Question 1

In a period of rising prices, a company is most likely to use the FIFO method of pricing inventory if:

Accepted Answer

A)  Each item in the inventory is unique. 
B)  Management wants the same unit cost assigned to items sold and items remaining in inventory. 
C)  Management's primary objective is to minimize income taxes. 
D)  Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income. 
A)  Each item in the inventory is unique. 
B)  Management wants the same unit cost assigned to items sold and items remaining in inventory. 
C)  Management's primary objective is to minimize income taxes. 
D)  Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income.

Question 2

Inventory flow assumptions
Flat TV uses a perpetual inventory system. Shown below are Flat TV's beginning inventory of a particular product and purchases during January:
  
On January 23 (prior to the purchase on January 25), Flat TV sold 13 units of this product.
Determine the cost of goods sold relating to the sale on January 23 under each of the following flow assumptions. (Show your computations.)

Accepted Answer

The answer of Inventory flow assumptions
Flat TV uses a perpetual...

Question 3

Inventory turnover
In the spaces provided, indicate the likely effect of each of the following events or strategies upon the inventory turnover rate. Use the following code letters: I for Increase, D for Decrease, and NE for No Effect.
____ (a) Switched from the LIFO flow assumption to FIFO during a period of rising prices.
____ (b) Dramatically increased advertising expense.
____ (c) Increased the sales price of merchandise that is so popular it is difficult to keep in stock.
____ (d) Implemented internal control procedures to reduce a serious inventory shrinkage problem.
____ (e) Switched from a restrictive credit policy to offering liberal terms to credit customers.

Accepted Answer

The answer of Inventory turnover
In the spaces provided, indicate the...

Question 4

The cost flow assumption selected by a company must correspond to the actual physical movement of the company's merchandise.

Accepted Answer

A) True 
 B)False

Question 5

The Multi-Tech Company uses the gross profit method to estimate inventories. Fill in the missing amounts.

Accepted Answer

(a) $304,750
(b) $23

Question 6

During periods of inflation, the specific identification cost flow assumption will yield a higher cost of goods sold than LIFO.

Accepted Answer

A) True 
 B)False

Question 7

Periodic inventory systems
Funky Fashions 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 1,300 units.
Determine the cost of the year-end inventory and the cost of goods sold for this product under each of the following methods of inventory valuation:

Accepted Answer

The answer of Periodic inventory systems
Funky Fashions uses a periodic...

Question 8

The choice of inventory valuation method can help achieve each of the following independent goals, except:

Accepted Answer

A)  Reduce cost of merchandise acquired from suppliers. 
B)  Increase reported net income. 
C)  Increase the inventory turnover rate. 
D)  Reduce the amount of income taxes owed. 
A)  Reduce cost of merchandise acquired from suppliers. 
B)  Increase reported net income. 
C)  Increase the inventory turnover rate. 
D)  Reduce the amount of income taxes owed.

Question 9

Assuming that Anderson uses the LIFO flow assumption, it should record this inventory shrinkage by:

Accepted Answer

A)  Debiting Cost of Goods Sold $7,000. 
B)  Crediting Cost of Goods Sold $7,500. 
C)  Debiting Cost of Goods Sold $7,500. 
D)  Crediting Cost of Goods Sold $7,000. 
A)  Debiting Cost of Goods Sold $7,000. 
B)  Crediting Cost of Goods Sold $7,500. 
C)  Debiting Cost of Goods Sold $7,500. 
D)  Crediting Cost of Goods Sold $7,000.

Question 10

During periods of inflation, the LIFO cost flow assumption will yield a lower inventory value than FIFO.

Accepted Answer

A) True 
 B)False

Question 11

The balance in the Inventory account at January 31 was:

Accepted Answer

A)  $84,000. 
B)  $140,000. 
C)  $158,000. 
D)  $242,000. 
A)  $84,000. 
B)  $140,000. 
C)  $158,000. 
D)  $242,000.

Question 12

Lower-of-cost-or-market
Elite Systems sells a single product. At December 31, the company's perpetual inventory records indicate 2,500 units on hand with a total cost (FIFO basis) of $155,000. The replacement cost of this product at this date is $35 per unit.
Prepare journal entries to record (a) the write-down of the inventory to the lower-of-cost-or-market value at December 31, and (b) the cash sale of 100 units on January 4 at a retail price of $50 per unit.
$$\begin{array} { | l | c | } 
\hline \text { Date } & \text { General Journal } \
\hline 20 & \
\hline
\end{array}$$
(a) Dec. 31
(b) Jan. 4

Accepted Answer

The answer of Lower-of-cost-or-market
Elite Systems sells a single product. At...

Question 13

The inventory turnover rate provides an indication of how quickly the average quantity of inventory on hand:

Accepted Answer

A)  Spoils. 
B)  Sells. 
C)  Increases. 
D)  Converts into cash. 
A)  Spoils. 
B)  Sells. 
C)  Increases. 
D)  Converts into cash.

Question 14

Inventory flow assumptions
Arrow, Inc. uses a perpetual inventory system. On January 22, 2010, the company had 200 units of a particular product on hand, with a total cost of $2,400. The per-unit costs were:
  
On January 24, 2010, Arrow sold 65 units of this product.
Using the three flow assumptions listed below, compute (1) the cost of goods sold, and (2) the cost of the inventory of this product on hand after this sale. Show your computations.

Accepted Answer

The answer of Inventory flow assumptions
Arrow, Inc. uses a perpetual...

Question 15

What were the goods available for sale for the month?

Accepted Answer

A)  $129,000. 
B)  $171,000. 
C)  $235,000. 
D)  $304,750. 
A)  $129,000. 
B)  $171,000. 
C)  $235,000. 
D)  $304,750.

Question 16

The write-down of inventory:

Accepted Answer

A)  Only affects the balance sheet and not the income statement. 
B)  Only affects the income statement and not the balance sheet. 
C)  Affects both the income statement and the balance sheet. 
D)  Affects neither the income statement nor the balance sheet. 
A)  Only affects the balance sheet and not the income statement. 
B)  Only affects the income statement and not the balance sheet. 
C)  Affects both the income statement and the balance sheet. 
D)  Affects neither the income statement nor the balance sheet.

Question 17

Assume that Castle TV, Inc. uses the FIFO flow assumption. The cost of the 200 units in inventory at year-end is:

Accepted Answer

A)  $41,500. 
B)  $46,000. 
C)  $37,000. 
D)  $83,000. 
A)  $41,500. 
B)  $46,000. 
C)  $37,000. 
D)  $83,000.

Question 18

Inventory flow assumptions
Briefly discuss the factors management should consider in deciding:
(a) Whether to use specific identification or a flow assumption in measuring the cost of goods sold.
(b) Whether to use FIFO or LIFO. (Assume a long-run trend of slowly rising prices.)

Accepted Answer

(a) In large part, the decision of wheth

Question 19

The gross profit method of valuing inventory:

Accepted Answer

A)  Is the most accurate of the commonly used methods. 
B)  Is a satisfactory substitute for taking a physical inventory for annual financial statements. 
C)  Assumes that the gross profit rate will remain the same for the current year as it has in the past year or so. 
D)  Is not an acceptable method under GAAP. 
A)  Is the most accurate of the commonly used methods. 
B)  Is a satisfactory substitute for taking a physical inventory for annual financial statements. 
C)  Assumes that the gross profit rate will remain the same for the current year as it has in the past year or so. 
D)  Is not an acceptable method under GAAP.

Question 20

Accounting terminology
Listed below are nine technical accounting terms introduced in this chapter:
Just-in-time
Average-cost method
LIFO method
Gross profit method
Inventory shrinkage
FIFO method
Retail method
Inventory turnover
Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms.
_____ a. The flow assumptions in which the oldest units purchased are assumed to have remained in inventory.
_____ b. A method of estimating the cost of goods sold and ending inventory based upon cost relationships from prior periods.
_____ c. The practice of valuing inventory in the balance sheet at expected sales prices, rather than at cost.
_____ d. An inventory flow assumption involving only one "cost layer."
_____ e. The inventory flow assumption likely to result in the highest reported amount of gross profit during a period of rising prices.
_____ f. A technique for minimizing a company's investment in inventory, particularly inventories of raw materials and finished goods.
_____ g. A measure of a company's ability to sell its inventory quickly.

Accepted Answer

(a) LIFO method, (b) Gross pro

Exam 8: Inventories and the Cost of Goods Sold

In a period of rising prices, a company is most likely to use the FIFO method of pricing inventory if:

The cost flow assumption selected by a company must correspond to the actual physical movement of the company's merchandise.

The Multi-Tech Company uses the gross profit method to estimate inventories. Fill in the missing amounts.

During periods of inflation, the specific identification cost flow assumption will yield a higher cost of goods sold than LIFO.

The choice of inventory valuation method can help achieve each of the following independent goals, except:

Assuming that Anderson uses the LIFO flow assumption, it should record this inventory shrinkage by:

During periods of inflation, the LIFO cost flow assumption will yield a lower inventory value than FIFO.

The balance in the Inventory account at January 31 was:

The inventory turnover rate provides an indication of how quickly the average quantity of inventory on hand:

What were the goods available for sale for the month?

The write-down of inventory:

Assume that Castle TV, Inc. uses the FIFO flow assumption. The cost of the 200 units in inventory at year-end is:

Inventory flow assumptions Briefly discuss the factors management should consider in deciding: (a) Whether to use specific identification or a flow assumption in measuring the cost of goods sold. (b) Whether to use FIFO or LIFO. (Assume a long-run trend of slowly rising prices.)

The gross profit method of valuing inventory:

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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