Deck 8: Inventories and the Cost of Goods Sold

Question 1

The primary purpose of an inventory flow assumption is to:

A) Increase inventory turnover.
B) Increase gross profit.
C) Determine which unit costs are assigned to inventory and which are assigned to the cost of goods sold.
D) Minimize taxable income during periods of rising prices.

Answer 1

Determine which unit costs are assigned to inventory and which are assigned to the cost of goods sold.

Question 2

During a period of steadily rising prices, which of the following inventory valuation methods is likely to result in the lowest cost of goods sold?

A) LIFO.
B) FIFO.
C) The retail method.
D) The gross profit method.

Answer 2

FIFO.

Question 3

The primary reason for the popularity of the LIFO flow assumption is that this method:

A) Is most appropriate when each item in inventory is unique.
B) Tends to minimize taxable income.
C) Causes inventory to be reported at or near its current replacement cost.
D) Reduces the amount of money "tied up" in inventory.

Answer 3

Tends to minimize taxable income.

Question 4

In a periodic inventory system, the cost of goods sold is determined by:

A) Multiplying net sales for the period by a cost ratio.
B) Journal entries made at the time of each sales transaction.
C) Physically counting the quantities of merchandise sold each day, and determining the cost of these items at year-end.
D) Subtracting the cost assigned to the ending inventory from the cost of goods available for sale during the period.

Question 5

Salerno Co. has an inventory turnover rate of 7 and an accounts receivable turnover rate of 5. Assuming 365 days in a year, the period of time required for Salerno to convert its inventory into cash through normal business operations is approximately:

A) 21 days.
B) 52 days.
C) 4 months.
D) 2.5 months.

Question 6

Ace Systems, Inc. uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows:
On January 28, Ace Systems sells 18 units of this product. The other 12 units remain in inventory at January 31.

-Refer to above data. Assuming that Ace Systems uses the average cost flow assumption, the cost of goods sold to be recorded at January 28 is:

A) $504.
B) $336.
C) $499.
D) Some other amount.

Question 7

Ace Systems, Inc. uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows:
On January 28, Ace Systems sells 18 units of this product. The other 12 units remain in inventory at January 31.

-Refer to above data. Assuming that Ace Systems uses the LIFO flow assumption, the cost of goods sold on January 28 is:

A) $331.
B) $509.
C) $499.
D) Some other amount.

Question 8

Ace Systems, Inc. uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows:
On January 28, Ace Systems sells 18 units of this product. The other 12 units remain in inventory at January 31.

-Refer to above data. Assuming that Ace Systems uses the FIFO flow assumption, the cost of goods sold on January 28 is:

A) $509.
B) $341.
C) $499.
D) Some other amount.

Question 9

Ace Systems, Inc. uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows:
On January 28, Ace Systems sells 18 units of this product. The other 12 units remain in inventory at January 31.

-Refer to above data. Assuming that Ace Systems uses the LIFO flow assumption, the 12 units of this product in inventory at January 31 have a total cost of:

A) $499.
B) $331.
C) $509.
D) Some other amount.

Question 10

Ace Systems, Inc. uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows:
On January 28, Ace Systems sells 18 units of this product. The other 12 units remain in inventory at January 31.

-Refer to above data. Assuming that Ace Systems uses the FIFO flow assumption, the 12 units of this product in inventory at January 31 have a total cost of:

A) $341
B) $509.
C) $499.
D) Some other amount.

Question 11

Canfield uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows:
On January 25, Canfield sells 55 units of this product. The other 45 units remain in inventory at January 31.
a) b) Determine the cost of the 45 units in inventory at January 31 using each of the following flow assumptions:

Question 12

Sherman Electric uses a periodic inventory system. The beginning inventory of a particular product, and the purchases during the current year, were as follows:
At December 31, the ending inventory of this product consisted of 65 units.
Using periodic costing procedures, determine (1) cost of the year-end inventory and, (2) cost of goods sold relating to this product under each of the following flow assumptions: