Deck 6: Inventory Costing

Question 1

In a periodic system inventory quantities are continuously updated.

Answer 1

False

Question 2

Goods which have been removed from the warehouse and sent to a customer on approval do not need to be included in a seller's inventory.

Answer 2

False

Question 3

Automobiles are a good example of a type of inventory where the FIFO cost formula is used.

Answer 3

False

Question 4

The Ontario Canoe Company has $10,000 in inventory in its warehouse. The company has goods in transit of $500 shipped from a supplier FOB shipping point. Included in the items counted in the warehouse is $120 in goods held on consignment from a local manufacturer. Craft's correct inventory balance is $10,500.

Question 5

If the goods are produced for specific projects, then specific identification cost determination method must be used.

Question 6

Goods in transit should be ignored when performing a physical inventory count.

Question 7

The first in first out (FIFO) method tracks the actual physical flow (movement) of the goods in a perpetual inventory system.

Question 8

Internal control is the process designed and implemented by management to help their organization achieve reliable financial reporting.

Question 9

All companies need to count their inventory at least once a year.

Question 10

Only smaller companies need to do an annual physical count of inventory.

Question 11

Goods out on consignment should be included in the inventory of the consignor.

Question 12

The first-in, first-out (FIFO) cost formula assumes that the earliest (oldest) goods purchased are the last ones to be sold.

Question 13

Goods that have been purchased FOB shipping point and are in transit at the year end should be included in the buyer's physical count of goods.

Question 14

Only companies who use a periodic method of inventory need to have an annual physical inventory count.

Question 15

Companies are allowed to use the specific identification cost determination method when the goods are interchangeable.

Question 16

Determining ownership of goods is one of the steps in taking inventory.

Question 17

The counting of the inventory should be done by employees who are NOT responsible for either custody of the inventory or keeping inventory records.

Question 18

The FIFO and average cost formula can be used in both the perpetual and periodic inventory systems.

Question 19

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.

Question 20

An inventory count is generally more accurate when goods are not being sold or received during the counting.

Question 21

When using the perpetual method of accounting and the average cost formula, the average cost per unit will change every time a unit of inventory is purchased.

Question 22

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 average cost formulas.

Question 23

When using the perpetual method of accounting and the average cost formula, the average cost per unit will change every time a unit of inventory is sold.

Question 24

When using FIFO, beginning inventory + purchases - cost of goods sold = ending inventory.

Question 25

An overstatement of the cost of goods sold will result in an overstatement of gross profit.

Question 26

A company is able to change its cost determination method from one year to the next.

Question 27

If prices are stable, both average and FIFO cost formulas will report the same results.

Question 28

If the ending inventory is understated then the profit of the company will be understated.

Question 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.

Question 30

If the ending inventory is understated, then the beginning inventory of the next period will be overstated.

Question 31

Errors in the cost of goods sold will affect the income statement.

Question 32

Inventory affects both the income statement and the balance sheet.

Question 33

The first-in, first-out (FIFO) inventory cost formula results in an ending inventory valued at the most recent cost.

Question 34

The specific identification inventory cost determination method is desirable when a company sells a large number of low-unit cost items.

Question 35

Inventory errors which affect the balance sheet will NOT affect the income statement.

Question 36

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.

Question 37

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.

Question 38

The FIFO inventory cost determination method will result in a higher cash flow to a company than average.

Question 39

If prices are falling, FIFO will report the lower profit and average the higher.

Question 40

If beginning inventory is understated then the cost of goods sold will be understated if there are no other errors.

Question 41

The gross profit method of estimating inventory cannot be used if the gross profit margin has changed from the previous period.

Question 42

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.

Question 43

Net realizable value is the selling price less any costs required to make the goods ready for sale.

Question 44

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.

Question 45

Under the periodic method, the cost of goods available for sale will be the same under the average cost or FIFO.

Question 46

If there is a recovery in the net realizable value of the inventory, the write-up can never be larger than the original writedown.

Question 47

When the value of inventory is higher than its cost, the inventory is written down to its net realizable value at the end of the period.

Question 48

Inventory estimates are normally associated with the periodic method of accounting for inventory.

Question 49

The days sales in inventory ratio is the inventory ratio divided by the number of days in the year.

Question 50

Inventory ratios can be used to measure how effectively a company manages its inventory.

Question 51

Under the periodic system of inventory, if the number of units available for sale is the same as the ending inventory, no sales have been made in the period.

Question 52

Under the periodic system of inventory, opening inventory will always be higher using average cost of inventory than FIFO.

Question 53

If the item of inventory that had been previously written down has been sold, a reversal should be recorded.

Question 54

The inventory turnover ratio is the average inventory divided by the average cost of goods sold.

Question 55

Under the periodic system of inventory, the weighted average unit cost is calculated by dividing the total units available for sale by the cost of goods available for sale.

Question 56

If inventories are valued using the retail inventory method, they should not be classified as a current asset on the balance sheet.

Question 57

The retail inventory method is useful for estimating the amount of shrinkage due to breakage, loss, or theft.

Question 58

The major disadvantage of the retail method is that it is an averaging technique.

Question 59

The retail method estimates the cost of ending inventory by applying the gross profit margin to net sales.

Question 60

The inventory turnover ratio is the net sales divided by the average cost of goods sold.

Question 61

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 transportation company has legal title to the goods while the goods are in transit.
D) no one has legal title to the goods until they are delivered.

Question 62

Use the following information for questions 77-78.
A company just starting business made the following three inventory purchases in February: On Feb 15, there were 300 units sold. The company uses a perpetual inventory system.
Using the average cost formula, the amount allocated to the ending inventory on February 28 is

A) $4,950.
B) $3,075.
C) $2,958.
D) $1,992.

Question 63

The factor which 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.

Question 64

Per its January 31, 2015 physical inventory count, Pugwash Company has $24,500 in inventory on hand at year end. In addition, at year end the company has $1,200 in merchandise in transit purchased from a supplier shipped FOB destination. Included in its physical inventory is $900 in goods held on consignment from a local manufacturer. How much inventory should be reported on the company's January 31, 2015 balance sheet?

A) $24,500
B) $25,700
C) $24,800
D) $23,600

Question 65

"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.

Question 66

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.

Question 67

Use the following information for questions 79-80.
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:
Using the FIFO cost formula, the amount allocated to cost of goods sold for June is

A) $10,000.
B) $10,600.
C) $13,000.
D) $20,800.

Question 68

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.

Question 69

If the physical inventory count shows an amount which 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.

Question 70

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 transportation company has legal title to the goods while the goods are in transit.
D) no one has legal title to the goods until they are delivered.

Question 71

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.

Question 72

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.

Question 73

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.

Question 74

Use the following information for questions 79-80.
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:
Using the average cost formula, the amount allocated to the ending inventory on June 30 is

A) $19,323.
B) $14,538.
C) $19,927.
D) $10,600.

Question 75

The FIFO inventory cost formula assumes that the cost of the latest units purchased is

A) the last to be allocated to ending inventory.
B) the first to be allocated to ending inventory.
C) the first to be allocated to cost of goods sold.
D) allocated to the average cost of goods sold or ending inventory.

Question 76

If the physical inventory is less than the amount calculated using the retail method, then there may be a theft problem.

Question 77

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.

Question 78

Independent internal verification of the physical inventory process occurs when

A) the employee is required to count all items twice for sake of verification.
B) the items counted are compared to the inventory account balance.
C) a second employee counts the inventory and compares the result to the count made by the first employee.
D) all prenumbered inventory tags are accounted for.

Question 79

Westcoe Company's goods in transit at December 31 include sales made (1) FOB destination, and
(2) FOB shipping point, and purchases made
(3) FOB destination, and
(4) FOB shipping point.
Which items should be included in Westcoe's inventory at December 31?

A) (2) and (3)
B) (1) and (4)
C) (1) and (3)
D) (2) and (4)

Question 80

Use the following information for questions 77-78.
A company just starting business made the following three inventory purchases in February: 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) $1875.
C) $4,950.
D) $3,075.