Test Bank for Financial Accounting Jeffrey Waybright – 4th Edition

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Financial Accounting, 4e (Kemp)
Chapter 5 Inventory
5.1 Describe the four different inventory costing methods
1) Merchandise inventory represents the goods that a merchandiser has available to
sell to its customers.
Answer: TRUE
Diff: 1
Question Type: Concept
2) Inventory is probably the retailer’s smallest (by value) current asset.
Answer: FALSE
Diff: 1
Question Type: Concept
3) Manufacturers have three different kinds of inventory.
Answer: TRUE
Diff: 1
Question Type: Concept
4) GAAP allows two different kinds of inventory costing methods.
Answer: FALSE
Diff: 1
Question Type: Concept
5) A piece of artwork would probably be inventoried using the specific-identification
method.
Answer: TRUE
Diff: 1
Question Type: Concept
6) The Classics Collectibles, an antique shop, would most likely use the FIFO method of
accounting for inventory.
Answer: FALSE
Diff: 1
Question Type: Concept
7) Grocery stores are required to use the FIFO method because they sell the oldest
stock first to avoid spoilage.
Answer: FALSE
Diff: 1
Question Type: Concept
8) Under the specific-identification method, the flow of costs through the accounting
records will:
1.
2.
3.
4.
A) be nearly the opposite of the physical flow of goods through the business.
B) closely match the physical flow of goods through the business.
C) exactly match the physical flow of goods through the business.
D) have no relationship to the physical flow of goods through the business.
Answer: C
Diff: 1
Question Type: Concept
9) Under the LIFO method, the flow of costs through the accounting records will:
1.
2.
3.
4.
A) be nearly the opposite of the physical flow of goods through the business.
B) closely match the physical flow of goods through the business.
C) exactly match the physical flow of goods through the business.
D) have no relationship to the physical flow of goods through the business.
Answer: A
Diff: 1
Question Type: Concept
10) Under the average cost method, the flow of costs through the accounting records
will:
1.
2.
3.
4.
A) be nearly the opposite of the physical flow of goods through the business.
B) closely match the physical flow of goods through the business.
C) exactly match the physical flow of goods through the business.
D) have no relationship to the physical flow of goods through the business.
Answer: D
Diff: 1
Question Type: Concept
11) Under the FIFO method, the flow of costs through the accounting records will:
1.
2.
3.
4.
A) be nearly the opposite of the physical flow of goods through the business.
B) closely match the physical flow of goods through the business.
C) exactly match the physical flow of goods through the business.
D) have no relationship to the physical flow of goods through the business.
Answer: B
Diff: 1
Question Type: Concept
12) An inventory layer is synonymous with a separate:
1.
2.
3.
4.
A) sale of merchandise.
B) purchase of merchandise.
C) return of merchandise.
D) customer return of merchandise.
Answer: B
Diff: 1
Question Type: Concept
13) The quantity purchased and purchase price is tracked through:
1.
2.
3.
4.
A) inventory charting.
B) FIFO and LIFO only.
C) specific identification method only.
D) inventory layers.
Answer: D
Diff: 1
Question Type: Concept
14) When using LIFO, an accounting department only needs to know:
1.
2.
3.
4.
A) how many units were sold, not which units were sold.
B) which units were sold, not how many units were sold.
C) the specific price of a specific unit.
D) the average price of a specific unit.
Answer: A
Diff: 1
Question Type: Concept
15) The inventory system whereby the merchandise inventory account balance is
merely a record of the most recent physical inventory count is called the:
1.
2.
3.
4.
A) periodic system.
B) perpetual system.
C) LIFO system.
D) FIFO system.
Answer: A
Diff: 1
Question Type: Concept
16) The inventory system that uses the merchandise inventory account as an active
account is called the:
1.
2.
3.
4.
A) periodic system.
B) perpetual system.
C) LIFO system.
D) FIFO system.
Answer: B
Diff: 1
Question Type: Concept
17) A method of valuing inventory based on the average of units is called the:
1.
2.
3.
4.
A) LIFO method.
B) average cost method.
C) specific-unit-cost method.
D) FIFO method.
Answer: B
Diff: 1
Question Type: Concept
18) A method of valuing inventory based on the costs for each individual item is called
the:
1.
2.
3.
4.
A) LIFO method.
B) average cost method.
C) specific identification method.
D) FIFO method.
Answer: C
Diff: 1
Question Type: Concept
19) A method of valuing inventory based on the assumption that the oldest goods will be
sold first is called the:
1.
2.
3.
4.
A) LIFO method.
B) average cost method.
C) specific-unit-cost method.
D) FIFO method.
Answer: D
Diff: 1
Question Type: Concept
20) A method of valuing inventory based on the assumption that the newest goods will
be sold first is called the:
1.
2.
3.
4.
A) LIFO method.
B) average cost method.
C) specific identification method.
D) FIFO method.
Answer: A
Diff: 1
Question Type: Concept
21) A manufacturer uses ________ inventory to produce the goods it sells.
1.
2.
3.
4.
A) raw materials
B) purchases
C) finished goods
D) work-in-process
Answer: A
Diff: 1
Question Type: Concept
22) A manufacturer’s goods available for sale represents:
1.
2.
3.
4.
A) work-in-process inventory.
B) raw materials inventory.
C) cost of goods sold inventory.
D) finished goods inventory.
Answer: D
Diff: 1
Question Type: Concept
23) Goods such as milk, bread, and cheese need to be sold quickly due to potential
spoilage. Therefore, they would probably be costed using the:
1.
2.
3.
4.
A) LIFO method of inventory costing.
B) FIFO method of inventory costing.
C) average cost method of inventory costing.
D) any method as the physical flow and the cost flow are different.
Answer: D
Diff: 2
Question Type: Application
24) New technology, like the latest cell phones and HDTV, would probably be costed
using the:
1.
2.
3.
4.
A) LIFO method of inventory costing.
B) FIFO method of inventory costing.
C) moving average method of inventory costing.
D) any method as the physical flow and the cost flow are different.
Answer: D
Diff: 2
Question Type: Application
25) A custom boat shop would probably cost its inventory using the:
1.
2.
3.
4.
A) LIFO method of inventory costing.
B) FIFO method of inventory costing.
C) moving average method of inventory costing.
D) specific-identification method of inventory costing.
Answer: D
Diff: 1
Question Type: Application
26) C&S Petstore purchased 50 cases of dog food on January 1 and 25 cases of dog
food on January 5. Right away, 50 cases were sold, so they purchased an additional 50
cases of dog food on January 15. How many inventory layers were created from these
purchases?
1.
2.
3.
4.
A) 1
B) 3
C) 75
D) 125
Answer: B
Diff: 1
Question Type: Application
5.2 Compute inventory costs using first-in, first-out (FIFO), last-in, first-out (LIFO), and
average cost methods and journalize inventory transactions
1) The journal entries to record the purchases of inventory on account are different
based on the costing method chosen.
Answer: FALSE
Diff: 1
Question Type: Concept
2) The various inventory costing methods will still produce the same cost of goods sold
value.
Answer: FALSE
Diff: 1
Question Type: Concept
3) The sum of ending inventory and cost of goods available for sale equals cost of
goods sold.
Answer: FALSE
Diff: 1
Question Type: Concept
4) Beginning inventory plus net purchases equals cost of goods sold.
Answer: FALSE
Diff: 1
Question Type: Concept
5) The objective of inventory tracking is to allocate the cost of goods available for sale
between the cost of units sold and the cost of unsold inventory.
Answer: TRUE
Diff: 1
Question Type: Concept
6) Cost of goods sold is shown on the:
1.
2.
3.
4.
A) Balance Sheet as an asset.
B) Income Statement before gross profit.
C) Statement of Retained Earnings.
D) Income Statement after gross profit.
Answer: B
Diff: 1
Question Type: Concept
7) Inventory is shown on the:
1.
2.
3.
4.
A) Balance Sheet as a long-term asset.
B) Income Statement before gross profit.
C) Balance Sheet as a current asset.
D) Income Statement after gross profit.
Answer: C
Diff: 1
Question Type: Concept
8) The amount of cost of goods sold is MOST influenced by the:
1.
2.
3.
4.
A) cost of the items sold.
B) cost of the unsold items.
C) inventory costing method used.
D) number of items sold.
Answer: C
Diff: 2
Question Type: Concept
9) The LEAST widely used of the four inventory valuation methods is:
1.
2.
3.
4.
A) FIFO.
B) LIFO.
C) average cost.
D) specific-identification.
Answer: D
Diff: 1
Question Type: Concept
10) The journal entry to record the purchase of $7,500 of inventory on account under
the perpetual inventory system is:
500.
501.
502.
A) debit Inventory, $7,500; credit Cash, $7,500.
B) debit Purchases, $7,500; credit Accounts Payable, $7,500.
C) debit Inventory, $7,500; credit Accounts Payable, $7,500.
503.
D) debit Cost of Goods Sold, $7,500; credit Inventory, $7,500.
Answer: C
Diff: 2
Question Type: Application
11) Part of the journal entry to record the cost of an item for $28 that sold for $42 cash
under the perpetual inventory system is:
14.
15.
16.
17.
A) debit Sales, $42; credit Cost of Goods Sold, $28; credit Cash, $14.
B) debit Cost of Goods Sold, $42; sales, $42.
C) debit Cash, $42; credit Inventory $42.
D) debit Cost of Goods Sold $28; credit Inventory, $28.
Answer: D
Diff: 2
Question Type: Application
12) When merchandise is sold and the perpetual system of inventory is used, the
journal entry to record a sale of merchandise on account would include:
1.
2.
3.
4.
A) debiting Accounts Receivable and crediting Sales.
B) debiting Accounts Receivable and crediting Inventory.
C) debiting Accounts Receivable and crediting Cost of Goods Sold.
D) debiting Cost of Goods Sold and crediting Accounts Receivable.
Answer: A
Diff: 1
Question Type: Application
13) Liberty, Inc. has the following list of inventory:
Item
Unit
Cost
Selling
Price
ELF
$6,307
$20,332
ICF
$6,850
$7,184
CKS
$18,282
$19,793
PCC
$9,434
$11,284
CRD
$27,444
$33,459
Under specific-identification, what is Liberty’s ending inventory if ICF and CRD are not
sold during the current period?
1.
2.
3.
4.
A) $34,294
B) $40,643
C) $34,023
D) $51,409
Answer: A
Diff: 2
Question Type: Application
14) Liberty, Inc. has the following list of inventory:
Item
Unit
Cost
Selling
Price
ELF
$13,287
$20,342
ICF
$6,760
$7,214
CKS
$18,282
$19,723
PCC
$9,434
$11,234
CRD
$27,464
$33,419
Under specific-identification, what is Liberty’s cost of goods sold if ICF and CRD were
not sold during the current period?
1.
2.
3.
4.
A) $34,224
B) $40,633
C) $41,003
D) $51,299
Answer: C
Diff: 2
Question Type: Application
15) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit
Cost
July 1
Beginning
inventory
5
$49
July 4
Purchase
10
$57
July 7
Sale
12
July 11
Purchase
9
July 14
Sale
8
$54
Assuming FIFO, what is the cost of goods sold for the July 7 sale?
1.
2.
3.
4.
A) $588
B) $668
C) $652
D) $644
Answer: D
Diff: 2
Question Type: Application
16) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit
Cost
July 1
Beginning
inventory
5
$51
July 4
Purchase
10
$53
July 7
Sale
12
July 11
Purchase
9
July 14
Sale
8
$54
Assuming LIFO, what is the cost of goods sold for the July 7 sale? (Round your final
answer to the nearest dollar.)
1.
2.
3.
4.
A) $628
B) $632
C) $636
D) $626
Answer: B
Diff: 2
17) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit
Cost
July 1
Beginning
inventory
5
$52
July 4
Purchase
10
$58
July 7
Sale
12
July 11
Purchase
9
July 14
Sale
8
$57
Assuming average cost, what is the cost of goods sold for the July 7 sale? (Round any
intermediary calculations to the nearest cent and round your final answer to the nearest
dollar.)
1.
2.
3.
4.
A) $660
B) $684
C) $672
D) $666
Answer: C
Diff: 2
Question Type: Application
18) Lionworks Enterprises had the following inventory data:
Date
July 1
Beginning
inventory
Quantity
Unit
Cost
5
$53
July 4
Purchase
10
July 7
Sale
12
July 11
Purchase
9
July 14
Sale
8
$52
$57
Assuming FIFO, what is the cost of goods sold for the July 14 sale? (Round any
intermediary calculations to the nearest cent and your final answer to the nearest
dollar.)
1.
2.
3.
4.
A) $441
B) $416
C) $444
D) $456
Answer: A
Diff: 2
Question Type: Application
19) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit
Cost
July 1
Beginning
inventory
5
$53
July 4
Purchase
10
$52
July 7
Sale
12
July 11
Purchase
9
July 14
Sale
8
$59
Assuming LIFO, what is the cost of goods sold for the July 14 sale?
1.
2.
3.
4.
A) $451
B) $416
C) $472
D) $531
Answer: C
Diff: 2
Question Type: Application
20) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit
Cost
July 1
Beginning
inventory
5
$55
July 4
Purchase
10
$52
July 7
Sale
12
July 11
Purchase
9
$57
July 14
Sale
8
Assuming average cost, what is the cost of goods sold for the July 14 sale?
1.
2.
3.
4.
A) $340
B) $448
C) $436
D) $456
Answer: B
Diff: 2
Question Type: Application
21) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit
Cost
July 1
Beginning
inventory
5
$51
July 4
Purchase
10
$52
July 7
Sale
12
July 11
Purchase
9
July 14
Sale
8
$57
Assuming FIFO, what is the ending inventory after the July 14 sale? (Round any
intermediary calculations to the nearest cent and your final answer to the nearest
dollar.)
1. A) $204
2. B) $65
3. C) $228
4. D) $206
Answer: C
Diff: 2
Question Type: Application
22) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit
Cost
July 1
Beginning
inventory
5
$48
July 4
Purchase
10
$53
July 7
Sale
12
July 11
Purchase
9
July 14
Sale
8
$56
Assuming LIFO, what is the ending inventory after the July 14 sale? (Round any
intermediary calculations to the nearest cent and your final answer to the nearest
dollar.)
1.
2.
3.
4.
A) $224
B) $200
C) $214
D) $192
Answer: B
Diff: 2
Question Type: Application
23) Lionworks Enterprises had the following inventory data:
Date
Quantity
Unit
Cost
July 1
Beginning
inventory
5
$52
July 4
Purchase
10
$58
July 7
Sale
12
July 11
Purchase
9
July 14
Sale
8
$64
Assuming average cost, what is the ending inventory after the July 14 sale? (Round any
intermediary calculations to the nearest cent and your final answer to the nearest
dollar.)
1.
2.
3.
4.
A) $248
B) $256
C) $220
D) $232
Answer: A
Diff: 2
Question Type: Application
24) Cost of goods sold equals:
1.
2.
3.
4.
A) ending inventory plus net purchases minus beginning inventory.
B) beginning inventory minus net purchases plus ending inventory.
C) beginning inventory plus net sales minus ending inventory.
D) beginning inventory plus net purchases minus ending inventory.
Answer: D
Diff: 1
Question Type: Concept
25) When purchasing inventory on account in a perpetual inventory system, which of
the following is TRUE?
1. A) The journal entry would be exactly the same for all inventory costing methods.
2. B) LIFO and FIFO inventory valuation methods require a debit to inventory while all others
require a debit to purchases.
3. C) GAAP does not allow inventory to be purchased on account.
4. D) The average costing method requires a credit to inventory.
Answer: A
Diff: 1
Question Type: Concept
26) In which case will the journal entries relating to inventory differ based on the chosen
costing method?
1.
2.
3.
4.
A) When inventory is purchased on account.
B) When inventory is purchased for cash.
C) When inventory is sold – the revenue entry will differ.
D) When inventory is sold – the inventory entry will differ.
Answer: D
Diff: 1
Question Type: Concept
27) Given the following inventory activity, what is ending inventory using the perpetual
average costing method? (Round any intermediary calculations to the nearest cent and
your final answer to the nearest dollar.)
Date
Quantity
Unit
Cost
Beginning
Balance
80
$6.00
$5.50
September
17
Purchase
40
September
24
Sale
25
September
29
5.
6.
7.
8.
Purchases
60
$5
A) 155 units @ $5.51
B) 80 units @ $6.00 and 15 units @ $5.50 and 60 units @ $5
C) 95 units @ $5.83 and 60 units @ $5
D) 55 units @ $6.00 and 40 units @ $5.50 and 60 units @ $5
Answer: A
Diff: 2
Question Type: Application
28) Given the following inventory activity, what is ending inventory using the perpetual
LIFO costing method? (Round any intermediary calculations to the nearest cent and
your final answer to the nearest dollar.)
Date
Quantity
Unit
Cost
Beginning
Balance
120
$3.00
$2.50
September
17
Purchase
60
September
24
Sale
15
September
29
Purchases
30
$6.00
3. A) 195 units @ $3.32
4. B) 120 units @ $3.00 and 45 units @ $2.50 and 30 units @ $6.00
5. C) 165 units @ $2.83 and 30 units @ $6.00
6. D) 105 units @ $3.00 and 60 units @ $2.50 and 30 units @ $6.00
Answer: B
Diff: 2
Question Type: Application
29) Given the following inventory activity, what is ending inventory using the perpetual
FIFO costing method? (Round any intermediary calculations to the nearest cent and
your final answer to the nearest dollar.)
Date
Quantity
Unit
Cost
Beginning
Balance
100
$6.50
$3.00
September
17
Purchase
30
September
24
Sale
55
September
29
Purchases
15
4.
5.
6.
7.
$4.75
A) 90 units at $4.75
B) 80 units @ $6.50 and 10 units @ $4.75
C) 45 units @ $6.50 and 30 units @ $3.00 and 15 units @ $4.75
D) 85 units @ $6.50 and 5 units @ $3.00
Answer: C
Diff: 2
Question Type: Application
5.3 Compare the effects of the different costing methods on the financial statements
1) One benefit of the LIFO inventory method is that it most closely matches the actual
flow of goods in most cases.
Answer: FALSE
Diff: 1
Question Type: Concept
2) When using the FIFO inventory method, the ending inventory has the newer costs.
Answer: TRUE
Diff: 1
Question Type: Concept
3) When using the LIFO inventory method, the ending inventory has the newer, higher
costs.
Answer: FALSE
Diff: 1
Question Type: Concept
4) The choice of inventory costing method does not have an effect on net income.
Answer: FALSE
Diff: 1
Question Type: Concept
5) According to the consistency principle, companies may change inventory costing
methods depending on circumstances.
Answer: FALSE
Diff: 1
Question Type: Concept
6) The average cost method generates gross profit, net income, and income tax
amounts that fall between the extremes of FIFO and LIFO.
Answer: TRUE
Diff: 1
Question Type: Concept
7) In order to pay the least income tax possible in periods of rising inventory costs, the
company should use which of the following inventory costing methods?
1.
2.
3.
4.
A) FIFO
B) LIFO
C) Average cost
D) Specific identification
Answer: B
Diff: 2
Question Type: Critical Thinking
8) In order to pay the least income tax possible in periods of decreasing inventory costs,
the company should use which of the following inventory costing methods?
1. A) FIFO
2. B) LIFO
3. C) Average cost
4. D) Specific identification
Answer: A
Diff: 2
Question Type: Critical Thinking
9) In order to pay the least income tax possible in periods of constant costs, the
company should use which of the following inventory costing methods?
1.
2.
3.
4.
A) FIFO
B) LIFO
C) Average cost
D) Any method, as there is no effect on net income or taxes for the period if costs are
constant.
Answer: D
Diff: 2
Question Type: Critical Thinking
10) The most popular inventory costing method is:
1.
2.
3.
4.
A) FIFO.
B) LIFO.
C) average cost.
D) specific identification.
Answer: A
Diff: 2
Question Type: Concept
11) ________ produces the lowest cost of goods sold and the highest gross profit when
prices are increasing.
1.
2.
3.
4.
A) FIFO
B) LIFO
C) Average cost
D) Specific identification
Answer: A
Diff: 2
Question Type: Critical Thinking
12) ________ produces the highest cost of goods sold and the lowest gross profit when
prices are increasing.
1.
2.
3.
4.
A) FIFO
B) LIFO
C) Average cost
D) Specific identification
Answer: B
Diff: 2
Question Type: Critical Thinking
13) Companies that want a “middle ground” solution to net income and the amount of
income taxes that the company will pay will value their inventory at:
1.
2.
3.
4.
A) FIFO.
B) LIFO.
C) average cost.
D) specific identification.
Answer: C
Diff: 2
Question Type: Critical Thinking
14) ________ helps investors compare a company’s financial statements from one
period to the next.
1.
2.
3.
4.
A) Reliability
B) Consistency
C) Objectivity
D) Entity
Answer: B
Diff: 1
15) The consistency principle is mandated by:
1.
2.
3.
4.
A) the IRS.
B) the SEC.
C) GAAP.
D) the federal government.
Answer: C
Diff: 1
Question Type: Concept
16) In order to attract investors and borrow on favorable terms, a company would use
________ in times when inventory costs are rising.
1.
2.
3.
4.
A) LIFO
B) FIFO
C) average costing
D) specific-identification costing
Answer: B
Diff: 2
Question Type: Critical Thinking
17) A drawback to using ________ when inventory costs are rising is that the company
reports lower net income.
1.
2.
3.
4.
A) LIFO
B) FIFO
C) average costing
D) specific-identification costing
Answer: A
Diff: 2
Question Type: Critical Thinking
18) Which inventory costing method results in the oldest costs in ending inventory?
1.
2.
3.
4.
A) Average cost
B) Last-In, First-Out
C) First-In, First-Out
D) Average-In, First-Out
Answer: B
Diff: 1
Question Type: Concept
5.4 Value inventory using the lower-of-cost-or-market (LCM) rule
1) Under the LCM rule, a business must report inventory at the current replacement
cost.
Answer: FALSE
Diff: 1
Question Type: Concept
2) Under the conservatism rule, assets and income would be understated, rather than
overstated.
Answer: TRUE
Diff: 1
Question Type: Concept
3) Under the conservatism principle, liabilities and expenses would be understated,
rather than overstated.
Answer: FALSE
Diff: 1
4) The LCM rule compares original cost to current replacement cost to determine the
amount at which inventory should be valued.
Answer: TRUE
Diff: 1
Question Type: Concept
5) A material amount of value is one large enough to cause someone to change a
decision that has been made.
Answer: TRUE
Diff: 1
Question Type: Concept
6) Changing from LIFO to FIFO over two accounting periods could be viewed as a
violation of which accounting concept or principle?
1.
2.
3.
4.
A) Conservatism
B) Consistency
C) Materiality
D) Entity
Answer: B
Diff: 1
Question Type: Concept
7) Ignoring a write-off of inventory because it will not make a difference to financial
statement users is an example of:
1.
2.
3.
4.
A) conservatism.
B) consistency.
C) materiality.
D) entity.
Answer: C
Diff: 1
Question Type: Application
8) If the replacement cost of inventory is less than its historical cost, the company will
write down the inventory by:
1.
2.
3.
4.
A) debiting Cost of Goods Sold and crediting Inventory.
B) debiting Inventory and crediting Cost of Goods Sold.
C) making a note in the financial statements only.
D) debit Inventory for replacement cost, credit Inventory for historical cost.
Answer: A
Diff: 2
Question Type: Application
9) One lot of merchandise was counted at $566.34. A second count of the same
merchandise showed $566.82. The difference could be ignored due to:
1.
2.
3.
4.
A) conservatism.
B) consistency.
C) materiality.
D) entity.
Answer: C
Diff: 1
Question Type: Application
10) The LCM rule must be applied to inventory:
1.
2.
3.
4.
A) on an item-by-item basis.
B) by categories of items.
C) as a whole.
D) as a company decides, for there is no requirement to apply LCM.
Answer: D
Diff: 1
Question Type: Concept
11) Applying LCM to the items that make up ending inventory is an application of which
of the following concepts?
1.
2.
3.
4.
A) Materiality
B) Conservatism
C) Reliability
D) Full disclosure
Answer: B
Diff: 2
Question Type: Concept
12) Cypress Co. has the following LIFO perpetual inventory records:
Date
Purchases
Cost of Goods
Sold
December 1
December 7
$4,150
$1,500
December 18
December 31
Inventory on
Hand
$5,650
$1,000
$1,600
$4,650
$6,250
The current replacement cost of the ending inventory is $3,300. To apply the lower-ofcost-or-market rule, the journal entry would be:
1.
2.
3.
4.
A) Debit Cost of Goods Sold $2,950, credit Inventory $2,950,
B) Debit Inventory $2,950, credit Cost of Goods Sold $2,950,
C) Debit Cost of Goods Sold $1,000, credit Inventory $1,000
D) Debit inventory $1,000, credit Cost of Goods Sold $1,000
Answer: A
Diff: 2
Question Type: Application
13) S&C Inc. has the following LIFO perpetual inventory records:
Date
Purchases
Cost of Goods
Sold
Inventory on
Hand
December 1
December 7
$3,000
$900
December 18
December 31
$3,900
$900
$200
$3,000
$3,200
The current replacement cost of the ending inventory is $2,400. To apply the lower-ofcost-or-market rule, the journal entry would be:
1.
2.
3.
4.
A) Debit Cost of Goods Sold $900, credit Inventory $900
B) debit Inventory $900, credit Cost of Goods Sold $900
C) Debit Cost of Goods Sold $800, credit Inventory $800
D) debit Inventory $800, credit Cost of Goods Sold $800
Answer: C
Diff: 2
Question Type: Application
14) Renoir, Inc. has the following LIFO perpetual inventory records:
Date
Purchases
Cost of Goods
Sold
February 1
February 5
February 10
Inventory on
Hand
$500
$600
$1,100
$200
$900
February 28
$100
$1,000
The current replacement cost of the ending inventory is $1,400. To apply the lower-ofcost-or-market rule, the journal entry would be:
400.
401.
402.
403.
A) debit Cost of Goods Sold $400, credit Inventory $400.
B) debit Inventory $400, credit Cost of Goods Sold $400.
C) No entry required, since the amount is not material.
D) No entry required, since historical cost is less than replacement.
Answer: D
Diff: 2
Question Type: Application
5.5 Illustrate the reporting of inventory in the financial statements
1) A company using the perpetual inventory system does not need to perform a physical
count of inventory.
Answer: FALSE
Diff: 1
Question Type: Concept
2) To save time when performing physical inventory counts, outside companies are
rarely used because they are not familiar with the inventory.
Answer: FALSE
Diff: 1
Question Type: Concept
3) An example of full disclosure would be a footnote to the financial statements
indicating what method was used to value inventory.
Answer: TRUE
Diff: 1
Question Type: Concept
4) Shrinkage refers to the loss of inventory due to theft, damage or other similar
occurrences.
Answer: TRUE
Diff: 1
Question Type: Concept
5) If inventory shrinkage has occurred, the Inventory account will be credited for the
amount of lost inventory.
Answer: TRUE
Diff: 1
Question Type: Application
6) If shrinkage is found for $400, an adjusting entry would be made as follows:
400.
401.
402.
403.
A) debit Inventory for $400; credit Cost of Goods Sold for $400.
B) debit Inventory for $400; credit Sales Returns and Allowances for $400.
C) debit Cost of Goods Sold for $400; credit Inventory for $400.
D) debit Sales Returns and Allowances for $400; credit Inventory for $400.
Answer: C
Diff: 1
Question Type: Application
7) Which of the following is often used when taking a physical inventory?
1.
2.
3.
4.
A) Pre-numbered count sheets
B) Tags to show what inventory has been counted
C) Maps of the location of the inventory
D) All of the above
Answer: D
Diff: 1
Question Type: Concept
8) If the inventory shows an actual count of $450 and the perpetual inventory according
to the records shows $410, the adjusting entry for the $40 would:
1.
2.
3.
4.
A) debit Cost of Goods Sold; debit Purchase Returns and Allowances.
B) debit Cost of Goods Sold; credit Inventory.
C) debit Inventory; credit Cost of Goods Sold.
D) debit Inventory; credit Purchase Returns and Allowances.
Answer: C
Diff: 2
Question Type: Application
9) If the inventory shows an actual count of $405 and the perpetual inventory according
to the records shows $420, the adjusting entry for the $15 would:
1.
2.
3.
4.
A) debit Cost of Goods Sold; credit Inventory.
B) debit Cost of Goods Sold; credit Purchase Returns and Allowances.
C) debit Inventory; credit Cost of Goods Sold.
D) debit Inventory; credit Purchase Returns and Allowances.
Answer: A
Diff: 2
Question Type: Application
10) Footnotes are used with what concept or principle of accounting?
1.
2.
3.
4.
A) Conservatism
B) Consistency
C) Materiality
D) Full disclosure
Answer: D
Diff: 1
Question Type: Concept
11) Which is usually NOT a common practice in taking a physical inventory?
1.
2.
3.
4.
A) Taking inventory during slow store hours
B) Hiring an outside firm
C) Taking inventory during the November and December holidays
D) Taking inventory in team of two persons
Answer: C
Diff: 1
Question Type: Concept
12) Which account would always be used for an inventory adjustment?
1.
2.
3.
4.
A) Sales
B) Purchase Returns and Allowances
C) Cost of Goods Sold
D) Cash
Answer: C
Diff: 1
Question Type: Application
13) Which is NOT an assurance of footnote disclosures?
1.
2.
3.
4.
A) Conservative information
B) Reliable information
C) Comparable information
D) Relevant information
Answer: A
Diff: 2
Question Type: Concept
14) Which of the following would probably NOT need to be disclosed in a footnote?
1.
2.
3.
4.
A) Change of inventory methods
B) A material change in estimated shrinkage
C) A change in depreciation method
D) A 10% increase in sales
Answer: D
Diff: 2
Question Type: Concept
15) Which of the following would cause inventory shrinkage?
1.
2.
3.
4.
A) Employee theft
B) Spoilage of items
C) Spills of items
D) All of the above
Answer: D
Diff: 1
Question Type: Concept
16) Making notes in the financial statements to explain the justification of valuation
changes and other financial decisions would be an example of:
1. A) conservatism.
2. B) consistency.
3. C) materiality.
4. D) full disclosure.
Answer: D
Diff: 1
Question Type: Concept
17) The Betta Corp’s inventory account balance was $1,450 at the end of the year. A
physical inventory count revealed that inventory on hand was $1,150. What amount
should Betta report on the balance sheet for inventory?
1.
2.
3.
4.
A) $300
B) 1,150
C) $1,450
D) $2,600
Answer: B
Diff: 1
Question Type: Application
5.6 Determine the effect of inventory errors on the financial statements
1) If the ending inventory is overstated in Year 1, then the Cost of Goods Sold will be
overstated in Year 2.
Answer: TRUE
Diff: 1
Question Type: Application
2) If the ending inventory is understated in Year 1, then the Gross Profit will be
understated in Year 2.
Answer: FALSE
Diff: 1
Question Type: Application
3) The ending inventory of one year becomes the beginning inventory of the next year.
Answer: TRUE
Diff: 1
Question Type: Application
4) Counting inventory that is in transit on December 31 that was shipped from the
supplier FOB shipping point would not cause any error in the final inventory valuation.
Answer: TRUE
Diff: 1
Question Type: Application
5) Inventory errors cancel out after two periods.
Answer: TRUE
Diff: 1
Question Type: Concept
6) If Period 1 ending inventory is understated, then:
1.
2.
3.
4.
A) both cost of goods sold and net income are understated in Period 1.
B) cost of goods sold is overstated and net income is understated in Period 1.
C) cost of goods sold is understated and net income is overstated in Period 1.
D) both cost of goods sold and net income are overstated in Period 1.
Answer: B
Diff: 2
Question Type: Application
7) If Period 1 ending inventory is overstated, then:
1.
2.
3.
4.
A) both cost of goods sold and net income are understated in Period 1.
B) cost of goods sold is overstated and net income is understated in Period 1.
C) cost of goods sold is understated and net income is overstated in Period 1.
D) both cost of goods sold and net income are overstated in Period 1.
Answer: C
Diff: 2
Question Type: Application
8) If the ending inventory in Period 1 is understated, gross profit for Year 1 is:
1.
2.
3.
4.
A) overstated.
B) understated.
C) not affected.
D) determined by beginning inventory.
Answer: B
Diff: 1
Question Type: Application
9) If ending inventory in Period 1 is understated, Cost of Goods Sold in Period 2 is:
1.
2.
3.
4.
A) overstated.
B) understated.
C) not affected.
D) the same as in Period 1.
Answer: B
Diff: 1
Question Type: Application
10) If ending inventory in Period 1 is overstated, gross profit in Period 2 is:
1.
2.
3.
4.
A) overstated.
B) understated.
C) not affected.
D) the same as in Period 1.
Answer: B
Diff: 1
Question Type: Application
11) If gross profit is overstated in Period 1, then the ending inventory and net income in
Period 1 were respectively:
1. A) overstated, and understated.
2. B) overstated, and overstated.
3. C) understated, and overstated.
4. D) understated, and understated.
Answer: B
Diff: 2
Question Type: Application
12) If Cost of Goods Sold was understated in Period 1, then Cost of Goods Sold and
gross profit in Period 2 will be:
1.
2.
3.
4.
A) both understated.
B) both overstated.
C) understated for cost of goods sold and overstated for gross profit.
D) overstated for cost of goods sold and understated for gross profit.
Answer: D
Diff: 2
Question Type: Application
13) Inventory errors cancel out at the end of ________ accounting periods.
1.
2.
3.
4.
A) 1
B) 2
C) 3
D) 4
Answer: B
Diff: 1
Question Type: Concept
14) Which of the following is an INCORRECT statement if ending inventory is
overstated?
1.
2.
3.
4.
A) Cost of goods sold is overstated.
B) Gross profit is overstated.
C) Net income is overstated.
D) Income tax is overstated.
Answer: A
Diff: 3
Question Type: Application
15) Which of the following is an INCORRECT statement if ending inventory is
understated?
1.
2.
3.
4.
A) Cost of goods sold is overstated.
B) Gross profit is overstated.
C) Net income understated.
D) Income tax is understated.
Answer: B
Diff: 3
Question Type: Application
16) If a misstatement of inventory occurs, the net income for ________ periods will be
misstated.
1. A) 0
2. B) 1
3. C) 2
4. D) 3
Answer: C
Diff: 1
Question Type: Concept
17) Which of the following would NOT cause an error in the physical inventory count on
December 31?
1. A) Counting inventory purchased that was shipped by the supplier FOB destination on
December 31
2. B) Double counting an aisle of product
3. C) Counting inventory purchased that was shipped by the supplier FOB shipping point on
December 31
4. D) Forgetting to tag a section of inventory
Answer: C
Diff: 3
Question Type: Application
18) An error in the reported inventory will cause errors in all of the following EXCEPT
the:
1.
2.
3.
4.
A) Balance Sheet.
B) Statement of Retained Earnings.
C) following year’s financial statements.
D) cash account.
Answer: D
Diff: 1
Question Type: Concept
19) Cascade Supply Company’s income statement includes sales revenue $122,000,
cost of goods sold $80,000, and gross profit $42,000. If ending inventory was
accidentally overstated by $5,000, what is the correct amount for gross profit?
1.
2.
3.
4.
A) $37,000
B) $42,000
C) $47,000
D) $52,000
Answer: A
Diff: 2
Question Type: Application
5.7 Use the gross profit method to estimate ending inventory
1) Ending inventory can be estimated by subtracting the estimated cost of goods
available for sale from the Cost of Goods Sold.
Answer: FALSE
Diff: 1
Question Type: Application
2) The historical gross profit percentage can be used to estimate the current period’s
gross profit.
Answer: TRUE
Diff: 1
Question Type: Concept
3) If a company experiences a loss of inventory for fire, there is no way to estimate the
inventory.
Answer: FALSE
Diff: 1
Question Type: Concept
4) The first step in using the gross profit method to estimate ending inventory is to:
1.
2.
3.
4.
A) calculate the cost of goods available for sale.
B) estimate the ending inventory.
C) estimate the beginning inventory.
D) estimate the cost of goods sold.
Answer: A
Diff: 1
Question Type: Concept
5) The second step in using the gross profit method to estimate ending inventory is to:
1.
2.
3.
4.
A) estimate the cost of goods sold.
B) calculate the cost of goods available for sale.
C) estimate the ending inventory.
D) estimate the beginning inventory.
Answer: A
Diff: 1
Question Type: Concept
6) The last step in using the gross profit method to estimate ending inventory is to:
1.
2.
3.
4.
A) estimate the beginning inventory.
B) estimate the cost of goods sold.
C) calculate the cost of goods available for sale.
D) estimate the ending inventory.
Answer: D
Diff: 1
Question Type: Concept
7) Beginning inventory + Net purchases =
1.
2.
3.
4.
A) Cost of goods sold.
B) Cost of goods available for sale.
C) Gross profit.
D) Ending inventory.
Answer: B
Diff: 1
Question Type: Concept
8) Net sales times the historical gross profit percentage yields the estimated:
1.
2.
3.
4.
A) ending inventory.
B) beginning inventory.
C) gross profit.
D) cost of goods sold.
Answer: C
Diff: 1
Question Type: Concept
9) Net sales minus estimated gross profit yields the estimated:
1.
2.
3.
4.
A) ending inventory.
B) beginning inventory.
C) gross profit.
D) cost of goods sold.
Answer: D
Diff: 1
Question Type: Concept
10) Cost of goods available for sale minus estimated Cost of Goods Sold yields the
estimated:
1.
2.
3.
4.
A) ending inventory.
B) beginning inventory.
C) gross profit.
D) cost of goods sold.
Answer: A
Diff: 1
Question Type: Concept
11) A company has $4,200 in net sales, $3,500 in gross profit, $1,000 in ending
inventory, and $1,600 in beginning inventory. The company’s cost of goods sold is:
500.
501.
502.
503.
A) $3,500.
B) $700.
C) $2,600.
D) $1,900.
Answer: B
Diff: 1
Question Type: Application
12) A company has $8,100 in net sales, $1,000 in gross profit, $2,300 in ending
inventory and $1,900 in beginning inventory. The company’s cost of goods sold is:
100.
101.
102.
103.
A) $7,100.
B) $6,200.
C) $5,800.
D) $5,200.
Answer: A
Diff: 1
Question Type: Application
13) The ________ estimates inventory by using the format for cost of goods sold.
1.
2.
3.
4.
A) FIFO method
B) LIFO method
C) gross profit method
D) average cost method
Answer: C
Diff: 1
Question Type: Concept
14) The Wolfe Company recently lost it’s entire inventory in a fire. The accounting
records reflect the following information:
Beginning Inventory
$34,000
Net Purchases
$220,400
Net Sales
$378,000
Gross Profit Rate
40%
Using the gross profit method, estimated inventory is:
1.
2.
3.
4.
A) $101,760
B) $27,600
C) $34,000
D) Cannot be determined with given information.
Answer: B
Diff: 2
Question Type: Application
5.8 Compute the inventory turnover and days-sales-in-inventory
1) Inventory is the most important asset in a service business.
Answer: FALSE
Diff: 1
Question Type: Concept
2) Inventory turnover equals average ending inventory divided by cost of goods sold.
Answer: FALSE
Diff: 1
Question Type: Concept
3) Inventory turnover measures the amount of times a company turns over its beginning
inventory during a period.
Answer: FALSE
Diff: 1
Question Type: Concept
4) Other than the cost of purchasing the inventory, another large cost of inventory would
be storage of the inventory.
Answer: TRUE
Diff: 1
Question Type: Concept
5) An inventory turnover rate of 4 means that the company is selling its inventory
approximately every three months.
Answer: TRUE
Diff: 2
Question Type: Application
6) Caesar’s Coffee has beginning inventory of $15,000, ending inventory of $20,000,
and cost of goods sold $50,000. Caesar’s could operate for approximately 4 months
without buying more inventory.
Answer: TRUE
Diff: 2
Question Type: Application
7) The inventory turnover rate is computed by:
1.
2.
3.
4.
A) dividing average inventory by cost of goods sold.
B) dividing cost of goods sold by average inventory.
C) dividing ending inventory by cost of goods sold.
D) dividing ending inventory by beginning inventory.
Answer: B
Diff: 1
Question Type: Concept
8) Goods available for sale are $26,000; beginning inventory is $15,000; ending
inventory is $17,000; and cost of goods sold is $42,000. The inventory turnover is:
(Round your final answer two decimal places, X.XX)
2.
3.
4.
5.
A) 2.80.
B) 2.47.
C) 2.63.
D) 1.63.
Answer: C
Diff: 1
Question Type: Application
9) Goods available for sale are $43,000; beginning inventory is $15,000; ending
inventory is $19,000; and cost of goods sold is $47,000. The inventory turnover is:
(Round your final answer two decimal places, X.XX)
2.
3.
4.
5.
A) 2.53.
B) 2.76.
C) 2.47.
D) 2.26.
Answer: B
Diff: 1
Question Type: Application
10) Goods available for sale are $29,000; beginning inventory is $8,000; ending
inventory is $15,000; and cost of goods sold is $10,000. The days-sales-in-inventory is
closest to: (Round any intermediary calculations two decimal places, X.XX, and your
final answer to the nearest day.)
460.
461.
462.
463.
A) 460.
B) 292.
C) 420.
D) 548.
Answer: C
Diff: 1
Question Type: Application
11) Goods available for sale are $330,000; beginning inventory is $20,000; ending
inventory is $35,000; and cost of goods sold is $245,000. The inventory turnover is:
(Round your final answer two decimal places, X.XX.)
12.
13.
14.
15.
A) 12.25.
B) 7.00.
C) 12.00.
D) 8.91.
Answer: D
Diff: 1
Question Type: Application
12) Goods available for sale are $113,000; beginning inventory is $35,000; ending
inventory is $39,000; and cost of goods sold is $73,000. The days-sales-in-inventory is
closest to: (Round any intermediary calculations two decimal places, X.XX, and your
final answer to the nearest day.)
236.
237.
238.
239.
A) 236.
B) 185.
C) 120.
D) 195.
Answer: B
Diff: 1
Question Type: Application
13) Inventory is often the largest:
1.
2.
3.
4.
A) expense on the Income Statement.
B) long-term asset on the Balance Sheet.
C) current asset on the Balance Sheet.
D) part of general selling expenses.
Answer: C
Diff: 1
Question Type: Concept
14) The inventory turnover ratio is normally computed for:
1.
2.
3.
4.
A) a buying season.
B) the entire year.
C) each monthly accounting period.
D) each quarter.
Answer: B
Diff: 1
Question Type: Concept
15) Customer demand for an item CANNOT:
1.
2.
3.
4.
A) increase the inventory turnover.
B) decrease the inventory turnover.
C) affect the amount of merchandise the company purchases.
D) change the formula used to calculate inventory turnover.
Answer: D
Diff: 2
Question Type: Critical Thinking
16) A business with a ________ net income percentage may often have a ________
inventory turnover rate:
1.
2.
3.
4.
A) lower, higher.
B) lower, lower
C) higher, lower
D) all of the above are possible combinations of net income percentage and inventory
turnover rate.
Answer: D
Diff: 1
Question Type: Concept
17) Having too much inventory can be a problem because:
1.
2.
3.
4.
A) inventory takes up space and ties up money.
B) inventory can become obsolete and lose value.
C) inventory is expensive to maintain.
D) all of the above.
Answer: D
Diff: 1
Question Type: Concept
18) An indication that inventory is being sold quickly is:
1. A) a high turnover rate and high days-sales-in-inventory rate.
2. B) a high turnover rate and low days-sales-in-inventory rate.
3. C) a low turnover rate and high days-sales-in-inventory rate.
4. D) a low turnover rate and low days-sales-in-inventory rate.
Answer: B
Diff: 1
Question Type: Application
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