Merchandise Inventory | Full Practice Test Bank – 11th - Test Bank | Financial Accounting Enhanced eText 11e by Pratt Peters by Pratt Peters. DOCX document preview.
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Financial Accounting, 11th edition
Test Bank and Video Questions
By Pratt and Peters
Chapter 7: Merchandise Inventory
Copyright © 2021 John Wiley & Sons, Inc. or the author, all rights reserved.
Table of Contents
Multiple Choice Questions
1) Portland Supplies Co. mistakenly excluded $3,000 of goods from its December 31, 2020 physical inventory count. Its December 31, 2019 inventory amount was correct. As a result of this error:
A) 2020 income is overstated by $3,000.
B) 2020 ending inventory is overstated by $3,000.
C) 2021 income is overstated by $3,000.
D) 2021 cost of goods sold is overstated by $3,000.
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 1 / None
2) Which one of the following expenditures should not be included in the cost of inventory?
A) Transportation-out
B) Purchase cost
C) Packaging cost
D) Transportation-in
Diff: Easy
Learning Objective: 7.2
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 2 / None
3) Michael Manufacturers fraudulently overstated its December 31, 2020 and December 31, 2021 inventory by $3,000 and $6,000, respectively. As a result of these overstatements:
A) 2020 income is overstated by $3,000 and 2021 income is overstated by $3,000.
B) 2020 income is overstated by $3,000 and 2021 income is overstated by $6,000.
C) 2020 income is overstated by $3,000 and 2021 income is accurate.
D) 2020 and 2021 incomes are not affected.
Explanation: 2020 overstatement = $6,000 (2020) - $3,000 (2019 reversal) = $3,000
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 3 / None
4) Jackson Roper fraudulently overstated its December 31, 2020 inventory by $8,000. As a result of this overstatement:
A) the 2020 earnings per share is overstated.
B) the 2020 current ratio is understated.
C) the 2020 cost of goods sold amount is overstated.
D) net income is overstated for 2021, and net income for 2020 is correct.
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 4 / None
5) If a company desires to increase its inventory, then it should:
A) sell more goods than it purchases during the period.
B) purchase more goods than it sells during the period.
C) purchase the same amount of goods that it sells.
D) increase its selling prices to a level that customers would not be willing to purchase.
Diff: Easy
Learning Objective: 7.1
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 5 / None
6) Cagey Trading Inc. counted $2,000 of inventory twice during its December 31, 2020 physical inventory count. Its December 31, 2021 inventory amount is correct. As a result of this error:
A) 2020 ending inventory is overstated by $2,000.
B) 2020 income is understated by $2,000.
C) 2021 income is overstated by $2,000.
D) 2021 cost of goods sold is understated by $2,000.
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 6 / None
7) Washington Co. mistakenly omitted $4,000 of merchandise from its inventory on December 31, 2020. Its December 31, 2021, inventory is correct. As a result of this error:
A) earnings per share is overstated for 2020 and overstated for 2021.
B) total income for 2020 and 2021 combined is correct.
C) the current ratio is overstated on December 31, 2020 and is correct on December 31, 2021.
D) ending inventory is understated at December 31, 2021.
Diff: Hard
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 7 / None
8) Parker Books purchased 200 books, paying $10 each. Parker paid the $40 shipping costs and $30 binding repair fees so that those books could be sold. How much is the cost of inventory?
A) $2,000
B) $2,040
C) $2,030
D) $2,070
Explanation: (200 × $10) + $40 + $30
Diff: Medium
Learning Objective: 7.2
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 8 / None
9) A company deliberately and inappropriately included interest costs in its December 31 inventory. Which one of the following statements is true for the company's December 31 financial statements?
A) Earnings per share is understated.
B) Inventory turnover ratio (times) is understated.
C) The current ratio is understated.
D) Cost of goods sold is overstated.
Diff: Medium
Learning Objective: 7.2
Bloom's: Application
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 9 / None
10) Dole Produce Ltd. counted $700 of inventory twice in its December 31, 2020 inventory. On December 31, 2021, it mistakenly omitted $200 of merchandise from its inventory. As a result of these errors:
A) net income is overstated by $700 in 2021 and understated by $200 in 2021.
B) net income in understated by $700 in 2021 and overstated by $200 in 2021.
C) net income is overstated by $700 in 2021 and understated by $900 in 2021.
D) total net income for 2021 and 2021 is correct.
Explanation: 2021 understatement = −$700 − $200 = − $900
Diff: Hard
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 10 / None
11) Kemp Clothing has cost of goods sold of $14,000 with beginning and ending inventories of $4,000 and $2,000, respectively. Purchases during the period are:
A) $ 8,000.
B) $ 9,000.
C) $10,000.
D) $12,000.
Explanation: $14,000 + $2,000 − $4,000 = $12,000
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 11 / None
12) Which one of the following expenditures should not be included in the cost of inventory?
A) Purchase cost
B) Transportation-in
C) Packaging cost
D) Capitalized equipment cost
Diff: Easy
Learning Objective: 7.2
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 12 / None
13) Mars Hardware sold 20 drills for $8 each. Each drill cost $4. Which journal entry completely records the sale under a perpetual inventory system?
A)
Cash 160
Sales 160
B)
Cash 160
Inventory 160
C)
Cash 160
Cost of Goods Sold 80
Sales 160
Inventory 80
D)
Cash 160
Inventory 80
Gain from Sale 80
Explanation: Sales = 20 × $8 = $160; CGS = 20 × $4 = $80
Diff: Easy
Learning Objective: 7.3
Bloom's: Application
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 13 / None
14) Wood Inc. sells automobiles at $6,000 above cost and uses the specific identification method for inventory. Below are the cars and the costs Wood paid for each automobile before the sale.
Auto 1: $35,000
Auto 2: $17,500
Auto 3: $19,500
Auto 4: $23,000
Auto 5: $26,000
If Wood sells Auto 3 and Auto 5 for cash, which of the following would be included in the journal entries it uses to record the sale and recognize the cost of the inventory?
A) A debit to Cost of Goods Sold for $45,500.
B) A credit to Sales for $45,500.
C) A credit to Inventory for $57,500.
D) A credit to Sales for $12,000.
Explanation: CGS = $19,500 + $26,000 = $45,500
Diff: Medium
Learning Objective: 7.3; 7.4
Bloom's: Application
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 14 / None
15) Vic's Produce purchased 50 boxes of tomatoes for a total of $400. It paid $20 for shipping tomatoes to a customer and $15 for repackaging them into smaller boxes. The cost of these tomatoes is:
A) $400.
B) $420.
C) $415.
D) $435.
Explanation: $400 + $15 = $415
Diff: Medium
Learning Objective: 7.2
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 15 / None
16) Simon Cereal purchased 100 pounds of cornflakes for $100. Transportation cost to Simon's production facility was $25 for the barrel of cornflakes shipped FOB destination. Simon paid $60 for 100 one-pound biodegradable plastic bags into which the cornflakes were placed. The cost of each one-pound bag of cornflakes is:
A) $1.00.
B) $1.25.
C) $1.60.
D) $1.85.
Explanation: ($100 + $60) ÷ 100 = $1.60
Diff: Medium
Learning Objective: 7.2
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 16 / None
17) Beginning inventory is valued at $7,000, purchases are $15,000 and ending inventory is valued at $9,000. Cost of goods sold is:
A) $23,000.
B) $16,000.
C) $30,000.
D) $13,000.
Explanation: $7,000 + $15,000 - $9,000 = $13,000
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 17 / None
18) Victoria Fashions Clothing Store uses the perpetual method of accounting for inventory. During the current year, purchases are $30,000 and cost of goods sold is $25,000. Beginning inventory is valued at $4,000 and ending inventory was taken on December 31 and valued at $6,000. Inventory shortage expense for the current year is:
A) $0.
B) $2,000.
C) $3,000.
D) $5,000.
Explanation: ($30,000 + $4,000 - $25,000) - $6,000 = $3,000
Diff: Hard
Learning Objective: 7.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 18 / None
19) During a year of decreasing inventory costs and decreasing inventory, which cost flow assumption would measure the greatest net income?
A) FIFO
B) LIFO
C) Average
D) Both A and C are correct.
Diff: Easy
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 19 / None
20) During a year of rising inventory costs and increasing inventory, which cost flow assumption would yield the greatest current ratio?
A) Average
B) LIFO
C) FIFO
D) Both A and C are correct.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 20 / None
21) During a year of rising inventory costs and increasing inventory, which cost flow assumption would measure the smallest net income?
A) LIFO
B) FIFO
C) Average
D) All methods measure income the same.
Diff: Easy
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 21 / None
22) During a year of rising inventory costs and increasing inventory, which cost flow assumption would measure the smallest working capital ratio?
A) FIFO
B) LIFO
C) Average
D) Working capital is not sensitive to inventory cost flow assumptions.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 22 / None
23) The President and CEO of Quinn Manufacturing receives a cash bonus equal to 1% of audited net income during the current year. During a period of rising inventory costs and increasing inventory, which inventory cost flow assumption would measure the smallest compensation expense and greatest cash position for Quinn Manufacturing?
A) FIFO
B) NIFO
C) Average
D) LIFO
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 23 / None
24) Unusually high income resulted when Vincent Inc. cut back its inventory levels. This effect is:
A) backed by the LIFO elimination rule.
B) expected in most industries.
C) achieved through using the lower-of-cost-or-market rule.
D) called LIFO liquidation.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 24 / None
25) During a year of rising inventory costs and increasing inventory, which cost flow assumption would measure the fastest inventory turnover ratio?
A) FIFO
B) LIFO
C) Average
D) The inventory turnover ratio is not sensitive to inventory cost flow assumptions.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 25 / None
26) During a period of rising inventory costs and increasing inventory, which cost flow assumption used on both federal income tax returns and financial reports would provide a company with the highest cash balance?
A) FIFO
B) LIFO
C) Average
D) TIFO
Diff: Easy
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 26 / None
27) During a year of falling inventory costs, which cost flow assumption would measure the strongest operating cash flow position?
A) LIFO
B) FIFO
C) Average
D) Net income will remain the same under all methods.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 27 / None
28) During a year of falling inventory costs, which cost flow assumption would yield the highest current ratio?
A) FIFO
B) LIFO
C) Average
D) Lower-of-cost or market
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 28 / None
29) If a company uses the LIFO cost flow assumption on its federal income tax return in order to minimize its tax payment, then it:
A) must use LIFO on its financial statements.
B) must use FIFO on its financial statements.
C) may use any cost flow assumption permitted by GAAP on its financial statements.
D) must correct the error at the beginning of the next accounting period.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 29 / None
30) An excessively slow inventory turnover ratio may reveal that:
A) customers are delaying their payments on account.
B) the selling price of inventory is too high.
C) sales returns have decreased significantly.
D) the company is selling too much inventory.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 30 / None
31) Carmelo Inc. has Cost of Goods Sold of $45,000 (beginning inventory of $10,000, plus purchases of $55,000, less ending inventory of $20,000). Inventory turnover (times) is:
A) 2.3.
B) 3.0.
C) 3.7.
D) 4.5.
Explanation: ($10,000 + $20,000)/2 = $15,000; $45,000/$15,000 = 3.0
Diff: Medium
Learning Objective: 7.6
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 31 / None
32) Under generally accepted accounting principles, a company can choose from several options a cost flow assumption for valuing cost of goods sold and ending inventory. However, it can't frequently change the cost flow assumption because of the:
A) conservatism principle.
B) going concern principle.
C) stable-dollar principle.
D) consistency principle.
Diff: Easy
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 32 / None
33) During an extended period of constant inventory costs, which cost flow assumption would generally measure the largest earnings per share?
A) FIFO
B) LIFO
C) Weighted average
D) All of the above assumptions would result in equal earnings per share during an extended period of constant prices.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 33 / None
34) At which point in accounting for inventory under the perpetual method is determining the cost of goods sold amount an issue?
A) When the inventory is acquired.
B) As the inventory is carried in the warehouse and held for sale.
C) As the ending inventory is counted.
D) As the inventory is sold.
Diff: Medium
Learning Objective: 7.3
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 34 / None
35) Items should be included in the company's inventory if they are:
A) being used in the production of income.
B) held in anticipation of an increase in value.
C) being held for sale.
D) sold during the period.
Diff: Medium
Learning Objective: 7.2
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 35 / None
36) Which one of the following should be included in Camden's inventory at December 31, 2021?
A) Goods shipped FOB shipping point on December 31, 2021, from Camden to a customer.
B) Goods in the Camden's warehouse on December 31, 2021, waiting to be shipped to a customer.
C) Goods ordered from one of Camden's suppliers on December 31, 2021, shipped FOB destination on December 31, 2021, which arrived January 2, 2022.
D) Goods sold and shipped to a customer on December 30, 2021, terms FOB destination, which were delivered on December 31, 2021.
Diff: Medium
Learning Objective: 7.2
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 36 / None
37) Which one of the following companies would likely carry the largest percentage of inventory as compared to its other assets?
A) EY (CPAs)
B) Merrill Lynch Investment Brokers
C) The Magic Kingdom at Disney World
D) Jim's Ford Dealership
Diff: Easy
Learning Objective: 7.1
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 37 / None
38) When inventory costs are stable across time, which cost flow assumption would generally measure the largest current ratio?
A) FIFO
B) LIFO
C) Average
D) All of the above assumptions would result in equal current ratios during an extended period of stable costs.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 38 / None
39) When accounting for inventory consignments, the issue which helps determine whether the inventory cost should be included on a company's balance sheet is:
A) whether the inventory is physically located in the company's warehouse.
B) who actually owns title to the inventory.
C) who will ultimately sell the inventory to the consumer.
D) when the inventory will be sold.
Diff: Medium
Learning Objective: 7.2
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 39 / None
40) Specific identification is a method of accounting for inventory:
A) which eliminates the need for tracking the cost of inventory items.
B) that allocates the oldest cost to the first units sold.
C) that often allows a manager to manipulate net income and the ending inventory value.
D) commonly used in periods of rising prices.
Diff: Medium
Learning Objective: 7.4
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 40 / None
41) Especially for small privately-held companies, choosing an inventory cost flow assumption will most likely be impacted by which one of the following?
A) The physical flow of the inventory goods.
B) The cost of the company's plant and equipment.
C) Income taxes.
D) The cost flow assumptions most often used by other companies.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 41 / None
42) All of the following are typically associated with Japanese business inventory accounting except:
A) the use of the average assumption for inventory cost.
B) shared business risks.
C) slow inventory turnover.
D) lower levels of inventory.
Diff: Easy
Learning Objective: 7.6
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Global; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 42 / None
43) Inventory reported on the balance sheet of a manufacturing company consists of:
A) raw materials and the cost of labor to convert the raw materials to finished products.
B) raw materials, the cost of labor to convert the raw materials, and an allocated portion of manufacturing overhead cost.
C) the cost of the raw materials used.
D) raw materials, the cost of labor to convert the raw materials, and all major corporate overhead costs.
Diff: Medium
Learning Objective: 7.2
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 43 / None
44) The LIFO conformity rule requires a company that uses:
A) the LIFO assumption for computing cost of goods sold on its tax return to also use the LIFO assumption in preparing its financial statements.
B) any inventory cost assumption to use the LIFO cost assumption for tax purposes.
C) the LIFO assumption for computing cost of goods sold on its financial statements to also use LIFO on its tax return.
D) the LIFO assumption to avoid paying taxes on inventory profits.
Diff: Medium
Learning Objective: 7.4
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 44 / None
45) During a period of rising inventory costs, a company whose current ratio is dangerously close to the minimum specified by agreement with a major creditor would prefer which cost flow assumption?
A) FIFO
B) LIFO
C) Average
D) The company would be indifferent as to which cost flow assumption is adopted.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 45 / None
46) Selling more inventory than was purchased during the current period may often cause old, smaller costs that were carried as part of the company's beginning inventory, to be moved to the income statement and reported as cost of goods sold. This is called:
A) the LIFO conformity rule.
B) LIFO liquidation.
C) the LIFO reserve rule.
D) lower-of-cost-or-market accounting.
Diff: Easy
Learning Objective: 7.4
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 46 / None
47) During a period of rising inventory costs, a company whose debt/equity ratio is dangerously close to the minimum specified by agreement with a major creditor would prefer which cost flow assumption?
A) FIFO
B) LIFO
C) Average
D) The company would be indifferent as to which cost flow assumption is adopted.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 47 / None
48) During a period of highly fluctuating inventory costs, which of the following is not immediately sensitive to the particular cost flow assumption adopted?
A) Net income
B) Current ratio
C) Gross profit
D) Quick ratio
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 48 / None
49) Under the lower-of-cost-or-market rule, market value (net realizable value) is:
A) the selling price of inventory items.
B) the original cost paid for inventory.
C) used to value inventory if it is less than its recorded cost.
D) the amount of cash the company expects to collect from the sale of an inventory item less an estimate of bad debts.
Diff: Medium
Learning Objective: 7.5
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 49 / None
50) Which of the following policies would speed up a firm's inventory turnover ratio?
A) Reducing inventory while maintain the level of sales
B) Decreasing the units of inventory sold while holding average inventory constant
C) Increasing inventory levels by adopting a Just-in-Time production schedule
D) Accelerating purchases inventory purchases
Diff: Medium
Learning Objective: 7.6
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 50 / None
51) If the market value of inventory is greater than its cost, then the application of the lower-of-cost-or-market rule would:
A) decrease both the current ratio and net income.
B) decrease the current ratio but not change net income.
C) not change the current ratio but decrease net income.
D) change neither the current ratio nor net income.
Diff: Medium
Learning Objective: 7.5
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 51 / None
52) During a period of rising inventory costs, which method boosts cash flows by reducing tax payments?
A) FIFO
B) LIFO
C) Average
D) The company would be indifferent as to which cost flow assumption is adopted.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 52 / None
53) Which of the following should not be included in inventory cost for a car dealership?
A) The costs of transporting the cars from the factory to the dealership
B) Cost of new car preparation for customers
C) The salary and commission of the salesman who sells the vehicle
D) The cost of adding a CD player to the vehicles before the vehicle is offered for sale
Diff: Easy
Learning Objective: 7.2
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 53 / None
54) If the net realizable value of the inventory is less than its cost, then application of the lower-of-cost-or-market rule would:
A) increase earnings and decrease the current ratio.
B) decrease earnings and increase the current ratio.
C) decrease earnings and decrease the current ratio.
D) cause no change to earnings or the current ratio.
Diff: Medium
Learning Objective: 7.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 54 / None
55) What is the impact on the financial statements of an overstatement of ending inventory?
A) Next year's ending inventory will be overstated.
B) Next year's net income will be overstated.
C) Current year's net income will be overstated.
D) Next year's ending inventory will be understated.
Diff: Medium
Learning Objective: 7.1
Bloom's: Application
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 55 / None
56) The following information comes from the annual reports of Devin Designs.
2021 2020 2019
Beginning inventory $ ? $ ? $ 2,250
Purchases 12,652 ? ?
Goods available for sale ? ? 12,899
Ending inventory ? 2,662 ?
Cost of goods sold 12,213 10,908 10,490
What is the Purchases amount for 2019?
A) $4,713
B) $2,397
C) $81
D) $10,649
Explanation: $12,899 - $2,250 = $10,649
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 56 / None
57) The following information comes from the annual reports of Devin Designs.
2021 2020 2019
Beginning inventory $ ? $ ? $ 2,250
Purchases 12,652 ? ?
Goods available for sale ? ? 12,899
Ending inventory ? 2,662 ?
Cost of goods sold 12,213 10,908 10,490
What is the ending inventory amount for 2019?
A) $4,713
B) $2,409
C) $81
D) $10,583
Explanation: $12,899 - $10,490 = $2,409
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 57 / None
58) The following information comes from the annual reports of Devin Designs.
2021 2020 2019
Beginning inventory $ ? $ ? $ 2,250
Purchases 12,652 ? ?
Goods available for sale ? ? 12,899
Ending inventory ? 2,662 ?
Cost of goods sold 12,213 10,908 10,490
What is the beginning inventory amount for 2020?
A) $2,409
B) $13,570
C) $10,502
D) $8,246
Explanation: $12,899 - $10,490 = $2,409
*End. Inv. 2019 = Beg. Inv. 2020 = $10,490
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 58 / None
59) The following information comes from the annual reports of Devin Designs.
2021 2020 2019
Beginning inventory $ ? $ ? $ 2,250
Purchases 12,652 ? ?
Goods available for sale ? ? 12,899
Ending inventory ? 2,662 ?
Cost of goods sold 12,213 10,908 10,490
What is the amount of purchases for 2020?
A) $8,246
B) $11,161
C) $13,570
D) $10,643
Explanation: $10,908 + $2,662 = $13,570. $13,570 - ($12,899 - $10,490) = $11,161.
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 59 / None
60) The following information comes from the annual reports of Devin Designs.
2021 2020 2019
Beginning inventory $ ? $ ? $ 2,250
Purchases 12,652 ? ?
Goods available for sale ? ? 12,899
Ending inventory ? 2,662 ?
Cost of goods sold 12,213 10,908 10,490
What is the amount of goods available for sale for 2020?
A) $8,246
B) $11,173
C) $13,570
D) $10,643
Explanation: $10,908 + $2,662 = $13,570
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 60 / None
61) The following information comes from the annual reports of Devin Designs.
2021 2020 2019
Beginning inventory $ ? $ ? $ 2,250
Purchases 12,652 ? ?
Goods available for sale ? ? 12,899
Ending inventory ? 2,662 ?
Cost of goods sold 12,213 10,908 10,490
What is the beginning inventory amount for 2021?
A) $439
B) $8,246
C) $10,908
D) $2,662
Explanation: End. Inv. 2020 = Beg. Inv. 2021 = $2,662
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 61 / None
62) The following information comes from the annual reports of Devin Designs.
2021 2020 2019
Beginning inventory $ ? $ ? $ 2,250
Purchases 12,652 ? ?
Goods available for sale ? ? 12,899
Ending inventory ? 2,662 ?
Cost of goods sold 12,213 10,908 10,490
What is the amount of goods available for sale for 2021?
A) $11,347
B) $15,314
C) $13,957
D) $24,865
Explanation: $2,662 + $12,652 = $15,314
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 62 / None
63) The following information comes from the annual reports of Devin Designs.
2021 2020 2019
Beginning inventory $ ? $ ? $ 2,250
Purchases 12,652 ? ?
Goods available for sale ? ? 12,899
Ending inventory ? 2,662 ?
Cost of goods sold 12,213 10,908 10,490
What is the ending inventory amount for 2021?
A) $24,865
B) $3,101
C) $2,223
D) $15,314
Explanation: $2,662 + $12,652 - $12,213 = $3,101
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 63 / None
64) Forrest's Crab House purchased Florida stone crab on account on November 10, 2021, for a gross price of $87,000. Forrest also purchased farm-raised catfish on account on November 11, 2021 for a gross price of $25,000. Forrest paid for the first purchase on November 19, 2021, and for the second purchase on November 30. If Forrest uses the perpetual inventory method, which of the following journal entries would he make on November 30?
A)
Inventory 25,000
Accounts Payable 25,000
B)
Accounts Payable 25,000
Cash 25,000
C)
Accounts Payable 25,000
Cash 24,500
Inventory 500
D)
Accounts Payable 24,500
Cash 24,500
Diff: Medium
Learning Objective: 7.1
Bloom's: Application; Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 64 / None
65) Gump Supplies has the following information:
Beginning inventory $39,000
Inventory purchases 92,000
Transportation-in 11,300
Assume that inventory purchases and transportation-in are both reflected in the inventory
account, which shows an ending balance of $59,000. What is the amount of the cost of goods sold?
A) $123,300
B) $83,300
C) $60,700
D) $100,700
Explanation: With the perpetual method, the balance in the Cost of Goods Sold account is perpetually updated for sales of inventory, as is the balance in the Inventory account for sales and acquisitions of inventory. This means that the balance in Cost of Goods Sold should correspond to the actual cost of the sold inventory, and that no entry is necessary at the end of the year to record Cost of Goods Sold.
Ending Inventory = Beginning Inventory + Net Purchases -
Cost of Goods Sold
$59,000 = $39,000 + ($92,000 + $11,300) - COGS
Cost of Goods Sold = $83,300
Diff: Medium
Learning Objective: 7.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 65 / None
66) Gump Supplies has the following information:
Beginning inventory $39,000
Inventory purchases 92,000
Transportation-in 11,300
An inventory count taken at year end indicates that inventory with a cost of $56,000 is on hand as of December 31, 2021. Assume that inventory purchases and transportation-in are both reflected in the inventory account, which shows an ending balance of $59,000. Which of the following would be the best adjusting journal entry to make at the end of the period with respect to this information?
A)
Inventory Loss 3,000
Inventory 3,000
B)
Inventory 3,000
Inventory Gain 3,000
C)
Inventory 3,000
Purchases 3,000
D)
Cost of Goods Sold 3,000
Sales 3,000
Explanation: Since the physical count indicates that Gump has $3,000 less inventory than is recorded in its Inventory account ($59,000 - $56,000), the following adjusting entry is necessary at the end of the year.
Inventory Loss (E, -SE) 3,000
Inventory (-A) 3,000
Diff: Medium
Learning Objective: 7.3
Bloom's: Application; Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 66 / None
67) Dakota Industries has two items in inventory as of December 31, 2021. Each item was purchased for $52. Company management chose to write down Item #1 to $39, which at year-end was assessed to be its net realizable value. Management did not write down Item #2 because its net realizable value was estimated to be greater than $52. During 2021, each item was sold for $63 cash.
The journal entry for the write down of Item #1 would include which of the following?
A)
Inventory Loss 24
Inventory 24
B)
Inventory 13
Inventory Loss 13
C)
Inventory Loss 13
Inventory 13
D)
Inventory 24
Inventory Loss 24
Explanation: ($52 - $39) = $13
Diff: Medium
Learning Objective: 7.5
Bloom's: Application; Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 67 / None
68) Dakota Industries has two items in inventory as of December 31, 2021. Each item was purchased for $52. Company management chose to write down Item #1 to $39, which at year-end was assessed to be its market value (net realizable value). Management did not write down Item #2 because its net realizable value was estimated to be greater than $52. During 2022, each item was sold for $63 cash.
If Dakota uses the perpetual inventory method, which of the following would be included in the entry or entries to record the sale of Item #1?
A) A debit to Sales for $63.
B) A credit to Inventory for $52.
C) A debit to Cost of Goods Sold for $39.
D) A credit to Cost of Goods Sold for $52.
Diff: Medium
Learning Objective: 7.3; 7.5
Bloom's: Application; Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 68 / None
69) Grey Manufacturing had the following transaction:
Grey received an order to sell inventory with a cost of $50,000, and debited Accounts Receivable and credited Sales. The goods were shipped to the customer on December 31, 2020 and received on January 2, 2021.
If the terms of the sale were FOB shipping point and Grey included all these items in its ending inventory of 12/31/20, which of the following is the best statements regarding this treatment?
A) Grey made no mistake and rightfully included the items in its inventory until January 2, 2021.
B) Grey made a mistake and wrongly understated ending inventory.
C) Grey made a mistake and wrongly understated Cost of Goods Sold.
D) Grey made a mistake and wrongly understated Retained Earnings.
Diff: Hard
Learning Objective: 7.2
Bloom's: Application
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 69 / None
70) Grey Manufacturing had the following transaction:
Grey ordered $67,000 of inventory on December 30, 2020. The inventory was shipped on December 31, 2020, with the terms FOB destination. Grey received the inventory on January 3, 2021.
If Grey included all these items in it ending inventory of 12/31/20, which of the following is the best statement regarding this treatment?
A) Grey made no mistake and rightfully included the items in its ending inventory for 12/31/20.
B) Grey made a mistake and wrongly overstated ending Inventory.
C) Grey made a mistake and wrongly overstated Cost of Goods Sold.
D) Grey made a mistake and wrongly overstated Retained Earnings.
Diff: Hard
Learning Objective: 7.1
Bloom's: Application
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 70 / None
Matching Questions
71) For each cost numbered 1 through 8 below, identify which accounting treatment (a through c) would most likely be used in accounting for the cost. You may use each letter more than once or not at all.
Users
a. Added to cost of inventory
b. Deducted from cost of inventory
c. Not part of cost of inventory
_______ 1. Cash price of goods purchased for resale
_______ 2. Transportation cost of goods shipped to customers
_______ 3. Transportation cost of goods shipped from suppliers FOB shipping point
_______ 4. Return of inventory to supplier
_______ 5. Transportation cost of goods being shipped to consignee
_______ 6. Assembly costs of products which will be sold to customers
_______ 7. Insurance cost paid by purchaser while inventory is in transit from suppliers
_______ 8. Excise, sales, use, value added, and other fees and taxes paid on the purchase of
inventory
1. a
2. c
3. a
4. b
5. a
6. a
7. a
8. a
Diff: Medium
Learning Objective: 7.1
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Matching Question 1 / None
72) For each item listed in 1 through 4, place the letter of the accounting effect (a through e) in the space provided. You may use each letter more than once or not at all.
Accounting Effects
a. Current ratio and earnings per share increase.
b. Current ratio and earnings per share are not affected.
c. Current ratio increases and earnings per share decreases.
d. Current ratio decreases and earnings per share increases.
e. Current ratio and earnings per share decrease.
_______ 1. During a period of increasing inventory and rising prices, a company decides to use FIFO instead of LIFO.
_______ 2. During a period of increasing inventory and rising prices, a company decides to use Average instead of FIFO.
_______ 3. During a period of static prices, a company decides to use FIFO instead of LIFO.
_______ 4. A company applies lower-of-cost-or-market for valuing ending inventory when market price is less than cost.
1. a
2. e
3. b
4. e
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Matching Question 2 / None
73) For each item listed in 1 through 2, place the letter of the accounting effect (a through e) in the space provided. You may use each letter more than once or not at all.
Accounting Effects
a. Current ratio and earnings per share increase.
b. Current ratio and earnings per share decrease.
c. Current ratio increases and earnings per share decreases.
d. Current ratio decreases and earnings per share increases.
e. Current ratio and earnings per share are not affected.
_______ 1. A company applies lower-of-cost-or-market for valuing ending inventory when cost is greater than market price (net realizable value).
_______ 2. During an extended period of stable inventory costs, a company uses LIFO instead of FIFO.
1. b
2. e
Diff: Medium
Learning Objective: 7.4; 7.5
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Matching Question 3 / None
74) For each item listed in 1 through 6, place the letter (a through e) of the accounting effect in the space provided. You may use each letter more than once or not at all.
Accounting Effects
a. Assets and net income increase
b. Assets and net income decrease
c. Assets decrease and net income increases
d. Assets increase and net income decreases
e. Assets and net income are not affected
_______ 1. During a period of increasing inventory costs, a company uses FIFO instead of LIFO.
_______ 2. During a period of increasing inventory costs, a company uses Average instead of FIFO.
_______ 3. During a period of increasing inventory costs, a company uses the LIFO method, which creates the largest cost of goods sold.
_______ 4. A company applies lower-of-cost-or-market for valuing ending inventory when net realizable value is less than cost.
_______ 5. A company applies lower-of-cost-or-market for valuing ending inventory when cost is less than net realizable value.
_______ 6. During an extended period of stable prices, a company adopts LIFO instead of FIFO.
1. a
2. b
3. b
4. b
5. e
6. e
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Matching Question 4 / None
Short Problems
75) Bisbee Ltd. has been overstating its inventory to "pump up" a lagging income. It started this practice in 2020 and overstated the 2020 income by $9,000. By what amount will Bisbee have to overstate December 31, 2021 inventory to overstate 2021 income by $14,000?
Diff: Medium
Learning Objective: 7.1; 7.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Problem 1 / None
Use the information that follows concerning Bradley Corporation to answer the problems below.
Bradley Corporation began business on January 1. During January, Bradley used the periodic method and reported the following:
January 1 purchase: | 100 units @ $10 = | $1,000 |
January 10 purchase: | 150 units @ $14 = | $2,100 |
January sales: | 200 units |
76) Determine the amount of inventory to report on Bradley's balance sheet at January 31 under the FIFO cost flow assumption.
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Problem 2 / None
77) Determine the amount of inventory to report on Bradley's balance sheet on January 31 under the LIFO cost flow assumption.
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Problem 3 / None
78) Determine the amount of the inventory valuation on January 31 under the Average cost flow assumption.
50 × $12.40 = $620
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 4 / None
79) Determine the amount of cost of goods sold under the FIFO cost flow assumption for the month of January.
($1,000 + $2,100) = $3,100 - (50 × $14) = $2,400
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Problem 5 / None
80) Warren Trading pays for its inventory purchases with cash. Beginning inventory is $3,000, purchases were $19,000, and cost of goods sold is $18,000. Determine the cost of Warren's ending inventory.
Diff: Medium
Learning Objective: 7.1; 7.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Problem 6 / None
Use the information that follows concerning Cinci Corporation to answer the problems below.
Cinci Company began business on March 1. During March, Cinci made the following purchases.
March 1: 100 units @ $8 $ 800
March 6: 200 units @ $10 2,000
March sales: 240 units
81) How much will Cinci report as cost of goods sold using LIFO during March?
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Problem 7 / None
82) Calculate the cost of goods sold during March under the Average cost flow assumption.
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Problem 8 / None
83) The management of Dayton Ltd. erroneously understated its ending inventory during 2020 by $2,000. Using the information below and assuming there are no distributions of retained earnings: (1) present a brief analysis with the accurate numbers and the numbers in error and (2) explain whether retained earnings would be overstated, understated, or be indifferent to the error at the end of 2021.
2020 Sales: $60,000
2020 Purchases: $50,000
2020 Cost of Goods Sold (before effect of inventory error) $20,000
2021 Sales: $210,000
2021 Purchases: $60,000
2021 Cost of Goods Sold (based on error numbers): $68,000
(1)
If Accurate | With 2020 Error | |
2020 | ||
Sales | $60,000 | $60,000 |
Less: Cost of Goods Sold | 20,000 | 22,000 |
Net Income | $40,000 | $38,000 |
2021 | ||
Sales | $210,000 | $210,000 |
Less: Cost of Goods Sold | 70,000 | 68,000 |
Net Income | $140,000 | $142,000 |
(2) Since errors in inventory misstate net income in the subsequent period by an equal dollar amount in the opposite direction, retained earnings should be correctly stated at the end of 2021, if no further errors occur.
Accurate incomes = $40,000 + $140,000 = $180,000 Retained earnings
Incomes associated with error = $38,000 + $142,000 = $180,000 Retained earnings
Diff: Medium
Learning Objective: 7.1; 7.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 5 min.
Title/Media Ref.: Short Problem 9 / None
84) Yale Co. has valued its beginning and ending inventories at $4,000 and $7,000, respectively, during a period where cost of goods sold was $22,000. An auditor found an error in the valuation of the ending inventory and insisted that it be restated to $6,000. Calculate the adjusted cost of goods sold resulting from the inventory restatement.
Diff: Medium
Learning Objective: 7.1; 7.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Problem 10 / None
85) Summers Company began business on August 1, 2021 and uses the periodic inventory method. During August, Summers made the following purchases:
August 3 | 100 units @ $10 | $1,000 |
August 21 | 300 units @ $20 | $6,000 |
Other information provided:
August sales | 350 units at $50 each |
August expenses excluding cost of goods sold | $ 7,200 |
August 31 current assets excluding inventory | 34,000 |
August 31 current liabilities | 26,000 |
Calculate Summers' August 31 ending inventory under the FIFO and LIFO cost flow assumptions.
LIFO = (100 + 300) - 350 = 50 × $10 = $500
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 11 / None
86) Yogi Company began operations on July 1. Each unit is sold for $80. Under the periodic LIFO method of inventory, Yogi reported the following:
July 3 | Purchased 60 units @ $50 | $3,000 |
July 14 | Purchased 40 units @ $60 | 2,400 |
Cost of goods available | $5,400 | |
July 31 | Inventory (10 @ $50) | 500 |
Cost of goods sold | $4,900 |
Complete the following table for Yogi for July using the FIFO cost flow assumption instead of LIFO.
Sales revenue ______________
Cost of goods sold ______________
Gross profit ______________
Cost of goods sold = (60 × $50) + (30 × $60) = $4,800
Gross profit = $7,200 - $4,800 = $2,400
Diff: Hard
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 5 min.
Title/Media Ref.: Short Problem 12 / None
87) A firm overstated its December 31, 2020 and 2021 inventories by $4,000 and $7,000, respectively. What is the amount and direction of 2020 and 2021 misstatements of cost of goods sold which results from these inventory overstatements?
2021 cost of goods sold is understated by $3,000 ($7,000 - $4,000).
Diff: Medium
Learning Objective: 7.1; 7.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Problem 13 / None
Use the information that follows concerning Grandma's Gift Store to answer the problems below.
Grandma's Gift Store uses the periodic inventory method. Inventory and purchase information for July is as follows:
July 1 | Beginning inventory | 500 @ $4 |
July 10 | Purchase | 800 @ $5 |
July 31 | Ending inventory | 300 |
88) Grandma's Gift Store uses the FIFO cost flow assumption. Calculate its cost of goods sold for the month of July and its ending inventory at July 31.
Ending inventory = 300 × $5 = $1,500
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 14 / None
89) Grandma's Gift Store uses the Average cost flow assumption. Calculate its cost of goods sold for July and its inventory at July 31. Round average cost per unit to 3 decimal places.
Cost of goods sold = $4.615 × 1,000 = $4,615
Ending inventory = $4.615 × 300 = $1,385
Diff: Hard
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Problem 15 / None
90) Ignoring taxes, by what amount would Grandma's working capital on July 31 under FIFO exceed working capital using LIFO?
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Problem 16 / None
Use the information that follows concerning Ruby Company to answer the problems below.
Ruby Company sells office supplies and uses the periodic system. Below is a list of purchases and sales for the month of January:
Date Inventory Balances Purchases
January 1 Beginning inventory 10 @ $6
January 4 Purchase 40 @ $7
January 18 Purchase 40 @ $8
January 31 Ending inventory 20 units
91) Ruby uses the FIFO cost flow assumption. Calculate its January cost of goods sold.
(10 × $6) + (40 × $7) + (20 × $8) = $500
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 17 / None
92) Ruby uses the LIFO cost flow assumption. Calculate its January cost of goods sold.
(40 × $8) + (30 × $7) = $530
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 18 / None
93) Ruby uses the Average cost flow assumption. Calculate its January cost of goods sold.
Diff: Medium
Learning Objective: 7.4
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 19 / None
94) Toyz Retail Store sold $900 of merchandise to Ebony Inc. on April 3. On April 8, Ebony returned $200 of the merchandise that was defective. The original merchandise sold cost Toyz $600, but of this amount, $70 was returned. Toyz received payment from Ebony on April 10. What amount of sales and cost of goods sold should Toyz record for these transactions?
Cost of goods sold = $600 - $70 = $530
Diff: Medium
Learning Objective: 7.1; 7.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 2 min.
Title/Media Ref.: Short Problem 20 / None
Use the information that follows concerning Edward Company to answer the problems below.
Edward Company began business on January 1 and uses the periodic system. During January, Edward made the following purchases:
January 3: | 100 units @ $30 | $3,000 |
January 21: | 400 units @ $20 | $8,000 |
January sales: | 320 units @ $40 | $12,800 |
Other information:
January expenses excluding cost of goods sold | $ 800 |
January 31 current assets excluding inventory | 11,000 |
January 31 current liabilities | 6,000 |
Number of shares of common stock | 300 |
95) Calculate Edward's January earnings per share under the FIFO and LIFO cost flow assumptions.
LIFO net income: $12,800 − [320 × $20] − $800 = $5,600
FIFO EPS: $4,600/300 = $15.33 per share
LIFO EPS: $5,600/300 = $18.67 per share
Diff: Hard
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 5 min.
Title/Media Ref.: Short Problem 21 / None
96) Calculate Edward's January current ratio under the FIFO and LIFO cost flow assumptions.
FIFO: ($11,000 + $3,600)/$6,000 = 2.43; LIFO: ($11,000 + $4,600)/$6,000 = 2.60
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 22 / None
97) Nokia Inc. reported beginning inventory of $90,000, ending inventory of $23,000, purchases of $128,000, purchase returns of $2,000, and transportation-in of $3,000. Calculate cost of goods sold.
Diff: Medium
Learning Objective: 7.1; 7.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Short Problem 23 / None
98) Ramiro Co. has valued its beginning and ending inventories at $4,000 and $5,000, respectively, during a period where purchases totaled $150,000. An auditor found errors in the ending inventory valuation and insisted that it be restated to $6,000. Calculate the adjusted cost of goods sold resulting from the inventory restatement.
Diff: Medium
Learning Objective: 7.1; 7.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 24 / None
99) Morrie Produce began operations on July 1. Below is its income statement for the month of July and the current portion of its balance sheet dated July 31.
Sales revenue | $45,000 |
Cost of goods sold (Note 1) | 12,000 |
Gross profit | 33,000 |
Operating expenses | 4,700 |
Net income | $28,300 |
Current assets: | |
Cash | $8,000 |
Accounts receivable | 4,000 |
Inventory | 1,200 |
Total current assets | $13,200 |
Current liabilities: | |
Accounts payable | $ 9,000 |
Notes payable | 4,000 |
Total current liabilities | $13,000 |
Note 1: Morrie uses the periodic LIFO method of inventory valuation. | ||
July 1 | Purchased 80 units @ $30 | $ 2,400 |
July 17 | Purchased 180 units @ $60 | 10,800 |
Cost of goods available | 13,200 | |
July 31 Inventory | (40 @ $30) | 1,200 |
Cost of goods sold | $12,000 | |
Complete the following income statement and current portion of the balance sheet for Morrie for July using the FIFO cost flow assumption instead of LIFO.
Sales revenue . . . . . . . . . . . . . . . . . . ________
Cost of goods sold . . . . . . . . . . . . . .________
Gross profit . . . . . . . . . . . . . . . . . . . ________
Operating expenses. . . . . . . . . . . . . ________
Net income. . . . . . . . . . . . . . . . . . . . ________
Current assets:
Inventory. . . . . . . . . . . . . . . . . . .________
Sales revenue $ 45,000
Cost of goods sold 10,800
Gross profit 34,200
Operating expenses 4,700
Net income $ 29,500
Inventory (40 × $60) $ 2,400
Diff: Hard
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 8 min.
Title/Media Ref.: Short Problem 25 / None
100) Mamma's Cafe assigned the following costs to inventory on December 31:
Cash purchase costs $6,000
Commissions paid to Mamma's sales staff 230
Transportation-in costs 310
Cell phone charges for Mamma's' CEO 400
Handling cost associated with unloading the inventory 150
Labor and overhead costs attributable to repackaging inventory 280
Total cost $7,370
Current net income $24,000
Determine the correct December 31 inventory and recalculate current net income that is appropriate under generally accepted accounting principles. Justify your new valuation of inventory.
Cash price | $6,000 |
Repackaging costs | 280 |
Transportation-in | 310 |
Handling costs | 150 |
Total cost | $6,740 |
The adjusted net income is $24,000 - $230 - $400 = $23,370.
Diff: Hard
Learning Objective: 7.2
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 6 min.
Title/Media Ref.: Short Problem 26 / None
Short Essay Questions
101) Explain the statement that "a LIFO liquidation creates 'phantom' income".
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Communication; Reflective Thinking / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Essay Question 1 / None
102) Identify the options a manager has in measuring the cost of inventory when it is sold.
Diff: Easy
Learning Objective: 7.4
Bloom's: Knowledge
AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Essay Question 2 / None
103) What effect does management's perception of the 'capital market' have on selecting an inventory costing method?
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Communication; Reflective Thinking / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Essay Question 3 / None
104) If an entity overstates its ending inventory for the current year, what are the effects on assets, cost of goods sold, retained earnings, and total stockholders' equity for the current year?
Diff: Medium
Learning Objective: 7.1
Bloom's: Application
AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Essay Question 4 / None
105) During a period of rapidly rising inventory costs and a significant increase in inventory, a financial analyst made the following statement:
"I rank a company's earning power by using earnings per share. You do not need to be a rocket scientist and know all that accounting mumbo-jumbo in order to compare earnings per share of two companies to obtain a ranking of their earnings power."
Respond to the statement made by the financial analyst concerning the implications of choosing an inventory valuation method.
Diff: Hard
Learning Objective: 7.4
Bloom's: Application
AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Essay Question 5 / None
106) How do inventories of manufacturing companies differ from inventories of merchandising companies?
Diff: Easy
Learning Objective: 7.2
Bloom's: Knowledge
AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Essay Question 6 / None
107) The chief investment officer of a large mutual fund made the following statement:
"I prefer to use the debt/equity ratio instead of the debt/asset ratio because the latter ratio is sensitive to the measure of inventory where accountants can choose LIFO, FIFO, or weighted average. Therefore, I use the debt/equity ratio so that I do not have to worry about which inventory valuation method the accountant used when I run comparisons between companies."
Comment on the preceding statement.
Diff: Hard
Learning Objective: 7.4
Bloom's: Application
AACSB/AICPA: Communication; Reflective Thinking / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 7 / None
108) Why is the lower-of-cost-or-market rule necessary in accounting?
Diff: Medium
Learning Objective: 7.5
Bloom's: Application
AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Short Essay Question 8 / None
109) After studying a financial accounting text, your roommate asserts that what is interesting about accountants is that they always measure what actually happens. Having studied inventory, you disagree with your roommate's assertion. Present an argument refuting your roommate's position that accountants measure what actually happens using the knowledge acquired after learning about the options available to management regarding the allocation of the inventory cost to ending inventory and cost of goods sold at the point of sale.
Diff: Medium
Learning Objective: 7.4
Bloom's: Application
AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Essay Question 9 / None
110) If an entity understates its ending inventory for the current period, why does the effect on cost of goods sold and inventory carry over to the next year?
Diff: Medium
Learning Objective: 7.1
Bloom's: Application
AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Essay Question 10 / None
111) Explain the relationship between the valuation of inventory and income reporting.
Diff: Medium
Learning Objective: 7.2; 7.4; 7.5
Bloom's: Comprehension
AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Short Essay Question 11 / None
IFRS Questions
112) Which of the following inventory cost flow assumptions is not allowed under IFRS?
A) FIFO
B) Average Cost
C) LIFO
D) FIFO and LIFO
Diff: Easy
Learning Objective: 7.4
Bloom's: Knowledge
AACSB/AICPA: Analytic; Communication / BB: Global; FC: Reporting
TOT: 1 min.
Title/Media Ref.: IFRS Question 1 / None
113) When applying the lower-of-cost-or-market rule, IFRS uses the market value which is:
A) normally the realizable value or the amount at which the inventory could be sold.
B) normally the replacement cost or the cost of replacing the inventory.
C) normally the hypothetical future value.
D) IFRS does not use the lower-of-cost or market rule.
Diff: Easy
Learning Objective: 7.5
Bloom's: Knowledge
AACSB/AICPA: Analytic; Communication / BB: Global; FC: Reporting
TOT: 1 min.
Title/Media Ref.: IFRS Question 2 / None
114) Which of the following statements is true about cost recoveries that follow write downs associated with the lower-of-cost-or-market rule?
A) They boost earnings under IFRS but not under US GAAP.
B) They boost earnings under US GAAP but not under IFRS.
C) They boost earnings under both US GAAP and IFRS.
D) They boost earnings under neither US GAAP nor IFRS.
Diff: Easy
Learning Objective: 7.5
Bloom's: Knowledge
AACSB/AICPA: Analytic; Communication / BB: Global; FC: Reporting
TOT: 1 min.
Title/Media Ref.: IFRS Question 3 / None
Data Analytic Questions
Important Note to Instructor: All of the real world data included in the data analytic test bank questions was taken from the company information data base used for the data analytic concept practice exercises in the text located at www.wiley.com/go/pratt/financialaccounting11e. These questions can be used in at least two different ways to test two levels of data analytic skills. To test only the basic analysis required simply provide the student with the financial information followed by the questions just as they are illustrated in the test bank. Alternatively, to test both their ability to access and navigate the data base as well as their analysis skills, you can provide for the students only the questions and require them to access and navigate the data base, organize the data, and perform the analysis.
Key ratios for apparel retailer R.H. Macy's for 2017, 2018 and 2019, organized into the ROE framework, are provided below. Review the ratios and answer the questions that follow.
Key: ROE = Return on equity; ROA = Return on assets; CSL = Capital structure leverage; PM = Profit margin; AT = Asset turnover; LTD/TA = Long-term debt/total assets; COGS/S = COGS/sales; A/R Turn = Accounts receivable turnover; CR = Current ratio; OpEx/S = Operating expenses/sales; Inv Turn = Inventory turnover; QR = Quick ratio; Int/S = Interest expense/sales; LTA Turn = Long-term asset turnover; Int Cov = Interest coverage; Tax/S = Federal income tax expense/sales; A/P Turn = Accounts payable turnover; UG/NI = Unusual gains/net income; UL/NI = Unusual losses/net income
115) The change in ROE from 2018 to 2019 was driven primarily by:
A) the change in inventory turnover.
B) the change in asset turnover.
C) the change in the current ratio.
D) the change in Macy's ability to control total expenses.
Diff: Hard
Learning Objective: 7.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Data Analytic Question 1 / None
116) Least important to the change in asset turnover was:
A) the change in accounts receivable turnover.
B) the change in inventory turnover.
C) the change in accounts payable turnover.
D) the change in long-term asset turnover.
Diff: Hard
Learning Objective: 7.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Data Analytic Question 2 / None
117) Choose the best answer in explaining the change in ROE from 2018 to 2019.
A) Problems with Macy's ability to turn its inventories over more quickly.
B) Problems with Macy's ability to turn its asset over more quickly.
C) Problems with Macy's ability to control its total expenses.
D) Problems with turnover in its stores.
Diff: Hard
Learning Objective: 7.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Data Analytic Question 3 / None
118) Which of the following statements is false?
A) Macy's is showing an improved ability to turnover its inventory across the 3-year period.
B) Over the 3-year period Macy's paid its suppliers increasingly slower.
C) Macy's sales price markup over its costs generally improved.
D) The change in the current ratio from 2018 to 2019 is unrelated to the change in inventory turnover.
Diff: Hard
Learning Objective: 7.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Data Analytic Question 4 / None
Video Questions
119) Which of the following statements is not true about inventories?
A) Inventory management and accounting is particularly important for retail and manufacturing companies.
B) Inventories are disclosed in the current asset section of the balance sheet.
C) Inventory accounting affects the balance sheet, but not the income statement.
D) When inventories are sold, the cost of goods sold account increases.
Diff: Easy
Learning Objective: 7.1
Bloom's: Comprehension
AACSB/AICPA: Knowledge / None
Title/Media Ref.: Introduction to inventory - Caterpillar Video: Question 1 / Video: Introduction to inventory - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
120) An overstatement of the year-end inventory balance leads to:
A) an overstatement of net income for the year.
B) an understatement of net income for the year.
C) no effect on net income for the year.
D) an overstatement of cost of goods sold for the year.
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Introduction to inventory - Caterpillar Video: Question 2 / Video: Introduction to inventory - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
121) An understatement of the year-end inventory balance leads to:
A) an understatement of the following year's gross profit.
B) an understatement of cost of goods sold of the following year.
C) no effect on the following year's net income.
D) an understatement of net income for the following year.
Diff: Medium
Learning Objective: 7.1
Bloom's: Analysis
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Introduction to inventory - Caterpillar Video: Question 3 / Video: Introduction to inventory - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
122) What issues must be addressed when accounting for the acquisition of inventory?
A) The inventory cost flow assumption and the lower-of-cost or market rule.
B) The federal income taxes paid by the company.
C) The difference between accounting for the inventory acquisition under IFRS versus U.S. GAAP.
D) The inventory units acquired and the costs to attach to the acquired units.
Diff: Medium
Learning Objective: 7.1
Bloom's: Comprehension
AACSB/AICPA: Knowledge / None
Title/Media Ref.: Introduction to inventory - Caterpillar Video: Question 4 / Video: Introduction to inventory - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
123) What is the primary advantage of maintaining a perpetual balance in the inventory account?
A) It allows the company to follow up on cases where the ending inventory account differs from the dollar balance in the inventory at year end.
B) It makes it easier to compute financial ratios that use the inventory valuation.
C) It encourages companies to adopt the averaging cost flow assumption.
D) It normally increases the inventory valuation leading to higher net income amounts.
Diff: Medium
Learning Objective: 7.1
Bloom's: Comprehension
AACSB/AICPA: Knowledge / None
Title/Media Ref.: Introduction to inventory - Caterpillar Video: Question 5 / Video: Introduction to inventory - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
124) Which of the following is not true about inventory cost flow assumptions?
A) They can have a significant effect on the manner in which the inventory costs are allocated to ending inventory on the balance sheet and cost of goods sold on the income statement.
B) Averaging and last-in, first-out are acceptable assumptions under both U.S. GAAP and IFRS.
C) Averaging and first-in, first-out are acceptable under both U.S. GAAP and IFRS.
D) The choice of the inventory cost flow assumptions not only affects the net income number on the income statement, but also affects the taxable income number on the income tax forms filed with the IRS.
Diff: Medium
Learning Objective: 7.1
Bloom's: Comprehension
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Introduction to inventory - Caterpillar Video: Question 6 / Video: Introduction to inventory - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
125) Which of the following rules is applied to the ending inventory on the balance sheet?
A) Revenue recognition
B) Matching
C) Lower-of-cost-or-market
D) Cost flow assumption
Diff: Medium
Learning Objective: 7.1
Bloom's: Comprehension
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Introduction to inventory - Caterpillar Video: Question 7 / Video: Introduction to inventory - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
126) If the cost of a company's ending inventory is $50 and its market value is estimated to be $52, at what value should the ending inventory be carried on the balance sheet?
A) $52
B) $50
C) $2.
D) $48
Diff: Medium
Learning Objective: 7.1
Bloom's: Comprehension
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Introduction to inventory - Caterpillar Video: Question 8 / Video: Introduction to inventory - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
127) Which of the following statements is not true if an inventory value written down from $58 to $54 at the end of year 1 recovers to $56 by the end of year 2?
A) If the company uses IFRS, the end of year 2 balance would be $54.
B) Under both U.S. GAAP and IFRS, the end of year 1 balance would be $54.
C) Under IFRS the company would book a $4 loss in year 1 and a $2 gain in year 2.
D) Under U.S. GAAP the company would book a $4 loss in year 1 and no loss or gain in year 2.
Diff: Medium
Learning Objective: 7.1
Bloom's: Comprehension
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Introduction to inventory - Caterpillar Video: Question 9 / Video: Introduction to inventory - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
128) Which of the following statements is true if one observed a negative number on the inventory line in the operating section of the statement of cash flows prepared under the indirect form of presentation?
A) Net income is less than net cash from operating activities.
B) Net income is greater than net cash from operating activities.
C) Inventory purchases likely exceeded inventory sales, which depressed operating cash flows.
D) Investing cash flows were increased by the sale of inventories.
Diff: Medium
Learning Objective: 7.1
Bloom's: Application
AACSB/AICPA: Knowledge / None
Title/Media Ref.: Introduction to inventory - Caterpillar Video: Question 10 / Video: Introduction to inventory - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
129) Which of the following is a statement of the general rule for attaching costs to inventories?
A) Any good owned by the company, whether or not on the company's premises, should be included in the inventory of that company.
B) Any costs associated with acquiring or selling the inventory should be included in the cost of the inventory.
C) Any cost required to get the inventory into sellable condition should be included in the capitalized cost of the inventory.
D) Inventory costs should be expensed when incurred.
Diff: Easy
Learning Objective: 7.2
Bloom's: Comprehension
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Accounting for inventory and manufacturers - Caterpillar Video: Question 1 / Video: Accounting for inventory and manufacturers - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
130) The cost of goods sold account of a retailer primarily consists of:
A) labor costs paid to the sales force.
B) the cost of purchasing the inventory which has been sold in the current period.
C) the cost of purchasing the inventory which as of year-end remains on the retailer's shelves.
D) the purchase cost, employee labor costs and overhead associated with acquiring, carrying and selling the inventory.
Diff: Easy
Learning Objective: 7.2
Bloom's: Comprehension
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Accounting for inventory and manufacturers - Caterpillar Video: Question 2 / Video: Accounting for inventory and manufacturers - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
131) The ledger of manufacturing companies typically include:
A) a general ledger inventory account and three subsidiary inventory accounts.
B) general ledger inventory and a cost of goods sold accounts, but no subsidiary ledgers.
C) only subsidiary ledgers for raw materials, work in process and finished goods that map to the balance sheet.
D) primarily a raw materials subsidiary account and a cost of goods sold general ledger account.
Diff: Easy
Learning Objective: 7.2
Bloom's: Comprehension
AACSB/AICPA: Knowledge / None
Title/Media Ref.: Accounting for inventory and manufacturers - Caterpillar Video: Question 3 / Video: Accounting for inventory and manufacturers - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
132) Which of the entries below would be recorded when accruing the labor cost of a company employee who worked on the assembly line for a specific inventory product?
A) Wage expense (debit); accrued wages payable (credit).
B) Prepaid wage expense (debit); accrued wages payable (credit).
C) Unearned wages (debit); accrued wages payable (credit).
D) Work in process (debit); accrued wages payable (credit).
Diff: Medium
Learning Objective: 7.2
Bloom's: Application
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Accounting for inventory and manufacturers - Caterpillar Video: Question 4 / Video: Accounting for inventory and manufacturers - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
133) Which of the entries below would be recorded when a manufacturing company sells an item of its inventory on account?
A) Cost of goods sold (debit); work in process (credit).
B) Cost of goods sold (debit); finished goods (credit).
C) Cost of goods sold (debit); inventory (credit).
D) Cost of goods sold (debit); raw materials (credit).
Diff: Medium
Learning Objective: 7.2
Bloom's: Application
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Accounting for inventory and manufacturers - Caterpillar Video: Question 5 / Video: Accounting for inventory and manufacturers - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
134) Which of the following is not an inventory cost flow assumption?
A) Lower-of-cost-or-market
B) Last-in, first-out
C) First-in, first-out
D) Averaging
Diff: Easy
Learning Objective: 7.4
Bloom's: Knowledge
AACSB/AICPA: Knowledge / None
Title/Media Ref.: Inventory cost flow assumptions - Caterpillar Video: Question 1 / Video: Inventory cost flow assumptions - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
135) Which statement below describes the LIFO Conformity Rule?
A) LIFO is not allowed under IFRS.
B) If LIFO is chosen for tax purposes, it must be used for financial reporting purposes.
C) LIFO must be used to report lower net income.
D) LIFO can only be used if it describes the actual physical flow of the inventory.
Diff: Easy
Learning Objective: 7.4
Bloom's: Knowledge
AACSB/AICPA: Knowledge / None
Title/Media Ref.: Inventory cost flow assumptions - Caterpillar Video: Question 2 / Video: Inventory cost flow assumptions - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
136) Which of the following is not true if inventory acquisition costs are increasing?
A) The averaging assumption leads to higher net income than the FIFO assumption.
B) The FIFO assumption leads to higher net income than the LIFO assumption.
C) The averaging assumption leads to higher net income than the LIFO assumption.
D) Cost of goods sold under FIFO is lower than under LIFO.
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Inventory cost flow assumptions - Caterpillar Video: Question 3 / Video: Inventory cost flow assumptions - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
137) Which of the following is not true if inventory acquisition costs are decreasing?
A) The averaging assumption leads to higher net income than the FIFO assumption.
B) The FIFO assumption leads to lower ending inventory than the LIFO assumption.
C) The averaging assumption leads to lower net income than the LIFO assumption.
D) Cost of goods sold under FIFO is lower than under LIFO.
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Inventory cost flow assumptions - Caterpillar Video: Question 4 / Video: Inventory cost flow assumptions - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
138) Which of the following is true if inventory acquisition costs are constant?
A) The averaging assumption leads to lower net income than the LIFO assumption.
B) The FIFO assumption leads to lower net income than the LIFO assumption.
C) The averaging assumption leads to higher net income than the LIFO assumption.
D) Cost of goods sold under FIFO is equal to cost of goods sold under LIFO.
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Inventory cost flow assumptions - Caterpillar Video: Question 5 / Video: Inventory cost flow assumptions - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
139) Which of the following is true if inventory acquisition costs are increasing?
A) LIFO leads to a lower income tax liability than both the FIFO and averaging assumptions.
B) The FIFO assumption leads to a lower income tax liability than the averaging assumption.
C) The averaging assumption leads to lower ending inventory than the LIFO assumption.
D) Cost of goods sold under FIFO is equal to cost of sold under LIFO.
Diff: Medium
Learning Objective: 7.4
Bloom's: Analysis
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Inventory cost flow assumptions - Caterpillar Video: Question 6 / Video: Inventory cost flow assumptions - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
140) Which of the following inventory cost flow assumptions resembles a "coal pile," where purchased units are assumed to be added to the top of the "pile" and sold units are assumed to be removed from the top of the "pile"?
A) FIFO
B) Averaging
C) LIFO
D) None of the assumptions resemble a "coal pile."
Diff: Easy
Learning Objective: 7.4
Bloom's: Knowledge
AACSB/AICPA: Knowledge / None
Title/Media Ref.: Inventory cost flow assumptions - Caterpillar Video: Question 7 / Video: Inventory cost flow assumptions - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
141) Which of the following is not a disadvantage of LIFO versus FIFO over a period of generally rising inventory costs?
A) LIFO ending inventory values can be significantly outdated.
B) LIFO does not normally reflect the actual physical flow of the goods.
C) The cost of goods sold under LIFO contains higher, more current costs than FIFO.
D) LIFO can cause companies to incur huge tax costs if they dip into old LIFO layers.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: Knowledge / None
Title/Media Ref.: Inventory cost flow assumptions - Caterpillar Video: Question 8 / Video: Inventory cost flow assumptions - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
142) Which of the following describes the LIFO Reserve?
A) The difference between ending inventory under LIFO and an estimate of ending inventory under FIFO.
B) The difference between ending inventory under LIFO and an estimate of ending inventory under Averaging.
C) The difference between cost of goods sold under LIFO and an estimate of cost of gods sold under FIFO.
D) The difference between income tax liability under LIFO and an estimate of the tax liability under FIFO
Diff: Easy
Learning Objective: 7.4
Bloom's: Knowledge
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: Inventory cost flow assumptions - Caterpillar Video: Question 9 / Video: Inventory cost flow assumptions - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
143) Which of the following is not true about the LIFO reserve?
A) Under U.S. GAAP the LIFO reserve must be disclosed by LIFO users.
B) The LIFO reserve can be used to estimate the net income a LIFO user would have reported had that company used FIFO.
C) The LIFO reserve can be used to estimate the income tax savings a company has enjoyed by using LIFO instead of FIFO over its lifetime.
D) The LIFO reserve can be helpful when comparing the reported net incomes of two companies that use IFRS to prepare their financial statements.
Diff: Medium
Learning Objective: 7.4
Bloom's: Comprehension
AACSB/AICPA: None / FC: Disclosure Question
Title/Media Ref.: Inventory cost flow assumptions - Caterpillar Video: Question 10 / Video: Inventory cost flow assumptions - Caterpillar. www.wiley.com/go/pratt/financialaccounting11e
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Test Bank | Financial Accounting Enhanced eText 11e by Pratt Peters
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