Deck 7: Inventory and Cost of Goods Sold

Question 1

Richmond Company had the following information taken from its 20X1 adjusted trial balance: Sales, $200,000; Sales Discounts, $4,000; Beginning Inventory, $10,000; and Purchases, $140,000. A physical count of the merchandise on hand at the end of the year showed $20,000. Compute the gross margin (gross profit) that would appear in the statement of earnings.

A) $62,000
B) $66,000
C) $70,000
D) $74,000

Answer 1

$66,000

Question 2

Which of the following is not an inventory account in a manufacturing company?

A) Raw materials
B) Work in process
C) Goods available for sale
D) Finished goods

Answer 2

Goods available for sale

Question 3

The inventory of a retail company is comparable to which type of inventory of a manufacturing company?

A) Work in process
B) Finished goods
C) Raw materials
D) Supplies

Answer 3

Finished goods

Question 4

Which of the following should be included in the cost of inventory?

A) The cost of keeping the inventory records
B) Amortization on the inventory warehouse
C) The salesperson's commission
D) Receiving and inspection costs

Question 5

Which of the following statements about inventory costs is true?

A) Factory overhead consists of manufacturing costs other than direct materials and direct labour.
B) Net realizable value is the expected sales price plus selling costs.
C) FIFO Reserve is a contra sales account for the excess of FIFO over weighted-average inventory.
D) Purchases discounts increase sales revenue to arrive at net sales.

Question 6

Which of the following businesses would not have cost of goods sold?

A) A jewelry store
B) A grocery store
C) A movie theatre
D) A manufacturer of batteries

Question 7

When goods are sold on credit, revenue usually should be recognized on which of the following dates?

A) receipt of the sales order
B) receipt of the goods by the buyer.
C) passage of title from the seller to the buyer.
D) manufacture of the goods.

Question 8

Which of the following costs would not be part of product inventory costs for a manufacturer such as Harley Davidson?

A) Costs to store ?nished motorcycles until they are sold.
B) Kickstands purchased for use in manufacturing the motorcycles.
C) The factory manager's salary and bene?ts.
D) The wages and bene?ts of an employee in the welding department.

Question 9

Which of the following types of inventory usually is not held by a manufacturing business?

A) Finished goods inventory.
B) Raw material inventory.
C) Work in process inventory.
D) Merchandise inventory.

Question 10

On March 10, Frazier Company received merchandise for resale from its normal supplier. The invoice price was $3,600 with terms of 2/10, n/30 for 100 units of Part #345. The invoice was paid on March 17. Freight costs were $120 and the company paid $108 of interest on a loan to buy the inventory. What is the unit cost that should be recorded for each of the 100 units of Part #345?

A) $36.00
B) $36.48
C) $37.20
D) $37.56

Question 11

Which of the following equations is correct?

A) Beginning Inventory + Purchases - Cost of Goods Sold = Ending Inventory.
B) Sales + Cost of Goods Sold = Gross Margin.
C) Beginning Inventory + Ending Inventory - Purchases = Cost of Goods Sold.
D) Income Before Taxes - Operating Expenses = Cost of Goods Sold.

Question 12

Which of the following costs would be included in the costs of inventory of a manufacturer?

A) Sales salaries.
B) Electricity for the o?ce building.
C) Wages for factory workers.
D) Wages for administrative staff.

Question 13

Marsden Company purchased a signi?cant amount of raw materials inventory for a new product it is manufacturing. Marsden purchased insurance on these raw materials while they were in transit from the supplier. How should Marsden account for the insurance costs ?

A) As an operating expense of the period
B) As a prepaid expense until the inventory arrives
C) As part of the cost of the raw materials inventory
D) As a contra-asset account to inventory

Question 14

Which of the following should be included in the cost of the inventory?

A) The cost of shelves used to store inventory
B) Shipping and handling on inventory purchases
C) Salaries paid to warehouse employees.
D) Advertising costs to sell the inventory

Question 15

The cost of goods sold account is which of the following?

A) An asset
B) A contra-asset
C) An extraordinary item
D) An expense

Question 16

Wilburn Company reported the following data at year-end: Sales, $100,000; Beginning inventory, $8,000; Ending inventory, $6,000; Cost of goods sold, $60,000; and Gross margin, $40,000. What was the amount of merchandise purchases for the year?

A) $40,000
B) $46,000
C) $58,000
D) $68,000

Question 17

The 20X2 records of Tom Company showed beginning inventory, $6,000; cost of goods sold, $14,000; and ending inventory, $8,000. What was the purchases amount for 20X2?

A) $9,000
B) $10,000
C) $12,000
D) $16,000

Question 18

The following information was taken from the 20X2 income statement of Milburn Company: Pretax profit, $12,000; Total operating expenses (not including income taxes), $20,000; Sales revenue, $120,000; Beginning inventory, $8,000; and Purchases, $90,000. Compute the amount of the ending inventory.

A) $8,000
B) $10,000
C) $18,000
D) $88,000

Question 19

Retail Company reported the following amounts on its 20X2 income statement: Purchases, $45,000; Beginning 20X2 inventory, $15,000; and Cost of goods sold, $50,000. What was the 20X2 ending inventory?

A) $10,000
B) $25,000
C) $26,000
D) $27,000

Question 20

The following information was taken from the 20X2 income statement of Milburn Company: Pretax profit, $12,000; Total operating expenses, $20,000; Sales revenue, $120,000. Compute the cost of goods sold.

A) $88,000
B) $100,000
C) $108,000
D) $112,000

Question 21

Two systems are used in accounting for inventory-perpetual and periodic. Which of the following statements is correct?

A) In a perpetual inventory system, the inventory account is not changed for each purchase during the accounting period.
B) In a perpetual inventory system, cost of goods sold is recorded at the time of each sale during the accounting period.
C) In a periodic inventory system, cost of goods sold is developed from a comparison of beginning inventory and ending inventory only.
D) In a periodic inventory system, the inventory account is increased for each purchase during the accounting period.

Question 22

On February 20, 20X1, Ross Sound Company purchased $10,000 of stereo equipment for resale on credit, subject to the terms 3/15, n/30. The periodic inventory system is used. If the company paid for these goods on March 20, the entry made to record the payment should include which of the following?

A) A $300 debit to Purchases discounts.
B) A $10,000 debit to Trade payables.
C) An $8,500 credit to Cash.
D) A $9,700 debit to Purchases.

Question 23

Halles Medical Instruments has net sales and gross pro?t of $1,841,000 and $971,000 respectively. Assuming the cost of goods available were $1,584,000, what was the cost of Halle's ending inventory?

A) $747,000
B) $460,000
C) $350,000
D) $714,000

Question 24

A company reports its 20X2 cost of goods sold at $20.0 billion. Its ending inventory for 20X2 is $1.8 billion and for 20X1, ending inventory was $1.5 billion. How much inventory did the company purchase during 20X2?

A) $18.5 billion
B) $19.7 billion
C) $20.3 billion
D) $21.8 billion

Question 25

Which of the following is true under the perpetual inventory system?

A) One entry is required to record a sales return.
B) Cost of goods sold cannot be determined unless a physical inventory is taken.
C) Two entries are required to record a sale.
D) A separate account for purchases is required.

Question 26

Which one of the following statements concerning the periodic and perpetual inventory systems is true?

A) The periodic system uses a purchases account.
B) Inventory controls are only needed for the periodic inventory systems.
C) None of the accounting entries vary between the two systems.
D) Due to advances in computers, many businesses recently have begun to use the periodic inventory system.

Question 27

In order to determine cost of goods sold in a periodic inventory system we

A) subtract ending inventory from beginning inventory.
B) subtract ending inventory from cost of goods available for sale.
C) subtract purchases from ending inventory.
D) add purchases to beginning inventory.

Question 28

When a company uses the periodic inventory system in accounting for its merchandise inventory, which of the following is true?

A) Purchases are recorded in the cost of goods sold account.
B) The inventory account is updated after each sale.
C) Cost of goods sold is computed at the end of the accounting periods rather than at each sale.
D) The inventory account is updated throughout the year as purchases are made.

Question 29

IFRS standards require that a ?rm select the cost ?ow assumption that:

A) maximizes income.
B) provides the most conservative inventory cost.
C) most clearly re?ects current income.
D) most closely matches the physical ?ow of inventory.

Question 30

If ABC's statement of earnings showed cost of goods sold at $78,000, purchases of $80,000, freight-in at $300, purchases returns of $500 and end-of-the period inventory at $11,900, its beginning-of-the- period-inventory must have been:

A) $10,400
B) $10,100
C) $9,900
D) $9,200

Question 31

If a company were using a perpetual inventory system, which of the following entries is the correct journal entry to record the purchase of $20,000 of merchandise on account?
a)
$\begin{array}{|c|c|c|}\hline \text { Dr. Inventory } & 20,000 & \\\hline \text { Cr. Accounts payable } & & 20,000 \\\hline\end{array}$

b)
$\begin{array}{|c|c|c|}\hline \text { Dr. Inventory } & 20,000 & \\\hline \text { Cr. Purchases } & & 20,000 \\\hline\end{array}$

d)
$\begin{array}{|c|c|c|}\hline \text { Dr. Purchases } & 20,000 & \\\hline \text { Cr. Inventory } & & 20,000 \\\hline\end{array}$

d)
$\begin{array}{|c|c|c|}\hline \text { Dr. Purchases } & 20,000 & \\\hline \text { Cr. Accounts payable } & & 20,00 \\\hline\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 32

Which of the following statements regarding inventories is correct?

A) FIFO assumes that the costs of the earliest goods acquired are the last to be sold.
B) It is generally good business management to sell the most recently acquired goods ?rst.
C) Under FIFO, the ending inventory is based on the latest units purchased.
D) FIFO seldom coincides with the actual physical ?ow of inventory.

Question 33

In 20X2, Landings Inc. provided the following items in their footnotes. Its cost of goods available for sale was $6.2 billion under FIFO costing and its ending inventory value under FIFO costing was $2.1 billion. Its opening inventory was $2.5 billion. What was its purchases?

A) $3.7 billion
B) $4.1 billion
C) $4.6 billion
D) $8.3 billion

Question 34

If merchandise for resale is purchased for $2,000, terms 2/10, n/30, the entry to record the purchase should be which of the following (assuming a periodic inventory system)? $$\begin{array} { | l | l | r | l | r | } \hline & \text { Debit } && \text { Credit } \\\hline \text { A } & \text { Inventory } & \$ 2,000 & \text { Trade payables } & 1,960 \\\hline B & \text { Accounts payable } & 1,960 & \text { Inventory } & 1,960 \\\hline \text { C } & \text { Inventory } & 1,960 & \text { Trade payables } & 2,000 \\\hline D & \text { Purchases } & 2,000 & \text { Trade payables } & 2,000 \\\hline\end{array}$$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 35

Which inventory system keeps an ongoing record of purchases and sales of inventory with adjustments that re?ect changes as they occur

A) Periodic system
B) Speci?c identi?cation system
C) Perpetual system
D) Just-in-time system

Question 36

Joe Company sold merchandise at an invoice price of $1,000 to Gibbs, Inc., with terms of 2/10, n/30. Which of the following is the correct entry to record the purchase by Gibbs if the company uses the periodic inventory system and the gross method to record purchases?
a)
$\begin{array} { l l r r } & \text { Purchases } & 1,000 & \\& \text { Cash } & & 1,000 \\\end{array}$
b)
$\begin{array} { l l r r } & \text { Inventory } & 1,000 & \\ & \text { Trade Payables } & &1,000 \\\end{array}$
c)
$\begin{array} { l l r r } & \text { Purchases } & 980 & \\ & \text { Trade Payables } & & 980 \\\end{array}$
d )
$\begin{array} { l l r r } \text { Purchases } & 1,000 & 1,000 \\\text { Trade Payables } & & \\\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 37

Smithers Amusement Machines has cost of goods sold of $100,000 and ending inventory of $150,000. If Smithers had no purchases and no returns, what was the cost of its beginning inventory?

A) $50,000
B) $250,000
C) $150,000
D) $100,000

Question 38

Which of the following items will increase the cost of inventory for the buyer of goods?

A) Purchase returns and allowances granted by the seller
B) Freight charges paid by the seller
C) Purchase discounts taken by the purchase
D) Freight charges paid by the purchaser

Question 39

In 20X2, Landings, Inc. provided the following items in their footnotes. Their cost of goods available for sale was $4.5 billion under FIFO costing and their ending inventory value under FIFO costing was $2.1 billion. Their purchases were $4.1 billion. What was their opening inventory?

A) $0.4 billion
B) $2.0 billion
C) $2.4 billion
D) $6.2 billion

Question 40

A company that makes the following journal entry at the time of purchasing inventory is using which of the following inventory systems?
$$\begin{array} { | l | l | l | } \hline \text { Dr. Inventory } & \text { xxx } & \\\hline \text { Cr. Accounts Payable } & & \mathrm { xxx } \\\hline\end{array}$$

A) Periodic system
B) Just in time system
C) Specific identification method
D) Perpetual system

Question 41

Under the lower of cost and net realizable value basis, the adjusting entry to record a decline in net realizable value below cost includes a

A) debit to the Inventory account.
B) debit to the Cost of Goods Sold account.
C) credit to the Cost of Goods Sold account.
D) credit to the Sales account.

Question 42

$\begin{array}{l}\text { Shillings had the following inventory activity during April: }\\\\\begin{array} { | l | r | r | r | } \hline & \text { Units } & \text { Unit cost } & \text { Total cost } \\\hline \text { Beginning inventory } & 800 & \$ 10.00 & \$ 8,000 \\\hline \text { Purchase: April 4 } & 1,400 & 11.00 & 15,400 \\\hline \text { Sale: April 8 } & ( 1,500 ) & & \\\hline \text { Purchase: April 12 } & 900 & 10.50 & 9,450 \\\hline \text { Sales: April 24 } & ( 900 ) & & \\\hline\end{array}\end{array}$

-If Shillings is using a perpetual system and the weighted average costing assumption, what is the ending inventory closest to?

A) $7,460
B) $7,588
C) $8,470
D) $7,392

Question 43

During a period of in?ation, which cost formula will result in the highest net income?

A) Average cost.
B) FIFO.
C) Lower of cost and net realizable value.
D) Both FIFO and average cost.

Question 44

Why would high technology ?rms probably choose FIFO as their inventory valuation method?

A) FIFO would cause reported earnings to be higher.
B) FIFO would cause reported earnings to be lower due to the de?ationary nature of its ending inventory causing taxes to also be lower.
C) FIFO would ensure that inventory would not become obsolete.
D) FIFO is the easiest method to use.

Question 45

Which cost determination method smooths the effects of price changes?

A) Speci?c identi?cation.
B) FIFO.
C) Average cost.
D) Lower of cost and net realizable value.

Question 46

$\begin{array}{l}\text { Shillings had the following inventory activity during April: }\\\\\begin{array} { | l | r | r | r | } \hline & \text { Units } & \text { Unit cost } & \text { Total cost } \\\hline \text { Beginning inventory } & 800 & \$ 10.00 & \$ 8,000 \\\hline \text { Purchase: April 4 } & 1,400 & 11.00 & 15,400 \\\hline \text { Sale: April 8 } & ( 1,500 ) & & \\\hline \text { Purchase: April 12 } & 900 & 10.50 & 9,450 \\\hline \text { Sales: April 24 } & ( 900 ) & & \\\hline\end{array}\end{array}$

-If Shillings is using a perpetual system and the weighted average costing assumption, what is the cost of goods sold closest to?

A) $24,683
B) $24,777
C) $25,012
D) $25,458

Question 47

During a period of rising costs, the owners of a company wishing to minimize the company's tax burden would select which of the following cost ?ow assumptions?

A) Speci?c identi?cation.
B) FIFO.
C) Weighted-average cost.
D) Lower of cost and net realizable value.

Question 48

Which of the following should be assessed when analyzing the quality of the cost of goods sold amount:

A) The cost ?ow assumption for inventory
B) The method used to count physical inventory
C) The amount of discretionary expenses included in the cost of goods sold amount.
D) The method used to depreciate inventory.

Question 49

A company purchased inventory as follows: $$\begin{array} { | l | l | } \hline \text { March } 3 & 300 \text { units at } \$ 9.00 \\\hline \text { March } 4 & 200 \text { units at } \$ 10.00 \\\hline\end{array}$$ On March 5, it sold 400 units for $17 each. The weighted- average unit cost to be used for the cost of goods sold on March 5, in a perpetual inventory system, is

A) $9.00.
B) $9.40.
C) $9.60.
D) $10.00

Question 50

$\begin{array}{l}\text { Shillings had the following inventory activity during April: }\\\\\begin{array} { | l | r | r | r | } \hline & \text { Units } & \text { Unit cost } & \text { Total cost } \\\hline \text { Beginning inventory } & 800 & \$ 10.00 & \$ 8,000 \\\hline \text { Purchase: April 4 } & 1,400 & 11.00 & 15,400 \\\hline \text { Sale: April 8 } & ( 1,500 ) & & \\\hline \text { Purchase: April 12 } & 900 & 10.50 & 9,450 \\\hline \text { Sales: April 24 } & ( 900 ) & & \\\hline\end{array}\end{array}$

-If Shillings is using a perpetual system and the FIFO costing assumption, what is the cost of goods sold closest to?

A) $25,700
B) $25,500
C) $25,930
D) $22,400

Question 51

Inventory that originally cost $20,000 was written down to its net realizable value of $18,500 in the last accounting period. At the end of the current accounting period, the net realizable value is determined to be $23,000. At what amount should the inventory be reported on the current period's statement of ?nancial position?

A) $20,000.
B) $18,500.
C) $23,00000.
D) $16,000.

Question 52

Which of the following businesses would be most likely to use the speci?c identi?cation method?

A) shoe store
B) car dealership
C) grocery store
D) bookstore

Question 53

The lower of cost and net realizable value basis of valuing inventories ensures that inventories are

A) valued at their current cost.
B) valued at their selling price.
C) not under-valued.
D) not over-valued.

Question 54

During a period of rising costs, the manager of a company wishing to maximize her bonus would select which of the following cost ?ow assumptions?

A) Speci?c identi?cation.
B) FIFO.
C) Weighted-average cost.
D) Lower of cost and net realizable value.

Question 55

The consistent application of an inventory cost formula is essential for

A) neutrality.
B) accuracy.
C) comparability.
D) relevance.

Question 56

$\begin{array}{l}\text { Shillings had the following inventory activity during April: }\\\\\begin{array} { | l | r | r | r | } \hline & \text { Units } & \text { Unit cost } & \text { Total cost } \\\hline \text { Beginning inventory } & 800 & \$ 10.00 & \$ 8,000 \\\hline \text { Purchase: April 4 } & 1,400 & 11.00 & 15,400 \\\hline \text { Sale: April 8 } & ( 1,500 ) & & \\\hline \text { Purchase: April 12 } & 900 & 10.50 & 9,450 \\\hline \text { Sales: April 24 } & ( 900 ) & & \\\hline\end{array}\end{array}$

-If Shillings is using a perpetual system and the FIFO costing assumption, what is the ending inventory closest to?

A) $7,350
B) $7,500
C) $7,310
D) $7,880

Question 57

Nutone values its inventory on the lower of cost and market basis. The following data came from the 20X7 inventory, which consisted of two items: $$\begin{array} { | l | r | r | } \hline & \text { Components } & \text { Cables } \\\hline \text { Original cost } & \$ 12,000 & \$ 15,000 \\\hline \text { Selling price } & 15,000 & 26,000 \\\hline \text { Estimated selling costs } & 5,000 & 10,000 \\\hline \text { Normal profit margin } & 1,500 & 1,000 \\\hline\end{array}$$ What would be the value of inventory on Nutone's statement of financial position?

A) $29,000
B) $24,000
C) $25,000
D) $27,000

Question 58

The lower of cost and net realizable value basis of valuing inventories is a departure from the

A) matching principle.
B) valuation principle.
C) historical cost principle.
D) prudence principle.

Question 59

Selection of an inventory cost formula by management should be in?uenced most by the:

A) ?scal year end.
B) physical ?ow of goods.
C) goal of reporting inventory at its lowest cost.
D) income tax effects.

Question 60

Tuba Inc. is a wholesaler of electronics. It purchased 1,000 units of Product X for $500 each during 2013. The selling price during the year was $750 per unit. At year end, it had 100 units on hand and due of changes in technology, the selling price will have to be reduced by 40% in order to sell them. The value of each unit of Product X for the year-end inventory presentation should be

A) $600.
B) $500.
C) $400.
D) $450.

Question 61

A $15,000 overstatement of the 20X2 ending inventory was discovered after the ?nancial statements for 20X2 were prepared. What was the effect of the inventory error on the 20X2 ?nancial statements?

A) Current assets were overstated and pro?t was understated.
B) Current assets were understated and pro?t was understated.
C) Current assets were understated and pro?t was overstated.
D) Current assets were overstated and pro?t was overstated.

Question 62

The lower of cost and net realizable value basis of valuing inventories ensures that inventories are

A) valued at their current cost.
B) not under-valued.
C) re?ective of obsolescence.
D) valued at their selling price.

Question 63

Inventory that originally cost $10,000 was written down to its net realizable value of $8,500 at the end of 2012. At the end of 2013, the net realizable value is determined to be $10,500. At what amount should the inventory be reported on the December 31, 2013 statement of ?nancial position?

A) $10,500.
B) $10,000.
C) $9,500.
D) $8,500.

Question 64

An overstatement of the beginning inventory results in

A) an overstatement of profit.
B) an understatement of profit.
C) no effect on the period's profit.
D) a need to adjust purchases.

Question 65

On December 15, 20X1, Toby Company accepted delivery of merchandise which it purchased on credit. As of December 31, 20X1, the company had neither recorded the transaction nor included the merchandise in its inventory because the seller's invoice had not been received. The effect of this omission on its statement of ?nancial position at December 31, 20X1, (end of the accounting period) was which of the following?

A) Assets and shareholders' equity were overstated but liabilities were not affected.
B) Shareholder's equity was the only item affected by the omission.
C) Assets and liabilities were understated but shareholders' equity was not affected.
D) Assets and shareholders' equity were understated but liabilities were not affected.

Question 66

Will Company's independent accountant discovered that the ending inventory for 20X2 had been overstated by the company by $2,000. Before the correction, what was the effect in the 20X2 statement of earnings because of the overstatement of the ending inventory?

A) Pretax pro?t understated by $2,000.
B) Cost of goods sold was overstated by $2,000.
C) Pretax pro?t was overstated and the cost of goods sold was understated by $2,000.
D) Pretax pro?t was understated by $2,000.

Question 67

If beginning inventory is understated by $1,300 and ending inventory is understated by $700, pretax profit for the period will be which of the following?

A) Understated by $600.
B) Understated by $2,000.
C) Overstated by $600.
D) Overstated by $2,000.

Question 68

During the audit of Virginia Company's 20X2 financial statements, the auditors discovered that the 20X1 ending inventory had been overstated by $10,000 and that the 20X2 ending inventory had been overstated by $8,000. Before the effect of these errors, 20X2 pretax profit had been computed as $100,000. What should be reported as the correct 20X2 profit before taxes?

A) $98,000
B) $100,000
C) $102,000
D) $118,000

Question 69

Sue Company reported profit in 20X1 of $27,000 and in 20X2 of $32,000. Later it was discovered that the ending inventory for 20X1 was understated by $15,000. Disregard income taxes. The correct amounts of profit for 20X1 and 20X2 were which of the following?
$\begin{array} { l r r } && \underline { 20 X1 } && \underline { 20 X 2 } \\\end{array}$
a) $\begin{array} { l r r } & \$ 27,000 & \$ 32,000 \\\end{array}$
b) $\begin{array} { l r r } & \$ 42,000 & \$ 17,000 \\\end{array}$
c) $\begin{array} { l r r }& \$ 12,000 & \$ 47,000 \\\end{array}$
d) $\begin{array} { l r r } & \$ 17,000 & \$ 32,000 \\\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 70

Upaway Company hired some students to help count inventory during their semester break. Unfortunately, the students added incorrectly and ending inventory was overstated by $12,000. What would be the effect of this error in ending inventory?

A) Pro?t would be overstated.
B) Pro?t would be understated.
C) Ending retained earnings would be understated.
D) Cost of goods sold would be overstated.

Question 71

At the end of 20X1, a $2,500 understatement was discovered in the amount of the 20X1 ending inventory as re?ected in the perpetual inventory records. What were the 20X1 effects of the $2,500 inventory error (before correction)?

A) Assets (inventory) were understated by $2,500 and pretax pro?t was understated by $2,500.
B) Assets (inventory) were understated by $2,500 and pretax pro?t was overstated by $2,500.
C) Cost of goods sold was understated by $2,500 and pretax pro?t was understated by $2,500.
D) Cost of goods sold was overstated by $2,500 and pretax pro?t was overstated by $2,500.

Question 72

An automobile dealer would most likely have a

A) high inventory turnover.
B) low profit margin.
C) high volume.
D) low inventory turnover.

Question 73

Wilder Company reported pretax profit amounts of: 20X2, $11,000; and 20X3, $15,000. Later it was discovered that the ending inventory for 20X2 was understated by $2,000 (and not corrected in 20X3). The correct pretax profit for each year was which of the following?
$\begin{array} {lrr} && \underline { 20 X 2 } && \underline { 20 X 3 } \\\end{array}$
a) $\begin{array} {lrr } & \$ 9,000 & \$ 13,000 \\\end{array}$
b) $\begin{array} { lrr } & \$ 13,000 & \$ 13,000 \\\end{array}$
c) $\begin{array} { lrr} & \$ 13,000 & \$ 17,000 \\\end{array}$
d) $\begin{array} { lrr} & \$ 9,000 & \$ 17,000 \\\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 74

The inventory turnover ratio is calculated by dividing cost of goods sold by

A) beginning inventory.
B) ending inventory.
C) average inventory.
D) 365 days.

Question 75

An overstatement of ending inventory in one period results in

A) no effect on pro?t of the next period.
B) an overstatement of pro?t of the next period.
C) an understatement of pro?t of the next period.
D) an overstatement of the ending inventory of the next period.

Question 76

Picton Co. prepares its estimate of LCM using the net realizable value. Inventory item X570 cost $45 and the item is currently selling in the market for $55 and selling costs are estimated to be $6. Picton expects to earn a pro?t of $4 on the sale of this item. In its year-end ?nancial statements, Picton Co. should value this item at:

A) $49
B) $55
C) $45
D) $50

Question 77

An understatement of the beginning inventory results in

A) no effect on the period's earnings.
B) an overstatement of earnings.
C) an understatement of earnings.
D) a need to adjust purchases.

Question 78

Darkhorse Ltd. has a days in inventory ratio of 40 and average inventory of $254,000. What is its cost of goods sold?

A) Cannot be determined.
B) $12,700,000.
C) $2,317,750.
D) $1,854,200.

Question 79

Days in inventory is calculated by dividing 365 days by

A) average inventory.
B) beginning inventory.
C) ending inventory.
D) the inventory turnover ratio.

Question 80

Shilling Company has implemented an inventory management system in which one person places the order for new inventory, a second person checks it against the purchase order when it arrives and a third person records the receipt of physical inventory in the accounting records. The purpose of this system is:

A) to reduce storage costs.
B) to guard against stock-outs.
C) to reduce accounting errors.
D) to guard against internal theft and collusion.