309
Chapter 6—Inventories
Multiple
Choice
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
Multiple
Choice
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
1
1
Moderate
Reflective
Reporting
30
5
Difficult
Analytic
2
1
Moderate
Reflective
Reporting
31
5,6
Difficult
Analytic
3
1
Difficult
Reflective
Measure
32
5
Difficult
Analytic
4
1
Difficult
Reflective
Measure
33
5
Difficult
Analytic
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1
Difficult
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Measure
34
5
Difficult
Analytic
6
2
Moderate
Reflective
Reporting
35
5
Difficult
Analytic
7
2
Moderate
Reflective
Reporting
36
5
Easy
Analytic
8
2
Moderate
Reflective
Reporting
37
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Difficult
Analytic
9
2
Moderate
Reflective
Reporting
38
5
Difficult
Analytic
10
3
Moderate
Reflective
Measure
39
5
Difficult
Analytic
11
3
Moderate
Reflective
Measure
40
5
Difficult
Analytic
12
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Moderate
Reflective
Measure
41
6
Easy
Reflective
13
3
Moderate
Reflective
Measure
42
6
Moderate
Reflective
14
3
Easy
Reflective
Measure
43
6
Easy
Analytic
15
3
Easy
Reflective
Measure
44
6
Difficult
Analytic
16
3
Easy
Reflective
Measure
45
6
Moderate
Analytic
17
3
Difficult
Analytic
Reporting
46
6
Moderate
Reflective
18
3
Difficult
Analytic
Reporting
47
6
Easy
Reflective
19
3
Difficult
Analytic
Reporting
48
6
Difficult
Analytic
20
3
Difficult
Analytic
Reporting
49
6
Moderate
Reflective
21
3
Difficult
Analytic
Reporting
50
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Moderate
Reflective
22
4
Moderate
Analytic
Reporting
51
7
Difficult
Analytic
23
4
Easy
Analytic
Reporting
52
7
Difficult
Analytic
24
4
Easy
Reflective
Measure
53
7
Easy
Reflective
25
4
Moderate
Analytic
Reporting
54
7
Easy
Analytic
26
4
Difficult
Analytic
Measure
55
8
Easy
Reflective
27
4
Difficult
Analytic
Measure
56
9
Easy
Analytic
28
5
Difficult
Analytic
Measure
57
9
Moderate
Analytic
29
5
Difficult
Analytic
Measure
58
9
Difficult
Analytic
310 ♦ Chapter 6
True/
False
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
1
1
Moderate
Reflective
2
1
Moderate
Reflective
3
1
Moderate
Reflective
4
1
Moderate
Reflective
5
1
Moderate
Reflective
6
1
Moderate
Reflective
7
1
Moderate
Reflective
8
1
Moderate
Reflective
9
1
Moderate
Reflective
10
2
Moderate
Reflective
11
2
Moderate
Reflective
12
2
Moderate
Reflective
13
2
Moderate
Reflective
14
2
Moderate
Reflective
15
2
Moderate
Reflective
16
3
Moderate
Reflective
17
4
Moderate
Reflective
18
6
Moderate
Reflective
19
6
Difficult
Reflective
20
6
Difficult
Reflective
21
6
Moderate
Reflective
22
6
Moderate
Reflective
23
6
Difficult
Reflective
24
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Moderate
Reflective
25
7
Moderate
Reflective
26
7
Moderate
Reflective
27
8
Moderate
Reflective
28
8
Moderate
Reflective
29
9
Difficult
Analytic
Essay
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
1
Difficult
Reflective
Measure
2
1
Moderate
Reflective
Reporting
3
1,2
Difficult
Reflective
Reporting
4
2
Difficult
Reflective
Measure
5
2
Moderate
Reflective
Reporting
6
3
Difficult
Reflective
Measure
7
4
Difficult
Analytic
Measure
8
4,5
Difficult
Reflective
Measure
9
6
Difficult
Reflective
Reporting
10
6
Difficult
Reflective
Measure
11
6
Difficult
Reflective
Measure
12
6
Difficult
Reflective
Reporting
13
7
Difficult
Reflective
Measure
14
8
Moderate
Reflective
Reporting
15
9
Difficult
Analytic
Measure
Case
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
6
Difficult
Reflective
Reporting
2
6
Difficult
Reflective
Reporting
3
4,5,6
Difficult
Reflective
Reporting
4
9
Difficult
Analytic
Measure
5
9
Difficult
Analytic
Measure
Problem
(s)
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
4
Difficult
Analytic
Reporting
2
4
Difficult
Analytic
Measure
3
4
Difficult
Analytic
Measure
4
4
Difficult
Analytic
Measure
5
4
Difficult
Analytic
Measure
6
5
Difficult
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Measure
7
5
Difficult
Analytic
Measure
8
5
Difficult
Analytic
Measure
9
5
Difficult
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Measure
10
6
Difficult
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Measure
11
7
Difficult
Analytic
Measure
12
7
Difficult
Analytic
Measure
13
7
Difficult
Analytic
Measure
Difficulty Ratings
Guide
Easy
Taken nearly verbatim
from the text
Moderate
Using different expression or
application of concept
Difficult
Several reasoning steps
Inventories ♦ 311
MULTIPLE CHOICE
1. Which inventory account would be used by a merchandiser?
a.
Raw materials
b.
Work in process
c.
Finished goods
d.
None of the above
2. Which inventory account would NOT be used by a manufacturer?
a.
Finished goods
b.
Merchandise inventory
c.
Work in process
d.
Raw materials
3. Which component would NOT be included in the work in process inventory?
a.
Direct materials
b.
Direct labor costs
c.
Factory overhead costs
d.
All of the above would be included
4. Which component would NOT be included in factory overhead costs?
a.
Direct materials
b.
Supervisor salaries
c.
Equipment depreciation
d.
Power costs
312 ♦ Chapter 6
5. The following accounts reflect the inventory accounts of a merchandising company and a
manufacturing company:
Materials Inventory $35,000
Merchandise Inventory $65,000
Finished Goods Inventory $15,000
Work-in-process Inventory $25,000
How much is the inventory total for the manufacturing company?
a.
$15,000
b.
$65,000
c.
$75,000
d.
$140,000
6. Two primary objectives of control over inventory are
a.
inventory cost flow and inventory valuation
b.
safeguarding inventory and reporting inventory in the financial statements
c.
quick response and inventory turnover
d.
Neither a nor b nor c
7. Control over inventory involves reconciling
a.
accounts payable and cash
b.
receiving report and accounts receivable
c.
purchase order and cash
d.
receiving report, purchase order, and vendor’s invoice
8. A physical inventory would be necessary under a __________.
a.
Perpetual inventory system
b.
Periodic inventory system
c.
Both a and b
d.
Neither a or b
Inventories ♦ 313
9. Which of the following is NOT an example of a security measure to prevent inventory theft?
a.
Two way mirrors
b.
Plastic alarm tags
c.
Sensors at exit doors
d.
Maintaining a subsidiary inventory ledger
10. Which inventory cost flow assumption would be appropriate for high priced low volume units?
a.
LIFO
b.
FIFO
c.
Average
d.
Specific identification
11. Which inventory cost flow assumption would value inventory at more recent costs?
a.
LIFO
b.
FIFO
c.
Average
d.
Specific identification
12. Which inventory cost flow assumption would value inventory at older earlier costs?
a.
LIFO
b.
FIFO
c.
Average
d.
Specific identification
13. Which inventory cost flow assumption allows management to identify which costs are included in
cost of merchandise sold?
a.
LIFO
b.
FIFO
c.
Average
d.
Specific identification
14. An auto dealer would probably use which of the following inventory costing methods?
a.
LIFO
b.
FIFO
c.
Average
d.
Specific identification
314 ♦ Chapter 6
15. When the FIFO method is used, ending inventory is assumed to consist of __________.
a.
The most recently purchased units
b.
The oldest units
c.
The units with the highest per unit cost
d.
The units with the lowest per unit cost
16. When the LIFO method is used, ending inventory is assumed to consist of __________.
a.
The most recently purchased units
b.
The oldest units
c.
The units with the highest per unit cost
d.
The units with the lowest per unit cost
17. Which inventory cost flow assumption would report the highest net income under periods of
inflation?
a.
LIFO
b.
FIFO
c.
Average
d.
Specific identification
18. Which inventory cost flow assumption would report the lowest net income under periods of
inflation?
a.
LIFO
b.
FIFO
c.
Average
d.
Specific identification
19. Which inventory cost flow assumption would report the highest cost of merchandise sold under
periods of inflation?
a.
LIFO
b.
FIFO
c.
Average
d.
Specific identification
Inventories ♦ 315
20. Which inventory cost flow assumption would report the lowest cost of merchandise sold under
periods of inflation?
a.
LIFO
b.
FIFO
c.
Average
d.
Specific identification
21. Which inventory cost flow assumption would report the highest net income under periods of
deflation?
a.
LIFO
b.
FIFO
c.
Average
d.
Specific identification
22. Which entry would be made to record the purchase of inventory on credit under a perpetual
system?
a.
Merchandise Inventory XXX
Accounts Payable XXX
b.
Merchandise Inventory XXX
Accounts Receivable XXX
c.
Purchases XXX
Accounts Payable XXX
d.
Purchases XXX
Accounts Receivable XXX
23. Under a perpetual inventory system, recording a sale on account involves a debit to which of the
following accounts?
a.
Inventory and Accounts Payable
b.
Cost of Merchandise Sold and Accounts Receivable
c.
Purchases and Accounts Receivable
d.
Inventory and Accounts Receivable
24. When the LIFO method is used, cost of merchandise sold is assumed to consist of __________.
a.
The most recently purchased units
b.
The oldest units
c.
The units with the highest per unit cost
d.
The units with the lowest per unit cost
316 ♦ Chapter 6
25. Which of the following entries are required to record the cost of merchandise sold under a
perpetual inventory system?
a.
Cost of Merchandise Sold XXX
Merchandise Inventory XXX
b.
Cost of Merchandise Sold XXX
Purchases XXX
c.
Merchandise Inventory XXX
Cost of Merchandise Sold XXX
d.
Purchases XXX
Cost of Merchandise Sold XXX
Exhibit 8-1
Use the following data for the month of April.
April 1
Beginning Inventory
100 units @ $4
April 2
Sales
50 units
April 3
Purchases
300 units @ $6
April 10
Sales
350 units
April 21
Purchases
400 units @ $8
April 28
Sales
200
26. Refer to Exhibit 8-1. Assuming a perpetual inventory system is used, what is ending inventory
under FIFO?
a.
$1,600
b.
$1,200
c.
$800
d.
$1,000
27. Refer to Exhibit 8-1. Assuming a perpetual inventory system is used, what is ending inventory
under LIFO?
a.
$1,000
b.
$1,100
c.
$1,600
d.
$1,350
28. Refer to Exhibit 8-1. Assuming a periodic inventory system is used, what is ending inventory
under LIFO?
a.
$1,000
b.
$1,100
c.
$1,600
d.
$1,350
Inventories ♦ 317
29. Refer to Exhibit 8-1. Assuming a periodic inventory system is used, what is ending inventory
under FIFO?
a.
$1,400
b.
$1,000
c.
$1,100
d.
$1,600
30. Refer to Exhibit 8-1. Assuming a periodic inventory system is used, what is ending inventory
under the Average Cost method?
a.
$1,200
b.
$1,400
c.
$1,350
d.
$1,250
31. Using the periodic inventory system, how much lower would taxable income be if LIFO is used
rather than FIFO given the following?
Beginning inventory
100 units @ $10
Purchases
500 units @ $13
Sales
300 units
a.
$3,000
b.
$1,000
c.
$600
d.
$300
32. Use the following data to calculate the cost of ending inventory under FIFO using the periodic
inventory system.
September 1
Beginning Inventory
15 units @ $20
September 10
Purchases
20 units @ $25
September 20
Purchases
25 units @ $28
September 30
Ending Inventory
30 units
a.
$750
b.
$825
c.
$675
d.
$600
318 ♦ Chapter 6
33. Use the following data to calculate cost of merchandise sold under FIFO using the periodic
inventory system.
September 1
Beginning Inventory
15 units @ $20
September 10
Purchases
20 units @ $25
September 20
Purchases
25 units @ $28
September 30
Ending Inventory
30 units
a.
$750
b.
$825
c.
$675
d.
$600
34. Calculate the cost of ending inventory using FIFO inventory cost method using the periodic
inventory system.
1/1
Beginning inventory
10 units @ $10 per unit
2/28
Purchases
40 units @ $12 per unit
5/10
Purchases
50 units @ $14 per unit
9/20
Purchases
30 units @ $16 per unit
12/31
Ending inventory
50 units
a.
$500
b.
$800
c.
$580
d.
$760
35. Use the following data to calculate the cost of ending inventory under LIFO using the periodic
inventory system.
September 1
Beginning Inventory
15 units @ $20
September 10
Purchases
20 units @ $25
September 20
Purchases
25 units @ $28
September 30
Ending Inventory
30 units
a.
$750
b.
$825
c.
$675
d.
$600
Inventories ♦ 319
36. When using the weighted average cost method, the cost per unit in valuing inventory is
determined by __________.
a.
Dividing the cost of purchases by the number of units purchased
b.
Dividing the cost of ending inventory by the number of units in ending inventory
c.
Dividing the cost of goods available by the number of units available for sale
d.
Dividing the cost of beginning inventory by the number of units in beginning inventory
37. Use the following data to calculate the cost of ending inventory under Average Cost method using
the periodic inventory system.
September 1
Beginning Inventory
15 units @ $20
September 10
Purchases
20 units @ $25
September 20
Purchases
25 units @ $28
September 30
Ending Inventory
30 units
a.
$750
b.
$825
c.
$675
d.
$600
38. Use the following data to calculate cost of merchandise sold under LIFO using the periodic
inventory system.
September 1
Beginning Inventory
15 units @ $20
September 10
Purchases
20 units @ $25
September 20
Purchases
25 units @ $28
September 30
Ending Inventory
30 units
a.
$750
b.
$825
c.
$675
d.
$600
320 ♦ Chapter 6
39. Calculate the cost of ending inventory using the weighted-average inventory costing method using
the periodic inventory system (round to nearest dollar).
1/1
Beginning inventory
10 units @ $10 per unit
2/28
Purchases
40 units @ $12 per unit
5/10
Purchases
50 units @ $14 per unit
9/20
Purchases
30 units @ $16 per unit
12/31
Ending inventory
50 units
a.
$692
b.
$650
c.
$677
d.
$700
40. Calculate the cost of ending inventory using LIFO inventory cost method using the periodic
inventory system.
1/1
Beginning inventory
10 units @ $10 per unit
2/28
Purchases
40 units @ $12 per unit
5/10
Purchases
50 units @ $14 per unit
9/20
Purchases
30 units @ $16 per unit
12/31
Ending inventory
50 units
a.
$500
b.
$800
c.
$580
d.
$760
41. When prices are decreasing, the ending inventory balance reported on a FIFO basis is generally
__________.
a.
Greater than a LIFO basis
b.
Equal to ending inventory reported on a LIFO basis
c.
Lower than on a LIFO basis
d.
Cannot be determined by the information given
42. Which of the following statement is generally true during period of inflation?
a.
LIFO produces higher taxable income than under FIFO
b.
FIFO results in paying less taxes than under LIFO
c.
LIFO will maximize income reported to shareholders
d.
The use of LIFO will result in paying less taxes than under FIFO
Inventories ♦ 321
43. If a company is using LIFO during inflation and has a large purchase of inventory at year-end, this
will cause __________ using the periodic inventory system.
a.
Cost of goods sold to increase
b.
Cost of good sold to decrease
c.
Inventory to increase
d.
Gross profit to increase
44. LIFO results in lower taxes when __________.
a.
Costs are decreasing
b.
Costs are increasing
c.
Costs are constant
d.
LIFO always results in lower taxes
45. “LIFO Reserve” is calculated as __________.
a.
LIFO end of year minus LIFO beginning of the year
b.
FIFO inventory plus LIFO inventory
c.
FIFO inventory minus LIFO inventory
d.
None of the above
46. Which inventory costing method achieves the best matching of revenues and costs in a period of
inflation?
a.
Specific Identification
b.
LIFO
c.
FIFO
d.
Average Cost
47. Which inventory costing method when used for taxes must also be used for financial reporting?
a.
Specific Identification
b.
LIFO
c.
FIFO
d.
Average Cost
48. FIFO would increase taxable income (and therefore taxes would increase) taxes when
__________.
a.
Costs are increasing
b.
Costs are declining
c.
Costs are constant
d.
FIFO will always yield the highest taxes
322 ♦ Chapter 6
49. The LIFO conformity rule requires that a company __________.
a.
Use FIFO for financial reporting
b.
Use any inventory costing method it wishes for financial reporting
c.
Use LIFO for financial reporting when using LIFO for tax purposes
d.
None of the above
50. When applying the lower-of-cost-or-market method, which way can cost and replacement cost be
determined?
a.
Each item
b.
Major classes
c.
Inventory as a whole
d.
Any of the above
51. Use the following data to determine the market decline of inventory under the lower of cost or
market rule, applied on an individual basis.
Commodity
Inventory
Quantity
Unit Cost
Price
Unit Market
Price
A
1,000
$2.50
$3.25
B
5,500
$3.00
$2.75
C
3,000
$1.75
$1.50
a.
$750
b.
$1,375
c.
$2,125
d.
None of the above
52. Use the following data to value inventory under the lower of cost or market rule, applied on an
individual basis.
Commodity
Inventory
Quantity
Unit Cost
Price
Unit Market
Price
A
200
$10
$ 8
B
100
$15
$16
C
400
$ 8
$ 7
a.
$6,700
b.
$6,000
c.
$5,900
d.
$6,800
Inventories ♦ 323
53. The net realizable value valuation method is appropriate when
a.
inventory is out of date, spoiled, or damaged or that can be sold only at prices below cost.
b.
the cost of replacing inventory is lower than the original purchase cost.
c.
prices are rising.
d.
prices are falling.
54. If damaged merchandise costing $500 can only be sold for $200 and the direct selling expenses are
estimated to be $150, the net realizable value of the inventory would be
a.
$200
b.
$150
c.
$50
d.
$300
55. Quick response strategies optimize inventory levels in the value chain by
a.
using manual inventory recording systems.
b.
requiring cash payment of inventory.
c.
offering special sales of merchandise.
d.
electronically sharing information.
56. Inventory turnover is arrived at by __________.
a.
Dividing average inventory by the number of days’ sales in inventory
b.
Dividing average inventory by cost of merchandise sold
c.
Dividing cost of merchandise sold by the number of days’ sales in inventory
d.
Dividing cost of merchandise sold by the average inventory
57. Inventory turnover is calculated by __________.
a.
Dividing average inventory by the number of days sales in inventory
b.
Dividing costs of goods sold by the number of days’ sales in inventory
c.
Dividing cost of goods sold by average inventory
d.
Dividing average inventory by cost of goods sold
324 ♦ Chapter 6
58. Cash received from the sale of inventory is shown on a statement of cash flows as a(n)
__________.
a.
Operating activity
b.
Investing activity
c.
Financing activity
d.
None of the above
TRUE/FALSE
1. A merchandiser is a company that converts raw materials into final products.
2. Merchandise inventory is a significant current liability for most merchandising companies.
3. The cost of merchandise consists solely of the purchase price.
4. Materials inventory consists of the cost of raw materials used in manufacturing a product.
5. In a chocolate manufacturer, materials inventory would consist of the cost of cocoa and sugar.
6. Direct labor consists of the wages of factory workers directly involved in making the product.
7. Factory overhead consists of all costs other than direct labor.
8. Work in process inventory consists of direct materials, direct labor costs and factory overhead
costs.
Inventories ♦ 325
9. When finished goods inventory are sold the costs are transferred to the cost of goods sold.
10. A preventive control is designed to prevent errors or misstatements from occurring.
11. Control over inventory should begin as soon as inventory is received.
12. The amount of each type of merchandise can be found in the subsidiary inventory ledger.
13. Under a perpetual inventory system it is NOT necessary to take a physical inventory.
14. In a perpetual inventory system, the physical count of inventory is compared to the inventory
recorded.
15. Most companies take their physical inventories when their inventory levels are highest.
16. The specific identification method is most suitable to low volume and high priced units.
17. Under the perpetual inventory system a sales transaction requires two journal entries.
18. The LIFO inventory method reports inventory at more recent costs on the balance sheet.