Deck 8: Inventory

Question 1

Under variable costing, fixed manufacturing overhead costs are

A)product costs.
B)period costs.
C)charged to work in process and finished goods.
D)part of cost of goods sold.

Answer 1

B

Question 2

On June 15, 2010, Solder Corporation accepted delivery of merchandise which it purchased on account.As of June 30, Solder had not recorded the transaction or included the merchandise in its inventory.The effect of this on its balance sheet for June 30, 2010 would be

A)assets and shareholders' equity were overstated but liabilities were not affected.
B)shareholders' equity was the only item affected by the omission.
C)assets, liabilities, and shareholders' equity were understated.
D)none of these.

Answer 2

D

Question 3

Which of the following types of interest cost incurred in connection with the purchase or manufacture of inventory should be capitalized as a product cost?

A)Purchase discounts lost
B)Interest incurred during the production of discrete projects such as ships or real estate projects
C)Interest incurred on notes payable to vendors for routine purchases made on a
D)All of these should be capitalized.

Answer 3

B

Question 4

The cost of raw material plus direct labour cost plus overhead

A)Constitutes the work-in-process inventory, when the process has not yet been completed.
B)Constitutes the finished goods inventory, when the process has been completed.
C)(a) and (b)
D)None of these.

Question 5

The use of a Purchase Discounts account implies that the recorded cost of a purchased inventory item is its

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

Question 6

Use the following information for questions
During 2010 Ebert Corporation transferred inventory to Holger Corporation and agreed to repurchase the merchandise early in 2011.Holger then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to Ebert.In 2011 when Ebert repurchased the inventory, Holger used the proceeds to repay its bank loan.
On whose books should the cost of the inventory appear at the December 31, 2010 balance sheet date?

A)Ebert Corporation
B)Holger Corporation
C)Norwalk Bank
D)Holger Corporation, with Ebert making appropriate note disclosure of the transaction

Question 7

Which of the following should usually be considered when calculating the cost of ending inventory?

A)Inventory that is subject to special sales agreements.
B)The ownership for inventory in transit at the balance sheet date.
C)Discounts and vendor rebates.
D)All of these

Question 8

Other things being equal, income calculated by the variable costing method will exceed that calculated by the absorption method if

A)units produced exceed units sold.
B)units sold exceed units produced.
C)fixed manufacturing costs increase.
D)variable manufacturing costs increase.

Question 9

Chen Co.accepted delivery of merchandise which it purchased on account.As of December 31, Chen had recorded the transaction, but did not include the merchandise in its inventory.The effect of this on its financial statements for December 31 would be

A)net income, current assets, and retained earnings were understated.
B)net income was correct and current assets were understated.
C)net income was understated and current liabilities were overstated.
D)net income was overstated and current assets were understated.

Question 10

All of the following costs should be charged against revenue in the period in which costs are incurred except for

A)manufacturing overhead costs for a product manufactured and sold in the same accounting period.
B)costs which will not benefit any future period.
C)costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
D)costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.

Question 11

Goods in transit which are shipped f.o.b.shipping point should be

A)included in the inventory of the seller.
B)included in the inventory of the buyer.
C)included in the inventory of the shipping company.
D)none of these.

Question 12

Use the following information for questions
During 2010 Ebert Corporation transferred inventory to Holger Corporation and agreed to repurchase the merchandise early in 2011.Holger then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to Ebert.In 2011 when Ebert repurchased the inventory, Holger used the proceeds to repay its bank loan.
This transaction is known as a(n)

A)consignment.
B)instalment sale.
C)assignment for the benefit of creditors.
D)product financing arrangement.

Question 13

When using a perpetual inventory system,

A)no Purchases account is used.
B)a Cost of Goods Sold account is used.
C)two entries are required to record a sale.
D)all of these.

Question 14

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 15

A manufacturing company typically has the following inventory accounts:

A)Accounts Receivable, purchases and freight-in.
B)Beginning inventory and ending inventory
C)Raw materials, work in process and finished goods.
D)None of these

Question 16

Which of the following is correct?

A)Selling costs are product costs.
B)Manufacturing overhead costs are product costs.
C)Interest costs for routine inventories are product costs.
D)All of these.

Question 17

An exception to the general rule that costs should be charged to expense in the period incurred is

A)factory overhead costs incurred on a product manufactured but not sold during the current accounting period.
B)interest costs for financing of inventories that are routinely manufactured in large quantities on a repetitive basis.
C)general and administrative fixed costs incurred in connection with the purchase of
D)sales commission and salary costs incurred in connection with the sale of inventory.

Question 18

Dubb Co.received merchandise on consignment.As of March 31, Dubb had recorded the transaction as a purchase and included the goods in inventory.The effect of this on its financial statements for March 31 would be

A)no effect.
B)net income was correct and current assets and current liabilities were overstated.
C)net income, current assets, and current liabilities were overstated.
D)net income and current liabilities were overstated.

Question 19

Eskins Co.received merchandise on consignment.As of January 31, Eskins included the goods in inventory, but did not record the transaction.The effect of this on its financial statements for January 31 would be

A)net income, current assets, and retained earnings were overstated.
B)net income was correct and current assets were understated.
C)net income and current assets were overstated and current liabilities were understated.
D)net income, current assets, and retained earnings were understated.

Question 20

Goods in transit which are shipped f.o.b.destination should be

A)included in the inventory of the seller.
B)included in the inventory of the buyer.
C)included in the inventory of the shipping company.
D)none of these.

Question 21

Which of the following does not correctly describe a perpetual inventory accounting system?

A)In a perpetual system cost of goods sold are calculated every time a sale is made.
B)In a perpetual system, assuming shrinkage of zero, inventory and cost of goods sold do not have to be updated at the end of the period.
C)The use of this system eliminates the requirement for an annual physical inventory
D)In a perpetual system, assuming a FIFO cost flow, the cost of goods sold would equal those from a periodic system

Question 22

In situations where there is a rapid turnover, an inventory method which produces a balance sheet valuation similar to the first-in, first-out method is

A)average cost.
B)base stock.
C)joint cost.
D)prime cost.

Question 23

Lower of cost and market

A)is most conservative if applied to the total inventory.
B)is most conservative if applied to major categories of inventory.
C)is most conservative if applied to individual items of inventory.
D)must be applied to major categories for taxes.

Question 24

Which of the following is least likely an example of a special sales agreement?

A)A sale with a buyback agreement
B)A sale with delayed payment terms
C)A cash sale where title to the goods passes as the cash is received.
D)A sale with a high rate of return

Question 25

Which of the following statements best describes the treatment of selling expenses with respect to inventories?

A)They are generally treated as period costs.
B)They are generally unlikely to be related to unsold inventory.
C)None of these
D)(a) and (b)

Question 26

Which of the following does not correctly describe the FIFO costing method?

A)This method assumes that the oldest inventory costs are the first costs recorded for cost of goods sold.
B)This method assumes that most current inventory costs are the first costs recorded for cost of goods sold.
C)This method approximates the physical flow of most types of goods.
D)This method is permitted under private entity GAAP

Question 27

In no case can "market" in the lower of cost and market rule be more than

A)estimated selling price in the ordinary course of business.
B)estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.
C)estimated selling price in the ordinary course of business less reasonably predictable
D)estimated selling price in the ordinary course of business less reasonably predictable

Question 28

Which of the following does not correctly describe the weighted average costing method?

A)This method prices items in inventory on the basis of the average cost of beginning inventory.
B)This method prices items in inventory on the basis of the average cost of goods available for sale during the period.
C)This method takes into account that the volumes of goods acquired at each price are different.
D)None of these

Question 29

Which of the following does not correctly describe the specific identification costing method?

A)This method is most appropriate when goods are not interchangeable
B)This method is most appropriate when goods are interchangeable
C)This method is generally used for expensive, one-of-a-kind merchandise
D)None of these

Question 30

Which of the following best describes the concept of product costs?

A)They are costs that are "attached" to inventory.
B)They are costs that are usually expenses.
C)They usually don't include freight charges
D)They usually don't include conversion costs.

Question 31

Which of the following does not correctly describe a periodic inventory accounting system?

A)In a periodic system cost of goods sold are calculated every time a sale is made.
B)In a periodic system, costs of goods sold are a residual amount.
C)In a periodic system assuming a FIFO cost flow, the cost of goods sold would equal those from a perpetual system
D)In a periodic system, inventory and cost of goods sold must be updated at the end of

Question 32

Which of the following does not correctly describe the concept of net realizable value (NRV)?

A)Estimates of NRV are based on the best evidence available at and shortly after the balance sheet date.
B)NRV generally does not change over time
C)NRV generally changes over time
D)A new estimate of NRV is required at each balance sheet date.

Question 33

Which of the following statements regarding borrowing costs is correct?

A)Neither Private entity GAAP nor IFRS usually require disclosure these items.
B)They are usually amortized until the majority (51%) of the underlying products have been sold.
C)They are usually treated as product costs if they are incurred to bring inventories to a condition ready for sale.
D)All of these

Question 34

When inventory declines in value below original (historical) cost, and this decline is considered other than temporary, what is the maximum amount that the inventory can be valued at?

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

Question 35

The primary basis of accounting for inventories is cost.A departure from the cost basis of pricing the inventory is required where there is evidence that when the goods are sold in the ordinary course of business their

A)selling price will be less than their replacement cost.
B)replacement cost will be more than their net realizable value.
C)cost will be less than their replacement cost.
D)future utility will be less than their cost.

Question 36

Which of the following statements is correct for a company that uses the FIFO costing method under a perpetual inventory system? All else being equal

A)The value of the ending inventory would be higher under a periodic system.
B)The value of the ending inventory would be lower under a periodic system.
C)The value of the ending inventory would be the same under a periodic system.
D)The periodic system would not require any additional entries at the end of the period.

Question 37

Which of the following is correct for the use of the average cost method with a perpetual system?

A)A weighted-average cost is calculated at year end.
B)A new unit cost is calculated each time a sale is made.
C)A new unit cost is calculated each time a purchase is made.
D)All of these.

Question 38

Which of the following best describes the concept of a basket purchase?

A)The purchase of a group of units with similar characteristics at a single lump-sum price.
B)The purchase of individual units with similar characteristics priced individually.
C)The purchase of a group of units with different characteristics at a single lump-sum price.
D)The purchase of individual units with different characteristics priced individually.

Question 39

Which of the following best describes the concept of standard costs?

A)They are the costs that should be incurred per unit of finished goods inventory.
B)They are the costs that are actually incurred per unit of finished goods inventory.
C)They are the costs that were incurred when current Canadian Accounting Standards were applied.
D)Standard costs are acceptable for reporting purposes

Question 40

An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is

A)FIFO.
B)moving average.
C)base stock.
D)weighted-average.

Question 41

The gross profit percentage is calculated by

A)dividing cost of goods sold by net sales.
B)dividing gross profit on sales by cost of goods sold.
C)dividing gross profit on sales by net sales.
D)dividing gross profit on sales by goods available for sale.

Question 42

Which of the following criteria does not have to be met in order to be able to value inventory above cost?

A)The cost of disposal can be estimated.
B)The sale is assured.
C)There is an active market for the product
D)The sale must already have occurred

Question 43

Which of the following statements with respect to the gross profit method of estimating inventory is not correct?

A)This method is sometimes used by auditors to confirm a physical count.
B)The use of this method eliminates the need for performing an actual inventory count.
C)This method utilizes the interrelationship between the accounts used in the cost of goods sold calculation.
D)It may be used to estimate ending inventory when inventory has been destroyed.

Question 44

If a unit of inventory has declined in value below original cost, but the market value 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 45

At the end of its accounting year, Getz Corporation's physical inventory count indicated that 543,345 units of inventory, costing $1.50 each were on hand.The company's perpetual inventory system reported a balance of $817,135. The year end adjusting entry is:

A)Debit inventory and credit "inventory over and short" $2,117.50
B)Debit "inventory over and short" and credit inventory $2,117.50
C)Debit inventory and credit "inventory over and short" $273,790
D)Debit "inventory over and short" and credit inventory $273,790

Question 46

Which statement is true about the retail inventory method?

A)It may not be used to estimate inventories for interim statements.
B)It may not be used to estimate inventories for annual statements.
C)It may not be used by auditors.
D)None of these.

Question 47

To produce an inventory valuation which approximates the lower of average cost and market using the conventional retail inventory method, the calculation of the ratio of cost to retail should

A)include mark-ups but not markdowns.
B)include mark-ups and markdowns.
C)ignore both mark-ups and markdowns.
D)include markdowns but not mark-ups.

Question 48

Which of the following does not correctly describe the implications of an executory contract on the accounting entries and/or disclosures to be made by the purchaser and/or seller?

A)Assets and liabilities are usually recorded at inception of the contract.
B)Assets and liabilities are usually not recorded at inception of the contract.
C)Contract details should be disclosed if the amounts are abnormal in relation to the entity's normal business operations.
D)Assets and liabilities are recognized as performance has occurred.

Question 49

Which statement is true about the gross profit method of inventory valuation?

A)It can be used as a substitute for the annual physical count of inventory.
B)It assumes past percentages are appropriate for the current period.
C)It uses mark-ups but not markdowns.
D)It is designed to approximate inventory valuation at the lower of cost and market.

Question 50

Assume that no correcting entries were made at December 31, 2010, or December 31, 2011 and that no additional errors occurred in 2011.Ignoring income taxes, by how much will working capital, at December 31, 2011 be overstated or understated?

A)$0
B)$4,000 overstated
C)$4,000 understated
D)$3,000 understated

Question 51

Which of the following formulas is used to determine a company's inventory turnover?

A)Cost of goods sold / Average inventory
B)Average inventory / Cost of goods sold
C)Cost of goods sold x Average inventory
D)Average assets / Cost of goods sold

Question 52

Assume that no correcting entries were made at December 31, 2010.Ignoring income taxes, by how much will retained earnings at December 31, 2011 be overstated or understated?

A)$2,000 understated
B)$6,000 overstated
C)$6,000 understated
D)$9,000 understated

Question 53

If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet date for future delivery at firm prices,

A)this fact must be disclosed.
B)disclosure is required only if prices have declined since the date of the order.
C)disclosure is required only if prices have since risen substantially.
D)an appropriation of retained earnings is necessary.

Question 54

An inventory method which is designed to approximate inventory valuation at the lower of average cost and market is

A)last-in, first-out.
B)weighted average.
C)conventional retail method.
D)specific identification.

Question 55

When the conventional retail inventory method is used, markdowns are commonly ignored in the calculation of the cost to retail ratio because

A)there may be no markdowns in a given year.
B)this tends to give a better approximation of the lower of cost and market.
C)mark-ups are also ignored.
D)this tends to result in the showing of a normal profit margin in a period when no markdown goods have been sold.

Question 56

Which of the following statements with respect to the impact of inventory errors is not correct?
All else being equal,

A)An overstatement of ending inventory will result in an understatement of income.
B)An overstatement of ending inventory will result in an overstatement of income.
C)An overstatement of beginning inventory will result in an understatement of income.
D)An understatement of beginning inventory will cause cost of goods sold to be understated

Question 57

The following information is available for Kobold Company for 2010: The cost of goods sold is equal to 400% of selling expenses.What is the cost of goods available for sale?

A)$420,000.
B)$390,000.
C)$750,000.
D)$720,000.

Question 58

The gross profit method of inventory valuation is invalid when

A)a portion of the inventory is destroyed.
B)there is a substantial increase in inventory during the year.
C)there is no beginning inventory because it is the first year of operation.
D)none of these.

Question 59

Assume that the proper correcting entries were made at December 31, 2010.By how much will 2011 income before taxes be overstated or understated?

A)$2,000 understated
B)$2,000 overstated
C)$4,000 overstated
D)$6,000 overstated

Question 60

Which statement is not true about the gross profit method of inventory valuation?

A)It may be used to estimate inventories for interim statements.
B)It may be used to estimate inventories for annual statements.
C)It may be used by auditors.
D)None of these.

Question 61

Use the following information for questions

Assuming that Lock maintains perpetual inventory records, what should be the inventory at January 31, using the moving-average inventory method, rounded to the nearest dollar?

A)$10,505.
B)$10,237.
C)$10,260.
D)$10,360.

Question 62

On April 15 of the current year, a fire destroyed the entire uninsured inventory of a retail store.The following data are available: The amount of the inventory loss is estimated to be

A)$75,000.
B)$66,833.
C)$111,500.
D)$90,000.

Question 63

Hoskins Company had a gross profit of $270,000, total purchases of $320,000, and an ending inventory of $150,000 in its first year of operations as a retailer.Hoskins' sales in its first year must have been

A)$120,000.
B)$160,000.
C)$440,000.
D)$360,000.

Question 64

Peskari Company's cost of goods sold and ending inventory were $100,000 and $150,000 respectively.Assuming Peskari had neither purchases nor returns, what was the cost of its beginning inventory?

A)$50,000
B)$150,000
C)$250,000
D)undeterminable

Question 65

For 2010, cost of goods available for sale for Volker Corporation was $870,000.The gross profit rate was 40%.Sales for the year were $600,000.What was the amount of the ending inventory?

A)$260,000.
B)$320,000.
C)$0.
D)$510,000.

Question 66

Use the following information for questions

Assuming Chu uses a periodic inventory system, the entry to account for the March 1 purchase is:

A)Debit: "Inventory" and Credit: "Accounts Payable" $875
B)Debit: "Purchases" and Credit: "Accounts Payable" $875
C)Debit: "Accounts Payable" and Credit: "Purchases" $875
D)Debit: "Accounts Payable" and Credit: "Inventory" $875

Question 67

Use the following information for questions

Assuming that perpetual inventory records are kept in dollars, the ending inventory on a FIFO basis is

A)$1,900.
B)$1,920.
C)$2,065.
D)$2,100.

Question 68

Danner, Ltd.estimates the cost of its physical inventory at March 31 for use in an interim financial statement.The rate of mark-up on cost is 25%.The following account balances are available: The estimate of the cost of inventory at March 31 would be

A)$34,000.
B)$104,000.
C)$121,500.
D)$78,000.

Question 69

Use the following information for questions

Peak's 2010 entry to record to adjust its inventory from cost to the lower of cost and net realizable value (NRV) is

A)Debit: "Loss-NRV" and credit: "Allowance-NRV" $50,000
B)Debit: "Allowance-NRV" and credit: "Loss-NRV" $50,000
C)Debit: "Loss-NRV" and credit: "Inventory" $50,000
D)Debit: "Inventory" and credit: "Loss-NRV" $50,000

Question 70

Use the following information for questions

Assuming that Lock does not maintain perpetual inventory records, what should be the inventory at January 31, using the weighted-average inventory method, rounded to the nearest dollar?

A)$10,505.
B)$10,237.
C)$10,260.
D)$10,360.

Question 71

In 2010, Garrison Corporation reported net income of $70,000.A recount of the company's inventories revealed that 2010 ending inventory was overstated by $10,000.What is Garrison's corrected net income?

A)$60,000
B)$80,000
C)$70,000
D)$75,000

Question 72

Wendling Company's net sales and gross profit were $1,341,000 and $471,000 respectively.Assuming the cost of goods available were $1,084,00, what was the cost of Wendling's ending inventory?

A)$471,000
B)$214,000
C)$247,000
D)$870,000

Question 73

Use the following information for questions

Assuming that perpetual inventory records are kept in units only, the ending inventory on an average-cost basis, rounded to the nearest dollar, is

A)$1,980.
B)$1,956.
C)$1,970.
D)$1,995.

Question 74

In 2010, Frobisher Corporation reported net income of $245,000.You have been made aware that the company's beginning inventory was overstated by $12,000 and ending inventory was understated by $11,000.What is Frobisher's corrected net income for 2010?

A)$244,000
B)$268,000
C)$246,000
D)$222,000

Question 75

Use the following information for questions

Peak's 2011 entry to record to adjust its inventory from cost to the lower of cost and net realizable value (NRV) is

A)Debit: "Loss-NRV" and credit: "Allowance-NRV" $40,000
B)Debit: "Allowance-NRV" and credit: "Loss-NRV" $40,000
C)Debit: "Allowance" and credit "Recovery of loss" $10,000
D)Debit: "Recovery of loss" and credit "Allowance" $10,000

Question 76

A mark-up of 35% on cost is equivalent to what percentage of gross profit on selling price?

A)60%
B)26%
C)29%
D)40%

Question 77

On January 1, 2010, the merchandise inventory of Morton, Ltd.was $1.2 million.During 2010 Morton purchased $2,300,000 of merchandise and recorded sales of $2.7 million.The gross profit rate on these sales was 35%.
What is the merchandise inventory of Morton at December 31, 2010?

A)$1,125,000.
B)$1,745,000.
C)$1,765,000.
D)$945,000.

Question 78

Use the following information for questions
Chi Co.records purchases at net amounts.On May 5 Chi purchased merchandise on account,
$8,000, terms 2/10, n/30.Pye returned $500 of the May 5 purchase and received credit on account.At May 31 the balance had not been paid.
By how much should the account payable be adjusted on May 31?

A)$0.
B)$170.
C)$160.
D)$150.

Question 79

Use the following information for questions

Assuming Chu uses a perpetual inventory system, the entry to account for the March 1 purchase is

A)Debit: "Inventory" and Credit: "Accounts Payable" $875
B)Debit: "Purchases" and Credit: "Accounts Payable" $875
C)Debit: "Accounts Payable" and Credit: "Purchases" $875
D)Debit: "Accounts Payable" and Credit: "Inventory" $875

Question 80

Use the following information for questions
Chi Co.records purchases at net amounts.On May 5 Chi purchased merchandise on account,
$8,000, terms 2/10, n/30.Pye returned $500 of the May 5 purchase and received credit on account.At May 31 the balance had not been paid.
The amount to be recorded as a purchase return is

A)$450.
B)$510.
C)$500.
D)$490.