Deck 7: Merchandise Inventory

Question 1

Cagey Trading Inc. counted $2,000 of inventory twice during its December 31, 2010 physical inventory count. Its December 31, 2011 inventory amount is correct. As a result of this error,

A) 2010 ending inventory is overstated by $2,000.
B) 2010 income is understated by $2,000.
C) 2011 income is overstated by $2,000.
D) 2011 cost of goods sold is understated by $2,000.

Answer 1

A

Question 2

Victoria Fashions Clothing Store uses the perpetual method of accounting for inventory. During the current year, purchases are $30,000 and cost of goods sold is $25,000. Beginning inventory is valued at $4,000 and ending inventory was taken on December 31 and valued at $6,000. Inventory shortage expense for the current year is:

A) $0.
B) $2,000.
C) $3,000.
D) $5,000.

Answer 2

C

Question 3

Wood Inc. sells automobiles at $6,000 above its costs and uses the specific identification method for inventory. Below are the cars and the costs Wood paid for the inventory before the sale. If Wood sells Auto 3 and Auto 5 for cash, which of the following would be included in the journal entries it uses to record the sale and recognize the cost of the inventory?

A) A debit to Cost of Goods Sold for $45,500.
B) A credit to Sales for $45,500.
C) A credit to Inventory for $57,500.
D) A credit to Sales for $12,000.

Answer 3

A

Question 4

Mars Hardware sold 20 drills for $8 each. Each drill cost $4. Which journal entry is required at the time of sale under a perpetual inventory system?

Question 5

Which one of the following expenditures should not be included in the cost of inventory?

A) Purchase cost
B) Transportation-in
C) Packaging cost
D) Capitalized equipment cost

Question 6

Beginning inventory is valued at $7,000, purchases are $15,000 and ending inventory is valued at $9,000. Cost of goods sold is:

A) $23,000.
B) $16,000.
C) $30,000.
D) $13,000.
E) $16,000.

Question 7

Dole Produce Ltd. counted $700 of inventory twice in its December 31, 2010 inventory. On December 31, 2011, it mistakenly omitted $200 of merchandise from its inventory. As a result of these errors:

A) net income is overstated by $700 in 2010 and understated by $200 in 2011.
B) net income in understated by $700 in 2010 and overstated by $200 in 2011.
C) net income is overstated by $700 in 2010 and understated by $900 in 2011.
D) total net income for 2010 and 2011 is correct.

Question 8

Jackson Roper fraudulently overstated its December 31, 2010 inventory by $8,000. As a result of this overstatement,

A) the 2010 earnings per share is overstated.
B) the 2010 current ratio is understated.
C) the 2010 cost of goods sold amount is overstated.
D) net income is overstated for 2011, and net income for 2010 is correct.

Question 9

During a year of rising prices and increasing inventory, which cost flow assumption would yield the greatest current ratio?

A) Averaging
B) LIFO
C) FIFO
D) Both a and c are correct.

Question 10

Michael Manufacturers fraudulently overstated its December 31, 2010 and December 31, 2011 inventory by $3,000 and $6,000, respectively. As a result of these overstatements,

A) 2010 income is overstated by $3,000 and 2011 income is overstated by $3,000.
B) 2010 income is overstated by $3,000 and 2011 income is overstated by $6,000.
C) 2010 income is overstated by $3,000 and 2011 income is accurate.
D) 2010 and 2010 incomes are not affected.

Question 11

Which one of the following expenditures should not be included in the cost of inventory?

A) Transportation-out
B) Purchase cost
C) Packaging cost
D) Transportation-in

Question 12

Vic's Produce purchased 50 boxes of tomatoes for a total of $400. It paid $20 for shipping tomatoes to a customer and $15 for repackaging them into smaller boxes. The cost of these tomatoes is:

A) $400.
B) $420.
C) $415.
D) $435.

Question 13

During a year of decreasing prices and decreasing inventory, which cost flow assumption would measure the greatest net income?

A) FIFO
B) LIFO
C) Averaging
D) Both a and c are correct.

Question 14

A company deliberately and inappropriately included interest costs on its December 31 inventory. Which one of the following statements is true for the company's December 31 financial statements?

A) Earnings per share is understated.
B) Inventory turnover ratio is understated.
C) The current ratio is understated.
D) Cost of goods sold is overstated.

Question 15

Parker Books purchased 200 books, paying $10 each. Parker paid the $40 shipping costs and $30 binding repair fees so that those books could be sold. How much is the cost of inventory?

A) $2,000
B) $2,040
C) $2,030
D) $2,070

Question 16

Simon Cereal purchased 100 pounds of cornflakes for $100. Transportation cost to Simon's production facility was $25 for the barrel of cornflakes shipped FOB destination. Simon paid $60 for 100 one-pound biodegradable plastic bags into which the cornflakes were placed. The cost of each one-pound bag of cornflakes is:

A) $1.00.
B) $1.25.
C) $1.60.
D) $1.75.

Question 17

Portland Supplies Co. mistakenly excluded $3,000 of goods from its December 31, 2010 physical inventory count. Its December 31, 2011 inventory amount was correct. As a result of this error,

A) 2010 income is overstated by $3,000.
B) 2010 ending inventory is overstated by $3,000.
C) 2011 income is overstated by $3,000.
D) 2011 cost of goods sold is overstated by $3,000.

Question 18

If a company desires to increase its inventory, then it should:

A) sell more goods than it purchases during the period.
B) purchase more goods than it sells during the period.
C) purchase the same amount of goods that it sells.
D) increase its selling prices to a level that customers would not be willing to purchase.

Question 19

Kemp Clothing has cost of goods sold of $14,000 with beginning and ending inventories of $4,000 and $2,000, respectively. Purchases during the period are:
a. $ 8,000.
b. $ 9,000.
c. $10,000.
d. $11,000.
e. $12,000.

Question 20

Washington Co. mistakenly omitted $4,000 of merchandise from its inventory on December 31, 2010. Its December 31, 2011, inventory is correct. As a result of this error,

A) earnings per share is overstated for 2010 and overstated for 2011.
B) total income for 2010 and 2011 combined is correct.
C) the current ratio is overstated on December 31, 2010 and is correct on December 31, 2011.
D) ending inventory is understated at December 31, 2011.

Question 21

When accounting for inventory consignments, the issue which helps determine whether or not the inventory cost should be included on a company's balance sheet is:

A) whether the inventory is physically located in the company's warehouse.
B) who actually owns title to the inventory.
C) who will ultimately sell the inventory to the consumer.
D) when the inventory will be sold.

Question 22

If a company uses the LIFO cost flow assumption on its federal income tax return in order to minimize its tax payment, then it:

A) must use LIFO on its financial statements.
B) must use FIFO on its financial statements.
C) may use any cost flow assumption permitted by GAAP on its financial statements.
D) must correct the error at the beginning of the next accounting period.

Question 23

Which one of the following should be included in Camden's inventory at December 31, 2010?

A) Goods shipped FOB shipping point on December 31, 2010, from Camden to a customer.
B) Goods in the Camden's warehouse on December 31, 2010, waiting to be shipped to a customer.
C) Goods ordered from one of Camden's suppliers on December 31, 2010, shipped FOB destination on December 31, 2010, which arrived January 2, 2011.
D) Goods sold and shipped to a customer on December 31, 2010, terms FOB destination, which were delivered on December 31, 2011.

Question 24

The President and CEO of Quinn Manufacturing receives a cash bonus equal to 1% of audited net income during the current year. During a period of rising prices and increasing inventory, which inventory cost flow assumption would measure the smallest compensation expense and greatest cash position for Quinn Manufacturing?

A) FIFO
B) NIFO
C) Averaging
D) LIFO

Question 25

During a year of rising prices and increasing inventory, which cost flow assumption would measure the smallest net income?

A) LIFO
B) FIFO
C) Averaging
D) All methods measure income the same.

Question 26

During a year of falling prices, which cost flow assumption would yield the greatest current ratio?

A) FIFO
B) LIFO
C) Averaging
D) Lower-of-cost or market

Question 27

When prices remain the same, which cost flow assumption would generally measure the largest current ratio?

A) FIFO
B) LIFO
C) Averaging
D) All of the above assumptions would result in equal current ratios during an extended period of constant prices.

Question 28

During an extended period of constant prices, which cost flow assumption would generally measure the largest earnings per share?

A) FIFO
B) LIFO
C) Weighted average
D) All of the above assumptions would result in equal earnings per share during an extended period of constant prices.

Question 29

Items should be included in the company's inventory if they are:

A) being used in the production of income.
B) held in anticipation of an increase in value.
C) being held for sale.
D) sold during the period.

Question 30

At which point in accounting for inventory in a perpetual system is determining the cost of goods sold amount an issue?

A) When the inventory is acquired.
B) As the inventory is carried in the warehouse and held for sale.
C) As the ending inventory is counted.
D) As the inventory is sold.

Question 31

Under generally accepted accounting principles, a company can choose a cost flow assumption for valuing cost of goods sold that can result in different income measurement. However, it can't frequently change the cost flow assumption adopted in order to measure the highest income possible because of the:

A) conservativism principle.
B) going concern principle.
C) stable-dollar principle.
D) consistency principle.

Question 32

Carmelo Inc. has an inventory turnover ratio of 25. Carmelo's average number of day's inventory is:
a. Less than 10.
b. Between 10 and 12.
c. More than 12.
d. Unable to be determined based on this limited information.

Question 33

During a year of rising prices and increasing inventory, which cost flow assumption would measure the smallest working capital ratio?

A) FIFO
B) LIFO
C) Averaging
D) Working capital is not sensitive to inventory cost flow assumptions.

Question 34

During a period of rising prices and increasing inventory, which cost flow assumption used on both federal income tax returns and financial reports would provide a company with the greatest cash position?

A) FIFO
B) LIFO
C) Averaging
D) TIFO

Question 35

An excessively low inventory turnover ratio may reveal that:

A) customers are delaying their payments on account.
B) the selling price of inventory is too high.
C) sales returns have decreased significantly.
D) the company is selling too much inventory.

Question 36

Which one of the following companies would likely carry the largest percentage of inventory as compared to its other assets?

A) Ernst & Young, CPAs
B) Merrill Lynch Investment Brokers
C) The Magic Kingdom at Disney World
D) Jim's Ford Dealership

Question 37

During a year of rising prices and increasing inventory, which cost flow assumption would measure the largest inventory turnover ratio?

A) FIFO
B) LIFO
C) Averaging
D) The inventory turnover ratio is not sensitive to inventory cost flow assumptions.

Question 38

Specific identification is a method of accounting for inventory:

A) which eliminates the need for tracking the cost of inventory items.
B) that allocates the oldest cost to the first units sold.
C) that often allows a manager to manipulate net income and the ending inventory value.
D) commonly used in periods of rising prices.

Question 39

Unusually high income resulted when Vincent Inc. cut back its inventory levels. This effect is:

A) backed by the LIFO elimination rule.
B) expected in most industries.
C) achieved through using the lower-of-cost-or-market rule.
D) called LIFO liquidation.

Question 40

During a year of falling prices, which cost flow assumption would measure the strongest cash flow position?

A) LIFO
B) FIFO
C) Averaging
D) Net income will remain the same under all methods.

Question 41

The following information comes from the annual reports of Devin Designs. What is the Purchases amount for 2010?

A) $4,713
B) $2,397
C) $81
D) $10,649

Question 42

What is the impact on the financial statements of an overstatement of ending inventory?

A) Next year's ending inventory will be overstated.
B) Next year's net income will be overstated.
C) Current year's net income will be overstated.
D) Next year's ending inventory will be understated.

Question 43

The following information comes from the annual reports of Devin Designs. What is the beginning inventory amount for 2011?

A) $2,409
B) $13,570
C) $10,502
D) $8,246

Question 44

If the market value of inventory is greater than its cost, then the application of the lower-of-cost-or-market rule would:

A) decrease both the current ratio and net income.
B) decrease the current ratio but not change net income.
C) not change the current ratio but decrease net income.
D) change neither the current ratio nor net income.

Question 45

Which of the following policies would increase a firm's current inventory turnover ratio?

A) Reduction of the average inventory that supports a constant amount of sales
B) An decrease in the units of inventory sold while holding average inventory constant
C) Increase of inventory by adopting a Just-in-Time production schedule
D) Saving new purchases of inventory until the following year instead of this year

Question 46

Under the lower-of-cost-or-market rule, market is:

A) the selling price of inventory items.
B) the original cost paid for inventory.
C) used to value inventory if it is less than its recorded cost.
D) the amount of cash the company expects to collect from the sale of an inventory item.

Question 47

All of the following are typically associated with Japanese business inventory accounting except:

A) the use of the average assumption for inventory cost.
B) shared business risks.
C) slow inventory turnover.
D) lower levels of inventory.

Question 48

During a period of rising prices and inventories, which method causes cash flows to be stronger?

A) FIFO
B) LIFO
C) Averaging
D) The company would be indifferent as to which cost flow assumption is adopted.

Question 49

During a period of rising prices and inventories, a company whose current ratio is dangerously close to the minimum specified by agreement with a major creditor would prefer which cost flow assumption?

A) FIFO
B) LIFO
C) Averaging
D) The company would be indifferent as to which cost flow assumption is adopted.

Question 50

During a period of rising prices and inventories, a company whose debt/equity ratio is dangerously close to the minimum specified by agreement with a major creditor would prefer which cost flow assumption?

A) FIFO
B) LIFO
C) Averaging
D) The company would be indifferent as to which cost flow assumption is adopted.

Question 51

Inventory reported on the balance sheet of a manufacturing company consists of:

A) raw materials and the cost of labor to convert the raw materials to finished products.
B) raw materials, the cost of labor to convert the raw materials, and an allocated portion of manufacturing overhead cost.
C) the cost of the raw materials used.
D) raw materials, the cost of labor to convert the raw materials, and all major corporate overhead costs.

Question 52

If the market value of inventory is less than its cost, then application of the lower-of-cost-or-market rule would:

A) increase earnings and decrease the current ratio.
B) decrease earnings and increase the current ratio.
C) decrease earnings and decrease the current ratio.
D) cause no change to earnings or the current ratio.

Question 53

Selling more inventory than was purchased during the current period may often cause old, smaller costs that were carried as part of the company's beginning inventory, to be moved to the income statement and reported as cost of goods sold. This is called:

A) the LIFO conformity rule.
B) LIFO liquidation.
C) the LIFO reserve rule.
D) lower-of-cost-or-market accounting.

Question 54

The following information comes from the annual reports of Devin Designs. What is the ending inventory amount for 2010?

A) $4,713
B) $2,409
C) $81
D) $10,583

Question 55

The LIFO conformity rule requires a company that uses:

A) the LIFO assumption for computing cost of goods sold on its tax return to also use the LIFO assumption in preparing its financial statements.
B) any inventory cost assumption to use the LIFO cost assumption for tax purposes.
C) the LIFO assumption for computing cost of goods sold on its financial statements to also use LIFO on its tax return.
D) the LIFO assumption to avoid paying taxes on inventory profits.

Question 56

Selecting an inventory cost flow assumption will most likely be impacted by which one of the following?

A) The physical flow of the inventory goods.
B) The cost of the company's plant and equipment.
C) Income taxes.
D) The cost flow assumptions most often used by other companies.

Question 57

The following information comes from the annual reports of Devin Designs. What is the amount of goods available for sale for 2011?

A) $8,246
B) $11,173
C) $13,570
D) $10,643

Question 58

Which of the following should not be included in inventory cost for a car dealership?

A) The costs of transporting the cars from the factory to the dealership
B) Cost of new car preparation for customers
C) The salary and commission of the salesman who sells the vehicle
D) The cost of adding a CD player to the vehicles before the vehicle is offered for sale

Question 59

During a period of changing inventory prices, which of the following is NOT immediately sensitive to the particular cost flow assumption adopted?

A) Net income
B) Current ratio
C) Gross profit
D) Working capital
E) Quick ratio

Question 60

The following information comes from the annual reports of Devin Designs. What is the amount of purchases for 2011?

A) $8,246
B) $11,161
C) $13,570
D) $10,643

Question 61

Use the information that follows concerning Bradley Corporation to answer problems 2- 5.
Bradley Corporation began business on January 1. During January, Bradley reported the following:

Determine the amount of the inventory valuation on January 31 under the averaging cost flow assumption.

Question 62

Use the information that follows concerning Bradley Corporation to answer problems 2- 5.
Bradley Corporation began business on January 1. During January, Bradley reported the following:

Determine the amount of inventory to report on Bradley's balance sheet at January 31 under the FIFO cost flow assumption.

Question 63

Use the information that follows concerning Bradley Corporation to answer problems 2- 5.
Bradley Corporation began business on January 1. During January, Bradley reported the following:

Determine the amount of cost of goods sold under the FIFO cost flow assumption for the month of January.

Question 64

For each cost numbered 1 through 8 below, identify which accounting treatment (a through c) would most likely be used in accounting for the cost. You may use each letter more than once or not at all.

Question 65

Dakota Industries has two items in inventory as of December 31, 2010. Each item was purchased for $52. Company management chose to write down Item #1 to $39, which at year-end was assessed to be its market value. Management did not write down Item #2 because its market value was estimated to be greater than $52. During 2010, each item was sold for $63 cash. If Dakota uses the perpetual inventory method, which of the following would be included in the entry or entries to record the sale of Item #1?

A) A debit to Sales for $63.
B) A credit to Inventory for $52.
C) A debit to Cost of Goods Sold for $39.
D) A credit to Cost of Goods Sold for $52.

Question 66

The following information comes from the annual reports of Devin Designs. What is the ending inventory amount for 2012?

A) $24,865
B) $3,101
C) $2,223
D) $15,314

Question 67

For each item listed in 1 through 4, place the letter of the accounting effect (a through e) in the space provided. You may use each letter more than once or not at all.
____ 1. During a period of increasing inventory and rising prices, a company decides to use FIFO instead of LIFO.
____ 2. During a period of increasing inventory and rising prices, a company decides to use averaging instead of FIFO.
____ 3. During a period of static prices, a company decides to use FIFO instead of LIFO.
____ 4. A company applies lower-of-cost-or-market for valuing ending inventory when market price is less than cost.

Question 68

For each item listed in 1 through 7, place the letter (a through e) of the accounting effect in the space provided. You may use each letter more than once or not at all.
____ 1. During a period of increasing inventory and rising prices, a company decides to use FIFO instead of LIFO.
____ 2. During a period of increasing inventory and rising prices, a company decides to use averaging instead of FIFO.
____ 3. During a period of increasing inventory and increasing prices, a company uses the LIFO method, which creates the largest cost of goods sold.
____ 4. A company applies lower-of-cost-or-market for valuing ending inventory when market price is less than cost.
____ 5. A company applies lower-of-cost-or-market for valuing ending inventory when cost is less than market price.
____ 6. During an extended period of constant prices, a company adopts LIFO instead of FIFO.

Question 69

Use the information that follows concerning Bradley Corporation to answer problems 2- 5.
Bradley Corporation began business on January 1. During January, Bradley reported the following:

Determine the amount of inventory to report on Bradley's balance sheet at January 31 under the LIFO cost flow assumption.

Question 70

Grey Manufacturing had the following transaction: $\bullet$ Grey received an order to sell inventory with a cost of $50,000, and debited Accounts Receivable and credited Sales. The goods were shipped to the customer on December 31, 2010, and received on January 2, 2011.
If the terms of the sale were FOB shipping point and Grey included all these items in its ending inventory of 12/31/10, which of the following is the best statements regarding this treatment?

A) Grey made no mistake and rightfully included the items in its inventory until January 2, 2011.
B) Grey made a mistake and wrongly understated ending inventory.
C) Grey made a mistake and wrongly understated Cost of Goods Sold.
D) Grey made a mistake and wrongly understated Retained Earnings.

Question 71

The following information comes from the annual reports of Devin Designs. What is the beginning inventory amount for 2012?

A) $439
B) $8,246
C) $10,908
D) $2,662

Question 72

Grey Manufacturing had the following transaction: $\bullet$ Grey ordered $67,000 of inventory on December 30, 2010. The inventory was shipped on December 31, 2010, with the terms FOB destination. Grey received the inventory on January 3, 2011.
If Grey included all these items in it ending inventory of 12/31/10, which of the following is the best statement regarding this treatment?

A) Grey made no mistake and rightfully included the items in its ending inventory for 12/31/10.
B) Grey made a mistake and wrongly overstated Inventory.
C) Grey made a mistake and wrongly overstated Cost of Goods Sold.
D) Grey made a mistake and wrongly overstated Retained Earnings.

Question 73

The following information comes from the annual reports of Devin Designs. What is the amount of goods available for sale for 2012?

A) $11,347
B) $15,314
C) $13,957
D) $24,865

Question 74

Gump Supplies has the following information: An inventory count taken at year end indicates that inventory with a cost of $56,000 is on hand as of December 31, 2010. Assume that inventory purchases and transportation-in are both reflected in the inventory account, which shows an ending balance of $59,000. Which of the following would be the best adjusting journal entry to make at the end of the period with respect to this information?

Question 75

For each item listed in 1 through 2, place the letter of the accounting effect (a through e) in the space provided. You may use each letter more than once or not at all.
____ 1. A company applies lower-of-cost-or-market for valuing ending inventory when cost is greater than market price.
____ 2. During an extended period of constant prices, a company uses LIFO instead of FIFO.

Question 76

Forrest's Crab House purchased Florida stone crab on account on November 10, 2010, for a gross price of $87,000. Forrest also purchased farm-raised catfish on account on November 11, 2010 for a gross price of $25,000. The terms of both sales were 2/15, n/30. Forrest paid for the first purchase on November 19, 2010, and for the second purchase on November 30. If he uses the perpetual inventory method, which of the following journal entries would Forrest make for November 30?

Question 77

Dakota Industries has two items in inventory as of December 31, 2010. Each item was purchased for $52. Company management chose to write down Item #1 to $39, which at year-end was assessed to be its market value. Management did not write down Item #2 because its market value was estimated to be greater than $52. During 2010, each item was sold for $63 cash. The journal entry for the write down of Item #1 would include which of the following?

Question 78

Forrest's Crab House purchased Florida stone crab on account on November 10, 2009, for a gross price of $87,000. Forrest also purchased farm-raised catfish on account on November 11, 2009 for a gross price of $25,000. The terms of both sales were 2/15, n/30. Forrest paid for the first purchase on November 19, 2009, and for the second purchase on November 30. If he uses the perpetual inventory method, his journal entry for November 19 would include:
a. a debit to Inventory for $1,740.
b. a debit to Inventory for $85,260.
c. a credit to Inventory for $1,740.
d. a credit to Accounts Payable for $87,000

Question 79

Bisbee Ltd. has been fraudulently overstating its inventory in order to "pump up" a lagging income. It started this practice on January 1, 2010 and overstated the 2010 income by $9,000. By what amount will they have to overstate December 31, 2011 inventory in order to overstate 2011 income by $14,000?

Question 80

Gump Supplies has the following information: An inventory count taken at year end indicates that inventory with a cost of $56,000 is on hand as of December 31, 2010. Assume that inventory purchases and transportation-in are both reflected in the inventory account, which shows an ending balance of $59,000. What is the amount of the cost of goods sold?
a. $123,300
b. $83,300
c. $60,700
d. $100,700