Deck 8: Inventories

Question 1

Inventory is an example of a long-term asset.

Answer 1

False

Question 2

An understatement of ending inventory in a period will result in an overstatement of gross margin in the next period.

Answer 2

False

Question 3

The higher the inventory turnover, the higher the days' inventory on hand.

Answer 3

False

Question 4

Despite its advantages, the just-in-time operating environment produces increased carrying costs for inventory.

Question 5

Periodic and perpetual are examples of inventory costing systems.

Question 6

Goods in transit shipped FOB destination should not be included in the buyer's ending inventory.

Question 7

The determination of the balance sheet cost of merchandise inventory is important to the determination of net income.

Question 8

An overstatement of ending inventory in a period will result in an understatement of gross margin in that period.

Question 9

A merchandiser's inventory consists of raw materials, work in process, and finished goods.

Question 10

Indirect materials and indirect labor are components of manufacturing overhead.

Question 11

The portion of cost of goods available for sale that is not assigned to ending inventory is assigned to work-in-process.

Question 12

The costs included in work in process and finished goods inventories would properly contain manufacturing overhead costs.

Question 13

Supply-chain management helps companies maintain lower levels of inventory.

Question 14

Inventory turnover is a measure expressed in terms of a percentage.

Question 15

Supply-chain management works well in a just-in-time operating environment.

Question 16

Goods in transit shipped FOB shipping point should not be included in the seller's ending inventory.

Question 17

The higher the value assigned to ending inventory, the lower the gross margin.

Question 18

The term cost flow refers to the association of costs with their assumed flow in the operation of a business.

Question 19

An overstatement of beginning inventory in a period will result in an overstatement of gross margin in the next period.

Question 20

Days' inventory on hand equals the inventory turnover divided by 365.

Question 21

Under the perpetual inventory system, cost of goods sold is not recorded until the end of the accounting period.

Question 22

The average-cost method relies on a simple average calculation.

Question 23

The LIFO method is rarely used because most companies do not sell the last goods they purchase first.

Question 24

Goods held on consignment should be included in the consignee's ending inventory.

Question 25

Realizable value is the amount for which an inventory item can be resold.

Question 26

In periods of rising inventory prices, the LIFO method will result in a higher inventory valuation than will the average-cost method.

Question 27

If prices were to never change, there would be no need for alternative inventory methods.

Question 28

Freight charges associated with the purchase of inventory normally are not included in inventory cost.

Question 29

The lower-of-cost-or-market rule implies that it is unrealistic to carry inventory at a cost that is in excess of its market value.

Question 30

Costs incurred in storing inventory usually are included in inventory costs.

Question 31

A major criticism of the FIFO method is that it magnifies the effects of the business cycle on business income.

Question 32

In periods of rising prices, the FIFO method will result in a larger gross margin than the LIFO method.

Question 33

The specific identification method is well suited for a discount department store.

Question 34

In accounting for inventory, the assumed cost flow need not match the physical goods flow.

Question 35

Inventory methods such as LIFO and FIFO deal more with cost flow than with goods flow.

Question 36

The LIFO method agrees with the actual physical goods flow in most businesses.

Question 37

The matching of revenue with inventory costs is best achieved with the FIFO method.

Question 38

The LIFO method tends to smooth out the peaks and valleys of a business cycle.

Question 39

When the cost of inventory is written down due to a market decline, a loss must be recorded.

Question 40

Merchandise inventory is valued on the balance sheet at the expected resale price.

Question 41

When taking a physical inventory under the retail method, it is necessary to know only the quantity of items on hand.

Question 42

All of the following are inventory costing methods except

A) first-in, first-out.
B) average-cost.
C) periodic.
D) specific identification.

Question 43

When the average-cost method is applied to a perpetual inventory system, the sale of goods will change the unit cost of the goods that remain in inventory.

Question 44

Specific identification is a very popular inventory method because it is very easy to apply.

Question 45

In periods of falling prices, LIFO will result in a higher ending inventory valuation than FIFO.

Question 46

The average-cost method produces an ending inventory figure that is somewhere between the figures produced by FIFO and LIFO.

Question 47

In general, in times of rising prices, using FIFO has a favorable effect on cash flows.

Question 48

When the average-cost method is applied to a perpetual inventory system, a moving average cost per unit is computed with each purchase.

Question 49

During periods of consistently falling prices, the FIFO inventory method will produce the highest possible amount of net income.

Question 50

A cost-to-retail percentage must be calculated when applying the retail method.

Question 51

The FIFO inventory method does not produce the most up-to-date figure for ending inventory.

Question 52

If a company uses LIFO for tax purposes, it must also use LIFO for financial reporting purposes.

Question 53

In verifying a claim for a loss of inventory, an insurance company might use the gross profit method.

Question 54

The specific identification method and the FIFO method produce the same results under both the perpetual and periodic inventory systems.

Question 55

Under the perpetual inventory system, cost of goods sold is not recorded until the end of the accounting period.

Question 56

The gross profit method requires that records be kept at both cost and retail.

Question 57

Both the retail method and the gross profit method are useful in estimating the inventory cost.

Question 58

In general, when prices are rising, use of the FIFO method will result in a lower tax liability than the other methods.

Question 59

Ending merchandise inventory for LIFO will be the same dollar amount under a periodic inventory system as under a perpetual inventory system.

Question 60

The computer has made the perpetual inventory system more popular and easier to apply.

Question 61

An understatement of year 1's ending inventory will

A) cause year 2's cost of goods sold to be overstated.
B) result in an understatement of year 2's beginning inventory.
C) not affect year 2's ending owner's equity.
D) have no effect on year 2's gross margin.

Question 62

Applying the lower-of-cost-or-market rule follows which of the following accounting conventions?

A) Full disclosure
B) Matching
C) Materiality
D) Conservatism

Question 63

Inventory turnover is expressed in terms of

A) days.
B) a percentage.
C) dollars.
D) times.

Question 64

The most important accounting problem in dealing with merchandise inventory is the application of which of the following conventions or rules?

A) Materiality
B) Full disclosure
C) Matching
D) Conservatism

Question 65

When applying the lower-of-cost-or-market rule to inventory valuation, market generally means

A) original cost, less physical deterioration.
B) replacement cost.
C) original cost.
D) resale value.

Question 66

An understatement of ending inventory in one period results in

A) an overstatement of the ending inventory of the next period.
B) an understatement of gross margin of the next period.
C) an overstatement of gross margin of the next period.
D) no effect on gross margin of the next period.

Question 67

Which of the following accounts would not appear as an asset on a manufacturer's balance sheet?

A) Finished Goods
B) Work in Process
C) Factory Overhead
D) Raw Materials

Question 68

An understatement of year 1's beginning inventory will

A) cause year 2's gross margin to be overstated.
B) cause year 1's cost of goods sold to be understated.
C) cause year 2's gross margin to be understated.
D) have no effect on year 1's gross margin.

Question 69

Which of the following is an inventory valuation method?

A) First-in, first-out
B) Average-cost
C) Lower-of-cost-or-market
D) Perpetual

Question 70

Which of the following costs usually would not be included in the inventory cost?

A) Storage costs
B) Related tariffs
C) Invoice price less purchases discounts
D) Insurance on goods in transit

Question 71

Which of the following is an inventory costing method?

A) Perpetual
B) Lower-of-cost-or-market
C) Specific identification
D) Periodic

Question 72

Which of the following costs would not be included in the inventory cost?

A) Invoice price
B) Cost of goods held on consignment
C) Freight-in
D) Sales tax

Question 73

Goods held on consignment are

A) kept for sale on the premises of the consignor.
B) included as part of no one's ending inventory.
C) never owned by the consignee.
D) included in the consignee's ending inventory.

Question 74

Inventory costing methods place primary reliance on assumptions about the flow of

A) costs.
B) goods.
C) resale prices.
D) values.

Question 75

An overstatement of beginning inventory results in

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

Question 76

Cost of goods sold equals $500,000, and average inventory equals $200,000. Days' inventory on hand equals

A) 91.3 days.
B) 146.0 days.
C) 821.9 days.
D) 912.5 days.

Question 77

Manufacturing overhead would not include which of the following costs?

A) Packing materials
B) Supervisory salaries
C) Factory rent
D) Raw materials

Question 78

Days' inventory on hand equals 365 divided by

A) inventory turnover.
B) cost of goods sold.
C) goods available for sale.
D) average inventory.

Question 79

Average inventory equals $100,000, and cost of goods sold equals $221,000. Days' inventory on hand equals

A) 165.2 days.
B) 165.2 days.
C) 154.3 days.
D) 188.7 days.

Question 80

Which of the following is an inventory processing system?

A) Perpetual
B) Last-in, first-out
C) Lower-of-cost-or-market
D) Average-cost