Accounting Chapter 6 False explanation Companies Are Required Record Adjustment When

Financial Accounting, 5e (Spiceland)

Chapter 6 Inventory and Cost of Goods Sold

1) Inventory is usually reported as a long-term asset in the balance sheet.

2) Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported

in the income statement.

3) Merchandising companies purchase inventories that are primarily in finished form for resale to

customers.

4) Cost of goods sold is an expense reported in the income statement and represents the cost of

inventory sold during the period.

5) If a company has beginning inventory of $15,000, purchases during the year of $75,000, and

ending inventory of $20,000, cost of goods sold equals $70,000.

6) A multiple-step income statement reports multiple levels of profitability, such as gross profit,

operating income, income before income taxes, and net income.

7) Gross profit equals net sales of inventory less cost of goods sold.

8) Sales revenue minus cost of goods sold is referred to as operating income.

9) Income before income taxes equals operating income plus nonoperating revenues less

nonoperating expenses.

10) If a company has ending inventory of $25,000, purchases during the year of $95,000, and

beginning inventory of $30,000, cost of goods sold equals $90,000.

11) Companies are not allowed to report inventory costs by assuming which units of inventory are

sold and which units still remain on hand.

12) Using the first-in, first-out method (FIFO), the first units purchased are assumed to be the first

ones sold.

13) Using the weighted-average cost method, the average cost of inventory is calculated as the

average unit cost of inventory purchased during the year.

14) Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and

cost of goods sold.

15) For most companies, actual physical flow of their inventory follows LIFO.

16) During periods of rising costs, FIFO generally results in a higher ending inventory balance.

17) During periods of rising costs, FIFO generally results in a higher cost of goods sold.

18) During periods of rising costs, LIFO generally results in a higher cost of goods sold.

19) During periods of rising costs, LIFO generally results in a higher ending inventory balance.

20) Accountants often call FIFO the balance-sheet approach because the amount it reports for

ending inventory better approximates the current cost of inventory.

21) One of the primary benefits of using FIFO when inventory costs are rising is that it results in

greater tax savings.

22) The LIFO conformity rule requires a company that uses LIFO for tax reporting to use FIFO for

financial reporting.

23) The LIFO difference (reserve) is the additional amount of inventory a company would report if

it used FIFO instead of LIFO.

24) Companies can choose which inventory cost method they prefer, even if the method does not

match the actual physical flow of goods.

25) Companies are allowed to switch each year from one inventory cost method to another,

depending on economic circumstances.

26) Using a perpetual inventory system, the purchase of inventory is recorded with a debit to the

Purchases account, which is a temporary account closed to cost of goods sold at the end of the

period.

27) For inventory that is shipped FOB destination, title transfers from the seller to the buyer once

the seller ships the inventory.

28) For inventory that is shipped FOB shipping point, title transfers from the seller to the buyer

once the seller ships the inventory.

29) Freight-in is included in the cost of inventory.

30) At the time inventory is sold, cost of goods sold is recorded under the perpetual inventory

system.

31) Using LIFO, the amount reported for ending inventory does not differ depending on whether a

company uses a periodic system or a perpetual system.

32) When the value of inventory falls below its cost, companies other than those that use LIFO

have the option of recording the inventory at cost or the lower net realizable value.

33) When the net realizable value of inventory falls below its cost, no adjustment to the accounting

records is needed.

34) The adjustment to write down inventory from cost to its lower net realizable value includes a

debit to Cost of Goods Sold and a credit to Inventory.

35) The use of the lower of cost and net realizable value to report inventory is an example of

conservatism in financial reporting.

36) The inventory turnover ratio equals cost of goods sold divided by average inventory.

37) Generally, a higher inventory turnover ratio reflects positively on a company’s ability to

manage its inventory.

38) A company that has average inventory of $500 and cost of goods sold of $2,000 would have an

inventory turnover ratio of 0.25.

39) The gross profit ratio measures the amount by which the sale price of inventory exceeds its

cost per dollar of sales.

40) Generally, a lower gross profit ratio reflects positively on a company’s ability to manage its

inventory.

41) A periodic inventory system does not continually modify inventory amounts, but instead

adjusts for purchases and sales of inventory at the end of the reporting period based on a physical

count of inventory on hand.

42) Overstating ending inventory in the current year causes net income in the current year to be

overstated.

43) Understating ending inventory in the current year causes cost of goods sold in the current year

to be understated.

44) Companies that purchase inventories that are primarily in finished form for resale to customers

are known as:

A) Delivering companies.

B) Service companies.

C) Merchandising companies.

D) Manufacturing companies.

45) One of the major differences between service companies and retail or manufacturing

companies is that retailers and manufacturers must account for:

A) Current assets.

B) Inventory.

C) Selling expenses.

D) Deferred revenue.

46) The cost of unsold inventory at the end of the year is classified as a(n) ________ in the

________.

A) Asset; Balance sheet

B) Expense; Income statement

C) Liability; Balance sheet

D) Revenue; Income statement

47) What type of company purchases raw materials and makes goods to sell?

A) Wholesaler.

B) Retailer.

C) Merchandiser.

D) Manufacturer.

48) A manufacturer’s inventory consists of what type of inventory?

A) Raw materials.

B) Finished goods.

C) Work-in-process.

D) All of the other answers are included in a manufacturer’s inventory.

49) For a manufacturing company, the combination of the cost of raw materials, direct labor, and

overhead for inventory that has not yet completed production is known as:

A) Work-in-process.

B) Finished goods.

C) Merchandise.

D) Retail goods.

50) Inventory does not include:

A) Materials used in the production of goods to be sold.

B) Assets intended to be sold in the normal course of business.

C) Equipment used in the manufacturing of assets for sale.

D) Assets currently in production for normal sales.

51) The cost of the goods that a company sold during a period is shown in its financial statements

as ________ and the cost of the goods that a company still has on hand at the end of the year is

shown in the financial statements as ________.

A) Cost of goods sold; inventory

B) Goods on hand; inventory expense

C) Inventory; cost of goods sold

D) Sales revenue; cost of goods sold

52) Cost of Goods Sold is:

A) An asset account.

B) A revenue account.

C) An expense account.

D) A permanent equity account.

53) The balance of the Cost of Goods Sold account at the end of the year represents:

A) The cost of inventory not sold in the current year.

B) The total sales revenue to customers.

C) The cost of inventory sold in the current year.

D) Total purchases of inventory for the year.

54) The cost of inventory sold during the current year is classified as a(n) ________ in the

________.

A) Asset; Balance sheet

B) Expense; Income statement

C) Liability; Balance sheet

D) Revenue; Income statement

55) The largest expense on a retailer’s income statement is typically:

A) Salaries.

B) Cost of goods sold.

C) Income tax expense.

D) Depreciation expense.

56) Cost of goods sold equals:

A) Beginning inventory – net purchases + ending inventory.

B) Beginning inventory – accounts payable – net purchases.

C) Net purchases + ending inventory – beginning inventory.

D) Beginning inventory + net purchases – ending inventory.

57) A company has beginning inventory for the year of $12,000. During the year, the company

purchases inventory for $150,000 and ends the year with $20,000 of inventory. The company will

report cost of goods sold equal to:

A) $150,000.

B) $158,000.

C) $142,000.

D) $170,000.

58) Tyler Toys has beginning inventory for the year of $18,000. During the year, Tyler purchases

inventory for $230,000 and has cost of goods sold equal to $233,000. Tyler’s ending inventory

equals:

A) $15,000.

B) $18,000.

C) $21,000.

D) $19,000.

59) Beginning inventory is $40,000. Purchases of inventory during the year are $200,000. Ending

inventory is $100,000. What is cost of goods sold?

A) $340,000.

B) $240,000.

C) $260,000.

D) $140,000.

60) Beginning inventory is $30,000. Purchases of inventory during the year are $50,000. Cost of

goods sold is $60,000. What is ending inventory?

A) $20,000.

B) $30,000.

C) $10,000.

D) $50,000.

61) Purchases of inventory during the year were $450,000. At the end of the year, ending inventory

is $200,000 and cost of goods sold is $400,000. What was beginning inventory?

A) $250,000.

B) $300,000.

C) $150,000.

D) $100,000.