Test Bank Chapter 6 Inventory Costing Mutiple Choice - Accounting Principles Vol 1 8e Canadian Complete Test Bank by Jerry J. Weygandt. DOCX document preview.
CHAPTER 6
INVENTORY COSTING
CHAPTER STUDY OBJECTIVES
1. Describe the steps in determining inventory quantities. The steps in determining inventory quantities are (1) taking a physical inventory of goods on hand, and (2) determining the ownership of goods in transit, on consignment, and in similar situations.
2. Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination. Costs are allocated to the Cost of Goods Sold account each time a sale occurs in a perpetual inventory system. The cost is determined by specific identification or by one of two cost formulas: FIFO (first-in, first-out) and weighted average.
Specific identification is used for goods that are not ordinarily interchangeable. This method tracks the actual physical flow of goods, allocating the exact cost of each merchandise item to cost of goods sold and ending inventory.
The FIFO cost formula assumes a first-in, first-out cost flow for sales. Cost of goods sold consists of the cost of the earliest goods purchased. Ending inventory is determined by allocating the cost of the most recent purchases to the units on hand.
The weighted average cost formula is used for goods that are homogeneous or non-distinguishable. Under weighted average, a new weighted (moving) average unit cost is calculated after each purchase and applied to the number of units sold. Inventory is updated by subtracting cost of goods sold for each sale from the previous ending inventory balance.
3. Explain the financial statement effects of inventory cost determination methods. Specific identification results in the best match of costs and revenues on the income statement. When prices are rising, weighted average results in a higher cost of goods sold and lower profit than FIFO. Weighted average results in a better match on the income statement because it results in an expense amount made up of more current costs. On the balance sheet, FIFO results in an ending inventory that is closest to the current (replacement) value and the best balance sheet valuation. All three methods result in the same cash flow.
4. Determine the financial statement effects of inventory errors. An error in beginning inventory will have a reverse effect on profit in the current year (e.g., an overstatement of beginning inventory results in an overstatement of cost of goods sold and an understatement of profit). An error in the cost of goods purchased will have a reverse effect on profit (e.g., an overstatement of purchases results in an overstatement of cost of goods sold and an understatement of profit). An error in ending inventory will have a similar effect on profit (e.g., an overstatement of ending inventory results in an understatement of cost of goods sold and an overstatement of profit). If ending inventory errors are not corrected in the following period, their effect on profit for the second period is reversed and total profit for the two years will be correct. On the balance sheet, ending inventory errors will have the same effects on total assets and total owner’s equity, and no effect on liabilities.
5. Value inventory at the lower of cost and net realizable value. The cost of the ending inventory is compared with its net realizable value. If the net realizable value is lower, a writedown is recorded, which results in an increase in cost of goods sold, and a reduction in inventory. The writedown is reversed if the net realizable value of the inventory increases, but the value of the inventory can never be higher than its original cost.
6. Demonstrate the presentation and analysis of inventory. Ending inventory is reported as a current asset on the balance sheet at the lower of cost and net realizable value. Cost of goods sold is reported as an expense on the income statement. Additional disclosures include the cost determination method.
The inventory turnover ratio is a measure of liquidity. It is calculated by dividing the cost of goods sold by average inventory. It can be converted to days sales in inventory by dividing 365 days by the inventory turnover ratio.
7. Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas (Appendix 6A). Under the FIFO cost formula, the cost of the most recent goods purchased is allocated to ending inventory. The cost of the earliest goods on hand is allocated to cost of goods sold. Under the weighted average cost formula, the total cost available for sale is divided by the total units available to calculate a weighted average unit cost. The weighted average unit cost is applied to the number of units on hand at the end of the period to determine ending inventory. Cost of goods sold is calculated by subtracting ending inventory from the cost of goods available for sale.
The main difference between applying cost formulas in a periodic inventory system and applying cost formulas in a perpetual inventory system is the timing of the calculations. In a periodic inventory system, the cost formula is applied at the end of the period. In a perpetual inventory system, the cost formula is applied at the date of each sale to determine the cost of goods sold.
8. Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B). Two methods of estimating inventories are the gross profit method and the retail inventory method. Under the gross prof t method, the gross profit margin is applied to net sales to determine the estimated cost of goods sold. The estimated cost of goods sold is subtracted from the cost of goods available for sale to determine the estimated cost of the ending inventory. Under the retail inventory method, a cost-to-retail ratio is calculated by dividing the cost of goods available for sale by the retail value of the goods available for sale. This ratio is then applied to the ending inventory at retail to determine the estimated cost of the ending inventory.
TRUE-FALSE STATEMENTS
1. In a periodic system, inventory quantities are continuously updated.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
2. All companies need to count their inventory at least once a year.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
3. Determining ownership of goods is one of the steps in taking a physical inventory count.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
4. Only smaller companies need to do an annual physical count of inventory.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
5. Only companies who use a periodic inventory system need to have an annual physical inventory count.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
6. Goods on consignment should be included in the inventory of the consignor.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
7. Goods that have been purchased FOB destination point but are in transit at year end should be included in the seller’s physical inventory count at year end.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
8. Goods that have been purchased FOB shipping point and are in transit at the year end should be included in the buyer’s physical inventory count at year end.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
9. Goods that have been removed from the warehouse and sent to a customer on approval do not need to be included in a seller’s inventory.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
10. Goods in transit should be ignored when performing a physical inventory count.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
11. Internal control is the process designed and implemented by management to help their organization achieve reliable financial reporting.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
12. An inventory count is generally more accurate when goods are not being sold or received during the counting.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
13. The counting of the inventory should be done by employees who are not responsible for either custody of the inventory or keeping inventory records.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
14. The Ontario Craft Company has $ 10,000 in inventory in its warehouse. The company has goods in transit of $ 500 shipped from a supplier FOB shipping point. Excluded from the items counted in the warehouse is $ 120 in goods held on consignment for a local manufacturer. Craft’s correct inventory balance is $ 10,500.
Difficulty: Medium
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
15. Physical inventory counts are not necessary under a perpetual inventory system.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
16. The first-in, first-out (FIFO) method tracks the actual physical flow (movement) of the goods in a perpetual inventory system.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
17. Companies use the specific identification cost determination method when the goods are interchangeable.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
18. If the goods are produced for specific projects, then the specific identification cost determination method must be used.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
19. Automobiles are a good example of a type of inventory where the FIFO cost formula is used.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
20. The FIFO and weighted average cost formulas can be used in both the perpetual and periodic inventory systems.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
21. The first-in, first-out (FIFO) cost formula assumes that the earliest (oldest) goods purchased are the last ones to be sold.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
22. When using the perpetual method of accounting and the weighted average cost formula, the weighted average cost per unit will change every time a unit of inventory is sold.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
23. When using the perpetual method of accounting and the weighted average cost formula, the weighted average cost per unit will change every time a unit of inventory is purchased.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
24. The specific identification inventory cost determination method is desirable when a company sells a large number of low-unit cost items.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
25. When using FIFO, beginning inventory + purchases – cost of goods sold = ending inventory.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
26. The first-in, first-out (FIFO) inventory cost formula results in an ending inventory valued at the most recent cost.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
27. If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under the FIFO and weighted average cost formulas.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
28. Inventory transactions affect both the income statement and the balance sheet.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
29. One of the considerations in choosing a cost determination method is to report an inventory cost on the balance sheet that is close to the inventory’s recent costs.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
30. One of the considerations of choosing a cost determination method is to use the same method for all inventories having a similar nature and usage in the company.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
31. A company is able to change its cost determination method from one year to the next.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
32. A change in the inventory cost determination method can only occur if the physical flow of inventory changes and a different method would result in more relevant information in the financial statements.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
33. If prices are falling, FIFO will report the lower profit, and weighted average the higher.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
34. If prices are stable, both weighted average and FIFO cost formulas will report the same results.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
35. The FIFO inventory cost determination method will result in a higher cash flow to a company than weighted average.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
36. The inventory cost determination method that assigns the highest cost to ending inventory in a period of rising prices is FIFO.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
37. Errors in the cost of goods sold will affect the income statement.
Difficulty: Easy
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
38. If beginning inventory is understated, then the cost of goods sold will be understated if there are no other errors.
Difficulty: Medium
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
39. An overstatement of the cost of goods sold will result in an overstatement of gross profit.
Difficulty: Easy
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
40. If the ending inventory is understated, then the beginning inventory of the next period will be overstated.
Difficulty: Easy
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
41. If the ending inventory is understated, then the profit of the company will be understated.
Difficulty: Medium
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
42. Inventory errors that affect the balance sheet will not affect the income statement.
Difficulty: Easy
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
43. Net realizable value is the selling price less any costs required to make the goods ready for sale.
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
44. When the net realizable value of inventory is lower than its cost, the inventory is written down to its net realizable value at the end of the period.
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
45. When there is clear evidence of an increase in net realizable value because of changed economic circumstances, the amount of a previously recorded writedown is reversed.
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
46. If an item of inventory that had been previously written down has been sold, a reversal should be recorded.
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
47. If there is a recovery in the net realizable value of the inventory, the write-up can never be larger than the original writedown.
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
48. In applying LCNRV, net realizable value is defined as the original purchase price less any costs required to make the goods ready for sale.
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
49. The inventory turnover ratio is the net sales divided by the average cost of goods sold.
Difficulty: Easy
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
AACSB: Analytic
50. The inventory turnover ratio is the average inventory divided by the average cost of goods sold.
Difficulty: Easy
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
AACSB: Analytic
51. The days sales in inventory ratio is the inventory ratio divided by the number of days in the year.
Difficulty: Easy
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
AACSB: Analytic
52. Inventory ratios can be used to measure how effectively a company manages its inventory.
Difficulty: Easy
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
AACSB: Analytic
53. Under the periodic inventory system, opening inventory will always be higher using weighted average cost of inventory than FIFO.
Difficulty: Easy
Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)
CPA: Financial Reporting
AACSB: Analytic
54. Under the periodic inventory system, the weighted average unit cost is calculated by dividing the total units available for sale by the cost of goods available for sale.
Difficulty: Easy
Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)
CPA: Financial Reporting
AACSB: Analytic
55. Under the periodic inventory system, the cost of goods available for sale will be the same under the weighted average cost or FIFO.
Difficulty: Easy
Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)
CPA: Financial Reporting
AACSB: Analytic
56. Under the periodic inventory system, if the number of units available for sale is the same as the ending inventory, no sales have been made in the period.
Difficulty: Easy
Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)
CPA: Financial Reporting
AACSB: Analytic
57. There is no difference in the amount of inventory calculated by the periodic and perpetual inventory systems when using the weighted average cost formula.
Difficulty: Easy
Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)
CPA: Financial Reporting
AACSB: Analytic
58. Inventory estimates are normally associated with the use of a periodic inventory system.
Difficulty: Easy
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
59. The retail inventory method estimates the cost of ending inventory by applying the gross profit margin to net sales.
Difficulty: Easy
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
60. To use the retail inventory method, a company’s records must show both the cost and the retail value of the goods available for sale.
Difficulty: Easy
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
61. The retail inventory method is useful for estimating the amount of shrinkage due to breakage, loss, and theft.
Difficulty: Easy
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
62. The major disadvantage of the retail inventory method is that it is an averaging technique.
Difficulty: Easy
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
63. If inventories are valued using the retail inventory method, they should not be classified as a current asset on the balance sheet.
Difficulty: Easy
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
64. The gross profit method of estimating inventory cannot be used if the gross profit margin has changed from the previous period.
Difficulty: Easy
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
65. If the physical inventory count shows an amount that is lower than the estimate from the calculation of the gross profit method of inventory estimation, the estimate should be used for the amount reported on the balance sheet.
Difficulty: Easy
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
66. If the physical inventory is less than the amount estimated using the retail inventory method, then there may be a theft problem.
Difficulty: Easy
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
MULTIPLE CHOICE QUESTIONS
67. The factor that determines whether or not goods should be included in a physical count of inventory is
a) physical possession.
b) legal title.
c) management's judgement.
d) whether or not the purchase price has been paid.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
68. If goods in transit are shipped FOB shipping point by a carrier named by the buyer,
a) the seller has legal title to the goods until they are delivered.
b) the buyer has legal title to the goods when a public carrier accepts the goods from the seller.
c) the seller is responsible for paying the shipping charges.
d) no one has legal title to the goods until they are delivered.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
69. If goods in transit are shipped FOB destination,
a) the seller has legal title to the goods until they are delivered.
b) the buyer has legal title to the goods when a public carrier accepts the goods from the seller.
c) the buyer is responsible for paying the shipping charges.
d) no one has legal title to the goods until they are delivered.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
70. According to the January 31, 2021 physical inventory count, Jigsaw Company has $ 24,500 in inventory on hand at year end. In addition, at year end the company has $ 1,200 of merchandise in transit purchased from a supplier and shipped FOB destination. Included in the physical inventory count was $ 900 of goods held on consignment for a local manufacturer. How much inventory should be reported on the company’s January 31, 2021 balance sheet?
a) $ 24,500
b) $ 25,700
c) $ 24,800
d) $ 23,600
Difficulty: Medium
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
71. “Goods on Approval”
a) are considered sold when removed from the seller’s premises regardless of whether or not legal title has transferred to the buyer.
b) should be included in the seller’s physical inventory unless legal title has passed to the buyer.
c) would be considered inventory of the buyer.
d) are not considered to be sold until the buyer has paid a cash deposit to the seller.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
72. Which of the following is an internal control procedure for counting inventory?
a) An employee is required to count all items twice for sake of verification.
b) Inventory should be counted by employees who are responsible for recording inventory.
c) Counting inventory in teams of two.
d) None of the above are internal control procedures for counting inventory.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
73. An employee assigned to counting computer monitors in boxes should
a) count the number of boxes only.
b) read each box and rely on the box description for the contents.
c) open each box and check that the box contains a monitor.
d) rely on the warehouse records of the number of computer monitors.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
74. After the physical inventory is completed
a) quantities are listed on inventory summary sheets.
b) quantities are entered into various general ledger inventory accounts.
c) the accuracy of the inventory summary sheets is checked by the person listing the quantities on the sheets.
d) unit costs are determined by dividing the quantities on the summary sheets by the total inventory costs.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
75. All of the following are examples of strong internal control when counting inventory except
a) prenumbered inventory tags should be used.
b) the inventory clerk should control all of the inventory count sheets.
c) the counting should be done by employees who are not responsible for either custody of the inventory or keeping inventory records.
d) there should be a second count by another employee or auditor.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
76. While goods purchased FOB destination, and shipped by train and then truck, are in transit, the goods should be included in the inventory of the
a) seller.
b) purchaser.
c) train company.
d) truck company.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
77. Under a consignment arrangement, the
a) consignor has ownership until goods are sold to a customer.
b) consignor has ownership until goods are shipped to the consignee.
c) consignee has ownership when the goods are in the consignee's possession.
d) consigned goods are included in the inventory of the consignee.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
78. Goods in transit should be included in the inventory of
a) the seller if the purchaser is responsible for paying freight charges.
b) the purchaser if the seller is responsible for paying freight charges.
c) either company that is party to the transaction.
d) the company that has ownership of the goods.
Difficulty: Easy
Learning Objective: Describe the steps in determining inventory quantities.
Section Reference: Determining Inventory Quantities
CPA: Financial Reporting
AACSB: Analytic
79. A company just starting in business purchased three merchandise inventory items at the following prices: first purchase, $ 100; second purchase, $ 120; third purchase, $ 125. If the company sold two units for a total of $ 400 and used FIFO, the gross profit for the period would be
a) $ 220.
b) $ 180.
c) $ 245.
d) $ 155.
Difficulty: Medium
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
80. The FIFO inventory cost formula assumes that the cost of the latest units purchased are
a) included in ending inventory.
b) included in cost of goods sold.
c) used to determine the average cost of the goods sold.
d) used to determine the average cost of the inventory.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
81. A company just starting business made the following three inventory purchases in February:
Feb. 1 225 units $ 1,350
Feb. 10 400 units 2,800
Feb. 28 100 units 800
$ 4,950
On Feb 15, there were 300 units sold. The company uses a perpetual inventory system. Using the FIFO inventory cost formula, the amount allocated to cost of goods sold for the February 15 sale is
a) $ 1,525.
b) $ 1,875.
c) $ 4,950.
d) $ 3,075.
Difficulty: Medium
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
82. A company just starting business made the following three inventory purchases in February:
Feb. 1 225 units $ 1,350
Feb. 10 400 units 2,800
Feb. 28 100 units 800
$ 4,950
On Feb 15, there were 300 units sold. The company uses a perpetual inventory system. Using the weighted average cost formula, the balance in ending inventory on February 28 is
a) $ 4,950.
b) $ 3,075.
c) $ 2,958.
d) $ 1,992.
Difficulty: Medium
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
83. Singh Computer Shop begins operations on June 1 and uses a perpetual inventory system. During June, the company had the following purchases and sales for its Model 10 Fastback Computer System:
Purchases____
Date Units Unit Cost Sales (Units)
June 1 4 $ 2,000
5 2
9 9 $ 2,600
16 3
Using the FIFO cost formula, total cost of goods sold for June is
a) $ 10,000.
b) $ 10,600.
c) $ 13,000.
d) $ 20,800.
Difficulty: Medium
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
84. Singh Computer Shop begins operations on June 1 and uses a perpetual inventory system. During June, the company had the following purchases and sales for its Model 10 Fastback Computer System:
Purchases____
Date Units Unit Cost Sales (Units)
June 1 4 $ 2,000
5 2
9 9 $ 2,600
16 3
Using the weighted average cost formula, the balance in ending inventory on June 30 is
a) $ 19,323.
b) $ 14,538.
c) $ 19,927.
d) $ 10,600.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
85. A company purchased inventory as follows:
200 units at $ 9
300 units at $ 10
The weighted average unit cost for inventory is
a) $ 9.00.
b) $ 9.50.
c) $ 9.60.
d) $ 10.00.
Difficulty: Medium
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
86. The cost of goods available for sale consists of which two elements?
a) the cost of beginning inventory and the cost of ending inventory
b) the cost of ending inventory and the cost of goods purchased during the year
c) the cost of beginning inventory and the cost of goods purchased during the year
d) the difference between the costs of goods purchased and the cost of goods sold during the year
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
87. Of the following companies, which one would not likely employ the specific identification method for inventory costing?
a) art gallery
b) farm implements dealership
c) antique shop
d) drug store
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
88. A problem with the specific identification method is that
a) inventories can be reported at actual costs.
b) management can manipulate profit.
c) the physical flow of inventory is not followed.
d) the lower of cost and market basis cannot be applied.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
89. The selection of an appropriate inventory cost formula for an individual company is made by
a) the external auditors.
b) the accounting standards for private companies.
c) the International Financial Reporting Standards for public companies.
d) management.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
90. Stella Inc. uses the perpetual inventory system and the weighted average cost formula to value inventories. On August 1, there were 5,000 units valued at $ 15,000 in the beginning inventory. On August 10, 10,000 units were purchased for $ 6 per unit. On August 15, 8,000 units were sold for $ 12 per unit. The amount charged to cost of goods on August 15 was
a) $ 35,000.
b) $ 40,000.
c) $ 48,000.
d) $ 36,000.
Difficulty: Medium
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
91. Which of the following statements is correct with respect to inventories?
a) The FIFO cost formula assumes that the costs of the earliest goods acquired are the last to be sold.
b) It is generally good business management to sell the most recently acquired goods first.
c) Under FIFO, the ending inventory is based on the latest units purchased.
d) FIFO seldom coincides with the actual physical flow of inventory.
Difficulty: Easy
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
Section Reference: Inventory Cost Determination Methods
CPA: Financial Reporting
AACSB: Analytic
92. Goldfish Pro Company sells fly fishing lures and uses a perpetual inventory system. The beginning balance of the inventory and transactions during September were as follows:
September 1: Balance: 10 units @ $ 13
September 7: Purchased 30 units @ $ 14
September 10: Sold 18 units @ $ 17
September 22: Purchased 25 units @ $ 17
September 29: Sold 22 units @ $ 19
What inventory cost determination method was used if the ending inventory is determined to be $ 425?
a) average costing
b) FIFO
c) weighted average
d) specific identification
Difficulty: Medium
Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
CPA: Financial Reporting
AACSB: Analytic
93. When prices are constant, which of the following inventory cost formulas will lead to the lowest cost of goods sold figure?
a) FIFO
b) specific identification
c) weighted average
d) When prices are constant, all cost determination methods will yield the same cost of goods sold figure.
Difficulty: Medium
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
94. Which of the following statements is true regarding inventory cost formulas?
a) A company may use more than one cost formula concurrently.
b) A company must comply with the method specified by industry standards.
c) A company must use the same method for domestic and foreign operations.
d) A company may never change its inventory cost formula once it has chosen a method.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
95. In a period of increasing prices, which cost determination method will result in the lowest amount of cash flow?
a) FIFO
b) specific identification
c) weighted average
d) Cash flow will be the same under all methods.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
96. The specific identification method of costing inventories is used when the
a) physical flow of units cannot be determined.
b) company sells large quantities of relatively low-cost homogeneous items.
c) company sells large quantities of relatively low-cost heterogeneous items.
d) company sell goods that are not interchangeable.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
97. In a period of rising prices, ending inventory using FIFO will be ______ ending inventory determined using weighted average.
a) higher than
b) lower than
c) equal to
d) Cost formulas have no impact on ending inventory.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
98. Trailers R Us uses the specific identification method of costing inventory. During March, they purchased three cars for $ 5,000, $ 6,500, and $ 8,000, respectively. During March, the first two cars are sold for $ 7,500 each. What is Trailers R Us gross profit for March?
a) $ 2,000
b) $ 3,500
c) $ 500
d) $ 7,000
Difficulty: Medium
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
99. In periods of rising prices, the ending inventory using the FIFO cost formula will be
a) higher than using the weighted average cost method.
b) indeterminable.
c) lower than weighted average cost.
d) the same as weighted average cost.
Difficulty: Medium
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
100. The managers of Tong Company receive performance bonuses based on the profit of the firm. Which cost formula are they likely to favour in periods of declining prices?
a) estimating inventory method
b) weighted average
c) FIFO
d) physical inventory method
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
101. Selection of an inventory cost formula by management does not usually depend on
a) the fiscal year end.
b) income statement effects.
c) balance sheet effects.
d) tax effects.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
102. When comparing the weighted average and FIFO inventory cost formulas during a period when prices are rising, which of the following statements is correct?
a) FIFO will result in a lower inventory balance reported on the balance sheet.
b) Weighted average will result in a higher cash flow.
c) FIFO will result in a higher profit reported on the income statement.
d) Weighted average will result in a higher gross profit reported on the income statement.
Difficulty: Medium
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
103. The two inventory cost formulas will result in the following comparative effects on profit during a period when prices are rising:
FIFO Weighted Average
a) Higher No effect
b) Higher Lower
c) Lower Higher
d) No effect No effect
Difficulty: Medium
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
104. Two companies report the same cost of goods available for sale but each employs a different cost formula. If the price of goods has increased during the period, then the company using
a) weighted average will have the higher ending inventory.
b) FIFO will have the higher cost of goods sold.
c) FIFO will have the higher ending inventory.
d) weighted average will have the lower cost of goods sold.
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
105. Assuming rising inventory prices, which inventory cost determination method results in reporting the lower ending inventory value?
a) specific identification
b) FIFO
c) weighted average
d) none of the above
Difficulty: Easy
Learning Objective: Explain the financial statement effects of inventory cost determination methods.
Section Reference: Financial Statement Effects
CPA: Financial Reporting
AACSB: Analytic
106. If ending inventory is overstated in 2021, and no further errors are made in 2022, then profit will be
a) overstated in 2021 and understated in 2022.
b) understated in 2021 and overstated in 2022.
c) overstated in both 2021 and 2022.
d) overstated in 2021 and correct in 2022.
Difficulty: Easy
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
107. If ending inventory is understated in 2021, and no further errors are made in 2022, the 2022 ending owner’s equity will be
a) understated.
b) overstated.
c) correct.
d) Owner’s equity is never affected by an inventory error.
Difficulty: Easy
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
108. During its December 31, 2021 year-end inventory count, March Ltd. failed to count items in transit to which it had legal title. As a result of this error, ending inventory was understated by $ 30,000. As a result of this error, 2021 cost of goods sold will be
a) understated by $ 30,000.
b) overstated by $ 30,000.
c) correct.
d) greater when weighted average cost is used.
Difficulty: Medium
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
109. During its December 31, 2021 year-end inventory count, Googly Company failed to count items in transit to which it had legal title. As a result of this error, ending inventory was understated by $ 30,000. Assuming the company makes no errors in 2022, Googly’s owner’s equity at the end of December 2022 will be
a) overstated by $ 30,000.
b) understated by $ 30,000.
c) overstated by $ 60,000.
d) correct.
Difficulty: Medium
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
110. An error in the physical count of goods on hand at the end of a period resulted in a $ 10,000 overstatement of the ending inventory. The effect of this error in the current period is
Cost of Goods Sold Profit
a) understated understated
b) overstated overstated
c) understated overstated
d) overstated understated
Difficulty: Easy
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
111. If beginning inventory is understated by $ 10,000, the effect of this error in the current period is
Cost of Goods Sold Profit
a) understated understated
b) overstated overstated
c) understated overstated
d) overstated understated
Difficulty: Medium
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
112. Medieval Company uses the perpetual inventory method and the beginning inventory is overstated by $ 4,000 because the ending inventory in the previous period was overstated by $ 4,000. The amounts reflected in the current end-of-period balance sheet are
Assets Owner's Equity
a) overstated overstated
b) correct correct
c) understated understated
d) overstated correct
Difficulty: Medium
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
113. Inventory errors can result in errors in determining all of the following, except
a) ending inventory.
b) sales.
c) beginning inventory.
d) cost of goods sold.
Difficulty: Easy
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
114. An error in cost of goods sold has ______ impact on gross profit and profit.
a) no
b) the opposite
c) the same
d) immaterial
Difficulty: Easy
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
115. Which of the following statements is correct?
a) Errors can only occur in a perpetual inventory system.
b) Errors can only occur in a periodic inventory system.
c) Errors can occur either in a perpetual or periodic inventory system.
d) Errors will not occur if you are using a perpetual inventory system.
Difficulty: Easy
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
116. Which of the following best describes why inventory errors are often said to be “self-correcting”?
a) Inventory errors have no impact on the income statement.
b) An inventory error in the current period will have a reverse effect in the next period.
c) An inventory error in the current period will have the same effect in the next period.
d) Inventory errors have no impact on the balance sheet.
Difficulty: Medium
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
117. Overstatement of ending inventory causes
a) cost of goods sold to be overstated and net income to be understated.
b) cost of goods sold to be overstated and net income to be overstated.
c) cost of goods sold to be understated and net income to be understated.
d) cost of goods sold to be understated and net income to be overstated.
Difficulty: Medium
Learning Objective: Determine the financial statement effects of inventory errors.
Section Reference: Inventory Errors
CPA: Financial Reporting
AACSB: Analytic
118. Revaluation of inventories to net realizable value should occur
a) only if the amount is material.
b) at year end only.
c) in the period during which the decline occurs.
d) at management’s discretion.
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
119. If the net realizable value of a merchandising company’s inventory is higher than its cost
a) no actions should be taken.
b) the company’s ending owner’s equity should be increased to reflect this.
c) the inventory accounts should be debited and a gain should be reported.
d) the inventory account should be debited and cost of goods sold credited.
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
120. Cheap Sheep Company developed the following information about its inventories in applying the lower of cost and net realizable value in valuing inventories:
Product Cost_ NRV
A $ 70,000 $ 75,000
B 50,000 48,000
C 100,000 102,000
After Cheap Sheep Company values its inventory at the lower of cost or net realizable value, the value of the inventory reported on the balance sheet would be
a) $ 227,000.
b) $ 220,000.
c) $ 225,000.
d) $ 218,000.
Difficulty: Medium
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
121. For a merchandising company, the net realizable value of its inventory is the
a) original cost of the inventory.
b) current selling price.
c) current selling price less any costs required to make the goods ready for sale.
d) original cost of the inventory less any costs required to make the goods ready for sale.
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
122. LCNRV is an acronym for
a) lower of count and net realizable value.
b) lower of cost and net realizable value.
c) lower of cost and non-realistic value.
d) lower of cost and net retail value.
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
123. LCNRV is applied to inventory
a) at the end of the period.
b) at the beginning of the period.
c) after each purchase.
d) after each sale.
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
124. If the net realizable value declines to an amount lower than cost, the Cost of Goods Sold account will
a) increase.
b) decrease.
c) be adjusted to the cost amount.
d) stay the same.
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
125. The evidence required for a reversal of a previous inventory writedown would be
a) a decline in selling prices.
b) an increase in selling prices.
c) an increase in products/ merchandise sold.
d) a decrease in products/ merchandise sold.
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
126. If there is a recovery in the value of inventory, the writeup may
a) always be greater than the original writedown.
b) never be greater than the original writedown.
c) always be for the fair value amount of the inventory.
d) always be for the full amount of the recovery.
Difficulty: Easy
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
127. Duke’s Snowshoes usually sells its snowshoes for $ 140 per unit and allows Duke’s to earn a 20% profit margin. It has recently come to Duke’s attention that the expected selling price has fallen to $ 70 per unit. Duke’s current inventory includes 85 units purchased at $ 100 per unit. Calculate the value of the inventory at the lower of cost and net realizable value.
a) $ 7,000
b) $ 8,500
c) $ 5,950
d) $ 9,520
Difficulty: Medium
Learning Objective: Value inventory at the lower of cost and net realizable value.
Section Reference: Presentation and Analysis of Inventory
CPA: Financial Reporting
AACSB: Analytic
128. If the cost of goods sold is $ 250,000 and the inventory turnover is 2.8, then the average inventory and days sales in inventory are
a) $ 89,286 and 130 days.
b) $ 700,000 and 130 days.
c) $ 89,286 and 1022 days.
d) $ 700,000 and 1022 days.
Difficulty: Medium
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
AACSB: Analytic
129. Everything Must Go Company has a beginning merchandise inventory of $ 17,000, an ending merchandise inventory of $ 20,000, sales of $ 350,000, and a cost of goods sold of $ 200,000. Everything Must Go’s inventory turnover is
a) 10.0 times.
b) 10.8 times.
c) 17.5 times.
d) 18.9 times.
Difficulty: Medium
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
AACSB: Analytic
130. Which of the following best indicates that a company is managing its inventory efficiently?
a) a low inventory turnover ratio
b) a high inventory turnover ratio
c) a high days sales in inventory ratio
d) a low gross profit margin
Difficulty: Easy
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
AACSB: Analytic
131. In 2022, Rock Support Inc. had average inventory of $ 86,000. The 2022 income statement showed net sales of $ 2,200,000 and gross profit of $ 420,000. In 2021, it was taking the company approximately 30 days to sell its inventory. The company’s inventory turnover for 2022 was approximately
a) 20.7 times.
b) 2.7 times.
c) 25.6 times.
d) 4.9 times.
Difficulty: Medium
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
AACSB: Analytic
132. In 2022, Tornado Ltd. had average inventory of $ 86,000. The 2022 income statement showed net sales of $ 2,200,000 and gross profit of $ 420,000. In 2021, it was taking the company approximately 30 days to sell its inventory. In 2022, the company’s days sales in inventory
a) improved.
b) deteriorated.
c) remained unchanged.
d) More information is needed to make this determination.
Difficulty: Easy
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
AACSB: Analytic
133. Which one of the following statements is correct?
a) A merchandiser buys inventory and a manufacturer produces its inventory.
b) A manufacturer buys inventory and a merchandiser produces its inventory.
c) A merchandiser and a manufacturer produce their inventory.
d) A merchandiser and a manufacturer buy their inventory.
Difficulty: Easy
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
AACSB: Analytic
134. Having too much inventory can cost the company money in all the following areas except
a) storage costs.
b) interest costs.
c) high tech goods becoming obsolete.
d) depreciation.
Difficulty: Easy
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
AACSB: Analytic
135. The inventory turnover ratio measures the number of times inventory is
a) purchased.
b) returned.
c) sold.
d) written off.
Difficulty: Easy
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
AACSB: Analytic
136. Days sales in inventory is
a) the number of days it takes to deliver the inventory sold.
b) a measure of how many times the inventory is sold.
c) the number of days it takes to purchase inventory.
d) a measure of the average age of the inventory on hand.
Difficulty: Easy
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
AACSB: Analytic
137. Days sales in inventory is calculated as
a) cost of goods sold divided by average inventory.
b) average inventory divided by cost of goods sold.
c) days in the year divided by inventory turnover ratio.
d) inventory turnover ratio divided by days in the year.
Difficulty: Easy
Learning Objective: Demonstrate the presentation and analysis of inventory.
Section Reference: Reporting and Analyzing Inventory
CPA: Financial Reporting
AACSB: Analytic
138. When valuing ending inventory under a perpetual inventory system, the
a) valuation using weighted average is the same as the valuation using weighted average under the periodic inventory system.
b) weighted average cost method requires that a new weighted average unit cost be calculated after every sale.
c) valuation using FIFO is the same as the valuation using FIFO under the periodic inventory system.
d) most recent units purchased during the period using FIFO are allocated to the cost of goods sold when units are sold.
Difficulty: Medium
Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)
CPA: Financial Reporting
AACSB: Analytic
139. Which of the following statements concerning cost formulas in a periodic inventory system is incorrect?
a) The results under FIFO in a periodic system are the same as in a perpetual system.
b) The cost of goods sold would be lower using FIFO than weighted average in a period of rising prices.
c) When using the weighted average cost formula, a new weighted average cost per unit is calculated after each purchase.
d) The results under weighted average in a periodic system are not the same as in a perpetual system.
Difficulty: Easy
Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)
CPA: Financial Reporting
AACSB: Analytic
140. In a periodic inventory system the cost of goods available for sale is allocated between
a) beginning inventory and ending inventory.
b) beginning inventory and cost of goods on hand.
c) ending inventory and cost of goods sold.
d) beginning inventory and cost of goods purchased.
Difficulty: Easy
Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)
CPA: Financial Reporting
AACSB: Analytic
141. The Commodore Computer Shop begins operations on June 1 and uses a periodic inventory system. During June, the company had the following purchases for its Model 10 Fastback Computer System:
Purchases____
Date Units Unit Cost
June 1 4 $ 2,000
9 9 $ 2,600
On June 30 an inventory count showed there were 8 units on hand. Using the FIFO inventory cost formula, the amount allocated to cost of goods sold for June is
a) $ 10,000.
b) $ 10,600.
c) $ 16,000.
d) $ 20,800.
Difficulty: Medium
Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)
CPA: Financial Reporting
AACSB: Analytic
142. The Singh Computer Shop begins operations on June 1 and uses a periodic inventory system. During June, the company had the following purchases for its Model 10 Fastback Computer System:
Purchases____
Date Units Unit Cost
June 1 4 $ 2,000
9 9 $ 2,600
On June 30 an inventory count showed there were 8 units on hand. Using the weighted average cost formula, the amount allocated to the ending inventory on June 30 is
a) $ 19,323.
b) $ 12,077.
c) $ 20,800.
d) $ 18,400.
Difficulty: Medium
Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)
CPA: Financial Reporting
AACSB: Analytic
143. Which of the following statements concerning cost formulas in a periodic inventory system is correct?
a) The results under FIFO in a periodic system are the same as in a perpetual system.
b) In a periodic system using weighted average, the latest units purchased before each sale are allocated to the cost of goods sold.
c) In a periodic system using the weighted average cost formula, a new weighted average is calculated after each purchase.
d) The results under weighted average in a periodic system are the same as in a perpetual system.
Difficulty: Easy
Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)
CPA: Financial Reporting
AACSB: Analytic
144. In a periodic inventory system you must
a) track the number or cost of units sold during the year.
b) wait until the end of the year to allocate the costs of goods available for sale to ending inventory and cost of goods sold.
c) adjust inventory after each purchase only.
d) adjust inventory after each sale only.
Difficulty: Easy
Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)
CPA: Financial Reporting
AACSB: Analytic
145. Shareek Company uses the periodic inventory system. The following information is available for the year ended March 31:
Sales $ 165,000
Beginning inventory 58,500
Ending inventory 42,000
Purchases 100,000
The cost of goods sold for the period is
a) $ 116,500.
b) $ 158,500.
c) $ 65,000.
d) $ 48,500.
Difficulty: Medium
Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.
Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A)
CPA: Financial Reporting
AACSB: Analytic
146. Inventories are estimated
a) more frequently under a periodic inventory system than a perpetual inventory system.
b) using the wholesale inventory method.
c) more frequently under a perpetual inventory system than a periodic inventory system.
d) using the net method.
Difficulty: Easy
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
147. A company had sales of $ 150,000 and cost of goods available for sale of $ 300,000 during January. If its gross profit margin is estimated to be 40%, the ending inventory value at January 31 is estimated to be
a) $ 90,000.
b) $ 210,000.
c) $ 180,000.
d) $ 120,000.
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
148. A company had sales of $ 180,000 and cost of goods available for sale of $ 200,000 during August. If its gross profit margin is estimated to be 30%, the ending inventory value at August 31 is estimated to be
a) $ 20,000.
b) $ 60,000.
c) $ 74,000.
d) $ 54,000.
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
149. A company has goods available for sale during a period at cost and at retail of $ 90,000 and $ 150,000, respectively. If sales during the period amounted to $ 120,000, an estimate of the ending inventory at cost at the end of the period under the retail method is
a) $ 48,000.
b) $ 72,000.
c) $ 18,000.
d) $ 30,000.
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
150. A company has goods available for sale during a period at cost of $ 60,000 and at retail of $ 90,000. If sales during the period amounted to $ 75,000, an estimate of the ending inventory at cost at the end of the period under the retail method is
a) $ 22,500.
b) $ 15,000.
c) $ 10,000.
d) $ 25,000.
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
151. Newman Department Store estimates inventory by using the retail inventory method. The following information was developed:
At Cost At Retail
Beginning inventory $ 160,000 $ 400,000
Goods purchased 500,000 700,000
Net sales 650,000
The estimated cost of the ending inventory is
a) $ 390,000.
b) $ 270,000.
c) $ 490,000.
d) $ 450,000.
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
152. Margolians Department Store estimates inventory by using the retail inventory method. The following information was developed:
At Retail At Cost
Beginning inventory $ 220,000 $ 80,000
Goods purchased 360,000 152,000
Net sales 330,000
The estimated cost of the ending inventory is
a) $ 250,000.
b) $ 140,000.
c) $ 95,000.
d) $ 100,000.
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
153. Walters Department Store uses the retail inventory method to estimate its inventories. It calculated its cost-to-retail ratio during the period at 70%. Goods available for sale at retail amounted to $ 300,000 and goods were sold during the period for $ 160,000. The estimated cost of the ending inventory is
a) $ 140,000.
b) $ 210,000.
c) $ 98,000.
d) $ 200,000.
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
154. Hamil Company prepares monthly financial statements and uses the gross profit method to estimate ending inventories. Historically, the company has had a 40% gross profit margin. During June, net sales amounted to $ 50,000; the beginning inventory on June 1 was $ 15,000; and the cost of goods purchased during June amounted to $ 25,000. The estimated cost of Hamil Company's inventory on June 30 is
a) $ 10,000.
b) $ 30,000.
c) $ 9,000.
d) $ 20,000.
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
155. Fargone Products began its fiscal year with $ 38,000 in inventory at cost and purchased $ 65,000 of goods during the year. Net sales for the year totalled $ 150,000. Assuming the company has operated with a 35% average gross profit ratio for a number of years, what is the estimated ending inventory using the gross profit method?
a) $ 5,500
b) $ 50,500
c) $ 103,000
d) $ 150,000
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
156. The following inventory information is provided for Darwin Canoes:
Beginning inventory: cost $ 87,000; retail $ 115,000
Net purchases: cost $ 70,000; retail $ 138,000
Sales at retail: $ 200,000
The estimated cost of the ending inventory rounded to the nearest dollar and rounding the cost-to-retail ratio to the nearest percent is
a) $ 33,000.
b) $ 53,000.
c) $ 157,000.
d) $ 253,000.
Difficulty: Medium
Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.
Section Reference: Estimating Inventories (Appendix 6B)
CPA: Financial Reporting
AACSB: Analytic
MATCHING QUESTIONS
157. Match the items below by entering the appropriate code letter in the space provided.
A. Taking a physical inventory F. First-in, first-out (FIFO)
B. Consignment G. Lower of cost and net realizable value
C. FOB shipping point H. Weighted average
D. FOB destination I. Inventory turnover ratio
E. Specific identification J. Days sales in inventory
1. Involves counting, weighing, or measuring each kind of inventory on hand.
2. Ownership of goods transfers to the buyer when the public carrier accepts the goods.
3. Ownership of the goods remains with the seller until the goods reach the buyer.
4. Cost determination method that matches the actual physical flow for each inventory item.
5. Ending inventory consists of the most recent inventory purchases.
6. The same unit cost is used to determine the cost of ending inventory on hand and cost of goods sold.
7. To hold goods belonging to other parties and to sell them for a fee, without ever taking ownership to the goods.
8. Measures the number of times the inventory is sold during the period.
9. When the value of inventory is lower than its cost.
10. Days in the year divided by inventory turnover.
Document Information
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Accounting Principles Vol 1 8e Canadian Complete Test Bank
By Jerry J. Weygandt
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