Financial Accounting, 3e (Kemp/Waybright)
Chapter 5 Inventory
5.1 Questions
1) Merchandise inventory represents the goods that a merchandiser has available to sell to its
customers.
2) Inventory is probably the retailer’s smallest (by value) current asset.
3) Manufacturers have three different kinds of inventory.
4) GAAP allows two different kinds of inventory costing methods.
5) A piece of artwork would probably be inventoried using the specific-identification method.
6) The Vintage Showroom, an antique shop, would most likely use the FIFO method of
accounting for inventory.
7) Grocery stores are required to use the FIFO method because they sell the oldest stock first to
avoid spoilage.
8) Under the specific-identification method, the flow of costs through the accounting records
will:
A) be nearly the opposite of the physical flow of goods through the business.
B) closely match the physical flow of goods through the business.
C) exactly match the physical flow of goods through the business.
D) have no relationship to the physical flow of goods through the business.
9) Under the LIFO method, the flow of costs through the accounting records will:
A) be nearly the opposite of the physical flow of goods through the business.
B) closely match the physical flow of goods through the business.
C) exactly match the physical flow of goods through the business.
D) have no relationship to the physical flow of goods through the business.
10) Under the average cost method, the flow of costs through the accounting records will:
A) be nearly the opposite of the physical flow of goods through the business.
B) closely match the physical flow of goods through the business.
C) exactly match the physical flow of goods through the business.
D) have no relationship to the physical flow of goods through the business.
11) Under the FIFO method, the flow of costs through the accounting records will:
A) be nearly the opposite of the physical flow of goods through the business.
B) closely match the physical flow of goods through the business.
C) exactly match the physical flow of goods through the business.
D) have no relationship to the physical flow of goods through the business.
12) Under the specific-identification method, the physical flow of goods through the business
will:
A) have no relationship to the flow of costs through the accounting records.
B) closely match the flow of costs through the accounting records.
C) exactly match the flow of costs through the accounting records.
D) be nearly the opposite of the flow of costs through the accounting records.
13) Under the LIFO method, the physical flow of goods through the business will:
A) have no relationship to the flow of costs through the accounting records.
B) closely match the flow of costs through the accounting records.
C) exactly match the flow of costs through the accounting records.
D) be nearly the opposite of the flow of costs through the accounting records.
14) Under the average cost method, the physical flow of goods through the business will:
A) have no relationship to the flow of costs through the accounting records.
B) closely match the flow of costs through the accounting records.
C) exactly match the flow of costs through the accounting records.
D) be nearly the opposite of the flow of costs through the accounting records.
15) Under the FIFO method, the physical flow of goods through the business will:
A) have no relationship to the flow of costs through the accounting records.
B) closely match the flow of costs through the accounting records.
C) exactly match the flow of costs through the accounting records.
D) be nearly the opposite of the flow of costs through the accounting records.
16) An inventory layer is synonymous with a separate:
A) sale of merchandise.
B) purchase of merchandise.
C) return of merchandise.
D) customer return of merchandise.
17) When using LIFO, an accounting department only needs to know:
A) how many units were sold, not which units were sold.
B) which units were sold, not how many units were sold.
C) the specific price of a specific unit.
D) the average price of a specific unit.
18) The inventory system whereby the merchandise inventory account balance is merely a record
of the most recent physical inventory count is called the:
A) periodic system.
B) perpetual system.
C) LIFO system.
D) FIFO system.
19) The inventory system that uses the merchandise inventory account as an active account is
called the:
A) periodic system.
B) perpetual system.
C) LIFO system.
D) FIFO system.
20) A method of valuing inventory based on the average of units is called the:
A) LIFO method.
B) average cost method.
C) specific cost method.
D) FIFO method.
21) A method of valuing inventory based on the costs for each individual item is called the:
A) LIFO method.
B) average cost method.
C) specific cost method.
D) FIFO method.
22) A method of valuing inventory based on the assumption that the oldest goods will be sold
first is called the:
A) LIFO method.
B) average cost method.
C) specific cost method.
D) FIFO method.
23) A method of valuing inventory based on the assumption that the newest goods will be sold
first is called the:
A) LIFO method.
B) average cost method.
C) specific cost method.
D) FIFO method.
24) A manufacturer uses ________ inventory to produce the goods it sells.
A) raw materials
B) purchases
C) finished goods
D) work-in-process
25) A manufacturer’s goods available for sale represents:
A) work-in-process inventory.
B) raw materials inventory.
C) cost of goods sold inventory.
D) finished goods inventory.
26) Goods such as milk, bread, and cheese need to be sold quickly due to potential spoilage.
Therefore, they would probably be costed using the:
A) LIFO method of inventory costing.
B) FIFO method of inventory costing.
C) average cost method of inventory costing.
D) any method as the physical flow and the cost flow are different.
27) New technology, like the latest cell phones and HDTV, would probably be costed using the:
A) LIFO method of inventory costing.
B) FIFO method of inventory costing.
C) moving average method of inventory costing.
D) any method as the physical flow and the cost flow are different.
28) A new car lot would probably cost its inventory using the:
A) LIFO method of inventory costing.
B) FIFO method of inventory costing.
C) moving average method of inventory costing.
D) specific-identification method of inventory costing.
5.2 Questions
1) The journal entries to record the purchases of inventory on account are different based on the
costing method chosen.
2) The various inventory costing methods will still produce the same cost of goods sold value.
3) The sum of ending inventory and cost of goods available for sale equals cost of goods sold.
4) Beginning inventory plus net purchases equals cost of goods sold.
5) The objective of inventory tracking is to allocate the cost of goods available for sale between
the cost of units sold and the cost of unsold inventory.
6) Cost of goods sold is shown on the:
A) Balance Sheet as an asset.
B) Income Statement before gross profit.
C) Statement of Retained Earnings.
D) Income Statement after gross profit.
7) Inventory is shown on the:
A) Balance Sheet as an asset.
B) Income Statement before gross profit.
C) Statement of Retained Earnings.
D) Income Statement after gross profit.
8) The amount of cost of goods sold is MOST influenced by the:
A) cost of the items sold.
B) cost of the unsold items.
C) inventory costing method used.
D) number of items sold.
9) The LEAST widely used of the four inventory valuation methods is:
A) FIFO.
B) LIFO.
C) average cost.
D) specific-identification.
10) The journal entry to record the purchase of $7,400 of inventory on account under the
perpetual inventory system is:
A) debit Inventory, $7,400; credit Cash, $7,400.
B) debit Purchases, $7,400; credit Accounts Payable, $7,400.
C) debit Inventory, $7,400; credit Accounts Payable, $7,400.
D) debit Cost of Goods Sold, $7,400; credit Inventory, $7,400.
11) Part of the journal entry to record the cost of an item for $28 that sold for $40 cash under the
perpetual inventory system is:
A) debit Sales, $40; credit Cost of Goods Sold, $28; credit Cash, $12.
B) debit Cost of Goods Sold, $40; sales, $40.
C) debit Cash, $40; credit Inventory $40.
D) debit Cost of Goods Sold $28; credit Inventory, $28.
12) When merchandise is sold and the perpetual system of inventory is used, the journal entry to
record a sale of merchandise on account would include:
A) debiting Accounts Receivable and crediting Sales.
B) debiting Accounts Receivable and crediting Inventory.
C) debiting Accounts Receivable and crediting Cost of Goods Sold.
D) debiting Cost of Goods Sold and crediting Accounts Receivable.
13) Liberty, Inc. has the following list of inventory:
Item
Unit Cost
Selling Price
ELF
$13,257
$20,322
ICF
$6,790
$7,192
CKS
$18,302
$19,773
PCC
$9,394
$11,274
CRD
$27,434
$33,409
Under specific-identification, what is Liberty’s ending inventory if ICF and CRD are not sold
during the current period?
A) $34,224
B) $40,601
C) $40,953
D) $51,369
14) Liberty, Inc. has the following list of inventory:
Item
Unit Cost
Selling Price
ELF
$13,257
$20,322
ICF
$6,790
$7,192
CKS
$18,302
$19,773
PCC
$9,394
$11,274
CRD
$27,434
$33,409
Under specific-identification, what is Liberty’s cost of goods sold if ICF and CRD were not sold
during the current period?
A) $34,224
B) $40,601
C) $40,953
D) $51,369
15) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit cost
July 1
Beginning inventory
5
$52
July 4
Purchase
10
$55
July 7
Sale
12
July 11
Purchase
9
$58
July 14
Sale
8
Assuming FIFO, what is the cost of goods sold for the July 7 sale?
A) $624
B) $654
C) $648
D) $645
16) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit cost
July 1
Beginning inventory
5
$52
July 4
Purchase
10
$55
July 7
Sale
12
July 11
Purchase
9
$58
July 14
Sale
8
Assuming LIFO, what is the cost of goods sold for the July 7 sale?
A) $648
B) $654
C) $660
D) $645
17) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit cost
July 1
Beginning inventory
5
$52
July 4
Purchase
10
$55
July 7
Sale
12
July 11
Purchase
9
$58
July 14
Sale
8
Assuming average cost, what is the cost of goods sold for the July 7 sale?
A) $642
B) $654
C) $648
D) $645
18) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit cost
July 1
Beginning inventory
5
$52
July 4
Purchase
10
$55
July 7
Sale
12
July 11
Purchase
9
$58
July 14
Sale
8
Assuming FIFO, what is the cost of goods sold for the July 14 sale?
A) $455
B) $440
C) $456
D) $464
19) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit cost
July 1
Beginning inventory
5
$52
July 4
Purchase
10
$55
July 7
Sale
12
July 11
Purchase
9
$58
July 14
Sale
8
Assuming LIFO, what is the cost of goods sold for the July 14 sale?
A) $455
B) $440
C) $456
D) $464
20) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit cost
July 1
Beginning inventory
5
$52
July 4
Purchase
10
$55
July 7
Sale
12
July 11
Purchase
9
$58
July 14
Sale
8
Assuming average cost, what is the cost of goods sold for the July 14 sale?
A) $455
B) $456
C) $452
D) $464
21) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit cost
July 1
Beginning inventory
5
$52
July 4
Purchase
10
$55
July 7
Sale
12
July 11
Purchase
9
$58
July 14
Sale
8
Assuming FIFO, what is the ending inventory after the July 14 sale?
A) $208
B) $228
C) $232
D) $214
22) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit cost
July 1
Beginning inventory
5
$52
July 4
Purchase
10
$55
July 7
Sale
12
July 11
Purchase
9
$58
July 14
Sale
8
Assuming LIFO, what is the ending inventory after the July 14 sale?
A) $232
B) $214
C) $228
D) $208
23) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit cost
July 1
Beginning inventory
5
$52
July 4
Purchase
10
$55
July 7
Sale
12
July 11
Purchase
9
$58
July 14
Sale
8
Assuming average cost, what is the ending inventory after the July 14 sale?
A) $228
B) $232
C) $214
D) $208
24) Cost of goods sold equals:
A) ending inventory plus net purchases minus beginning inventory.
B) beginning inventory minus net purchases plus ending inventory.
C) beginning inventory plus net sales minus ending inventory.
D) beginning inventory plus net purchases minus ending inventory.
25) When purchasing inventory on account in a perpetual inventory system, which of the
following is TRUE?
A) The journal entry would be exactly the same for all inventory costing methods.
B) LIFO and FIFO inventory valuation methods require a debit to inventory while all others
require a debit to purchases.
C) GAAP does not allow inventory to be purchased on account.
D) The average costing method requires a credit to inventory.
26) Given the following inventory activity, what is ending inventory using the perpetual average
costing method?
Date
Quantity
Unit Cost
Beginning
Balance
100
$5.00
September 17
Purchase
50
$3.50
September 24
Sale
25
September 29
Purchases
40
$6
A) 165 units @ $4.86
B) 100 units @ $5.00 and 25 units @ $3.50 and 40 units @ $6.00
C) 125 units @ $4.50 and 40 units @ $6.00
D) 75 units @ $5.00 and 50 units @ $3.50 and 40 units @ $6.00
27) Given the following inventory activity, what is ending inventory using the perpetual LIFO
costing method?
Date
Quantity
Unit Cost
Beginning
Balance
100
$5.00
September 17
Purchase
50
$3.50
September 24
Sale
25
September 29
Purchases
40
$6
A) 165 units @ $4.86
B) 100 units @ $5.00 and 25 units @ $3.50 and 40 units @ $6.00
C) 125 units @ $4.50 and 40 units @ $6.00
D) 75 units @ $5.00 and 50 units @ $3.50 and 40 units @ $6.00
28) Cost of goods sold may include all of the following EXCEPT for:
A) the actual cost of the item.
B) shipping costs.
C) insurance.
D) management salaries.
5.3 Questions
1) One benefit of the LIFO inventory method is that it most closely matches the actual flow of
goods in most cases.