Chapter 6—Cost of Goods Sold and Inventory Key
1. For a merchandising company, the cost of goods sold is subtracted from net sales to arrive at gross profit.
2. Cost of goods sold represents an outflow of a resource, inventory, which is caused by the sale of products.
3. If cost of goods sold does not equal the cost of merchandise purchased during the period, an adjustment must
be made to correct the error.
4. Cost of goods sold is the difference between costs of goods available for sale and ending inventory.
5. With the perpetual inventory system, the inventory account is updated after each sale or purchase.
6. Under the periodic inventory system, a physical inventory must be taken to determine cost of goods sold.
7. Under a perpetual inventory system, each time goods are purchased, the inventory account is transferred to
sales revenue.
8. A company using a periodic inventory system must total the selling prices of the units on hand at the end of
the period in order to value the ending inventory.
9. Sales discounts decrease the cost of inventory acquired.
10. The buyer must include goods purchased FOB shipping point in its inventory account if the goods are still in
11. When merchandise is sold FOB destination, the seller is responsible for the shipping costs.
12. The weighted average cost is calculated by adding the units’ costs from each purchase and then dividing by
the number of purchases.
13. Under the FIFO method of inventory costing, the units in the ending inventory represent the oldest
purchase(s).
14. The difference between the FIFO, LIFO, and average cost methods is that each of these methods of
inventory costing makes a specific assumption about the flow of costs.
15. Under the LIFO method of inventory costing, the units in the ending inventory represent the most recent
purchase(s).
16. A LIFO liquidation occurs when a company sells more units than it buys during the period.
17. A LIFO reserve represents the amount by which cost of goods sold on a FIFO basis exceeds the cost of
goods sold on a LIFO basis for the current year.
18. During periods of stable purchase prices, FIFO produces the highest ending inventory relative to the other
inventory costing methods.
19. During periods of declining purchase prices, LIFO produces the lowest amount of ending inventory relative
to the other inventory costing methods.
20. The lower of cost or market (LCM) rule violates the historical cost principle.
21. A loss in inventory value caused by application of the lower of cost or market (LCM) rule is recorded in a
“Loss from Impairment” account.
22. The inventory turnover ratio is defined as cost of goods sold divided by average inventory.
23. The inventory turnover ratio is a measure of how many times during a period a company sells off its
inventory.
24. If ending inventory is understated, then cost of goods sold is understated.
25. If ending inventory is overstated, then net income is overstated as well.
26. Under a periodic inventory system, the Purchases account accumulates the cost of the inventory acquired
during the period.
27. A Purchases account is not needed under a periodic inventory system.
28. When the shipping terms are FOB destination, the buyer must record transportation costs as an additional
cost of acquiring the inventory under the perpetual inventory system.
29. Under the periodic method, the information on sales can be combined within any period because all
purchases are assumed to occur before any sales transactions.
30. The weighted average cost per unit must be continually updated under the perpetual inventory system.
31. The inventory of a(n) ____________________ consists of three categories: raw materials, work-in-process,
and finished goods.
32. Cost of goods sold is equal to beginning inventory plus the net cost of purchases minus _____.
33. Under the _______________ inventory system, the inventory account is updated after each purchase or
sale.
34. The amount recognized on the balance sheet as the cost of inventory will ultimately be recognized as a(n)
____________________.
35. Shipping terms of ____________________ mean that the buyer pays shipping costs.
36. Shipping terms of FOB Destination means that the shipping costs are paid by the ______.
37. The _______________ method most closely approximates replacement cost of inventory on the balance
sheet.
38. During periods of rising prices, the ____________________ method results in the cost of goods sold
expense on the income statement being a close approximation of the replacement cost of the goods sold.
39. When a company using LIFO experiences a partial or complete liquidation of its older, lower-priced
inventory, its gross margin will be ____________________ for the period.
40. The excess of an inventory’s value stated on a FIFO basis over its value stated on a LIFO basis is called
a(n) ____________________.
41. A departure from the cost basis of accounting may be necessary when the ____________________ of the
inventory is less than its cost to the company.
42. Accountants define the market value of inventory as its ____________________.
43. The ratio of a company’s cost of goods sold to its average inventory is called its __________.
44. A company can calculate its average days to sell inventory by dividing 365 days per year by its _____.
45. The understatement of ending inventories in one period leads to a(n) ____________________ of cost of
goods sold in the same period.
46. An overstatement error in the inventory account in the current period will result in an understatement of
____________________ in the subsequent period.
47. Under a periodic inventory system, the ____________________ account accumulates the cost of inventory
acquired during the period.
48. Under a periodic inventory system, shipping costs are not charged to the inventory asset account. Instead,
such costs are charged to the ____________________ account.
49. Under the periodic inventory system, all purchases are assumed to occur before any ______.
50. Under the periodic inventory system, Net purchases = Purchases + ______________ – Purchase Discounts –
Purchase Returns and Allowances.
51. Match the inventory-related accounts to costs that may be included in inventories for retailers and
manufacturers.
customers.
4
1. Costs of completed items that have been sold to
2. Costs to purchase goods ready to sell.
finished goods
3
3. Cost of completed, unsold items.
2
4. Cost of ingredients used to make a product.
5
merchandise
5. Cost of material, labor, and other production-related
52. Match the terms with the descriptions related to merchandise sales and purchases.
2. Relies on a count of inventory on the last day of
3. Requires updating of the inventory account at the
5. The seller is responsible for the cost of delivering
53. Match the terms with the descriptions provided.
1. Term referring to transportation costs paid by the
2. Generally speaking, the lower this measure the
3. Measures how quickly merchandise is purchased
5. The difference between a company’s net sales and
6. For a given level of sales, the higher the cost of
54. Match the terms with the descriptions provided.
1. The time span during which purchase discounts are
2. Represents a departure from reporting assets at their
3. Reduce the amount that is owed to the seller for
4. Merchandise held for sale in the normal course of
5. Under the perpetual inventory system, a reduction in
the inventory account balance not caused by a sale or
6. The amount that the inventory would increase or
decrease if the company had used FIFO instead of
7. Arrangement whereby goods owned by one party are
8. In the periodic inventory system, the account used to
9. A reduction in the amount of goods available for sale
55. Match the terms with the descriptions provided.
1. Companies that maintain three separate inventory
3. General term for companies who sell goods to other
5. Companies such as advertising agencies and auto repair
56. Which of the following types of inventory accounts would be used by a wholesaler or retailer?
57. The inventory account a manufacturer uses to record the cost of products completed and available for sale is
called
58. Items should be included as part of the company’s inventory if they are
59. Determine the amount of inventory on the balance sheet of a manufacturing company from the following
account balances:
Finished goods $24,000 Merchandise inventory $50,000
Raw materials 30,000 Work in process 6,000
60. A manufacturing company reported total inventory of $75,000. Assuming the following account balances,
what is this company’s work in process inventory?
Finished goods $15,000 Merchandise inventory $10,000
Raw materials $40,000
61. Which of the following accounts would most likely appear on the income statement of a merchandise
company, but not on the income statement of a service company?
62. Which of the following best describes “cost of goods available for sale”?
63. Aaron Corporation
Aaron Corporation is a merchandising company. Selected account balances are listed below:
Sales $250,000
Purchases 112,500
Beginning Inventory 8,000
Ending Inventory 15,000
Operating Expenses 74,000
Income Tax Expense 5,000
Beginning Retained Earnings 26,500
Dividends 7,500
Refer to the information provided for Aaron Corporation. Calculate gross margin.
64. Aaron Corporation
Aaron Corporation is a merchandising company. Selected account balances are listed below:
Sales $250,000
Purchases 112,500
Beginning Inventory 8,000
Ending Inventory 15,000
Operating Expenses 74,000
Income Tax Expense 5,000
Beginning Retained Earnings 26,500
Dividends 7,500
Refer to the information provided for Aaron Corporation. Calculate the Cost of Goods Sold.
65. Aaron Corporation
Aaron Corporation is a merchandising company. Selected account balances are listed below:
Sales $250,000
Purchases 112,500
Beginning Inventory 8,000
Ending Inventory 15,000
Operating Expenses 74,000
Income Tax Expense 5,000
Beginning Retained Earnings 26,500
Dividends 7,500
Refer to the information provided for Aaron Corporation. Calculate net income.
66. Bihary Company has a beginning balance in its inventory account of $2,250 and the ending balance is
$1,500. Cost of goods sold is $9,750. According to the cost of goods sold model, what was the amount of
inventory purchased during the year?
67. Cost of goods sold is equal to:
68. In a periodic inventory system, the cost of purchases is recognized as:
69. The cost of goods sold is equal to:
70. Which of the following statements is false?
71. In order to determine inventory for its balance sheet, a company must count the inventory at the end of its
accounting period according to:
72. Which of the following statements is true?
73. Which of the following statements is false regarding the reason that inventory costs are recorded as
expenses when sold rather than when incurred?
74. Which of the following statements is true regarding just-in-time inventory management?
75. The amount recognized on the balance sheet as the cost of inventory will ultimately be recognized as:
76. A customer returned damaged goods for credit. Under a perpetual system, which of the seller’s accounts
decreases?
77. Ending inventory is equal to the cost of items on hand plus:
78. Dollar Town
Dollar Town is a merchandising company that uses the periodic inventory system. Selected account balances
are listed below:
Sales $105,000
Purchases 54,000
Beginning Inventory 13,800
Ending Inventory 10,200
Purchase Returns and Allowances 1,800
Purchase Discounts 4,200
Transportation-in 2,400
Sales Discounts 4,800
Sales Returns and Allowances 3,000
Refer to the information provided for Dollar Town. Calculate net sales.
79. Dollar Town
Dollar Town is a merchandising company that uses the periodic inventory system. Selected account balances
are listed below:
Sales $105,000
Purchases 54,000
Beginning Inventory 13,800
Ending Inventory 10,200
Purchase Returns and Allowances 1,800
Purchase Discounts 4,200
Transportation-in 2,400
Sales Discounts 4,800
Sales Returns and Allowances 3,000
Refer to the information provided for Dollar Town. Calculate the net cost of goods purchased.
80. Dollar Town
Dollar Town is a merchandising company that uses the periodic inventory system. Selected account balances
are listed below:
Sales $105,000
Purchases 54,000
Beginning Inventory 13,800
Ending Inventory 10,200
Purchase Returns and Allowances 1,800
Purchase Discounts 4,200
Transportation-in 2,400
Sales Discounts 4,800
Sales Returns and Allowances 3,000
Refer to the information provided for Dollar Town. Calculate the company’s gross margin.
81. What effects on a retail store’s accounting equation occur when it records merchandise purchased for cash,
assuming the use of a perpetual inventory system?
82. What effects on a retail store’s accounting equation occur when merchandise returned by customers is
recorded?
83. Coffski, Inc. sold merchandise to a customer on credit. The invoice amount was $1,000; the invoice date
was June 10th; credit terms were 1/10, n/30. Which of the following statements is true?
84. Dietz, Inc. sells merchandise on credit. If a customer pays its balance due within the discount period, what is
the effect of the payment on Dietz’s accounting equation?
85. Echols Company sells merchandise on credit. If a customer pays its balance due after the discount period
has passed, what is the effect of the payment on seller’s accounting equation?
86. Eli Company
Eli Company sells novelty items and offers terms of 1/10, n/30 to credit customers. One customer, Faulkner,
Inc., purchased 100 Sweet-16 party decor packs with a list price of $20 each on March 5, 2013.
Refer to the information provided for Eli Company. If the customer pays the amount of the invoice for its
purchase on March 14, 2013, how much cash will Eli Company receive?
87. Eli Company
Eli Company sells novelty items and offers terms of 1/10, n/30 to credit customers. One customer, Faulkner,
Inc., purchased 100 Sweet-16 party decor packs with a list price of $20 each on March 5, 2013.
Refer to the information provided for Eli Company. If the customer pays the invoice on March 31, 2013, how
much sales discount will Eli Company recognize?
88. Gbane Company
The following information is from Gbane Company’s 2013 accounting records:
Purchases $218,400
Transportation-in 13,200
Inventory, January 1, 2013 31,800
Inventory, December 31, 2013 34,560
Purchase Returns and Allowances 10,080
Refer to the information provided for Gbane Company. How much will the company report as net purchases
for 2013?
89. Refer to the information provided for Gbane Company. Using the cost of goods sold model, how much will
the company report as its cost of goods sold in its 2013 income statement?
90. Gools, Inc. buys designer clothing to sell in its retail stores. Since much of the merchandise comes from
Europe, the company must pay freight charges. Which of the following statements must be true?
91. Harris Corp. sold merchandise to Ichay Company on December 28, 2012, with shipping terms of FOB
destination. The buyer received the merchandise on January 3, 2013. Which of the following is true?
92. Transportation-in is:
93. Irwin Company counted its ending inventory as $178,000 at year-end, January 31, 2013. Upon review of the
records, it was noted that the following items were in transit during the count:
– Goods totaling $2,000 shipped by the supplier FOB destination on January 31 were received February 5th and
were not counted by Irwin Company.
– Goods totaling $5,000 shipped by the supplier FOB shipping point on January 30 were received February 2nd
and were not counted by Irwin Company.
– Goods totaling $6,000 shipped by Irwin Company to a customer FOB shipping point on January 31 were
received by the customer on February 3rd and were counted by Irwin Company.
What is Irwin Company’s correct inventory balance on January 31, 2013?
94. At the year-end inventory count, if goods in transit are shipped FOB destination, they should be included in
the inventory count of:
95. At the year-end inventory count, if goods in transit are shipped FOB shipping point, they should be included
in the inventory count of:
96. The journal entries required for purchase and sales transactions using the perpetual system are more
complex than under the periodic system but offer the advantage of:
97. The following journal entry was included in the accounting records of Jentzen Corp.:
Oct. 15 Accounts Payable 4,000
Merchandise Inventory 40
Cash 3,960
Based on this information, it is likely that the company:
98. The following journal entry was included in the accounting records of Jumani Company:
Feb. 11 Merchandise Inventory 7,000
Cost of Goods Sold 7,000
This entry is needed to record the:
99. Which of the following statements is true?
100. Which inventory cost flow method assigns the cost of the most recent items purchased to ending
inventory?
101. Which inventory cost flow method assigns the cost of the most recent items purchased to cost of goods
sold?
102. Which inventory cost flow method assigns the same cost to all units whether sold or left in ending
inventory?
103. For which type of merchandise would a company most likely use the specific identification method of
inventory costing?
104. Klinc Company
Klinc Company uses a perpetual inventory system and had the following inventory transactions for the month of
June:
June 1 On hand, 50 units at $14.00 each $ 700
4 Purchased 115 units at $15 each 1,725
5 Sold 100 units
10 Purchased 75 units at $16 each 1,200
24 Sold 50 units
Total cost of goods available for sale $3,625
30 On hand, 90 units
The June 30th inventory included 45 units from the June 4th purchase and 45 units from the June 10th purchase.
Refer to the information provided for Klinc Company. What is the cost of ending inventory at June 30th under
the specific identification method?
105. Klinc Company
Klinc Company uses a perpetual inventory system and had the following inventory transactions for the month of
June:
June 1 On hand, 50 units at $14.00 each $ 700
4 Purchased 115 units at $15 each 1,725
5 Sold 100 units
10 Purchased 75 units at $16 each 1,200
24 Sold 50 units
Total cost of goods available for sale $3,625
30 On hand, 90 units
The June 30th inventory included 45 units from the June 4th purchase and 45 units from the June 10th purchase.
Refer to the information provided for Klinc Company. What is the cost of goods sold for June under the
specific identification method?
106. Klump Co.
Klump Co. uses a perpetual inventory system and had the following inventory transactions for the month of
June.
June 1 On hand, 50 units at $18.00 each $ 900.00
4 Purchased 115 units at $18.20 each 2,093.00
5 Sold 100 units
10 Purchased 75 units at $18.25 each 1,368.75
24 Sold 40 units
Total cost of goods available for sale $4,361.75
30 On hand, 100 units
Refer to the information provided for Klump Co. If the company uses the FIFO inventory costing method, the
amount of ending inventory reported on the balance sheet is: