Chapter 07 Reporting and Interpreting Cost of Goods Sold and Inventory
Answer Key
True / False Questions
1.
The use of raw materials in the manufacturing process is reported as an operating expense on
the income statement.
2.
Manufactured goods transferred out of work in process are reported as finished goods on the
balance sheet.
3.
Inventory inspection costs are reported as operating expenses on the income statement.
4.
Direct material costs are a component of the cost of the work-in process inventory.
5.
A decrease in the merchandise inventory account occurs when units of inventory purchased
are greater than units of goods sold.
6.
Goods available for sale are allocated to both ending inventory and cost of goods sold.
7.
The LIFO inventory method will result in the lowest gross profit in comparison with the FIFO
method when unit costs are decreasing.
8.
The FIFO inventory method will result in the lowest net income in comparison with the LIFO
method when costs are decreasing.
9.
A company can use the LIFO inventory method for income tax purposes and the FIFO
inventory method for financial reporting purposes during a given year.
10.
A grocery store probably would use the specific identification inventory costing method for
most of the items in its inventory.
11.
The FIFO inventory method allocates the earliest inventory purchase costs to ending
inventory.
12.
The LIFO inventory method allocates the oldest inventory purchase costs to cost of goods
sold.
13.
During periods of decreasing unit costs, use of the LIFO inventory method will result in a
higher amount of ending inventory than will the use of the FIFO inventory method.
14.
During periods of increasing unit costs, the LIFO inventory method will result in a higher
inventory amount on the balance sheet and a lower net income than will the FIFO inventory
method.
15.
During periods of increasing unit costs, the LIFO inventory method results in lower income
taxes.
16.
During periods of decreasing unit costs, use of the FIFO inventory method results in lower
gross profit than would use of the LIFO method.
17.
The lower of cost or market (LCM) rule is used due to the conservatism constraint, and
therefore an inventory calculation may result in a departure from the historical cost principle.
18.
The journal entry to write-down inventory under the lower of cost or market (LCM) rule results
in a decrease in both ending inventory and cost of goods sold.
19.
The journal entry to write-down inventory under the lower of cost or market (LCM) rule results
in a debit to cost of goods sold and a credit to inventory.
20.
The journal entry to write-down inventory under the lower of cost or market (LCM) rule results
in a credit to cost of goods sold and a debit to inventory.
21.
Inventory turnover is calculated as cost of goods sold divided by average inventory.
22.
Inventory turnover under LIFO is greater than inventory turnover under FIFO when unit costs
are increasing.
23.
The average days to sell inventory decreases as inventory turnover increases.
24.
An increase in inventory is subtracted from net income when determining cash flow from
operating activities.
25.
An increase in accounts payable is added to net income when determining cash flows from
operating activities.
26.
When there is a $3,000,000 decrease in inventory and a $2,000,000 decrease in accounts
payable, cash flow from operating activities increases by $1,000,000.
27.
The LIFO Reserve represents the excess of FIFO inventory costs over LIFO inventory costs.
28.
In a period of increasing costs, the LIFO Reserve would be deducted from the ending
inventory under LIFO costing to convert it to ending inventory under FIFO costing.
29.
An understatement of ending inventory results in an overstatement of net income.
30.
In the year of an overstatement of ending inventory, cost of goods sold will be understated
and net income will be overstated.
31.
An overstatement of the 2015 ending inventory results in an understatement of net income
during 2016.
32.
LIFO liquidation results when a company has a lower level of inventory at the end of the year
than it had at the beginning of the year.
33.
An overstatement of the 2015 ending inventory results in an overstatement of stockholders’
equity as of the end of 2016.
34.
An overstatement of the 2015 ending inventory results in an overstatement of stockholders’
equity as of the end of 2015.
Multiple Choice Questions
35.
A company reported the following information for its most recent year of operation: purchases,
$100,000; beginning inventory, $20,000; and cost of goods sold, $110,000. How much was the
company’s ending inventory?
36.
Coleman Company has provided the following information: beginning inventory, $100,000; cost
of goods sold, $450,000; and ending inventory, $80,000. How much were Coleman’s inventory
purchases?
37.
Which of the following statements is incorrect?
38.
Which of the following costs is not included as inventory on the balance sheet?