CHAPTER 6

INVENTORY costing

Summary of Questions by STUDY Objectives
and Bloom’s Taxonomy

Note: K = Knowledge C = Comprehension AN = Analysis AP = Application

*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Note: TF = True-False MC = Multiple Choice Ma = Matching

*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF QUESTIONS BY LEVEL OF DIFFICULTY (LOD)

Note: E = Easy M = Medium H=Hard

*This topic is dealt with in an Appendix to the chapter.

CHAPTER STUDY OBJECTIVES

1. Describe the steps in determining inventory quantities. The steps in determining inventory quantities are (1) taking a physical inventory of goods on hand, and (2) determining the ownership of goods in transit, on consignment, and in similar situations.

2. Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and average methods of cost determination. Costs are allocated to the cost of goods sold account each time a sale occurs in a perpetual inventory system. The cost is determined by specific identification or by one of two cost formulas: FIFO (first-in, first-out) and average.

Specific identification is used for goods that are not ordinarily interchangeable (i.e., they are not identical to one another). This method tracks the actual physical flow of goods, allocating the exact cost of each merchandise item to cost of goods sold and ending inventory.

The FIFO cost formula assumes a first-in, first-out cost flow for sales. Cost of goods sold consists of the cost of the earliest goods purchased. Ending inventory is determined by allocating the cost of the most recent purchases to the units on hand.

The average cost formula is used for goods that are homogeneous or non-distinguishable. Under average, a new weighted (moving) average unit cost is calculated after each purchase and applied to the number of units sold and the number of units remaining in inventory.

3. Explain the financial statement effects of inventory cost determination methods. Specific identification results in the best match of costs and revenues on the income statement. When prices are rising, average results in a higher cost of goods sold and lower profit than FIFO. Average results in a better match on the income statement of more current costs with current revenues than does FIFO. On the balance sheet, FIFO results in an ending inventory that is closest to the current (replacement) value and the best balance sheet valuation. All three methods result in the same cash flow.

4. Determine the financial statement effects of inventory errors. An error in beginning inventory will have a reverse effect on profit in the current year (e.g., an overstatement of beginning inventory results in an overstatement of cost of goods sold and an understatement of profit). An error in the cost of goods purchased will have a reverse effect on profit (e.g., an overstatement of purchases results in an overstatement of cost of goods sold and an understatement of profit). An error in ending inventory will have a similar effect on profit (e.g., an overstatement of ending inventory results in an understatement of cost of goods sold and an overstatement of profit). If ending inventory errors are not corrected in the following period, their effect on profit for the second period is reversed and total profit for the two years will be correct. On the balance sheet, ending inventory errors will have the same effects on total assets and total owner’s equity, and no effect on liabilities.

5. Value inventory at the lower of cost and net realizable value. The cost of the ending inventory is compared with its net realizable value. If the cost is lower, no further steps are required. If the net realizable value is lower, a writedown is recorded, which results in an increase in (debit to) cost of goods sold, and a reduction in (credit to) merchandise inventory. The writedown is reversed if the net realizable value of the inventory increases, but the value of the inventory can never be higher than its original cost.

6. Demonstrate the presentation and analysis of inventory. Ending inventory is reported as a current asset on the balance sheet at the lower of cost and net realizable value. Cost of goods sold is reported as an expense on the income statement. Additional disclosures include the cost determination method.

The inventory turnover ratio is a measure of liquidity. It is calculated by dividing the cost of goods sold by average inventory. It can be converted to days sales in inventory by dividing 365 days by the inventory turnover ratio. Days sales in inventory tells us, on average, how quickly a merchandiser takes to turn its inventory over once.

7. Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and average inventory cost formulas (Appendix 6A). Under the FIFO cost formula, the cost of the most recent goods purchased is allocated to ending inventory. The cost of the earliest goods on hand is allocated to cost of goods sold. Under the average cost formula, the total cost of goods available for sale is divided by the total units available to calculate a weighted average unit cost. The weighted average unit cost is applied to the number of units on hand at the end of the period to determine ending inventory. Cost of goods sold is calculated by subtracting ending inventory from the cost of goods available for sale.

The main difference between applying cost formulas in a periodic inventory system and applying cost formulas in a perpetual inventory system is the timing of the calculations. In a periodic inventory system, the cost formula is applied at the end of the period. In a perpetual inventory system, the cost formula is applied at the date of each sale to determine the cost of goods sold. FIFO will provide the same result under both the perpetual and periodic system, whereas the average formula will yield different results for perpetual and periodic.

8. Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B). Two methods of estimating inventories are the gross profit method and the retail inventory method. Under the gross profit method, the gross profit margin is applied to net sales to determine the estimated cost of goods sold. The estimated cost of goods sold is subtracted from the cost of goods available for sale to determine the estimated cost of the ending inventory. Under the retail inventory method, a cost-to-retail ratio is calculated by dividing the cost of goods available for sale by the retail value of the goods available for sale. This ratio is then applied to the ending inventory at retail to determine the estimated cost of the ending inventory.

TRUE-FALSE STATEMENTS

1. In a periodic system inventory quantities are continuously updated.

2. All companies need to count their inventory at least once a year.

3. Determining ownership of goods is one of the steps in taking inventory.

4. Only smaller companies need to do an annual physical count of inventory.

5. Only companies who use a periodic method of inventory need to have an annual physical inventory count.

6. Goods out on consignment should be included in the inventory of the consignor.

7. Goods that have been purchased FOB destination point but are in transit at year end should be included in the seller’s physical inventory count.

8. Goods that have been purchased FOB shipping point and are in transit at the year end should be included in the buyer’s physical count of goods.

9. Goods which have been removed from the warehouse and sent to a customer on approval do not need to be included in a seller’s inventory.

10. Goods in transit should be ignored when performing a physical inventory count.

11. Internal control is the process designed and implemented by management to help their organization achieve reliable financial reporting.

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

13. The counting of the inventory should be done by employees who are NOT responsible for either custody of the inventory or keeping inventory records.

14. The Ontario Canoe Company has $10,000 in inventory in its warehouse. The company has goods in transit of $500 shipped from a supplier FOB shipping point. Included in the items counted in the warehouse is $120 in goods held on consignment from a local manufacturer. Craft’s correct inventory balance is $10,500.

15. The first in first out (FIFO) method tracks the actual physical flow (movement) of the goods in a perpetual inventory system.

16. Companies are allowed to use the specific identification cost determination method when the goods are interchangeable.

17. If the goods are produced for specific projects, then specific identification cost determination method must be used.

18. Automobiles are a good example of a type of inventory where the FIFO cost formula is used.

19. The FIFO and average cost formula can be used in both the perpetual and periodic inventory systems.

20. The first-in, first-out (FIFO) cost formula assumes that the earliest (oldest) goods purchased are the last ones to be sold.

21. When using the perpetual method of accounting and the average cost formula, the average cost per unit will change every time a unit of inventory is sold.

22. When using the perpetual method of accounting and the average cost formula, the average cost per unit will change every time a unit of inventory is purchased.

23. The specific identification inventory cost determination method is desirable when a company sells a large number of low-unit cost items.

24. When using FIFO, beginning inventory + purchases – cost of goods sold = ending inventory.

25. The first-in, first-out (FIFO) inventory cost formula results in an ending inventory valued at the most recent cost.

26. 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 the FIFO and average cost formulas.

27. Inventory affects both the income statement and the balance sheet.

28. One of the considerations in choosing a cost determination method is to report an inventory cost on the balance sheet that is close to the inventory’s recent costs.

29. One of the considerations of choosing a cost determination method is to use the same method for all inventories having a similar nature and usage in the company.

30. A company is able to change its cost determination method from one year to the next.

31. A change in the inventory cost determination method can only occur if the physical flow of inventory changes and a different method would result in more relevant information in the financial statements.

32. If prices are falling, FIFO will report the lower profit and average the higher.

33. If prices are stable, both average and FIFO cost formulas will report the same results.

34. The FIFO inventory cost determination method will result in a higher cash flow to a company than average.

35. Errors in the cost of goods sold will affect the income statement.

36. If beginning inventory is understated then the cost of goods sold will be understated if there are no other errors.

37. An overstatement of the cost of goods sold will result in an overstatement of gross profit.

38. If the ending inventory is understated, then the beginning inventory of the next period will be overstated.

39. If the ending inventory is understated then the profit of the company will be understated.

40. Inventory errors which affect the balance sheet will NOT affect the income statement.

41. Net realizable value is the selling price less any costs required to make the goods ready for sale.

42. When the value of inventory is higher than its cost, the inventory is written down to its net realizable value at the end of the period.

43. When there is clear evidence of an increase in net realizable value because of changed economic circumstances, the amount of a previously recorded writedown is reversed.

44. If the item of inventory that had been previously written down has been sold, a reversal should be recorded.

45. If there is a recovery in the net realizable value of the inventory, the write-up can never be larger than the original writedown.

46. The inventory turnover ratio is the net sales divided by the average cost of goods sold.

47. The inventory turnover ratio is the average inventory divided by the average cost of goods sold.

48. The days sales in inventory ratio is the inventory ratio divided by the number of days in the year.

49. Inventory ratios can be used to measure how effectively a company manages its inventory.

*50. Under the periodic system of inventory, opening inventory will always be higher using average cost of inventory than FIFO.

*51. Under the periodic system of inventory, the weighted average unit cost is calculated by dividing the total units available for sale by the cost of goods available for sale.

*52. Under the periodic method, the cost of goods available for sale will be the same under the average cost or FIFO.

*53. Under the periodic system of inventory, if the number of units available for sale is the same as the ending inventory, no sales have been made in the period.

*54. Inventory estimates are normally associated with the periodic method of accounting for inventory.

*55. The retail method estimates the cost of ending inventory by applying the gross profit margin to net sales.

*56. To use the retail inventory method, a company’s records must show both the cost and the retail value of the goods available for sale.

*57. The retail inventory method is useful for estimating the amount of shrinkage due to breakage, loss, or theft.

*58. The major disadvantage of the retail method is that it is an averaging technique.

*59. If inventories are valued using the retail inventory method, they should not be classified as a current asset on the balance sheet.

*60. The gross profit method of estimating inventory cannot be used if the gross profit margin has changed from the previous period.

*61. If the physical inventory count shows an amount which is lower than the estimate from the calculation of the gross profit method of inventory estimation, the estimate should be used for the amount reported on the balance sheet.

*62. If the physical inventory is less than the amount calculated using the retail method, then there may be a theft problem.

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

63. 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 judgement.

d. whether or not the purchase price has been paid.

64. If goods in transit are shipped FOB shipping point by a carrier named by the buyer,

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

b. the buyer has legal title to the goods when a public carrier accepts the goods from the seller.

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.

65. 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 when a public carrier accepts the goods from the seller.

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.

66. Per its January 31, 2015 physical inventory count, Pugwash Company has $24,500 in inventory on hand at year end. In addition, at year end the company has $1,200 in merchandise in transit purchased from a supplier shipped FOB destination. Included in its physical inventory is $900 in goods held on consignment from a local manufacturer. How much inventory should be reported on the company’s January 31, 2015 balance sheet?

a. $24,500

b. $25,700

c. $24,800

d. $23,600

67. “Goods on Approval”

a. are considered sold when removed from the seller’s premises regardless of whether or not legal title has transferred to the buyer.

b. should be included in the seller’s physical inventory unless legal title has passed to the buyer.

c. would be considered inventory of the buyer

d. are not considered to be sold until the buyer has paid a cash deposit to the seller.

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

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

69. An employee assigned to counting computer monitors in boxes should

a. count the number of boxes only.

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

c. open each box and check that the box contains a monitor.

d. rely on the warehouse records of the number of computer monitors.

70. After the physical inventory is completed

a. quantities are listed on inventory summary sheets.

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

c. the 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 summary sheets by the total inventory costs.

71. All of the following are examples of strong internal control when counting inventory EXCEPT

a. prenumbered inventory tags should be used.

b. the inventory clerk should control all of the inventory count sheets.

c. the counting should be done by employees who are not responsible for either custody of the inventory or keeping inventory records.

d. there should be a second count by another employee or auditor.

72. Westcoe Company's goods in transit at December 31 include sales made

(1) FOB destination, and

(2) FOB shipping point, and purchases made

(3) FOB destination, and

(4) FOB shipping point.

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

a. (2) and (3)

b. (1) and (4)

c. (1) and (3)

d. (2) and (4)

73. While goods purchased FOB destination, and shipped by train and then truck, are in transit, the goods should be included in the inventory of the

a. seller.

b. purchaser.

c. train company.

d. truck company.

74. Under a consignment arrangement, the

a. consignor has ownership until goods are sold to a customer.

b. consignor has ownership until goods are shipped to the consignee.

c. consignee has ownership when the goods are in the consignee's possession.

d. consigned goods are included in the inventory of the consignee.

75. A company just starting in business purchased three merchandise inventory items at the following prices: first purchase, $100; second purchase, $120; third purchase, $125. If the company sold two units for a total of $400 and used FIFO, the gross profit for the period would be

a. $220.

b. $180.

c. $245.

d. $155.

76. The FIFO inventory cost formula assumes that the cost of the latest units purchased is

a. the last to be allocated to ending inventory.

b. the first to be allocated to ending inventory.

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

d. allocated to the average cost of goods sold or ending inventory.

Use the following information for questions 77–78.

A company just starting business made the following three inventory purchases in February:

Feb. 1 225 units $1,350

Feb. 10 400 units 2,800

Feb. 28 100 units 800

$4,950

On Feb 15, there were 300 units sold. The company uses a perpetual inventory system.

77. Using the FIFO inventory cost formula, the amount allocated to cost of goods sold for the February 15 sale is

a. $1,525.

b. $1875.

c. $4,950.

d. $3,075.

78. Using the average cost formula, the amount allocated to the ending inventory on February 28 is

a. $4,950.

b. $3,075.

c. $2,958.

d. $1,992.

Use the following information for questions 79–80.

Singh Computer Shop begins operations on June 1 and uses a perpetual inventory system. During June, the company had the following purchases and sales for its Model 10 Fastback Computer System:

Purchases____

Date Units Unit Cost Sales (Units)

June 1 4 $2,000

5 2

9 9 $2,600

16 3

79. Using the FIFO cost formula, the amount allocated to cost of goods sold for June is

a. $10,000.

b. $10,600.

c. $13,000.

d. $20,800.

80. Using the average cost formula, the amount allocated to the ending inventory on June 30 is

a. $19,323.

b. $14,538.

c. $19,927.

d. $10,600.

81. A company purchased inventory as follows:

200 units at $9

300 units at $10

The average unit cost for inventory is

a. $9.00.

b. $9.50.

c. $9.60.

d. $10.00.

82. The cost of goods available for sale consists of which two elements?

a. the cost of beginning inventory and the cost of ending inventory

b. the cost of ending inventory and the cost of goods purchased during the year

c. the cost of beginning inventory and the cost of goods purchased during the year

d. the difference between the costs of goods purchased and the cost of goods sold during the year

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

a. Art Gallery

b. Farm implements dealership

c. Antique shop

d. Drug store

84. A problem with the specific identification method is that

a. inventories can be reported at actual costs.

b. management can manipulate profit.

c. the physical flow of inventory is not followed.

d. the lower of cost and market basis cannot be applied.

85. The selection of an appropriate inventory cost formula for an individual company is made by

a. the external auditors.

b. the CICA for private companies.

c. the International Financial Reporting Standards for public companies.

d. management.

86. The Jeter Company uses the perpetual inventory system and the average cost formula to value inventories. On August 1, there were 5,000 units valued at $15,000 in the beginning inventory. On August 10, 10,000 units were purchased for $6 per unit. On August 15, 8,000 units were sold for $12 per unit. The amount charged to cost of goods on August 15 was

a. $35,000.

b. $40,000.

c. $48,000.

d. $36,000.

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

a. The FIFO cost formula 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.

88. When prices are constant, which of the following inventory cost formulas will lead to the lowest cost of goods sold figure?

a. FIFO

b. Specific Identification

c. Average

d. When prices are constant, all cost determination methods will yield the same cost of goods sold figure.

89. Which of the following statements is true regarding inventory cost formulas?

a. A company may use more than one cost formula 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 cost formula once it has chosen a method.

90. In a period of increasing prices, which cost determination method will result in the lowest amount of cash flow?

a. FIFO

b. Specific Identification

c. Average

d. Cash flow will be the same under all methods.

91. 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 sell goods which are not interchangeable.

92. In a period of rising prices, ending inventory using FIFO will be ______________ ending inventory determined using average.

a. higher than

b. lower than

c. equal to

d. Cost formulas have no impact on ending inventory.

93. Levy's Used Cars uses the specific identification method of costing inventory. During March, Levy purchased three cars for $5,000, $6,500, and $8,000, respectively. During March, the first two cars are sold for $7,500 each. What is Levy's gross profit for March?

a. $2,000

b. $3,500

c. $500

d. $7,000

94. In periods of rising prices, the ending inventory using the FIFO cost formula will be

a. higher than using the average cost method.

b. can not be determined.

c. lower than average cost.

d. the same as average cost.

95. The managers of Tong Company receive performance bonuses based on the profit of the firm. Which cost formula are they likely to favour in periods of declining prices?

a. Estimating inventory method

b. Average

c. FIFO

d. Physical inventory method

96. Selection of an inventory cost formula by management does NOT usually depend on

a. the fiscal year-end.

b. income statement effects.

c. balance sheet effects.

d. tax effects.

97. When comparing the average and FIFO inventory cost formulas during a period when prices are rising, which of the following statements is correct?

a. FIFO will result in a lower inventory balance reported on the balance sheet.

b. Average will result in a higher cash flow.

c. FIFO will result in a higher profit reported on the income statement.

d. Average will result in a higher gross profit reported on the income statement.

98. The two inventory cost formulas will result in the following comparative effects on profit during a period when prices are rising:

FIFO Average

a. Higher no effect

b. Higher lower

c. Lower higher

d. No effect No effect

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

a. Average will have the highest ending inventory.

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

c. FIFO will have the highest ending inventory.

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

100. If ending inventory is overstated in 2014, then profit will be

a. overstated in 2014 and understated in 2015.

b. understated in 2014 and overstated in 2015.

c. overstated in both 2014 and 2015.

d. overstated in 2014 and correct in 2015.

101. If ending inventory is understated in 2014, the 2015 ending owner’s equity will be

a. understated.

b. overstated.

c. correct.

d. Owner’s equity is never affected by an inventory error.

Use the following information for question 102–103.

During its December 31, 2014 year-end inventory count, Jefferson Company failed to count items in transit to which it had legal title. As a result of this error, ending inventory was understated by $30,000.

102. As a result of this error, 2014 cost of goods sold will be

a. understated by $30,000.

b. overstated by $30,000.

c. correct.

d. greater when average cost is used.

103. Assuming the company makes no errors in 2015, Jefferson’s owner’s equity at the end of December 2015 will be

a. overstated by $30,000.

b. understated by $30,000.

c. overstated by $60,000.

d. correct.

104. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is

Cost of Goods Sold Profit

a. Understated Understated

b. Overstated Overstated

c. Understated Overstated

d. Overstated Understated

105. If beginning inventory is understated by $10,000, the effect of this error in the current period is

Cost of Goods Sold Profit

a. Understated Understated

b. Overstated Overstated

c. Understated Overstated

d. Overstated Understated

106. A company uses the perpetual inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000. The amounts reflected in the current end of the period balance sheet are

Assets Owner's Equity

a. Overstated Overstated

b. Correct Correct

c. Understated Understated

d. Overstated Correct

107. Inventory errors can result in errors in determining all of the following, EXCEPT

a. ending inventory.

b. sales.

c. beginning inventory.

d. cost of goods purchased.

108. An error in Cost of Goods sold has _______________ impact on gross profit and profit.

a. no

b. the opposite

c. the same

d. immaterial

109. Which of the following statements is correct?

a. Errors can only occur in a perpetual inventory system.

b. Errors can only occur in a periodic inventory system.

c. Errors can occur either in a perpetual or periodic inventory system.

d. Errors will not occur if you are using a perpetual inventory system.

110. Revaluation of inventories to net realizable value should occur

a. only if the amount is material.

b. at year end only.

c. in the period during which the decline occurs.

d. at management’s discretion.

111. If the net realizable value of a merchandising company’s inventory is higher than its cost

a. no actions should be taken.

b. the company’s ending owner’s equity should be increased to reflect this.

c. the inventory accounts should be debited and a gain should be reported.

d. the inventory account should be debited and cost of goods sold credited.

112. Deerfield Company developed the following information about its inventories in applying the lower of cost and net realizable value in valuing inventories:

Product Cost__ NRV

A $ 70,000 $ 75,000

B 50,000 48,000

C 100,000 102,000

After Deerfield Company values its inventory at the lower of cost or net realizable value, the value of the inventory reported on the balance sheet would be

a. $227,000.

b. $220,000.

c. $225,000.

d. $218,000.

113. For a merchandising company, the net realizable value of its inventory is the

a. original cost of the inventory.

b. current selling price.

c. current selling price less any costs required to make the goods ready for sale.

d. original cost of the inventory less any costs required to make the goods ready for sale.

114. LCNRV is an acronym for

a. lower of count and net realizable value.

b. lower of cost and net realizable value.

c. lower of cost and non realistic value.

d. lower of cost and net retail value.

115. LCNRV is applied to inventory

a. at the end of the period.

b. at the beginning of the period.

c. after each purchase.

d. after each sale.

116. If the net realizable value declines to an amount lower than cost, the Cost of Goods Sold account will

a. increase.

b. decrease.

c. be adjusted to the cost amount.

d. stay the same.

117. The evidence required for a reversal of a previous inventory write down would be

a. a decline in selling prices.

b. an increase in selling prices.

c. an increase in products/ merchandise sold.

d. a decrease in products/ merchandise sold.

118. If there is a recovery in the value of inventory the write-up may

a. always be greater than the original writedown.

b. never be greater than the original writedown.

c. always be for the fair value amount of the inventory.

d. always be for the full amount of the recovery.

119. If the cost of goods sold is $250,000 and the inventory turnover is 2.8, then the average inventory and days sales in inventory are:

a. $89,286 and 130 days.

b. $700,000 and 130 days.

c. $89,286 and 1022 days.

d. $700,000 and 1022 days.

120. Karr Company has a beginning merchandise inventory of $17,000, an ending merchandise inventory of $20,000, sales of $350,000, and a cost of goods sold of $200,000. Karr’s inventory turnover is

a. 10.0 times.

b. 10.8 times.

c. 17.5 times.

d. 18.9 times.

121. Which of the following best indicates that a company is managing its inventory efficiently?

a. a low inventory turnover ratio

b. a high inventory turnover ratio

c. a high days sales in inventory ratio

d. a low gross profit margin

Use the following information for questions 122–123.

In 2015, Hidey Company had average inventory of $86,000. The 2015 income statement showed net sales of $2,200,000 and gross profit of $420,000. In 2014, it was taking the company approximately 30 days to sell its inventory.

122. The company’s inventory turnover for 2015 was approximately

a. 20.7 times.

b. 2.7 times.

c. 25.6 times.

d. 4.9 times.

123. In 2015, the company’s days sales in inventory

a. improved.

b. deteriorated.

c. remained unchanged.

d. More information is needed to make this determination.

124. Which one of the following statements is correct?

a. A merchandiser buys inventory and a manufacturer produces its inventory.

b. A manufacturer buys inventory and a merchandiser produces its inventory.

c. A merchandiser and a manufacturer produces their inventory.

d. A merchandiser and a manufacturer buy their inventory.

125. Having too much inventory can cost the company money in all the following areas EXCEPT

a. storage costs.

b. interest costs.

c. high tech goods becoming obsolete.

d. depreciation.

126. The inventory turnover ratio measurers the number of times inventory is

a. purchased.

b. returned.

c. sold.

d. written off.

*127. When valuing ending inventory under a perpetual inventory system, the

a. valuation using Average is the same as the valuation using Average under the periodic inventory system.

b. Average cost method requires that a new average unit cost be calculated after every sale.

c. valuation using FIFO is the same as the valuation using FIFO under the periodic inventory system.

d. most recent units purchased during the period using FIFO are allocated to the cost of goods sold when units are sold.

*128. Which of the following statements concerning cost formulas in a periodic inventory system is INCORRECT?

a. The results under FIFO in a periodic system are the same as in a perpetual system.

b. The cost of goods sold would be lower using FIFO than average in a period of rising prices.

c. When using the average cost formula, a new average cost per unit is calculated after each purchase.

d. The results under average in a periodic system are not the same as in a perpetual system.

*129. In a periodic inventory system the cost of goods available for sale is allocated between

a. beginning inventory and ending inventory.

b. beginning inventory and cost of goods on hand.

c. ending inventory and cost of goods sold.

d. beginning inventory and cost of goods purchased.

Use the following information for questions *130–*131.

The Singh Computer Shop begins operations on June 1 and uses a periodic inventory system. During June, the company had the following purchases and sales for its Model 10 Fastback Computer System:

Purchases

Date Units Unit Cost

June 1 4 $2,000

9 9 $2,600

On June 30 an inventory count showed there were 8 units on hand.

*130. Using the FIFO inventory cost formula, the amount allocated to cost of goods sold for June is

a. $10,000.

b. $10,600.

c. $16,000.

d. $20,800.

*131. Using the average cost formula, the amount allocated to the ending inventory on June 30 is

a. $19,323.

b. $12,077.

c. $20,800.

d. $18,400.

*132. Which of the following statements concerning cost formulas in a periodic inventory system is correct?

a. The results under FIFO in a periodic system are the same as in a perpetual system.

b. In a periodic system using average, the latest units purchased before each sale are allocated to the cost of goods sold.

c. In a periodic system using the average cost formula, a new average is calculated after each purchase.

d. The results under average in a periodic system are the same as in a perpetual system.

*133. In a periodic inventory system you must

a. track the number or cost of units sold during the year.

b. wait until the end of the year to allocate the costs of goods available for sale to ending inventory and cost of goods sold.

c. adjust inventory after each purchase only.

d. adjust inventory after each sale only.

*134. Inventories are estimated

a. more frequently under a periodic inventory system than a perpetual inventory system.

b. using the wholesale inventory method.

c. more frequently under a perpetual inventory system than a periodic inventory system.

d. using the net method.

*135. A company had sales of $150,000 and cost of goods available for sale of $300,000 during January. If its gross profit margin is estimated to be 40%, the ending inventory value at January 31 is estimated to be

a. $90,000.

b. $210,000.

c. $180,000.

d. $120,000.

*136. A company had sales of $180,000 and cost of goods available for sale of $200,000 during August. If its gross profit margin is estimated to be 30%, the ending inventory value at August 31 is estimated to be

a. $20,000.

b. $60,000.

c. $74,000.

d. $54,000.

*137. A company has goods available for sale during a period at cost and at retail of $90,000 and $150,000, respectively. If sales during the period amounted to $120,000, an estimate of the ending inventory at cost at the end of the period under the retail method is

a. $48,000.

b. $72,000.

c. $18,000.

d. $30,000.

*138. A company has goods available for sale during a period at cost of $60,000 and at retail of $90,000. If sales during the period amounted to $75,000, an estimate of the ending inventory at cost at the end of the period under the retail method is

a. $22,500.

b. $15,000.

c. $10,000.

d. $25,000.

*139. Newman Department Store estimates inventory by using the retail inventory method. The following information was developed:

At Cost At Retail

Beginning inventory $160,000 $400,000

Goods purchased 500,000 700,000

Net sales 650,000

The estimated cost of the ending inventory is

a. $390,000.

b. $270,000.

c. $490,000.

d. $450,000.

*140. Margolians Dept Store estimates inventory by using the retail inventory method. The following information was developed:

At Retail At Cost

Beginning inventory $220,000 $ 80,000

Goods purchased 360,000 152,000

Net sales 330,000

The estimated cost of the ending inventory is

a. $250,000.

b. $140,000.

c. $ 95,000.

d. $100,000.

*141. Walters Department Store uses the retail inventory method to estimate its inventories. It calculated its cost to retail ratio during the period at 70%. Goods available for sale at retail amounted to $300,000 and goods were sold during the period for $160,000. The estimated cost of the ending inventory is

a. $140,000.

b. $210,000.

c. $98,000.

d. $200,000.

*142. Hamil Company prepares monthly financial statements and uses the gross profit method to estimate ending inventories. Historically, the company has had a 40% gross profit margin. During June, net sales amounted to $50,000; the beginning inventory on June 1 was $15,000; and the cost of goods purchased during June amounted to $25,000. The estimated cost of Hamil Company's inventory on June 30 is

a. $10,000.

b. $30,000.

c. $9,000.

d. $20,000.

ANSWERS TO MULTIPLE CHOICE QUESTIONS

MATCHING QUESTIONS

143. Match the items below by entering the appropriate code letter in the space provided.

A. Taking a physical inventory F. First-in, first-out (FIFO)

B. Consigned goods G. Lower of cost and net realizable value

C. FOB shipping point H. Average

D. FOB destination I. Inventory turnover ratio

E. Specific identification J. Days Sales in Inventory

1. Involves counting, weighing or measuring each kind of inventory on hand.

2. Ownership of goods transfers when the public carrier accepts the goods.

3. Ownership of the goods remains with the seller until the goods reach the buyer.

4. Tracks the actual physical flow for each inventory item available for sale.

5. Ending inventory valuation consists of the most recent inventory purchases.

6. The same unit cost is used to value inventory on hand and cost of goods sold.

7. To hold goods belonging to other parties and to sell them for a fee, without ever taking ownership to the goods

8. Measures the number of times the inventory sold during the period.

9. When the value of inventory is lower than its cost

10. Days in the year divided by inventory turnover

ANSWERS TO MATCHING QUESTIONS

1. A

2. C

3. D

4. E

5. F

6. H

7. B

8. I

9. G

10. J

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