Financial Accounting, 10e (Libby)
Chapter 7 Reporting and Interpreting Cost of Goods Sold and Inventory
1) The use of raw materials in the manufacturing process is reported as an operating expense on
the income statement.
2) Manufactured goods transferred out of work in process become part of finished goods
inventory.
3) Generally, inventory inspection costs are reported as operating expenses on the income
statement.
4) Direct material costs are a component of the cost of the work in process inventory.
5) A decrease in the merchandise inventory account occurs when units of inventory purchased
are greater than units of goods sold.
6) Goods available for sale are allocated to both ending inventory and cost of goods sold.
7) The LIFO inventory method will result in the lowest gross profit in comparison with the FIFO
method when unit costs are decreasing.
8) The FIFO inventory method will result in the lowest net income in comparison with the LIFO
method when costs are decreasing.
9) A company can use the LIFO inventory method for income tax purposes and the FIFO
inventory method for financial reporting purposes during a given year.
10) A grocery store would likely use the specific identification inventory costing method for
most of the items in its inventory.
11) The FIFO inventory method allocates the earliest inventory purchase costs to ending
inventory.
12) The LIFO inventory method allocates the oldest inventory purchase costs to cost of goods
sold.
13) During periods of decreasing unit costs, use of the LIFO inventory method will result in a
higher amount of ending inventory than will the use of the FIFO inventory method.
14) During periods of increasing unit costs, the LIFO inventory method will result in a higher
inventory amount on the balance sheet and a lower net income than will the FIFO inventory
method.
15) During periods of increasing unit costs, the LIFO inventory method results in lower income
taxes.
16) During periods of decreasing unit costs, use of the FIFO inventory method results in lower
gross profit than would use of the LIFO method.
17) The lower of cost or net realizable value rule is used due to the conservatism constraint, and
therefore an inventory calculation may result in a departure from the historical cost principle.
18) The journal entry to write down inventory under the lower of cost or net realizable value rule
results in a decrease in both ending inventory and cost of goods sold.
19) The journal entry to write down inventory under the lower of cost or net realizable value rule
results in a debit to cost of goods sold and a credit to inventory.
20) The journal entry to write down inventory under the lower of cost or net realizable value rule
results in a credit to cost of goods sold and a debit to inventory.
21) Inventory turnover is calculated as cost of goods sold divided by average inventory.
22) Inventory turnover under LIFO is greater than inventory turnover under FIFO when unit
costs are increasing.
23) The average days to sell inventory decreases as inventory turnover increases.
24) An increase in inventory is subtracted from net income when determining cash flow from
operating activities.
25) An increase in accounts payable is added to net income when determining cash flows from
operating activities.
26) When there is a $3,000,000 decrease in inventory and a $2,000,000 decrease in accounts
payable, cash flow from operating activities increases by $1,000,000.
27) The LIFO Reserve represents the excess of FIFO inventory costs over LIFO inventory costs.
28) In a period of increasing costs, the LIFO Reserve would be deducted from the ending
inventory under LIFO costing to convert it to ending inventory under FIFO costing.
29) An understatement of ending inventory results in an overstatement of net income.
30) In the year of an overstatement of ending inventory, cost of goods sold will be understated
and net income will be overstated.
31) An overstatement of the 2018 ending inventory results in an understatement of net income
during 2019.
32) LIFO liquidation results when a company has a lower level of inventory at the end of the
year than it had at the beginning of the year.
33) An overstatement of the 2018 ending inventory results in an overstatement of stockholders’
equity as of the end of 2019.
34) An overstatement of the 2019 ending inventory results in an overstatement of stockholders’
equity as of the end of 2019.
35) A company reported the following information for its most recent year of operation:
purchases, $100,000; beginning inventory, $20,000; and cost of goods sold, $110,000. How
much was the company’s ending inventory?
A) $10,000.
B) $20,000.
C) $15,000.
D) $30,000.
36) Coleman Company has provided the following information: beginning inventory, $100,000;
cost of goods sold, $450,000; and ending inventory, $80,000. How much were Coleman’s
inventory purchases?
A) $450,000.
B) $410,000.
C) $430,000.
D) $420,000.
37) Which of the following statements is incorrect?
A) Ending inventory exceeds beginning inventory when purchases are greater than cost of goods
sold.
B) Cost of goods sold exceeds purchases when ending inventory is less than beginning
inventory.
C) Cost of goods available for sale will always be equal to or greater than cost of goods sold.
D) Ending inventory is greater than beginning inventory when purchases are less than cost of
goods sold.
38) Which of the following costs is not included as inventory on the balance sheet?
A) Raw materials to be used in the manufacturing process.
B) Work in process.
C) Finished goods.
D) Freight-out costs for finished goods sent to retailers.
39) Which of the following costs will not affect cost of goods sold?
A) Inventory inspection costs.
B) Inventory preparation costs.
C) Inventory-related selling costs.
D) Freight charges incurred to bring inventory to the warehouse.
40) Which of the following would not be a component of the year-end inventory balance?
A) Freight-in costs.
B) Inventory inspection costs.
C) Inventory preparation costs.
D) Inventory-related selling costs.
41) Which of the following is correct?
A) The raw materials inventory account is used to record inventory purchased by a retailer for
resale.
B) Work in process is an expense account used by a manufacturing company.
C) Finished goods is an asset account used by a manufacturing company to record the cost of
inventory ready for sale.
D) Retailers use a purchases account to record raw materials inventory.
42) Which of the following statements is incorrect for a manufacturing entity?
A) Inventory is transferred from work in process to finished goods.
B) Raw materials used are transferred to work in process.
C) Finished goods inventory eventually becomes cost of goods sold.
D) Cost of goods sold is recognized when the manufacturing process is complete.
43) A company provided the following data: sales, $500,000; beginning inventory, $40,000;
ending inventory, $45,000; and gross profit, $150,000. What was the amount of inventory
purchased during the year?
A) $385,000.
B) $355,000.
C) $345,000.
D) $145,000.
44) Lauer Corporation has provided the following information about one of its laptop computers:
Date
Transaction
Number
of Units
Cost per Unit
1/1
Beginning Inventory
100
$
800
5/5
Purchase
200
$
900
8/10
Purchase
300
$
1,000
10/15
Purchase
200
$
1,100
During the year, Lauer sold 750 laptop computers.
What was ending inventory using the FIFO cost flow assumption?
A) $60,000.
B) $55,000.
C) $45,000.
D) $40,000.
45) Lauer Corporation provided the following information about one of its laptop computers:
Date
Transaction
Number
of Units
Cost per Unit
1/1
Beginning Inventory
100
$
800
5/5
Purchase
200
$
900
8/10
Purchase
300
$
1,000
10/15
Purchase
200
$
1,100
During the year, Lauer sold 750 laptop computers.
What was cost of goods sold using the FIFO cost flow assumption?
A) $725,000.
B) $740,000.
C) $735,000.
D) $720,000.
46) Lauer Corporation has provided the following information about one of its laptop computers:
Date
Transaction
Number
of Units
Cost per Unit
1/1
Beginning Inventory
100
$
800
5/5
Purchase
200
$
900
8/10
Purchase
300
$
1,000
10/15
Purchase
200
$
1,100
During the year, Lauer sold 750 laptop computers.
What was cost of goods sold using the LIFO cost flow assumption?
A) $725,000.
B) $740,000.
C) $735,000.
D) $720,000.
47) Lauer Corporation has provided the following information about one of its laptop computers:
Date
Transaction
Number
of Units
Cost per Unit
1/1
Beginning Inventory
100
$
800
5/5
Purchase
200
$
900
8/10
Purchase
300
$
1,000
10/15
Purchase
200
$
1,100
During the year, Lauer sold 750 laptop computers.
What was ending inventory using the LIFO cost flow assumption?
A) $40,000.
B) $45,000.
C) $55,000.
D) $60,000.
48) Under the FIFO cost flow assumption during a period of rising costs, which of the following
is false?
A) Income tax expense will be higher under FIFO than under LIFO.
B) Net income will be higher under FIFO than under LIFO.
C) Ending inventory will be lower under FIFO than under LIFO.
D) Cost of goods sold will be lower under FIFO than under LIFO.