Chapter 6 – Inventories
1. One of the two internal control procedures over inventory is to properly report inventory on the financial statements.
a.
True
b.
False
2. A purchase order establishes an initial record of the receipt of the inventory.
a.
True
b.
False
3. A perpetual inventory system is an effective means of control over inventory.
a.
True
b.
False
4. A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels.
a.
True
b.
False
Chapter 6 – Inventories
5. Safeguarding inventory and proper reporting of the inventory in the financial statements are the reasons for controlling
the inventory.
a.
True
b.
False
6. Inventory controls start when the merchandise is shelved in the store area.
a.
True
b.
False
7. A physical inventory should be taken at the end of every month.
a.
True
b.
False
8. The specific identification inventory method should be used when the inventory consists of identical, low-cost units that
are purchased and sold frequently.
a.
True
b.
False
Chapter 6 – Inventories
9. The choice of an inventory costing method has no significant impact on the financial statements.
a.
True
b.
False
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.
a.
True
b.
False
11. When using the FIFO inventory costing method, the most recent costs are assigned to the cost of goods sold.
a.
True
b.
False
12. FIFO is the inventory costing method that follows the physical flow of the goods.
a.
True
b.
False
Chapter 6 – Inventories
13. Under the LIFO inventory costing method, the most recent costs are assigned to ending inventory.
a.
True
b.
False
14. If the perpetual inventory system is used, the inventory account is debited for purchases of merchandise.
a.
True
b.
False
15. Under the periodic inventory system, the inventory account continuously discloses the amount of inventory on hand.
a.
True
b.
False
16. Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and
the cost of the goods sold.
a.
True
b.
False
Chapter 6 – Inventories
17. The three inventory costing methods will normally each yield different amounts of net income.
a.
True
b.
False
18. The weighted average cost method will always yield results between FIFO and LIFO.
a.
True
b.
False
19. 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.
a.
True
b.
False
20. 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.
a.
True
b.
False
Chapter 6 – Inventories
21. During periods of rapidly rising costs, the use of the LIFO method results in illusory or inventory profits.
a.
True
b.
False
22. 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.
a.
True
b.
False
23. During periods of increasing costs, an advantage of the LIFO inventory cost method is that it matches more recent
costs against current revenues.
a.
True
b.
False
24. In valuing merchandise for inventory purposes, net realizable value is the estimated selling price less any direct costs
of disposal.
a.
True
b.
False
Chapter 6 – Inventories
25. Unsold consigned merchandise should be included in the consignee’s inventory.
a.
True
b.
False
26. If ending inventory for the year is understated, net income for the year is overstated.
a.
True
b.
False
27. If ending inventory for the year is overstated, stockholders’ equity reported on the balance sheet at the end of the year
is understated.
a.
True
b.
False
28. The lower of cost or market is a method of inventory valuation.
a.
True
b.
False
Chapter 6 – Inventories
29. “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 the company.
a.
True
b.
False
30. 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.
a.
True
b.
False
31. 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.
a.
True
b.
False
32. 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.
a.
True
b.
False
Chapter 6 – Inventories
33. When 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.
a.
True
b.
False
34. It’s not unusual for large companies to use different inventory costing methods for different segments of its inventory.
a.
True
b.
False
35. Direct disposal costs do not include special advertising or sales commissions.
a.
True
b.
False
36. Inventory errors, if not discovered, will self-correct within two years.
a.
True
b.
False
Chapter 6 – Inventories
37. Generally, the lower the number of days’ sales in inventory, the better.
a.
True
b.
False
38. One negative effect of carrying too much inventory is risk that customers will change their buying habits.
a.
True
b.
False
39. 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.
a.
True
b.
False
40. Inventory turnover measures the length of time it takes to acquire, sell, and replace the inventory.
a.
True
b.
False
Chapter 6 – Inventories
41. 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
goods sold.
a.
True
b.
False
42. Use of the retail inventory method requires taking a physical count of inventory.
a.
True
b.
False
43. If a fire destroys the inventory, the gross profit method can be used to estimate the cost of merchandise destroyed.
a.
True
b.
False
44. If a company uses a periodic inventory system, the gross profit method can be used to estimate inventory for
monthly or quarterly statements.
a.
True
b.
False
Chapter 6 – Inventories
45. Under a perpetual inventory system, the amount of each type of merchandise on hand is available in the
a.
customer’s ledger
b.
creditor’s ledger
c.
inventory ledger
d.
purchase ledger
46. Which document authorizes the purchase of the inventory from an approved vendor?
a.
b.
c.
d.
47. The primary objectives of control over inventory are
a.
safeguarding the inventory from damage and maintaining constant observation of the inventory
b.
reporting inventory in the financial statements
c.
maintaining constant observation of the inventory and reporting inventory in the financial statements
d.
safeguarding inventory from damage and reporting inventory in the financial statements
Chapter 6 – Inventories
48. Taking a physical count of inventory
a.
is not necessary when a periodic inventory system is used
b.
should be done near year-end
c.
has no internal control relevance
d.
is not necessary when a perpetual inventory system is used
49. 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?
a.
check the invoice to the receiving report
b.
check the invoice to the purchase order
c.
check the invoice with the person who specifically purchased the item
d.
check the invoice extensions and totals
50. All of the following are documents used for inventory control except
a.
a petty cash voucher
b.
a vendor’s invoice
c.
a receiving report
d.
a purchase order
Chapter 6 – Inventories
51. Which document establishes an initial record of the receipt of the inventory?
a.
receiving report
b.
vendor’s invoice
c.
purchase order
d.
petty cash voucher
52. Which of the following is not an example for safeguarding inventory?
a.
Storing inventory in restricted areas.
b.
Physical devices such as two–way mirrors, cameras, and alarms.
c.
Matching receiving documents, purchase orders, and vendor’s invoice.
d.
Returning inventory that is defective or broken.
53. Which of the following methods is appropriate for a business whose inventory consists of a relatively small number of
unique, high-cost items?
a.
FIFO
b.
LIFO
c.
average
d.
specific identification
Chapter 6 – Inventories
54. Ending inventory is made up of the oldest purchases when a company uses
a.
first-in, first-out
b.
last-in, first-out
c.
average cost
d.
retail method
55. When merchandise sold is assumed to be in the order in which the purchases were made, the company is using
a.
first-in, last-out
b.
last-in, first-out
c.
first-in, first-out
d.
average cost
56. Cost flow is in the order in which costs were incurred when using
a.
average cost
b.
last-in, first-out
c.
first-in, first-out
d.
weighted average
Chapter 6 – Inventories
57. Cost flow is in the reverse order in which costs were incurred when using
a.
weighted average
b.
last-in, first-out
c.
first-in, first-out
d.
average cost
58. The inventory method that assigns the most recent costs to cost of goods sold is
a.
FIFO
b.
LIFO
c.
weighted average
d.
specific identification
59. The inventory costing method that reports the most current prices in ending inventory is
a.
FIFO
b.
specific identification
c.
LIFO
d.
average cost
Chapter 6 – Inventories
60. The inventory costing method that reports the earliest costs in ending inventory is
a.
FIFO
b.
LIFO
c.
weighted average
d.
specific identification
61. Which of the following companies would be more likely to use the specific identification inventory costing method?
a.
Gordon’s Jewelers
b.
Lowe’s
c.
Best Buy
d.
Walmart
Addison, Inc. uses a perpetual inventory system. Below is information about one inventory item for the month of
September. Use this information to answer the questions that follow.
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
62. If Addison uses FIFO, the cost of the ending inventory on September 30 is
a.
$800
b.
$650
c.
$750
d.
$700
Chapter 6 – Inventories
63. If Addison uses LIFO, the cost of the ending inventory on September 30 is
a.
$800
b.
$650
c.
$750
d.
$700
64. When using a perpetual inventory system, the journal entry to record the cost of goods sold is:
a.
debit Cost of Goods Sold; credit Sales
b.
debit Cost of Goods Sold; credit Inventory
c.
debit Inventory; credit Cost of Goods Sold
d.
No journal entry is made to record the cost of goods sold.
65. Under the _____ inventory method, accounting records maintain a continuously updated inventory value.
a.
retail
b.
periodic
c.
physical
d.
perpetual
Chapter 6 – Inventories
66. 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 goods sold for November if the company uses LIFO?
a.
$610
b.
$600
c.
$590
d.
$580
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 goods sold for November if the company uses FIFO?
a.
$610
b.
$600
c.
$590
d.
$580
Chapter 6 – Inventories
Use the information below 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
Blankets
Units
Cost
May 3
Purchase
5
$20
10
Sale
3
17
Purchase
10
$24
20
Sale
6
23
Sale
3
30
Purchase
10
$30
68. Assuming that the company uses the perpetual inventory system, determine the cost of goods sold for the sale of May
20 using the LIFO inventory cost method.
a.
$136
b.
$144
c.
$180
d.
$120
Bloom’s: Applying
69. Assuming that the company uses the perpetual inventory system, determine the cost of goods sold for the sale of May
20 using the FIFO inventory cost method.
a.
$120
b.
$180
c.
$136
d.
$144
Bloom’s: Applying