Question 1

Three key variables determine the dollar value of inventory: (1) inventory quantity, (2) costs of inventory and (3) cost flow assumption.

Accepted Answer

A) True 
 B)False

Question 2

LIFO inventory value is often less than the inventory's replacement cost because LIFO inventory is valued using the oldest purchase cost.

Accepted Answer

A) True 
 B)False

Question 3

A company has the following per unit original costs and replacement costs for its inventory:
 Part A: 50 units with a cost of $5 and replacement cost of $4.50
Part B: 75 units with a cost of $6 and replacement cost of $6.50
Part C: 160 units with a cost of $3 and replacement cost of $2.50
Under the lower of cost or market method, the total value of this company's ending inventory is:

Accepted Answer

A)  $1,180.00 
B)  $1,075.00 
C)  $1,112.50 or $1075.00, depending upon whether LCM is applied to individual items or the inventory as a whole 
D)  $1,112.50 
E)  $1180.00 or $1075.00, depending upon whether LCM is applied to individual items or to the inventory as a whole 
A)  $1,180.00 
B)  $1,075.00 
C)  $1,112.50 or $1075.00, depending upon whether LCM is applied to individual items or the inventory as a whole 
D)  $1,112.50 
E)  $1180.00 or $1075.00, depending upon whether LCM is applied to individual items or to the inventory as a whole

Question 4

The inventory turnover ratio is calculated as:

Accepted Answer

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

Question 5

During a period of steadily rising costs, the inventory valuation method that yields the lowest reported net income is:

Accepted Answer

A)  Specific identification method 
B)  Average cost method 
C)  Weighted-average method 
D)  FIFO method 
E)  LIFO method 
A)  Specific identification method 
B)  Average cost method 
C)  Weighted-average method 
D)  FIFO method 
E)  LIFO method

Question 6

Monitor Company uses the LIFO method for valuing its ending inventory. The following financial statement information is available for their first year of operation:
Monitor Company
Income Statement
For the year ended December 31
$\begin{array}{|l|r|}
\hline \text { Sales } & \$ 50,000 \
\hline \text { Cost of goods sold } & \underline{23,000} \
\hline \text { Gross profit } & \$ 27,000 \
\hline \text { Expenses } & \underline{13,000} \
\hline \text { Income before taxes } & \$ 14,000 \
\hline
\end{array}$
Monitor's ending inventory using the LIFO method was $8,200. Monitor's accountant determined that had they used FIFO, the ending inventory would have been $8,500.
a. Determine what the income before taxes would have been, had Monitor used the FIFO method of inventory valuation instead of LIFO
b. What would be the difference in income taxes between LIFO and FIFO, assuming a 30% tax rate?

Accepted Answer

a. If ending inventory is $300 higher us

Question 7

It can be expected that companies that sell perishable goods have higher inventory turnover than companies that sell nonperishable goods.

Accepted Answer

A) True 
 B)False

Question 8

The assignment of costs to the cost of goods sold and to inventory under the FIFO is the same for both the perpetual and periodic inventory systems.

Accepted Answer

A) True 
 B)False

Question 9

A company made the following merchandise purchases and sales during the month of May:
$\begin{array}{|l|l|l|l|}
\hline \text { May 1 purchased } & 380 & \text { units at } & \$ 15 \text { each } \
\hline \text { May 5 purchased } & 270 & \text { units at } & \$ 17 \text { each } \
\hline \text { May 10 sold } & 400 & \text { units at } & \$ 50 \text { each } \
\hline \text { May 20 purchased } & 300 & \text { units at } & \$ 22 \text { each } \
\hline \text { May 25 sold } & 400 & \text { units at } & \$ 50 \text { each } \
\hline
\end{array}$
There was no beginning inventory. If the company uses the FIFO periodic inventory method, what would be the cost of the ending inventory?

Accepted Answer

Cost of ending inven

Question 10

A company sells a climbing kit and uses the periodic inventory system to account for its merchandise. The beginning balance of the inventory and its transactions during January were as follows:
$\begin{array} { | l | l | } 
\hline \text { January 1: } & \text { Beginning balance of } 18 \text { units at } \$ 13 \text { each } \
\hline \text { January 12: } & \text { Purchased } 30 \text { units at } \$ 14 \text { each } \
\hline \text { January 19: } & \text { Sold } 24 \text { units at a selling price of } \$ 30 \text { each } \
\hline \text { January 20: } & \text { Purchased } 24 \text { units at } \$ 17 \text { each } \
\hline \text { January 27: } & \text { Sold } 27 \text { units at a selling price of } \$ 30 \text { each } \
\hline
\end{array}$
 If the ending inventory is reported at $357, what inventory method was used?

Accepted Answer

A)  LIFO 
B)  FIFO 
C)  Weighted average 
D)  Specific identification 
E)  Retail inventory method 
A)  LIFO 
B)  FIFO 
C)  Weighted average 
D)  Specific identification 
E)  Retail inventory method

Question 11

The full disclosure principle:

Accepted Answer

A)  Requires that when a change in inventory valuation method is made, the notes to the financial statements report the type of change, why it was made and its effect on net income 
B)  Requires that companies use the same accounting method for inventory valuation period after period 
C)  Is not subject to the materiality principle 
D)  Is only applied to retailers 
E)  Is also called the consistency principle 
A)  Requires that when a change in inventory valuation method is made, the notes to the financial statements report the type of change, why it was made and its effect on net income 
B)  Requires that companies use the same accounting method for inventory valuation period after period 
C)  Is not subject to the materiality principle 
D)  Is only applied to retailers 
E)  Is also called the consistency principle

Question 12

LIFO is the preferred inventory costing method when costs are rising and managers have incentives to report higher income. The reasons for doing this is for a bonus plan, job security and reputation.

Accepted Answer

A) True 
 B)False

Question 13

The dollar value assigned to goods purchased will differ under the different inventory valuation methods of specific identification, FIFO, LIFO and weighted average.

Accepted Answer

A) True 
 B)False

Question 14

An error in the period-end inventory causes an offsetting error in the next period and therefore:

Accepted Answer

A)  Managers can ignore the error 
B)  It is sometimes said to be self-correcting 
C)  It affects only income statement accounts 
D)  If affects only balance sheet accounts 
E)  Is immaterial for managerial decision making 
A)  Managers can ignore the error 
B)  It is sometimes said to be self-correcting 
C)  It affects only income statement accounts 
D)  If affects only balance sheet accounts 
E)  Is immaterial for managerial decision making

Question 15

A company's total cost of inventory was $305,000 and its market value is $297,000. Under the lower cost or market, the amount reported should be $305,000.

Accepted Answer

A) True 
 B)False

Question 16

A company's store was destroyed by a fire on February 10 of this year. The only information for the current period that could be salvaged included the following:
Beginning inventory, January 1: $34,000
Purchases to date: $118,000
Sales to date: $140,000
Historically, the company's gross profit ratio has been 30%. Estimate the value of the destroyed inventory using the gross profit method.

Accepted Answer

The answer of A company's store was destroyed by a...

Question 17

When purchase costs regularly rise, the ___________________ method of inventory valuation yields the highest gross profit and net income.

Accepted Answer

First in,

Question 18

A company has inventory of 15 units at a cost of $12 each on August 1. On August 5, they purchased 10 units at $13 per unit. On August 12 they purchased 20 units at $14 per unit. On August 15, they sold 30 units. Using the FIFO perpetual inventory method, what is the value of the inventory on August 15 after the sale?

Accepted Answer

A)  $140 
B)  $160 
C)  $210 
D)  $380 
E)  $590 
A)  $140 
B)  $160 
C)  $210 
D)  $380 
E)  $590

Question 19

In applying the lower of cost or market method to inventory valuation, market is defined as:

Accepted Answer

A)  Historical cost 
B)  Current replacement cost 
C)  Current sales price 
D)  FIFO 
E)  LIFO 
A)  Historical cost 
B)  Current replacement cost 
C)  Current sales price 
D)  FIFO 
E)  LIFO

Question 20

To avoid the time-consuming process of taking an inventory each year, the majority of companies use the gross profit method to estimate ending inventory.

Accepted Answer

A) True 
 B)False

Exam 5: Inventories and Cost of Sales

Three key variables determine the dollar value of inventory: (1) inventory quantity, (2) costs of inventory and (3) cost flow assumption.

LIFO inventory value is often less than the inventory's replacement cost because LIFO inventory is valued using the oldest purchase cost.

The inventory turnover ratio is calculated as:

During a period of steadily rising costs, the inventory valuation method that yields the lowest reported net income is:

It can be expected that companies that sell perishable goods have higher inventory turnover than companies that sell nonperishable goods.

The assignment of costs to the cost of goods sold and to inventory under the FIFO is the same for both the perpetual and periodic inventory systems.

The full disclosure principle:

LIFO is the preferred inventory costing method when costs are rising and managers have incentives to report higher income. The reasons for doing this is for a bonus plan, job security and reputation.

The dollar value assigned to goods purchased will differ under the different inventory valuation methods of specific identification, FIFO, LIFO and weighted average.

An error in the period-end inventory causes an offsetting error in the next period and therefore:

A company's total cost of inventory was $305,000 and its market value is $297,000. Under the lower cost or market, the amount reported should be $305,000.

When purchase costs regularly rise, the ___________________ method of inventory valuation yields the highest gross profit and net income.

In applying the lower of cost or market method to inventory valuation, market is defined as:

To avoid the time-consuming process of taking an inventory each year, the majority of companies use the gross profit method to estimate ending inventory.

Introducing Accounting in Business

Analyzing and Recording Transactions

Adjusting Accounts and Preparing Financial Statements

Accounting for Merchandising Operations

Cash and Internal Controls

Accounts and Notes Receivable

Long-Term Assets

Current Liabilities

Long-Term Liabilities

Corporate Reporting and Analysis

Reporting and Analyzing Cash Flows

Analyzing Financial Statements

Managerial Accounting Concepts and Principles

Job Order Costing and Analysis

Process Costing and Analysis

Activity-Based Costing and Analysis

Cost Behavior and Cost-Volume-Profit Analysis

Variable Costing and Performance Reporting

Master Budgets and Performance Planning

Flexible Budgets and Standard Costing

Decentralization and Performance Evaluation

Relevant Costing for Managerial Decisions

Capital Budgeting and Investment Analysis

Investments and International Operations

Accounting for Partnerships

Appendix : Accounting With Special Journals

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