Inventories and Their Valuation – Test Bank | 11th Edition

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Testbank

to accompany

Accounting

11^th edition

by

Hoggett et al.

© John Wiley & Sons Australia, Ltd 2020

Chapter 13: Inventories

Multiple-choice questions

1. Which of the following is not included in the cost of inventory as defined by IAS 2/AASB 102?

a. GST.

b. Cost of purchase.

c. Costs incurred in bringing the inventory to its present location and condition.

d. Import duties.

General Feedback:

Learning objective 13.1: describe how an entity determines its inventory on hand by way of a physical stocktake, and how the cost of inventory is determined.

2. A business performing a physical count of inventory on hand is known as a:

a. stocktake.

b. count.

c. stockvalue.

d. stocklist.

General Feedback:

Learning objective 13.1: describe how an entity determines its inventory on hand by way of a physical stocktake, and how the cost of inventory is determined.

3. Below is an extract from a statement of financial performance
The cost of sales is:

a. $36 900.

b. $32 000.

c. $29 500.

d. $34 400.

General Feedback:

Learning objective 13.1: describe how an entity determines its inventory on hand by way of a physical stocktake, and how the cost of inventory is determined.
Feedback: $28 000 + $2 500 + $31 600 - $25 200.

4. Which of the following is not a step in a properly conducted stocktake?

a. Recount some items by a supervisor or auditor.

b. Sale of all damaged goods.

c. Attach an inventory ticket to stock items that have been counted.

d. Account for all pre-numbered inventory tickets.

General Feedback:

Learning objective 13.1: describe how an entity determines its inventory on hand by way of a physical stocktake, and how the cost of inventory is determined.

5. Which item should not be included in the statement of financial performance's cost of inventory?

a. Costs associated with receiving and inspecting the goods

b. The purchase price of the goods.

c. Costs incurred in preparing the goods for sale

d. Cost for normal storage of the goods.

General Feedback:

Learning objective 13.1: describe how an entity determines its inventory on hand by way of a physical stocktake, and how the cost of inventory is determined.

6. Inventory is normally classified in the statement of financial position as a:

a. current asset.

b. non-current asset.

c. negative asset.

d. current liability.

General Feedback:

Learning objective 13.1: describe how an entity determines its inventory on hand by way of a physical stocktake, and how the cost of inventory is determined.

7. Which of the following statements relating to the periodic inventory system is incorrect?

a. The balance in the Inventory account represents the cost of the inventory on hand at the beginning of the period.

b. A stocktake must be performed to determine the ending inventory balance.

c. Inventory purchases are recorded in the Purchases account.

d. The Inventory account is classified as a non-current asset.

General Feedback:

Learning objective 13.1: describe how an entity determines its inventory on hand by way of a physical stocktake, and how the cost of inventory is determined.

8. Inventory is defined as goods held for resale in the ordinary course of business. Which of the following would not be included in inventory for any type of business?

a. Cash at bank

b. Land held for resale

c. Furniture

d. Work in process

General Feedback:

Learning objective 13.1: describe how an entity determines its inventory on hand by way of a physical stocktake, and how the cost of inventory is determined.

9. A physical stocktake is carried out:

a. only under the perpetual inventory system.

b. under neither the periodic nor the perpetual systems.

c. under both the periodic and perpetual inventory systems.

d. only under the periodic inventory system.

General Feedback:

Learning objective 13.1: describe how an entity determines its inventory on hand by way of a physical stocktake, and how the cost of inventory is determined.

10. In performing a stocktake care must be taken with goods in transit. Which of the following statements is correct?

a. Stock on consignment is included in the stock of the consignor.

b. Stock on consignment is included in the stock of the consignee.

c. Goods in transit should be included in both the purchaser's and the seller's inventory.

d. Stock on consignment is regarded as sold by the consignor.

General Feedback:

Learning objective 13.1: describe how an entity determines its inventory on hand by way of a physical stocktake, and how the cost of inventory is determined.

11. The accounting standards governing determination of the cost of inventories are:

a. IAS 34/AASB 134.

b. IAS 8/AASB 8.

c. IAS 3/AASB 3.

d. IAS 2/AASB 102.

General Feedback:

Learning objective 13.1: describe how an entity determines its inventory on hand by way of a physical stocktake, and how the cost of inventory is determined.

12. Which statement concerning inventory is incorrect?

a. Accounting data produced in different accounting periods is not comparable if arbitrary changes in accounting methods are permitted.

b. Consistency rules out ever switching to an alternative accounting method.

c. Consistency is an important consideration when alternative accounting methods exist.

d. Once an inventory costing method is selected management should not deliberately switch to another to manipulate profits.

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.

13. A major theoretical problem in accounting for inventory is:

a. allocating costs between cost of sales and stock on hand.

b. counting the stock.

c. deciding which goods are obsolete.

d. calculating the cost of purchases.

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.

14. Blueberry Ltd uses the FIFO assumption with the periodic inventory method.
Sales during year were 18 units. The value of closing stock at the end of the period is:

a. $415

b. $236

c. $651

d. $336

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.
Feedback: (5 × $14) + (23 × $15)

15. Which inventory valuation method gives the highest profit when inventory costs are rising?

a. LIFO.

b. Weighted average.

c. It is not possible to calculate which method gives the highest profit.

d. FIFO.

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.

16. The specific identification method of costing inventory would be unsuitable for which of the following?

a. Petrol at a service station

b. Works of art

c. Motor vehicles

d. Gold jewellery

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.

17. Which of the following is not one of the methods used to assign costs between cost of sales and closing inventory?

a. Weighted average

b. Lower of cost and net realisable value

c. Specific identification

d. First-in first-out

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.

18. Hunter Coy sells calculators. At the beginning of March, 100 Z1200 scientific calculators were on hand for which the firm had paid $25 each. Purchases and sales for the month were as follows.

If Hunter Coy uses a periodic system with a LIFO cost flow assumption March's cost of sales for the Z1200 scientific calculators is:

a. $5340.

b. $5020.

c. $3360.

d. $4500.

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.
Feedback: (150 units × $30) + (30 units × $28)

19. Fairy Gardens Ltd uses a periodic inventory system with the weighted average method of cost assignment. The following data are available.

The cost of the ending inventory to the nearest dollar is:

a. $49 000.

b. $ 5 000.

c. $12 250.

d. $13 000.

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.
Feedback: Total cost/total units × 1000 units = ($5 000 + $18 000 + $26 000)/4 000 units) = $12.25 × 1000 units

20. Which of the following is a disadvantage to business of the LIFO method of applying costs to inventory?

a. Current income is matched with the most recent costs of acquiring goods.

b. If it is allowed for tax purposes, in times of rising prices it results in less tax being paid in the current period.

c. It is difficult for a computer program to apply the method.

d. It understates the statement of financial position value for inventory.

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.

21. Tully Sales uses a periodic inventory system with the weighted average method of cost assignment. The following data are available.

The cost of sales for January is: (calculate your answer to the nearest whole dollar).

a. $9 800

b. $8 000

c. $15 400

d. $7 000

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.
Feedback: ($400 x $5.50 + 800 x $6.50 +1000 x $8) / 2200 units = $7.00. Cost of sales = 1400 x $7

22. Fabulous Furniture uses a periodic inventory system. Many purchases and sales of goods occur during the financial year. For Fabulous Furniture, the balance in the general ledger inventory account:

a. represents the goods on hand at any given point in time.

b. will usually be zero except at a balance date.

c. reports the goods purchased since the beginning of the accounting period.

d. does not change until a stocktake is carried out.

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.

23. Which of the following are advantages of the weighted average method of applying costs to inventory?
I. It is not subject to profit manipulation.
II. The profit and closing inventory values tend to be 'smoothed' compared to other methods.
III. It is simple to understand.

a. I and III only

b. I, II and III

c. II and III only

d. I and II only

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.

24. Which statement is correct?

a. LIFO assumes the last goods purchased are the first goods sold.

b. LIFO assumes that cost of sales consists of the oldest purchases.

c. LIFO assumes that stock at end consists of the most recent purchases.

d. LIFO assumes the first goods purchased are the first goods sold.

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.

25. In the event of rising inventory prices, the method of inventory valuation that gives the highest profit and the highest ending inventory is the:

a. Perpetual method.

b. Weighted average.

c. LIFO method.

d. FIFO method.

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.
Feedback: Cost of sales is lower as it is assumed to consist of the older, cheaper goods, therefore profit is higher; ending inventory is higher as it is assumed to consist of the more recent goods purchased at higher prices.

26. Under IAS 2/AASB 102 the costing method that is not permitted is:

a. weighted/moving average.

b. FIFO.

c. LIFO.

d. specific identification.

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.

27. Marlin Co. uses a periodic inventory system with the specific identification method of cost assignment. Inventory purchases for the month of August were:

On 24 August 1200 units from beginning inventory and 1000 units from the 16 August purchase were sold. What was the value of ending inventory at 31 August?

a. $21 600

b. $36 700

c. $39 600

d. $58 300

General Feedback:

Learning objective 13.2: determine cost of sales under alternative cost flow assumptions for the periodic inventory system.
Feedback: (800 × $8) + (1000 × $10) + (500 × $12) + (1300 × $11)

28. With the perpetual method of accounting for inventory, the costing assumption, such as first-in first-out, is applied to:

a. each sale via stock cards or computer records.

b. inventory at the end of the month.

c. the current asset inventory in the statement of financial position.

d. cost of sales at the end of the accounting year.

General Feedback:

Learning objective 13.3: determine the valuation of ending inventory and cost of sales under alternative cost flow assumptions for the perpetual inventory system.

29. Which statement relating to the moving average method of costing inventories, used with the perpetual inventory system, is correct?

a. A new average cost is calculated at the end of each month.

b. A new average cost is calculated after each sale.

c. A new average cost is calculated after each sale and each purchase.

d. A new average cost is calculated after each purchase

General Feedback:

Learning objective 13.3: determine the valuation of ending inventory and cost of sales under alternative cost flow assumptions for the perpetual inventory system.

30. Which statement relating to the moving average method of costing inventories, used with the perpetual inventory system, is incorrect?

a. The formula for average cost is cost of goods available for sale divided by units for sale.

b. A new average cost is calculated after each sale

c. A new average cost is calculated after each purchase return.

d. In periods of rising prices the profit result is between that of the FIFO and LIFO methods.

General Feedback:

Learning objective 13.3: determine the valuation of ending inventory and cost of sales under alternative cost flow assumptions for the perpetual inventory system.

31. The main aspect of the perpetual method of accounting for inventory is:

a. all movements in each item of stock are tracked via detailed inventory records.

b. a stocktake is performed.

c. it is useful for high value, low volume items.

d. cost of sales is calculated at the end of the accounting period.

General Feedback:

Learning objective 13.3: determine the valuation of ending inventory and cost of sales under alternative cost flow assumptions for the perpetual inventory system.

32. NET Computers sold 20 modems for $60 on 30 April. At that date, the stock card for the modems sold had a total of 50 modems on hand at an average cost of $45.50 each. What is the cost of the modems recognised in the statement of financial performance? Assume the weighted average method of costing is used.

a. $1 200

b. $2 275

c. $3 000

d. $910

General Feedback:

Learning objective 13.3: determine the valuation of ending inventory and cost of sales under alternative cost flow assumptions for the perpetual inventory system.
Feedback: $910 = 20 x $45.50

33. Which statement relating to the determination of the cost of inventory in a computerised system is not true?

a. Computerised systems generally use the periodic inventory system.

b. Computerised inventory systems are now used by most firms.

c. Determining the cost of inventory is greatly simplified compared to a manual system.

d. The system can automatically produce reorder information.

General Feedback:

Learning objective 13.3: determine the valuation of ending inventory and cost of sales under alternative cost flow assumptions for the perpetual inventory system.

34. Products can be uniquely identified by using:

a. bar codes.

b. photos.

c. ledger account numbers.

d. purchase order numbers.

General Feedback:

Learning objective 13.3: determine the valuation of ending inventory and cost of sales under alternative cost flow assumptions for the perpetual inventory system.

35. Which of the following statements concerning the perpetual inventory method is incorrect?

a. With the increased use of computers it has become the most common system.

b. A stocktake is required to estimate cost of sales.

c. Cost of sales is calculated for each transaction.

d. A continuous record is kept of all movements in inventory.

General Feedback:

Learning objective 13.3: determine the valuation of ending inventory and cost of sales under alternative cost flow assumptions for the perpetual inventory system.

36. With the perpetual method of accounting for inventory the first-in first-out assumption is applied to:

a. each sale via stock cards or computer records.

b. cost of sales at the end of the month.

c. inventory at the end of the month.

d. cost of sales at the end of the accounting year.

General Feedback:

Learning objective 13.3: determine the valuation of ending inventory and cost of sales under alternative cost flow assumptions for the perpetual inventory system.

37. If inventory costs are decreasing, profit will be highest if the inventory method used is:

a. weighted average.

b. It is not possible to answer the question.

c. LIFO.

d. FIFO.

General Feedback:

Learning objective 13.4: compare the results of cost flow assumptions for the periodic and perpetual inventory systems.

38. Assuming rising inventory prices, which statement is correct?

a. FIFO reports a lower value for closing inventory than other methods.

b. FIFO reports a lower profit than other methods.

c. Using FIFO, it is not possible to calculate whether cost of sales/inventory is lower or higher than it would be if other assumptions about inventory valuation were made.

d. FIFO reports a lower value for cost of sales than other methods.

General Feedback:

Learning objective 13.4: compare the results of cost flow assumptions for the periodic and perpetual inventory systems.
Feedback: Because cost of sales is assumed to consists of the oldest, cheaper goods.

39. Which of the following are reasons for the selling value of some inventory items falling below their cost price?
I. Obsolescence
II. Damage
III. Past use-by date
IV. A rise in the market price

a. I, II and III only.

b. I and II only.

c. I, II, III and IV.

d. II and III only

General Feedback:

Learning objective 13.5: apply the lower of cost and net realisable value rule, required by accounting standards, for the valuation of inventory.
Feedback: Not the last reason.

40. Which of the following statements relating to the lower of cost and net realisable value rule is incorrect?

a. It results in probable losses being recorded in the period when they are first noticed rather than when the sale occurs.

b. The rule is applied separately to each item of inventory or to each group of inventory.

c. The rule is based on the accounting principle of prudence (conservatism).

d. The gross profit reported in the period when the rule is applied is higher than it otherwise would be.

General Feedback:

Learning objective 13.5: apply the lower of cost and net realisable value rule, required by accounting standards, for the valuation of inventory.
Feedback: Gross profit is lower than it otherwise would be.

41. Which of the following statements is incorrect?

a. In certain circumstances, some inventory items will be valued at below cost.

b. Inventory is normally valued at cost.

c. Net realisable value is related to estimated market value.

d. In certain circumstances, some inventory items will be valued at above cost.

General Feedback:

Learning objective 13.5: apply the lower of cost and net realisable value rule, required by accounting standards, for the valuation of inventory.

42. In relation to inventory, net realisable value is the estimated:

a. selling price less stock loss.

b. discounted value.

c. selling price less anticipated further costs to complete the sale.

d. replacement value.

General Feedback:

Learning objective 13.5: apply the lower of cost and net realisable value rule, required by accounting standards, for the valuation of inventory.

43. Novice Co purchased goods for $2500. While on display, the goods were damaged and it is estimated that they can now only be sold for $1800. Additional marketing and distribution costs are $200. The net realisable value of the goods is:

a. $1600.

b. $2300.

c. $500.

d. $700.

General Feedback:

Learning objective 13.5: apply the lower of cost and net realisable value rule, required by accounting standards, for the valuation of inventory.
Feedback: $1600 = $1800 - $200

44. Which of the following statements relating to the lower of cost and net realisable is incorrect?

a. The rule is based on the accounting principle of conservatism (prudence).

b. The gross profit reported in the period when the rule is applied is higher than it otherwise would be.

c. It results in probable losses being recorded in the period when they are first noticed rather than when the sale occurs.

d. The rule is applied separately to each item of inventory or to groups of inventory items.

General Feedback:

Learning objective 13.5: apply the lower of cost and net realisable value rule, required by accounting standards, for the valuation of inventory.

45. The lower of cost or net realisable value procedure is used with which of the following inventory methods?
I. FIFO
II. LIFO
III. Weighted average
IV. The perpetual method

a. I, III and IV only

b. IV only

c. I and III only

d. I, II, III and IV

General Feedback:

Learning objective 13.5: apply the lower of cost and net realisable value rule, required by accounting standards, for the valuation of inventory.

46. Under the FIFO method sales returns are costed back into inventory at:

a. a price determined by the accountant.

b. an average cost price.

c. the original cost price that was attached to the original sale.

d. the most recent cost price attached to a sale.

General Feedback:

Learning objective 13.6: record sales returns and purchases returns under the perpetual inventory system with different cost flow assumptions.

47. Ricardo Clothing uses a periodic inventory system and committed an error that overstated inventory at the end of Year One. Assuming no further errors occur during the following year, at the end of Year Two:

a. profit is understated; equity is correct.

b. profit is overstated; equity is overstated.

c. profit is understated; equity is overstated.

d. profit is overstated; equity is correct.

General Feedback:

Learning objective 13.7: describe the effects on financial statements of errors made in determining inventory.

48. The end of the financial year for Ziggie's Trading Company is 30 June 2023. At that date, ending inventory was understated by $3 650. The profit for the year ending 30 June 2023 will be:

a. correctly stated.

b. overstated.

c. dependant on whether or not the inventory increased during 2023.

d. understated.

General Feedback:

Learning objective 13.7: describe the effects on financial statements of errors made in determining inventory.
Feedback: Profit will be understated because cost of sales will be overstated.

49. The following are possible sources of error in calculating closing inventory except for:

a. Mistakes in dealing with goods on consignment.

b. An incorrect cut-off between accounting periods.

c. Mistakes in the price at which the goods are sold to customers.

d. Mistakes in counting during the stocktake.

General Feedback:

Learning objective 13.7: describe the effects on financial statements of errors made in determining inventory.

50. Stanley Inc. has an historical gross profit percentage of 40%. Net purchases for six months were $2800 and sales were $4000. Inventory at the end of the previous period was $300. If Stanley Inc. prepares an interim statement of financial position the amount that can be estimated for closing inventory is:

a. $2400.

b. $300.

c. $700.

d. $1600.

General Feedback:

Learning objective 13.8: estimate the value for inventories using the retail inventory and gross profit methods.
Feedback: Gross profit = ($4000 x 40%) = $1600. COS = sales - gross profit = $4000 - $1600 = $2400. Closing inventory = cost of goods available for sale - cost of sales = ($300 + $2800 - $2400) = $700).

51. Kingfisher Furniture has just completed its annual physical inventory count. The ending inventory was obtained by adding up all the retail price tags for the goods on hand. Estimate the amount for ending inventory at cost.

a. $56 950

b. $65 000

c. $85 500

d. $24 700

General Feedback:

Learning objective 13.8: estimate the value for inventories using the retail inventory and gross profit methods.
Feedback: (Estimate of ending inventory at retail × ratio of cost to retail) = $525 000 - $460 000 × 38%. $200 000/$525 000)

52. The showroom of Sundale Furniture was flooded due to a recent cyclone and its inventory was totally destroyed. Their accounting records were damaged but the following information was salvaged.
Sales revenue (to date this period) $280 000
Beginning inventory (at retail) $50 000
Purchases (to date this period at retail) $430 000
Historical gross profit percentage 40%
Assuming the historical gross profit ratio is maintained the estimated cost of inventory lost in the flood is:

a. $80 000.

b. $200 000.

c. $60 000.

d. $172 000.

General Feedback:

Learning objective 13.8: estimate the value for inventories using the retail inventory and gross profit methods.
Feedback: $80 000 = ($50 000 + $430 000) - $280 000 = $200 000 x 40%.

53. River Wholesalers was wiped out by a recent flood when all its inventory was observed floating down the river. On the day after the flood, management filed an insurance claim on the inventory that was totally destroyed. From records maintained elsewhere it was established:
Sales revenue (to date this period) $500000
Beginning inventory $ 40000
Purchases (so far this period) $480000
Historical gross profit percentage 70%
Assuming the historical gross profit was maintained during the current period what was the cost of inventory lost in the flood?

a. $370 000

b. $350 000

c. $480 000

d. $150 000

General Feedback:

Learning objective 13.8: estimate the value for inventories using the retail inventory and gross profit methods.
Feedback: (Sales - gross profit = cost of sales = $500 000 - $350 000 = $150 000) $500 000 × 70%. (When COS is known can then find ending stock. Beginning stock + purchases - COS = ending stock = $40 000 + $480 000 - $150 000 = $370 000)

54. Which of the following statements concerning the retail inventory method of estimating closing stock is incorrect?

a. Differences in the mix of inventory compared to the mix used to determine the cost ratio does not affect the accuracy of the method.

b. It can be applied with or without a physical stocktake being carried out.

c. A stocktake is carried out, valued at retail and then converted to cost by applying the historical gross profit percentage.

d. The ratio of cost to retail is goods available for sale at cost divided by the goods available for sale at retail.

General Feedback:

Learning objective 13.8: estimate the value for inventories using the retail inventory and gross profit methods.

55. If Michelle knows that the ending inventory at retail for her corner store is $22 000 and her cost to retail percentage is 45%, her ending inventory at cost can be estimated as:

a. $40 000.

b. $9 900.

c. $12 100.

d. $31 900.

General Feedback:

Learning objective 13.8: estimate the value for inventories using the retail inventory and gross profit methods.
Feedback: $9 900 = $22 000 x 45%

56. The following information concerning inventory is required to be disclosed in the external financial reports except for:

a. Inventory turnover ratio

b. Finished goods

c. Method of valuation, e.g. FIFO, weighted average

d. Work in process

General Feedback:

Learning objective 13.9: present information on inventories in financial statements.

57. All of the following statements about the presentation of inventory in financial reports are correct except for:

a. Inventory shown on the statement of financial position should always be in a saleable condition.

b. The assumption used to assign costs to inventory should be disclosed.

c. The general basis of valuation should be shown, e.g. cost, NRV.

d. Inventory should be classified into its current and non-current components.

General Feedback:

Learning objective 13.9: present information on inventories in financial statements.
Feedback: Incorrect as inventory can consist of raw materials and WIP.

58. The ratio that indicates an entity's overall mark-up on goods sold is the:

a. return on inventory ratio.

b. profit margin ratio.

c. gross profit ratio.

d. inventory turnover ratio.

General Feedback:

Learning objective 13.10: describe how an entity determines its inventory on hand by way of a physical stocktake, and how the cost of inventory is determined.

59. The formula, cost of sales/average inventory, measures the:

a. mark-up on inventory expressed as a percentage of the cost price.

b. gross profit ratio.

c. mark-up on inventory expressed as a percentage of the selling price.

d. number of times, on average, that inventory is turned over per year.

General Feedback:

Learning objective 13.10: describe how an entity determines its inventory on hand by way of a physical stocktake, and how the cost of inventory is determined.