Deck 8: Inventories and the Cost of Goods Sold

Question 1

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

Answer 1

False

Question 2

The inventory method used by a company will affect profitability by affecting the amount of income tax a company owes.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

The LIFO conformity requirement permits a company to use LIFO for tax purposes only if the company also uses LIFO for internal reporting purposes.

Question 5

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

Question 6

In order to obtain the maximum tax benefit,companies that use a perpetual inventory system can restate their year-end inventory at costs indicated by periodic LIFO costing procedures.

Question 7

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

Question 8

When the periodic inventory system is used,determining the cost of the year-end inventory involves two distinct steps: counting the units and pricing the units.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

The specific identification method is acceptable only when the actual cost of individual units of merchandise can be determined from the accounting records.

Question 14

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

Question 15

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 16

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.

Question 17

Just-in-time inventory systems cannot be used in conjunction with the LIFO cost flow assumption.

Question 18

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

Question 19

A physical inventory is usually taken during a period of high activity.

Question 20

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 21

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 22

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

Question 23

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

Question 24

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 25

In a perpetual inventory system,an inventory cost 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 26

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

Question 27

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 28

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

Question 29

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

Question 30

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 cost flow assumption in use.

Question 31

Which of the four inventory approaches 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 cost
D)Specific identification

Question 32

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

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

Question 33

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

A)FIFO
B)LIFO
C)Average cost
D)Cost of goods sold will be the same under these methods.

Question 34

In which of these inventory approaches 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)Average cost

Question 35

Assume ending inventory is overstated at the end of Year 1 and correctly stated at the end of Year 2.Owners' equity will be correctly stated at the end of Year 2.

Question 36

The retail inventory method requires a company to state inventory on the year-end balance sheet at its retail value.

Question 37

Which of the following is generally not true about inventory?

A)Inventory consists of all goods owned and held for sale to customers.
B)Inventory is a non-financial asset.
C)Inventory must be managed on a unit-by-unit (i.e. ,specific identification)method.
D)Inventory is usually shown on the balance sheet at cost.

Question 38

The gross profit method can be used for both interim and year-end financial reporting.

Question 39

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

Question 40

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 41

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 42

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 43

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 44

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.

Question 45

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 46

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 cost
D)Specific identification

Question 47

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 48

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 49

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 50

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

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

Question 51

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 52

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 53

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 54

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 55

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 56

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 57

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 58

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 59

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 60

The specific identification method is more appropriate than a cost 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 61

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

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

Question 62

[The following information applies to the questions displayed below.]
Beech Soda,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 14,Beech Soda,Inc.sold 25 units of this product.The other 28 units remained in inventory at January 31.
Assuming that Beech Soda uses the LIFO cost flow assumption,the cost of goods sold to be recorded at January 14 is:

A)$393.
B)$268.
C)$278.
D)$673.

Question 63

[The following information applies to the questions displayed below.]
Castle TV,Inc.purchased 1,000 monitors on January 5 at a per-unit cost of $185,and another 1,000 units on January 31 at a per-unit cost of $230.In the period from February 1 through year-end,the company sold 1,800 units of this product.At year-end,200 units remained in inventory.
Assume that Castle TV,Inc.uses the LIFO flow assumption.The cost of the 200 units in the year-end inventory is:

A)$37,000.
B)$46,000.
C)$41,500.
D)$83,000.

Question 64

[The following information applies to the questions displayed below.]
Castle TV,Inc.purchased 1,000 monitors on January 5 at a per-unit cost of $185,and another 1,000 units on January 31 at a per-unit cost of $230.In the period from February 1 through year-end,the company sold 1,800 units of this product.At year-end,200 units remained in inventory.
Assume that the replacement cost of this monitor at year-end is $220 per unit.Using the FIFO flow assumption and the lower-of-cost-or-market rule,Castle TV should write down the carrying value of this inventory by:

A)$0.
B)$1,000.
C)$2,000.
D)$3,000.

Question 65

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 66

[The following information applies to the questions displayed below.]
At year-end,the perpetual inventory records of Anderson Co.indicate 60 units of a particular product in inventory,acquired at the following dates and unit costs:
Purchased in August: 30 units at $750 per unit.
Purchased in November: 30 units at $700 per unit.
A complete physical inventory taken at year-end indicates only 50 units of this product actually are on hand
Assuming that Anderson uses the LIFO cost flow assumption,it should record this inventory shrinkage by:

A)Debiting Cost of Goods Sold $7,000.
B)Crediting Cost of Goods Sold $7,500.
C)Debiting Cost of Goods Sold $7,500.
D)Crediting Cost of Goods Sold $7,000.

Question 67

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

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

Question 68

[The following information applies to the questions displayed below.]
At year-end,the perpetual inventory records of Anderson Co.indicate 60 units of a particular product in inventory,acquired at the following dates and unit costs:
Purchased in August: 30 units at $750 per unit.
Purchased in November: 30 units at $700 per unit.
A complete physical inventory taken at year-end indicates only 50 units of this product actually are on hand
Assuming that Anderson uses the FIFO cost flow assumption,it should record this inventory shrinkage by:

A)Crediting Cost of Goods Sold $7,500.
B)Debiting Cost of Goods Sold $7,000.
C)Crediting Cost of Goods Sold $7,000.
D)Debiting Cost of Goods Sold $7,500.

Question 69

Under the LIFO cost flow assumption,the cost of this item to be included as inventory in the company's year-end balance sheet is:

A)$36,000.
B)$42,000.
C)$36,500.
D)$37,500.

Question 70

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

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

Question 71

[The following information applies to the questions displayed below.]
200 At the end of last year,Games-2-Use had merchandise costing $140,000 in inventory.During January of the current year,the company purchased merchandise costing $102,000,and sold merchandise that it had purchased at a total cost of $84,000.Games-2-Use uses a perpetual inventory system.
The total amount debited to the Inventory account during January was:

A)$0.
B)$84,000.
C)$102,000.
D)$140,000.

Question 72

[The following information applies to the questions displayed below.]
Beech Soda,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 14,Beech Soda,Inc.sold 25 units of this product.The other 28 units remained in inventory at January 31.
Assuming that Beech Soda uses the FIFO cost flow assumption,the cost of goods sold to be recorded at January 14 is:

A)$278.
B)$268.
C)$393.
D)$673.

Question 73

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)The two companies will rely upon an industry inventory turnover measurement.

Question 74

[The following information applies to the questions displayed below.]
Beech Soda,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 14,Beech Soda,Inc.sold 25 units of this product.The other 28 units remained in inventory at January 31.
Assuming that Beech Soda uses the FIFO cost flow assumption,the 28 units of this product in inventory at January 31 have a total cost of:

A)$400.
B)$395.
C)$405.
D)$410.

Question 75

[The following information applies to the questions displayed below.]
200 At the end of last year,Games-2-Use had merchandise costing $140,000 in inventory.During January of the current year,the company purchased merchandise costing $102,000,and sold merchandise that it had purchased at a total cost of $84,000.Games-2-Use uses a perpetual inventory system.
The balance in the Inventory account at January 31 was:

A)$84,000.
B)$140,000.
C)$158,000.
D)$242,000.

Question 76

[The following information applies to the questions displayed below.]
Castle TV,Inc.purchased 1,000 monitors on January 5 at a per-unit cost of $185,and another 1,000 units on January 31 at a per-unit cost of $230.In the period from February 1 through year-end,the company sold 1,800 units of this product.At year-end,200 units remained in inventory.
Assume that Castle TV,Inc.uses the FIFO flow assumption.The cost of the 200 units in inventory at year-end is:

A)$41,500.
B)$46,000.
C)$37,000.
D)$83,000.

Question 77

[The following information applies to the questions displayed below.]
200 At the end of last year,Games-2-Use had merchandise costing $140,000 in inventory.During January of the current year,the company purchased merchandise costing $102,000,and sold merchandise that it had purchased at a total cost of $84,000.Games-2-Use uses a perpetual inventory system.
The amount of goods transferred from the Inventory account to the Cost of Goods Sold account during January was:

A)$0.
B)$84,000.
C)$102,000.
D)$56,000.

Question 78

[The following information applies to the questions displayed below.]
Beech Soda,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 14,Beech Soda,Inc.sold 25 units of this product.The other 28 units remained in inventory at January 31.
Assuming that Beech Soda uses the LIFO cost flow assumption,the 28 units of this product in inventory at January 31 have a total cost of:

A)$400.
B)$395.
C)$405.
D)$410.

Question 79

[The following information applies to the questions displayed below.]
Beech Soda,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 14,Beech Soda,Inc.sold 25 units of this product.The other 28 units remained in inventory at January 31.
Assuming that Beech Soda uses the average cost flow assumption,the cost of goods sold to be recorded at January 14 is (round your intermediate calculation to one decimal place and cost per unit to the nearest cent):

A)$317.50.
B)$308.25.
C)$272.50.
D)$673.00.

Question 80

Under the FIFO cost flow assumption,the cost of these items to be included in inventory in the company's year-end balance sheet is:

A)$36,000.
B)$36,500.
C)$42,000.
D)$37,500.