Chapter 6—Inventories Key
1. One of the two internal control procedures over inventory is to properly report inventory on the financial
statements.
2. A purchase order establishes an initial record of the receipt of the inventory.
3. A perpetual inventory system is an effective means of control over inventory.
4. A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels.
5. Safeguarding inventory and proper reporting of the inventory in the books are the reasons for controlling the
inventory.
6. Inventory controls start when the merchandise is shelved in the store area.
7. A physical inventory should be taken at the end of every month.
8. The specific identification inventory method should be used when the inventory consists of identical, low
cost units that are purchased and sold frequently.
9. The selection of an inventory costing method has no significant impact on the financial statements.
10. Of the three widely used inventory costing methods (FIFO, LIFO, and average cost), the LIFO method of
costing inventory assumes costs are charged based on the most recent purchases first.
11. When using the FIFO inventory costing method, the most recent costs are assigned to the cost of goods
sold.
12. FIFO is the inventory costing method that follows the physical flow of the goods.
13. Under the LIFO inventory costing method, the most recent costs are assigned to ending inventory.
14. The average cost inventory method is the rarely used with a perpetual inventory system.
15. If the perpetual inventory system is used, the account entitled Merchandise Inventory is debited for
purchases of merchandise.
16. Under the periodic inventory system, the merchandise inventory account continuously discloses the amount
of inventory on hand.
17. Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on
hand and the cost of the merchandise sold.
18. The three inventory costing methods will normally each yield different amounts of net income.
19. The average cost method will always yield results between FIFO and LIFO.
20. During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater
amount of net income than would result from the use of the LIFO cost method.
21. During periods of increasing costs, the use of the FIFO method of costing inventory will yield an inventory
amount for the balance sheet that is higher than LIFO would produce.
22. During periods of rapidly rising costs, the use of the LIFO method results in illusory or inventory profits.
23. During periods of decreasing costs the use of the LIFO method of costing inventory will result in a lower
amount of net income than would result from the use of the FIFO method.
24. During periods of increasing costs, an advantage of the LIFO inventory cost method is that it matches more
recent costs against current revenues.
25. In valuing damaged merchandise for inventory purposes, net realizable value is the estimated selling price
less any direct costs of disposal.
26. Unsold consigned merchandise should be included in the consignee’s inventory.
27. If ending inventory for the year is understated, net income for the year is overstated.
28. If ending inventory for the year is overstated, owner’s equity reported on the balance sheet at the end of the
year is understated.
29. The lower of cost or market is a method of inventory valuation.
30. “Market,” as used in the phrase “lower of cost or market” for valuing inventory, refers to the price at which
the inventory is being offered for sale by its owner.
31. A consignor who has goods out on consignment with an agent should include the goods in ending inventory
even though they are not in the possession of the consignor.
32. The use of the lower-of-cost-or-market method of inventory valuation increases net income for the period in
which the inventory replacement price declined.
33. The lower-of-cost-or-market method of determining the value of ending inventory can be applied on an item
by item, by major classification of inventory, or by the total inventory.
34. When merchandise inventory is shown on the balance sheet, both the method of determining the cost of the
inventory and the method of valuing the inventory should be shown.
35. Most large companies will use only one inventory costing methods for all of its different segments.
36. Direct disposal costs do not include special advertising or sales commissions.
37. Inventory errors, if not discovered, will self-correct in two years.
38. Generally, the lower the number of days’ sales in inventory, the better.
39. One negative effect of carrying too much inventory is risk that customers will change their buying habits.
40. Average inventory is computed by adding the inventory at the beginning of the period to the inventory at the
end of the period and dividing by two.
41. Inventory turnover measures the length of time is takes to acquire, sell and replace the inventory.
42. In the retail inventory method, the cost to retail ratio is equal to the cost of goods sold divided by the retail
price of the good sold.
43. Use of the retail inventory method requires taking a physical count of inventory.
44. If a fire destroys the merchandise inventory, the gross profit method can be used to estimate the cost of
merchandise destroyed.
45. If a company uses the periodic inventory system to cost its inventory, the gross profit method is a method
that can be used to check on theft when the actual inventory is taken by the company.
46. Match the following documents used for inventory control:
1. authorizes the purchase of inventory from an approved
Vendor’s
2. last document in the chain, use to compare all three for
Receiving
47. Match the following cost flow assumption to their inventory costing method:
1. Cost flow is in the reverse order in which the cost
2. Cost flow matches the unit sold to the unit
Last-in, Last-out
3. Cost flow is in the order in which the costs were
Specific
First-in, First-out
48. Under a perpetual inventory system, the amount of each type of merchandise on hand is available in the
49. Taking a physical count of inventory
50. Control of inventory should begin as soon as the inventory is received. Which of the following internal
control steps is not done to meet this goal?
51. Which of the following is not an example for safeguarding inventory?
52. Which of the following methods is appropriate for a business whose inventory consists of a relatively small
number of unique, high-cost items?
53. Ending inventory is made up of the oldest purchases when a company uses
54. When merchandise sold is assumed to be in the order in which the purchases were made, the company is
using
55. The two most widely used methods for determining the cost of inventory are
56. Cost flow is in the order in which costs were incurred when using
57. Cost flow is in the reverse order in which costs were incurred when using
58. The inventory method that assigns the most recent costs to cost of goods sold is
59. Inventory costing methods place primary emphasis on assumptions about
60. The inventory costing method that reports the most current prices in ending inventory is
61. The inventory costing method that reports the earliest costs in ending inventory is
62. Which of the following companies would be more likely to use the specific identification inventory costing
method?
63. Addison, Inc. uses a perpetual inventory system. The following is information about one inventory item for
the month of September:
Sep. 1
Inventory
20 units at $20
4
Sold
10 units
10
Purchased
30 units at $25
17
Sold
20 units
30
Purchased
10 units at $30
If Addison uses FIFO, the cost of the ending merchandise inventory on September 30 is
64. Addison, Inc. uses a perpetual inventory system. The following is information about one inventory item for
the month of September:
Sep. 1
Inventory
20 units at $20
4
Sold
10 units
10
Purchased
30 units at $25
17
Sold
20 units
30
Purchased
10 units at $30
If Addison uses LIFO, the cost of the ending merchandise inventory on September 30 is
65. When using a perpetual inventory system, the journal entry to record the cost of merchandise sold is:
66. Under the _________ inventory method, accounting records maintain a continuously updated inventory
value.
67. The inventory data for an item for November are:
Nov. 1
Inventory
20 units at $19
4
Sold
10 units
10
Purchased
30 units at $20
17
Sold
20 units
30
Purchased
10 units at $21
Using a perpetual system, what is the cost of the merchandise sold for November if the company uses LIFO?
68. The inventory data for an item for November are:
Nov. 1
Inventory
20 units at $19
4
Sold
10 units
10
Purchased
30 units at $20
17
Sold
20 units
30
Purchased
10 units at $21
Using a perpetual system, what is the cost of the merchandise sold for November if the company uses FIFO?
69. Use the following information to answer the following questions.
The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records
during May. The company had no beginning inventory on May 1.
Date
Product Z
Units
Cost
May 3
Purchase
5
$20
May 10
Sale
3
May 17
Purchase
10
$24
May 20
Sale
6
May 23
Sale
3
May 30
Purchase
10
$30
Assuming that the company uses the perpetual inventory system, determine the cost of merchandise sold for the sale of May 20 using the LIFO
inventory cost method.
70. Use the following information to answer the following questions.
The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records
during May. The company had no beginning inventory on May 1.
Date
Product Z
Units
Cost
May 3
Purchase
5
$20
May 10
Sale
3
May 17
Purchase
10
$24
May 20
Sale
6
May 23
Sale
3
May 30
Purchase
10
$30
Assuming that the company uses the perpetual inventory system, determine the cost of merchandise sold for the sale of May 20 using the FIFO
inventory cost method.
71. Use the following information to answer the following questions.
The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records
during May. The company had no beginning inventory on May 1.
Date
Product Z
Units
Cost
May 3
Purchase
5
$20
May 10
Sale
3
May 17
Purchase
10
$24
May 20
Sale
6
May 23
Sale
3
May 30
Purchase
10
$30
Assuming that the company uses the perpetual inventory system, determine the ending inventory value for the month of May using the FIFO
inventory cost method.
72. Use the following information to answer the following questions.
The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records
during May. The company had no beginning inventory on May 1.
Date
Product Z
Units
Cost
May 3
Purchase
5
$20
May 10
Sale
3
May 17
Purchase
10
$24
May 20
Sale
6
May 23
Sale
3
May 30
Purchase
10
$30
Assuming that the company uses the perpetual inventory system, determine the gross profit for the sale of May 23 using the FIFO inventory cost
method.
73. Use the following information to answer the following questions.
The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records
during May. The company had no beginning inventory on May 1.
Date
Product Z
Units
Cost
May 3
Purchase
5
$20
May 10
Sale
3
May 17
Purchase
10
$24
May 20
Sale
6
May 23
Sale
3
May 30
Purchase
10
$30
Assuming that the company uses the perpetual inventory system, determine the ending inventory for the month of May using the LIFO inventory
cost method.
74. Use the following information to answer the following questions.
The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records
during May. The company had no beginning inventory on May 1.
Date
Product Z
Units
Cost
May 3
Purchase
5
$20
May 10
Sale
3
May 17
Purchase
10
$24
May 20
Sale
6
May 23
Sale
3
May 30
Purchase
10
$30
Assuming that the company uses the perpetual inventory system, determine the Gross Profit for the month of May using the LIFO cost method.
75. The following units of an inventory item were available for sale during the year:
Beginning inventory
10 units at $55
First purchase
25 units at $60
Second purchase
30 units at $65
Third purchase
15 units at $70
The firm uses the periodic inventory system. During the year, 60 units of the item were sold.
The value of ending inventory using FIFO is:
76. The following units of an inventory item were available for sale during the year:
Beginning inventory
10 units at $55
First purchase
25 units at $60
Second purchase
30 units at $65
Third purchase
15 units at $70
The firm uses the periodic inventory system. During the year, 60 units of the item were sold.
The value of ending inventory using LIFO is:
77. The following units of an inventory item were available for sale during the year:
Beginning inventory
10 units at $55
First purchase
25 units at $60
Second purchase
30 units at $65
Third purchase
15 units at $70
The firm uses the periodic inventory system. During the year, 60 units of the item were sold.
The value of ending inventory using average cost is:
78. The following lots of a particular commodity were available for sale during the year:
Beginning inventory
10 units at $30
First purchase
25 units at $32
Second purchase
30 units at $34
Third purchase
10 units at $35
The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end
of the year according to the LIFO method?
79. The following lots of a particular commodity were available for sale during the year:
Beginning inventory
10 units at $30
First purchase
25 units at $32
Second purchase
30 units at $34
Third purchase
10 units at $35
The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end
of the year according to the FIFO method?
80. The following lots of a particular commodity were available for sale during the year:
Beginning inventory
10 units at $30
First purchase
25 units at $32
Second purchase
30 units at $34
Third purchase
10 units at $35
The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end
of the year according to the average cost method?
81. The following lots of a particular commodity were available for sale during the year:
Beginning inventory
5 units at $61
First purchase
15 units at $63
Second purchase
10 units at $74
Third purchase
10 units at $77
The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year.
What is the amount of cost of good sold for the year according to the average cost method?
D. $1,250
82. The following lots of a particular commodity were available for sale during the year:
Beginning inventory
5 units at $61
First purchase
15 units at $63
Second purchase
10 units at $74
Third purchase
10 units at $77
The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year.
What is the amount of cost of goods sold for the year according to the FIFO method?
83. The following lots of a particular commodity were available for sale during the year:
Beginning inventory
5 units at $61
First purchase
15 units at $63
Second purchase
10 units at $74
Third purchase
10 units at $77
The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year.
What is the amount of cost of goods sold for the year according to the LIFO method?
84. Under a periodic inventory system
85. The following lots of a particular commodity were available for sale during the year:
Beginning inventory
10 units at $60
First purchase
25 units at $65
Second purchase
30 units at $68
Third purchase
15 units at $75
The firm uses the periodic system and there are 25 units of the commodity on hand at the end of the year.
What is the amount of the inventory at the end of the year using the FIFO method?
86. The following lots of a particular commodity were available for sale during the year:
Beginning inventory
10 units at $60
First purchase
25 units at $65
Second purchase
30 units at $68
Third purchase
15 units at $75
The firm uses the periodic system and there are 25 units of the commodity on hand at the end of the year.
What is the amount of the inventory at the end of the year using the LIFO method?
87. The following lots of a particular commodity were available for sale during the year:
Beginning inventory
10 units at $60
First purchase
25 units at $65
Second purchase
30 units at $68
89. During a period of consistently rising prices, the method of inventory that will result in reporting the
greatest cost of merchandise sold is
90. During times of rising prices, which of the following is not an accurate statement?
91. If the revenues are correctly reported and the Gross Profit of a company is understated, what is the effect on
Owner’s Equity?
Third purchase
15 units at $75
92. If merchandise inventory is being valued at cost and the price level is steadily rising, the method of costing
that will yield the highest net income is
93. If merchandise inventory is being valued at cost and the purchase price is steadily falling, which method of
costing will yield the largest net income?
94. During a period of falling prices, which of the following inventory methods generally results in the lowest
balance sheet amount for inventory.
95. Damaged merchandise that can be sold only at prices below cost should be valued at
96. If a manufacturer ships merchandise to a retailer on consignment, the unsold merchandise should be
included in the inventory of the
97. Merchandise inventory at the end of the year was inadvertently overstated. Which of the following
statements correctly states the effect of the error on net income, assets, and owner’s equity?
98. Merchandise inventory at the end of the year was understated. Which of the following statements correctly
states the effect of the error?
99. Merchandise inventory at the end of the year is overstated. Which of the following statements correctly
states the effect of the error?
100. If the cost of an item of inventory is $60 and the current replacement cost is $75, the amount included in
inventory according to the lower of cost or market is
101. Kristin’s Boutiques has identified the following items for possible inclusion in its December 31, 2010
inventory. Which of the following would not be included in the year end inventory?