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Chapter 08 Inventories and the Cost of Goods Sold Answer Key
True / False Questions
1.
The specific identification method is acceptable only when the actual cost of individual
units of merchandise can be determined from the accounting records.
2.
An advantage of the average-cost method of accounting for inventory is that the inventory
is valued in the balance sheet at current replacement costs.
3.
An advantage to the LIFO method of accounting for inventory is that it values the cost of
goods sold at current replacement costs.
4.
During periods of inflation, the LIFO cost flow assumption will yield a lower inventory value
than FIFO.
5.
Any business that sells numerous units of identical products may determine its cost of
goods sold using a cost flow assumption, rather than the specific identification method.
6.
During periods of inflation, the FIFO cost flow assumption will yield a higher cost of goods
sold than LIFO.
7.
The cost flow assumption selected by a company must correspond to the actual physical
movement of the company's merchandise.
8.
The inventory method used by a company will affect profitability by affecting the amount
of income taxes a company owes.
9.
The LIFO conformity requirement permits a company to use LIFO for tax purposes only if
the company also uses LIFO for internal reporting purposes.
10.
The principle of consistency prohibits a company from changing an inventory valuation
method once one is selected.
11.
Just-in-time inventory systems cannot be used in conjunction with the LIFO cost flow
assumption.
12.
Companies with perpetual inventories need not take physical inventory counts because
inventory amounts are perpetually available.
13.
A physical inventory is usually taken during a period of high activity.
14.
A write down of inventory due to obsolescence reduces the amount in the Inventory
account and may increase the amount in the Cost of Goods Sold account.
15.
Merchandise sold F.O.B. destination belongs to the buyer while in transit.
16.
Because of the consistency principle, inventory should never be written down below cost.
17.
If the terms of a sale are F.O.B. shipping point, the sale should not be recorded until the
goods are delivered to the buyer.
18.
In a periodic system, the only account in regard to inventory that is kept up-to-date is the
inventory account.
19.
In order to obtain the maximum tax benefit, companies that use a perpetual inventory
system can restate their year-end inventory at costs indicated by periodic LIFO costing
procedures.
20.
When the periodic inventory system is used, determining the cost of the year-end
inventory involves two distinct steps: counting the units and pricing the units.
21.
In a periodic inventory system, understating the amount of ending inventory will cause an
understatement of gross profit in the current year.
22.
In a periodic inventory system, overstating the amount of ending inventory will cause an
understatement of gross profit in the following year.
23.
Overstating the ending inventory will result in understating the cost of goods sold and
overstating profits.
24.
In the year following an overstatement of ending inventory, the year-end owners' equity
will be correctly stated.
25.
The gross profit method can be used for both interim and year-end financial reporting.
26.
The retail inventory method requires a company to state inventory on the year-end
balance sheet at its retail value.
27.
The inventory turnover rate is equal to the average inventory divided by the cost of goods
sold.
28.
The higher a company's inventory turnover rate, the higher its gross profit.
29.
A clothing store would logically have a higher inventory turnover rate than would a
doughnut shop.
Multiple Choice Questions
30.
Inventory:
31.
Which of the following is
not
considered an acceptable inventory cost method according to
GAAP?
32.
When prices are increasing, which inventory method will produce the highest cost of goods
sold?
33.
Kent Company has used the same inventory method for many years. This is an example of
which principle?
34.
In which of these inventory approaches is it important to determine the actual cost of a
particular inventory item being sold in order to determine cost of goods sold?
35.
In a perpetual inventory system, two entries are normally made to record each sales
transaction. The purpose of these entries is best described as follows:
36.
Which of the four inventory approaches is best suited to inventories of high-priced, low-
volume items?
37.
In a perpetual inventory system, an inventory cost flow assumption is used primarily for
determining which costs to use in:
38.
Which of the four inventory approaches transfers the most recent purchase cost to the
cost of goods sold and the remaining items in inventory are valued at the oldest
acquisition costs?
39.
Harris Corporation's inventory of a particular product includes 200 units purchased at a
per-unit cost of $50, and another 100 units purchased at a unit cost of $60. If Harris sells
10 units of this product, the cost of goods sold will be:
40.
During periods of inflation, when comparing LIFO with FIFO:
41.
The specific identification method is more appropriate than a cost flow assumption
method:
42.
When the LIFO costing method is in use, the seller:
43.
Which of the following statements is
not
a characteristic of the LIFO method of pricing
inventory?
Topic: The Flow of Inventory Costs
44.
Which of the following methods of measuring the cost of goods sold most closely parallels
the actual physical flow of the merchandise?
45.
In a perpetual inventory system, the flow of inventory cost is:
