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10) The LCM rule must be applied to inventory:
A) on an item–by-item basis.
B) by categories of items.
C) as a whole.
D) as a company decides, for there is no requirement to apply LCM.
Question Type: Concept
11) Applying LCM to the items that make up ending inventory is an application of which of the
following concepts?
A) Materiality
B) Conservatism
C) Reliability
D) Full disclosure
Question Type: Concept
12) Cypress Co. has the following LIFO perpetual inventory records:
Date
Purchases
Cost of Goods Sold
Inventory on Hand
December 1
$4,150
December 7
$1,500
$5,650
December 18
$1,000
$4,650
December 31
$1,600
$6,250
The current replacement cost of the ending inventory is $3,300. To apply the lower–of-cost-or-
market rule, the journal entry would be:
A) Debit Cost of Goods Sold $2,950, credit Inventory $2,950,
B) Debit Inventory $2,950, credit Cost of Goods Sold $2,950,
C) Debit Cost of Goods Sold $1,000, credit Inventory $1,000
D) Debit inventory $1,000, credit Cost of Goods Sold $1,000
Question Type: Application
22
13) S&C Inc. has the following LIFO perpetual inventory records:
Date
Purchases
Cost of Goods Sold
Inventory on Hand
December 1
$3,000
December 7
$900
$3,900
December 18
$900
$3,000
December 31
$200
$3,200
The current replacement cost of the ending inventory is $2,400. To apply the lower–of-cost-or-
market rule, the journal entry would be:
A) Debit Cost of Goods Sold $900, credit Inventory $900
B) debit Inventory $900, credit Cost of Goods Sold $900
C) Debit Cost of Goods Sold $800, credit Inventory $800
D) debit Inventory $800, credit Cost of Goods Sold $800
Question Type: Application
14) Renoir, Inc. has the following LIFO perpetual inventory records:
Date
Purchases
Cost of Goods Sold
Inventory on Hand
February 1
$500
February 5
$600
$1,100
February 10
$200
$900
February 28
$100
$1,000
The current replacement cost of the ending inventory is $1,400. To apply the lower–of-cost-or-
market rule, the journal entry would be:
A) debit Cost of Goods Sold $400, credit Inventory $400.
B) debit Inventory $400, credit Cost of Goods Sold $400.
C) No entry required, since the amount is not material.
D) No entry required, since historical cost is less than replacement.
Question Type: Application
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Copyright © 2017 Pearson Education, Inc.
5.5 Illustrate the reporting of inventory in the financial statements
1) A company using the perpetual inventory system does not need to perform a physical count of
inventory.
Question Type: Concept
2) To save time when performing physical inventory counts, outside companies are rarely used
because they are not familiar with the inventory.
Question Type: Concept
3) An example of full disclosure would be a footnote to the financial statements indicating what
method was used to value inventory.
Question Type: Concept
4) Shrinkage refers to the loss of inventory due to theft, damage or other similar occurrences.
Question Type: Concept
5) If inventory shrinkage has occurred, the Inventory account will be credited for the amount of
lost inventory.
Question Type: Application
6) If shrinkage is found for $400, an adjusting entry would be made as follows:
A) debit Inventory for $400; credit Cost of Goods Sold for $400.
B) debit Inventory for $400; credit Sales Returns and Allowances for $400.
C) debit Cost of Goods Sold for $400; credit Inventory for $400.
D) debit Sales Returns and Allowances for $400; credit Inventory for $400.
Question Type: Application
24
7) Which of the following is often used when taking a physical inventory?
A) Pre-numbered count sheets
B) Tags to show what inventory has been counted
C) Maps of the location of the inventory
D) All of the above
Question Type: Concept
8) If the inventory shows an actual count of $450 and the perpetual inventory according to the
records shows $410, the adjusting entry for the $40 would:
A) debit Cost of Goods Sold; debit Purchase Returns and Allowances.
B) debit Cost of Goods Sold; credit Inventory.
C) debit Inventory; credit Cost of Goods Sold.
D) debit Inventory; credit Purchase Returns and Allowances.
Question Type: Application
9) If the inventory shows an actual count of $405 and the perpetual inventory according to the
records shows $420, the adjusting entry for the $15 would:
A) debit Cost of Goods Sold; credit Inventory.
B) debit Cost of Goods Sold; credit Purchase Returns and Allowances.
C) debit Inventory; credit Cost of Goods Sold.
D) debit Inventory; credit Purchase Returns and Allowances.
Question Type: Application
10) Footnotes are used with what concept or principle of accounting?
A) Conservatism
B) Consistency
C) Materiality
D) Full disclosure
Question Type: Concept
11) Which is usually NOT a common practice in taking a physical inventory?
A) Taking inventory during slow store hours
B) Hiring an outside firm
C) Taking inventory during the November and December holidays
D) Taking inventory in team of two persons
Question Type: Concept
25
12) Which account would always be used for an inventory adjustment?
A) Sales
B) Purchase Returns and Allowances
C) Cost of Goods Sold
D) Cash
Question Type: Application
13) Which is NOT an assurance of footnote disclosures?
A) Conservative information
B) Reliable information
C) Comparable information
D) Relevant information
Question Type: Concept
14) Which of the following would probably NOT need to be disclosed in a footnote?
A) Change of inventory methods
B) A material change in estimated shrinkage
C) A change in depreciation method
D) A 10% increase in sales
Question Type: Concept
15) Which of the following would cause inventory shrinkage?
A) Employee theft
B) Spoilage of items
C) Spills of items
D) All of the above
Question Type: Concept
16) Making notes in the financial statements to explain the justification of valuation changes and
other financial decisions would be an example of:
A) conservatism.
B) consistency.
C) materiality.
D) full disclosure.
Question Type: Concept
26
17) The Betta Corp’s inventory account balance was $1,450 at the end of the year. A physical
inventory count revealed that inventory on hand was $1,150. What amount should Betta report
on the balance sheet for inventory?
A) $300
B) 1,150
C) $1,450
D) $2,600
Question Type: Application
5.6 Determine the effect of inventory errors on the financial statements
1) If the ending inventory is overstated in Year 1, then the Cost of Goods Sold will be overstated
in Year 2.
Question Type: Application
2) If the ending inventory is understated in Year 1, then the Gross Profit will be understated in
Year 2.
Question Type: Application
3) The ending inventory of one year becomes the beginning inventory of the next year.
Question Type: Application
4) Counting inventory that is in transit on December 31 that was shipped from the supplier FOB
shipping point would not cause any error in the final inventory valuation.
Question Type: Application
5) Inventory errors cancel out after two periods.
Question Type: Concept
27
6) If Period 1 ending inventory is understated, then:
A) both cost of goods sold and net income are understated in Period 1.
B) cost of goods sold is overstated and net income is understated in Period 1.
C) cost of goods sold is understated and net income is overstated in Period 1.
D) both cost of goods sold and net income are overstated in Period 1.
Question Type: Application
7) If Period 1 ending inventory is overstated, then:
A) both cost of goods sold and net income are understated in Period 1.
B) cost of goods sold is overstated and net income is understated in Period 1.
C) cost of goods sold is understated and net income is overstated in Period 1.
D) both cost of goods sold and net income are overstated in Period 1.
Question Type: Application
8) If the ending inventory in Period 1 is understated, gross profit for Year 1 is:
A) overstated.
B) understated.
C) not affected.
D) determined by beginning inventory.
Question Type: Application
9) If ending inventory in Period 1 is understated, Cost of Goods Sold in Period 2 is:
A) overstated.
B) understated.
C) not affected.
D) the same as in Period 1.
Question Type: Application
10) If ending inventory in Period 1 is overstated, gross profit in Period 2 is:
A) overstated.
B) understated.
C) not affected.
D) the same as in Period 1.
Question Type: Application
28
11) If gross profit is overstated in Period 1, then the ending inventory and net income in Period 1
were respectively:
A) overstated, and understated.
B) overstated, and overstated.
C) understated, and overstated.
D) understated, and understated.
Question Type: Application
12) If Cost of Goods Sold was understated in Period 1, then Cost of Goods Sold and gross profit
in Period 2 will be:
A) both understated.
B) both overstated.
C) understated for cost of goods sold and overstated for gross profit.
D) overstated for cost of goods sold and understated for gross profit.
Question Type: Application
13) Inventory errors cancel out at the end of ________ accounting periods.
A) 1
B) 2
C) 3
D) 4
Question Type: Concept
14) Which of the following is an INCORRECT statement if ending inventory is overstated?
A) Cost of goods sold is overstated.
B) Gross profit is overstated.
C) Net income is overstated.
D) Income tax is overstated.
Question Type: Application
15) Which of the following is an INCORRECT statement if ending inventory is understated?
A) Cost of goods sold is overstated.
B) Gross profit is overstated.
C) Net income understated.
D) Income tax is understated.
Question Type: Application