CHAPTER 7: INVENTORIES: COST MEASUREMENT AND FLOW
ASSUMPTIONS
1. The following relationship is only true for a merchandising firm:
Beginning
Inventory
+
Purchases (net)
or
Production costs
for the period
=
Cost of
Goods
Available
for Sale
a.
True
b.
False
False
Easy
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2. The cost of goods sold model for a manufacturer is:
Beginning
Finished
Goods
Inventory
+
Purchases
(net)
=
Cost of
Goods
Available
for Sale
–
Ending
Finished
Goods
Inventory
=
Cost of
Goods Sold
a.
True
b.
False
False
Easy
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Chapter 7: Inventories: Cost Measurement and Flow Assumptions
3. A perpetual inventory system provides management with valuable tools with which to plan and control inventory levels
because the amount of inventory is known at any point in time.
a.
True
b.
False
True
1
Easy
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4. Net purchases is computed as follows:
Net
Purchases
=
Purchases
+
Freight-
out
–
Purchase
Discounts
Taken
–
Purchase
Returns and
Allowances
a.
True
b.
False
False
1
Easy
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5. When goods are shipped FOB shipping point, the buyer has economic control of the inventory and must record the
goods in its inventory accounts as soon as the goods are shipped.
a.
True
b.
False
True
Easy
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Chapter 7: Inventories: Cost Measurement and Flow Assumptions
6. When goods are shipped FOB shipping point, the seller retains economic control until the goods are received by the
buyer; therefore, the buyer should not record the goods into inventory until they are received.
a.
True
b.
False
False
1
Easy
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7. Inventory costs include all costs directly or indirectly associated with bringing an item to its existing condition or
location for sale.
a.
True
b.
False
True
1
Easy
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8. The costs of operating a purchasing department are necessary to the purchasing of inventory therefore; those costs
should be allocated to inventory.
a.
True
b.
False
False
1
Easy
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Chapter 7: Inventories: Cost Measurement and Flow Assumptions
9. In a period of falling prices, FIFO produces the lowest cost of goods sold and the highest gross profit.
a.
True
b.
False
False
1
Easy
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10. In a period of rising prices LIFO produces the highest cost of goods sold and the lowest gross profit.
a.
True
b.
False
True
1
Easy
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11. The LIFO conformity rule allows a company to use FIFO for financial reporting and LIFO for income taxes.
a.
True
b.
False
False
1
Easy
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Chapter 7: Inventories: Cost Measurement and Flow Assumptions
12. A company’s liquidation of inventory under LIFO results in higher income during periods of rising costs. Therefore,
management can manipulate earnings by delaying purchases until after the end of the fiscal year.
a.
True
b.
False
True
1
Easy
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13. The use of dollar-value LIFO follows the same methodology as the LIFO method but reduces the record keeping.
a.
True
b.
False
True
1
Easy
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14. The use of inventory pools with dollar-value LIFO overcomes the issues associated with keeping numerous detailed
records of individual quantities of each item.
a.
True
b.
False
False
1
Easy
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Chapter 7: Inventories: Cost Measurement and Flow Assumptions
15. The SEC requires a company that uses LIFO to disclose the difference between the LIFO value of the inventory and
the FIFO value of the inventory.
a.
True
b.
False
True
1
Easy
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16. If a company uses LIFO for annual reporting purposes, it must also use it for interim reporting. This enables external
users to accurately compare financial statements.
a.
True
b.
False
True
1
Easy
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17. A retail firm would normally use an inventory account titled
a.
finished goods inventory
b.
merchandise inventory
c.
goods in process inventory
d.
raw materials inventory
b
1
Easy
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18. A manufacturing company typically has how many inventory accounts?
a.
1
b.
2
c.
3
d.
4
c
1
Easy
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19. A manufacturing firm would not normally have an account titled
a.
goods in process inventory
b.
raw materials inventory
c.
merchandise inventory
d.
finished goods inventory
c
1
Easy
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20. Which of the following is included in the work in process account?
a.
manufacturing overhead
b.
direct labor cost
c.
cost of raw materials used in production
d.
All of these answer choices are included in the work in process account.
d
1
Easy
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21. Use the following letters to represent items:
P = Purchases (net)
C = Cost of goods sold
B = Beginning inventory
E = Ending inventory
Which equation is correct?
a.
B − C + P = E
b.
B − E = C + P
c.
P − E = B + C
d.
B = C − E + P
a
1
Moderate
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22. A perpetual inventory system
a.
only records the inventory on hand at the end of the year physical count
b.
keeps a continuous record of the physical quantities of inventory on hand
c.
does not maintain a continuous record of the physical quantities of inventory on hand
d.
does not maintain a continuous record of the cost of inventory on hand
b
1
Easy
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23. Which of the following are characteristics of a perpetual inventory system?
a.
Management knows how much inventory is on hand at all times.
b.
Purchases of inventory are recorded to the inventory account.
c.
The computer tracks inventory upon a sale and the cost of goods and inventory are immediately updated.
d.
All of these answer choices are characteristics of a perpetual inventory system.
d
1
Easy
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24. When a company uses a perpetual inventory system,
a.
there is no purchases account
b.
the cost of goods sold account is used
c.
two entries are required when inventory is sold
d.
All of these answer choices are used in a perpetual inventory system.
d
1
Easy
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25. Which of the following is not an advantage of a perpetual inventory system?
a.
assists in the prevention of stock outs
b.
requires less data processing effort than periodic systems
c.
maintains up-to–date inventory and cost of goods sold balances
d.
b
1
Easy
ACCT.WHAL.16.7.2 – LO: 7.2
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provides evidence of inventory shrinkage
Chapter 7: Inventories: Cost Measurement and Flow Assumptions
26. Which of the following is a characteristic of a periodic inventory system?
a.
The system does not maintain a continuous record of the quantities of inventory on hand or inventory sold
b.
The system reports how much inventory is on hand at all times.
c.
The computer tracks inventory upon a sale, and the cost of goods and inventory are immediately updated.
d.
Purchases of inventory are recorded to the inventory account.
a
1
Easy
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27. The cost of goods sold can be determined only after a physical count of inventory on hand under the
a.
perpetual inventory system
b.
variable costing system
c.
moving average system
d.
periodic system
d
1
Easy
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28. Which one of the following statements is false?
a.
A company using the periodic system does not maintain a continuous record of the physical quantities (or
costs) of inventory on hand.
b.
In the periodic system, the costs of acquisition of inventory are debited directly to an inventory account.
c.
In the perpetual inventory system, recording in detailed subsidiary records can be in units only, not in dollar
costs.
d.
When the perpetual system is used, a physical count still needs to be made periodically.
b
1
Moderate
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Chapter 7: Inventories: Cost Measurement and Flow Assumptions
29. The basic criterion for including items in inventory is
a.
physical control
b.
legal ownership
c.
physical possession
d.
economic control
d
1
Easy
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30. When goods are sold FOB shipping point, ownership of the inventory is passed when the
a.
inventory arrives at the destination
b.
purchase order for the inventory is complete
c.
inventory is shipped to the buyer
d.
inventory sold is segregated from the seller’s other inventory
c
1
Easy
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31. Goods in transit shipped FOB shipping point should be included in the inventory of the
a.
buyer
b.
seller
c.
shipping company
d.
none of these
a
1
Easy
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32. Which one of the following statements is true?
a.
FOB destination means the buyer has legal title to the goods while they are in transit.
b.
FOB shipping point means the seller has legal title to the goods while they are in transit.
c.
FOB destination means the seller has legal title to the goods until they reach the buyer’s place of business.
d.
FOB shipping point means the buyer acquires legal title to the goods when they reach the buyer’s place of
business.
c
1
Easy
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33. Near the end of 2016, Spruce Co. made the following purchases. The months involved in all cases are December 2016
and January 2017.
Date
Date
Date
Date
Goods
Invoice
Goods
Invoice
Amount
FOB
Shipped
Mailed
Rec’d
Rec’d
$1,575
Destination
12/29
1/2
1/5
1/4
2,430
Shipping Point
1/2
12/29
1/4
12/30
1,890
Shipping Point
12/28
1/2
1/3
1/4
2,700
Destination
12/29
12/27
1/2
12/28
What amount of the above purchases should be included in Spruce’s inventory at December 31, 2016?
a.
$1,575
b.
$1,890
c.
$4,320
d.
$4,575
b
1
Moderate
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34. Which one of the following statements is false?
a.
FOB shipping point means the buyer has legal title to the goods while they are in transit.
b.
FOB shipping point means the buyer has legal title to the goods when they are shipped.
c.
FOB destination means the seller has legal title to the goods until they reach the buyer’s place of business.
d.
FOB shipping point means the buyer acquires legal title to the goods when they reach the buyer’s place of
business.
d
1
Moderate
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35. Stansbury Company determined its December 31, 2015 inventory to be $1,000,000 based on a physical count priced at
cost. Additional information for the company is as follows:
Merchandise costing $90,000 was shipped FOB shipping point from a vendor on December 30, 2015. This
merchandise was received and recorded on January 5, 2016.
Goods costing $120,000 were staged on the shipping dock and excluded from inventory although shipment was not
made until January 4, 2016. The goods were billed to the customer FOB shipping point on December 30, 2015.
What is Stansbury’s ending inventory for its December 31, 2015 balance sheet?
a.
$1,000,000
b.
$1,090,000
c.
$1,120,000
d.
$1,210,000
d
1
Moderate
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36. Which one of the following types of costs should be included in the cost of a manufactured inventory?
a.
abnormal spoilage
b.
production supervisory salaries
c.
interest costs
d.
selling costs
b
1
Easy
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37. Which one of the following types of costs is excluded from the cost of inventory that is routinely manufactured?
a.
interest
b.
raw materials
c.
normal spoilage
d.
Insurance
a
1
Easy
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38. The Purchases Discounts Taken account may appear in the accounting records if which one of the following methods
is used to account for purchase discounts?
a.
net price method
b.
gross price method
c.
allowance method
d.
sales price method
b
1
Easy
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Chapter 7: Inventories: Cost Measurement and Flow Assumptions
Exhibit 7-1
Edwards Co. purchased raw materials with a cost of $95,000 on March 2, 2015. Credit terms of 3/20, n/60 applied.
Edwards paid for the purchase on March 18, 2015. Calculate the amount at which Edwards would record the inventory on
March 2, 2015, the date of purchase, using the method given.
39. Refer to Exhibit 7-1. Edwards uses a perpetual inventory system and the gross price method.
a.
$42,000
b.
$76,000
c.
$92,150
d.
$95,000
d
1
Moderate
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40. Refer to Exhibit 7-1. Edwards uses a perpetual inventory system and the net price method.
a.
$42,000
b.
$76,000
c.
$92,150
d.
$95,000
c
1
Moderate
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Chapter 7: Inventories: Cost Measurement and Flow Assumptions
Exhibit 7-2
Edwards Co. purchased raw materials with a cost of $95,000 on March 2, 2015. Credit terms of 3/20, n/60 applied.
41. Refer to Exhibit 7-2. If Edwards uses the net method and pays for the purchase on March 18, 2015, what amount is
recorded in the Purchase Discounts Taken account?
a.
$0
b.
$2,850
c.
$5,000
d.
$3,000
a
1
Moderate
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42. Refer to Exhibit 7-2. If Edwards uses the net method and pays for the purchase on March 31, 2015, what amount is
recorded in the Purchase Discounts Lost account?
a.
$0
b.
$2,850
c.
$4,000
d.
$8,000
b
1
Moderate
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43. McClure Corp. purchased raw materials with a cost of $86,000. Credit terms of 3/10, n/60 apply. If McClure uses the
net price method, the purchase should be recorded as
a.
$77,400
b.
$86,000
c.
$83,420
d.
$88,580
c
1
Easy
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44. Which one of the following types of costs is most likely to be included in determining the cost of inventory?
a.
freight-in costs
b.
freight-out costs
c.
interest cost for amounts borrowed to finance the purchase of inventory
d.
marketing costs
a
1
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45. Concerning purchase discounts, which one of the following statements is true?
a.
Purchase discounts taken should be deducted from the acquisition cost of the inventory.
b.
The net price method results in recording accounts payable at the maximum value of the liability that the
company may be required to pay out.
c.
Purchase discounts lost should be included in the cost of inventory.
d.
An advantage of the gross price method is that it isolates purchase discounts lost and thus highlights
inefficiencies.
a
1
Moderate
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46. On June 1, Dollar Hardware, Inc. had an inventory of 300 gas grills costing $100 each. Purchases and sales during
June are as follows:
Date
Purchases
Sales
June 3
100 @ $125 each
June 10
50 @ $110 each
June 17
150 @ $130 each
June 28
50 @ $120 each
What is the cost of Dollar’s inventory on June 30 using the FIFO method?
a.
$15,000
b.
$16,000
c.
$16,500
d.
$18,000
c
1
Challenging
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47. On August 1, Micro Encoders, Inc. had 120 units of a certain software package that cost $6 per unit. During August,
the following purchases were made:
August 7
60 units @ $9.00 per unit
15
80 units @ $12.00 per unit
21
140 units @ $10.50 per unit
During August, 300 units were sold. If Micro Encoders uses the weighted average method, the cost of ending
inventory would be
a.
$922.50
b.
$2,767.50
c.
$937.50
d.
$2,812.20
a
1
Moderate
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48. Rubric, Inc. provided the following inventory transaction summary for May:
5/1
Purchased 200 units @ $3.00 per unit
5/15
Sold 40 units
5/21
Purchased 300 units @ $5.00 per unit
5/31
Purchased 40 units @ $10.00 per unit
In addition, it has been determined that Rubric’s inventory at the beginning of the month was $400.00 (200 units).
What was Rubric’s cost per unit at the end of May, using the moving average method?
a.
$3.00
b.
$2.00
c.
$4.00
d.
$6.00
c
1
Moderate
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49. Morton uses the moving average flow assumption. On January 1, there were 180 units on hand and the total inventory
cost was $900. On January 10, 40 more units were purchased at a cost of $6 per unit. Sales included 20 units on
January 3 and 60 units on January 17. What was the total cost of goods sold recorded for the units sold on January 17?
a.
$728
b.
$330
c.
$100
d.
d
1
Challenging
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$312
50. Eller Company uses a periodic inventory system. Relevant inventory information for the year follows:
1-Jan
Beginning inventory
20 units @ $170 per unit
23-May
Purchased
20 units @ $135 per unit
5-Nov
Purchased
400 units @ $185 per unit
18-Nov
Purchased
100 units @ $195 per unit
At year-end, 50 units remain in inventory. What is the cost of the ending inventory on a LIFO basis?
a.
$7,950
b.
$7,100
c.
$8,750
d.
$8,450
a
1
Moderate
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51. Left Images Printing uses perpetual LIFO in valuing its inventory. The March 1 inventory was 36 units at $6 each.
Purchases and sales during March were as follows:
Purchases
Sales
Mar. 10
20 units @ $8 per unit
Mar. 5
15 units
17
24 units @ $10 per unit
15
26 units
The cost of the ending inventory was
a.
$424
b.
$312
c.
$330
d.
$286
c
1
Moderate
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