8) The ending Merchandise Inventory for the current accounting period is understated by $2,700. What
effect will this error have on Cost of Goods Sold and Net Income for the current accounting period?
A)
Cost of Goods Sold
Net Income
Understated
Understated
B)
Cost of Goods Sold
Net Income
Overstated
Overstated
C)
Cost of Goods Sold
Net Income
Understated
Overstated
D)
Cost of Goods Sold
Net Income
Overstated
Understated
9) Ending inventory for the current accounting period is overstated by $2,700. What effect will this error
have on Cost of Goods Sold and Net Income for the current accounting period?
A)
Cost of Goods Sold
Net Income
Overstated
Overstated
B)
Cost of Goods Sold
Net Income
Understated
Overstated
C)
Cost of Goods Sold
Net Income
Overstated
Understated
D)
Cost of Goods Sold
Net Income
Understated
Understated
10) Which of the following is affected as a result of an error in performing the physical count of inventory
at the end of the accounting period?
A) sales revenue
B) operating expenses
C) net income
D) net cost of purchases
11) State the effects of inventory errors on cost of goods sold and net income for periods 1 and 2. The
response should be overstated or understated.
Period 1 Ending Merchandise Inventory is overstated
12) State the effects of inventory errors on cost of goods sold and net income for periods 1 and 2. The
response should be overstated or understated.
Period 1 Ending Merchandise Inventory is understated
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Copyright © 2018 Pearson Education, Inc.
6.6 Learning Objective 6-6
1) Businesses strive to sell merchandise inventory quickly because the merchandise inventory generates
no profit until it is sold.
2) Two ratios that help businesses monitor their inventory levels are days’ sales in inventory and the
inventory level ratio.
3) Fast selling inventory is less likely to ________.
A) become worthless
B) require higher storage costs
C) require higher insurance costs
D) All statements are correct.
4) A high rate of inventory turnover indicates difficulty in selling inventory.
5) Inventory turnover measures the number of times a company sells its average level of merchandise
inventory during a period.
6) Companies try to manage their inventory levels such that they will have just enough inventory to meet
customer demand without investing large amounts of money in inventory or having it sit on the shelves
gathering dust.
7) Inventory turnover is computed by dividing average merchandise inventory by cost of goods sold.
8) Inventory turnover measures ________.
A) the days’ sales in inventory ratio
B) how rapidly merchandise inventory is purchased
C) how rapidly merchandise inventory is sold
D) the time period for inventory to become obsolete
9) Which of the following is the correct formula to calculate inventory turnover?
A) Inventory turnover = Cost of goods sold / Average merchandise inventory
B) Inventory turnover = Cost of goods sold × Average merchandise inventory
C) Inventory turnover = Cost of goods sold + Average merchandise inventory
D) Inventory turnover = Cost of goods sold – Average merchandise inventory
10) Which of the following is the correct formula to calculate average merchandise inventory?
A) Average merchandise inventory = (Beginning merchandise inventory – Ending merchandise
inventory) / 2
B) Average merchandise inventory = (Beginning merchandise inventory × Ending merchandise
inventory) / 2
C) Average merchandise inventory = (Beginning merchandise inventory / Ending merchandise inventory)
/ 2
D) Average merchandise inventory = (Beginning merchandise inventory + Ending merchandise
inventory) / 2
11) Wildflower, Inc. provided the following for 2019:
Cost of Goods Sold (Cost of sales)
$1,000,000
Beginning Merchandise Inventory
325,000
Ending Merchandise Inventory
630,000
Calculate the average merchandise inventory held by Wildflower, Inc. during the year.
A) $955,000
B) $477,500
C) $325,000
D) $630,000
12) Anderson Farms, Inc. provided the following for 2018:
Cost of Goods Sold (Cost of sales)
$1,300,000
Beginning Merchandise Inventory
340,000
Ending Merchandise Inventory
630,000
Calculate the company’s inventory turnover ratio for the year. (Round your answer to two decimal
places.)
A) 3.82 times per year
B) 2.68 times per year
C) 2.06 times per year
D) 1.34 times per year
13) What does inventory turnover measure? What does a high rate of inventory turnover indicate?
14) What does inventory turnover measure? What does a low rate of inventory turnover indicate?
15) The days’ sales in inventory ratio is calculated by dividing cost of goods sold by the average
merchandise inventory.
16) A higher days‘ sales in inventory is preferable.
17) A lower days’ sales in inventory for Samson, Inc., when compared to other companies, indicates that it
is ________.
A) selling its inventory more quickly
B) spending more on inventory storage
C) incurring higher insurance costs
D) holding excess obsolete inventory
18) Which of the following is the correct formula to calculate days’ sales in inventory?
A) Days’ sales in inventory = 365 days × Inventory turnover
B) Days’ sales in inventory = 365 days + Inventory turnover
C) Days’ sales in inventory = 365 days / Inventory turnover
D) Days’ sales in inventory = 365 days – Inventory turnover
19) Kelley, Inc. provided the following account balances for 2018:
Cost of Goods Sold (Cost of sales)
$1,300,000
Beginning Merchandise Inventory
330,000
Ending Merchandise Inventory
350,000
Calculate the average number of days that inventory was held by Kelley, Inc. during 2018. (Assume 365
days in a year. Round your intermediate calculations and final answer to two decimal places.)
A) 191.10 days
B) 98.38 days
C) 92.64 days
D) 95.55 days
20) Smithson Electrical Fixtures reported the following income statement for the year ended December 31,
2019.
Smithson Electrical Fixtures
Income Statement
Year Ended December 31, 2019
Sales Revenue
$258,000
Cost of Goods Sold
Beginning Merchandise Inventory
Net Cost of Purchases
Cost of Goods Available for Sale
Less: Ending Merchandise Inventory
Cost of Goods Sold:
150,500
Gross Profit
107,500
Operating Expenses
87,200
Net Income
$ 20,300
Compute inventory turnover rate for the year. (Round to two decimal places.)
Compute days’ sales in inventory for the year. (Round to two decimal places.)