Financial and Managerial Accounting, 8e (Wild)
Chapter 5 Inventories and Cost of Sales
1) Goods in transit are automatically included in inventory regardless of whether title has passed
to the buyer.
2) Goods on consignment are goods shipped by their owner, called the consignor, to another
party called the consignee. The consignee sells goods for the owner.
3) If obsolete or damaged goods can be sold, they will be included in inventory at their original
cost.
4) If the seller is responsible for paying freight charges, then ownership of inventory passes when
goods arrive at their destination.
5) Net realizable value for damaged or obsolete goods is sales price less the cost of making the
sale.
6) The cost of an inventory item includes its invoice cost minus any discount, plus any added or
incidental costs necessary to put it in a place and condition for sale.
7) One application of internal control when taking a physical count of inventory is the use of pre-
numbered inventory tickets.
8) Incidental costs for acquiring merchandise inventory, such as import duties, freight, storage,
and insurance, should not be added to the cost of inventory.
9) The physical count of inventory is used to adjust the Inventory account balance to the actual
inventory available.
10) Most companies do not take a physical count of inventory each year, but rather rely on
inventory records to determine the inventory value.
11) According to the expense recognition principle, inventory costs are expensed as cost of
goods sold when inventory is sold.
12) The weighted average method matches the costs of inventory items with the revenue
generated by the sale of the inventory items.
13) Assuming items in inventory were purchased at different prices, the inventory cost method
used affects net income.
14) Whether purchase costs are rising or falling, FIFO always will yield the highest gross profit
and net income.
15) An advantage of the weighted average inventory method is that it tends to smooth out erratic
changes in costs.
16) In a period of rising purchase costs, LIFO usually gives a lower taxable income and
therefore, yields a tax advantage.
17) FIFO is preferred when purchase costs are rising and managers have incentives to report
higher income for reasons such as bonus plans, job security, and reputation.
18) The LIFO method of inventory costing best matches current costs with revenues.
19) The choice of costing method will impact both the balance sheet and income statement.
20) An advantage of FIFO is that it assigns the most recent costs to cost of goods sold, and does
a better job of matching current costs with revenues on the income statement.
21) According to IRS guidelines, companies may use FIFO for financial reporting and LIFO for
tax reporting.
22) An error in the ending inventory balance will cause an error in the calculation of cost of
goods sold.
23) Errors in the ending inventory balance only affect the current period’s records and financial
statements.
24) Understating ending inventory understates both current and total assets.
25) An understatement of the ending inventory balance will overstate cost of goods sold and
understate net income.
26) Overstating beginning inventory will understate cost of goods sold and net income.
27) An understatement of ending inventory will cause an understatement of assets and equity on
the balance sheet.
28) An overstatement of ending inventory will cause an overstatement of assets and an
understatement of equity on the balance sheet.
29) A merchandiser’s ability to pay its short-term obligations depends on many factors including
how quickly it sells its merchandise inventory.
30) The inventory turnover ratio is computed by dividing cost of goods sold by average
merchandise inventory.
31) The days’ sales in inventory ratio is computed by dividing ending inventory by cost of goods
sold and multiplying the result by 365.
32) The simple rule for inventory turnover is that a low ratio is preferable.
33) It can be expected that companies selling perishable goods have a higher inventory turnover
than companies selling nonperishable goods.
34) A company’s cost of goods sold was $15,500 and its average merchandise inventory was
$4,500. Its inventory turnover equals 3.4.
35) Underwood had cost of goods sold of $8 million and its ending inventory was $2 million.
Therefore, its days’ sales in inventory equals 25 days.
36) Determining the unit costs assigned to inventory items is one of the most important decisions
in accounting for inventory.
37) When units are purchased at different costs over time, determining the cost per unit assigned
to inventory items is simple.
38) LIFO assumes that inventory costs flow in the order incurred.
39) The assignment of costs to cost of goods sold and inventory using weighted average usually
yields different results depending on whether a perpetual or periodic system is used.
40) The FIFO inventory method assumes that costs for the latest units purchased are the first to
be charged to the cost of goods sold.
41) The cost flow method chosen must match the actual physical flow of the goods.
42) The assignment of costs to the cost of goods sold and to ending inventory using FIFO is the
same for both the perpetual and periodic inventory systems.
43) Under FIFO, the most recent costs are assigned to ending inventory.
44) The choice of an inventory valuation method has little to no impact on gross profit and cost
of sales.
45) In applying the lower of cost or market method to inventory valuation, market is defined as
the current replacement cost for LIFO.
46) In applying the lower of cost or market method to inventory valuation, market is defined as
the current selling price.
47) A company has inventory with a selling price of $451,000, a market value of $223,000, and a
cost of $241,000. According to the lower of cost or market, the inventory should be written down
to $223,000.
48) The lower of cost or market rule for inventory valuation is always applied to individual units
separately rather than to major categories of inventory or to the entire inventory.
49) Accounting principles require that inventory be reported at the market value (cost) of
replacing inventory when cost is lower than market value.
50) Accounting principles require that LIFO inventory be reported at the market value (cost) of
replacing inventory when market value is lower than cost.
51) A company’s total cost of FIFO inventory was $329,000 and its current replacement cost is
$307,000. Under the lower cost or market, the amount reported should be $329,000.
52) A company’s cost of inventory was $219,500. Due to phenomenal demand the market value
of its inventory increased to $221,700. This company should record the inventory at its market
value.
53) When LIFO is used with the periodic inventory system, cost of goods sold is assigned costs
from the most recent purchases at the point of each sale, rather than from the most recent
purchases for the period.
54) The retail inventory method estimates the cost of ending inventory by applying the gross
profit ratio to net sales.
55) The reasoning behind the retail inventory method is that if we can get a good estimate of the
cost-to-retail ratio, we can multiply ending inventory at retail by this ratio to estimate ending
inventory at cost.
56) The reliability of the gross profit method depends on a good estimate of the gross profit ratio.
57) In the retail inventory method of inventory valuation, the retail amount of inventory is
measured using selling prices of inventory items.
58) To avoid the time-consuming process of taking an inventory each year, most companies use
the gross profit method to estimate ending inventory.
59) Using the retail inventory method, if the cost to retail ratio is 70% and ending inventory at
retail is $145,000, then estimated ending inventory at cost is $207,143.
60) Damaged and obsolete goods that can be sold:
A) Are never counted as inventory.
B) Are included in inventory at their full cost.
C) Are included in inventory at their net realizable value.
D) Should be disposed of immediately.
E) Are assigned a value of zero.
61) Merchandise inventory includes:
A) All goods owned by a company and held for sale.
B) All goods in transit.
C) All goods on consignment.
D) Only damaged goods.
E) Only non-damaged goods.
62) Goods in transit are included in a purchaser’s inventory:
A) At any time during transit.
B) When the goods are shipped FOB shipping point.
C) When the supplier is responsible for freight charges.
D) If the goods are shipped FOB destination.
E) After the half-way point between the buyer and seller.
63) Consignment goods are:
A) Goods shipped by the owner to the consignee who sells the goods for the owner.
B) Reported in the consignee’s books as inventory.
C) Goods shipped to the consignor who sells the goods for the owner.
D) Not reported in the consignor’s inventory since they do not have possession of the inventory.
E) Always paid for by the consignee when they take possession.
64) Regardless of the inventory costing system used, cost of goods available for sale must be
allocated at the end of the period between
A) beginning inventory and net purchases during the period.
B) ending inventory and beginning inventory.
C) net purchases during the period and ending inventory.
D) ending inventory and cost of goods sold.
E) beginning inventory and cost of goods sold.
65) On December 31 of the current year, Plunkett Company reported an ending inventory
balance of $215,000. The following additional information is also available:
• Plunkett sold and shipped goods costing $38,000 to Savannah Enterprises on
December 28 with shipping terms of FOB shipping point. The goods were not
included in the ending inventory amount of $215,000.
• Plunkett purchased goods costing $44,000 on December 29. The goods were shipped
FOB destination and were received by Plunkett on January 2 of the following year.
The shipment was a rush order that was supposed to arrive by December 31. These
goods were included in the ending inventory balance of $215,000.
• Plunkett’s ending inventory balance of $215,000 included $15,000 of goods being
held on consignment from Carole Company. (Plunkett Company is the consignee.)
• Plunkett’s ending inventory balance of $215,000 did not include goods costing
$95,000 that were shipped to Plunkett on December 27 with shipping terms of FOB
destination and were still in transit at year-end.
Based on the above information, the amount that Plunkett should report in ending inventory on
December 31 is:
A) $194,000
B) $209,000
C) $200,000
D) $171,000
E) $156,000
66) Bedrock Company reported a December 31 ending inventory balance of $412,000. The
following additional information is also available:
• The ending inventory balance of $412,000 included $72,000 of consigned inventory
for which Bedrock was the consignor.
• The ending inventory balance of $412,000 included $22,000 of office supplies that
were stored in the warehouse and were to be used by the company’s supervisors and
managers during the coming year.
Based on this information, the correct balance for ending inventory on December 31 is:
A) $412,000
B) $340,000
C) $318,000
D) $362,000
E) $390,000