Deck 7: Reporting and Interpreting Cost of Goods Sold and Inventory

Question 1

A grocery store probably would use the specific identification inventory costing method for most of the items in its inventory.

Answer 1

False

Question 2

A company can use the LIFO inventory method for income tax purposes and the FIFO inventory method for financial reporting purposes during a given year.

Answer 2

False

Question 3

The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a decrease in both ending inventory and cost of goods sold.

Answer 3

False

Question 4

The use of raw materials in the manufacturing process is reported as an operating expense on the income statement.

Question 5

Manufactured goods transferred out of work in process are reported as finished goods on the balance sheet.

Question 6

The LIFO inventory method allocates the oldest inventory purchase costs to cost of goods sold.

Question 7

During periods of decreasing unit costs, use of the FIFO inventory method results in lower gross profit than would use of the LIFO method.

Question 8

The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a credit to cost of goods sold and a debit to inventory.

Question 9

The FIFO inventory method allocates the earliest inventory purchase costs to ending inventory.

Question 10

During periods of increasing unit costs, the LIFO inventory method will result in a higher inventory amount on the balance sheet and a lower net income than will the FIFO inventory method.

Question 11

A decrease in the merchandise inventory account occurs when units of inventory purchased are greater than units of goods sold.

Question 12

Direct material costs are a component of the cost of the work-in process inventory.

Question 13

During periods of decreasing unit costs, use of the LIFO inventory method will result in a higher amount of ending inventory than will the use of the FIFO inventory method.

Question 14

The lower of cost or market (LCM) rule is used due to the conservatism constraint, and therefore an inventory calculation may result in a departure from the historical cost principle.

Question 15

The FIFO inventory method will result in the lowest net income in comparison with the LIFO method when costs are decreasing.

Question 16

Inventory inspection costs are reported as operating expenses on the income statement.

Question 17

Goods available for sale are allocated to both ending inventory and cost of goods sold.

Question 18

During periods of increasing unit costs, the LIFO inventory method results in lower income taxes.

Question 19

The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a debit to cost of goods sold and a credit to inventory.

Question 20

The LIFO inventory method will result in the lowest gross profit in comparison with the FIFO method when unit costs are decreasing.

Question 21

Inventory turnover under LIFO is greater than inventory turnover under FIFO when unit costs are increasing.

Question 22

The average days to sell inventory decreases as inventory turnover increases.

Question 23

An overstatement of the 2015 ending inventory results in an overstatement of stockholders' equity as of the end of 2016.

Question 24

Inventory turnover is calculated as cost of goods sold divided by average inventory.

Question 25

In the year of an overstatement of ending inventory, cost of goods sold will be understated and net income will be overstated.

Question 26

When there is a $3,000,000 decrease in inventory and a $2,000,000 decrease in accounts payable, cash flow from operating activities increases by $1,000,000.

Question 27

An overstatement of the 2015 ending inventory results in an overstatement of stockholders' equity as of the end of 2015.

Question 28

Which of the following statements is incorrect?

A)Ending inventory exceeds beginning inventory when purchases are greater than cost of goods sold.
B)Cost of goods sold exceeds purchases when ending inventory is less than beginning inventory.
C)Cost of goods available for sale will always be equal to or greater than cost of goods sold.
D)Ending inventory is greater than beginning inventory when purchases are less than cost of goods solD.Ending inventory exceeds beginning inventory when purchases are greater than cost of goods sold.

Question 29

A company reported the following information for its most recent year of operation: purchases, $100,000; beginning inventory, $20,000; and cost of goods sold, $110,000. How much was the company's ending inventory?

A)$10,000.
B)$20,000.
C)$15,000.
D)$30,000.

Question 30

An understatement of ending inventory results in an overstatement of net income.

Question 31

Which of the following costs will not affect cost of goods sold?

A)Inventory inspection costs.
B)Inventory preparation costs.
C)Inventory-related selling costs.
D)Freight charges incurred to bring inventory to the warehouse.

Question 32

An increase in inventory is subtracted from net income when determining cash flow from operating activities.

Question 33

An overstatement of the 2015 ending inventory results in an understatement of net income during 2016.

Question 34

Which of the following would not be a component of the year-end inventory balance?

A)Freight-in costs.
B)Inventory inspection costs.
C)Inventory preparation costs.
D)Inventory-related selling costs.

Question 35

LIFO liquidation results when a company has a lower level of inventory at the end of the year than it had at the beginning of the year.

Question 36

An increase in accounts payable is added to net income when determining cash flows from operating activities.

Question 37

Which of the following costs is not included as inventory on the balance sheet?

A)Raw materials to be used in the manufacturing process.
B)Work in process.
C)Finished goods.
D)Freight-out costs for finished goods sent to retailers.

Question 38

The LIFO Reserve represents the excess of FIFO inventory costs over LIFO inventory costs.

Question 39

Coleman Company has provided the following information: beginning inventory, $100,000; cost of goods sold, $450,000; and ending inventory, $80,000. How much were Coleman's inventory purchases?

A)$450,000.
B)$410,000.
C)$430,000.
D)$420,000.

Question 40

In a period of increasing costs, the LIFO Reserve would be deducted from the ending inventory under LIFO costing to convert it to ending inventory under FIFO costing.

Question 41

Which of the following statements does not accurately describe the effects of a write-down of inventory on December 31, 2016 using the lower of cost or market (LCM) valuation method?

A)The 2016 gross profit decreases.
B)The 2017 cost of goods sold is effectively decreased if the inventory is sold during 2017.
C)The 2016 ending inventory is decreased.
D)The 2017 gross profit is not affected if the inventory is sold during 2017.

Question 42

Which of the following statements is correct?

A)The choice of an inventory costing method is dependent upon the actual physical flow of the goods in inventory.
B)LIFO should be used during a period of increasing unit costs when the objective is to maximize the ending inventory value on the balance sheet.
C)FIFO should be used during a period of decreasing unit costs when the objective is to maximize the gross profit reported on the balance sheet.
D)The average cost method will result in an ending inventory balance which is somewhere between LIFO and FIFO when inventory unit costs are changing.

Question 43

Maxim Corp. has provided the following information about one of its products: During the year, Maxim sold 400 units. What is cost of goods sold using the average cost method?

A)$48,000.
B)$64,000.
C)$50,000.
D)$62,000.

Question 44

Lauer Corporation uses the periodic inventory system and has provided the following information about one of its laptop computers: During the year, Lauer sold 750 laptop computers. What was cost of goods sold using the FIFO cost flow assumption?

A)$725,000.
B)$740,000.
C)$735,000.
D)$720,000.

Question 45

Lauer Corporation uses the periodic inventory system and has provided the following information about one of its laptop computers: During the year, Lauer sold 750 laptop computers. What was cost of goods sold using the LIFO cost flow assumption?

A)$725,000.
B)$740,000.
C)$735,000.
D)$720,000.

Question 46

Which of the following statements is correct?

A)FIFO reports lower net income amounts than LIFO when unit costs are increasing.
B)LIFO reports a higher net income amount than FIFO when unit costs are increasing.
C)LIFO reports a higher net income amount than FIFO when unit costs are decreasing.
D)LIFO reports the same amount of net income as FIFO when unit costs are increasing.

Question 47

Under the LIFO cost flow assumption during a period of rising costs, which of the following is false?

A)Cost of goods sold will be lower under LIFO than under FIFO.
B)Net income will be lower under LIFO than under FIFO.
C)Income tax expense will be lower under LIFO than under FIFO.
D)Ending inventory will be lower under LIFO than under FIFO.

Question 48

Lauer Corporation uses the periodic inventory system and has provided the following information about one of its laptop computers: During the year, Lauer sold 750 laptop computers. What was ending inventory using the FIFO cost flow assumption?

A)$60,000.
B)$55,000.
C)$45,000.
D)$40,000.

Question 49

Which of the following is correct?

A)The raw materials inventory account is used to record inventory purchased by a retailer for resale.
B)Work in process is an expense account used by a manufacturing company.
C)Finished goods is an asset account used by a manufacturing company to record the cost of inventory ready for sale.
D)Retailers use a purchases account to record raw materials inventory.

Question 50

On December 31, 2016, Cruise Company has 10,000 units of an inventory item, which cost $40 per unit when purchased on June 15, 2016. The selling price was $60 per unit. On December 30, 2016 it was determined that disposal cost was $24 per unit. At what amount should the 10,000 units of inventory be reported at on the December 31, 2016 balance sheet?

A)$400,000.
B)$360,000.
C)$160,000.
D)$40,000.

Question 51

Which of the following statements does not accurately describe the lower of cost or market (LCM or net realizable value) valuation method for inventory?

A)The journal entry to write-down inventory decreases gross profit.
B)The journal entry to write-down inventory decreases current assets.
C)The journal entry to write-down inventory does not affect pretax income.
D)The journal entry to write-down inventory increases cost of goods solD.The journal entry increases cost of goods sold and therefore decreases gross profit and pretax income.The journal entry also decreases inventory.

Question 52

Which of the following statements is correct when inventory unit costs are increasing?

A)LIFO will result in lower net income and a higher inventory valuation than will FIFO.
B)LIFO will result in higher net income and lower inventory valuation than will FIFO.
C)FIFO will result in lower net income and a lower inventory valuation than will LIFO.
D)FIFO will result in higher net income and a higher inventory valuation than will LIFO.

Question 53

Which of the following statements is correct when inventory unit costs are decreasing?

A)LIFO will result in lower net income and a higher inventory valuation than will FIFO.
B)LIFO will result in higher net income and a higher inventory valuation than will FIFO.
C)FIFO will result in higher net income and a higher inventory valuation than will LIFO.
D)FIFO will result in higher net income and a lower inventory valuation than will LIFO.

Question 54

Moore Company purchased an item for inventory that cost $20 per unit and was priced to sell at $30. It was determined that the disposal cost is $12 per unit. Using the lower of cost or net realizable value (LCM) rule, what amount should be reported on the balance sheet for inventory?

A)$18.
B)$20.
C)$10.
D)$8.

Question 55

Maxim Corp. has provided the following information about one of its products: During the year, Maxim sold 400 units. What is ending inventory using the average cost method?

A)$48,000.
B)$64,000.
C)$50,000.
D)$62,000.

Question 56

A company provided the following data: sales, $500,000; beginning inventory, $40,000; ending inventory, $45,000; and gross profit, $150,000. What was the amount of inventory purchased during the year?

A)$385,000.
B)$355,000.
C)$345,000.
D)$145,000.

Question 57

Lauer Corporation uses the periodic inventory system and has provided the following information about one of its laptop computers: During the year, Lauer sold 750 laptop computers. What was ending inventory using the LIFO cost flow assumption?

A)$40,000.
B)$45,000.
C)$55,000.
D)$60,000.

Question 58

Which of the following statements is incorrect for a manufacturing entity?

A)Inventory is transferred from work in process to finished goods.
B)Raw materials used are transferred to work in process.
C)Finished goods inventory eventually becomes cost of goods sold.
D)Cost of goods sold is recognized when the manufacturing process is complete.

Question 59

Under the FIFO cost flow assumption during a period of rising costs, which of the following is false?

A)Income tax expense will be higher under FIFO than under LIFO.
B)Net income will be higher under FIFO than under LIFO.
C)Ending inventory will be lower under FIFO than under LIFO.
D)Cost of goods sold will be lower under FIFO than under LIFO.

Question 60

Which of the following statements is false?

A)Companies do not have to use the same inventory method for all items of inventory.
B)Companies do not have to consistently use the same inventory costing methods.
C)Use of the LIFO inventory method during a period of increasing unit costs may create a conflict of interest between the owners and managers.
D)A company choosing to maximize stockholders' equity during a period of increasing unit costs should use the FIFO inventory methoD.GAAP requires companies to consistently apply their inventory costing methods.

Question 61

Which of the following is correct when, in the same year, beginning inventory is overstated by $1,300 and ending inventory is understated by $700?

A)Net income is understated by $600.
B)Net income is understated by $2,000.
C)Net income is overstated by $600.
D)Net income is overstated by $2,000.

Question 62

Hollander Company hired some students to help count inventory during their semester break. Unfortunately, the students added incorrectly and the 2016 ending inventory was overstated by $5,000. What would be the effect of this error in ending inventory?

A)2016 net income would be overstated.
B)2016 net income would be understated.
C)2016 ending retained earnings would be understated.
D)2016 cost of goods sold would be overstateD.The overstatement of the ending inventory causes cost of goods sold to be understated and net income to be overstated.

Question 63

Cranchey Company reported a LIFO ending inventory of $670,000 on its balance sheet at December 31, 2016. Cranchey's disclosure notes to the financial statements reported that the LIFO Reserve at December 31, 2015 was $32,000 and the LIFO Reserve at December 31, 2016 was $40,000. Which of the following statements is correct for Cranchey Company for the effect of the LIFO Reserve in 2016 in converting LIFO amounts to FIFO amounts?

A)Cost of goods sold would have been higher by $40,000 under FIFO.
B)Pretax income would have been higher by $32,000 under FIFO.
C)Pretax income would have been higher by $8,000 under FIFO.
D)Cost of goods sold would have been higher by $8,000 under FIFO.

Question 64

Barrington Company must write down its inventory from its cost of $260,000 to its net realizable value of $248,000 at December 31, 2016. The inventory will all be sold in the year 2017. Which of the following provides a correct effect of the write-down?

A)The 2016 gross profit decreases by $12,000.
B)The 2017 cost of goods sold increases by $12,000.
C)The 2017 ending inventory increases by $12,000.
D)The 2017 gross profit is not affected if the inventory is sold during 2017.

Question 65

If two companies each use different inventory accounting methods, the companies can be made comparable from information reported in the financial statements by

A)converting the FIFO Reserve to a LIFO inventory.
B)converting inventory at cost to inventory at lower of cost or market (net realizable value).
C)converting cost of goods sold to lower of cost or market (net realizable value).
D)converting inventory on a LIFO basis to a FIFO basis using the LIFO Reserve.

Question 66

Tinker's cost of goods sold in the year of sale (2016) was $750,000 and 2015 cost of goods sold was $770,000. The inventory at the end of 2016 was $188,000 and at the end of 2015 the inventory was $208,000. Tinker's inventory turnover during 2016 was closest to:

A)3.79
B)3.99
C)3.84
D)3.89

Question 67

QV-TV, Inc. provided the following items in its notes to the financial statements for the year-end 2016: Cost of goods sold was $22 billion under FIFO costing and the inventory value under FIFO costing was $2.1 billion. The LIFO Reserve for year-end 2015 was $0.6 billion and at year-end 2016 it had increased to $0.8 billion. How much is the 2016 LIFO cost of goods sold?

A)$22.2 billion.
B)$19.8 billion.
C)$22.8 billion.
D)$19.2 billion.

Question 68

Abel Company must write-down its inventory by $30,000 to the net realizable value of $450,000 at December 31, 2016. What is the effect of this writedown on the year 2016 financial statements?

A)Decrease cost of goods sold.
B)Decrease ending inventory on the balance sheet.
C)Increase pretax income.
D)Decrease accounts payable.

Question 69

A $25,000 overstatement of the 2015 ending inventory was discovered after the financial statements for 2015 were prepared. Which of the following describes the effect of the inventory error on the 2016 financial statements?

A)Net income and stockholders' equity are both understated.
B)Net income is understated and stockholders' equity is correct.
C)Net income and stockholders' equity are both overstated.
D)Net income and stockholders' equity are both unaffecteD.The overstatement of the 2015 ending inventory causes the 2015 net income to be overstated and the 2016 net income to be understated.Stockholders' equity at the end of 2016 is correct because inventory errors are counter-balancing.

Question 70

An understatement of the ending inventory in Year 1, if not corrected, will cause which of the following?

A)The year 1 net income to be understated and Year 2 net income to be overstated.
B)The year 1 net income to be overstated and Year 2 net income to be overstated.
C)The year 1 net income to be overstated and Year 2 net income will be correct.
D)The year 1 net income to be overstated and Year 2 net income to be understateD.The understatement of the year 1 ending inventory causes the year 1 cost of goods sold to be overstated and the year 1 net income is therefore understated.The year 2 cost of goods sold is understated because beginning inventory is understated, which causes the year 2 net income to be overstated.

Question 71

Tinker's cost of goods sold in the year of sale (2016) was $750,000 and 2015 cost of goods sold was $770,000. The inventory at the end of 2016 was $188,000 and at the end of 2015 the inventory was $208,000. Tinker's average number of days to sell its inventory during 2016 is closest to:

A)96
B)92
C)95
D)94

Question 72

A company using the periodic inventory system correctly recorded a purchase of merchandise, but the merchandise was not included in the physical inventory count at the end of the accounting period. The error caused which of the following?

A)An understatement of both net income and inventory.
B)An overstatement of inventory, purchases, and accounts payable.
C)An understatement of inventory, purchases, and accounts payable.
D)An overstatement of net income and inventory.

Question 73

At the end of 2016, a $5,000 understatement was discovered in the amount of the 2016 ending inventory as reflected in the inventory records. What were the 2016 effects of the $5,000 inventory error (before correction)?

A)Assets were understated by $5,000 and pretax income was understated by $5,000.
B)Assets were understated by $5,000 and pretax income was overstated by $5,000.
C)Cost of goods sold was understated by $5,000 and pretax income was understated by $5,000.
D)Cost of goods sold was overstated by $5,000 and pretax income was overstated by $5,000.

Question 74

A $25,000 overstatement of the 2016 ending inventory was discovered after the financial statements for 2016 were prepared. Which of the following describes the effect of the inventory error on the 2016 financial statements?

A)Current assets were overstated and net income was understated.
B)Current assets were understated and net income was understated.
C)Current assets were overstated and net income was overstated.
D)Current assets were understated and net income was overstateD.An overstatement of ending inventory overstates current assets and understates cost of goods sold and therefore overstates net income.

Question 75

QV-TV, Inc. provided the following items in its notes to the financial statements for the year-end 2016: Cost of goods sold was $22 billion under FIFO costing and the inventory value under FIFO costing was $2.1 billion. The LIFO Reserve for year-end 2015 was $0.6 billion and at year-end 2016 it had increased to $0.8 billion. What is the LIFO inventory value at year-end 2016?

A)$1.9 billion.
B)$2.9 billion.
C)$2.3 billion.
D)$1.3 billion.

Question 76

On December 15, 2016, Transport Company accepted delivery of merchandise that it purchased on credit. As of December 31, 2016, the company had neither recorded the transaction nor included the merchandise in its ending inventory amount because the seller's invoice had not been received. The effect of this omission on its balance sheet at December 31, 2016, (end of the accounting period) was that

A)inventory and net income were overstated but liabilities were correct.
B)net income was the only item affected by the omission.
C)inventory and accounts payable were understated but net income was correct.
D)assets and stockholders' equity were understated but liabilities were correct.

Question 77

Wilmington Company reported pretax income of $25,000 during 2015 and $30,000 during 2016. Later it was discovered that the ending inventory for 2015 was understated by $2,000 (and not corrected in 2015). What is the correct pretax income for each year?

A)Option A
B)Option B
C)Option C
D)Option D

Question 78

Which of the following is correct when, in the same year, beginning inventory is understated by $1,300 and ending inventory is understated by $700?

A)Net income is understated by $600.
B)Net income is understated by $2,000.
C)Net income is overstated by $600.
D)Net income is overstated by $2,000.

Question 79

The inventory turnover

A)reflects how many times, on average, that the inventory balance was sold during the year.
B)is increased when accounts receivable increases.
C)is decreased if inventory balances decrease from the beginning of the year to the end of the year.
D)is improved if cost of goods sold decrease and inventory balances increase from one year to the next.

Question 80

During the audit of Montane Company's 2016 financial statements, the auditors discovered that the 2016 ending inventory had been overstated by $8,000 and that the 2016 beginning inventory was overstated by $5,000. Before the effect of these errors, 2016 pretax income had been computed as $100,000. What should be reported as the correct 2016 pretax income before taxes?

A)$113,000.
B)$87,000.
C)$105,000.
D)$97,000.