CHAPTER 7: 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
Chapter 7: Inventories
4.
A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels.
a.
True
b.
False
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
Chapter 7: Inventories
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
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
Chapter 7: Inventories
11.
When using the FIFO inventory costing method, the most recent costs are assigned to the cost of merchandise sold.
a.
True
b.
False
12.
FIFO is the inventory costing method that follows the physical flow of the goods.
a.
True
b.
False
13.
Under the LIFO inventory costing method, the most recent costs are assigned to ending inventory.
a.
True
b.
False
14.
The weighted average inventory cost flow method is the least used of the inventory costing methods.
a.
True
b.
False
Chapter 7: Inventories
15.
If the perpetual inventory system is used, the merchandise inventory account is debited for purchases
of
merchandise.
a.
True
b.
False
16.
Under the periodic inventory system, the merchandise inventory account continuously discloses the amount
of
inventory on hand.
a.
True
b.
False
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.
a.
True
b.
False
Chapter 7: Inventories
18.
The three inventory costing methods will normally each yield different amounts of net income.
a.
True
b.
False
19.
The average cost method will always yield results between FIFO and LIFO.
a.
True
b.
False
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.
a.
True
b.
False
Chapter 7: Inventories
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.
a.
True
b.
False
22.
During periods of rapidly rising costs, the use of the LIFO method results in illusory or inventory profits.
a.
True
b.
False
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.
a.
True
b.
False
Chapter 7: Inventories
24.
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
25.
In valuing merchandise for inventory purposes, net realizable value is the estimated selling price less any
direct
costs of disposal.
a.
True
b.
False
26.
Unsold consigned merchandise should be included in the consignee’s inventory.
a.
True
b.
False
Chapter 7: Inventories
27.
If ending inventory for the year is understated, net income for the year is overstated.
a.
True
b.
False
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.
a.
True
b.
False
29.
The lower of cost or market is a method of inventory valuation.
a.
True
b.
False
Chapter 7: Inventories
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.
a.
True
b.
False
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.
a.
True
b.
False
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.
a.
True
b.
False
Chapter 7: Inventories
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.
a.
True
b.
False
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.
a.
True
b.
False
35.
It’s not unusual for large companies to use different inventory costing methods for different segments of
its
inventory.
a.
True
b.
False
Chapter 7: Inventories
36.
Direct disposal costs do not include special advertising or sales commissions.
a.
True
b.
False
37.
Inventory errors, if not discovered, will self-correct within two years.
a.
True
b.
False
38.
Generally, the lower the number of days’ sales in inventory, the better.
a.
True
b.
False
39.
One negative effect of carrying too much inventory is risk that customers will change their buying habits.
a.
True
b.
False
Chapter 7: Inventories
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.
a.
True
b.
False
41.
Inventory turnover measures the length of time it takes to acquire, sell, and replace the inventory.
a.
True
b.
False
42.
In the retail inventory method, the cost to retail ratio is equal to the cost of merchandise sold divided by the
retail
price of the merchandise sold.
a.
True
b.
False
Chapter 7: Inventories
43.
Use of the retail inventory method requires taking a physical count of inventory.
a.
True
b.
False
44.
If a fire destroys the merchandise inventory, the gross profit method can be used to estimate the cost of
merchandise destroyed.
a.
True
b.
False
45.
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 7: Inventories
46.
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
47.
Which document authorizes the purchase of the inventory from an approved vendor?
a.
the purchase order
b.
the petty cash voucher
c.
the receiving report
d.
the vendor’s invoice
48.
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 7: Inventories
49.
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
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?
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
51.
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 7: Inventories
52.
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
53.
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.
54.
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 7: Inventories
55.
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
56.
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
57.
The two most widely used methods for determining the cost of inventory are
a.
FIFO and LIFO
b.
FIFO and average cost
c.
LIFO and average cost
d.
gross profit and average cost
Chapter 7: Inventories
58.
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
59.
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
60.
The inventory method that assigns the most recent costs to cost of merchandise sold is
a.
FIFO
b.
LIFO
c.
weighted average
d.
specific identification
Chapter 7: Inventories
61.
The inventory costing method that reports the most current prices in ending inventory is
a.
FIFO
b.
specific identification
c.
LIFO
d.
average cost
62.
The inventory costing method that reports the earliest costs in ending inventory is
a.
FIFO
b.
LIFO
c.
weighted average
d.
specific identification
63.
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