Deck 5: Inventories and Cost of Goods Sold

Question 1

The buyer must include goods purchased FOB shipping point in its inventory account if the goods are still in transit.

Answer 1

True

Question 2

With the periodic inventory system, the inventory account is updated after each sale or purchase.

Answer 2

False

Question 3

Net purchases equal purchases less purchase return, allowances, and discounts plus transportation-in.

Answer 3

False

Question 4

A company using the periodic inventory system must total the selling prices of the units on hand at the end of the period to value the ending inventory.

Question 5

The three distinct types of cost to a manufacturer are direct materials, direct labor, and
manufacturing overhead.

Question 6

Gross margin as a percentage of sales is a common analytical tool for service companies.

Question 7

Sales revenue is an inflow of assets.

Question 8

Sales Returns and Allowances is a contra-asset account.

Question 9

Cost of goods sold is the difference between costs available for sale and beginning inventory.

Question 10

Under the perpetual inventory system, each time goods are purchased, the inventory account is transferred to sales revenue.

Question 11

Purchase returns and allowances is subtracted from cost of goods sold to determine net purchases.

Question 12

If cost of goods sold does not equal the cost of merchandise purchased during the period, an adjustment must be made to correct the error.

Question 13

If a customer returns merchandise which has already been paid for, the retailer may give either a cash refund or a credit on account.

Question 14

Cost of goods sold represents an outflow of an asset, inventory, from the sale of products.

Question 15

On the income statement of a merchandising company, cost of goods is added to net sales to arrive at gross margin or gross profit.

Question 16

Like sales revenue, cost of goods sold represents an inflow of assets.

Question 17

Credit terms of n/30 mean that the net amount of the invoice, less any returns or allowances, is due within 30 days of the date of the invoice.

Question 18

Purchase discounts decrease the total cost of merchandise acquired.

Question 19

Under the periodic inventory system, a physical inventory must be taken at the end of the period to determine cost of goods sold.

Question 20

The three forms or states in the development of inventory for a manufacturer are direct materials, direct labor, and finished goods.

Question 21

FIFO results in the least amount of income before taxes, assuming a period of rising prices.

Question 22

Cost of goods available for sale is equal to beginning inventory less cost of goods sold.

Question 23

The inventory method that assigns the most recent costs to ending inventory is LIFO.

Question 24

Under FIFO, the units in the ending inventory represent the oldest purchase(s).

Question 25

Specific identification relies on matching unit costs with the actual units sold.

Question 26

The gross profit ratio is calculated as gross profit divided by net income.

Question 27

According to the IRS's LIFO conformity rule, a company that chooses LIFO to report net income to its shareholders may not use LIFO in preparing its income tax return.

Question 28

Under LIFO, the units in the ending inventory represent the most recent purchase(s).

Question 29

It important that the proper amount be assigned to inventory because the amount assigned to inventory will affect the amount eventually recorded as net sales.

Question 30

If ending inventory is understated, then cost of goods sold is overstated.

Question 31

The weighted average cost is calculated by adding up the units' costs from each purchase and then dividing by the number of purchases.

Question 32

The gross profit ratio is computed by dividing net sales by gross profit.

Question 33

When merchandise is sold FOB shipping point, the buyer is responsible for the shipping costs.

Question 34

A LIFO reserve represents the amount by which cost of goods sold on a FIFO basis exceeds the cost of goods sold on a LIFO basis for the current year.

Question 35

A LIFO liquidation occurs when a company sells fewer units than it buys during the period.

Question 36

The LIFO conformity rule requires that if a company uses LIFO in reporting income to stockholders, it also must use LIFO on its tax return.

Question 37

A counterbalancing inventory error is one where the error on the balance sheet is offset by the same amount of error on the income statement.

Question 38

Changing inventory methods to take advantage of the tax breaks offered by LIFO is not a valid reason for a change in methods.

Question 39

If ending inventory is overstated, then net income is overstated as well.

Question 40

Many countries prohibit the use of LIFO for tax or financial reporting purposes.

Question 41

The journal entry to write down inventory to its market value results in a loss on the income statement.

Question 42

If the direct method is used to prepare the Operating Activities category of the statement of cash flows, the amount of cash paid
to suppliers of inventory is shown as an addition in this section of the statement.

Question 43

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

Question 44

When inventory is sold by a wholesaler or retailer, it is recorded in a different account on the income statement than a manufacturer would use.

Question 45

Moving average is the name given to the use of an average cost method used with a periodic inventory system.

Question 46

If a company has a number of day's sales in inventory equal to 60, that means that it takes about two months on average to sell its inventory.

Question 47

Ending inventory valued under the FIFO method will be the same regardless of whether the periodic system or the perpetual system is used.

Question 48

Under the indirect method, a decrease in inventory is added to net income to determine cash flow from operating activities.

Question 49

Under the indirect method, an increase in accounts payable is added to net income to determine cash flow from operating activities.

Question 50

The effect of a misstatement of the year-end inventory is limited to the net income for that year.

Question 51

The lower of cost or market (LCM) rule violates the historical cost principle.

Question 52

Both U.S.GAAP and international financial reporting standards (IFRS) require the use of the lower-of-cost-or-market rule to value inventories.

Question 53

The value assigned to an asset such as inventory on the balance sheet determines the amount eventually recognized as an expense on the income statement.

Question 54

The lower the inventory turnover ratio, the less time inventory resides in storage.

Question 55

The inventory turnover ratio is a measure of how many times during a period a company sells off its inventory.

Question 56

The inventory costing method is applied after each sale of merchandise to update the Inventory account.

Question 57

Assets are unexpired costs, and expenses are expired costs.

Question 58

If a change in accounts payable was added back to net income on the statement of cash flows prepared using the indirect method, then the amount owed to suppliers during the period had decreased.

Question 59

Whether LIFO costing is applied at the time each sale is made or only at the end of the period, both the periodic and perpetual systems will yield the same ending inventory under LIFO.

Question 60

Finished goods are the equivalent of merchandise inventory for a retailer or wholesaler in that both represent the inventory of goods held for sale.

Question 61

The inventory account a manufacturer uses to record the cost of products completed and available for sale is called

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

Question 62

Takenson Corp.is a merchandising company that uses the periodic inventory system.Selected account balances are listed below: $$\begin{array} { l r } \text { Sales } & \$ 500,000 \\\text { Purchases } & 225,000 \\\text { Inventory (beginning) } & 16,000 \\\text { Inventory (ending) } & 30,000 \\\text { Operating Expenses } & 148,000 \\\text { Income Tax Expense } & 10,000 \\\text { Retained Earnings (beginning) } & 53,000 \\\text { Dividends } & 15,000\end{array}$$

-Refer to the information for Takenson Corp. Calculate net income.

A) $289,000
B) $131,000
C) $141,000
D) $116,000

Question 63

Items should be reported as part of the company's "inventory" at year end, if they are

A) Sold during the period.
B) Determined to be part of cost of goods sold.
C) Purchased from a creditor, available for sale, and paid for the following year.
D) Held in anticipation of an increase in market value.

Question 64

George's Department Store is a merchandising company that uses the periodic inventory system.Selected account balances are listed below: $$\begin{array} { l r } \text { Sales } & \$ 200,000 \\\text { Purchases } & 90,000 \\\text { Inventory (beginning) } & 23,000 \\\text { Inventory (ending) } & 17,000 \\\text { Purchase returns and allowances } & 3,000 \\\text { Purchase discounts } & 7,000 \\\text { Transportation-in } & 4,000 \\\text { Sales discounts } & 8,000 \\\text { Sales returns and allowances } & 5,000\end{array}$$

-Refer to the account information for George's Department Store. Determine George's gross profit.

A) $93,000
B) $97,000
C) None of these choices
D) $103,000

Question 65

A customer returned damaged goods for credit.Which of the seller's accounts decreases?

A) Sales Returns
B) Purchase Returns
C) Accounts Receivable
D) Sales Revenue

Question 66

What effects on a retail store's accounting equation occur when merchandise returned by customers is recorded?

A) Stockholders' equity decreases and liabilities increase.
B) Assets and stockholders' equity decrease.
C) Assets and stockholders' equity increase.
D) Assets decrease and liabilities increase.

Question 67

Using the following information, what is the amount of cost of goods sold? $$\begin{array} { | l | r | l | l | r | } \hline \text { Furchases } & \$ 32,000 & & \text { Purchases discounts } & \$ 960 \\\hline \begin{array} { l } \text { Merchandise inventory } \\\text { September 1 }\end{array} & 5,700 & & \begin{array} { l } \text { Merchandise inventory } \\\text { September } 30\end{array} & 6,370 \\\hline \begin{array} { l } \text { Sales returns and } \\\text { allowances }\end{array} & 910 & & \text { Sales } & 63,000 \\\hline \begin{array} { l } \text { Purchases returns and } \\\text { allowances }\end{array} & 1,200 & & \text { Freight In } & 1,040 \\\hline\end{array}$$

A) $26,900
B) $20,530
C) $28,130
D) $30,210

Question 68

Which one of the following types of inventory accounts would be used by a wholesaler or retailer?

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

Question 69

Ending inventory is equal to the cost of items on hand plus

A) the cost of all inventory purchased during the period.
B) merchandise in transit sold to customers FOB shipping point.
C) merchandise purchased in transit with terms FOB destination.
D) merchandise in transit sold to customers FOB destination.

Question 70

George's Department Store is a merchandising company that uses the periodic inventory system.Selected account balances are listed below: $$\begin{array} { l r } \text { Sales } & \$ 200,000 \\\text { Purchases } & 90,000 \\\text { Inventory (beginning) } & 23,000 \\\text { Inventory (ending) } & 17,000 \\\text { Purchase returns and allowances } & 3,000 \\\text { Purchase discounts } & 7,000 \\\text { Transportation-in } & 4,000 \\\text { Sales discounts } & 8,000 \\\text { Sales returns and allowances } & 5,000\end{array}$$

-Refer to the account information for George's Department Store Calculate George's cost of goods purchased

A) $ 90,000
B) $ 84,000
C) $ 117,000
D) $ 103,000

Question 71

Travelli Co.sold merchandise to Trapani Co.on account, $17,000, terms 2/15, net 45.The cost of the merchandise sold is $15,400.Tavella Co.issued a credit memo for $1,750 for merchandise returned that originally cost $1,400.The Trapani Co.paid the invoice within the discount period.What is amount of net sales from the above transactions?

A) $17,000
B) $14,945
C) $15,250
D) None of these choices

Question 72

Takenson Corp.is a merchandising company that uses the periodic inventory system.Selected account balances are listed below: $$\begin{array} { l r } \text { Sales } & \$ 500,000 \\\text { Purchases } & 225,000 \\\text { Inventory (beginning) } & 16,000 \\\text { Inventory (ending) } & 30,000 \\\text { Operating Expenses } & 148,000 \\\text { Income Tax Expense } & 10,000 \\\text { Retained Earnings (beginning) } & 53,000 \\\text { Dividends } & 15,000\end{array}$$

-Refer to the information for Takenson Corp. Calculate the gross profit.

A) $241,000
B) $275,000
C) $425,000
D) $289,000

Question 73

Which one of the following accounts most likely would appear on the income statement of a merchandise company, but not on the income statement of a service company?

A) Income Tax Expense
B) Cost of Goods Sold
C) Selling Expenses
D) Administrative Expenses

Question 74

Which of the following terms best describes "Cost of goods available for sale"?

A) Cost of goods available for sale is an expense account.
B) Cost of goods available for sale is added to beginning inventory to determine cost of purchases during the period.
C) Cost of goods available for sale is subtracted from net sales to arrive at the gross margin
D) Cost of goods available for sale is allocated into cost of goods on hand and cost of goods sold at the end of the fiscal year

Question 75

Takenson Corp.is a merchandising company that uses the periodic inventory system.Selected account balances are listed below: $$\begin{array} { l r } \text { Sales } & \$ 500,000 \\\text { Purchases } & 225,000 \\\text { Inventory (beginning) } & 16,000 \\\text { Inventory (ending) } & 30,000 \\\text { Operating Expenses } & 148,000 \\\text { Income Tax Expense } & 10,000 \\\text { Retained Earnings (beginning) } & 53,000 \\\text { Dividends } & 15,000\end{array}$$

-Refer to information for Takenson Corp. Calculate the cost of goods sold for Takenson Corp.

A) $275,000
B) $211,000
C) $241,000
D) $259,000

Question 76

For what reason might retailers like Target select an accounting period that ends on or near the end of January?

A) The company's CPAs are attempting to spread out the workload.
B) The Internal Revenue Service requires merchandise companies to select such a date for their fiscal year.
C) The company originally started business operations on that date.
D) Business activity has reached a slow period that is suited to the preparation of its financial statements at the end of the year.

Question 77

Which one of the following ratios is a common analytical tool used by merchandise corporations, but not by service corporations?

A) Earnings per share
B) Gross profit ratio
C) Current ratio
D) Profit margin

Question 78

George's Department Store is a merchandising company that uses the periodic inventory system.Selected account balances are listed below: $$\begin{array} { l r } \text { Sales } & \$ 200,000 \\\text { Purchases } & 90,000 \\\text { Inventory (beginning) } & 23,000 \\\text { Inventory (ending) } & 17,000 \\\text { Purchase returns and allowances } & 3,000 \\\text { Purchase discounts } & 7,000 \\\text { Transportation-in } & 4,000 \\\text { Sales discounts } & 8,000 \\\text { Sales returns and allowances } & 5,000\end{array}$$

-Refer to the account information for George's Department Store. ?
Calculate George's net sales.

A) $200,000
B) $187,000
C) $195,000
D) $192,000

Question 79

A company using the periodic inventory system has the following account balances: Merchandise Inventory at the beginning of the year, $3,600; Freight-In, $650; Purchases, $10,700; Purchases Returns and Allowances, $1,950; Purchases Discounts, $330.The cost of merchandise purchased is equal to

A) $8,420
B) $17,230
C) $12,670
D) $9,070

Question 80

Anthony's Shoe Company uses a perpetual inventory system.The beginning balance in its inventory account is $1,500 and the ending balance is $1,000.Cost of goods sold is $6,500.What was the amount of inventory purchased during the year?

A) $ 500
B) $7,000
C) $7,500
D) $6,000