Inventory – Ch6 Test Bank | 2nd Canadian Edition

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Financial Accounting, 2nd Cdn. Ed. (Waybright)

Chapter 6 Inventory

6.1 Describe the three different inventory costing methods

1) Merchandise inventory represents the goods that a merchandiser has available to sell to its customers.

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Concept

Blooms: Knowledge

2) Merchandising companies can be either wholesalers or retailers.

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Concept

Blooms: Knowledge

3) Manufacturers generally purchase large amounts of products from wholesalers and resell them to retailers.

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Concept

Blooms: Knowledge

4) GAAP allows two different kinds of inventory costing methods.

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Concept

Blooms: Knowledge

5) Under the specific-identification method, the flow of goods through the accounting records will:

A) be the opposite of the physical flow of goods through the business.

B) closely match the physical flow of goods through the business.

C) exactly match the physical flow of goods through the business.

D) have no relationship to the physical flow of goods through the business.

E) sometimes match the physical flow of goods through the business.

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Recall

Blooms: Knowledge

6) Under the FIFO method, the flow of goods through the accounting records will:

A) be nearly the opposite of the physical flow of goods through the business.

B) closely match the physical flow of goods through the business.

C) exactly match the physical flow of goods through the business.

D) have no relationship to the physical flow of goods through the business.

E) sometimes match the physical flow of goods through the business.

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Recall

Blooms: Knowledge

7) Under the average cost method, the flow of goods through the accounting records will:

A) be the opposite of the physical flow of goods through the business.

B) closely match the physical flow of goods through the business.

C) exactly match the physical flow of goods through the business.

D) have no relationship to the physical flow of goods through the business.

E) sometimes match the physical flow of goods through the business.

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Recall

Blooms: Knowledge

8) An inventory layer is synonymous with a separate:

A) sale of merchandise.

B) purchase of merchandise.

C) return of merchandise.

D) customer return of merchandise.

E) discount of goods from the supplier.

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Recall

Blooms: Knowledge

9) An accounting department only needs to know:

A) how many units were sold, not which units were sold.

B) which units were sold, not how many units were sold.

C) the specific price of a specific unit.

D) the average price of a specific unit.

E) the physical flow of goods.

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Recall

Blooms: Knowledge

10) For a retail firm, the cost of goods sold may include all of the following EXCEPT for:

A) the actual cost of the item.

B) shipping costs.

C) insurance.

D) management salaries.

E) the cost to make the item.

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Application

Blooms: Application

11) A manufacturer uses ________ inventory to produce the goods it sells.

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Recall

Blooms: Knowledge

12) The inventory system that uses the merchandise inventory account as an active account is called:

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Concept

Blooms: Knowledge

13) What does a manufacturer's goods available for sell represent?

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Application

Blooms: Application

14) Which method of valuing inventory is based on the average of units?

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Concept

Blooms: Knowledge

15) What method of valuing inventory is based on the costs for each individual item?

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Concept

Blooms: Knowledge

16) What method of valuing inventory is based on the assumption that the oldest goods will be

sold first?

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Concept

Blooms: Knowledge

17) Goods such as milk, bread, and cheese would probably be costed using what method?

Diff: 2

LO: 6-1 Describe the three different inventory costing methods

Skill: Application

Blooms: Application

18) A new car lot would probably cost its inventory using what method?

Diff: 2

LO: 6-1 Describe the three different inventory costing methods

Skill: Application

Blooms: Application

19) The inventory system whereby the merchandise inventory account balance is merely a record of the most recent physical inventory count is called the:

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Concept

Blooms: Knowledge

20) Why would a company choose to value its inventory using the specific identification method?

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Application

Blooms: Knowledge

21) Why would a company choose to value its inventory using the FIFO method?

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Application

Blooms: Knowledge

22) Why would a company choose to value its inventory using the average cost method?

Diff: 1

LO: 6-1 Describe the three different inventory costing methods

Skill: Application

Blooms: Knowledge

6.2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

1) Beginning inventory plus net purchases equals cost of goods sold.

Diff: 1

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Recall

Blooms: Knowledge

2) A piece of artwork would probably be inventoried using the specific-identification method.

Diff: 1

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Application

Blooms: Application

3) The objective of inventory tracking is to allocate the cost of goods available for sale between the cost of units sold and the cost of unsold inventory.

Diff: 1

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Recall

Blooms: Knowledge

4) Cost of goods sold is shown on the:

A) balance sheet as an asset.

B) income statement before gross profit.

C) statement of retained earnings.

D) income statement after gross profit.

E) balance sheet as a liability.

Diff: 1

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Recall

Blooms: Knowledge

5) Inventory is shown on the:

A) balance sheet as an asset.

B) income statement before gross profit.

C) statement of retained earnings.

D) income statement after gross profit.

E) balance sheet as a long-term asset.

Diff: 1

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Recall

Blooms: Knowledge

6) The dollar value of cost of goods sold is MOST influenced by the:

A) cost of the items sold.

B) cost of the unsold items.

C) inventory method used.

D) number of items sold.

E) the physical flow of inventory.

Diff: 2

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Critical Thinking

Blooms: Comprehension

7) The LEAST widely used of the inventory valuation methods is:

A) FIFO.

B) perpetual system.

C) average cost.

D) specific-identification.

E) periodic system.

Diff: 1

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Recall

Blooms: Knowledge

8) Brandon Company has the following list of inventory:

Under specific-identification, what is Brandon's ending inventory if EOR and CIS are not sold during the current period?

Diff: 3

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Application

Blooms: Application

9) Isaiah Sporting Goods uses the perpetual average cost method of determining inventory costs.

Below is the inventory record for Product C124.

What is the average cost per unit after the receipt of the June 21 inventory?

Calculation: (3513.72 + 2901.10 + 2629.64)/(534 + 433 + 389)

Diff: 3

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Application

Blooms: Application

10) Brandon Company has the following list of inventory:

Under specific-identification, what is Brandon's cost of goods sold if EOR and CIS were not sold during the current period?

Diff: 3

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Application

Blooms: Application

11) Rick Company's beginning inventory and purchases during the fiscal year ended December 31, 2012 were as follows: (NOTE: The company uses a perpetual system of inventory.)

What is the ending inventory of Rick Company for 2012 using FIFO?

Diff: 2

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Application

Blooms: Application

12) Casey Company's beginning inventory and purchases during the fiscal year ended December 31, 2012 were as follows: (NOTE: The company uses a perpetual system of inventory.)

What is the ending inventory of Casey Company for 2012 using FIFO?

Calculation: There are 14 items left out of the second purchase (14 × $14 = $196).

Diff: 3

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Application

Blooms: Application

13) Prepare the journal entries to record the cost of an item for $28 that sold for $40 cash under the perpetual

inventory method.

Debit Cash $40; Credit Sales $40

Diff: 2

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Application

Blooms: Application

14) Prepare the journal entry to record the purchase of $7,400 of inventory on account under the perpetual

inventory method.

Diff: 2

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Application

Blooms: Application

15) When merchandise is sold and the perpetual system of inventory is used, the journal entry to record a

sale of merchandise on account would include:

Debit Cost of Goods Sold; Credit Inventory.

Diff: 2

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Application

Blooms: Application

16) Rick Company's beginning inventory and purchases during the fiscal year ended December 31, 2012 were as follows: (NOTE: The company uses a perpetual system of inventory.)

What is the cost of goods sold for Rick Company for 2012 using FIFO showing detailed calculations?

Calculations:

A. Sold 13 out of the beginning inventory of 18 (13 × $24 = $312)

B. Sold the remaining 5 of the beginning inventory of 18 (5 × $24 = $120)

C. Sold 28 out of the first purchase of 45 (28 × $29 = $812)

D. Sold the remaining 17 of the first purchase of 45 (17 × $29 = $493)

E. Sold 12 out of the second purchase of 35 (12 × $27 = $324)

Diff: 3

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Application

Blooms: Application

17) Journalize the following transactions using the perpetual inventory method.

June 11 Purchased $6,700 of merchandise on account, terms 4/10, n/45.

June 14 Returned $990 of merchandise that was damaged for credit.

June 18 Paid balance of account from purchase of June 11.

Diff: 2

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Application

Blooms: Application

18) Journalize the following inventory transactions using the perpetual inventory method.

April 17 Purchased $4,800 of inventory, on account, terms 2/10, n/30.

April 22 Returned $750 of damaged merchandise to supplier.

April 25 Paid balance due on inventory purchase of April 17.

Diff: 2

LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods and journalize inventory transactions

Skill: Application

Blooms: Application

19) Eshaan Corporation uses the perpetual inventory system and reports the following inventory transactions for the month of June.

Determine the cost of goods sold and the cost of the ending inventory using (1) FIFO and (2) average cost.

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Application

Blooms: Application

6.3 Compare the effects of the different costing methods on the financial statements

1) The choice of inventory costing method does not have an effect on net income.

Diff: 1

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Concept

Blooms: Knowledge

2) In periods of rising prices, the average cost method generates gross profit, net income, and income tax amounts that fall below the FIFO method.

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Application

Blooms: Knowledge

3) A company should switch its method of valuing inventory frequently throughout the year depending on which method produces the highest net income.

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Application

Blooms: Knowledge

4) The conservatism principle states that businesses should use the same accounting methods and procedures from period to period.

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Application

Blooms: Application

5) In order to pay the least income tax possible in periods of decreasing inventory costs, the company should use which of the following inventory costing methods?

A) FIFO

B) Perpetual

C) Average cost

D) Specific identification

E) Periodic

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Application

Blooms: Application

6) In order to pay the least income tax possible in periods of constant costs, the company should use which of the following inventory costing methods?

A) FIFO

B) Perpetual

C) Average cost

D) Periodic

E) Any method, as constant costs have no effect on net income or taxes for the period

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Recall

Blooms: Knowledge

7) ________ helps investors compare a company's financial statements from one period to the next.

A) Reliability

B) Consistency

C) Objectivity

D) Entity

E) Comparability

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Recall

Blooms: Knowledge

8) Consistency is mandated by:

A) CRA.

B) the OSC.

C) IFRS and ASPE.

D) the federal government.

E) the provincial government.

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Recall

Blooms: Knowledge

9) In order to attract investors and borrow on attractive terms, what method would a company use in times when inventory costs are rising?

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Application

Blooms: Application

10) What is the most popular inventory costing method?

Diff: 1

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Recall

Blooms: Knowledge

11) ________ produces the lowest cost of goods sold and the highest gross profit when prices are increasing.

Diff: 1

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Concept

Blooms: Knowledge

12) If a company wants a "middle ground" solution to net income and the amount of income taxes that the

company will pay, what method would they use to value their inventory?

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Concept

Blooms: Comprehension

13) Which method produces the lowest cost of goods sold and the highest gross profit when prices are

increasing?

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Application

Blooms: Application

14) In order to pay the least income tax possible in periods of rising inventory costs, which inventory costing method should the company use?

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Application

Blooms: Application

15) When inventory prices are rising, what is the effect on Inventory, Cost of Goods Sold, and Net Income under the FIFO method?

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Critical Thinking

Blooms: Evaluation

16) What are the benefits of using FIFO?

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Recall

Blooms: Knowledge

17) What are the benefits of using average costing?

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Recall

Blooms: Knowledge

18) When inventory prices are decreasing, what is the effect on Inventory, Cost of Goods Sold, and Net Income under the FIFO method?

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Critical Thinking

Blooms: Evaluation

19) When inventory costs are rising, what is the income statement effect if a company uses the average cost method?

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Critical Thinking

Blooms: Evaluation

20) What are some of the the guidelines that a company should consider when choosing among the three methods of determining cost for inventories: specific identification, FIFO, and average cost?

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Application

Blooms: Knowledge

21) What are some good reasons for switching from the average cost method to the FIFO method?

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Application

Blooms: Knowledge

22) Eshaan Corporation uses the perpetual inventory system and reports the following inventory transactions for the month of June.

a) Determine the cost of goods sold and the cost of the ending inventory using (1) FIFO and (2) average cost.

b) Which method produced the highest value for cost of goods sold? Why?

c) Which method produced the highest value for ending inventory? Why?

b) Weighted average cost produced the highest value of cost of goods sold because Eshaan Corporation is experiencing a period of rising costs.

c) FIFO produced the highest value of ending inventory because Eshaan Corporation is experiencing a period of rising costs.

Diff: 2

LO: 6-3 Compare the effects of the different costing methods on the financial statements

Skill: Application

Blooms: Application

6.4 Value inventory using the lower of cost or net realizable value rule

1) Under the conservatism principle, liabilities and expenses would be overstated, rather than understated.

Diff: 1

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Recall

Blooms: Knowledge

2) The LCM rule compares original cost to current replacement cost to determine the amount at which inventory should be valued.

Diff: 1

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Recall

Blooms: Knowledge

3) A material amount of value is one large enough to cause someone to change a decision that has been made.

Diff: 1

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Recall

Blooms: Knowledge

4) Changing from Average Cost to FIFO over two accounting periods could be viewed as a violation of what accounting concept or principle?

A) Conservatism

B) Consistency

C) Materiality

D) Entity

E) Cost principle

Diff: 2

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Recall

Blooms: Knowledge

5) If there was a significant decrease in inventory and the company did not write off this decrease, which principle has been violated?

A) Conservatism

B) Consistency

C) Materiality

D) Entity

E) Cost principle

Diff: 2

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Concept

Blooms: Comprehension

6) Making notes in the financial statements to explain the justification of valuation changes and other financial decisions would be an example of:

A) conservatism.

B) consistency.

C) materiality.

D) full disclosure.

E) cost principle.

Diff: 2

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Concept

Blooms: Comprehension

7) What accounting principle would be followed when underestimating inventory?

Diff: 2

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Concept

Blooms: Comprehension

8) When using the LCNRV rule, is the calculation of ending inventory applied to inventory on an item-by-item basis or as a whole?

Diff: 2

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Application

Blooms: Application

9) Assigning LCNRV to the items that make up the inventory of merchandise at the end of the accounting period is an application of which accounting concept?

Diff: 2

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Application

Blooms: Application

10) One lot of merchandise was valued at $566.34. A second count of the same merchandise showed $566.82. The difference could be ignored due to which accounting principle?

Diff: 2

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Concept

Blooms: Knowledge

11) If the replacement cost of inventory is less than its historical cost, the company will write down the inventory. What is the journal entry required?

Credit Inventory

Diff: 2

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Application

Blooms: Application

12) When is an item considered to be material?

Diff: 2

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Concept

Blooms: Knowledge

13) Meranda Company reports the following inventory information.

What is the total value of the merchandise under LCNRV (lower of cost or net realizable value)? Show all calculations.

Calculation:

Each inventory item at the lower of cost or NRV:

(325 × 55.32) = 17,979

(506 × 92.31) = 46,708.86

(817 × 77.89) = 63,636.13

(382 × 19.02) = 7,265.64

(626 × 30.74) = 19,243.24

Total = $154,832.87

Diff: 2

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Application

Blooms: Application

14) Nicola Company reports the following inventory information.

What is the total value of the merchandise under LNRV M (lower of cost or net realizable value)? Show all your calculations.

Calculation:

(440 × 51.29) = 22,567.60

(290 × 76.59) = 22,211.10

(310 × 42.34) = 13,125.40

(200 × 21.75) = 4,350

(180 × 31.17) = 5,610.60

Total = 67,864.70

Diff: 2

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Application

Blooms: Application

15) The lower of cost and net realizable value method of valuing inventory is in compliance with which GAAP principle? Explain why.

Diff: 2

LO: 6-4 Value inventory using the lower of cost or net realizable value rule

Skill: Application

Blooms: Knowledge

6.5 Illustrate the reporting of inventory in the financial statements

1) An example of full disclosure would be a footnote to the financial statements indicating what method was used to value inventory.

Diff: 1

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Application

Blooms: Application

2) Knowledgeable decisions that are made by outsiders who read financial reports are a result of the concept of conservatism.

Diff: 1

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Concept

Blooms: Knowledge

3) Shrinkage refers to the loss of inventory due to theft, damage, or other similar occurrences.

Diff: 1

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Recall

Blooms: Knowledge

4) Which of the following is probably NOT used when taking a physical inventory?

A) Pre-numbered count sheets

B) Tags to show what inventory has been counted

C) Maps of the location of the inventory

D) Random counts of items

E) Prewritten inventory instructions

Diff: 1

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Application

Blooms: Application

5) Which is usually NOT a common practice in taking a physical inventory?

A) Taking inventory during slow store hours

B) Hiring an outside firm

C) Taking inventory during the November and December holidays

D) Taking inventory in team of two persons

E) Having prewritten instructions

Diff: 2

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Recall

Blooms: Evaluation

6) Which is NOT an assurance of footnote disclosures?

A) Conservative information

B) Reliable information

C) Comparable information

D) Relevant information

E) Materiality

Diff: 2

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Recall

Blooms: Knowledge

7) Which of the following would probably NOT need to be disclosed in a footnote?

A) A change of inventory methods

B) A material change in estimated shrinkage

C) A change in depreciation method

D) A 10% increase in sales

E) The accounting policy used

Diff: 2

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Application

Blooms: Application

8) Which of the following would probably NOT cause inventory shrinkage?

A) Employee theft

B) Spoilage of items

C) Spills of items

D) Correct counting of all inventory

E) Customer theft

Diff: 2

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Application

Blooms: Application

9) Footnotes are used with what concept or principle of accounting?

Diff: 2

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Application

Blooms: Application

10) What term describes the decrease in inventory due to employee theft, customer theft, and the damage, spillage, or spoilage of inventory items?

Diff: 2

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Concept

Blooms: Knowledge

11) Which account would always be used for an inventory adjustment?

Diff: 2

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Recall

Blooms: Knowledge

12) If shrinkage is found for $500, what adjusting entry would be required?

Diff: 2

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Application

Blooms: Application

13) After a physical count, the ending inventory is adjusted. Where on the balance sheet is the ending inventory shown?

Diff: 2

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Recall

Blooms: Knowledge

14) If the actual inventory count determines an inventory value of $350 while the perpetual inventory records

show a value of $339, what is the adjusting entry for the $11?

Diff: 2

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Application

Blooms: Application

15) What are the two things about inventory that must be disclosed in the notes of the financial statements?

Diff: 2

LO: 6-5 Illustrate the reporting of inventory in the financial statements

Skill: Recall

Blooms: Knowledge

6.6 Determine the effect of inventory errors on the financial statements

1) The ending inventory of one year becomes the beginning inventory of the next year.

Diff: 1

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Recall

Blooms: Knowledge

2) Counting inventory on December 31 that was shipped FOB shipping point would not cause any error in the final inventory valuation.

Diff: 1

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Recall

Blooms: Knowledge

3) An error on inventory in one year does not have any effect on the inventory at the start of the next year.

Diff: 1

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Recall

Blooms: Knowledge

4) Inventory errors cancel out at the end of the ________ accounting period(s).

A) 1st

B) 2nd

C) 3rd

D) 4th

E) 5th

Diff: 2

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Recall

Blooms: Knowledge

5) Which of the following is an INCORRECT statement if ending inventory is overstated?

A) Cost of goods sold is overstated.

B) Gross profit is overstated.

C) Net income is overstated.

D) Income tax is overstated.

E) Retained earnings is overstated.

Diff: 3

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Application

Blooms: Application

6) Which of the following is an INCORRECT statement if ending inventory is understated?

A) Cost of goods sold is overstated.

B) Gross profit is overstated.

C) Net income understated.

D) Income tax is understated.

E) Retained earnings is understated.

Diff: 3

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Application

Blooms: Application

7) Which of the following would NOT cause an error in the physical inventory count on December 31?

A) Counting inventory purchased that was shipped FOB destination on December 31

B) Double counting an aisle of product

C) Counting inventory purchased that was shipped FOB shipping point on December 31

D) Forgetting to tag a section of inventory

E) Forgetting to count an inventory item

Diff: 2

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Critical Thinking

Blooms: Evaluation

8) An error in the reported inventory will cause errors in all of the following EXCEPT the:

A) balance sheet.

B) statement of retained earnings.

C) following year's financial statements.

D) cash account.

E) income statement.

Diff: 2

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Recall

Blooms: Knowledge

9) If the ending inventory in Period 1 is understated, gross profit for Year 1 is ________.

Diff: 2

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Application

Blooms: Application

10) If a misstatement of inventory occurs, the net income for ________ periods will be misstated.

Diff: 2

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Recall

Blooms: Knowledge

11) If ending inventory in Period 1 is overstated, gross profit in Period 2 is ________.

Diff: 2

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Application

Blooms: Application

12) If ending inventory in Period 1 is understated, cost of goods sold in Period 2 is ________.

Diff: 2

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Application

Blooms: Application

13) Assume that in Year 1, the ending merchandise inventory is overstated by $30,000. If this is the only error in Years 1 and 2, fill in the items below, indicating which items will be understated, overstated, or correctly stated for Years 1 and 2.

Beginning Inventory: Correct, Overstated

Cost of goods sold: Understated, Overstated

Diff: 3

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Application

Blooms: Application

14) Assume that in Year 1, the ending merchandise inventory is overstated by $30,000. If this is the only error in Years 1 and 2, fill in the items below, indicating which items will be understated, overstated, or correctly stated for Years 1 and 2.

Net income: Overstated, Understated

Ending Retained Earnings: Overstated, Correct

Diff: 3

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Application

Blooms: Application

15) If Period 1 ending inventory is overstated, then what items are affected on the income statement? Indicate whether the item would be understated or overstated.

Diff: 2

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Application

Blooms: Application

16) If Period 1 ending inventory is understated, then what items are affected on the income statement? Indicate whether the item would be understated or overstated

Diff: 2

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Application

Blooms: Application

17) If gross profit is overstated in Period 1, then what is the effect on the ending inventory and net income in Period 1?

Diff: 2

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Application

Blooms: Application

18) If cost of goods sold was understated in Period 1, then what is the effect on cost of goods sold and gross profit in Period 2?

Diff: 2

LO: 6-6 Determine the effect of inventory errors on the financial statements

Skill: Application

Blooms: Application

6.7 Use the gross profit method to estimate ending inventory

1) If a company experiences a loss of inventory for fire, there is no way to estimate the inventory due to fire.

Diff: 1

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Recall

Blooms: Knowledge

2) The first step in using the gross profit method to estimate ending inventory is to:

A) calculate the cost of goods available for sale.

B) estimate the ending inventory.

C) estimate the beginning inventory.

D) estimate the cost of goods sold.

E) calculate net income.

Diff: 1

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Recall

Blooms: Knowledge

3) The second step in using the gross profit method to estimate ending inventory is to:

A) estimate the cost of goods sold.

B) calculate the cost of goods available for sale.

C) estimate the ending inventory.

D) estimate the beginning inventory.

E) estimate net income.

Diff: 1

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Recall

Blooms: Knowledge

4) The last step in using the gross profit method to estimate ending inventory is to:

A) estimate the beginning inventory.

B) estimate the cost of goods sold.

C) calculate the cost of goods available for sale.

D) estimate the ending inventory.

E) calculate net income.

Diff: 1

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Recall

Blooms: Knowledge

5) Beginning inventory + Net purchases = ________.

A) Cost of goods sold

B) Cost of goods available for sale

C) Gross profit

D) Ending inventory

E) Sales revenue

Diff: 1

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Recall

Blooms: Knowledge

6) Net sales times the historical gross profit percentage yields the estimated:

A) ending inventory.

B) beginning inventory.

C) gross profit.

D) cost of goods sold.

E) net income.

Diff: 1

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Recall

Blooms: Knowledge

7) Net sales minus estimated gross profit yields the estimated ________.

Diff: 1

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Recall

Blooms: Knowledge

8) Cost of goods available for sale minus estimated cost of goods sold yields the estimated ________.

Diff: 1

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Recall

Blooms: Knowledge

9) A company has $4,500 in net sales, $3,200 in gross profit, $1,300 in ending inventory, and $1,800 in beginning inventory. What is the company's cost of goods sold?

Diff: 2

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Application

Blooms: Application

10) A company has $8,200 in net sales, $1,100 in gross profit, $2,500 in ending inventory, and $2,000 in beginning inventory. What is the company's cost of goods sold?

Diff: 2

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Application

Blooms: Application

11) What method is used to estimate the cost of ending inventory?

Diff: 2

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Recall

Blooms: Knowledge

12) The ________ estimates inventory by using the format for cost of goods sold.

Diff: 2

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Recall

Blooms: Knowledge

13) Aqua Corporation has given you the following inventory figures:

Using the gross profit method, calculate the estimated ending inventory to the nearest dollar. Show all calculations.

Calculation:

Goods available for sale: $534,274 + $1,356,493 + $11,382 - 7,302 = $1,894,847

Cost of goods sold: $945,358 - ($945,358 × 0.38) = $586,122

Estimated ending inventory: $1,894,847 - $586,122 = $1,308,725

Diff: 3

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Application

Blooms: Application

14) Beta Corporation has given you the following inventory figures:

Using the gross profit method, calculate the estimated ending inventory to the nearest dollar. Show all calculations.

Calculation:

Goods available for sale: $289,405 + 347,465 + 5,385 - 8,382 = $633,873

Cost of goods sold: $467,311 - ($467,311 × .44) = $261,694

Estimated ending inventory: $633,873 - 261,694 = $372,179

Diff: 3

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Application

Blooms: Application

15) Cobra Corporation has given you the following inventory figures:

Using the gross profit method, calculate the estimated ending inventory to the nearest dollar. Show all calculations.

Calculation:

Goods available for sale: $175,699 + 264,834 + 3,073 - 5,802 = $437,804

Cost of goods sold: $393,245 - ($393,245 × .57) = $169,095

Estimated ending inventory: $437,804 - 169,095 = $268,709

Diff: 3

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Application

Blooms: Application

16) Armedio Enterprises lost its entire inventory in a hurricane that occurred on March 31, 2014.

Over the past five years, gross profit has averaged 30% of net sales. The company's records reveal the following data for the month of March:

Beginning Inventory $42,600, Net Purchases $259,900, Sales $430,500, and

Sales Returns and Allowances $12,300

Estimate the inventory for the end of March using the gross profit method.

Calculation:

Goods available for sale: $42,600 + 259,900 = $302,500

Cost of goods sold: $(430,500 - 12,300) × .70 = $292,740

Estimated ending inventory: $302,500 - 292,740 = $9,760

Diff: 2

LO: 6-7 Use the gross profit method to estimate ending inventory

Skill: Application

Blooms: Application

6.8 Compute the inventory turnover rate

1) Inventory generates profit once it is stocked on the shelf.

Diff: 1

LO: 6-8 Compute the inventory turnover rate

Skill: Recall

Blooms: Knowledge

2) Inventory turnover equals the cost of goods sold divided by ending inventory.

Diff: 1

LO: 6-8 Compute the inventory turnover rate

Skill: Recall

Blooms: Knowledge

3) Inventory turnover measures the number of times a company turns over its beginning inventory during a period.

Diff: 1

LO: 6-8 Compute the inventory turnover rate

Skill: Recall

Blooms: Knowledge

4) Other than the cost of purchasing the inventory, another large cost of inventory would be storage of the inventory.

Diff: 1

LO: 6-8 Compute the inventory turnover rate

Skill: Recall

Blooms: Knowledge

5) The inventory turnover rate is computed by:

A) dividing average inventory by cost of goods sold.

B) dividing cost of goods sold by average inventory.

C) dividing ending inventory by cost of goods sold.

D) dividing ending inventory by beginning inventory.

E) dividing beginning inventory by cost of goods sold.

Diff: 1

LO: 6-8 Compute the inventory turnover rate

Skill: Recall

Blooms: Knowledge

6) Inventory is often the largest:

A) expense on the income statement.

B) long-term asset on the balance sheet.

C) current asset on the balance sheet.

D) part of general selling expenses.

E) property, plant, and equipment on the balance sheet.

Diff: 1

LO: 6-8 Compute the inventory turnover rate

Skill: Recall

Blooms: Knowledge

7) The inventory turnover ratio is normally computed for:

A) a buying season.

B) the entire year.

C) each monthly accounting period.

D) each quarter.

E) every sixth months.

Diff: 1

LO: 6-8 Compute the inventory turnover rate

Skill: Recall

Blooms: Knowledge

8) Customer demand for an item CANNOT:

A) increase the inventory turnover.

B) decrease the inventory turnover.

C) affect the amount of merchandise the company purchases.

D) directly impact cash on the balance sheet.

E) affect sales.

Diff: 2

LO: 6-8 Compute the inventory turnover rate

Skill: Recall

Blooms: Knowledge

9) Goods available for sale are $85,000; beginning inventory is $27,000; ending inventory is $19,000; and cost of goods sold is $63,500. What is the inventory turnover?

Diff: 1

LO: 6-8 Compute the inventory turnover rate

Skill: Application

Blooms: Application

10) Goods available for sale are $118,000; beginning inventory is $37,000; ending inventory is $42,000; and cost of goods sold is $77,000. What is the inventory turnover?

Diff: 1

LO: 6-8 Compute the inventory turnover rate

Skill: Application

Blooms: Application

11) Goods available for sale are $350,000; beginning inventory is $24,000; ending inventory is $32,000; and cost of goods sold is $275,000. The inventory turnover is ________.

Diff: 1

LO: 6-8 Compute the inventory turnover rate

Skill: Application

Blooms: Application

12) Goods available for sale are $25,000; beginning inventory is $8,000; ending inventory is $12,000; and cost of goods sold is $10,000. What is the inventory turnover?

Diff: 1

LO: 6-8 Compute the inventory turnover rate

Skill: Application

Blooms: Application

13) Goods available for sale are $40,000; beginning inventory is $16,000; ending inventory is $20,000; and cost of goods sold is $50,000. The inventory turnover is ________.

Diff: 1

LO: 6-8 Compute the inventory turnover rate

Skill: Application

Blooms: Application

14) Goods available for sale are $28,000; beginning inventory is $13,000; ending inventory is $15,000; and cost of goods sold is $39,000. What is the inventory turnover?

Diff: 1

LO: 6-8 Compute the inventory turnover rate

Skill: Application

Blooms: Application

15) Gross profit is $40,000; beginning inventory is $16,000; ending inventory is $20,000; and sales are $120,000. Calculate the inventory turnover and days in inventory.

Days in inventory = 365 / 4.44 = 82.21 days

Diff: 2

LO: 6-8 Compute the inventory turnover rate

Skill: Application

Blooms: Application

16) 2012 ending inventory is $27,000; 2013 ending inventory is $19,000; 2014 ending inventory is $21,000; and cost of goods sold is $63,500 for 2014 and $65,900 for 2013. What is the inventory turnover for 2013 and 2014? Has the inventory turnover improved?

2014: 63,500 / (19,000 + 21,000)/2 = 3.18

The inventory turnover has improved from 2013.

Diff: 2

LO: 6-8 Compute the inventory turnover rate

Skill: Application

Blooms: Application

17) 2012 ending inventory is $25,000; 2013 ending inventory is $19,500; 2014 ending inventory is $22,000; and cost of goods sold is $65,500 for 2014 and $67,900 for 2013. What is the days in inventory for 2013 and 2014? Has it improved?

2014: 65,500 / (19,500 + 22,000)/2 = 3.16; 365/3.16 =116 days

The days in inventory has improved from 2013.

Diff: 2

LO: 6-8 Compute the inventory turnover rate

Skill: Application

Blooms: Application

18) If a company has an inventory turnover rate of 4, how often is the company selling its inventory in months?

Diff: 1

LO: 6-8 Compute the inventory turnover rate

Skill: Application

Blooms: Application

19) Gross profit is $40,000; beginning inventory is $16,500; ending inventory is $20,800; and sales are $120,000. The industry average has an inventory turnover of 4.8. How is the company doing with its inventory management as compared to the industry?

Since the company's inventory turnover is less than the industry average, management should investigate the cause.

Diff: 2

LO: 6-8 Compute the inventory turnover rate

Skill: Critical Thinking

Blooms: Analysis

20) What can a poor or declining inventory turnover tell you?

Diff: 2

LO: 6-8 Compute the inventory turnover rate

Skill: Application

Blooms: Application

6.9 (Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

1) In the average cost method of determining costs for a periodic system there is only one weighted average cost method.

Diff: 1

LO: 6-9 Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

Skill: Recall

Blooms: Knowledge

2) The cost of goods sold and ending inventory amounts will be the same under both a periodic and perpetual inventory system.

Diff: 1

LO: 6-9 Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

Skill: Recall

Blooms: Knowledge

3) In a periodic inventory system the inventory is updated regularly as units are sold.

Diff: 1

LO: 6-9 Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

Skill: Recall

Blooms: Knowledge

4) In a periodic inventory system a value is assigned to inventory at the end of the period.

Diff: 1

LO: 6-9 Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

Skill: Recall

Blooms: Knowledge

5) When the average cost method is applied in a periodic inventory system, the weighted average cost is calculated as the cost of goods available for sale divided by the number of units available for sale.

Diff: 1

LO: 6-9 Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

Skill: Recall

Blooms: Knowledge

6) In a periodic inventory system, the cost of goods sold is determined:

A) at the beginning of the period.

B) at the end of the period.

C) after each sale.

D) after each purchase.

E) None of the above

Diff: 1

LO: 6-9 Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

Skill: Application

Blooms: Knowledge

7) In order to determine cost of goods sold in a periodic inventory system, we

A) add beginning inventory to purchases.

B) subtract cost of goods available from sale from beginning inventory.

C) subtract ending inventory from cost of goods available for sale.

D) add inventory to cost of goods available for sale.

E) None of the above

Diff: 1

LO: 6-9 Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

Skill: Application

Blooms: Knowledge

8) Rick Company's beginning inventory and purchases during the fiscal year ended December 31, 2012 were as follows: (NOTE: The company uses a periodic system of inventory.)

What is the ending inventory of Rick Company for 2012 using FIFO?

Diff: 2

LO: 6-9 Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

Skill: Application

Blooms: Application

9) Casey Company's beginning inventory and purchases during the fiscal year ended December 31, 2012 were as follows: (NOTE: The company uses a periodic system of inventory.)

What is the ending inventory of Casey Company for 2012 using FIFO?

Calculation: There are 14 items left from the second purchase (14 × $14 = $196)

Diff: 3

LO: 6-9 Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

Skill: Application

Blooms: Application

10) Rick Company's beginning inventory and purchases during the fiscal year ended December 31, 2012 were as follows: (NOTE: The company uses a periodic system of inventory.)

What is the cost of goods sold for Rick Company for 2012 using FIFO showing detailed calculations?

Calculations:

A. Cost of goods available for sale = $2,682

B. Value of ending inventory = 23 * $27 = $621

C. Cost of Good Sold = $2,682 - $621 = $2,061

Diff: 3

LO: 6-9 Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

Skill: Application

Blooms: Application

11) Isaiah Sporting Goods uses the periodic average cost method of determining inventory costs.

Below is the inventory record for Product C124. Isaiah Sporting goods conducted a physical inventory count on June 30.

What is the average cost per unit at the time of the physical inventory count?

Calculation: (3513.72 + 2901.10 + 2629.64)/(534 + 433 + 389)

Diff: 3

LO: 6-9 Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

Skill: Application

Blooms: Application

12) Rick Company's beginning inventory and purchases during the fiscal year ended December 31, 2012 were as follows: (NOTE: The company uses a periodic system of inventory.)

What is the cost of goods sold and ending inventory of Rick Company for 2012 using the average cost method?

Step 1: Cost of goods available for sale = $2,682 Number of units available = 98

Step 2: Weighted average cost = $27.37

Step 3: Value of ending inventory = $27.37 × 23 = $629.51

Step 4: Cost of good sold = $2,682 - $629.51 = $2,052.49

Diff: 2

LO: 6-9 Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

Skill: Application

Blooms: Application

13) Casey Company's beginning inventory and purchases during the fiscal year ended December 31, 2012 were as follows: (NOTE: The company uses a periodic system of inventory.)

What is the cost of goods sold and ending inventory of Casey Company for 2012 using the average cost method?

Step 1: Cost of goods available for sale = $980 Number of units available = 75

Step 2: Weighted average cost = 980/75 = $13.07

Step 3: Ending inventory = $13.07 × 14 = $182.98

Step 4: Cost of goods sold = $797.02

Diff: 3

LO: 6-9 Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

Skill: Application

Blooms: Application

6.10 Cumulative Questions

1) Journalize the following transactions for the next three independent situations.

Case 1

Gertrude Enterprises has determined that the replacement cost (current market value) of the December 31, 2014 ending inventory is $32,400.The inventory is recorded on the balance sheet at $33,500. What is the journal entry using the lower of cost or net realizable value rule?

Case 2

Austin's Jewellers carries a line of silver bracelets. Austin's Jewellers uses the FIFO method and a perpetual inventory system. The sales price of each bracelet is $105. Company records indicate the following activity for the bracelets for the month of March: Purchases of 200 units on January 1 at a cost of $30 per unit and purchases of 400 units on February 1 at a cost of $33 per unit. Sold 300 units on account on February 25. Journalize the sale of 300 units.

Case 3

On January 2, 2014, Bright Lights purchased showroom fixtures for $10,000 cash, expecting the fixtures to remain in service for five years. Bright Lights has depreciated the fixtures on a straight-line basis, with zero residual value. On September 30, 2015, Bright Lights sold the fixtures for $5,000 cash. Record both

the depreciation expense on the fixtures for 2015 and the sale of the fixtures on September 30, 2015.

Diff: 3

LO: 6-9 Appendix 6A) Compute inventory costs using different methods under a periodic inventory system

Skill: Application

Blooms: Application