Deck 8: Valuation of Inventories: a Cost-Basis Approach

Question 1

Companies must allocate the cost of all the goods available for sale (or use) between the income statement and the statement of financial position.

Answer 1

True

Question 2

The International Accounting Standards Board requires the specific identification method when unit price is low, inventory turnover is high, and inventory quantities are large.

Answer 2

False

Question 3

Interest costs incurred to manufacture large quantities of inventory that are produced routinely should be capitalized.

Answer 3

False

Question 4

Tang, Inc. sells collectible jewelry on consignment from various manufacturers and should include this consigned inventory on its statement of financial position.

Question 5

IFRS requires manufacturers to disclose their inventory components on the statement of financial position or in related notes.

Question 6

Goods in transit, shipped FOB shipping point, are included in the buyer's statement of financial position at the time of delivery to the common carrier.

Question 7

Abnormal freight costs are not included on the statement of financial position as part of the cost of inventory.

Question 8

The cost flow assumption adopted must be consistent with the physical movement of the goods.

Question 9

The International Accounting Standards Board (IASB) requires the specific identification method of inventory costing where individual items of inventory can be identified and costed.

Question 10

Purchase Discounts Lost is a financial expense and is reported in the "other income and expense" section of the income statement.

Question 11

Freight charges on goods purchased are considered a period cost and therefore are not part of the cost of the inventory.

Question 12

If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier delivers the goods to the common carrier.

Question 13

A manufacturing concern would report the cost of units only partially processed as inventory in the statement of financial position.

Question 14

Both merchandising and manufacturing companies normally have

Question 15

If both purchases and ending inventory are overstated by the same amount, net income is not affected.

Question 16

Freight costs incurred by the seller to ship merchandise to the purchaser are accounted for by the seller as part of inventory on the statement of financial position.

Question 17

When using a perpetual inventory system, freight charges on goods purchased are debited to Freight-In.

Question 18

Under IFRS, agricultural inventories, such as wheat, oranges, etc., are recorded at their fair value less estimated selling costs at the point of harvest.

Question 19

The LIFO perpetual method results in the same ending inventory and cost of goods sold amounts as under the LIFO periodic method.

Question 20

A trade discount that is granted as an incentive for a first-time customer or as a reward for large order should be accounted for by the purchaser as revenue.

Question 21

Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would be

A) no effect.
B) net income was correct and current assets and current liabilities were overstated.
C) net income, current assets, and current liabilities were overstated.
D) net income and current liabilities were overstated.

Question 22

Where should raw materials be classified on the statement of financial position?

A) Prepaid expenses.
B) Inventory.
C) Equipment.
D) Not on the statement of financial position.

Question 23

Feine Co. accepted delivery of merchandise which it purchased on account. As of December 31, Feine had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on its financial statements for December 31 would be

A) net income, current assets, and retained earnings were understated.
B) net income was correct and current assets were understated.
C) net income was understated and current liabilities were overstated.
D) net income was overstated and current assets were understated.

Question 24

Tang, Inc. sells collectible jewelry on consignment from various manufacturers. Additionally, Tang sells its own line of specialty jewelry manufactured in-house. On December 31, 2019, during Tang, Inc 's annual inventory count, an inexperienced new staff member included in Tang's ending inventory €350,000 worth of inventory held on consignment from Metcalf Associates. Which of the following is correct regarding the impact of this error on Tang's income statement and statement of financial position at December 31, 2019?

A) Ending inventory is understated by €350,000.
B) Retained earnings is overstated by €350,000.
C) Cost of goods sold is overstated by €350,000.
D) The financial statements are correctly stated.

Question 25

Computers For You is a retailer specializing in selling computers and related equipment. Which of the following would not be reported in the merchandise inventory account reported on the statement of financial position for Computers For You at December 31, 2019?

A) Computer purchased for resale during November 2019.
B) Shelving materials purchased during December 2019.
C) Freight costs related to the computers purchased in November.
D) All of the choices are included in the merchandise inventory account at December 31, 2019.

Question 26

When using a perpetual inventory system,

A) no Purchases account is used.
B) a Cost of Goods Sold account is used.
C) two entries are required to record a sale.
D) All of these are correct.

Question 27

Mineral Makers (MM) Company keeps its inventory records using a perpetual system. At December 31, 2019, the unadjusted balance in the inventory account is €64,000. Through a physical count on December 31, 2019, MM determines that its actual merchandise inventory at year-end is €62,500. Which of the following is true regarding the statement of financial position and the income statement of MM at December 31, 2019?

A) Inventory is increased and cost of goods sold is decreased by €1,500.
B) Inventory is decreased and cost of goods sold is increased by €1,500.
C) Inventory is increased and cost of goods sold is increased by €1,500.
D) Inventory is decreased and cost of goods sold is decreased by €1,500.

Question 28

Why are inventories included in the computation of net income?

A) To determine cost of goods sold.
B) To determine sales revenue.
C) To determine merchandise returns.
D) Inventories are not included in the computation of net income.

Question 29

Goods in transit which are shipped F.o.b. shipping point should be

A) included in the inventory of the seller.
B) included in the inventory of the buyer.
C) included in the inventory of the shipping company.
D) None of these are correct.

Question 30

Where should goods in transit that were recently purchased F.o.b. destination be included on the statement of financial position?

A) Accounts payable.
B) Inventory.
C) Equipment.
D) Not on the statement of financial position.

Question 31

How is a significant amount of consignment inventory reported in the statement of financial position?

A) The inventory is reported separately on the consignor's statement of financial position.
B) The inventory is combined with other inventory on the consignor's statement of financial position.
C) The inventory is reported separately on the consignee's statement of financial position.
D) The inventory is combined with other inventory on the consignee's statement of financial position.

Question 32

On June 15, 2019, Wynne Corporation accepted delivery of merchandise which it
Purchased on account. As of June 30, Wynne had not recorded the transaction or included the merchandise in its inventory. The effect of this on its statement of financial position for June 30, 2019 would be

A) assets and equity were overstated but liabilities were not affected.
B) equity was the only item affected by the omission.
C) assets, liabilities, and equity were understated.
D) None of these answers are correct.

Question 33

Which of the following accounts is not reported in inventory?

A) Raw materials.
B) Equipment.
C) Finished goods.
D) Supplies.

Question 34

Which of the following inventories carried by a manufacturer is similar to the merchandise inventory of a retailer?

A) Raw materials.
B) Work-in-process.
C) Finished goods.
D) Supplies.

Question 35

Culver Company purchases the majority of its inventory from three primary suppliers for re-sale to customers around the world. Culver Company's statement of financial position will include

A) Finished goods inventory.
B) Work-in-process inventory.
C) Merchandise inventory.
D) All of the choices are correct.

Question 36

Green Co. received merchandise on consignment. As of January 31, Green included the goods in inventory, but did not record the transaction. The effect of this on its financial statements for January 31 would be

A) net income, current assets, and retained earnings were overstated.
B) net income was correct and current assets were understated.
C) net income and current assets were overstated and current liabilities were understated.
D) net income, current assets, and retained earnings were understated.

Question 37

Which of the following items should be included in a company's inventory at the statement of financial position date?

A) Goods in transit which were purchased F.o.b. destination.
B) Goods received from another company for sale on consignment.
C) Goods sold to a customer which are being held for the customer to call for at his or her convenience.
D) None of these are correct.

Question 38

Companies must allocate the cost of all the goods available for sale (or use) between

A) The cost goods on hands at the beginning of the period as reported on the statement of financial position and the cost of goods acquired or produced during the period.
B) The cost of goods on hand at the end of the period as reported on the statement of financial position and the cost of goods acquired or produced during the period.
C) The income statement and the statement of financial position.
D) All of the choices are correct.

Question 39

What is consigned inventory?

A) Goods that are shipped, but title transfers to the receiver.
B) Goods that are sold, but payment is not required until the goods are sold.
C) Goods that are shipped, but title remains with the shipper.
D) Goods that have been segregated for shipment to a customer.

Question 40

Which of the following is a characteristic of a perpetual inventory system?

A) Inventory purchases are debited to a Purchases account.
B) Inventory records are not kept for every item.
C) Cost of goods sold is recorded with each sale.
D) Cost of goods sold is determined as the amount of purchases less the change in inventory.

Question 41

In a period of rising prices, the inventory method which tends to give the highest reported inventory is

A) FIFO.
B) moving average.
C) specific identification.
D) weighted-average.

Question 42

The use of a Discounts Lost account implies that the recorded cost of a purchased inventory item is its

A) invoice price.
B) invoice price plus the purchase discount lost.
C) invoice price less the purchase discount taken.
D) invoice price less the purchase discount allowable whether taken or not.

Question 43

Which of the following is included in inventory costs?

A) Product costs.
B) Period costs.
C) Product and period costs.
D) Neither product or period costs.

Question 44

Which of the following is a product cost as it relates to inventory?

A) Selling costs.
B) Interest costs.
C) Raw materials.
D) Abnormal spoilage.

Question 45

Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations?

A) Average cost
B) First-in, first-out
C) Moving-average
D) Weighted-average

Question 46

What is the effect of a €50,000 overstatement of last year's inventory on current year's ending retained earning balance?

A) Understated by €50,000.
B) No effect.
C) Overstated by €50,000.
D) Need more information to determine.

Question 47

In a period of rising prices, the inventory method which tends to give the highest reported net income is

A) moving-average.
B) first-in, first-out.
C) specific identification.
D) weighted-average.

Question 48

Which of the following is a period cost?

A) Labor costs.
B) Freight in.
C) Production costs.
D) Selling costs.

Question 49

The pricing of issues from inventory must be deferred until the end of the accounting period under the following method of inventory valuation

A) moving average.
B) weighted-average.
C) specific identification.
D) FIFO.

Question 50

Which of the following types of interest cost incurred in connection with the purchase or manufacture of inventory should be capitalized as a product cost?

A) Purchase discounts lost
B) Interest incurred during the production of discrete projects such as ships or real estate projects
C) Interest incurred on notes payable to vendors for routine purchases made on a repetitive basis
D) All of these should be capitalized.

Question 51

Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the average cost method?

A) Prices decreased.
B) Prices remained unchanged.
C) Prices increased.
D) Price trend cannot be determined from information given.

Question 52

Oats Company offers a trade discount to its customers as a reward for large orders. According to the International Accounting Standards Board (IASB) how should the customers of Oats Company account for these trade discounts?

A) As an expense.
B) As a revenue.
C) As a reduction in the cost of inventory.
D) The IASB allows any of these treatments so long as the company applies it consistently.

Question 53

Computers For You is a retailer specializing in selling computers and related equipment. During 2019, Computers For You sells €200,000 of merchandise to Sandcastles, Inc. Computers For You incurs €24,000 of freight costs associated with these sales. Which of the following is true regarding how this €24,000 is treated on the financial statements?

A) Computers For You will report the €24,000 as part of merchandise inventory on the statement of financial position.
B) Sandcastles, Inc. will report the €24,000 as part of merchandise inventory on the statement of financial position.
C) Computers For You will report the €24,000 as part of operating expenses on the income statement.
D) Sandcastles, Inc. will report the €24,000 as an accounts receivable on the statement of financial position.

Question 54

Margo, Inc. purchased goods from Fairlane Industries. If Margo's accounts show a Purchase Discount account related to this purchase, which of the following is true?

A) Margo considers purchase discounts lost as a financial expense.
B) Margo uses the gross method and a periodic inventory system.
C) Margo's management can measure inefficiency by holding management responsible for discounts not taken.
D) All of these are correct regarding Margo, Inc.

Question 55

The use of a Purchase Discounts account implies that the recorded cost of a purchased inventory item is its

A) invoice price.
B) invoice price plus any purchase discount lost.
C) invoice price less the purchase discount taken.
D) invoice price less the purchase discount allowable whether taken or not.

Question 56

Jarvis, Inc. manufactures cruise ships for sale. Each ship costs approximately €25,000,000 to build and takes 3 years to fully construct. During the time it takes to construct one cruise ship, Jarvis incurs €2,400,000 in interest cost related to the construction. The interest cost is incurred evenly throughout the construction period. During the first year of construction, Jarvis builds a shell that can be customized for any purchaser according to specifications; construction during the final 2 years is all based on client specification. The International Accounting Standards Board requires that Jarvis account for this interest cost as

A) €2,400,000 is recorded as interest expense as incurred.
B) €2,400,000 is capitalized to the cruise ship.
C) €800,000 incurred in 1^st year is expensed as incurred; the remaining amount is capitalized to the cruise ship.
D) €800,000 is capitalized to the cruise ship; the remaining amount is expensed as incurred.

Question 57

Which of the following costs should not be included on the statement of financial position as part of the cost of inventory?

A) Abnormal freight.
B) Import duties.
C) Conversion costs.
D) All of the choices are included on the statement of financial position as part of the cost of inventory.

Question 58

Which method may be used to record cash discounts a company receives for paying suppliers promptly?

A) Net method.
B) Gross method.
C) Average method.
D) Both the net method and the gross method.

Question 59

An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is

A) FIFO.
B) LIFO.
C) specific identification.
D) weighted-average.

Question 60

When inventory is misstated, its presentation lacks?

A) Relevance.
B) Faithful representation.
C) Comparability.
D) All of the choices are correct.

Question 61

In a period of falling prices, which inventory method generally provides the lowest amount of net income?

A) Average cost.
B) Moving average.
C) FIFO.
D) Specific identification.

Question 62

Which of the following is a reason why the specific identification method may be considered ideal for assigning costs to inventory and cost of goods sold?

A) The potential for manipulation of net income is reduced.
B) There is no arbitrary allocation of costs.
C) The cost flow matches the physical flow.
D) Able to use on all types of inventory.

Question 63

Oats and Honey Company produces healthy snacks for sale throughout the United States and Europe. The International Accounting Standards Board (IASB) prohibits Oats and Honey from using which of the following cost flow assumptions for its inventory?

A) LIFO (last-in, first-out).
B) Specific identification.
C) Weighted-average.
D) The IASB allows any of these cost flow assumptions as long as the company uses it consistently.

Question 64

The International Accounting Standards Board requires the specific identification method in certain circumstances. Which of the following is likely to be a circumstance where the specific identification criteria can be met?

A) Unit price is low.
B) Inventory turnover is low.
C) Inventory quantities are large.
D) All of the choices are circumstances where the criteria are likely to be met.

Question 65

In a period of falling prices which inventory method generally provides the lowest reported inventory?

A) Average cost.
B) FIFO.
C) Moving average.
D) Specific identification.

Question 66

Tanner Corporation's inventory cost on its statement of financial position was lower using first-in, first-out than it would have been using average cost. Assuming no beginning inventory, in what direction did the cost of purchases move during the period?

A) Up
B) Down
C) Steady
D) Cannot be determined

Question 67

Homes 4 You builds single-family homes throughout the United States and Europe. The International Accounting Standards Board (IASB) Requires Homes 4 You to use which of the following cost flow assumptions for its inventory?

A) FIFO (first-in, first-out).
B) Specific identification.
C) Weighted-average.
D) The IASB allows any of these cost flow assumptions as long as the company uses it consistently.

Question 68

The acquisition cost of a certain raw material changes frequently. The book value of the inventory of this material at year end will be the same if perpetual records are kept as it would be under a periodic inventory method only if the book value is computed under the

A) weighted-average method.
B) moving average method.
C) FIFO method.
D) None of these are correct.

Question 69

In a period of declining prices, the inventory method which tends to give the highest reported cost of goods sold is

A) specific identification.
B) average cost.
C) FIFO.
D) None of these are correct.