Chapter 8 Inventories: Measurement
True/False Questions
1. Physical counts of inventory are never made with perpetual inventory systems.
2. The main difference between perpetual and periodic inventory systems is the timing of the
allocation of costs between inventory and cost of goods sold.
3. LIFO periodic and LIFO perpetual always produce the same dollar amounts for ending
inventory.
4. FIFO periodic and FIFO perpetual always produce the same dollar amounts for cost of goods
sold.
5. Cost of goods on consignment is included in the consignee’s inventory until sold.
6. Shipping charges on outgoing goods are included in either cost of goods sold or selling
expenses.
7. Net purchases are reduced for discounts taken whether the net method is used or the gross
method is used.
8. The choice of cost flow assumption (FIFO, LIFO, or average) does not depend on the actual
physical flow of the product.
9. Inventory costing methods are merely means by which costs are allocated between ending
inventory and cost of goods sold.
10. During periods of falling prices, LIFO ending inventory will be less than FIFO ending
inventory.
11. LIFO usually provides a better match of revenue and expense than does FIFO.
12. Unit LIFO is more costly to implement than dollar-value LIFO.
13. LIFO liquidation profits occur when inventory quantity declines and costs are rising.
14. The gross profit ratio is calculated by dividing gross profit by average inventory.
15. Dollar-value LIFO eliminates the risk of LIFO liquidations.
16. A company that prepares its financial statements according to International Financial
Reporting Standards can use all of the same inventory valuation methods as a company that
prepares its statements under U.S. GAAP.
Chapter 8 Inventories: Measurement
Multiple Choice Questions
17. In a perpetual inventory system, the cost of purchases is debited to:
a. Purchases.
b. Cost of goods sold.
c. Inventory.
d. Accounts payable.
18. In a periodic inventory system, the cost of purchases is debited to:
a. Purchases.
b. Cost of goods sold.
c. Inventory.
d. Accounts payable.
19. In a perpetual inventory system, the cost of inventory sold is:
a. Debited to accounts receivable.
b. Credited to cost of goods sold.
c. Debited to cost of goods sold.
d. Not recorded at the time goods are sold.
20. In a periodic inventory system, the cost of inventories sold is:
a. Debited to accounts receivable.
b. Credited to cost of goods sold.
c. Debited to cost of goods sold.
d. Not recorded at the time goods are sold.
Chapter 8 Inventories: Measurement
21. The inventory method that will always produce the same amount for cost of goods sold in a
periodic inventory system as in a perpetual inventory system would be:
a. FIFO.
b. LIFO.
c. Weighted average.
d. None of these answer choices is correct.
22. The Mateo Corporation’s inventory at December 31, 2016, was $325,000 based on a physical
count priced at cost, and before any necessary adjustment for the following:
▪ Merchandise costing $30,000, shipped f.o.b. shipping point from a vendor on
December 30, 2016, was received on January 5, 2017.
▪ Merchandise costing $22,000, shipped f.o.b. destination from a vendor on December
28, 2016, was received on January 3, 2017.
▪ Merchandise costing $38,000 was shipped to a customer f.o.b. destination on
December 28, arrived at the customer’s location on January 6, 2017.
▪ Merchandise costing $12,000 was being held on consignment by Traynor Company.
What amount should Mateo Corporation report as inventory in its December 31, 2016, balance
sheet?
a. $367,000.
b. $427,000.
c. $405,000.
d. $325,000.
23. Ending inventory is equal to the cost of items on hand plus:
a. Items in transit sold f.o.b. shipping point.
b. Purchases in transit f.o.b. destination.
c. Items in transit sold f.o.b. destination.
d. None of these answer choices is correct.
24. Purchases equal the invoice amount:
a. Plus freight-in, plus discounts lost.
b. Less purchase returns, plus purchase allowances.
c. Plus freight-in, less purchase discounts.
d. Plus discounts, less purchase returns.
25. Using the gross method, purchase discounts lost are:
a. Included in purchases.
b. Added to accounts payable.
c. Included in interest expense.
d. Deducted from discount income.
26. Under the net method, purchase discounts lost are:
a. Included in purchases.
b. Added to accounts payable.
c. Included in interest expense.
d. Deducted from discount income.
Chapter 8 Inventories: Measurement
27. 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. The cost of office equipment.
d. Assets currently in production for normal sales.
28. Under the gross method, purchase discounts taken are:
a. Deducted from interest expense.
b. Added to net purchases.
c. Added to interest income.
d. Deducted from purchases.
29. Alison’s dress shop buys dresses from McGuire Manufacturing. Alison purchased dresses
from McGuire on July 17 and received an invoice with a list price amount of $6,000 and
payment terms of 2/10, n/30. Alison uses the net method to record purchases. Alison should
record the purchase at:
a. $5,940.
b. $5,880.
c. $6,000.
d. $6,120.
Chapter 8 Inventories: Measurement
Use the following to answer questions 30 and 31:
Northwest Fur Co. started 2016 with $94,000 of merchandise inventory on hand. During 2016,
$400,000 in merchandise was purchased on account with credit terms of 1/15, n/45. All discounts were
taken. Purchases were all made f.o.b. shipping point. Northwest paid freight charges of $7,500.
Merchandise with an invoice amount of $5,000 was returned for credit. Cost of goods sold for the year
was $380,000. Northwest uses a perpetual inventory system.
30. What is ending inventory assuming Northwest uses the gross method to record purchases?
a. $112,490.
b. $112,550.
c. $116,500.
d. $120,300.
31. Assuming Northwest uses the gross method to record purchases, what is the cost of goods
available for sale?
a. $492,500.
b. $496,500.
c. $490,500.
d. $492,550.
Chapter 8 Inventories: Measurement
Use the following to answer questions 32 and 33:
Cinnamon Buns Co. (CBC) started 2016 with $52,000 of merchandise on hand. During 2016,
$280,000 in merchandise was purchased on account with credit terms of 2/10, n/30. All discounts were
taken. Purchases were all made f.o.b. shipping point. CBC paid freight charges of $9,000.
Merchandise with an invoice amount of $4,000 was returned for credit. Cost of goods sold for the year
was $316,000. CBC uses a perpetual inventory system.
32. Assuming CBC uses the gross method to record purchases, ending inventory would be:
a. $6,480.
b. $15,400.
c. $15,480.
d. $21,000.
33. What is cost of goods available for sale, assuming CBC uses the gross method?
a. $312,480.
b. $326,000.
c. $331,480.
d. $337,000.
Chapter 8 Inventories: Measurement
34. Cost of goods sold is given by:
a. Beginning inventory – net purchases + ending inventory.
b. Beginning inventory + accounts payable – net purchases.
c. Net purchases + ending inventory – beginning inventory.
d. Net Purchases + beginning inventory – ending inventory.
35. The LIFO Conformity Rule states that if LIFO is used for:
a. One class of inventory, it must be used for all classes of inventory.
b. Tax purposes, it must be used for financial reporting.
c. One company in an affiliated group, it must be used by all companies in an affiliated
group.
d. Domestic companies, it must be used by foreign partners.
36. The largest expense on a retailer’s income statement is typically:
a. Salaries and wages.
b. Cost of goods sold.
c. Income tax expense.
d. Depreciation expense.
Chapter 8 Inventories: Measurement
37. In a perpetual average cost system:
a. A new weighted-average unit cost is calculated each time additional units are purchased.
b. The cost allocated to ending inventory is generally the same as it would be in a periodic
inventory system.
c. The moving-average unit cost is determined following each sale.
d. The average is determined by dividing the total number of units sold by the cost of units
purchased during the period.
38. In a period when costs are rising and inventory quantities are stable, the inventory method that
would result in the highest ending inventory is:
a. Weighted average.
b. Moving average.
c. FIFO.
d. LIFO.
39. During periods when costs are rising and inventory quantities are stable, cost of goods sold
will be:
a. Higher under FIFO than LIFO.
b. Higher under FIFO than average cost.
c. Lower under average cost than LIFO.
d. Lower under LIFO than FIFO.
40. During periods when costs are rising and inventory quantities are stable, ending inventory will
be:
a. Higher under LIFO than FIFO.
b. Lower under average cost than LIFO.
c. Higher under average cost than FIFO.
d. Higher under FIFO than LIFO.
41. In periods when costs are rising, LIFO liquidations:
a. Can’t occur.
b. Are used to reduce tax liabilities.
c. Are a source of off-balance-sheet financing.
d. Distort the net income.
42. The use of LIFO during a long inflationary period can result in:
a. A net increase in income tax expense.
b. An inflated balance sheet.
c. Significant cash flow advantages over FIFO.
d. A reduction in inventory turnover over FIFO.
Chapter 8 Inventories: Measurement
43. Company A is identical to Company B in every regard except that Company A uses FIFO and
Company B uses LIFO. In an extended period of rising inventory costs, Company A’s gross
profit and inventory turnover ratio, compared to Company B’s, would be:
Gross profit
Inventory turnover
a.
lower
lower
b.
higher
higher
c.
higher
lower
d.
lower
higher
44. Company C is identical to Company D in every respect except that Company C uses LIFO and
Company D uses average costs. In an extended period of rising inventory costs, Company C’s
gross profit and inventory turnover ratio, compared to Company D’s, would be:
Gross profit
Inventory turnover
a.
higher
higher
b.
higher
lower
c.
lower
lower
d.
lower
higher
Use the following information to answer questions 45–47.
Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made
the following purchases (listed in chronological order of acquisition):
• 40 units at $100
• 70 units at $ 80
• 170 units at $ 60
Sales for the year totaled 270 units, leaving 10 units on hand at the end of the year.
Chapter 8 Inventories: Measurement
45. Ending inventory using the average cost method (rounded) is:
a. $ 650.
b. $1,000.
c. $ 707.
d. $ 600.
46. Ending inventory using the FIFO method is:
a. $ 650.
b. $1,000.
c. $ 707.
d. $ 600.
47. Ending inventory using the LIFO method is:
a. $ 650.
b. $1,000.
c. $ 707.
d. $ 600.
Use the following to answer questions 48–50:
Nu Company reported the following pretax data for its first year of operations.
Chapter 8 Inventories: Measurement
Net sales
2,800
Cost of goods available for sale
2,500
Operating expenses
880
Effective tax rate
40%
Ending inventories:
If LIFO is elected
820
If FIFO is elected
1,060
48. What is Nu’s net income if it elects FIFO?
a. $ 480.
b. $ 288.
c. $1,360.
d. $ 144.
Net sales
Cost of goods sold ($2,500 – $1,060)
Gross profit
Operating expenses
Income before taxes
Income tax ($480 x 40%)
Net income
49. What is Nu’s net income if it elects LIFO?
a. $288.
b. $144.
c. $240.
d. $480.
Net sales
Chapter 8 Inventories: Measurement
50. What is Nu’s gross profit ratio if it elects LIFO?
a. 80%.
b. 49%.
c. 40%.
d. 5%.
Net sales
Cost of goods sold ($2,500 – $820)
Gross profit ratio
$1,120$2,800 = 40%
Use the following to answer questions 51–53:
Nueva Company reported the following pretax data for its first year of operations.
Net sales
7,340
Cost of goods available for sale
5,790
Operating expenses
1728
Effective tax rate
40%
Ending inventories:
If LIFO is elected
618
If FIFO is elected
798
51. What is Nueva’s gross profit ratio (rounded) if it elects FIFO?
a. 30%.
b. 32%.
c. 10.7%.
d. 60%.
Cost of goods sold ($2,500 – 820)
Gross profit
Operating expenses
Income before taxes
Income tax ($240 x 40%)
Net income
Chapter 8 Inventories: Measurement
52. What is Nueva’s net income if it elects FIFO?
a. $440.
b. $264.
c. $620.
d. $372.
53. What is Nueva’s net income if it elects LIFO?
a. $440.
b. $264.
c. $620.
d. $372.
Chapter 8 Inventories: Measurement
Use the following to answer questions 54–57:
Inventory records for Herb’s Chemicals revealed the following:
March 1, 2016, inventory: 1,000 gallons @ $7.20 = $7,200
Purchases:
Sales:
Mar. 10
600 gals @ $7.25
Mar. 5
400 gals
Mar. 16
800 gals @ $7.30
Mar. 14
700 gals
Mar. 23
600 gals @ $7.35
Mar. 20
500 gals
Mar. 26
700 gals
54. Ending inventory assuming LIFO in a periodic inventory system would be:
a. $5,040.
b. $5,055.
c. $5,075.
d. $5,135.
55. Ending inventory assuming LIFO in a perpetual inventory system would be:
a. $4,960.
b. $5,060.
c. $5,080.
d. $5,140.
Operating expenses
Income before taxes
Income tax
Net income
56. The ending inventory assuming FIFO is:
a. $5,140.
b. $5,080.
c. $5,060.
d. $5,050.
57. The ending inventory under a periodic inventory system assuming average cost (rounding unit
cost to three decimal places) is:
a. $5,087.
b. $5,107.