Chapter 06 Inventories and Cost of Sales
MULTIPLE CHOICE QUESTIONS
1)
Goods in transit are automatically included in inventory regardless of whether title has passed to
the buyer.
A)
True
B)
False
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.
A)
True
B)
False
3)
If obsolete or damaged goods can be sold, they will be included in inventory at their original cost.
A)
True
B)
False
4)
If the seller is responsible for paying freight charges, then ownership of inventory passes when
goods arrive at their destination.
A)
True
B)
False
5)
Net realizable value for damaged or obsolete goods is sales price less the cost of making the sale.
A)
True
B)
False
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.
A)
True
B)
False
7)
One application of internal control when taking a physical count of inventory is the use of
pre-numbered inventory tickets.
A)
True
B)
False
8)
Incidental costs for acquiring merchandise inventory, such as import duties, freight, storage, and
insurance, should not be added to the cost of inventory.
A)
True
B)
False
9)
The Inventory account is a controlling account for the inventory subsidiary ledger that contains a
separate record for each separate product.
A)
True
B)
False
10)
Most companies do not take a physical count of inventory each year, but rather rely on inventory
records to determine the inventory value.
A)
True
B)
False
11)
The expense recognition (matching) principle is used to determine how much of the cost of goods
available for sale is deducted from sales and how much is carried forward as inventory.
A)
True
B)
False
12)
The consistency concept allows a company to use different accounting methods from period to
period in order to maximize profits.
A)
True
B)
False
13)
A company must disclose any change in its inventory costing method in its financial statements.
A)
True
B)
False
14)
Whether purchase costs are rising or falling, FIFO always will yield the highest gross profit and net
income.
A)
True
B)
False
15)
An advantage of the weighted average inventory method is that it tends to smooth out erratic
changes in costs.
A)
True
B)
False
16)
In a period of rising purchase costs, LIFO usually gives a lower taxable income and therefore,
yields a tax advantage.
A)
True
B)
False
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.
A)
True
B)
False
18)
The LIFO method of inventory valuation can result in a company’s ending inventory being valued
at less than the inventory’s replacement cost because LIFO inventory leaves the oldest costs in
inventory.
A)
True
B)
False
19)
The full disclosure principle requires that the notes to the financial statements report any change in
the method of accounting for inventory.
A)
True
B)
False
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.
A)
True
B)
False
21)
According to IRS guidelines, companies may use FIFO for financial reporting and LIFO for tax
reporting.
A)
True
B)
False
22)
An error in the period-end inventory balance will cause an error in the calculation of cost of goods
sold.
A)
True
B)
False
23)
Errors in the period-end inventory balance only affect the current period’s records and financial
statements.
A)
True
B)
False
24)
An inventory error is sometimes said to be self-correcting because it yields an offsetting error in
the next period.
A)
True
B)
False
25)
An understatement of the ending inventory balance will overstate cost of goods sold and understate
net income.
A)
True
B)
False
26)
Overstating beginning inventory will understate cost of goods sold and net income.
A)
True
B)
False
27)
An understatement of ending inventory will cause an understatement of assets and equity on the
balance sheet.
A)
True
B)
False
28)
An overstatement of ending inventory will cause an overstatement of assets and an understatement
of equity on the balance sheet.
A)
True
B)
False
29)
A merchandiser’s ability to pay its short-term obligations depends on many factors including how
quickly it sells its merchandise inventory.
A)
True
B)
False
30)
The inventory turnover ratio is computed by dividing cost of goods sold by average merchandise
inventory.
A)
True
B)
False
31)
The days’ sales in inventory ratio is computed by dividing ending inventory by cost of goods sold
and multiplying the result by 365.
A)
True
B)
False
32)
The simple rule for inventory turnover is that a low ratio is preferable.
A)
True
B)
False
33)
It can be expected that companies selling perishable goods have a higher inventory turnover than
companies selling nonperishable goods.
A)
True
B)
False
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.
A)
True
B)
False
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.
A)
True
B)
False
36)
Determining the unit costs assigned to inventory items is one of the most important decisions in
accounting for inventory.
A)
True
B)
False
37)
When units are purchased at different costs over time, determining the cost per unit assigned to
inventory items is simple.
A)
True
B)
False
38)
LIFO assumes that inventory costs flow in the order incurred.
A)
True
B)
False
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.
A)
True
B)
False
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.
A)
True
B)
False
41)
The costs of goods purchased will vary under the different inventory methods of specific
identification, FIFO, LIFO, and weighted average.
A)
True
B)
False
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.
A)
True
B)
False
43)
Under FIFO, the most recent costs are assigned to ending inventory.
A)
True
B)
False
44)
The choice of an inventory valuation method has little to no impact on gross profit and cost of
sales.
A)
True
B)
False
45)
In applying the lower of cost or market method to inventory valuation, market is defined as the
current replacement cost.
A)
True
B)
False
46)
In applying the lower of cost or market method to inventory valuation, market is defined as the
current selling price.
A)
True
B)
False
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.
A)
True
B)
False
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.
A)
True
B)
False
49)
Accounting principles require that inventory be reported at the market value (cost) of replacing
inventory when cost is lower than market value.
A)
True
B)
False
50)
Accounting principles require that inventory be reported at the market value (cost) of replacing
inventory when market value is lower than cost.
A)
True
B)
False
51)
A company’s total cost of 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.
A)
True
B)
False
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.
A)
True
B)
False
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.
A)
True
B)
False
54)
The retail inventory method estimates the cost of ending inventory by applying the gross profit
ratio to net sales.
A)
True
B)
False
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.
A)
True
B)
False
56)
The reliability of the gross profit method depends on a good estimate of the gross profit ratio.
A)
True
B)
False
57)
In the retail inventory method of inventory valuation, the retail amount of inventory refers to its
dollar amount measured using selling prices of inventory items.
A)
True
B)
False
58)
To avoid the time-consuming process of taking an inventory each year, most companies use the
gross profit method to estimate ending inventory.
A)
True
B)
False
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.
A)
True
B)
False
60)
Damaged and obsolete goods that can be sold:
A)
Are assigned a value of zero.
B)
Are included in inventory at their full cost.
C)
Should be disposed of immediately.
D)
Are included in inventory at their net realizable value.
E)
Are never counted as inventory.