CHAPTER 5: INVENTORIES AND COST OF GOODS SOLD
1. Which one of the following types of inventory accounts would be used by a wholesaler or retailer?
a. Raw materials inventory
b. Work in process inventory
c. Finished goods inventory
d. Merchandise inventory
2. The inventory account a manufacturer uses to record the cost of products completed and available for sale is called
a. Raw materials inventory
b. Work in process inventory
c. Finished goods inventory
d. Merchandise inventory
3. Items should be reported as part of the company‘s “inventory” at year end, if they are
a. Purchased from a creditor, available for sale, and paid for the following year.
b. Held in anticipation of an increase in market value.
c. Determined to be part of cost of goods sold.
d. Sold during the period.
4. For what reason might retailers like Target select an accounting period that ends on or near the end of January?
a. The company originally started business operations on that date.
b. Business activity has reached a slow period that is suited to the preparation of its financial statements at the end of
the year.
c. The company’s CPAs are attempting to spread out the workload.
d. The Internal Revenue Service requires merchandise companies to select such a date for their fiscal year.
5. Which one of the following accounts most likely would appear on the income statement of a merchandise company,
but not on the income statement of a service company?
a. Cost of Goods Sold
b. Selling Expenses
c. Administrative Expenses
d. Income Tax Expense
Chapter 5: Inventories and Cost of Goods Sold
6. Which one of the following ratios is a common analytical tool used by merchandise corporations, but not by service
corporations?
a. Gross profit ratio
b. Earnings per share
c. Current ratio
d. Profit margin
7. A customer returned damaged goods for credit. Which of the seller’s accounts decreases?
a. Purchase Returns
b. Accounts Receivable
c. Sales Returns
d. Sales Revenue
8. Asago Co. sold merchandise to Health Co. on account, $18,000, terms 2/15, net 45. The cost of the merchandise sold
is $15,500. Asago Co. issued a credit memo for $1,750 for merchandise returned that originally cost $1,400. The
Health Co. paid the invoice within the discount period. What is amount of net sales from the above transactions?
a. $16,250
b. $14,100
c. $15,925
d. $13,818
9. A company using the periodic inventory system has the following account balances: Merchandise Inventory at the
beginning of the year, $3,600; Freight-In, $650; Purchases, $10,700; Purchases Returns and Allowances, $1,950;
Purchases Discounts, $330. The cost of merchandise purchased is equal to
a. $12,670
b. $9,070
c. $8,420
d. $17,230
Chapter 5: Inventories and Cost of Goods Sold
10. Using the following information, what is the amount of cost of goods sold?
Purchases
$32,000
Purchases discounts
$960
Merchandise inventory
September 1
5,700
Merchandise inventory
September 30
6,370
Sales returns and
allowances
910
Sales
63,000
Purchases returns and
allowances
1,200
Freight In
1,040
a. $26,900
b. $20,530
c. $28,130
d. $30,210
11. Which of the following terms best describes “Cost of goods available for sale”?
a. Cost of goods available for sale is an expense account.
b. Cost of goods available for sale is added to beginning inventory to determine cost of purchases during the period.
c. Cost of goods available for sale is subtracted from net sales to arrive at the gross margin
d. Cost of goods available for sale is allocated into cost of goods on hand and cost of goods sold at the end of the
fiscal year
12. Ending inventory is equal to the cost of items on hand plus
a. Merchandise in transit sold to customers FOB shipping point
b. Merchandise in transit sold to customers FOB destination
c. The cost of all inventory purchased during the period
d. Merchandise purchased in transit with terms FOB destination
Chapter 5: Inventories and Cost of Goods Sold
Givens Corp.
Givens Corp. is a merchandising company that uses the periodic inventory system. Selected account balances are
listed below:
Sales
$500,000
Purchases
225,000
Inventory (beginning)
Inventory (ending)
Operating Expenses
148,000
Income Tax Expense
10,000
Retained Earnings (beginning)
53,000
Dividends
15,000
13. Refer to information for Givens Corp.
Calculate the cost of goods sold for Givens Corp.
a. $275,000
b. $259,000
c. $241,000
d. $211,000
14. Refer to the information for Givens Corp.
Calculate the gross profit.
a. $241,000
b. $275,000
c. $289,000
d. $425,000
15. Refer to the information for Givens Corp.
Calculate net income.
a. $289,000
b. $141,000
c. $131,000
d. $116,000
Chapter 5: Inventories and Cost of Goods Sold
Chen’s Department Store
Chen’s Department Store is a merchandising company that uses the periodic inventory system. Selected account
balances are listed below:
Sales
$175,000
Purchases
90,000
Inventory (beginning)
23,000
Inventory (ending)
17,000
Purchase returns and allowances
3,000
Purchase discounts
7,000
Transportation-in
4,000
Sales discounts
8,000
Sales returns and allowances
5,000
16. Refer to the account information for Chen’s Department Store.
Calculate Chen’s net sales.
a. $162,000
b. $167,000
c. $170,000
d. $175,000
17. Refer to the account information for Chen’s Department Store
Calculate Chen’s cost of goods purchased
a. $ 84,000
b. $ 90,000
c. $ 103,000
d. $ 117,000
Chapter 5: Inventories and Cost of Goods Sold
18. Refer to the account information for Chen’s Department Store.
Determine Chen’s gross profit.
a. $68,000
b. $72,000
c. $78,000
d. $85,000
19. Klein’s Shoe Company uses a perpetual inventory system. The beginning balance in its inventory account is $1,500
and the ending balance is $1,000. Cost of goods sold is $6,500. What was the amount of inventory purchased during
the year?
a. $500
b. $6,000
c. $7,000
d. $7,500
20. What effects on a retail store‘s accounting equation occur when merchandise returned by customers is recorded?
a. Assets and stockholders’ equity decrease.
b. Assets and stockholders’ equity increase.
c. Assets decrease and liabilities increase.
d. Stockholders’ equity decreases and liabilities increase.
Chapter 5: Inventories and Cost of Goods Sold
21. Baker Corp. sold merchandise to a customer on credit. The invoice amount was $1,000; the invoice date was June
10; credit terms were 1/10, n/30. Which one of the following statements is true?
a. The customer can take a $10 discount if the invoice is paid on June 30.
b. The customer should pay $1,000 if the invoice is paid on July 9.
c. The customer must pay a $10 penalty if payment is made after July 9.
d. The customer must pay $1,010 if payment is made after June 20.
22. Floors, Inc. offers terms of 2/10, n/30 to credit customers. Tile Magic Corp. purchased 100 tile cutters with a list
price of $20 each on August 5, 2015, on account.
If Tile Magic Corp. pays the amount of the invoice for its purchase on August 14, 2015, how much cash will Floors
receive from Tile Magic Corp.?
a. $1,764
b. $1,800
c. $1,960
d. $2,000
23. Floors, Inc. offers terms of 2/10, n/30 to credit customers. Tile Magic Corp. purchased 100 tile cutters with a list
price of $20 each on August 5, 2015, on account.
Tile Magic Corp. paid the invoice on August 31, 2015. How much sales discount will Floors recognize?
a. $-0–
b. $40
c. $200
d. $236
24. Blenham, Inc. sells merchandise on credit. If a customer pays its balance due within the discount period, what is the
effect of the payment on Blenham’s accounting equation?
a. Assets and stockholders’ equity decrease
b. Assets and stockholders’ equity increase
c. Assets decrease and liabilities increase
d. Stockholders’ equity decreases and liabilities increase
Chapter 5: Inventories and Cost of Goods Sold
25. Blenham, Inc. sells merchandise on credit. If a customer pays its balance due after the discount period has passed,
what is the effect of the payment on Blenham’s accounting equation?
a. Assets and stockholders’ equity decrease
b. Assets and stockholders’ equity increase
c. Assets decrease and liabilities increase
d. No net effect
26. Sales Discounts is classified as what type of account?
a. An expense
b. A revenue
c. A contra-asset
d. A contra-revenue
27. When an inventory system updates the Inventory account at the time of each sale, this is known as:
a. a periodic system.
b. a contra-purchase system.
c. a perpetual system.
d. an accrual system.
28. Cost of goods sold is equal to:
a. the total amount of merchandise purchased during the year.
b. the cost of merchandise purchased plus transportation-in costs less ending inventory.
c. the cost of merchandise purchased plus transportation-in costs plus beginning inventory minus purchase returns
and allowances and purchase discounts minus ending inventory.
d. the cost of merchandise purchased plus transportation-in costs plus beginning inventory minus purchase returns
and allowances and purchase discounts
29. The recognition of cost of goods sold expense in the same period that sales revenue is recognized from the sale of
merchandise is a good example of the:
a. matching principle.
b. full disclosure principle.
c. revenue realization principle.
d. historical cost principle.
Chapter 5: Inventories and Cost of Goods Sold
30. The following is from Goldman Inc.’s 2015 income statement.
Purchases
$182,000
Transportation–In
11,000
Inventory, January 1, 2015
26,500
Inventory, December 31, 2015
28,800
Purchase Returns and Allowances
8,400
How much will Goldman report as cost of goods purchased in its 2015 income statement?
a. $184,600
b. $193,000
c. $201,400
d. $211,100
31. The following is from Goldman Inc.’s 2015 income statement.
Purchases
$182,000
Transportation–In
11,000
Inventory, January 1, 2015
26,500
Inventory, December 31, 2015
28,800
Purchase Returns and Allowances
8,400
How much will Goldman report as its cost of goods sold in its 2015 income statement?
a. $179,900
b. $182,300
c. $186,900
d. $190,700
Chapter 5: Inventories and Cost of Goods Sold
32. In a periodic inventory system, the cost of purchases is recognized as
a. An integral part of the calculation of cost of goods sold
b. The only part of the calculation of cost of goods sold
c. An increase in the inventory account
d. An increase in an asset account
33. The cost of goods sold is
a. Purchases less beginning inventory plus ending inventory
b. Reported on the balance sheet in the inventory account
c. Goods available for sale less ending inventory
d. Equal to the amount of inventory on hand at the end of the accounting period
34. Which one of the following statements is false?
a. The inventory account is updated after every sale and after every merchandise purchase under the perpetual
inventory system.
b. The inventory account is updated only at the end of the accounting period under the periodic inventory system.
c. A cost of goods sold account is updated after each sale of merchandise under the periodic inventory system.
d. A purchases account is used only under the periodic inventory system.
35. Slotkin Company buys designer clothing to sell in its retail stores. Since much of the merchandise comes from Dallas
and Europe, Slotkin Company must pay freight charges to get the merchandise shipped in. Which statement is true?
a. Transportation-in, paid by Slotkin Company, is added to the inventory account under the periodic system.
b. Transportation-in, paid by Slotkin Company, is subtracted from purchases under the periodic system.
c. Freight charges are only paid by a buyer in a periodic system.
d. Transportation-in is added to net purchases to determine cost of goods purchased in a periodic system.
36. In order to determine inventory for its balance sheet, it is best for a company to count the inventory at the end of its
accounting period for
a. The periodic inventory system
b. The perpetual inventory system
c. Both the periodic and perpetual inventory systems
d. Neither the periodic nor perpetual inventory systems
Chapter 5: Inventories and Cost of Goods Sold
37. Which one of the following is correct?
a. Inventory losses can be identified and controlled better under the perpetual system.
b. Inventory can only be sold at the end of an accounting period under the periodic system.
c. There is no difference in cost to implement a perpetual as compared to a periodic system.
d. The perpetual system eliminates the need for an annual inventory count
38. Texas Inc. sold merchandise to Fagin Corp. on December 28, 2014, with shipping terms of FOB destination. Fagin
Corp. received the merchandise on January 3, 2015. Which one of the following statements is true?
a. Texas should record sales revenue on December 28, 2014.
b. Fagin Corp. should pay the transportation costs.
c. Fagin Corp. should include the merchandise in its inventory at December 31, 2014.
d. Fagin Corp. should record a liability for the purchase on January 3, 2015.
39. How are purchase discounts and purchase returns recorded by a company using the periodic inventory system?
a. As a direct reduction to the Purchases account.
b. In contra accounts to the Purchases account.
c. As operating expenses.
d. As miscellaneous expenses.
40. Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2015. The goods were shipped the
same day. The merchandise‘s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were
FOB shipping point. Park received the merchandise on June 10, 2015. Park paid the amount due on June 13, 2015.
Park uses a perpetual inventory system. When will the cost of merchandise sold be recorded as an expense?
a. The date the merchandise was purchased.
b. The date the merchandise is sold.
c. The end of the accounting period.
d. Cannot be determined without further information.
Chapter 5: Inventories and Cost of Goods Sold
41. Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2015. The goods were shipped the
same day. The merchandise‘s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were
FOB shipping point. Park received the merchandise on June 10, 2015. Park paid the amount due on June 13, 2015.
Park uses the periodic inventory system. What effect does recording the purchase of merchandise on June 5, 2015
have on Park’s accounting equation?
a. Assets and liabilities increase.
b. Liabilities increase and stockholders’ equity decreases.
c. Assets and stockholders’ equity increase.
d. Liabilities and stockholders’ equity decrease.
42. Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2015. The goods were shipped the
same day. The merchandise‘s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were
FOB shipping point. Park received the merchandise on June 10, 2015. Park paid the amount due on June 13, 2015.
If Park uses the periodic inventory system, the effect of recording the payment on June 13, 2015, will include
a. A decrease to Purchases for $15,000.
b. An increase to Inventory for $14,850.
c. A decrease to Cash for $15,000.
d. A decrease to Accounts Payable for $15,000.
43. Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2015. The goods were shipped the
same day. The merchandise‘s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were
FOB shipping point. Park received the merchandise on June 10, 2015. Park paid the amount due on June 13, 2015.
When did title to the merchandise transfer from Jay Zee Music Company to Park?
a. June 5, 2015
b. June 10, 2015
c. June 13, 2015
d. Cannot be determined from the information provided
44. Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2015. The goods were shipped the
same day. The merchandise‘s selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were
FOB shipping point. Park received the merchandise on June 10, 2015. Park paid the amount due on June 13, 2015.
Who is responsible for payment of the transportation costs on the merchandise sold by Jay Zee Music to Park?
a. Jay Zee Music Company
b. Park, Inc.
c. Split equally between the two companies.
d. Cannot be determined from the information provided.
Chapter 5: Inventories and Cost of Goods Sold
45. Herndon Corp. purchased merchandise on account from Likert Corp. on November 18, 2014. On November 21,
2014, Herndon returned damaged merchandise to Likert and was granted an adjustment on its account. Herndon
uses the periodic inventory system. What effect does the merchandise return have on Herndon’s accounting
equation?
a. Assets and stockholders’ equity decrease.
b. Assets and liabilities decrease.
c. Liabilities decrease and stockholders’ equity increases.
d. Liabilities and stockholders’ equity decrease.
46. Transportation-in is
a. an operating expense
b. a stockholders‘ equity account
c. added to transportation-out as part of the calculation of cost of goods sold
d. part of cost of goods purchased
47. Which one of the following is not a contra account?
a. Purchase Returns and Allowances
b. Accumulated Depreciation
c. Transportation-in
d. Sales Discounts
48. Wendt, Inc. counted its ending inventory as $178,000 at year-end, January 31, 2014. Upon review of the records, it
was noted that the following items were in transit during the count:
A) $2,000 of goods shipped by a supplier to Wendt sent FOB destination on January 31 were received February 5,
and were not counted by Wendt.
B) $5,000 of goods shipped by a supplier to Wendt sent FOB shipping point on January 30 were received February
2, and were not counted by Wendt.
C) $6,000 of goods shipped by Wendt to a customer FOB shipping point on January 31 were received by the
customer February 3, and were counted by Wendt.
Determine the correct inventory balance at January 31.
a. $178,000
b. $177,000
c. $174,000
d. $172,000
Chapter 5: Inventories and Cost of Goods Sold
49. At the year-end inventory count, if goods in transit are shipped FOB destination, they should be included in the
inventory count of
a. The seller
b. The buyer
c. Neither the buyer nor the seller
50. At the year-end inventory count, if goods in transit are shipped FOB shipping point, they should be included in the
inventory count of
a. The seller
b. The buyer
c. Both the seller and the buyer
d. Neither the seller no the buyer
51. Many companies assign only the net invoice price for merchandise to inventory and cost of goods sold. All other
costs, including transportation and other costs of bringing merchandise to the place of business, are charged to
expense of the period in which they are incurred. Which accounting principle or concept is applied in this example?
a. Historical cost
b. Matching
c. Cost/Benefit
d. Conservatism
52. In order to evaluate a company’s gross profit ratio,
a. the ratio should be compared with forecasted financial statements.
b. the ratio should be compared with those of prior years.
c. the ratio should be compared with other companies in the same industry.
d. the ratio should be compared with those of both prior years and competitors.
53. All of the following statements regarding the gross profit ratio are true except:
a. The gross profit ratio alone is sufficient to determine a company’s profitability.
b. Managers, investors, and creditors use the gross profit ratio to measure one aspect of profitability.
c. The gross profit ratio explains how many cents on every dollar are available to cover expenses other than cost of
goods sold and to earn a profit.
d. If a company’s net sales were $200,000 and cost of goods sold were $120,000, its gross profit ratio would be
40%.
Chapter 5: Inventories and Cost of Goods Sold
54. The ending inventory balance represents
a. Expired costs and is reported on the balance sheet as an asset.
b. The cost of goods sold during the current period and is reported on the balance sheet as an asset.
c. Expired costs and is reported on the income statement as an expense
d. Unexpired costs and is reported on the balance sheet as an asset.
55. Cost of goods sold represents
a. Expired costs during a period and is reported on the income statement.
b. Unexpired costs and is reported on the balance sheet as an asset.
c. The cost of goods that will be purchased during the next operating cycle and is reported on the balance sheet as
an asset.
d. Expired costs and is reported on the balance sheet as an expense.
56. The Ramien Store held inventory items at the end of 2014. Which items should Ramien include as part of its total
inventory cost?
a. Freight incurred in shipping goods to customers.
b. Annual income taxes paid for operations.
c. Cost of storing inventory before it is sold.
d. Cost of salaries of clerks that sell the inventory items.
57. Which one of the following statements is true?
a. The flow of inventory costs should match the physical flow of the merchandise.
b. Accounting standards require that merchandise costs be specifically traced to units left in inventory and to units
that have been sold
c. Accountants have developed methods which make assumptions concerning how costs should be assigned to
inventory and cost of goods sold.
d. Alternative inventory cost flow assumptions have the same effect on the amount of net income reported.
58. Which method assigns the cost of the most recent items purchased to ending inventory?
a. Specific identification
b. Weighted average cost
c. FIFO
d. LIFO
Chapter 5: Inventories and Cost of Goods Sold
59. Which method assigns the cost of the most recent items purchased to cost of goods sold?
a. Specific identification
b. Weighted average cost
c. FIFO
d. LIFO
60. Which method assigns the same cost to all units whether sold or left in ending inventory?
a. Specific identification
b. Weighted average cost
c. FIFO
d. LIFO
61. For which type of inventory would a company most likely use the specific identification method?
a. Barbie dolls
b. Cartons of milk
c. Custom designed diamond rings
d. Gasoline in storage tanks at a gasoline station
62. Eversoll Inc. uses the periodic inventory system.
June
1
On hand, 50 units @ $15.00 each
$ 750.00
5
Purchased 115 units @ $15.10 each
1,736.50
14
Purchased 75 units @ $15.20 each
1,140.00
Total cost of goods available for sale
$3,626.50
30
On hand, 90 units
If the June 30th inventory included 45 units from the June 5th purchase and 45 units from the June 14th purchase,
Eversoll’s cost of goods sold for June under the specific identification method would be
a. $2,263.00
b. $2.373.00
c. $2,945.00
d. $3,626.50
Chapter 5: Inventories and Cost of Goods Sold
63. Eversoll Inc. uses the periodic inventory system.
June
1
On hand, 50 units @ $15.00 each
$ 750.00
5
Purchased 115 units @ $15.10 each
1,736.50
14
Purchased 75 units @ $15.20 each
1,140.00
Total cost of goods available for sale
$3,626.50
30
On hand, 90 units
If Eversoll uses the FIFO inventory method, the amount assigned to the June 30 inventory would be
a. $1,354.00
b. $1,366.50
c. $1,590.42
d. $1,594.00
64. Eversoll Inc. uses the periodic inventory system.
June
1
On hand, 50 units @ $15.00 each
$ 750.00
5
Purchased 115 units @ $15.10 each
1,736.50
14
Purchased 75 units @ $15.20 each
1,140.00
Total cost of goods available for sale
$3,626.50
30
On hand, 90 units
If Eversoll uses the weighted average cost inventory method, the amount assigned to the June 30th inventory
would be
a. $1,359.90
b. $1,486.50
c. $1,549.00
d. $1,591.50
Chapter 5: Inventories and Cost of Goods Sold
65. Eversoll Inc. uses the periodic inventory system.
June
1
On hand, 50 units @ $15.00 each
$ 750.00
5
Purchased 115 units @ $15.10 each
1,736.50
14
Purchased 75 units @ $15.20 each
1,140.00
Total cost of goods available for sale
$3,626.50
30
On hand, 90 units
If Eversoll uses the LIFO inventory method, the cost of goods sold for June would be
a. $1,354.00
b. $2,200.00
c. $2,272.50
d. $2,296.08
66. Eversoll Inc. uses the periodic inventory system.
June
1
On hand, 50 units @ $15.00 each
$ 750.00
5
Purchased 115 units @ $15.10 each
1,736.50
14
Purchased 75 units @ $15.20 each
1,140.00
Total cost of goods available for sale
$3,626.50
30
On hand, 90 units
How many units did Eversoll, Inc. sell during June?
a. 50
b. 90
c. 100
d. 150
Chapter 5: Inventories and Cost of Goods Sold
67. Quan uses a periodic inventory system. At the end of April, Quan had 20 units on hand.
April 1 On hand, 10 units @ $2 each
$ 20
19 Purchased 90 units @ $3 each
270
Goods available for sale
$290
If Quan, Inc. uses FIFO inventory costing, how much is cost of goods sold for April?
a. $230
b. $232
c. $240
d. $250
68. Quan uses a periodic inventory system. At the end of April, Quan had 20 units on hand.
April 1 On hand, 10 units @ $2 each
$ 20
19 Purchased 90 units @ $3 each
270
Goods available for sale
$290
If Quan, Inc. uses the weighted average cost inventory method, how much is cost of goods sold for April? a. $230
b. $232
c. $240
d. $250
69. Quan uses a periodic inventory system. At the end of April, Quan had 20 units on hand.
April 1 On hand, 10 units @ $2 each
$ 20
19 Purchased 90 units @ $3 each
270
Goods available for sale
$290
If Quan uses the LIFO inventory method, how much is inventory on the balance sheet as of April 30?
a. $40
b. $50
c. $58
d. $60
Chapter 5: Inventories and Cost of Goods Sold
70. A major advantage of the weighted average method of inventory costing is that
a. Cost flows correspond with the physical flow of merchandise
b. It is relatively easy to apply
c. It matches current costs with revenues
d. Recent costs are assigned to the ending inventory balance
71. Which method of inventory costing is not acceptable for financial accounting purposes?
a. Specific Identification
b. FIFO
c. LIFO
d. Replacement Cost
72. Which inventory costing method results in the highest inventory balance during a period of rising prices?
a. Weighted average cost
b. FIFO
c. LIFO
d. Both FIFO and LIFO result in the same inventory balance
73. Which method might allow a company to make significant inventory purchases at year end for the purpose of
manipulating income?
a. FIFO
b. LIFO
c. Specific Identification
d. Weighted Average Cost
74. Which inventory costing method results in the lowest income tax expense during a period of decreasing prices?
a. FIFO
b. LIFO
c. Specific Identification
d. Weighted Average Cost