Chapter 06 – Inventories
TRUE/FALSE
1. Supply-chain management works well in a just–in-time operating environment.
2. The lower the value assigned to ending inventory, the lower the gross margin.
3. Days’ inventory on hand equals the inventory turnover divided by 365.
4. The costs included in work in process and finished goods inventories would properly contain
manufacturing overhead costs.
5. Indirect materials and indirect labor are components of manufacturing overhead.
6. An overstatement of ending inventory in a period will result in an overstatement of gross margin in
that period.
7. An understatement of ending inventory in a period will result in an understatement of gross margin in
the next period.
8. An overstatement of beginning inventory in a period will result in an overstatement of gross margin in
the next period.
9. A merchandiser’s inventory consists of raw materials, work in process, and finished goods.
10. Inventory is an example of a long-term asset.
11. Despite its advantages, the just–in-time operating environment produces increased carrying costs for
inventory.
12. The determination of the balance sheet cost of merchandise inventory is important to the determination
of net income.
13. The portion of cost of goods available for sale that is not assigned to ending inventory is assigned to
cost of goods sold.
14. The higher the inventory turnover, the higher the days’ inventory on hand.
15. Inventory turnover is a measure expressed in terms of a percentage.
16. Periodic and perpetual are examples of inventory costing systems.
17. Supply-chain management helps companies maintain higher levels of inventory.
18. The term cost flow refers to the association of costs with their assumed flow in the operation of a
business.
19. Goods in transit shipped FOB shipping point should be included in the seller’s ending inventory.
20. Goods in transit shipped FOB destination should be included in the buyer’s ending inventory.
21. Goods held on consignment should be included in the consignee’s ending inventory.
22. In accounting for inventory, the assumed cost flow need not match the physical goods flow.
23. Inventory methods such as LIFO and FIFO deal more with cost flow than with goods flow.
24. Costs incurred in storing inventory usually are included in inventory costs.
25. Freight charges associated with the purchase of inventory normally are not included in inventory cost.
26. Realizable value is the amount for which an inventory item can be resold.
27. The lower-of-cost-or-market rule implies that it is unrealistic to carry inventory at a cost that is in
excess of its market value.
28. When the cost of inventory is written down due to a market decline, a loss must be recorded.
29. Merchandise inventory is valued on the balance sheet at the expected resale price.
30. The specific identification method identifies the cost of each item in ending inventory.
31. If prices were to never change, there would be no need for alternative inventory methods.
32. The average-cost method relies on a simple average calculation.
33. The LIFO method tends to smooth out the peaks and valleys of a business cycle.
34. The LIFO method agrees with the actual physical goods flow in most businesses.
35. A major criticism of the FIFO method is that it magnifies the effects of the business cycle on business
income.
36. The matching of revenue with inventory costs is best achieved with the FIFO method.
37. Under the periodic inventory system, cost of goods sold is not recorded until the end of the accounting
period.
38. In periods of rising inventory prices, the LIFO method will result in a higher inventory valuation than
will the average-cost method.
39. In periods of rising prices, the FIFO method will result in a larger gross margin than the LIFO method.
40. The LIFO method is rarely used because most companies do not sell the last goods they purchase first.
41. In periods of falling prices, LIFO will result in a higher ending inventory valuation than FIFO.
42. In general, when prices are rising, use of the FIFO method will result in a lower tax liability than the
other methods.
43. In general, in times of rising prices, using FIFO has a favorable effect on cash flows.
44. If a company uses LIFO for tax purposes, it must also use LIFO for financial reporting purposes.
45. The FIFO inventory method produces the most up–to-date figure for ending inventory.
46. During periods of consistently falling prices, the FIFO inventory method will produce the highest
possible amount of net income.
47. The average-cost method produces an ending inventory figure that is somewhere between the figures
produced by FIFO and LIFO.
48. Specific identification is a very popular inventory method because it is very easy to apply.
49. The specific identification method and the FIFO method produce the same results under both the
perpetual and periodic inventory systems.
50. The computer has made the perpetual inventory system more popular and easier to apply.
51. Under the perpetual inventory system, cost of goods sold is not recorded until the end of the
accounting period.
52. Ending merchandise inventory for LIFO will be the same dollar amount under a periodic inventory
system as under a perpetual inventory system.
53. When the average-cost method is applied to a perpetual inventory system, the sale and purchase of
goods will change the unit cost of the goods that remain in inventory.
54. When the average-cost method is applied to a perpetual inventory system, a moving average cost per
unit is computed with each purchase.
55. Both the retail method and the gross profit method are useful in estimating the inventory cost.
56. When taking a physical inventory under the retail method, it is necessary to know only the quantity of
items on hand.
57. In verifying a claim for a loss of inventory, an insurance company might use the gross profit method.
58. The gross profit method requires that records be kept at both cost and retail.
59. A cost-to-retail percentage must be calculated when applying the retail method.
MULTIPLE CHOICE
1. All of the following are inventory costing methods except
a.
first-in, first-out.
b.
average-cost.
c.
periodic.
d.
specific identification.
2. Which of the following is an inventory processing system?
a.
Perpetual
b.
Last-in, first-out
c.
Lower-of-cost-or-market
d.
Average-cost
3. Average inventory equals $100,000, and cost of goods sold equals $216,000. Days’ inventory on hand
equals
a.
168.98 days.
b.
170.0 days.
c.
157.9 days.
d.
193.1 days.
4. Cost of goods sold equals $500,000, and average inventory equals $200,000. Days’ inventory on hand
equals
a.
91.3 days.
b.
146.0 days.
c.
821.9 days.
d.
912.5 days.
5. Which of the following accounts would not appear as an asset on a manufacturer’s balance sheet?
a.
Finished Goods
b.
Work in Process
c.
Factory Overhead
d.
Raw Materials
6. An overstatement of beginning inventory results in
a.
no effect on the period’s gross margin.
b.
an overstatement of gross margin.
c.
an understatement of gross margin.
d.
a need to adjust purchases.
7. An overstatement of ending inventory in one period results in
a.
an overstatement of the ending inventory of the next period.
b.
an understatement of gross margin of the next period.
c.
an overstatement of gross margin of the next period.
d.
no effect on gross margin of the next period.
8. An understatement of year 1’s ending inventory will
a.
cause year 2’s cost of goods sold to be overstated.
b.
result in an understatement of year 2’s beginning inventory.
c.
not affect year 2’s ending owner’s equity.
d.
have no effect on year 2’s gross margin.
9. An understatement of year 1’s beginning inventory will
a.
cause year 2’s gross margin to be overstated.
b.
cause year 1’s cost of goods sold to be understated.
c.
cause year 2’s gross margin to be understated.
d.
have no effect on year 1’s gross margin.
10. The most important accounting problem in dealing with merchandise inventory is the application of
which of the following conventions or rules?
a.
Materiality
b.
Full disclosure
c.
Matching
d.
Conservatism
11. Manufacturing overhead would not include which of the following costs?
a.
Packing materials
b.
Supervisory salaries
c.
Factory rent
d.
Raw materials
12. Which of the following is an inventory valuation method?
a.
First-in, first-out
b.
Average-cost
c.
Lower-of-cost-or-market
d.
Perpetual
13. Which of the following is an inventory costing method?
a.
Perpetual
b.
Lower-of-cost-or-market
c.
Specific identification
d.
Periodic
14. Inventory turnover is expressed in terms of
a.
days.
b.
a percentage.
c.
dollars.
d.
times.
15. Days’ inventory on hand equals 365 divided by
a.
inventory turnover.
b.
cost of goods sold.
c.
goods available for sale.
d.
average inventory.
16. When applying the lower–of-cost-or-market rule to inventory valuation, market generally means
a.
original cost, less physical deterioration.
b.
replacement cost.
c.
original cost.
d.
resale value.
17. Applying the lower-of-cost-or-market rule follows which of the following accounting conventions?
a.
Full disclosure
b.
Matching
c.
Materiality
d.
Conservatism
18. Goods held on consignment are
a.
kept for sale on the premises of the consignor.
b.
included as part of no one’s ending inventory.
c.
never owned by the consignee.
d.
included in the consignee’s ending inventory.
19. Inventory costing methods place primary reliance on assumptions about the flow of
a.
costs.
b.
goods.
c.
resale prices.
d.
values.
20. Which of the following costs would not be included in the inventory cost?
a.
Invoice price
b.
Cost of goods held on consignment
c.
Freight-in
d.
Sales tax
21. Which of the following costs usually would not be included in the inventory cost?
a.
Storage costs
b.
Related tariffs
c.
Invoice price less purchases discounts
d.
Insurance on goods in transit
22. Which of the following terms best describes the assumption made in applying the four inventory
methods?
a.
Cost flow
b.
Goods flow
c.
Asset flow
d.
Physical flow
23. Which of the following costs normally would be included in the inventory cost?
a.
Ordering costs
b.
Receiving costs
c.
Applicable taxes
d.
Storage costs
24. An assumption about cost flow is necessary
a.
because it is required by income tax regulations.
b.
only when the flow of goods cannot be determined.
c.
because prices usually change, and tracking which units have been sold is difficult.
d.
even when there is no change in the purchase price of inventory.
25. A fur dealer probably would use which of the following inventory methods?
a.
Specific identification
b.
FIFO
c.
Average-cost
d.
LIFO
26. Use this inventory information for the month of June to answer the following question.
June
1
Beginning inventory
10 units @ $120
5
Purchase
60 units @ $112
14
Sale
40 units
21
Purchase
30 units @ $116
30
Sale
28 units
Assuming that a periodic inventory system is used, what is cost of goods sold on a LIFO basis?
a.
$7,696
b.
$7,736
c.
$3,664
d.
$3,704
27. Use this inventory information for the month of June to answer the following question.
1
Beginning inventory
10 units @ $120
5
Purchase
60 units @ $112
14
Sale
40 units
21
Purchase
30 units @ $116
30
Sale
28 units
Assuming that a periodic inventory system is used, what is cost of goods sold under the average-cost
method?
a.
$3,648
b.
$7,752
c.
$3,712
d.
$7,888
28. Use this inventory information for the month of June to answer the following question.
1
Beginning inventory
10 units @ $120
5
Purchase
60 units @ $112
14
Sale
40 units
21
Purchase
30 units @ $116
30
Sale
28 units
What is cost of goods sold under the specific identification method?
a.
More information is needed.
b.
$3,704
c.
$7,696
d.
$7,736
29. Use this inventory information for the month of May to answer the following question.
May
1
Beginning inventory
20 units @ $76
7
Purchase
70 units @ $80
18
Sale
25 units
22
Purchase
10 units @ $88
29
Sale
40 units
Assuming that a periodic inventory system is used, what is ending inventory (rounded) under the
average-cost method?
a.
$5,200
b.
$5,288
c.
$2,848
d.
$2,800
30. Use this inventory information for the month of May to answer the following question.
May
1
Beginning inventory
20 units @ $76
7
Purchase
70 units @ $80
18
Sale
25 units
22
Purchase
10 units @ $88
29
Sale
40 units
Assuming that a periodic inventory system is used, what is cost of goods sold on a FIFO basis?
a.
$2,880
b.
$5,120
c.
$5,200
d.
$2,800
31. Use this inventory information for the month of May to answer the following question.
1
Beginning inventory
20 units @ $76
7
Purchase
70 units @ $80
18
Sale
25 units
22
Purchase
10 units @ $88
29
Sale
40 units
What is ending inventory under the specific identification method?
a.
$2,720
b.
$2,800
c.
More information is needed.
d.
$2,880
32. Use this information to answer the following question.
Beginning inventory
100 units @ $8.00
Purchase—Oct.
200 units @ $6.00
Purchase—Dec.
100 units @ $12.00
A periodic inventory system is used; ending inventory is 150 units.
What is ending inventory under the average-cost method?
a.
$900
b.
$1,050
c.
$1,350
d.
$1,200
33. Use this information to answer the following question.
Beginning inventory
100 units @ $8.00
Purchase—Oct.
200 units @ $6.00
Purchase—Dec.
100 units @ $12.00
A periodic inventory system is used; ending inventory is 147 units.
What is cost of goods sold under LIFO?
a.
$1,118
b.
$3,118
c.
$2,118
d.
$4,118
34. Use this information to answer the following question.
Beginning inventory
100 units @ $8.00
Purchase—Oct.
200 units @ $6.00
Purchase—Dec.
100 units @ $12.00
A periodic inventory system is used; ending inventory is 151 units.
What is ending inventory under FIFO?
a.
$1,406
b.
$1,606
c.
$1,306
d.
$1,506
35. Use this information to answer the following question.
Feb.
1
Inventory
200 units @ $6.00
6
Purchase
300 units @ $6.60
13
Purchase
100 units @ $7.20
20
Purchase
200 units @ $7.80
25
Purchase
40 units @ $8.40
Total sales
620 units
A periodic inventory system is used.
Using the average-cost method, the cost assigned to ending inventory is
a.
$4,278.
b.
$1,518.
c.
$1,692.
d.
$1,584.
36. Use this information to answer the following question.
Feb.
1
Inventory
200 units @ $6.00
6
Purchase
300 units @ $6.60
13
Purchase
100 units @ $7.20
20
Purchase
200 units @ $7.80
25
Purchase
40 units @ $8.40
Total sales
620 units
A periodic inventory system is used.
Using the specific identification method and assuming that 50 of the items left are from the February
13 purchase and the rest are from the February 20 purchase, the cost assigned to ending inventory is
a.
$1,920.
b.
$1,656.
c.
$1,686.
d.
$1,588.
37. Use this information to answer the following question.
Feb.
1
Inventory
200 units @ $6.00
6
Purchase
300 units @ $6.60
13
Purchase
100 units @ $7.20
20
Purchase
200 units @ $7.80
25
Purchase
40 units @ $8.40
Total sales
620 units
A periodic inventory system is used.
Using LIFO, the cost assigned to ending inventory is
a.
$1,740.
b.
$4,056.
c.
$1,332.
d.
$4,464.
38. Use this information to answer the following question.
Feb.
1
Inventory
200 units @ $6.00
6
Purchase
300 units @ $6.60
13
Purchase
100 units @ $7.20
20
Purchase
200 units @ $7.80
25
Purchase
40 units @ $8.40
Total sales
620 units
A periodic inventory system is used.
Using FIFO, the cost assigned to ending inventory is
a.
$4,056.
b.
$1,332.
c.
$1,740.
d.
$4,464.
39. Use this information to answer the following question.
Feb.
1
Inventory
200 units @ $6.00
6
Purchase
300 units @ $6.60
13
Purchase
100 units @ $7.20
20
Purchase
200 units @ $7.80
25
Purchase
40 units @ $8.40
Total sales
620 units
A periodic inventory system is used.
Using LIFO, cost of goods sold is
a.
$1,740.
b.
$4,464.
c.
$1,332.
d.
$4,056.
40. Use this information to answer the following question.
Jan.
1
Inventory
15 units @ $4.00
8
Purchase
60 units @ $4.40
17
Purchase
30 units @ $4.20
25
Purchase
45 units @ $4.80
Total sales
100 units
A periodic inventory system is used.
Cost of goods sold under the average-cost method is
a.
$444.
b.
$333.
c.
$435.
d.
$222.