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Chapter 06 Inventory and Cost of Goods Sold Answer Key
True / False Questions
1.
Inventory is usually reported as a long-term asset in the balance sheet.
2.
Cost of goods sold is an asset reported in the balance sheet and inventory is an expense
reported in the income statement.
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3.
Merchandising companies purchase inventories that are primarily in finished form for
resale to customers.
4.
Cost of goods sold is an expense reported in the income statement and represents the
cost of inventory sold during the period.
5.
If a company has beginning inventory of $15,000, purchases during the year of $75,000,
and ending inventory of $20,000, cost of goods sold equals $70,000.
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6.
A multiple-step income statement reports multiple levels of profitability, such as gross
profit, operating income, income before income taxes, and net income.
7.
Gross profit equals net sales of inventory less cost of goods sold.
8.
Sales revenue minus cost of goods sold is referred to as operating income.
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9.
Income before income taxes equals operating income plus nonoperating revenues less
nonoperating expenses.
10.
If a company has ending inventory of $25,000, purchases during the year of $95,000, and
beginning inventory of $30,000, cost of goods sold equals $90,000.
11.
Companies are not allowed to report inventory costs by assuming which units of inventory
are sold and which units still remain on hand.
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12.
Using the first-in, first-out method (FIFO), the first units purchased are assumed to be the
first ones sold.
13.
Using the weighted-average cost method, the average cost of inventory is calculated as
the average unit cost of inventory purchased during the year.
14.
Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory
and cost of goods sold.
15.
For most companies, actual physical flow of their inventory follows LIFO.
16.
During periods of rising costs, FIFO generally results in a higher ending inventory balance.
17.
During periods of rising costs, FIFO generally results in a higher cost of goods sold.
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18.
During periods of rising costs, LIFO generally results in a higher cost of goods sold.
19.
During periods of rising costs, LIFO generally results in a higher ending inventory balance.
20.
Accountants often call FIFO the balance sheet approach because the amount it reports for
ending inventory better approximates the current cost of inventory.
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21.
One of the primary benefits of using FIFO when inventory costs are rising is that it results
in greater tax savings.
22.
The LIFO conformity rule requires a company that uses LIFO for tax reporting to use FIFO
for financial reporting.
23.
The LIFO difference (reserve) is the additional amount of inventory a company would
report if it used FIFO instead of LIFO.
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Topic: Effects of Inventory Cost Methods
24.
Using a perpetual inventory system, the purchase of inventory is recorded with a debit to
the Purchases account, which is a temporary account closed to cost of goods sold at the
end of the period.
25.
For inventory that is shipped FOB destination, title transfers from the seller to the buyer
once the seller ships the inventory.
26.
For inventory that is shipped FOB shipping point, title transfers from the seller to the
buyer once the seller ships the inventory.
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27.
Freight-in is included in the cost of inventory.
28.
At the time inventory is sold, cost of goods sold is recorded under the perpetual inventory
system.
Topic: Perpetual Inventory System
29.
Using LIFO, the amount reported for ending inventory does not differ depending on
whether a company uses a periodic system or a perpetual system.
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30.
When the value of inventory falls below its cost, companies other than those that use LIFO
have the option of recording the inventory at cost or the lower net realizable value.
31.
When the net realizable value of inventory falls below its cost, no adjustment to the
accounting records is needed.
32.
The adjustment to write down inventory from cost to its lower net realizable value includes
a debit to Cost of Goods Sold and a credit to Inventory.
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33.
The use of the lower of cost and net realizable value to report inventory is an example of
conservatism in financial reporting.
34.
The inventory turnover ratio equals cost of goods sold divided by average inventory.
35.
Generally, a higher inventory turnover ratio reflects positively on a company’s ability to
manage its inventory.
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36.
A company that has average inventory of $500 and cost of goods sold of $2,000 would
have an inventory turnover ratio of 0.25.
37.
The gross profit ratio measures the amount by which the sale price of inventory exceeds
its cost per dollar of sales.
38.
Generally, a lower gross profit ratio reflects positively on a company’s ability to manage its
inventory.
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39.
A periodic inventory system does not continually modify inventory amounts, but instead
adjusts for purchases and sales of inventory at the end of the reporting period based on a
physical count of inventory on hand.
40.
Overstating ending inventory in the current year causes net income in the current year to
be overstated.
41.
Understating ending inventory in the current year causes cost of goods sold in the current
year to be understated.
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Multiple Choice Questions
42.
One of the major differences between service companies and retail or manufacturing
companies is that retailers and manufacturers must account for:
43.
The cost of unsold inventory at the end of the year is classified as a(n) ______ in the
______.
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44.
What type of company purchases raw materials and makes goods to sell?
45.
A manufacturer’s inventory consists of what type of inventory?
46.
Inventory does not include:
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47.
The cost of the goods that a company sold during a period is shown in its financial
statements as ___________ and the cost of the goods that a company still has on hand at
the end of the year is shown in the financial statements as ____________.
48.
Cost of Goods Sold is:
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49.
The balance of the Cost of Goods Sold account at the end of the year represents:
50.
The cost of inventory sold during the current year classified as a(n) ______ in the ______.
51.
The largest expense on a retailer’s income statement is typically:
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52.
Cost of goods sold equals:
53.
Baker Fine Foods has beginning inventory for the year of $12,000. During the year, Baker
purchases inventory for $150,000 and ends the year with $20,000 of inventory. Baker will
report cost of goods sold equal to:
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54.
Tyler Toys has beginning inventory for the year of $18,000. During the year, Tyler
purchases inventory for $230,000 and has cost of goods sold equal to $233,000. Tyler’s
ending inventory equals:
55.
Beginning inventory is $40,000. Purchases of inventory during the year are $200,000.
Ending inventory is $100,000. What is cost of goods sold?