Question 1

Underwood had cost of goods sold of $8 million and its ending inventory was $2 million. Therefore, its days' sales in inventory equals 25 days.

Accepted Answer

A) True 
 B)False

Question 2

Use the following information for Davis Company to compute inventory turnover for Year 2. $$\begin{array} { | l | r | r | } 
\hline & \text { Year 2 } & \text { Year 1 } \
\hline \text { Cost of goods sold } & 279,500 & 291.800 \
\hline \text { Ending inventory } & 47.700 & 49.350 \
\hline
\end{array}$$

Accepted Answer

A)  5.89 
B)  5.86 
C)  5.76 
D)  11.77 
E)  5.67 
A)  5.89 
B)  5.86 
C)  5.76 
D)  11.77 
E)  5.67

Question 3

According to IRS guidelines, companies may use FIFO for financial reporting and LIFO for tax reporting.

Accepted Answer

A) True 
 B)False

Question 4

Describe the internal controls that must be applied when taking a physical count of inventory.

Accepted Answer

The internal controls should include (1)

Question 5

A company uses the periodic inventory system and had the following activity during the current monthly period. $$\begin{array} { | l | l | l | } 
\hline \text { November 1: } & \text { Beginning inventory } & 100 \text { units @ \$20 } \
\hline \text { November 5: } & \text { Purchased } & 100 \text { units @ \$22 } \
\hline \text { November 8: } & \text { Purchas ed } & 50 \text { units @ \$23 } \
\hline \text { November 16: } & \text { Sold } & 200 \text { units @ \$45 } \
\hline \text { November 19: } & \text { Purchased } & 50 \text { units @ \$25 } \
\hline
\end{array}$$ Using the weighted-average inventory method, the company's ending inventory would be:

Accepted Answer

A)  $4,400 
B)  $2,250 
C)  $2,400 
D)  $2,200 
E)  $2,000 
A)  $4,400 
B)  $2,250 
C)  $2,400 
D)  $2,200 
E)  $2,000

Question 6

The lower of cost or market rule for inventory valuation is always applied to individual units separately rather than to major categories of inventory or to the entire inventory.

Accepted Answer

A) True 
 B)False

Question 7

A company's cost of goods sold was $15,500 and its average merchandise inventory was $4,500. Its inventory turnover equals 3.4.

Accepted Answer

A) True 
 B)False

Question 8

A company's inventory records report the following in November of the current year: $$\begin{array} { | l | l | l | } 
\hline \text { Beginging } & \text { November 1 } & 5 \text { units @ \$20 } \
\hline \text { Purchase } & \text { November 2 } & 10 \text { units @ \$22 } \
\hline \text { Purchas e } & \text { November 12 } & 6 \text { units @ \$25 } \
\hline
\end{array}$$ On November 8, it sold 12 units for $54 each. 
-Using the LIFO perpetual inventory method, what amount of gross profit was earned from the 12 units sold?

Accepted Answer

A)  $366 
B)  $388 
C)  $577 
D)  $260 
E)  $438 
A)  $366 
B)  $388 
C)  $577 
D)  $260 
E)  $438

Question 9

McCarthy Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. 
-Using the FIFO perpetual inventory method, what is the value of inventory after the October 4 sale?

Accepted Answer

A)  $3,485. 
B)  $3,445. 
C)  $3,461. 
D)  $3,472. 
E)  $3,500. 
A)  $3,485. 
B)  $3,445. 
C)  $3,461. 
D)  $3,472. 
E)  $3,500.

Question 10

The understatement of the beginning inventory balance causes:

Accepted Answer

A)  Cost of goods sold to be overstated and net income to be correct. 
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 overstated. 
D)  Cost of goods sold to be understated and net income to be understated. 
E)  Cost of goods sold to be overstated and net income to be understated. 
A)  Cost of goods sold to be overstated and net income to be correct. 
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 overstated. 
D)  Cost of goods sold to be understated and net income to be understated. 
E)  Cost of goods sold to be overstated and net income to be understated.

Question 11

Use the information below to determine the sales revenue, cost of goods sold and gross profit that would be reported for the company related to the March 16 sale assuming the company uses weighted average inventory valuation and a perpetual inventory system.
 $$\begin{array} { | l | l | } 
\hline \text { January 1: } & \text { Purchased } 100 \text { units at \$10 per unit. } \
\hline \text { February 5: } & \text { Purchased } 60 \text { units at \$12 per unit. } \
\hline \text { March 16: } & \text { Sold } 40 \text { units for \$16 per unit. } \
\hline
\end{array}$$

Accepted Answer

Sales = 40 * $16 = $640
Cost o

Question 12

When units are purchased at different costs over time, determining the cost per unit assigned to inventory items is simple.

Accepted Answer

A) True 
 B)False

Question 13

The full disclosure principle:

Accepted Answer

A)  Requires that companies use the same accounting method for inventory valuation period after period. 
B)  Is not subject to the consideration of materiality. 
C)  Prescribes that the notes to the financial statements report the change from one inventory valuation method to another. 
D)  Is also called the consistency principle. 
E)  Is only applied to retailers and manufacturers. 
A)  Requires that companies use the same accounting method for inventory valuation period after period. 
B)  Is not subject to the consideration of materiality. 
C)  Prescribes that the notes to the financial statements report the change from one inventory valuation method to another. 
D)  Is also called the consistency principle. 
E)  Is only applied to retailers and manufacturers.

Question 14

A company had beginning inventory of 10 units at a cost of $20 each on March 1. On March 2, it purchased 10 units at $22 each. On March 6 it purchased 6 units at $25 each. On March 8, it sold 22 units for $54 each. Using the FIFO perpetual inventory method, what was the cost of the 22 units sold?

Accepted Answer

A)  $520 
B)  $570 
C)  $450 
D)  $470 
E)  $490 
A)  $520 
B)  $570 
C)  $450 
D)  $470 
E)  $490

Question 15

Lucia Company reported cost of goods sold for Year 1 and Year 2 as follows: $\begin{array}{|l|c|c|}
\hline & \text { Year 1 } & \text { Y ear 2 } \
\hline \text { Beginning inventory } & \$ 120,000 & \$ 130,000 \
\hline \text { Cost of goods purchased } & \underline{250,000} & \underline{275,000} \
\hline \begin{array}{l}
\text { Cost of goods available for } \
\text { sale }
\end{array} & 370,000 & 405,000 \
\hline \text { Ending inventory } & \underline{130,000} & \underline{135,000} \
\hline \text { Cost of goods sold } & \underline{\$ 240,000} & \underline{\$ 270,000} \
\hline
\end{array}$
 Lucia Company made two errors: 1) ending inventory at the end of Year 1 was understated by
$15,000 and 2) ending inventory at the end of Year 2 was overstated by $6,000. Given this information, the correct cost of goods sold figure for Year 2 would be:

Accepted Answer

A)  $291,000 
B)  $276,000 
C)  $264,000 
D)  $249,000 
E)  $285,000 
A)  $291,000 
B)  $276,000 
C)  $264,000 
D)  $249,000 
E)  $285,000

Question 16

Days' sales in inventory is calculated as:

Accepted Answer

A)  Ending inventory divided by cost of goods sold. 
B)  Ending inventory divided by cost of goods sold times 365. 
C)  Ending inventory times cost of goods sold. 
D)  Cost of goods sold divided by ending inventory times 365. 
E)  Cost of goods sold divided by ending inventory. 
A)  Ending inventory divided by cost of goods sold. 
B)  Ending inventory divided by cost of goods sold times 365. 
C)  Ending inventory times cost of goods sold. 
D)  Cost of goods sold divided by ending inventory times 365. 
E)  Cost of goods sold divided by ending inventory.

Question 17

Under FIFO, the most recent costs are assigned to ending inventory.

Accepted Answer

A) True 
 B)False

Question 18

FIFO is preferred when purchase costs are rising and managers have incentives to report higher income for reasons such as bonus plans, job security, and reputation.

Accepted Answer

A) True 
 B)False

Question 19

The conservatism constraint prescribes that:

Accepted Answer

A)  All items of a material nature are included in financial statements. 
B)  When multiple estimates of amounts to be received or paid in the future are equally likely, then the least optimistic amount should be used. 
C)  A company use the same accounting methods period after period. 
D)  Revenues and expenses are reported in the period in which they are earned or incurred. 
E)  All inventory items are reported at full cost. 
A)  All items of a material nature are included in financial statements. 
B)  When multiple estimates of amounts to be received or paid in the future are equally likely, then the least optimistic amount should be used. 
C)  A company use the same accounting methods period after period. 
D)  Revenues and expenses are reported in the period in which they are earned or incurred. 
E)  All inventory items are reported at full cost.

Question 20

Goods in transit are automatically included in inventory regardless of whether title has passed to the buyer.

Accepted Answer

A) True 
 B)False

Exam 6: Inventories and Cost of Sales

Underwood had cost of goods sold of $8 million and its ending inventory was $2 million. Therefore, its days' sales in inventory equals 25 days.

Use the following information for Davis Company to compute inventory turnover for Year 2. Year 2 Year 1 Cost of goods sold 279,500 291.800 Ending inventory 47.700 49.350

According to IRS guidelines, companies may use FIFO for financial reporting and LIFO for tax reporting.

Describe the internal controls that must be applied when taking a physical count of inventory.

The lower of cost or market rule for inventory valuation is always applied to individual units separately rather than to major categories of inventory or to the entire inventory.

A company's cost of goods sold was $15,500 and its average merchandise inventory was $4,500. Its inventory turnover equals 3.4.

McCarthy Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. -Using the FIFO perpetual inventory method, what is the value of inventory after the October 4 sale?

The understatement of the beginning inventory balance causes:

When units are purchased at different costs over time, determining the cost per unit assigned to inventory items is simple.

The full disclosure principle:

A company had beginning inventory of 10 units at a cost of $20 each on March 1. On March 2, it purchased 10 units at $22 each. On March 6 it purchased 6 units at $25 each. On March 8, it sold 22 units for $54 each. Using the FIFO perpetual inventory method, what was the cost of the 22 units sold?

Days' sales in inventory is calculated as:

Under FIFO, the most recent costs are assigned to ending inventory.

FIFO is preferred when purchase costs are rising and managers have incentives to report higher income for reasons such as bonus plans, job security, and reputation.

The conservatism constraint prescribes that:

Goods in transit are automatically included in inventory regardless of whether title has passed to the buyer.

Accounting in Business

Analyzing and Recording Transactions

Adjusting Accounts and Preparing Financial Statements

Completing the Accounting Cycle

Accounting for Merchandising Operations

Accounting Information Systems

Cash and Internal Controls

Accounting for Receivables

Plant Assets Natural Resoures and Intangibles

Current Liabilities and Payroll Accounting

Accounting for Partnerships

Accounting for Corporations

Long-Term Liabilities

Investments

Reporting the Statement of Cash Flows

Analysis of Financial Statements

Managerial Accounting Concepts and Principles

Job Order Costing

Process Costing

Cost-Volume-Profit Analysis

Master Budgets and Planning

Flexible Budgets and Standard Costs

Performance Measurement and Responsibility Accounting

Capital Budgeting and Managerial Decisions

Present and Future Values in Accounting

Activity-Based Costing

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