Deck 5: Accounting for Inventories

Question 1

Wooster Company purchased two units of a product for $18 and later purchased one more for $20. If the company uses the weighted average cost flow method, and it sold one unit of the product for $30, its gross margin would be $11.00.

Answer 1

False
Explanation: [(2 x $18) + (1 x $20)]/3 units = $18.67 per unit; $30 sales - $18.67 cost of goods sold = $11.33 gross margin

Question 2

Generally accepted accounting principles allow the cost flow pattern for merchandise inventory to differ from the physical flow of merchandise within the business.

Answer 2

True
Explanation: Companies do not need to select a cost flow method that matches the physical flow of goods.

Question 3

During a period of rising prices, the amount of ending inventory reported on the balance sheet will be lower using the LIFO cost flow method than with FIFO.

Answer 3

True
Explanation: During a period of rising prices, ending inventory will include the lower, older prices when using LIFO.

Question 4

If Singh uses the LIFO cost flow method, its ending inventory would be $1,620.

Question 5

During a period of declining prices, a company would report a lower gross margin using the LIFO cost flow method than with FIFO.

Question 6

One of the disadvantages of the specific identification inventory cost flow method is that it can allow managers of a business to manipulate the amount of income the business reports by choosing which item to sell if the cost is different for identical items of inventory.

Question 7

Generally accepted accounting principles would not allow a company to use FIFO for part of its inventory and the weighted-average cost flow assumption for the rest of its inventory.

Question 8

The last-in, first-out cost flow method assigns the cost of the items purchased last to ending inventory.

Question 9

In a period of rising prices, use of the FIFO cost flow method would cause a company to pay more income taxes than would use of LIFO.

Question 10

If Singh uses the weighted-average cost flow method, its weighted-average cost per unit would be $8.00.

Question 11

The Internal Revenue Service allows a company to use LIFO for income tax purposes only if it also uses LIFO for financial reporting.

Question 12

If Singh uses the FIFO cost flow method, its cost of goods sold would be $4,130.

Question 13

A company's gross margin reported on the income statement is not affected by the inventory cost flow method it uses.

Question 14

Generally accepted accounting principles do not restrict or limit a company's freedom to change accounting methods from one year to the next.

Question 15

If a company uses the FIFO cost flow method for its income tax return it must also use FIFO for financial reporting.

Question 16

During a period of rising prices the FIFO cost flow method will result in higher total assets than LIFO.

Question 17

The specific identification inventory method is not practical for companies that sell many low-priced, high turnover items.

Question 18

A company uses a cost flow method (such as LIFO or FIFO) to allocate product costs between cost of goods sold and beginning inventory.

Question 19

During a period of rising prices, a company's cost of goods sold would be higher using the LIFO cost flow method than with FIFO.

Question 20

In most businesses, the physical flow of goods occurs on a FIFO basis, but a different cost flow method is allowed under generally accepted accounting principles.

Question 21

If a company applies the lower-of-cost-or-market rule on an aggregate basis, its write-down of inventory is likely to be lower than if it applies the rule to individual items of inventory.

Question 22

In an inflationary environment,

A)a company's net income will be higher if it uses FIFO than if it uses LIFO.
B)a company's cost of goods sold will be lower if it uses LIFO as opposed to FIFO.
C)a company's net income will be the same regardless of whether LIFO or FIFO is used.
D)a company's assets will be lower if it uses FIFO as opposed to LIFO cost flow.

Question 23

When prices are falling:

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

Question 24

A loss resulting from application of the lower-of-cost-or-market rule is included in Cost of Goods Sold if the loss is material in amount.

Question 25

At a time of declining prices, which cost flow assumption will result in the highest ending inventory?

A)FIFO
B)LIFO
C)Weighted average
D)Either A or C

Question 26

International Financial Reporting Standards (IFRS) do not permit the use of the LIFO cost flow assumption.

Question 27

Kenya Co. uses the perpetual inventory method. Kenya purchased 400 units of inventory that cost $6.00 each. At a later date the company purchased an additional 600 units of inventory that cost $8.00 each. If Kenya uses the FIFO cost flow method and sells 700 units of inventory, the amount of cost of goods sold will be:

A)$5,600.
B)$4,800.
C)$4,200.
D)$5,400.

Question 28

If prices are rising, which inventory cost flow method will produce the lowest amount of cost of goods sold?

A)FIFO
B)LIFO
C)NIFO
D)Weighted Average

Question 29

A discount merchandiser is likely to have a higher inventory turnover than more upscale stores with higher merchandise prices.

Question 30

If a company uses the LIFO cost flow method, it is not required by generally accepted accounting principles to apply the lower-of-cost-or-market rule.

Question 31

If a company overstates its Inventory balance at the end of 2013 due to an error, its Retained Earnings will also be overstated on the 2013 balance sheet.

Question 32

Company A and Company B are similar retailing businesses. A uses FIFO, and B uses LIFO. In a period of rising prices, A should have a higher inventory turnover than
B.In a period of rising prices, FIFO will result in lower cost of goods sold (earlier, lower prices) and higher ending inventory (more recent, higher prices). The lower cost of goods sold divided by the higher inventory will produce a lower inventory turnover.

Question 33

Which inventory costing method will produce an amount for cost of goods sold that is closest to current market value?

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

Question 34

When prices are rising, which method of inventory, if any, will result in the lowest relative net cash outflow (including the effects of taxes, if any)?

A)weighted average.
B)FIFO.
C)LIFO.
D)None of these; inventory methods cannot affect cash flows.

Question 35

The gross margin method of estimating inventory can be used to help detect inventory fraud.

Question 36

Benson Company purchased two identical inventory items. The item purchased first cost $14.00, and the item purchased second cost $15.00. Benson sold one of the items for $24.00. Which of the following statements is true?

A)Ending inventory will be lower if Benson uses weighted average than if FIFO were used.
B)Cost of goods sold will be higher if Benson uses FIFO than if weighted average were used.
C)The dollar amount assigned to ending inventory will be the same no matter which cost flow method is used.
D)Gross margin will be higher if Benson uses LIFO than it would be if FIFO were useD.If Benson uses weighted average, ending inventory will be $14.50. If the company uses FIFO, ending inventory will be $15.00.

Question 37

Bowden Company paid cash to purchase two identical inventory items. The first purchase cost $16.00 cash and the second cost $18.00 cash. Bowden sold one inventory item for $28.00 cash. Based on this information alone, without considering the effect of income tax,:

A)cash flow from operating activities is $11.00 assuming a weighted average cost flow.
B)cash flow from operating activities is $12.00 assuming a FIFO cost flow.
C)cash flow from operating activities is $10.00 assuming a LIFO cost flow.
D)the amount of cash flow from operating activities is not affected by the cost flow methoD.Regardless of the cost flow assumption, Bowden reported outflow of $34.00 for the purchases of the two items and inflow of $28.00 for the sale of one item.

Question 38

If the replacement cost of inventory is greater than its historical cost, the increase in value does not affect the company's financial statements.

Question 39

When the cost of inventory is rising, which inventory cost flow method will produce the lowest amount of cost of goods sold?

A)FIFO
B)Weighted Average.
C)All methods will produce the same amount of cost of goods sold.
D)LIFO

Question 40

Haley Company purchased two identical inventory items. The item purchased first cost $32.00. The item purchased second cost $35.00. Haley sold one of the inventory items for $60.00. Based on this information:

A)the amount of ending inventory is $32.00 if Haley uses the LIFO cost flow method.
B)the amount of gross margin is $26.50 if Haley uses the weighted average cost flow method.
C)the amount of cost of goods sold is $32.00 if Haley uses the FIFO cost flow method.
D)All of the above are correct.

Question 41

Determine the amount of gross margin assuming the FIFO cost flow method.

A)$1,460
B)$1,710
C)$1,980
D)$1,530

Question 42

Assuming Chandler uses a LIFO cost flow method, the amount of cost of goods sold for the sales transaction on January 18 is (round the final result to the nearest whole dollar):

A)$1,150.
B)$1,070.
C)$1,050.
D)$1,130.

Question 43

Assuming Chandler uses a FIFO cost flow method, the ending inventory on January 31 is:

A)$345.
B)$330.
C)$340.
D)$1,020.

Question 44

Determine the amount of gross margin assuming the weighted average cost flow method.

A)$1,503
B)$2,160
C)$1,305
D)$657

Question 45

Greene's cost of goods sold under FIFO would be:

A)$620.
B)$550.
C)$770.
D)$700.

Question 46

Determine the weighted average cost per unit for May.

A)$2.23
B)$1.45
C)$2.45
D)$3.17

Question 47

Pinkston Company purchased two identical inventory items. One of the items, purchased in January, cost $18.00. The other, purchased in February, cost $19.00. One of the items was sold in March at a selling price of $30.00. Select the correct answer assuming that Pinkston uses a LIFO cost flow.

A)The balance in ending inventory would be $19.00.
B)The amount of gross margin would be $11.00.
C)The amount of ending inventory would be $18.50.
D)The amount of cost of goods sold would be $18.00.

Question 48

Vincent Company uses the perpetual inventory method. Vincent purchased 400 units of inventory that cost $5.00 each. At a later date the company purchased an additional 800 units of inventory that cost $6.00 each. Vincent sold 500 units of inventory for $9.00. If Vincent uses a FIFO cost flow method, the amount of cost of goods sold appearing on the income statement will be:

A)$1,900.
B)$2,000.
C)$1,500.
D)$2,600.

Question 49

Greene's ending inventory under weighted average would be approximately:

A)$780.
B)$787.
C)$660.
D)$666.

Question 50

Maddox Company uses the perpetual inventory method. Maddox purchased 500 units of inventory that cost $2.00 each. At a later date the company purchased an additional 600 units of inventory that cost $2.50 each. If Maddox uses a LIFO cost flow method, and sells 800 units of inventory, the amount of ending inventory appearing on the balance sheet will be:

A)$1,900.
B)$675.
C)$600.
D)$750.

Question 51

Which of the following businesses is most likely to use a specific identification cost flow method?

A)Hardware store
B)Grocery store
C)Car dealership
D)Roofing company

Question 52

Assuming Chandler uses a FIFO cost flow method, the cost of goods sold for the sales transaction on January 31 is:

A)$1,005.
B)$1,020.
C)$1,045.
D)$340.

Question 53

Determine the amount of ending inventory assuming the FIFO cost flow method.

A)$480
B)$470
C)$400
D)None of the above

Question 54

Determine the amount of cost of goods sold assuming the LIFO cost flow method.

A)$2,160
B)$2,050
C)$1,180
D)$1,800

Question 55

Torres Company purchased 2,000 units of inventory that cost $2.00 each on January 1, 2013. An additional 3,000 units of inventory were purchased on January 12, 2013 at a cost of $2.10 each. Torres Company sold 4,000 units of inventory on January 20, 2013. Which of the following entries would be required to recognize the cost of goods sold assuming that Torres Co. uses the perpetual inventory method and a FIFO cost flow method?

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

Question 56

The lower-of-cost-or-market rule can be applied to

A)major classes or categories of inventory.
B)the entire stock of inventory in aggregate.
C)each individual inventory item.
D)any of these.

Question 57

Kitchen Company uses the perpetual inventory method. On January 1, 2013, the company's first day of operations, Kitchen purchased 400 units of inventory that cost $2.50 each. On January 10, 2013, the company purchased an additional 600 units of inventory that cost $3.00 each. If Kitchen uses a weighted average cost flow method and sells 550 units of inventory, the amount of inventory appearing on balance sheet following the sale will be approximately:

A)$1,540.
B)$1,513.
C)$1,260.
D)$1,238.

Question 58

Reichart Company has four different categories of inventory. Quantity, cost, market value for each inventory category is shown below: The company carries inventory at lower-of-cost-or-market applied to the inventory in aggregate. The implementation of the lower-of-cost-or-market rule would:

A)increase assets and equity by $55.50.
B)reduce assets and equity by $101.00.
C)reduce assets and equity by $79.00.
D)None of these.

Question 59

Signal Company uses the perpetual inventory method. On January 1, 2013, Signal purchased 400 units of inventory that cost $2.00 each. On January 10, 2013, the company purchased an additional 600 units of inventory that cost $2.25 each. If Signal uses a weighted average cost flow method and sells 700 units of inventory for $4.00 each, the amount of gross margin reported on the income statement will be:

A)$1,313.
B)$1,295.
C)$1,225.
D)$1,505.

Question 60

Greene's ending inventory under LIFO would be:

A)$910.
B)$820.
C)$740.
D)$650.

Question 61

An overstatement of ending inventory results in which of the following in the present period?

A)Overstatement of total assets.
B)Overstatement of cost of goods sold.
C)Understatement of net income.
D)Understatement of retained earnings.

Question 62

When preparing its quarterly financial statements, Patterson Co. uses the gross margin method to estimate ending inventory. The following information is available for the 1^st quarter of 2013: What was Patterson's estimated inventory on March 31, 2013?

A)$412,500
B)$577,500
C)$472,500
D)$517,500

Question 63

Which of the following circumstances is not a reason to compute an estimate of the amount of inventory?

A)To evaluate the accuracy of a physical count of goods.
B)To complete the company's annual income tax return.
C)To prepare monthly or quarterly financial statements without incurring the expense of taking a physical inventory.
D)To support an insurance claim for a loss due to theft of inventory.

Question 64

At the end of the 2013 accounting period DeFazio Company determined that the market value of its inventory was $39,900. The historical cost of this inventory was $40,700. DeFazio uses the perpetual inventory method. The entry necessary to reduce the inventory to the lower of cost or market will

A)increase assets and increase liabilities.
B)decrease assets and decrease liabilities.
C)increase assets and increase net income.
D)decrease assets and decrease net income.

Question 65

If a firm is using the lower-of-cost-or-market rule and if a write-down entry is required, which of the following effects will apply?

A)Net income will increase.
B)Gross margin will decrease.
C)Assets will be unaffected.
D)Liabilities will increase.

Question 66

The Bristol Company was recently required to record an inventory write-down of $5,215 because the market value of its inventory was less than cost. Assuming the amount of the write-down is not material (the total inventory was over $9,750,000), which of the following is the appropriate journal entry?

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

Question 67

Nguyen Corporation is required to record an inventory write-down of $2,342 as a result of using the lower-of-cost-or-market rule. Which of the following answers correctly shows how this entry would affect the financial statements?

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

Question 68

What is meant by "market" in lower-of-cost-or-market calculations?

A)The amount of gross margin earned by selling merchandise.
B)The amount the goods were sold for during the period.
C)The amount that would have to be paid to replace the merchandise.
D)The amount originally paid for the merchandise.

Question 69

Trainer Co. had beginning inventory of $400 and ending inventory of $600. Trainer Co. had cost of goods sold amounting to $1,800. Based on this information, Trainer Co. must have purchased inventory amounting to:

A)$1,600
B)$2,000
C)$2,800
D)$2,400

Question 70

When using the gross margin method to estimate inventory, which of the following is a step in the computation?

A)Add the amount goods available for sale to estimated cost of goods sold.
B)Add estimated gross margin to sales.
C)Subtract estimated cost of goods sold from the amount of goods available for sale.
D)Subtract estimated goods available for sale from beginning inventory.

Question 71

Why are the inventory and cost of goods sold accounts attractive targets for managerial fraud?

A)There are few if any procedures that can check for fraud in these accounts.
B)These accounts are more significant than most other accounts.
C)There are no adequate methods of record keeping for inventory.
D)Cost of goods sold and Inventory accounts are not attractive targets of frauD.In contrast, selling and administrative expenses are made up of many less significant expenses, and are more difficult to misstate to a great extent.

Question 72

Lewiston Company is preparing its financial statements. Gross margin is normally 40% of sales. Information taken from the company's records revealed sales of $50,000; beginning inventory of $5,000 and purchases of $35,000. The estimated amount of ending inventory would be:

A)$10,000.
B)$30,000.
C)$20,000.
D)$16,000.

Question 73

Phillips Corporation overstated its ending inventory on December 31, 2013. Which of the following answers correctly identifies the effect of the error on 2014 financial statements?

A)Gross margin overstated.
B)Cost of goods sold is overstated.
C)Ending inventory is understated.
D)Net income is overstateD.Overstating inventory at the end of 2013, but correctly reporting inventory at the end of 2014 will cause cost of goods sold to be understated for 2013 and overstated for 2014. However, it will not necessarily impact the 2014 inventory count.

Question 74

An error that results in overstating ending inventory would have what effect on the company's financial statements in the current year?

A)Ending inventory will be overstated, COGS will be understated and net income, retained earnings and equity will be overstated.
B)Ending inventory will be overstated, COGS will be overstated and net income, retained earnings and equity will be overstated.
C)Ending inventory will be overstated, COGS will be understated and net income, retained earnings and equity will be understated.
D)Ending inventory will be overstated, COGS will be overstated and net income, retained earnings and equity will be understateD.Overstating ending inventory will overstate assets (inventory) and understate expenses (cost of goods sold), which will overstate net income, retained earnings and equity. It will have no effect on the statement of cash flows.

Question 75

Under the perpetual inventory system, the best estimate of the amount of inventory is:

A)shown on the previous period's financial statements.
B)provided by application of the gross margin method.
C)the book balance in the inventory account.
D)the beginning inventory balance minus sales for the perioD.In a perpetual inventory system, the balance in the inventory general ledger account should provide the best estimate of inventory on hand. The gross margin method should only be used if a book inventory and a physical inventory are unavailable.

Question 76

The gross margin method requires all but which of the following elements of information?

A)Total sales for the present period.
B)The ending inventory for the present period.
C)Amount of purchases during the present period.
D)The beginning inventory for the present perioD.The gross margin method is used when ending inventory for the present period is not available. It does require the beginning inventory balance and sales and purchases for the present period.

Question 77

Which of the following methods of applying the lower-of-cost-or-market rule will result in the fewest write-downs of inventory?

A)The entire stock of inventory in aggregate.
B)Average of cost of goods sold for the past three years.
C)Major classes or categories of inventory.
D)Each individual inventory item.

Question 78

On December 31, 2013, Owen Corporation overstates the ending inventory account by $4,000. How will this affect Retained Earnings in the December 31, 2014 balance sheet?

A)Retained Earnings will be overstated by $4,000.
B)Retained Earnings will be understated by $4,000.
C)Retained Earnings will be correctly stated.
D)Cannot be determined with the above information.

Question 79

Wynn Corporation's 2013 ending inventory was overstated by $20,000; however, ending inventory for 2014 was correct. Which of the following statements is correct?

A)Net income for 2013 is understated.
B)Retained earnings at the end of 2014 is overstated.
C)Cost of goods sold for 2014 is overstated.
D)Cost of goods sold for 2013 is overstateD.Overstating inventory at the end of 2013, but correctly reporting inventory at the end of 2014 will cause cost of goods sold to be understated for 2013 and overstated for 2014. However, by the end of 2014, retained earnings will be correctly stated.

Question 80

Zeus Company understated its ending inventory. Which of the following answers correctly states the effect of the error in the present period?

A)Overstatement of total assets and cost of goods sold.
B)Understatement of total assets and gross margin.
C)Understatement of liabilities and retained earnings.
D)Overstatement of cost of goods sold and retained earnings.