7) If Period 1 ending inventory is overstated, then:
A) both cost of goods sold and net income are understated in Period 1.
B) cost of goods sold is overstated and net income is understated in Period 1.
C) cost of goods sold is understated and net income is overstated in Period 1.
D) both cost of goods sold and net income are overstated in Period 1.
8) If the ending inventory in Period 1 is understated, gross profit for Year 1 is:
A) overstated.
B) understated.
C) not affected.
D) determined by beginning inventory.
9) If ending inventory in Period 1 is understated, Cost of Goods Sold in Period 2 is:
A) overstated.
B) understated.
C) not affected.
D) the same as in Period 1.
10) If ending inventory in Period 1 is overstated, gross profit in Period 2 is:
A) overstated.
B) understated.
C) not affected.
D) the same as in Period 1.
11) If gross profit is overstated in Period 1, then the ending inventory and net income in Period 1
were respectively:
A) overstated, and understated.
B) overstated, and overstated.
C) understated, and overstated.
D) understated, and understated.
12) If Cost of Goods Sold was understated in Period 1, then Cost of Goods Sold and gross profit
in Period 2 will be:
A) both understated.
B) both overstated.
C) understated for cost of goods sold and overstated for gross profit.
D) overstated for cost of goods sold and understated for gross profit.
13) Inventory errors cancel out at the end of ________ accounting periods.
A) 1
B) 2
C) 3
D) 4
14) Which of the following is an INCORRECT statement if ending inventory is overstated?
A) Cost of goods sold is overstated.
B) Gross profit is overstated.
C) Net income is overstated.
D) Income tax is overstated.
15) Which of the following is an INCORRECT statement if ending inventory is understated?
A) Cost of goods sold is overstated.
B) Gross profit is overstated.
C) Net income understated.
D) Income tax is understated.
16) If a misstatement of inventory occurs, the net income for ________ periods will be
misstated.
A) 0
B) 1
C) 2
D) 3
17) Which of the following would NOT cause an error in the physical inventory count on
December 31?
A) Counting inventory purchased that was shipped by the supplier FOB destination on December
31
B) Double counting an aisle of product
C) Counting inventory purchased that was shipped by the supplier FOB shipping point on
December 31
D) Forgetting to tag a section of inventory
18) An error in the reported inventory will cause errors in all of the following EXCEPT the:
A) Balance Sheet.
B) Statement of Retained Earnings.
C) following year’s financial statements.
D) cash account.
5.7 Questions
1) Ending inventory can be estimated by subtracting the estimated cost of goods available for
sale from the Cost of Goods Sold.
2) The historical gross profit percentage can be used to estimate the current period’s gross profit.
3) If a company experiences a loss of inventory for fire, there is no way to estimate the
inventory.
4) The first step in using the gross profit method to estimate ending inventory is to:
A) calculate the cost of goods available for sale.
B) estimate the ending inventory.
C) estimate the beginning inventory.
D) estimate the cost of goods sold.
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5) The second step in using the gross profit method to estimate ending inventory is to:
A) estimate the cost of goods sold.
B) calculate the cost of goods available for sale.
C) estimate the ending inventory.
D) estimate the beginning inventory.
6) The last step in using the gross profit method to estimate ending inventory is to:
A) estimate the beginning inventory.
B) estimate the cost of goods sold.
C) calculate the cost of goods available for sale.
D) estimate the ending inventory.
7) Beginning inventory + Net purchases =
A) Cost of goods sold.
B) Cost of goods available for sale.
C) Gross profit.
D) Ending inventory.
8) Net sales times the historical gross profit percentage yields the estimated:
A) ending inventory.
B) beginning inventory.
C) gross profit.
D) cost of goods sold.
9) Net sales minus estimated gross profit yields the estimated:
A) ending inventory.
B) beginning inventory.
C) gross profit.
D) cost of goods sold.
10) Cost of goods available for sale minus estimated Cost of Goods Sold yields the estimated:
A) ending inventory.
B) beginning inventory.
C) gross profit.
D) cost of goods sold.
11) A company has $4,500 in net sales, $3,200 in gross profit, $1,300 in ending inventory, and
$1,800 in beginning inventory. The company’s cost of goods sold is:
A) $3,200.
B) $1,300.
C) $2,700.
D) $1,400.
12) A company has $8,200 in net sales, $1,100 in gross profit, $2,500 in ending inventory and
$2,000 in beginning inventory. The company’s cost of goods sold is:
A) $7,100.
B) $6,200.
C) $5,700.
D) $5,600.
13) The method used to estimate the cost of ending inventory is called:
A) the FIFO method.
B) the LIFO method.
C) gross profit method.
D) the average cost method.
14) The ________ estimates inventory by using the format for cost of goods sold.
A) FIFO method
B) LIFO method
C) gross profit method
D) average cost method
5.8 Questions
1) Inventory is the most important asset in a service business.
2) Inventory turnover equals average ending inventory divided by cost of goods sold.
3) Inventory turnover measures the amount of times a company turns over its beginning
inventory during a period.
4) Other than the cost of purchasing the inventory, another large cost of inventory would be
storage of the inventory.
5) An inventory turnover rate of 4 means that the company is selling its inventory approximately
every three months.
6) The inventory turnover rate is computed by:
A) dividing average inventory by cost of goods sold.
B) dividing cost of goods sold by average inventory.
C) dividing ending inventory by cost of goods sold.
D) dividing ending inventory by beginning inventory.
7) Goods available for sale are $28,000; beginning inventory is $13,000; ending inventory is
$15,000; and cost of goods sold is $39,000. The inventory turnover is:
A) 3.00.
B) 2.60.
C) 2.79.
D) 2.00.
8) Goods available for sale are $40,000; beginning inventory is $16,000; ending inventory is
$20,000; and cost of goods sold is $50,000. The inventory turnover is:
A) 2.22.
B) 2.78.
C) 2.50.
D) 2.00.
9) Goods available for sale are $25,000; beginning inventory is $8,000; ending inventory is
$12,000; and cost of goods sold is $10,000. The days-sales-in-inventory is closest to:
A) 183.
B) 292.
C) 365.
D) 440.
10) Goods available for sale are $350,000; beginning inventory is $24,000; ending inventory is
$32,000; and cost of goods sold is $275,000. The inventory turnover is:
A) 11.46.
B) 8.59.
C) 12.50.
D) 9.82.
11) Goods available for sale are $118,000; beginning inventory is $37,000; ending inventory is
$42,000; and cost of goods sold is $77,000. The days-sales-in-inventory is closest to:
A) 239.
B) 187.
C) 122.
D) 199.
12) Inventory is often the largest:
A) expense on the Income Statement.
B) long-term asset on the Balance Sheet.
C) current asset on the Balance Sheet.
D) part of general selling expenses.
13) The inventory turnover ratio is normally computed for:
A) a buying season.
B) the entire year.
C) each monthly accounting period.
D) each quarter.
14) Customer demand for an item CANNOT:
A) increase the inventory turnover.
B) decrease the inventory turnover.
C) affect the amount of merchandise the company purchases.
D) change the formula used to calculate inventory turnover.
15) A business with a ________ net income percentage may often have a ________ inventory
turnover rate:
A) lower, higher.
B) lower, lower
C) higher, lower
D) all of the above are possible combinations of net income percentage and inventory turnover
rate.
16) Having too much inventory can be a problem because:
A) inventory takes up space and ties up money.
B) inventory can become obsolete and lose value.
C) inventory is expensive to maintain.
D) all of the above.
17) An indication that inventory is being sold quickly is:
A) a high turnover rate and high days-sales-in-inventory rate.
B) a high turnover rate and low days-sales-in-inventory rate.
C) a low turnover rate and high days-sales-in-inventory rate.
D) a low turnover rate and low days-sales-in-inventory rate.