, legal title to the goods remains with the seller until the goods reach the buyer.

4. Goods in transit shipped FOB shipping point should be included in the buyer’s ending inventory.

5. Goods purchased FOB destination but are in transit, should be excluded from a physical count of goods by the buyer.

6. If the ownership of merchandise passes to the buyer when the seller ships the merchandise, the terms are stated as FOB destination.

7. A physical count of inventory at year-end is required for a perpetual but not a periodic inventory system.

8. Under a periodic inventory system, the merchandise on hand at the end of the period is determined by a physical count of the inventory.

9. Consigned goods are held for sale by one party although ownership of the goods is retained by another party.

10. Goods held on consignment should not be included in the ending inventory.

11. In accounting for inventory, the assumed flow of costs must match the physical flow of goods.

12. Inventory methods such as FIFO and LIFO deal more with the flow of costs than with the flow of goods.

13. The average-cost inventory method relies on a simple average calculation.

14. If prices never changed, then there would be no need for alternative inventory cost flow assumptions.

15. The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.

16. Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.

17. The FIFO inventory method results in an ending inventory valued at the most recent cost.

18. The specific identification method of inventory valuation is desirable when a company sells a large number of low-cost items.

19. If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions.

20. A company can use different inventory methods for different categories of inventory and can elect to use a different inventory method each period.

21. If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods.

22. A company may use more than one inventory cost flow method at the same time for different categories of inventory.

23. Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.

24. The LIFO inventory method agrees with the actual physical movement of goods in most businesses.

25. In periods of falling prices, LIFO will result in a higher ending inventory valuation than FIFO.

26. In periods of falling prices, FIFO will result in a larger net income than the LIFO method.

27. If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.

28. A major criticism of the FIFO inventory method is that it magnifies the effects of the business cycle on business income.

29. The LIFO method is rarely used because most companies do not sell the last goods they purchase first.

30. The Average-Cost inventory method tends to smooth out the peaks and valleys of a business cycle.

31. Net realizable value is defined as cost less depreciation.

32. When the cost of inventory is higher than its net realizable value, the inventory is written down to its net realizable value.

33. Inventory disclosures include the major categories of inventory, basis of accounting and cost flow methods employed.

34. The write-down of inventory from cost to net realizable value should be made in the period in which the goods are sold.

35. Under the LCNRV basis, net realizable value is defined as current replacement cost.

36. The inventory turnover is calculated as cost of goods sold divided by ending inventory.

37. An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages.

38. The LIFO reserve is the difference between ending inventory using LIFO and ending inventory if FIFO were used instead.

39. The FIFO reserve is a required disclosure for companies that use FIFO.

*40. The use of FIFO with a perpetual inventory system yields the same results as with a periodic inventory system.

*41. When the average-cost method is applied to a perpetual inventory system, a moving-average unit cost is computed with each purchase.

*42. An error in the ending inventory of the current period will have a similar effect on the net income of the next accounting period.

*43. An error that overstates the ending inventory will also cause net income for the period to be overstated.

MULTIPLE CHOICE QUESTIONS

44. Patagonia’s inventory that has begun the production process but is not yet completed is classified as

a. work in process.

b. raw materials.

c. merchandise inventory.

d. finished goods.

45. The factor which determines whether or not goods should be included in a physical count of inventory is

a. physical possession.

b. legal title.

c. management's judgment.

d. payment status.

46. If goods in transit are shipped FOB destination,

a. the seller has legal title to the goods until they are delivered.

b. the buyer has legal title to the goods until they are delivered.

c. the transportation company has legal title to the goods while the goods are in transit.

d. no one has legal title to the goods until they are delivered.

47. Independent internal verification of the physical inventory process occurs when

a. the employee is required to count all items twice for the sake of verification.

b. the items counted are compared to the inventory account balance.

c. a second employee counts the inventory and compares the result to the count made by the first employee.

d. all prenumbered inventory tags are accounted for.

48. An employee assigned to counting head sets in boxes should

a. estimate the number if there is a large quantity to be counted.

b. read each box and rely on the box description for the contents.

c. determine that each box contains a headset.

d. rely on the warehouse records of the number of headsets.

49. After the physical inventory is completed, the

a. financial statements are prepared.

b. quantities are entered into various general ledger inventory accounts.

c. accuracy of the inventory summary sheets is checked by the person listing the quantities on the sheets.

d. unit costs are determined by dividing the quantities on the inventory summary sheets by the total inventory costs.

50. When is a physical inventory usually taken?

a. When goods are not being sold or received

b. When the company has its greatest amount of inventory

c. When inventory levels are expected to be greatest

d. When the company has its greatest amount of inventory and at the end of the company's fiscal year

51. Which of the following should not be included in the physical inventory of a company?

a. Goods held on consignment from another company

b. Goods in transit from another company shipped FOB shipping point

c. Goods shipped on consignment to another company

52. Suppose that Amazon's goods in transit at December 31 include sales made

(1) FOB destination

(2) FOB shipping point

and purchases made

(3) FOB destination

(4) FOB shipping point.

Which items should be included in Amazon's inventory at December 31?

a. (2) and (3)

b. (1) and (4)

c. (1) and (3)

d. (2) and (4)

53. The term "FOB" denotes

a. free on board.

b. freight on board.

c. free only to buyer.

d. freight charge on buyer.

54. Goods held on consignment are

a. goods held by one party for sale on behalf of the owner.

b. included in the ending inventory of the party holding the goods.

c. kept for sale on the premises of the owner.

d. included as part of no one’s ending inventory.

55. Apple uses just-in-time inventory methods. Which of the following is not an advantage of this method?

a. It limits the risk of having obsolete items in inventory.

b. Companies may not have quantities to meet customer demand.

c. It lowers inventory levels and costs.

d. Companies can respond to individual customer requests.

56. Walmart uses a perpetual inventory system. Which of the following is a reason why Walmart needs to take a physical inventory?

a. To check the accuracy of the perpetual inventory records

b. To determine cost of goods sold for the accounting period

c. To compute inventory ratios

d. All of the choices are correct.

57. Which of the following statements is false?

a. Taking a physical inventory involves actually counting, weighing, or measuring each kind of inventory on hand.

b. No matter whether a periodic or perpetual inventory system is used, all companies need to determine inventory quantities at the end of each accounting period.

c. An inventory count is generally more accurate when goods are not being sold or received during the counting.

d. Companies that use a perpetual inventory system must take a physical inventory to determine inventory on hand on the balance sheet date and to determine cost of goods sold for the accounting period.

58. Dick’s Sporting Goods is taking a physical inventory on January 30, the last day of its fiscal year. Which of the following must be included in this inventory count?

a. Goods in transit to Dick’s Sporting Goods which were shipped FOB destination

b. Goods that Dick’s Sporting Goods is holding on consignment for ENO

c. Goods in transit that Dick’s Sporting Goods sold to Watauga County Recreation Center, FOB shipping point

d. Goods that Dick’s Sporting Goods is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due

59. At December 31, 2025, suppose that ENO Company’s inventory records indicated a balance of $632,000. Upon further investigation it was determined that this amount included the following:

• • $112,000 in inventory purchases made by ENO shipped from the seller on December 27, 2025 terms FOB destination, but not due to be received until January 2, 2026
  • $74,000 in goods sold by ENO with terms FOB destination on December 27, 2025. The goods are not expected to reach their destination until January 6, 2026
  • $6,000 of goods received on consignment from Tepui Company

What is ENO’s correct ending inventory balance at December 31, 2025?

a. $520,000

b. $626,000

c. $440,000

d. $514,000

60. At December 31, 2025, suppose that Ulta Company’s inventory records indicated a balance of $878,000. Upon further investigation it was determined that this amount included the following:

• • $168,000 in inventory purchases made by Ulta shipped from the seller December 31, 2025 terms FOB destination, but not due to be received until January 2, 2026
  • $111,000 in goods sold by Ulta with terms FOB destination on December 27, 2025. The goods are not expected to reach their destination until January 6, 2026.
  • $9,000 of goods received on consignment from Cocokind Company

What is Ulta’s correct ending inventory balance at December 31, 2025?

a. $710,000

b. $869,000

c. $590,000

d. $701,000

61. Manufacturers such as TREK Bicycle Company usually classify inventory into each of the following categories except:

a. work in process

b. finished goods

c. merchandise inventory

d. raw materials

62. For companies such as Target that use perpetual inventory systems, all of the following are purposes for taking a physical inventory except to:

a. check the accuracy of the records.

b. determine the amount of wasted raw materials.

c. determine losses due to employee theft.

d. determine ownership of the goods.

63. Inventory costing methods place primary reliance on assumptions about the flow of

a. goods.

b. costs.

c. resale prices.

d. values.

64. The LIFO inventory method assumes that the cost of the latest units purchased is

a. the last to be allocated to cost of goods sold.

b. the first to be allocated to ending inventory.

c. the first to be allocated to cost of goods sold.

d. not allocated to cost of goods sold or ending inventory.

65. For what purpose does a company use LIFO, FIFO, or average-cost?

a. To determine the proper valuation of each individual inventory item

b. To determine the quantity and selling price of inventory items sold

c. To determine the amount to assign to inventory items under a particular cost flow

d. To parallel the physical flow of goods as they are sold

66. Acme Company began operations on January 1. The company uses a periodic inventory system. It purchased three shredders as part of its inventory. The first shredder had a cost of $45; the second one cost $52; and the third shredder cost $58. The company decided to use LIFO and sold two shredders in January. If the company had used FIFO, by how much would gross profit for the period be greater or less than using the LIFO method?

a. Gross profit would be $13 greater if FIFO is used.

b. Gross profit would be $13 less if FIFO is used.

c. Gross profit would be the same.

d. Gross profit would be $6 less if FIFO is used.

67. Acme Company just began business and made the following four inventory purchases in June:

June 1 150 units $1,040

June 10 200 units 1,560

June 15 200 units 1,680

June 28 150 units 1,320

$5,600

The company uses a periodic inventory system. A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is

a. $1,456.

b. $1,508.

c. $1,848.

d. $1,824.

68. Barkery Bakery Company began business in June and made the following four inventory purchases:

June 1 150 units $ 1,040

June 10 200 units 1,560

June 15 200 units 1,680

June 28 150 units 1,320

$5.600

The company uses a periodic inventory system. A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is

a. $1,456

b. $1,508

c. $1,824

d. $1,848

69. Suppose that Cocokind Natural Cosmetics Company began business and made the following four inventory purchases in June:

June 1 150 units $ 1,040

June 10 200 units 1,560

June 15 200 units 1,680

June 28 150 units 1,320

$5,600

The company uses a periodic inventory system. A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is

a. $1,639.

b. $1,824.

c. $1,764.

d. $1,680.

70. Acme Company began business and made the following four inventory purchases in June:

June 1 150 units $ 1,040

June 10 200 units 1,560

June 15 200 units 1,680

June 28 150 units 1,320

$5,600

The company uses a periodic inventory system. A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. The inventory method which results in the highest gross profit for June is

a. the FIFO method.

b. the LIFO method.

c. the Average-Cost method.

d. not determinable.

71. A1 Retail Solutions Company just began business and made the following four inventory purchases in June:

June 1 150 units $ 990

June 10 200 units 1,344

June 15 200 units 1,368

June 28 150 units 1,062

$4,764

The company uses a periodic inventory system. A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is

a. $1,326.

b. $1,320.

c. $1,404.

d. $1,416.

72. Ace Supply Inc. just began business and made the following four inventory purchases in June:

June 1 150 units $ 990

June 10 200 units 1,344

June 15 200 units 1,368

June 28 150 units 1,062

$4,764

The company uses a periodic inventory system. A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is

a. $1,326.

b. $1,320.

c. $1,404.

d. $1,416.

73. In periods of rising prices, what will LIFO produce?

a. Lower income taxes than FIFO

b. Higher net income than FIFO

c. Higher net income than Average-Costing

d. Lower cost of goods sold than FIFO

74. Acme Manufacturing Company began business in June and made the following four inventory purchases:

June 1 150 units $ 990

June 10 200 units 1,344

June 15 200 units 1,368

June 28 150 units 1,062

$4,764

The company uses a periodic inventory system. A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is

a. $1,361.

b. $1,416.

c. $1,320.

d. $1,344.

75. Assume that Party City purchased inventory as follows:

200 units at $6.00

300 units at $6.60

The weighted-average unit cost for inventory is

a. $6.00.

b. $6.30.

c. $6.36.

d. $6.60.

76. Suppose that Staples has the following inventory data:

July 1 Beginning inventory 30 units at $19 $ 570

7 Purchases 105 units at $20 2,100

22 Purchases 15 units at $22 330

$3,000

The company uses a periodic inventory system. A physical count of merchandise inventory on July 31 reveals that there are 48 units on hand. Using the average-cost method, the value of ending inventory is

a. $930.

b. $960.

c. $976.

d. $990.

77. Assume that Old Navy has the following inventory data:

July 1 Beginning inventory 30 units at $19 $ 570

7 Purchases 105 units at $20 2,100

22 Purchases 15 units at $22 330

$3,000

The company uses a periodic inventory system. A physical count of merchandise inventory on July 31 reveals that there are 48 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is

a. $930.

b. $990.

c. $2,010.

d. $2,070.

78. Suppose that Home Depot Inc. has the following inventory data:

July 1 Beginning inventory 30 units at $19 $ 570

7 Purchases 105 units at $20 2,100

22 Purchases 15 units at $22 330

$3,000

The company uses a periodic inventory system. A physical count of merchandise inventory on July 31 reveals that there are 48 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is

a. $930.

b. $990.

c. $960.

d. $1,056.

79. A company uses LIFO to cost its inventory. Which statement is true?

1. The company must sell its newer inventory items before its older items.
2. The company will pay less income taxes in periods of rising prices than if it used FIFO.
3. The cost of the company’s older inventory items are transferred to cost of goods sold prior to the cost of the newly acquired items.
4. The company will sell in the reverse order in which they were purchased.

80. Suppose that Lowes Hardware has the following inventory data:

July 1 Beginning inventory 30 units at $19 $ 570

7 Purchases 105 units at $20 2,100

22 Purchases 15 units at $22 330

$3,000

The company uses a periodic inventory system. A physical count of merchandise inventory on July 31reveals that there are 48 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is

a. $930.

b. $990.

c. $2,010.

d. $2,070.

81. Assume that Forever 21 Company has the following inventory data:

July 1 Beginning inventory 30 units at $19 $ 570

7 Purchases 105 units at $20 2,100

22 Purchases 15 units at $22 330

$3,000

The company uses a periodic inventory system. A physical count of merchandise inventory on July 31 reveals that there are 48 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is

a. $930.

b. $912.

c. $960.

d. $1,056.

82. A1 Supply Company has the following inventory data:

July 1 Beginning inventory 40 units at $20 $ 800

7 Purchases 140 units at $21 2,940

22 Purchases 20 units at $22 440

$4,180

The company uses a periodic inventory system. A physical count of merchandise inventory on July 31reveals that there are 50 units on hand. Using the average cost method, the value of ending inventory is

a. $1,070.

b. $1,045.

c. $1,050.

d $1,100.

83. Ace Inc. has the following inventory data:

July 1 Beginning inventory 40 units at $20 $ 800

7 Purchases 140 units at $21 2,940

22 Purchases 20 units at $22 440

$4,180

The company uses a periodic inventory system. A physical count of merchandise inventory on July 31 reveals that there are 50 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is

a. $3,110.

b. $3,170.

c. $3,010.

d. $3,080.

84. Acme Company has the following inventory data:

July 1 Beginning inventory 40 units at $20 $ 800

7 Purchases 140 units at $21 2,940

22 Purchases 20 units at $22 440

$4,180

The company uses a periodic inventory system. A physical count of merchandise inventory on July 31 reveals that there are 50 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is

a. $1,170.

b. $1,010.

c. $1,070.

d. $1,100.

85. Suppose that Sierra Trading Post has the following inventory data:

July 1 Beginning inventory 40 units at $20 $ 800

7 Purchases 140 units at $21 2,940

22 Purchases 20 units at $22 440

$4,180

The company uses a periodic inventory system. A physical count of merchandise inventory on July 31 reveals that there are 50 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is

a. $3,170.

b. $3,080.

c. $3,110.

d. $3,010.

86. Suppose that Sierra Trading Post has the following inventory data:

July 1 Beginning inventory 40 units at $20 $ 800

7 Purchases 140 units at $21 2,940

22 Purchases 20 units at $22 440

$4,180

The company uses a periodic inventory system. A physical count of merchandise inventory on July 31reveals that there are 50 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is

a. $1,100.

b. $1,010.

c. $1,070.

d. $1,000.

87. Which of the following is an inventory cost flow method?

a. Periodic

b. Specific identification

c. Perpetual

d. Lower of cost or market

88. Inventory costing methods place primary reliance on assumptions about the flow of

a. good.

b. costs.

c. resale prices.

d. values.

89. Which of the following terms best describes the assumption made in applying the four inventory methods?

a. Goods flow

b. Cost flow

c. Asset flow

d. Physical flow

90. An assumption about cost flow is used

a. because it is required by the income tax regulations.

b. even when there is no change in the purchase price of inventory.

c. only when the flow of goods cannot be determined.

d. because prices usually change, and tracking which units have been sold is difficult.

91. Assume that Acme Inc. has the following inventory data:

July 1 Beginning inventory 50 units at $120

5 Purchases 300 units at $112

14 Sale 200 units

21 Purchases 150 units at $115

30 Sale 140 units

Assuming that a periodic inventory system is used, what is the cost of goods sold on a LIFO basis?

a. $18,320

b. $18,370

c. $34,480

d. $38,530

92. Assume that Banana Republic has the following inventory data:

July 1 Beginning inventory 50 units at $120

5 Purchases 300 units at $112

14 Sale 200 units

21 Purchases 150 units at $115

30 Sale 140 units

Assuming that a periodic inventory system is used, what is the cost of goods sold on a FIFO basis?

a. $18,320

b. $18,370

c. $38,480

d. $38,530

93. Suppose that Target has the following inventory data:

July 1 Beginning inventory 50 units at $120

5 Purchases 300 units at $112

14 Sale 200 units

21 Purchases 150 units at $115

30 Sale 140 units

Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis?

a. $18,320

b. $18,370

c. $38,480

d. $38,530

94. Assume that Best Buy has the following inventory data:

July 1 Beginning inventory 50 units at $120

5 Purchases 300 units at $112

14 Sale 200 units

21 Purchases 150 units at $115

30 Sale 140 units

Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis?

a. $18,220

b. $18,370

c. $38,480

d. $38,530

95. Which of the following companies would likely use specific identification inventory costing??

a. grocery store

b. custom hot tub manufacturer

c. ice cream shop

d. large discount retailer

96. Of the following companies, which one would not likely employ the specific identification method for inventory costing?

a. Music store specializing in organ sales

b. Farm implement dealership

c. Antique shop

d. Hardware store

97. A problem with the specific identification method is that

a. inventories can be reported at actual costs.

b. management can manipulate income.

c. matching is not achieved.

d. the lower of cost or net realizable value basis cannot be applied.

98. The selection of an appropriate inventory cost flow assumption for an individual company is made by

a. the external auditors.

b. the SEC.

c. the internal auditors.

d. management.

99. Which of the following is not a common cost flow assumption used in costing inventory?

a. First-in, first-out

b. Middle-in, first-out

c. Last-in, first-out

d. Average-cost

100. Which of the following statements is true regarding inventory cost flow assumptions?

a. A company may use more than one costing method concurrently.

b. A company must comply with the method specified by industry standards.

c. A company must use the same method for domestic and foreign operations.

d. A company may never change its inventory costing method once it has chosen a method.

101. Which of the following statements is correct with respect to inventories?

a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold.

b. It is generally good business management to sell the most recently acquired goods first.

c. Under FIFO, the ending inventory is based on the latest units purchased.

d. FIFO seldom coincides with the actual physical flow of inventory.

102. Given equal circumstances, which inventory method would probably be the most time-consuming?

a. FIFO

b. LIFO

c. Average-cost

d. Specific identification.

103. Suppose that Best Buy has the following inventory data:

Nov. 1 Inventory 30 units @ $6.00 each

8 Purchase 120 units @ $6.45 each

17 Purchase 60 units @ $6.30 each

25 Purchase 90 units @ $6.60 each

The company uses a periodic inventory system. A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under FIFO is

a. $657.

b. $1,269.

c. $632.

d. $1,295.

104. Suppose that GameStop Company has the following inventory data:

Nov. 1 Inventory 30 units @ $6.00 each

8 Purchase 120 units @ $6.45 each

17 Purchase 60 units @ $6.30 each

25 Purchase 90 units @ $6.60 each

The company uses a periodic inventory system. A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under FIFO is

a. $657.

b. $1,269.

c. $632.

d. $1,295.

105. Suppose that Redbox Automated Retail Company has the following inventory data:

Nov. 1 Inventory 30 units @ $6.00 each

8 Purchase 120 units @ $6.45 each

17 Purchase 60 units @ $6.30 each

25 Purchase 90 units @ $6.60 each

The company uses a periodic inventory system. A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under LIFO rounded to the nearest dollar is

a. $657.

b. $1,269.

c. $632.

d. $1,295.

106. Acme Inc. has the following inventory data:

Nov. 1 Inventory 30 units @ $6.00 each

8 Purchase 120 units @ $6.45 each

17 Purchase 60 units @ $6.30 each

25 Purchase 90 units @ $6.60 each

The company uses a periodic inventory system. A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO rounded to the nearest dollar is

a. $657.

b. $632.

c. $1,269.

d. $1,295.

107. Enterprise Software has the following inventory data:

Nov. 1 Inventory 30 units @ $6.00 each

8 Purchase 120 units @ $6.45 each

17 Purchase 60 units @ $6.30 each

25 Purchase 90 units @ $6.60 each

The company uses a periodic inventory system. A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Assuming that the specific identification method is used and that ending inventory consists of 30 units from each of the three purchases and 10 units from the November 1 inventory, the cost of goods sold, rounded to the nearest dollar, is

a. $640.

b. $1,286.

c. $1,281.

d. $1,254.

108. Which inventory costing method would a gasoline retailer likely use?

a. Average-Cost

b. LIFO

c. FIFO

d. Either LIFO or FIFO.

109. In periods of rising prices, which is an advantage of using the LIFO inventory costing method?

a. Ending inventory will include the latest (most recent) costs and thus be more realistic.

b. Cost of goods sold will include the latest (most recent) costs and thus will be more realistic.

c. Net income will be the highest and thus reflect the prosperity of the company.

d. Phantom profits are reported.

110. Acme Industries had the following inventory transactions occur during 2025:

Units Cost/unit

Feb. 1, 2025 Purchase 108 $45

Mar. 14, 2025 Purchase 186 $47

May 1, 2025 Purchase 132 $49

The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to the nearest dollar)

a. $14,646

b. $14,190

c. $5,088

d. $4,632

111. Acme Industries had the following inventory transactions occur during 2025:

Units Cost/unit

Feb. 1, 2025 Purchase 108 $45

Mar. 14, 2025 Purchase 186 $47

May 1, 2025 Purchase 132 $49

The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $1,800, what is the company’s net income using LIFO? (rounded to the nearest dollar)

a. $2,832

b. $3,288

c. $2,302

d. $1,982

112. Acme Industries had the following inventory transactions occur during 2025:

Units Cost/unit

Feb. 1, 2025 Purchase 108 $45

Mar. 14, 2025 Purchase 186 $47

May 1, 2025 Purchase 132 $49

The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to the nearest dollar)

a. $14,646

b. $14,190

c. $5,088

d. $4,632

113. Assume that Walmart anticipates inflation in future periods. In a period of rising prices, which inventory method will result in the largest amount of net income?

a. LIFO

b. FIFO

c. Average-Cost

d. Specific identification

114. Assume that Walgreens Company uses FIFO for inventory costing. During 2025, price levels increased. Which statement is true concerning the amounts reported on Walgreens’ balance sheet and income statement?

a. The costs allocated to inventory on Walgreens' balance sheet reflect inventories that approximate current costs.

b. The costs allocated to inventory on Walgreens' balance sheet may be understated in terms of current cost.

c. The costs allocated to cost of goods sold on Walgreens' income statement may be overstated in terms of current cost.

d. The costs allocated to cost of goods sold on Walgreens' income statement will reflect the costs that most closely approximate current costs.

115. Acme Industries had the following inventory transactions occur during 2025:

Units Cost/unit

Feb. 1, 2025 Purchase 108 $45

Mar. 14, 2025 Purchase 186 $47

May 1, 2025 Purchase 132 $49

The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $1,800, what is the company’s net income using FIFO? (rounded to the nearest dollar)

a. $2,832

b. $3,288

c. $2,302

d. $1,982

116. Ace Industries had the following inventory transactions occur during 2025:

Units Cost/unit

Feb. 1, 2025 Purchase 90 $90

Mar. 14, 2025 Purchase 155 $94

May 1, 2025 Purchase 110 $98

The company sold 255 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to the nearest dollar)

a. $24,410

b. $23,650

c. $8,480

d. $7,720

117. Ace Industries had the following inventory transactions occur during 2025:

Units Cost/unit

Feb. 1, 2025 Purchase 90 $90

Mar. 14, 2025 Purchase 155 $94

May 1, 2025 Purchase 110 $98

The company sold 255 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $2,500, what is the company’s net income using LIFO? (rounded to the nearest dollar)

a. $5,220

b. $5,404

c. $4,186

d. $3,654

118. Ace Industries had the following inventory transactions occur during 2025:

Units Cost/unit

Feb. 1, 2025 Purchase 90 $90

Mar. 14, 2025 Purchase 155 $94

May 1, 2025 Purchase 110 $98

The company sold 255 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to the nearest dollar)

a. $24,410

b. $23,650

c. $8,480

d. $7,720

119. Ace Industries had the following inventory transactions occur during 2025:

Units Cost/unit

Feb. 1, 2025 Purchase 90 $90

Mar. 14, 2025 Purchase 155 $94

May 1, 2025 Purchase 110 $98

The company sold 255 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $2,500, what is the company’s net income using FIFO? (rounded to the nearest dollar)

a. $5,220

b. $5,980

c. $4,186

d. $3,654

120. Alpha Company began business in August. The company purchased three inventory items at the following prices: First purchase $80; Second purchase $95; Third purchase $85. If the company sold two units for a total of $270 and used FIFO costing, the gross profit for the period would be

a. $95.

b. $105.

c. $90.

d. $80.

121. On May 1, Heineken Company had beginning inventory consisting of 300 units with a unit cost of $7. During May, the company purchased inventory as follows:

600 units at $7

900 units at $8

The company sold 1,500 units during the month for $12 per unit. Heineken uses the average-cost method. Assuming that a periodic inventory system is used, the weighted-average unit cost for May is

a. $7.00.

b. $7.50.

c. $7.60.

d. $8.00.

122. On May 1, Heineken Company had beginning inventory consisting of 300 units with a unit cost of $7. During May, the company purchased inventory as follows:

600 units at $7

900 units at $8

The company sold 1,500 units during the month for $12 per unit. Heineken uses the average-cost method. Assuming that a periodic inventory system is used, Heineken's gross profit for the month of May is

a. $6,750

b. $11,250

c. $13,500

d. $18,000

123. On May 1, Heineken Company had beginning inventory consisting of 300 units with a unit cost of $7. During May, the company purchased inventory as follows:

600 units at $7

900 units at $8

The company sold 1,500 units during the month for $12 per unit. Heineken uses the average-cost method. Assuming that a periodic inventory system is used, the value of Heineken's inventory at May 31 is

a. $2,100

b. $2,250

c. $2,400

d. $13,500

124. Suppose GameStop Company uses a periodic inventory system. Details for the inventory account for the month of January are as follows:

Units Unit Cost Total

Balance, 1/1 300 $5.00 $1,500

Purchase, 1/15 150 5.30 795

Purchase, 1/28 150 5.50 825

An end of the month, inventory showed that 240 units were on hand. How many units did the company sell in January?

a. 90

b. 240

c. 300

d. 360

125. Suppose GameStop Company uses a periodic inventory system. Details for the inventory account for the month of January are as follows:

Units Unit Cost Total

Balance, 1/1 300 $5.00 $1,500

Purchase, 1/15 150 5.30 795

Purchase, 1/28 150 5.50 825

An end of the month, inventory showed that 240 units were on hand. If the company uses FIFO, what is the value of the ending inventory?

a. $1,320

b. $1,200

c. $1,302

d. $1,818

126. Suppose GameStop Company uses a periodic inventory system. Details for the inventory account for the month of January are as follows:

Units Unit Cost Total

Balance, 1/1 300 $5.00 $1,500

Purchase, 1/15 150 5.30 795

Purchase, 1/28 150 5.50 825

An end of the month, inventory showed that 240 units were on hand. If the company uses LIFO, what is the value of the ending inventory?

a. $1,264

b. $1,200

c. $1,302

d. $1,920

127. Suppose GameStop Company uses a periodic inventory system. Details for the inventory account for the month of January are as follows:

Units Unit Cost Total

Balance, 1/1 300 $5.00 $1,500

Purchase, 1/15 150 5.30 795

Purchase, 1/28 150 5.50 825

An end of the month, inventory showed that 240 units were on hand. If the company uses FIFO and sells the units for $10 each, what is the gross profit for the month?

a. $1,782

b. $1,818

c. $3,600

d. $2,400

128. In periods of rising prices, the inventory cost flow assumption which results in the inventory value on the balance sheet that is closest to current cost is the

a. FIFO method.

b. LIFO method.

c. average-cost method.

d. tax method.

129. In a period of declining prices, which of the following inventory cost flow assumptions generally results in the lowest balance sheet value for inventory?

a. Average-cost method

b. LIFO method

c. FIFO method

130. In a period of rising prices, which of the following inventory cost flow assumptions generally results in the lowest amount of net income?

a. Average-cost method

b. LIFO method

c. FIFO method

131. Which inventory cost flow assumption generally results in costs allocated to ending inventory that will approximate their current cost?

a. LIFO

b. FIFO

c. Average-cost method

d. Whichever method that produces the highest ending inventory figure

132. Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using

a. LIFO will have the highest ending inventory.

b. FIFO will have the highest cost of goods sold.

c. FIFO will have the highest ending inventory.

d. LIFO will have the lowest cost of goods sold.

133. If two companies have the same inventoriable costs but use different inventory flow assumptions when the price of goods have not been constant, then the

a. cost of goods sold of the companies will be identical.

b. cost of goods purchased during the year will be identical.

c. ending inventory of the companies will be identical.

d. net income of the companies will be identical.

134. In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense?

a. FIFO

b. LIFO

c. Average-cost method

d. Income tax expense for the period will be the same under all assumptions.

135. Given equal circumstances and generally rising costs, which inventory method will increase income tax expense the most?

a. FIFO

b. LIFO

c. Average cost

d. Income tax expense for the period will be the same under all assumptions.

136. The specific identification method of costing inventories is used when the

a. physical flow of units cannot be determined.

b. company sells large quantities of relatively low-cost homogeneous items.

c. company sells large quantities of relatively low-cost heterogeneous items.

d. company sells a limited quantity of high-unit cost items.

137. The specific identification method of inventory costing

a. always maximizes a company's net income.

b. always minimizes a company's net income.

c. has no effect on a company's net income.

d. may enable management to manipulate net income.

138. The managers of Kardashian Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices?

a. LIFO

b. Average-Cost

c. FIFO

d. Physical inventory method

139. In periods of inflation, phantom or paper profits may be reported as a result of using the

a. perpetual inventory method.

b. FIFO costing assumption.

c. LIFO costing assumption.

d. periodic inventory method.

140. Selection of an inventory costing method by management does not usually depend on

a. the fiscal year end.

b. income statement effects.

c. balance sheet effects.

d. tax effects.

141. Kim Kardashian, the accountant at Acme Company is determining the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The income tax rate is 30% and the FIFO method will result in income before taxes of $17,480. The LIFO method will result in income before taxes of $16,200. What is the difference in income tax that would be paid between the two methods?

a. $1,280

b. $896

c. $384

d. Cannot be determined from the information provided.

142. Ryan Seacrest, the accountant at Idol Company has determined that income before income taxes amounted to $11,000 using the FIFO costing assumption. If the income tax rate is 30% and the amount of income taxes paid would be $900 greater if the LIFO assumption were used, what would be the amount of income before taxes under the LIFO assumption?

a. $11,900

b. $14,000

c. $8,000

d. $10,100

143. Katy Perry, the manager of Idol Company is given a bonus based on net income before taxes. The net income is $59,500 for FIFO and $49,000 for LIFO. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager's bonus if FIFO is adopted instead of LIFO?

a. $15,000

b. $21,000

c. $3,000

d. $10,500

144. The consistent application of an inventory costing method enhances

a. conservatism.

b. accuracy.

c. comparability.

d. efficiency.

145. Acme Supply Company is a retailer operating in an industry that typically experiences inflation (rising prices). Acme wants the most realistic cost of goods sold. Which inventory costing method should Acme consider using?

a. Average-cost because all inventory costs will then represent an average amount

b. Specific identification is the most realistic method because it involves the actual costs

c. LIFO because the cost of goods sold represents the latest costs

d. FIFO because the cost of goods sold represents the earliest costs

146. A1 Energy Group is a retailer operating in an industry that typically experiences inflation (rising prices). A1 Energy Group wants the most realistic ending inventory. Which inventory costing method should the company consider using?

a. Average-cost because all inventory costs will then represent an average amount.

b. Specific identification is the most realistic method because it involves the actual costs.

c. LIFO because ending inventory represents the earliest costs.

d. FIFO because ending inventory represents the latest costs.

147. What does the inventory turnover measure?

a. The average amount of time inventory sits on a company’s shelves

b. The dollar amount of funds tied up in inventory

c. How quickly a company sells its goods

d. The profit generated from the selling of inventory

148. The lower-of-cost-or-net-realizable-value basis of valuing inventories is an example of

a. comparability.

b. the historical cost principle.

c. conservatism.

d. consistency.

149. When applying the lower-of-cost-or-net-realizable-value rule to inventory valuation, net realizable value refers to

a. estimated selling price less cost to complete and sell.

b. original cost.

c. current replacement cost.

d. original cost, less physical deterioration.

150. Which of the following is not a required inventory disclosure?

a. Cost flow method

b. Major categories of inventory

c. FIFO reserve

d. Basis of accounting (cost or LCNRV)

151. A departure from the cost basis of accounting to the lower-of- cost-or-net-realizable-value basis in valuing inventory is required when there has been

a. a decline in the value of the inventory.

b. an increase in selling price.

c. an increase in the value of the inventory.

d. a desire for more profit.

152. Which of the following statements concerning lower-of-cost-or-net-realizable-value (LCNRV) is incorrect?

a. LCNRV is an example of a company choosing the accounting method that will be least likely to overstate assets and income.

b. Under the LCNRV basis, market value does not apply because assets are always recorded and maintained at cost.

c. The LCNRV basis is justified because of a decline in the selling price of the inventory item.

d. LCNRV is applied after one of the cost flow assumptions has been applied.

153. Suppose that Home Depot developed the following information about its inventories in applying the lower-of-cost-or-net-realizable-value (LCNRV) basis in valuing inventories:

Product Cost NRV

A $114,000 $120,000

B 80,000 76,000

C 160,000 162,000

After Home Depot applies the LCNRV rule, the value of the inventory reported on the balance sheet will be

a. $354,000.

b. $358,000.

c. $350,000.

d. $362,000.

154. Suppose that Lowes Corporation sells three different products. The following information is available on December 31:

After applying the lower-of-cost-or-net-realizable-value rule to each item, what amount will be reported for ending inventory?

a. $6,900

b. $6,450

c. $7,950

d. $6,600

155. Suppose that Columbia Corporation sells six different products. The following information is available on December 31:

When applying the lower-of-cost-or-net-realizable-value rule to each item, what amount will be reported for ending inventory?

a. $346,000

b. $332,400

c. $333,100

d. $332,800

156. Suppose that Walgreens Company has a high inventory turnover that has increased over the last year. All of the following statements are true regarding this situation except that Walgreens Company:

a. is minimizing funds tied up in inventory.

b. is increasing the amount of inventory on hand relative to sales.

c. may be losing sales due to inventory shortages.

d. has a cost of goods sold that is increasing relative to its average inventory.

157. Use the following information regarding Black Company and Tan Company to determine Black Company's Days in Inventory for 2025 (round to one decimal place)?

a. 43.5 days

b. 52.1 days

c. 48.7 days

d. 42.0 days

158. Use the following information regarding Black Company and Tan Company to determine Tan Company's Days in Inventory for 2024 (round to one decimal place)?

a. 43.5 days

b. 48.7 days

c. 42.0 days

d. 52.1 days

159. Use the following information regarding Black Company and Tan Company to determine Black Company's Cost of Goods Sold for 2024 (round to the nearest dollar)?

a. $252,840

b. $260,043

c. $244,601

d. $260,957

160. Use the following information regarding Black Company and Tan Company to determine Tan Company's Cost of Goods Sold for 2025 (round to the nearest dollar)?

a. $260,043

b. $189,788

c. $168,975

d. $177,300

161. Which of the following companies would most likely have the highest inventory turnover?

a. An art gallery.

b. An automobile manufacturer.

c. A piano manufacturer.

d. A bakery.

162. An aircraft company would most likely have a

a. high inventory turnover.

b. low profit margin.

c. high volume.

d. low inventory turnover.

163. The inventory turnover is calculated by dividing cost of goods sold by

a. beginning inventory.

b. ending inventory.

c. average inventory.

d. 365 days.

164. Days in inventory is calculated by dividing 365 days by

a. average inventory.

b. beginning inventory.

c. ending inventory.

d. the inventory turnover.

165. Which of these actions would cause the inventory turnover ratio to increase the most?

a. increasing the amount of inventory on hand

b. keeping the amount of inventory on hand constant but increasing sales

c. keeping the amount of inventory on hand constant but decreasing sales

d. decreasing the amount of inventory on hand and increasing sales

166. Suppose that the following information was available for Tesla Company at December 31, 2025: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $630,000; and sales $900,000. Tesla’s inventory turnover, rounded to one decimal place, in 2025 was

a. 9.0 times.

b. 7.9 times.

c. 6.3 times.

d. 5.3 times.

167. Suppose that the following information was available for Tesla Company at December 31, 2025: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $630,000; and sales $900,000. Tesla’s days in inventory, rounded to one decimal place, in 2025 was

a. 40.6 days.

b. 46.2 days.

c. 57.9 days.

d. 68.9 days.

168. Suppose that the following information was available for Tata Company at December 31, 2025: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $800,000; and sales $1,100,000. Tata’s inventory turnover, rounded to one decimal place, in 2025 was

a. 13.8 times.

b. 10.0 times.

c. 11.4 times.

d. 8.9 times.

169. Suppose that the following information was available for Tata Company at December 31, 2025: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $800,000; and sales $1,100,000. Tata’s days in inventory, rounded to one decimal place, in 2025 was

a. 26.4 days.

b. 36.5 days.

c. 32.0 days.

d. 41.0 days.

170. A low number of days in inventory may indicate all of the following except

a. Sales opportunities may be lost because of inventory shortages.

b. There is less chance of having obsolete inventory items.

c. The company has fewer funds tied up in inventory.

d. Management has achieved the best balance between too much and too little inventory levels.

171. Suppose that Reebok International Ltd. had the following records:

2025 2024

Ending inventory $32,650 $30,490

Cost of goods sold 213,600 209,040

What is Reebok’s inventory turnover for 2025? (rounded to one decimal place)

a. 6.8 times

b. 7.0 times

c. 6.6 times

d. 6.5 times

172. Suppose that Reebok International Ltd. had the following records:

2025 2024

Ending inventory $32,650 $30,490

Cost of goods sold 213,600 209,040

What is Reebok’s average days in inventory for 2025? (rounded to one decimal place)

a. 53.7 days

b. 56.2 days

c. 55.3 days

d. 52.1 days

173. Suppose that Nike Inc. had the following records:

2025 2024

Ending inventory $32,650 $30,490

Cost of goods sold 306,300 313,600

What is Nike’s inventory turnover for 2025? (rounded to one decimal place)

a. 9.4 times

b. 9.7 times

c. 9.9 times

d. 10.0 times

174. Suppose that Nike Inc. had the following records:

2025 2024

Ending inventory $32,650 $30,490

Cost of goods sold 306,300 313,600

What is Nike’s average days in inventory for 2025? (rounded to one decimal place)

a. 37.6 days

b. 38.8 days

c. 36.9 days

d. 36.5 days

175. The difference between ending inventory using LIFO and ending inventory using FIFO is referred to as the

a. FIFO reserve.

b. inventory reserve.

c. LIFO reserve.

d. periodic reserve.

176. The LIFO reserve is

a. the difference between the value of the inventory under LIFO and the value under FIFO.

b. an amount used to adjust inventory to the lower of cost or market.

c. the difference between the value of the inventory under LIFO and the value under average-cost.

d. the amount used to adjust inventory to historical cost.

177. Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods?

a. FIFO reserve

b. Inventory turnover

c. LIFO reserve

d. Current replacement cost

178. Suppose that Tesla, Inc. reported ending inventory at December 31, 2025 of $1,200,000 under LIFO. It also reported a LIFO reserve of $210,000 at January 1, 2025, and $300,000 at December 31, 2025. Cost of goods sold for 2025 was $4,900,000. If CVS Company had used FIFO during 2025, its cost of goods sold for 2025 would have been

a. $5,200,000.

b. $4,990,000.

c. $4,810,000.

d. $4,600,000.

179. To adjust a company’s LIFO cost of goods sold to FIFO cost of goods sold

a. the ending LIFO reserve is added to LIFO cost of goods sold.

b. the ending LIFO reserve is subtracted from LIFO cost of goods sold.

c. an increase in the LIFO reserve is subtracted from LIFO cost of goods sold.

d. a decrease in the LIFO reserve is subtracted from LIFO cost of goods sold.

180. All of the following statements are true regarding the LIFO reserve except:

a. Companies using LIFO are required to report the LIFO reserve.

b. The equation (LIFO inventory – LIFO reserve = FIFO inventory) adjusts the inventory balance from LIFO to FIFO.

c. The financial statement differences of using LIFO normally increase the longer a company uses LIFO.

d. Current ratios and the inventory turnover can be significantly affected if a company has material LIFO reserves.

181. What is a LIFO reserve?

a. The tax savings resulting when LIFO is used during periods of rising prices

b. The difference in net income when a company uses LIFO as compared to FIFO

c. The difference between the inventory value and cost of goods sold when a company uses LIFO

d. The difference between the inventory value under LIFO and FIFO

182. What is a LIFO reserve?

a. The amount of income taxes saved when using LIFO costing instead of FIFO costing.

b. The difference between ending inventory using LIFO costing compared to FIFO costing

c. The difference between inventory cost using LIFO costing in the balance sheet and cost of goods sold in the income statement using LIFO costing.

d. The extra cost a company incurs as a result of using LIFO costing compared to FIFO costing in periods of rising prices.

183. Use the following information for Boba Fett, Inc., Cage Company, Draco Industries, and Elsa Services to determine Draco's LIFO reserve for 2024.”

a. $535

b. $85

c. $42

d. $58

184. Use the following information for Boba Fett, Inc., Cage Company, Draco Industries, and Elsa Services to determine which company has the strongest liquidity position for 2025 as expressed by the current ratio if the LIFO reserve adjustment is used.

a. Boba Fett

b. Cage

c. Draco

d. Elsa

185. Use the following information for Boba Fett, Inc., Cage Company, Draco Industries, and Elsa Services to determine Boba Fett's inventory turnover for 2025 using LIFO (to the closest decimal place).

a. 12.3 times

b. 9.3 times

c. 7.5 times

d. 6.4 times

186. Use the following information for Boba Fett, Inc., Cage Company, Draco Industries, and Elsa Services to determine which company shows the greatest improvement in its current ratio from 2024 to 2025 if the LIFO adjustment is used.

a. Boba Fett

b. Cage

c. Draco

d. Elsa

*187. In a perpetual inventory system,

a. LIFO cost of goods sold will be the same as in a periodic inventory system.

b. Average-Costs are based entirely on unit cost simple averages.

c. a new average is computed under the Average-Cost method after each sale.

d. FIFO cost of goods sold will be the same as in a periodic inventory system.

*188. Suppose that Adidas has the following inventory data:

July 1 Beginning inventory 30 units at $6.00

5 Purchases 120 units at $6.60

14 Sale 80 units

21 Purchases 60 units at $7.20

30 Sale 56 units

Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for July?

a. $931.20

b. $472.80

c. $1,404.00

d. $696.00

1. Goods shipped on consignment by Samsung to another company.

2. Goods in transit from a supplier shipped FOB destination.

3. Goods shipped via common carrier to a customer with terms FOB shipping point.

4. Goods held on consignment from another company.

Ex. 210

Suppose that Uniqlo has just completed a physical inventory count at year end, December 31, 2025. Only the items on the shelves, in storage, and in the receiving area were counted and costed on the FIFO basis. The inventory amounted to $80,000. During the audit, the independent CPA discovered the following additional information:

(a) There were goods in transit on December 31, 2025 from a supplier with terms FOB destination, costing $10,000. Because the goods had not arrived, they were excluded from the physical inventory count.

(b) On December 27, 2025, a regular customer purchased goods for cash amounting to $1,000 and had them shipped to a bonded warehouse for temporary storage on December 28, 2025. The goods were shipped via common carrier with terms FOB shipping point. The customer picked the goods up from the warehouse on January 4, 2026. Uniqlo had paid $500 for the goods and, because they were in storage, Uniqlo included them in the physical inventory count.

(c) Uniqlo , on the date of the inventory count, received notice from a supplier that goods ordered earlier, at a cost of $4,000, had been delivered to the transportation company on December 28, 2025; the terms were FOB shipping point. Because the shipment had not arrived on December 31, 2025, it was excluded from the physical inventory.

(d) On December 31, 2025, there were goods in transit to customers, with terms FOB shipping point, amounting to $800 (expected delivery on January 8, 2026). Because the goods had been shipped, they were excluded from the physical inventory count.

(e) On December 31, 2025, Uniqlo shipped $2,500 worth of goods to a customer, FOB destination. The goods arrived on January 5, 2026. Because the goods were not on hand, they were not included in the physical inventory count.

(f) Uniqlo, as the consignee, had goods on consignment that cost $3,000. Because these goods were on hand as of December 31, 2025, they were included in the physical inventory count.

Instructions

Analyze the above information and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item.

Ex. 211

Ulta Company was undergoing a year-end audit of its financial records. The auditors were in the process of reviewing Ulta’s inventory for year-end, December 31, 2025. An audit was completed on the year-end inventory. The value of the ending inventory prior to any adjustments was $185,000, but before finishing up they had a few questions. Discussion with Ulta’s accountant revealed the following:

(a) Ulta sold goods costing $60,000 to Aveda Beauty College FOB shipping point on December 28. The goods are not expected to reach Aveda until January 12. The goods were not included in the physical inventory because they were not in the warehouse.

(b) The physical count of the inventory did not include goods costing $95,000 that were shipped to Ulta FOB destination on December 27 and were still in transit at year-end.

(c) Ulta received goods costing $25,000 on January 2. The goods were shipped FOB shipping point on December 26 by Cocokind Company. The goods were not included in the physical count.

(d) Ulta sold goods costing $40,000 to Amazon FOB destination on December 30. The goods were received by Amazon on January 8. Because the goods had been shipped, they were excluded from the physical inventory count.

(e) Ulta received goods costing $42,000 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was supposed to have arrived on December 31. This purchase was included in the ending inventory of $185,000.

(f) Ulta Company, as the consignee, had goods on consignment that cost $3,000. Because these goods were on hand as of December 31, they were included in the physical inventory count.

Instructions

Analyze the above information and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item.

Ex. 212

Luke Bryan, an auditor with A. Idol CPAs, is performing a review of Richie Company's inventory account. Richie did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $640,000. However, the following information was not considered when determining that amount.

1. Included in the company's count were goods with a cost of $200,000 that the company is holding on consignment. The goods were placed on consignment by Underwood Corporation.

2. The physical count did not include goods purchased by Richie with a cost of $40,000 that were shipped FOB shipping point on December 28 and did not arrive at Richie's warehouse until January 3.

3. Included in the inventory account was $22,000 of office supplies that were stored in the warehouse and were to be used by the company's supervisors and managers during the coming year.

4. The company received a customer’s order on December 29 that was boxed and was sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of $40,000 and a cost of $30,000. The goods were not included in the count because they were sitting on the dock.

5. On December 29, Richie shipped goods with a selling price of $90,000 and a cost of $70,000 to Perry Corporation FOB shipping point. The goods arrived on January 3. Perry had only ordered goods with a selling price of $10,000 and a cost of $8,000. However, a sales manager at Richie had authorized the shipment and said that if Perry wanted to ship the goods back next week, it could.

6. Included in the count was $50,000 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Richie's products, it was unlikely that these obsolete parts have any other use. However, management would prefer to keep them on the books at cost, "since that is what we paid for them, after all."

Ex. 212 (Cont.)

Instructions

Prepare a schedule to determine the correct inventory amount. Provide explanations for each item above, specifying why or why not an adjustment should be made for each item.

Ex. 213

Suppose that Old Navy uses the periodic inventory system and has the following inventory information available:

Units Unit Cost Total Cost

1/1 Beginning Inventory 100 $4 $ 400

1/20 Purchase 500 $5 2,500

7/25 Purchase 100 $7 700

10/20 Purchase 300 $8 2,400

1,000 $6,000

A physical count of inventory on December 31 revealed that there were 350 units on hand.

Ex. 213 (Cont.)

Instructions

1. Assume that the company uses the FIFO method. The cost of the ending inventory at December 31 is $__________.

2. Assume that the company uses the average-cost method. The cost of the ending inventory on December 31 is $__________.

3. Assume that the company uses the LIFO method. The cost of the ending inventory on December 31 is $__________.

4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less?

Ex. 214

Acme Company uses the periodic inventory system and had the following inventory information available:

Units Unit Cost Total Cost

1/1 Beginning Inventory 100 $3 $ 300

1/20 Purchase 500 $4 2,000

7/25 Purchase 100 $5 500

10/20 Purchase 300 $6 1,800

1,000 $4,600

A physical count of inventory on December 31 revealed that there were 380 units on hand.

Instructions

1. Assume that the company uses the FIFO method. The cost of the ending inventory at December 31 is $__________.

2. Assume that the company uses the average-cost method. The cost of the ending inventory on December 31 is $__________.

3. Assume that the company uses the LIFO method. The cost of the ending inventory on December 31 is $__________.

4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less?

Ex. 215

Compute the cost to be assigned to ending inventory for each of the methods indicated given the following information about purchases and sales during the year. Assume that the periodic inventory system is used.

January 1 Beginning Inventory 150 items @ $4 = $ 600

May 1 Purchases 450 items @ $6 = 2,700

Total Available 600 items $3,300

Total Sales 430 items

December 31 Ending Inventory 170

Cost assigned on an average-cost basis $__________

Cost assigned on a FIFO basis $__________

Costs assigned on a LIFO basis $__________

Ex. 216

Compute the cost to be assigned to ending inventory for each of the methods indicated given the following information about purchases and sales during the year. Assume that the periodic inventory system is used.

January 1 Beginning Inventory 100 items @ $7 = $ 700

May 1 Purchases 400 items @ $8 = 3,200

Total Available 500 items $3,900

Total Sales 360 items

December 31 Ending Inventory 140

Cost assigned on an average-cost basis $__________

Cost assigned on a FIFO basis $__________

Costs assigned on a LIFO basis $__________

Ex. 217

Acme Supply Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Acme uses a periodic inventory.

Purchases Sales

Units Unit Cost Units Selling Price/Unit

3/1 Beginning inventory 100 $40

3/3 Purchase 60 $50

3/4 Sales 60 $80

3/10 Purchase 200 $55

3/16 Sales 70 $90

3/19 Sales 90 $90

3/25 Sales 60 $90

3/30 Purchase 40 $60

Instructions

(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)

(b) Using the average-cost method, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

1. Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

Ex. 218

Suppose that Target Corporation uses the periodic inventory system to account for inventories and has the following Information at October 31:

October 1 Beginning inventory 400 units @ $10.00 = $ 4,000

8 Purchase 800 units @ $10.40 = 8,320

16 Purchase 600 units @ $10.80 = 6,480

24 Purchase 200 units @ $11.60 = 2,320

Total units and cost 2,000 units $21,120

Instructions

1. Show computations to determine the ending inventory using the FIFO cost assumption if 500 units remain on hand at October 31.

2. Show computations to determine the ending inventory using the average-cost method if 500 units remain on hand at October 31.

3. Show computations to determine the ending inventory using the LIFO cost assumption if 500 units remain on hand at October 31.

Ex. 219

Suppose that Patagonia Inc. uses the periodic inventory system to account for inventories and has the following information at January 31:

January 1 Beginning inventory 400 units @ $12.00 = $ 4,800

8 Purchase 800 units @ $12.40 = 9,920

16 Purchase 600 units @ $12.80 = 7,680

24 Purchase 200 units @ $13.20 = 2,640

Total units and cost 2,000 units $25,040

Instructions

1. Show computations to determine the ending inventory using the FIFO cost assumption if 600 units remain on hand at January 31.

2. Show computations to determine the ending inventory using the average-cost method if 600 units remain on hand at January 31.

3. Show computations to determine the ending inventory using the LIFO cost assumption if 600 units remain on hand at January 31.

Ex. 220

Suppose that Amazon uses a periodic inventory system and reports the following for the month of June:

(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO,
(2) LIFO, and (3) average-cost.

(b) Which costing method gives the highest ending inventory? The highest cost of goods sold? Why?

(c) How do the average-cost values for ending inventory and cost of goods sold relate to ending inventory and cost of goods sold for FIFO and LIFO?

Ex. 221

Ritz Camera Shop Inc. uses the lower-of-cost-or-net-realizable-value (LCNRV) basis for its inventory. The following data are available at December 31.

Instructions

What amount should be reported on Ritz Camera Shop's financial statements, assuming the lower-of-cost-or-net-realizable-value rule is applied?

Ex. 222

Suppose that Forever 21 has the following information available for 2024 and 2025:

Instructions

Calculate the inventory turnover, days in inventory, and gross profit rate (rounded to one decimal place) for Forever 21 for 2024 and 2025. Comment on any trends.

Ex. 223

Acme Company reported the following summarized annual data at the end of 2025:

Sales revenue $1,600,000

Cost of goods sold* 900,000

Gross profit 700,000

Operating expenses 400,000

Income before income taxes $ 300,000

*Based on an ending FIFO inventory of $250,000.

The income tax rate is 30%. The controller of the company is considering a switch from FIFO to LIFO. She has determined that on a LIFO basis, the ending inventory would have been $205,000.

Instructions

(a) Restate the summary information on a LIFO basis.

(b) What effect, if any, would the proposed change have on Acme’s income tax expense, net income, and cash flows?

(c) If you were an owner of this business, what would your reaction be to this proposed change?

Ex. 224

Suppose that the following information is available from the annual reports of CVS and Walgreens:

(Amounts in millions)

CVS Walgreens

2025 Ending Inventory $ 6,031 $ 4,816

2024 Ending inventory 6,162 5,044

Cost of goods sold 25,937 31,983

Sales revenue 29,656 36,704

2025 LIFO reserve 227 —

2024 LIFO reserve 225 —

Instructions

(a) Calculate the inventory turnover and days in inventory (round to one decimal place) for both companies.

(b) Calculate CVS’s inventory turnover after adjusting for the LIFO reserve. Assume that CVS uses the LIFO inventory method.

(c) What conclusion concerning the management of inventory can be drawn from these data?

Ex. 225

Suppose that the following information is available for Starbucks Company for 2025. (Assume that Starbucks uses the LIFO inventory method).

Beginning inventory $ 600,000

Ending inventory 700,000

Beginning LIFO reserve 200,000

Ending LIFO reserve 300,000

Cost of goods sold 5,980,000

Sales 8,000,000

Instructions

(a) Calculate the inventory turnover and days in inventory (round to one decimal place) for Starbucks Company based on LIFO.

(b) Calculate the inventory turnover and days in inventory (round to one decimal place) after adjusting for the LIFO reserve.

*Ex. 226

Acme Supply Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Acme uses the perpetual inventory system.

Purchases Sales

Units Unit Cost Units Selling Price/Unit

3/1 Beginning inventory 100 $40

3/3 Purchase 60 $50

3/4 Sales 60 $80

3/10 Purchase 200 $55

3/16 Sales 90 $90

3/19 Sales 70 $90

3/25 Sales 60 $90

3/30 Purchase 40 $60

Instructions

(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)

(b) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

*Ex. 227

Acme Group sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Acme Group uses a perpetual inventory system.

Purchases Sales

Units Unit Cost Units Selling Price/Unit

3/1 Beginning inventory 100 $55

3/3 Purchase 60 $60

3/4 Sales 60 $120

3/10 Purchase 200 $65

3/16 Sales 90 $130

3/19 Sales 70 $130

3/25 Sales 50 $130

3/30 Purchase 40 $75

Instructions

(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)

(b) Using the FIFO assumption, calculate the amount assigned to ending inventory for March.

(c) Using the Moving-Average Cost method, calculate the amount assigned to the inventory on hand on March 31. (Show computations and use three decimal places for unit costs)

*Ex. 227 (Cont.)

(d) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

(e) Using the LIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)

*Ex. 228

Suppose that Ralph Lauren Company reports the following for the month of June.

Instructions

(a) Calculate the cost of the ending inventory and the cost of goods sold for each cost flow assumption, using a perpetual inventory system. Assume a sale of 570 units occurred on June 15 for a selling price of $8 and a sale of 600 units on June 27 for $9. (Note: For the moving-average cost method, round unit cost to three decimal places.)

(b) Why is the weighted-average unit cost not $6 [($5 + $6 + $7) ÷ 3 = $6]?

*Ex. 229

Suppose that StitchFix reported these income statement data for a 2-year period.

Assume that StitchFix uses a periodic inventory system. The inventories at January 1, 2024 and December 31, 2025, are correct. However, the ending inventory at December 31, 2024 is overstated by $4,000.

*Ex. 229 (Cont.)

Instructions

(a) Prepare correct income statement data for the 2 years.

(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?

*Ex. 230

For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item, assuming that the periodic inventory is used.

Code: O = item is overstated

U = item is understated

NA = item is not affected

Items

Stockholders’ Cost of Net

Events Assets Equity Goods Sold Income

1. The ending inventory in the previous period was overstated.

2. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice.

*Ex. 230 (Cont.)

3. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases. The goods were not included in the count of goods on hand on December 31 because they had not arrived by December 31.

4. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases. The goods were not included in the count of goods on hand on December 31 because they had not arrived by December 31.

5. The internal auditors discovered that the ending inventory in the previous period was understated $15,000 and that the ending inventory in the current period was overstated $25,000.

*Ex. 231

Condensed income statements for Acme Corporation are shown below for two years.

2024 2025

Sales $75,000 $90,000

Cost of Goods Sold 45,000 54,000

Gross Profit 30,000 36,000

Operating Expense 15,000 15,000

Net Income $15,000 $21,000

Compute the corrected net income for 2024 and 2025 assuming that the inventory as of the end of 2024 was mistakenly understated by $7,000.

2024 $ __________ 2025 $__________

*Ex. 232

Condensed income statements for The Energy Group are shown below for two years.

2024 2025

Sales $75,000 $90,000

Cost of Goods Sold 45,000 54,000

Gross Profit $30,000 $36,000

Operating Expense 15,000 15,000

Net Income $15,000 $21,000

Compute the corrected net income for 2024 and 2025 assuming that the inventory at the end of 2024 was mistakenly overstated by $5,000.

2024 $ __________ 2025 $__________

*Ex. 233

Suppose that Ralph Lauren Inc. reported cost of goods sold as follows:

2024 2025

Beginning inventory $ 54,000 $ 64,000

Cost of goods purchased 847,000 891,000

Cost of goods available for sale 901,000 955,000

Ending inventory 64,000 55,000

Cost of goods sold $837,000 $900,000

Assume that Ralph Lauren made two errors:

(1) 2024 ending inventory was overstated by $6,000.

(2) 2025 ending inventory was understated by $11,000.

*Ex. 233 (Cont.)

Instructions

Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also, indicate if the amounts are overstated (O) or understated (U).

2024 2025

Overstated/ Overstated/

Amount Understated Amount Understated

Total assets $_________ _______ $_________ _______

Stockholders’ equity $_________ _______ $_________ _______

Cost of goods sold $_________ _______ $_________ _______

Net income $_________ _______ $_________ _______