Deck 8: Inventories and the Cost of Goods Sold

Question 1

The inventory turnover rate is equal to the average inventory divided by the cost of goods sold.

Answer 1

False

Question 2

In a periodic inventory system, overstating the amount of ending inventory will cause an understatement of gross profit in the following year.

Answer 2

True

Question 3

If the terms of a sale are
F.O.B. shipping point, the sale should not be recorded until the goods are delivered to the buyer.

Answer 3

False

Question 4

Merchandise that has been sold but not yet recorded in the accounts should not be included in the physical inventory at year-end.

Question 5

During periods of inflation, the specific identification cost flow assumption will yield a higher cost of goods sold than LIFO.

Question 6

In a periodic system, the only account in regard to inventory that is kept up-to-date is the inventory account.

Question 7

When goods for sale are not homogeneous in nature, it is not necessary to use the specific identification method of accounting for inventory.

Question 8

Any business that sells numerous units of identical products may determine its cost of goods sold using a flow assumption, rather than the specific identification method.

Question 9

The retail inventory method would never be used if a company uses the FIFO method.

Question 10

During periods of inflation, the LIFO cost flow assumption will yield a lower inventory value than FIFO.

Question 11

In a perpetual inventory system, the flow of inventory cost is first through the balance sheet then through the income statement.

Question 12

In a periodic inventory system, understating the amount of ending inventory will cause an understatement of gross profit in the current year.

Question 13

An advantage to the LIFO method of accounting for inventory is that it values the cost of goods sold at current replacement costs.

Question 14

Merchandise sold
F.O.B. destination belongs to the buyer while in transit.

Question 15

A perpetual inventory system eliminates the need for periodically taking a physical inventory.

Question 16

Because of the consistency principle, inventory should never be written down below cost.

Question 17

The principle of consistency prohibits a company from changing an inventory valuation method once one is selected.

Question 18

An advantage of the average cost method of accounting for inventory is that the inventory is valued in the balance sheet at current replacement costs.

Question 19

The cost flow assumption selected by a company must correspond to the actual physical movement of the company's merchandise.

Question 20

A write down of inventory due to obsolescence reduces the amount in the Inventory account and may increase the amount in the Cost of Goods Sold account.

Question 21

Which of the four inventory cost flow assumptions is best suited to inventories of high-priced, low-volume items?

A) LIFO.
B) FIFO.
C) Average.
D) Specific identification.

Question 22

In a perpetual inventory system, an inventory flow assumption is used primarily for determining which costs to use in:

A) Recording purchases of inventory.
B) Recording the cost of goods sold.
C) Recording sales revenue.
D) Forecasts of future operating results.

Question 23

The lower of cost or market rule may be applied by comparing the market value of the inventory to the cost of the inventory based on:

A) Individual inventory items.
B) Major inventory categories.
C) The entire inventory.
D) Any of the three: individual inventory items, major inventory categories, or the entire inventory.

Question 24

A clothing store would logically have a higher inventory turnover rate than would a doughnut shop.

Question 25

Inventory:

A) Consists of all goods owned and held for sale to customers.
B) Is a non-financial asset.
C) Both consists of all goods owned and held for sale to customers and is a non-financial asset.
D) Both consists of all goods owned and held for sale to customers and is a financial asset.

Question 26

Overstating the ending inventory will result in understating the cost of goods sold and overstating profits.

Question 27

In a periodic inventory system, recording a sale on account involves debiting which of the following accounts?

A) Only Accounts Receivable.
B) Accounts Receivable and Inventory.
C) Accounts Receivable and Cost of Goods Sold.
D) Accounts Receivable, Cost of Goods Sold, and Inventory.

Question 28

Just-in-time inventory systems cannot be used in conjunction with LIFO.

Question 29

Companies with perpetual inventories need not take physical inventory counts because inventory amounts are perpetually available.

Question 30

Kent Company has used the same inventory method for many years. This is an example of which principle?

A) Matching.
B) Realization.
C) Cost.
D) Consistency.

Question 31

The higher a company's inventory turnover rate, the higher its gross profit.

Question 32

Which of the four inventory cost flow assumptions transfers the most recent purchase cost to the cost of goods sold and the remaining items in inventory are valued at the oldest acquisition costs?

A) LIFO.
B) FIFO.
C) Average.
D) Specific identification.

Question 33

If the ending inventory is overstated in the current year:

A) Net income will be understated in the current year.
B) Next year's beginning inventory will also be overstated.
C) Next year's net income will be overstated.
D) Next year's beginning inventory will be understated.

Question 34

Which of the following is not considered an acceptable inventory cost method according to GAAP?

A) First-in, first-out.
B) First-in, last-out.
C) Last-in, first-out.
D) Average cost.

Question 35

Gross profit rate is equal to.

A) Net sales divided by gross profit.
B) Gross sales divided by gross profit.
C) Gross profit divided by net sales.
D) Gross profit divided by gross sales.

Question 36

In which of these inventory cost flow assumptions is it important to determine the actual cost of a particular inventory item being sold in order to determine cost of goods sold?

A) LIFO.
B) FIFO.
C) Specific identification.
D) Weighted average.

Question 37

In a perpetual inventory system, two entries are normally made to record each sales transaction. The purpose of these entries is best described as follows:

A) One entry recognizes the sales revenue and the other recognizes the cost of goods sold.
B) One entry records the purchase of merchandise and the other records the sale.
C) One entry records the cost of goods sold and the other reduces the balance in the Inventory account.
D) One entry updates the subsidiary ledger and the other updates the general ledger.

Question 38

During the course of an audit of a company's financial statements, an auditor will be concerned that the company's inventory:

A) Physically exists.
B) Is valued correctly.
C) Both physically exists and is valued correctly.
D) Is being stored in a secure manner.

Question 39

When prices are increasing, which inventory method will produce the highest cost of goods sold?

A) FIFO.
B) LIFO.
C) Average.
D) Cost of goods sold will not change.

Question 40

In a periodic inventory system, recording a sale on account involves crediting which of the following accounts?

A) Only Sales.
B) Sales and Inventory.
C) Sales and Cost of Goods Sold.
D) Sales, Inventory, and Cost of Goods Sold.

Question 41

When the LIFO costing method is in use, the seller:

A) Must sell the most recently acquired units first.
B) Must sell the oldest unit in inventory first.
C) Assumes that the most recently acquired units are sold first.
D) Assumes that the oldest units in inventory are sold first.

Question 42

Which of the following results in the cost of goods sold being stated at the most current acquisition costs?

A) Average cost.
B) Specific identification.
C) FIFO.
D) LIFO.

Question 43

The write-down of inventory:

A) Only affects the balance sheet and not the income statement.
B) Only affects the income statement and not the balance sheet.
C) Affects both the income statement and the balance sheet.
D) Affects neither the income statement nor the balance sheet.

Question 44

If the beginning inventory of the current year and the ending inventory of the past year were overstated by the same amount:

A) Retained earnings at the end of the current year would be correct.
B) Retained earnings at the end of the current year would be overstated.
C) Retained earnings at the end of the current year would be understated.
D) Net income for the current year would be correct.

Question 45

Harris Corporation's inventory of a particular product includes 200 units purchased at a per-unit cost of $50, and another 100 units purchased at a unit cost of $60. If Harris sells 10 units of this product, the cost of goods sold will be:

A) $500.
B) $550.
C) $660.
D) The answer will depend upon the inventory flow assumption in use.

Question 46

In a perpetual inventory system, the flow of inventory cost is:

A) First through the income statement, then through the balance sheet.
B) First through the balance sheet, then through the income statement.
C) Only through the balance sheet and not the income statement.
D) Only through the income statement and not the balance sheet.

Question 47

Which of the following inventory cost flow assumptions is not in accord with the physical flow of merchandise in most businesses?

A) LIFO.
B) FIFO.
C) Specific identification.
D) Average.

Question 48

Which of the following results in the inventory being stated at the most current acquisition costs?

A) Specific identification.
B) LIFO.
C) FIFO.
D) Average cost.

Question 49

Which of the following will cause net income to be overstated for the following year?

A) Current year's ending inventory is understated.
B) Current year's ending inventory is overstated.
C) Next year's beginning inventory is overstated.
D) Next year's ending inventory is understated.

Question 50

Which of the following inventory valuation methods is only an estimate of actual costs?

A) The retail method.
B) The gross profit method.
C) Both retail and gross profit methods are only estimations.
D) Neither the retail nor the gross profit methods are estimations.

Question 51

During a period of steadily falling prices, which of the following methods of measuring the cost of goods sold is likely to result in the lowest taxable income?

A) LIFO.
B) FIFO.
C) Average cost.
D) Specific identification.

Question 52

During periods of inflation, when comparing LIFO with FIFO:

A) LIFO inventory and cost of sales would be higher.
B) LIFO inventory and cost of sales would be lower.
C) LIFO inventory would be lower and cost of sales would be higher.
D) LIFO inventory would be higher and cost of sales would be lower.

Question 53

During periods of inflation which method will yield the smallest ending inventory and the largest cost of goods sold?

A) LIFO.
B) FIFO.
C) Average.
D) Specific identification.

Question 54

The specific identification method is more appropriate than a flow assumption method:

A) For a large inventory of identical low-priced items.
B) If each item in the inventory is unique.
C) If purchase costs are rising.
D) If purchase costs are falling.

Question 55

During a period of steadily falling prices, which of the following methods of measuring the cost of goods sold is likely to result in reporting the highest gross profit?

A) Specific identification.
B) Average cost.
C) LIFO.
D) FIFO.

Question 56

In a period of rising prices, a company is most likely to use the specific identification method of pricing inventory if:

A) Each item in the inventory is unique.
B) Management wants the same unit cost assigned to items sold and items remaining in inventory.
C) Management's primary objective is to minimize income taxes.
D) Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income.

Question 57

In a period of rising prices, a company is most likely to use the FIFO method of pricing inventory if:

A) Each item in the inventory is unique.
B) Management wants the same unit cost assigned to items sold and items remaining in inventory.
C) Management's primary objective is to minimize income taxes.
D) Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income.

Question 58

Which of the following methods of measuring the cost of goods sold most closely parallels the actual physical flow of the merchandise?

A) LIFO.
B) FIFO.
C) Average cost.
D) Specific identification.

Question 59

During periods of inflation which method would yield the largest ending inventory and cost of goods sold?

A) LIFO.
B) FIFO.
C) Average.
D) Specific identification.

Question 60

Which of the following statements is not a characteristic of the LIFO method of pricing inventory?

A) During a period of rising prices, LIFO tends to minimize the amounts of income taxes owed.
B) The cost of goods sold is measured in relatively current costs.
C) Inventory is valued at relatively current costs.
D) During a period of falling prices, LIFO tends to maximize the amounts of income taxes owed.

Question 61

From an accounting point of view, one implication of an effective just-in-time inventory system is that:

A) Sales transactions must be recorded using on-line point-of-sale terminals.
B) Inventories are less material in dollar amount and alternative inventory flow assumptions will produce more similar results.
C) The cost of goods sold is significantly reduced.
D) Purchases of merchandise are recorded as cash payments are made, and sales transactions are recorded as cash is received.

Question 62

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

A) Year-end inventory, plus purchases during the year, less the inventory at the beginning of the year.
B) Net sales, less the balance in the Gross Profit account.
C) Cost of goods available for sale during the year, less the ending inventory.
D) A physical count is made of all items sold throughout the year, and a cost flow assumption is applied at year-end.

Question 63

A company with a liquid inventory will have:

A) A high inventory turnover and a high average number of days to sell inventory.
B) A high inventory turnover and a low average number of days to sell inventory.
C) A low inventory turnover and a high average number of days to sell inventory.
D) A low inventory turnover and a low average number of days to sell inventory.

Question 64

The "just-in-time" concept of inventory management is best illustrated by:

A) A clothing manufacturer that sells all of its finished goods before they go out of style.
B) A defense contractor that completes its projects within the deadlines set by its customer (the federal government).
C) A pharmaceutical firm that consistently brings new products to market ahead of its competitors.
D) A homebuilder who has its suppliers deliver lumber and other building materials to the building site the night before these materials will be used by the company's construction crews.

Question 65

For the purpose of delaying income taxes, during an inflationary period, which method would be best?

A) LIFO.
B) FIFO.
C) Average.
D) Taxes would be the same under each assumption.

Question 66

The choice of inventory valuation method can help achieve each of the following independent goals, except:

A) Reduce cost of merchandise acquired from suppliers.
B) Increase reported net income.
C) Increase the inventory turnover rate.
D) Reduce the amount of income taxes owed.

Question 67

As a result of taking an annual physical inventory, it usually is necessary in a perpetual inventory system to make an entry:

A) Reducing assets and increasing the cost of goods sold.
B) Reducing assets and increasing liabilities.
C) Reducing the cost of goods sold.
D) Increasing assets and increasing the cost of goods sold.

Question 68

The primary advantage of a just-in-time inventory system is:

A) The amount of money tied up in inventory is minimized.
B) Customers are afforded a wider selection of merchandise available for immediate delivery.
C) The company is able to use the specific identification method of inventory pricing.
D) The risks of losing sales opportunities or of having to shut down manufacturing operations because of inventory shortages are minimized.

Question 69

If all things are equal, except one company uses LIFO during inflation and the other uses FIFO, then:

A) The LIFO company will have a higher inventory turnover.
B) The FIFO company will have a higher inventory turnover.
C) The two companies will have the same inventory turnover.
D) Inventory valuation methods do not effect inventory turnover calculations.

Question 70

A store that sells expensive custom-made jewelry is most likely to determine its cost of goods sold using:

A) Specific identification.
B) Average cost.
C) First-in, first-out.
D) Last-in, last-out.

Question 71

Some companies that use a perpetual inventory system and the LIFO flow assumption restate their inventories at year-end to the amount indicated by periodic LIFO costing procedures. The primary reason for this adjustment is that:

A) Periodic LIFO often results in a higher valuation of inventory, thus reducing taxable income.
B) This adjustment is necessary to record shrinkage losses.
C) Periodic LIFO often results in a lower valuation of inventory, thus reducing taxable income.
D) Periodic and perpetual costing procedures produce the same results if the year-end inventory has been counted properly. No adjustment would be needed.

Question 72

Many companies state in their annual reports that inventory is shown at the lower of its cost or market value. This means that the inventory:

A) Is obsolete.
B) Has been written down to a carrying value below cost.
C) Is shown at the lesser of cost or sales value.
D) Is valued at current replacement cost or historical cost, whichever is less.

Question 73

The principle of consistency states that:

A) Companies are prohibited from ever changing their accounting methods.
B) Every company in the same industry must use the same accounting principle.
C) There must be a consistent blend to the accounting principles.
D) If changes in accounting principles are made, the reasons for the change and the effects on the company's net income must be disclosed.

Question 74

An advocate of just-in-time inventory system would say:

A) Maintain a large inventory selection for customers.
B) Leave extra time in order to make inventory deadlines.
C) Maintain a small inventory supply.
D) LIFO is preferred over FIFO.

Question 75

The logic behind the lower-of-cost-or-market rule is:

A) Inventory gradually becomes obsolete.
B) Inventory that is unsalable should be written down to zero (or its scrap value).
C) An asset is not worth more than it would cost the owner to replace it.
D) Inventory that is unsalable should be written down to its replacement cost.

Question 76

If the inventory at the end of the current year is understated and the error is never caught, the effect is to:

A) Understate income this year and overstate income next year.
B) Overstate income this year and understate income next year.
C) Understate income this year with no effect on income next year.
D) Overstate the cost of goods sold, but have no effect on net income.

Question 77

During periods of rising prices, and being primarily concerned with tax implications, most companies would select:

A) LIFO.
B) FIFO.
C) Specific identification.
D) The inventory valuation does not affect taxation.

Question 78

In a manufacturing company, the "just-in-time" concept of inventory management is best illustrated by:

A) Receiving deliveries of materials from suppliers just before the materials are used in the production process.
B) Completing the manufacturing process just before the deadline established by the customer.
C) An automated factory that reduces production time below that of other companies in the industry.
D) Selling finished products before they go out of style.

Question 79

The lower-of-cost-or-market rule:

A) Is used in conjunction with the other inventory cost flow assumptions.
B) Cannot be used if LIFO or FIFO are also used.
C) Can be used in conjunction with LIFO but not FIFO.
D) Can only be used with the specific identification cost flow assumption.

Question 80

With respect to the valuation of inventory and measurement of the cost of goods sold, the principle of consistency means that the same method should be applied:

A) In successive accounting periods.
B) By all companies in a given industry.
C) To all products in the inventory.
D) In financial statements and income tax returns.