Chapter 8 Inventories: Measurement
c. $5,077.
d. $5,005.
1,000 x $7.20
$ 7,200
600 x $7.25
800 x $7.30
600 x $7.35
Available for sale: 3,000 units
$21,800
Average cost: $21,800 3,000 units
Ending inventory: $7.267 x 700 units
$5,087
Use the following to answer questions 58 and 59:
Texas Petrochemical reported the following April activity for its VC-30 lubricant, which had a balance
of 300 qts. @ $2.40 on April 1.
Purchases:
Sales:
Apr. 10
500 qts @ $2.50
Apr. 3
200 qts
Apr. 14
400 qts @ $2.60
Apr. 12
500 qts
Apr. 20
400 qts @ $2.65
Apr. 26
300 qts
58. The ending inventory assuming LIFO and a periodic inventory system is:
a. $1,580.
b. $1,510.
c. $1,575.
d. $1,470.
Chapter 8 Inventories: Measurement
Chapter 8 Inventories: Measurement
59. The ending inventory assuming LIFO and a perpetual inventory system is:
a. $1,545.
b. $1,470.
c. $1,580.
d. $1,510.
60. The use of LIFO in accounting for a firm’s inventory:
a. Usually matches the physical flow of goods through the business.
b. Is usually used for internal management purposes.
c. Usually provides a better match of expenses with revenues.
d. None of these answer choices is correct.
Chapter 8 Inventories: Measurement
61. In a period when costs are falling and inventory quantities are stable, the lowest taxable
income would be reported by using the inventory method of:
a. Weighted average.
b. LIFO.
c. Moving average.
d. FIFO.
62. The primary reason for the popularity of LIFO is that it:
a. Provides better matching of physical flow and cost flow.
b. Saves income taxes currently.
c. Simplifies recordkeeping.
d. Provides a permanent reduction of income taxes.
63. When reported in financial statements, a LIFO allowance account usually:
a. Is shown in the firm’s income statement.
b. Is added to LIFO cost to indicate what the inventory would cost on a FIFO basis.
c. Indicates the effect on income if LIFO were not used.
d. Shows the current rate of inflation for that asset.
64. If a company uses LIFO, a LIFO liquidation causes a company’s income taxes to increase:
a. When inventory purchase costs are rising.
b. When inventory purchase costs are declining.
c. Whether inventory purchase costs are declining or rising.
d. LIFO liquidations have no effect on a company’s income taxes.
Chapter 8 Inventories: Measurement
65. GG Inc. uses LIFO. GG disclosed that if FIFO had been used, inventory at the end of 2016
would have been $15 million higher than the difference between LIFO and FIFO at the end of
2015. Assuming GG has a 40% income tax rate:
a. Its reported cost of goods sold for 2016 would have been $9 million higher if it had used
FIFO rather than LIFO for its financial statements.
b. Its reported cost of goods sold for 2016 would have been $15 million higher if it had used
FIFO rather than LIFO for its financial statements.
c. Its reported net income for 2016 would have been $9 million higher if it had used FIFO
rather than LIFO for its financial statements.
d. Its reported net income for 2016 would have been $15 million higher if it had used FIFO
rather than LIFO for its financial statements.
66. HH Company uses LIFO. HH disclosed that if FIFO had been used, inventory at the end of
2016 would have been $20 million lower than the difference between LIFO and FIFO at the
end of 2015. Assuming HH has a 30% income tax rate:
a. Its reported cost of goods for 2016 would have been $14 million less if it had used FIFO
rather than LIFO for its financial statements.
b. Its reported cost of goods for 2016 would have been $20 million less if it had used FIFO
rather than LIFO for its financial statements.
c. Its reported cost of goods sold for 2016 would have been $14 million higher if it had used
FIFO rather than LIFO for its financial statements.
d. Its reported cost of goods sold for 2016 would have been $20 million higher if it had used
FIFO rather than LIFO for its financial statements.
Chapter 8 Inventories: Measurement
67. During 2016, WW Inc. reduced its LIFO eligible inventory quantities due to a problem with
its major supplier. The effect of this liquidation was to increase its cost of goods sold by
approximately $50 million. WW has a 40% income tax rate. If WW had not experienced
these supplier problems and the resulting liquidation:
a. Its 2016 net income would have been $30 million lower because inventory purchase
prices were rising.
b. Its 2016 net income would have been $30 million lower because inventory purchase
prices were declining.
c. Its 2016 net income would have been $30 million higher because inventory purchase
prices were rising.
d. Its 2016 net income would have been $30 million higher because inventory purchase
prices were declining.
Use the following to answer questions 68 and 69:
Thompson TV and Appliance reported the following in its 2016 financial statements:
2016
Sales
$420,000
Cost of goods sold:
Inventory, January 1
82,000
Net purchases
340,000
Goods available for sale
422,000
Inventory, December 31
86,000
Cost of goods sold
336,000
Gross profit
$ 84,000
68. Thompson’s 2016 gross profit ratio is:
a. 25%.
b. 19%.
c. 20%.
d. None of the above is correct.
Chapter 8 Inventories: Measurement
69. Thompson’s 2016 inventory turnover ratio is:
a. 3.91.
b. 4.00.
c. 4.88.
d. 5.00.
70. Robertson Corporation’s inventory balance was $22,000 at the beginning of the year and
$20,000 at the end. The inventory turnover ratio for the year was 6.0 and the gross profit ratio
40%. What were net sales for the year?
a. $126,000.
b. $200,000.
c. $120,000.
d. $210,000.
Chapter 8 Inventories: Measurement
Use the following to answer questions 71–73:
Anthony Thomas Candies (ATC) reported the following financial data for 2016 and 2015:
2016
2015
Sales
$305,000
$284,000
Sales returns and allowances
9,000
6,000
Net sales
$296,000
$278,000
Cost of goods sold:
Inventory, January 1
43,000
36,000
Net purchases
152,000
146,000
Goods available for sale
195,000
182,000
Inventory, December 31
57,000
43,000
Cost of goods sold
138,000
139,000
Gross profit
$158,000
$139,000
71. ATC’s gross profit ratio (rounded) in 2016 is:
a. 53.4%.
b. 51.9%.
c. 50.3%.
d. None of the above is correct.
72. ATC’s inventory turnover ratio for 2016 is:
a. 2.42.
b. 2.76.
c. 3.21.
d. None of the above is correct.
Chapter 8 Inventories: Measurement
73. The average days inventory for ATC (rounded) for 2016 is:
a. Less than 100 days.
b. 114 days
c. 132 days.
d. 151 days.
74. Dollar-value LIFO:
a. Starts with ending inventory measured at current costs and re-creates LIFO layers for
measuring inventory costs.
b. Increases the recordkeeping costs of LIFO.
c. Only is allowed for internal reporting purposes.
d. None of the above is correct.
75. Compared to dollar-value LIFO, unit LIFO is:
a. Less costly to implement.
b. Less susceptible to LIFO liquidation.
c. More costly to implement.
d. More concerned with cost indexes.
Chapter 8 Inventories: Measurement
76. Bond Company adopted the dollar-value LIFO inventory method on January 1, 2016. In
applying the LIFO method, Bond uses internal cost indexes and the multiple-pools approach.
The following data were available for Inventory Pool No. 3 for the two years following the
adoption of LIFO:
Ending Inventory
At Current At Base
Year Cost Year Cost Cost Index
1/1/16 $300,000 $300,000 1.00
12/31/16 345,600 320,000 1.08
12/31/17 420,000 350,000 1.20
Under the dollar-value LIFO method, the inventory at December 31, 2017, should be
a. $357,600.
b. $350,000.
c. $351,600.
d. None of these answer choices is correct.
Use the following to answer questions 77–79:
On January 1, 2016, Badger Inc. adopted the dollar-value LIFO method. The inventory cost on this
date was $100,000. The 2016 ending inventory, valued at year-end costs, was $126,000. The relative
cost index for this inventory in 2016 was 1.05.
77. What inventory balance should Badger report on its 12/31/16 balance sheet?
a. $126,000
b. $121,000
c. $120,000
d. $100,000
Chapter 8 Inventories: Measurement
78. Suppose that Badger’s 2017 ending inventory, valued at year-end costs, was $143,000 and that
the relative cost index for this inventory in 2017 was 1.10. In determining the inventory
balance should Badger report in its 12/31/17 balance sheet:
a. An additional layer of $23,000 is added to the 1/1/17 balance.
b. An additional layer of $22,000 is added to the 1/1/17 balance.
c. An additional layer of $11,000 is added to the 1/1/17 balance.
d. None of the above is correct.
79. Suppose that Badger’s 2018 ending inventory, valued at year-end costs, was $153,600 and that
the relative cost index for this inventory in 2018 was 1.20. What inventory balance would
Badger report on its 12/31/18 balance sheet?
a. $128,000.
b. $129,800.
c. $153,600.
d. None of these answer choices is correct.
80. Ramen Inc. adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had a cost
inventory of $600,000. Its inventory as of December 31, 2016, was $667,800 at year-end costs
and the cost index was 1.06. What was DVL inventory on December 31, 2016?
a. $630,000.
b. $631,800.
c. $636,000.
d. None of the above is correct.
Chapter 8 Inventories: Measurement
81. Udon Inc. adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory
of $700,000. Its inventory as of December 31, 2016, was $777,000 at year-end costs and the
cost index was 1.05. What was DVL inventory on December 31, 2016?
a. $735,000.
b. $740,000.
c. $742,000.
d. $777,000.
Chapter 8 Inventories: Measurement
82. Linguini Inc. adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an
inventory of $800,000. Its inventory as of December 31, 2016, was $811,200 at year-end costs
and the cost index was 1.04. What was DVL inventory on December 31, 2016?
a. $780,000.
b. $800,000.
c. $811,200.
d. $832,000.
83. Buckeye Corporation adopted dollar-value LIFO on January 1, 2016, when the inventory
value was $500,000 and the cost index was 1.0. On December 31, 2016, the inventory value at
year-end costs was $535,000 and the cost index was 1.06. Buckeye would report a LIFO
inventory of:
a. $504,717.
b. $530,000.
c. $505,000.
d. $533,019.
Chapter 8 Inventories: Measurement
84. Tiger Inc. adopted dollar-value LIFO on January 1, 2016, when the inventory value was
$360,000 and the cost index was 1.25. On December 31, 2016, the inventory was valued at
year-end cost of $395,000 and the cost index was 1.30. Tiger would report a LIFO inventory
of:
a. $410,800.
b. $374,400.
c. $379,808.
d. $380,600.
85. A company that prepares its financial statements according to International Financial
Reporting Standards can use each of the following inventory valuation methods except:
a. Average cost.
b. FIFO.
c. LIFO.
d. All of these methods can be used.
Chapter 8 Inventories: Measurement
Matching Pair Questions
86. Listed below are 5 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Periodic inventory system
Adjusts inventory at the end of the period.
____
2. LIFO conformity rule
Allocated between ending inventory and cost
of goods sold.
____
3. Net purchases
Reduced by discounts taken under both gross
and net methods.
____
4. Finished goods
Inventory ready for sale.
____
5. Cost of Goods available for sale
LIFO must be used for financial reporting if
elected for taxes.
____
Answer:
TERM
PHRASE
1. Periodic inventory system
Adjusts inventory at the end of the period.
2. LIFO conformity rule
Allocated between ending inventory and cost
of goods sold.
3. Net purchases
Reduced by discounts taken under both gross
and net methods.
4. Finished goods
Inventory ready for sale.
5. Cost of Goods available for sale
LIFO must be used for financial reporting if
elected for taxes.
Chapter 8 Inventories: Measurement
87. Listed below are 5 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. LIFO liquidation
Considered a product cost.
____
2. LIFO pools
Continuously records changes in inventory.
____
3. Perpetual inventory system
Captured by FIFO for perishable products.
____
4. Freight-in
Reduces the quality of current period earnings
information.
____
5. Physical flow
Units grouped according to similarities.
____
Answer:
TERM
1. LIFO liquidation
Considered a product cost.
2. LIFO pools
Continuously records changes in inventory.
3. Perpetual inventory system
Captured by FIFO for perishable products.
4. Freight-in
Reduces the quality of current period earnings
information.
5. Physical flow
Units grouped according to similarities.
Chapter 8 Inventories: Measurement
88. Listed below are 5 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Consignment
Goods are transferred to another party but title
remains with transferor.
____
2. FIFO
Cost of goods available for sale less ending
inventory.
____
3. LIFO
Items sold are assumed to come from a mixture of
goods acquired during the period.
____
4. Average cost
Items sold are assumed to be those acquired first.
____
5. Cost of goods sold
Items sold are assumed to be those acquired last.
____
TERM
1. Consignment
Goods are transferred to another party but title remains
with transferor.
2. FIFO
Cost of goods available for sale less ending inventory.
3. LIFO
Items sold are assumed to come from a mixture of
goods acquired during the period.
4. Average cost
Items sold are assumed to be those acquired first.
5. Cost of goods sold
Items sold are assumed to be those acquired last.
Chapter 8 Inventories: Measurement
89. Listed below are 5 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. F.o.b. shipping point
Legal title passes when goods are delivered to
common carrier.
____
2. Cost flow assumption
Legal title passes when goods arrive at
customer location.
____
3. Inventory cut-off
Not required to correspond to actual product
flow.
____
4. F.o.b. destination
Making sure goods in transit are properly
accounted for.
____
5. Specific identification method
Not feasible for many types of products.
____
Answer:
TERM
1. F.o.b. shipping point
Legal title passes when goods are delivered to
common carrier.
2. Cost flow assumption
Legal title passes when goods arrive at customer
3. Inventory cut-off
Not required to correspond to actual product
flow.
4. F.o.b. destination
Making sure goods in transit are properly
accounted for.
5. Specific identification method
Not feasible for many types of products.
Chapter 8 Inventories: Measurement
90. Listed below are 5 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Net method
Purchase discounts not taken are considered interest
expense.
____
2. Specific identification
Purchase discounts not taken are included in
inventory.
____
3. Gross method
1 – (Cost of goods sold Net sales).
____
4. FIFO
Products that are not yet complete.
____
5. Gross profit ratio
Most recent purchases will be included in ending
inventory.
____
Answer:
TERM
1. Net method
Purchase discounts not taken are considered interest
expense.
2. Specific identification
inventory.
1 – (Cost of goods sold Net sales).
4. FIFO
Products that are not yet complete.
5. Gross profit ratio
Most recent purchases will be included in ending
inventory.
91. Listed below are 5 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Cost index
Most recent purchases will be included in cost of
goods sold.
____
2. Consumer Price Index
Could be used instead of an internally generated index
in dollar-value LIFO computations.
____
3. Specific identification
The cost of components purchased from other
manufacturers.
____
4. Raw materials
Used to convert ending inventory at year-end cost to
base year cost.
____
5. LIFO
Method not feasible for most inventories.
____
Answer:
TERM
1. Cost index
Most recent purchases will be included in cost of goods
sold.
2. Consumer Price Index
Could be used instead of an internally generated index
3. Specific identification
The cost of components purchased from other
manufacturers.
4. Raw materials
Used to convert ending inventory at year-end cost to
base year cost.
5. LIFO
Method not feasible for most inventories.