Deck 9: Inventory and Cost of Goods Sold

Question 1

If the ending inventory balance is understated, net income of the same period

A) will be overstated.
B) will be understated.
C) will be unaffected.
D) cannot be determined from the information.

Answer 1

B

Question 2

The use of the gross profit method assumes

A) the amount of gross profit is the same as in prior years.
B) sales and cost of goods sold have not changed from previous years.
C) inventory values have not increased from previous years.
D) the relationship between selling price and cost of goods sold is similar to prior years.

Answer 2

D

Question 3

An overstatement of ending inventory in Period 1 would result in income of Period 2 being

A) overstated.
B) understated.
C) correctly stated.
D) The answer cannot be determined from the information given.

Answer 3

B

Question 4

If ending inventory on December 31, 2010, is overstated by $30,000, what is the effect on net income for 2011?

A) Net income is overstated by $30,000.
B) Net income is understated by $30,000.
C) Net income is overstated by $60,000.
D) The answer cannot be determined from the information given.

Question 5

Net realizable value can be defined as

A) selling price.
B) selling price less costs to complete and sell.
C) selling price plus costs to complete and sell.
D) acquisition cost plus costs to complete and sell.

Question 6

When would the replacement cost of inventory be used as the market value under the lower-of-cost-or-market method?

A) Always
B) When replacement cost is above net realizable value
C) When replacement cost is below net realizable value and above net realizable value less normal profit margin
D) When replacement cost is below net realizable value less normal profit margin

Question 7

When valuing raw materials inventory at lower of cost or market, what is the general meaning of the term "market"?

A) Net realizable value
B) Net realizable value less a normal profit margin
C) Current replacement cost
D) Discounted present value

Question 8

Under generally accepted accounting principles, the lower-of-cost-or-market procedure for assigning a value to inventory can be assigned to

A) total inventory.
B) groups of similar inventory items.
C) individual inventory items.
D) all of these.

Question 9

An example of an inventory accounting policy that should be disclosed is the

A) effect of inventory profits caused by inflation.
B) classification of inventory into raw materials, work in process, and finished goods.
C) identification of major suppliers.
D) method used for inventory costing.

Question 10

What is the maximum amount at which inventory can be valued when the goods have experienced a permanent decline in value?

A) Historical cost
B) Sales price
C) Net realizable value
D) Net realizable value reduced by a normal profit margin

Question 11

Hardy Company is a wholesale electronics distributor. On December 31, 2011, it prepared the following partial income statement:
$\begin{array}{lr}\text { Grosss sales.}&\$600,400\\\text { Sales discounts}&400\\\text {Net sales }&\$600,000\\\text {Cost of goods sold: }&\\\text {Beginning inventary . }&\$200,000\\\text { Net purchases}&300,000\\\end{array}$

Given this information, if Hardy Company's gross margin is 30 percent of net sales, what is the correct ending inventory balance?

A) $80,000
B) $120,000
C) $180,000
D) $500,000

Question 12

Which one of the following would cause a decrease in the cost ratio as used in the retail inventory method?

A) Higher retail prices
B) Lower net markups
C) More employee discounts given
D) Higher freight-in charges

Question 13

A markup of 25 percent on cost is equivalent to what markup on selling price? (rounded)

A) 15 percent
B) 20 percent
C) 25 percent
D) 33 percent

Question 14

When the current year's ending inventory amount is overstated, the

A) current year's cost of goods sold is overstated.
B) current year's total assets are understated.
C) current year's net income is overstated.
D) next year's income is overstated.

Question 15

The lower-of-cost-or-market inventory procedure would be expected to result in the lowest inventory valuation when applied to

A) total inventory.
B) groups of similar inventory items.
C) individual inventory items.
D) none of these.

Question 16

The gross profit method of inventory valuation is not valid when

A) there is substantial increase in the quantity of inventory during the year.
B) there is substantial increase in the cost of inventory during the year.
C) the gross margin percentage changes significantly during the year.
D) all ending inventory is destroyed by fire before it can be counted.

Question 17

Which statement is true about the gross profit method?

A) It may not be used to estimate inventories for annual statements.
B) It may not be used to estimate inventories for interim statements.
C) It may not be used by insurers of inventory.
D) It may not be used for internal estimates of inventory.

Question 18

The gross profit method of estimating inventory would not be useful when

A) a periodic system is in use and inventories are required for interim statements.
B) inventories have been destroyed or lost by fire, theft, or other casualty, and the specific data required for inventory valuation are not available.
C) there is a significant change in the mix of products being sold.
D) the relationship between gross profit and sales remains stable over time.

Question 19

Which of the following will result if the current year's ending inventory amount is understated in the cost of goods sold calculation?

A) Cost of goods sold will be overstated.
B) Total assets will be overstated.
C) Net income will be overstated.
D) Both cost of goods sold and net income will be overstated.

Question 20

If the replacement cost of a unit of inventory has declined below original cost, but the replacement cost exceeds net realizable value, the amount to be used for purposes of inventory valuation is

A) net realizable value.
B) original cost.
C) market value.
D) net realizable value less a normal profit margin.

Question 21

A company sells four products: I, II, III, and IV. The company values all inventories using the lower-of-cost-or-market procedure. The company has consistently experienced a profit margin of 20 percent of sales and expects this rate to hold for the future. Additional information, shown below, is available for the most recent year as of December 31.

See information regarding the four products above. Using the lower-of-cost-or-market procedure, what is the reported inventory value at December 31 for one unit of Product I?

A) $60
B) $70
C) $80
D) $90

Question 22

The following information appears in Olsen Company's records for the year ended December 31:

On December 31, a physical inventory revealed that the ending inventory was only $210,000. Olsen's gross profit on net sales has remained constant at 30 percent in recent years. Olsen suspects that some inventory may have been pilfered by one of the company's employees. At December 31, what is the estimated cost of missing inventory?

A) $75,000
B) $82,500
C) $210,000
D) $292,500

Question 23

The following information is available for the Becca Company for the three months ended June 30 of this year:

The gross margin was 25 percent of sales. What is the estimated inventory balance at June 30?

A) $880,000
B) $933,000
C) $1,200,000
D) $1,500,000

Question 24

Davis Company's accounting records indicated the following information:

A physical inventory taken on December 31, 2011, revealed actual ending inventory at cost was $1,150,000. Davis's gross profit on sales has regularly been about 25 percent in recent years. The company believes some inventory may have been stolen during the year. What is the estimated amount of missing inventory at December 31, 2011?

A) $50,000
B) $200,000
C) $350,000
D) $450,000

Question 25

The Garrett Corporation uses the lower-of-cost-or-market method to value inventory. Data regarding the items in work-in-process inventory are presented below.

See information regarding the Garrett Corporation above. The inventory valuation for highlighters using the lower-of-cost-or-market method is

A) $25,600.
B) $29,200.
C) $31,800.
D) $30,000.

Question 26

The following information is available for Torino Corp. for its most recent year:

The gross margin is 40 percent of net sales. What is the cost of goods available for sale?

A) $1,680,000
B) $1,920,000
C) $2,400,000
D) $2,440,000

Question 27

On June 19, 2011, a fire destroyed the entire uninsured merchandise inventory of the Allen Merchandising Company. The following data are available:

What is the approximate inventory loss as a result of the fire?

A) $19,200
B) $27,200
C) $34,000
D) $58,000

Question 28

A company sells four products: I, II, III, and IV. The company values all inventories using the lower-of-cost-or-market procedure. The company has consistently experienced a profit margin of 20 percent of sales and expects this rate to hold for the future. Additional information, shown below, is available for the most recent year as of December 31.

See information regarding the four products above. Using the lower-of-cost-or-market procedure, what is the reported inventory value at December 31 for one unit of Product III?

A) $50
B) $60
C) $70
D) $80

Question 29

Jupiter Company prepares monthly income statements. A physical inventory is taken only at year-end; hence, month-end inventories must be estimated. All sales are made on account. The rate of markup on cost is 50 percent. The following information relates to the month of May:

The estimated cost of the May 31 inventory is

A) $24,000.
B) $28,000.
C) $38,000.
D) $44,000.

Question 30

Venus Inc. carries Product A in inventory on December 31 at its unit cost of $22.50. Because of a sharp decline in demand for the product, the selling price is reduced to $24.00 per unit. Venus's normal profit margin on Product A is $4.80, disposal costs are $3.00 per unit, and the replacement cost is $15.90. Under the rule of lower of cost or market, Venus's December 31 inventory of Product A should be valued at a unit cost of

A) $15.90.
B) $16.20.
C) $21.00.
D) $22.50.

Question 31

Which of the following would not be included in the cost of work in process inventory?

A) Cost of electricity to operate factory equipment
B) Maintenance costs of factory equipment
C) Depreciation on office equipment in the sales manager's office
D) Depreciation on factory equipment

Question 32

A company sells four products: I, II, III, and IV. The company values all inventories using the lower-of-cost-or-market procedure. The company has consistently experienced a profit margin of 20 percent of sales and expects this rate to hold for the future. Additional information, shown below, is available for the most recent year as of December 31.

See information regarding the four products above. Using the lower-of-cost-or-market procedure, what is the reported inventory value at December 31 for one unit of Product II?

A) $70
B) $76
C) $90
D) $96

Question 33

The Garrett Corporation uses the lower-of-cost-or-market method to value inventory. Data regarding the items in work-in-process inventory are presented below.

See information regarding the Garrett Corporation above. When valuing the pens, the market value to be used in the lower-of-cost-or- market comparison is

A) $22,200.
B) $31,200.
C) $16,800.
D) $18,800.

Question 34

The Garrett Corporation uses the lower-of-cost-or-market method to value inventory. Data regarding the items in work-in-process inventory are presented below.

The value for cost to be used in the lower-of-cost-or-market comparison for the markers is

A) $20,800.
B) $23,400.
C) $24,000.
D) $31,200.

Question 35

Commodity X sells for $12.00; selling expenses are $2.40; normal profit is $3.00. If the cost of Commodity X is $7.80 and the replacement cost is $6.00, the lower of cost or market is

A) $5.40.
B) $6.00.
C) $6.60.
D) $7.80.

Question 36

The following information is available for the Neptune Company for the three months ended March 31 of this year:

The gross margin was estimated to be 25 percent of sales. What is the estimated inventory balance at March 31?

A) $350,000
B) $450,000
C) $562,500
D) $600,000

Question 37

On October 31, a flood at Payne Company's only warehouse caused severe damage to its entire inventory. Based on recent history, Payne has a gross profit of 25 percent of net sales. The following information is available from Payne's records for the ten months ended October 31:

A physical inventory disclosed usable damaged goods which Payne estimates can be sold for $70,000. Using the gross profit method, the estimated cost of goods sold for the ten months ended October 31 should be

A) $680,000.
B) $3,830,000.
C) $3,900,000.
D) $4,200,000.

Question 38

Miller Company needs an estimate of its ending inventory balance. The following information is available:
$\begin{array}{ll}&\text { Cost } & \text { Retail } \\\text {Sales revenue }&\\\text {Beginning inventory }&\$ 35,000 & \$ 180,000 \\\text {Net purchases }&100,000 & 62,000 \\\text {Grosssmargin percentage }&30 \% & 135,000\end{array}$
Given this information, when using the gross margin estimation method, ending inventory is approximately

A) $1,000.
B) $9,000.
C) $19,000.
D) $11,650.

Question 39

The term LIFO reserve refers to

A) a cost flow assumption for valuing inventory.
B) a special fund set aside to cover LIFO liquidations.
C) inventory pools used in the dollar-value LIFO method.
D) the difference between the ending inventory amount under LIFO and the ending inventory amount under another inventory cost flow assumption.

Question 40

A company sells four products: I, II, III, and IV. The company values all inventories using the lower-of-cost-or-market procedure. The company has consistently experienced a profit margin of 20 percent of sales and expects this rate to hold for the future. Additional information, shown below, is available for the most recent year as of December 31.

See information regarding the four products above. Using the lower-of-cost-or-market procedure, what is the reported inventory value at December 31 for one unit of Product IV?

A) $60
B) $70
C) $80
D) $90

Question 41

Which of the following would not be reported as inventory?

A) Land acquired for resale by a real estate firm
B) Stocks and bonds held for resale by a brokerage firm
C) Partially completed goods held by a manufacturing company
D) Machinery acquired by a manufacturing company for use in the production process

Question 42

A firm using the perpetual inventory method returned defective merchandise costing $2,000 to one of its suppliers. The entry to record this transaction will include a debit to

A) Accounts Receivable.
B) Inventory.
C) Purchase Returns and Allowances.
D) Accounts Payable.

Question 43

If a company experiences a liquidation of a LIFO inventory layer in the second quarter that is expected to be restored by the end of the annual financial reporting period, the company should

A) treat the layer as if it were liquidated and include in cost of goods sold the expected replacement cost of the inventory sold.
B) deplete the LIFO layer as if the interim period were an annual period.
C) change to an alternative inventory cost method, such as FIFO, so that the problem of LIFO liquidation is not encountered.
D) delay the recognition of both revenue and cost of goods sold on the inventory involved until a final determination of the LIFO inventory can be made at the end of the annual period.

Question 44

In a period of rising prices, the inventory cost allocation method that tends to result in the lowest reported net income is

A) LIFO.
B) FIFO.
C) moving average.
D) weighted average.

Question 45

Goods on consignment are

A) included in the consignee's inventory.
B) recorded in a consignment out account which is an inventory account.
C) recorded in a consignment in account which is an inventory account.
D) all of these.

Question 46

Which of the following is not true of the perpetual inventory method?

A) Purchases are recorded as debits to the inventory account.
B) The entry to record a sale includes a debit to Cost of Goods Sold and a credit to Inventory.
C) After a physical inventory count, Inventory is credited for any missing inventory.
D) Purchase returns are recorded by debiting Accounts Payable and crediting Purchase Returns and Allowances.

Question 47

Cost of goods sold is equal to

A) the cost of inventory on hand at the end of a period plus net purchases minus the cost of inventory on hand at the beginning of a period.
B) the cost of inventory on hand at the beginning of a period minus net purchases plus the cost of inventory on hand at the end of a period.
C) the cost of inventory on hand at the beginning of a period plus net sales minus the cost of inventory on hand at the end of a period.
D) the cost of inventory on hand at the beginning of a period plus net purchases minus the cost of inventory on hand at the end of a period.

Question 48

If goods shipped FOB destination are in transit at the end of the year, they should be included in the inventory balance of the

A) seller.
B) common carrier.
C) buyer.
D) bank.

Question 49

The use of a discounts lost account implies that the recorded cost of a purchased inventory item is its

A) invoice price.
B) invoice price plus the purchase discount lost.
C) invoice price less the purchase discount taken.
D) invoice price less the purchase discount allowable whether taken or not.

Question 50

Which of the following statements is true?

A) A company must use the FIFO cost flow assumption for taxes as well as for financial accounting and reporting.
B) A company may use FIFO for inventory valuation purposes on the balance sheet provided that LIFO cost of goods sold is reported on the income statement.
C) Application of LIFO for financial reporting purposes must strictly follow IRS regulations relating to LIFO.
D) LIFO is the only inventory method that must be used for financial reporting purposes if used for tax purposes.

Question 51

Merchandise shipped FOB shipping point on the last day of the year should ordinarily be included in

A) the buyer's inventory balance.
B) the seller's inventory balance.
C) neither the buyer's nor seller's inventory balance.
D) both the buyer's and the seller's inventory balances.

Question 52

The specific identification method of inventory costing

A) eliminates all opportunity for profit manipulation.
B) matches the flow of recorded costs with the physical flow of goods.
C) can be used only with a perpetual inventory system.
D) is a violation of generally accepted accounting principles.

Question 53

When using the periodic inventory method, which of the following generally would not be separately accounted for in the computation of cost of goods sold?

A) Trade discounts applicable to purchases during the period
B) Cash (purchase) discounts taken during the period
C) Purchase returns and allowances of merchandise during the period
D) Cost of transportation-in for merchandise purchases during the period

Question 54

Which inventory pricing method best approximates specific identification in most manufacturing situations?

A) Activity-based costing
B) FIFO
C) Average cost
D) LIFO

Question 55

Which of the following describes the flow of product costs through the inventory accounts of a manufacturer?

A) Raw materials, goods in process, factory overhead, finished goods
B) Raw materials, goods in process, finished goods
C) Raw materials, direct labor, factory overhead, finished goods
D) Raw materials, direct labor, factory overhead

Question 56

Goods in transit at year-end purchased FOB shipping point were appropriately recorded in the purchases account but were incorrectly excluded from the ending inventory. What effect will this omission have on the company's assets, liabilities, and retained earnings at year-end?

A) No effect, no effect, overstated
B) No effect, no effect, understated
C) Understated, no effect, overstated
D) Understated, no effect, understated

Question 57

Which inventory costing method would not be appropriate for a manufacturer using a perpetual inventory system?

A) First-in, first-out
B) Last-in, first-out
C) Average cost
D) Dollar-value LIFO

Question 58

In a period of falling prices, the use of which of the following inventory cost flow methods would typically result in the highest cost of goods sold?

A) FIFO
B) LIFO
C) Weighted average cost
D) Specific identification

Question 59

The Allen Company makes the following entry in its accounting records:

This entry would be made when

A) merchandise is sold and the periodic inventory method is used.
B) merchandise is sold and the perpetual inventory method is used.
C) merchandise is returned and the perpetual inventory method is used.
D) merchandise is returned and the periodic inventory method is used.

Question 60

Goods on consignment should be included in the inventory of

A) the consignor but not the consignee.
B) the consignee but not the consignor.
C) both the consignor and the consignee.
D) neither the consignor nor the consignee.

Question 61

Which of the following will occur when inventory costs are decreasing?

A) LIFO will result in lower net income and lower ending inventory than will FIFO.
B) FIFO will result in lower net income and lower ending inventory than will LIFO.
C) LIFO will result in a lower net income, but a higher ending inventory, than will FIFO.
D) FIFO will result in a lower net income, but a higher ending inventory, than will LIFO.

Question 62

During periods of rising prices, when the FIFO inventory cost flow method is used, a perpetual inventory system would

A) not be permitted.
B) result in a higher ending inventory than a periodic inventory system.
C) result in the same ending inventory as a periodic inventory system.
D) result in a lower ending inventory than a periodic inventory system.

Question 63

Ami Retailers purchased merchandise with a list price of $100,000, subject to a trade discount of 20 percent and credit terms of 2/10, n/30. At what amount should Ami record the cost of this merchandise if the gross method is used?

A) $100,000
B) $80,000
C) $98,000
D) $78,400

Question 64

Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators during August is shown below:

See information for Miller Inc. above. If Miller Inc. uses a FIFO cost perpetual inventory system, the ending inventory of Model III calculators at August 31 is reported as

A) $150,080.
B) $150,160.
C) $152,232.
D) $152,960.

Question 65

Following are the account balances from Fulton Company's income statement:

Given this information, the cost of goods sold during 2011 is

A) $51,000.
B) $46,000.
C) $56,000.
D) $66,000.

Question 66

Stephens Inc. is a wholesaler of photography equipment. The activity for the VTC cameras during July is shown below:

See information for Stephens Inc. above. If Stephens Inc. uses a moving average perpetual inventory system, the ending inventory of the VTC cameras at July 31 is reported as

A) $153,400.
B) $156,912.
C) $158,736.
D) $159,464.

Question 67

Holdaway Co., a manufacturer, had inventories at the beginning and end of its current year as follows:

During the year, the following costs and expenses were incurred:

Holdaway's cost of goods sold for the year is

A) $257,000.
B) $260,500.
C) $261,000.
D) $269,500.

Question 68

Stephens Inc. is a wholesaler of photography equipment. The activity for the VTC cameras during July is shown below:

See information for Stephens Inc. above. If Stephens Inc. uses the average cost method to account for inventory, the ending inventory of VTC cameras at July 31 is reported as

A) $153,400.
B) $156,912.
C) $158,736.
D) $159,464.

Question 69

Assume that a company records purchases net of discount. If the company bought merchandise valued at $10,000 on credit terms 3/15, net 30, the entry to record a payment for half of the purchase within the discount period would include a debit to

A) Accounts Payable for $4,850 and a credit to Cash for $4,850.
B) Accounts Payable for $5,000 and a credit to Cash for $5,000.
C) Accounts Payable for $4,850 and to Interest Expense for $150, and a credit to Cash for $5,000.
D) Accounts Payable for $4,850 and to Interest Revenue for $150 and a credit to Cash for $5,000.

Question 70

Following are the account balances from Jackson Company's income statement:

Given this information, the cost of merchandise available for sale during 2011 is

A) $65,000.
B) $59,000.
C) $69,000.
D) $61,000.

Question 71

The following information is available for Lyman Company:

Assuming that a business year consists of 360 days, the number of days' sales in average inventories for 2011 was

A) 49.5.
B) 93.
C) 99.
D) 105.

Question 72

Barlow Company's Accounts Payable balance at December 31, 2011, was $1,800,000 before considering the following transactions:

In its December 31, 2011, balance sheet, Barlow should report Accounts Payable of

A) $1,950,000.
B) $1,900,000.
C) $1,850,000.
D) $1,800,000.

Question 73

With LIFO, cost of goods sold is $195,000, and ending inventory is $45,000. If FIFO ending inventory is $65,000, how much is FIFO cost of goods sold?

A) $215,000
B) $195,000
C) $175,000
D) $65,000

Question 74

Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators during August is shown below:

See information for Miller Inc. above. If Miller Inc. uses a LIFO periodic inventory system, the ending inventory of Model III calculators at August 31 is reported as

A) $146,400.
B) $150,080.
C) $150,160.
D) $152,960.

Question 75

Which of the following inventory costing methods reports most closely the current cost of inventory on the balance sheet?

A) FIFO
B) Specific identification
C) Weighted average
D) LIFO

Question 76

From the following information, determine the amount of freight-in.

A) $3,000
B) $4,000
C) $2,000
D) $1,000

Question 77

Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators during August is shown below:

See information for Miller Inc. above. If Miller Inc. uses a LIFO cost perpetual inventory system, the ending inventory of Model III calculators at August 31 is reported as

A) $146,400.
B) $150,080.
C) $150,160.
D) $152,960.

Question 78

Which of the inventory cost flow assumptions provides the best measure of earnings, where "best" means most appropriate for predicting future earnings, when prices have been declining?

A) FIFO
B) Specific identification
C) LIFO
D) Average cost

Question 79

Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators during August is shown below:

See information for Miller Inc. above. If Miller Inc. uses a FIFO periodic inventory system, the ending inventory of Model III calculators at August 31 is reported as

A) $150,080.
B) $150,160.
C) $152,288.
D) $152,960.

Question 80

From the following information, determine the amount of ending inventory.

A) $23,000
B) $32,000
C) $33,000
D) $22,000