Question 1

In a perpetual inventory system, the flow of inventory cost is first through the balance sheet then through the income statement.

Accepted Answer

A) True 
 B)False

Question 2

In a periodic inventory system, overstating the amount of ending inventory will cause an understatement of gross profit in the following year.

Accepted Answer

A) True 
 B)False

Question 3

The total amount debited to the Inventory account during January was:

Accepted Answer

A)  $0. 
B)  $84,000. 
C)  $102,000. 
D)  $140,000. 
A)  $0. 
B)  $84,000. 
C)  $102,000. 
D)  $140,000.

Question 4

Sherman Electric uses a periodic inventory system. The beginning inventory of a particular product, and the purchases during the current year, were as follows:
 
At December 31, the ending inventory of this product consisted of 65 units.
Using periodic costing procedures, determine (1) cost of the year-end inventory and, (2) cost of goods sold relating to this product under each of the following flow assumptions:

Accepted Answer

The answer of Sherman Electric uses a periodic inventory system....

Question 5

Companies with periodic inventory systems often use techniques such as the gross profit method and the retail method to:

Accepted Answer

A)  Prepare interim financial statements without taking a complete physical inventory. 
B)  Increase gross profit. 
C)  Value inventory at its sales price instead of its cost. 
D)  Reduce taxable income during a period of rising prices. 
A)  Prepare interim financial statements without taking a complete physical inventory. 
B)  Increase gross profit. 
C)  Value inventory at its sales price instead of its cost. 
D)  Reduce taxable income during a period of rising prices.

Question 6

When goods for sale are not homogeneous in nature, it is not necessary to use the specific identification method of accounting for inventory.

Accepted Answer

A) True 
 B)False

Question 7

Salerno Co. has an inventory turnover rate of 7 and an accounts receivable turnover rate of 5. Assuming 365 days in a year, the period of time required for Salerno to convert its inventory into cash through normal business operations is approximately:

Accepted Answer

A)  21 days. 
B)  52 days. 
C)  4 months. 
D)  2.5 months. 
A)  21 days. 
B)  52 days. 
C)  4 months. 
D)  2.5 months.

Question 8

The primary purpose for using an inventory flow assumption is to:

Accepted Answer

A)  Parallel the physical flow of units of merchandise. 
B)  Offset against revenue an appropriate cost of goods sold. 
C)  Minimize income taxes. 
D)  Maximize the reported amount of net income. 
A)  Parallel the physical flow of units of merchandise. 
B)  Offset against revenue an appropriate cost of goods sold. 
C)  Minimize income taxes. 
D)  Maximize the reported amount of net income.

Question 9

Trent Department Store uses a perpetual inventory system but adjusts its inventory records at year-end to reflect the results of a complete physical inventory. In the physical inventory taken at the ends of 2010 and 2011, Trent's employees failed to count the merchandise in the store's window display. The cost of this merchandise amounted to $13,000 at the end of 2010, and $19,000 at the end of 2011. As a result of these errors, the cost of goods sold for 2005 will be:

Accepted Answer

A)  Understated by $19,000. 
B)  Overstated by $6,000. 
C)  Understated by $6,000. 
D)  None of the above. 
A)  Understated by $19,000. 
B)  Overstated by $6,000. 
C)  Understated by $6,000. 
D)  None of the above.

Question 10

Many companies state in their annual reports that inventory is shown at the lower of its cost or market value. This means that the inventory:

Accepted Answer

A)  Is obsolete. 
B)  Has been written down to a carrying value below cost. 
C)  Is shown at the lesser of cost or sales value. 
D)  Is valued at current replacement cost or historical cost, whichever is less. 
A)  Is obsolete. 
B)  Has been written down to a carrying value below cost. 
C)  Is shown at the lesser of cost or sales value. 
D)  Is valued at current replacement cost or historical cost, whichever is less.

Question 11

If an error in valuing inventory occurs in one year:

Accepted Answer

A)  It has no effect upon income in the following year. 
B)  It has no effect upon the income statement, only on the balance sheet. 
C)  It is self-correcting after two years. 
D)  Retained earnings will be adversely affected until corrected. 
A)  It has no effect upon income in the following year. 
B)  It has no effect upon the income statement, only on the balance sheet. 
C)  It is self-correcting after two years. 
D)  Retained earnings will be adversely affected until corrected.

Question 12

Gross profit rate is equal to.

Accepted Answer

A)  Net sales divided by gross profit. 
B)  Gross sales divided by gross profit. 
C)  Gross profit divided by net sales. 
D)  Gross profit divided by gross sales. 
A)  Net sales divided by gross profit. 
B)  Gross sales divided by gross profit. 
C)  Gross profit divided by net sales. 
D)  Gross profit divided by gross sales.

Question 13

Just-in-time inventory systems cannot be used in conjunction with LIFO.

Accepted Answer

A) True 
 B)False

Question 14

Which of the four inventory cost flow assumptions is best suited to inventories of high-priced, low-volume items?

Accepted Answer

A)  LIFO. 
B)  FIFO. 
C)  Average. 
D)  Specific identification. 
A)  LIFO. 
B)  FIFO. 
C)  Average. 
D)  Specific identification.

Question 15

Carl Equipment's inventory turnover rate is:

Accepted Answer

A)  6.7 times. 
B)  10 times. 
C)  12 times. 
D)  1.2 times. 
A)  6.7 times. 
B)  10 times. 
C)  12 times. 
D)  1.2 times.

Question 16

If all things are equal, except one company uses LIFO during inflation and the other uses FIFO, then:

Accepted Answer

A)  The LIFO company will have a higher inventory turnover. 
B)  The FIFO company will have a higher inventory turnover. 
C)  The two companies will have the same inventory turnover. 
D)  Inventory valuation methods do not effect inventory turnover calculations. 
A)  The LIFO company will have a higher inventory turnover. 
B)  The FIFO company will have a higher inventory turnover. 
C)  The two companies will have the same inventory turnover. 
D)  Inventory valuation methods do not effect inventory turnover calculations.

Question 17

Because of the consistency principle, inventory should never be written down below cost.

Accepted Answer

A) True 
 B)False

Question 18

Assume that the replacement cost of this monitor at year-end is $210 per unit. Using LIFO flow assumption and the lower-of-cost-or-market rule, the ending inventory amounts to:

Accepted Answer

A)  $46,000. 
B)  $42,000. 
C)  $37,000. 
D)  $83,000. 
A)  $46,000. 
B)  $42,000. 
C)  $37,000. 
D)  $83,000.

Question 19

The logic behind the lower-of-cost-or-market rule is:

Accepted Answer

A)  Inventory gradually becomes obsolete. 
B)  Inventory that is unsalable should be written down to zero (or its scrap value). 
C)  An asset is not worth more than it would cost the owner to replace it. 
D)  Inventory that is unsalable should be written down to its replacement cost. 
A)  Inventory gradually becomes obsolete. 
B)  Inventory that is unsalable should be written down to zero (or its scrap value). 
C)  An asset is not worth more than it would cost the owner to replace it. 
D)  Inventory that is unsalable should be written down to its replacement cost.

Question 20

A store that sells expensive custom-made jewelry is most likely to determine its cost of goods sold using:

Accepted Answer

A)  Specific identification. 
B)  Average cost. 
C)  First-in, first-out. 
D)  Last-in, last-out. 
A)  Specific identification. 
B)  Average cost. 
C)  First-in, first-out. 
D)  Last-in, last-out.

Exam 8: Inventories and the Cost of Goods Sold

In a perpetual inventory system, the flow of inventory cost is first through the balance sheet then through the income statement.

In a periodic inventory system, overstating the amount of ending inventory will cause an understatement of gross profit in the following year.

The total amount debited to the Inventory account during January was:

Companies with periodic inventory systems often use techniques such as the gross profit method and the retail method to:

When goods for sale are not homogeneous in nature, it is not necessary to use the specific identification method of accounting for inventory.

Salerno Co. has an inventory turnover rate of 7 and an accounts receivable turnover rate of 5. Assuming 365 days in a year, the period of time required for Salerno to convert its inventory into cash through normal business operations is approximately:

The primary purpose for using an inventory flow assumption is to:

Many companies state in their annual reports that inventory is shown at the lower of its cost or market value. This means that the inventory:

If an error in valuing inventory occurs in one year:

Gross profit rate is equal to.

Just-in-time inventory systems cannot be used in conjunction with LIFO.

Which of the four inventory cost flow assumptions is best suited to inventories of high-priced, low-volume items?

Carl Equipment's inventory turnover rate is:

If all things are equal, except one company uses LIFO during inflation and the other uses FIFO, then:

Because of the consistency principle, inventory should never be written down below cost.

Assume that the replacement cost of this monitor at year-end is $210 per unit. Using LIFO flow assumption and the lower-of-cost-or-market rule, the ending inventory amounts to:

The logic behind the lower-of-cost-or-market rule is:

A store that sells expensive custom-made jewelry is most likely to determine its cost of goods sold using:

Accounting: Information for Decision Making

Basic Financial Statements

The Accounting Cycle: Capturing Economic Events

The Accounting Cycle: Accruals and Deferrals

The Accounting Cycle: Reporting Financial Results

Merchandising Activities

Financial Assets

Plant and Intangible Assets

Liabilities

Stockholders Equity: Paid-In Capital

Income and Changes in Retained Earnings

Statement of Cash Flows

Financial Statement Analysis

Global Business and Accounting

Management Accounting: a Business Partner

Job Order Cost Systems and Overhead Allocations

Process Costing

Costing and the Value Chain

Cost-Volume-Profit Analysis

Incremental Analysis

Responsibility Accounting and Transfer Pricing

Operational Budgeting

Standard Cost Systems

Rewarding Business Performance

Capital Budgeting

Forms of Business Organization

The Time Value of Money: Future Amounts and Present Values Answer Key

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