Accounting III - Chapter 6 Objective Questions
True/False
Indicate whether the statement is true or false.
____
1. If an inventory is taken once each year, the business must be using the perpetual inventory method.
____
2. If ending inventory is understated, retained earnings will be overstated.
____
3. A perpetual inventory maintains a continuous record of merchandise inventory increases and decreases.
____
4. To determine the inventory cost using the lower of cost or market, the business compares the cost of
inventory using its normal inventory costing method (fifo, lifo, or weighted-average) to the current
replacement cost of the inventory. The inventory is valued at whichever cost is lower.
____
5. A business may fail if it does not have enough inventory on hand, but will not fail if it has an excess of
inventory.
____
6. Comparing inventory costing method in times of rising prices, the first-in, first-out method will result in the
highest cost of merchandise sold.
____
7. FOB shipping point means that the title to the goods passes to the buyer when the vendor delivers the goods at
the buyer's place of business.
____
8. Most businesses have a merchandise inventory turnover ratio close to 12, since they offer terms of n/30 to
their customers.
____
9. The cost of items in inventory involves both the price paid to vendors for the merchandise and the costs
involved in getting the goods to the place of business and ready for sale.
____ 10. To use the retail method of estimating the inventory, the cost of purchases, sales and beginning merchandise
inventory must be known. In addition, the retail price of items sold must be known.
____ 11. The cost of merchandise available for sale consists of beginning merchandise inventory and net purchases.
____ 12. Each year, the business uses the inventory costing method that results in the most favorable net income.
____ 13. To prepare monthly interim financial statements, a business should take the inventory monthly.
____ 14. If ending inventory is overstated, net income will be overstated.
____ 15. The consignor is the owner of the goods on consignment and is responsible for selling the goods.
____ 16. The two methods businesses may use to determine the number of goods in inventory are taking a physical
count of the goods and keeping a continuous record for each inventory item.
____ 17. The unit of measurement concept states that the unit price should be used to record inventory cost when
merchandise is purchased.
____ 18. An inventory record lists the number of units on hand, the unit price of the item, and the item's total cost.
____ 19. At the end of each fiscal period, the cost of merchandise available for sale can be divided into the ending
merchandise inventory and net purchases for the fiscal period.
____ 20. The gross profit method of estimating inventory assumes that a relationship exists between net sales and gross
profit.
____ 21. If ending inventory is understated, merchandise inventory on the balance sheet will be overstated.
____ 22. If the average number of days' sales in merchandise inventory is 40 days, the merchandise turnover ratio
(rounded to the nearest 0.1) is 9.1.
____ 23. A consignee agrees to care for goods and attempt to sell the goods, but does not count the goods in its
inventory.
____ 24. A stock record is used in a periodic inventory to record the number of goods purchased, the number of goods
sold, and the quantity in inventory.
____ 25. A low merchandise inventory turnover ratio usually indicates a high return on investment.
____ 26. If ending inventory is overstated, the cost of merchandise sold will be understated.
____ 27. Comparing inventory costing methods in times of rising prices, the last-in, first-out method will result in the
lowest reported net income.
____ 28. FOB destination means that the title to the goods passes to the buyer when the goods are received at the
buyer's place of business.
____ 29. One advantage of a computerized inventory system is that managers have more frequent inventory
information available to them.
____ 30. A physical count indicates that 300 units are in ending inventory. There were 200 units in beginning inventory
purchased at $1.00 per unit. In addition, 400 units were purchased at $1.20. Using the last-in, first-out costing
method, the total cost of the ending inventory would be $360.00.
____ 31. When the terms of sale for goods in transit are FOB shipping point, the title to the goods passes to the buyer
when the goods are received by the buyer.
____ 32. Businesses that use a perpetual inventory never need to take a periodic inventory.
____ 33. Because of the expense, many businesses take a periodic inventory only once a year.
____ 34. Typically, a business counts as part of its inventory all goods for sale legally owned by the business.
____ 35. During a period of increasing prices, the weighted-average inventory costing method usually will give the
lowest total inventory cost.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____ 36. A completed form authorizing a seller to deliver goods with payment to be made later is called a(n) ____.
a. stock ledger
c. stock record
b. purchase order
d. invoice
____ 37. The costing method that uses the price of merchandise purchased last to calculate the cost of merchandise sold
first is called ____.
a. first-in, first-out
c. last-in, first-out
b. lower of cost or market
d. weighted average
____ 38. A form used during a periodic inventory to record information about each item of merchandise on hand is
called a(n) ____.
a. stock record
c. inventory record
b. stock ledger
d. merchandise-on-hand record
____ 39. The number of times the average amount of merchandise inventory is sold during a specific period of time is
called the ____.
a. average number of days' sales in merchandise inventory
b. average sales turnover ratio
c. inventory sales period ratio
d. merchandise inventory turnover ratio
____ 40. Goods that are given to a business to sell but for which title remains with the vendor, are called a(n) ____.
a. consignment
c. sale
b. purchase
d. consignee
____ 41. The costing method that uses the lower of cost or market price to calculate the cost of ending merchandise
inventory is called ____.
a. first-in, first-out
c. last-in, first-out
b. lower of cost or market
d. weighted average
____ 42. A form used to show the type of merchandise, quantity received, quantity sold, and balance on hand is called
a(n) ____.
a. stock ledger
c. stock record
b. purchase order
d. invoice
The following selected data is taken from the inventory records of Edwards, Inc: Inventory item S10 had
1,000 units at a unit price of $17.00 in inventory on January 1. The first purchase during the year was for
1,500 units at $18.00. The second purchase was for 1,500 units at $19.00. The December 31 inventory
consisted of 1,800 units.
____ 43. Refer to the Edwards Inc. Inventory Item S10 Scenario. The total cost of the inventory using fifo is ____.
a. $31,400
c. $33,900
b. $32,634
d. $34,200
____ 44. Refer to the Edwards Inc. Inventory Item S10 Scenario. The total cost of the inventory using lifo is ____.
a. $30,600
c. $32,634
b. $31,400
d. $33,900
____ 45. Refer to the Edwards Inc. Inventory Item S10 Scenario. The total cost of the inventory using weightedaverage is ____.
a. $30,600
c. $32,634
b. $31,400
d. $33,900
____ 46. The inventory method that uses the average cost of beginning inventory plus merchandise purchased during a
fiscal period to calculate the cost of merchandise sold is called ____.
a. first-in, first-out
c. last-in, first-out
b. lower of cost or market
d. weighted average
____ 47. The person or business that gives goods on consignment is called the ____.
a. consignment buyer
c. consignor
b. consignee
d. owner
____ 48. The method of estimating inventory by using a percentage based on both cost and retail prices is called ____.
a. gross profit
c. percentage
b. periodic inventory
d. retail
____ 49. A file of stock records for all merchandise on hand is called a(n) ____.
a. accounts payable ledger
c. merchandise ledger
b. stock ledger
d. inventory record
____ 50. The period of time needed to sell an average amount of merchandise inventory is called the ____.
a. average number of days' sales in merchandise inventory
b. average sales turnover ratio
c. merchandise inventory turnover ratio
d. merchandise sold ratio
____ 51. The costing method that uses the price of merchandise purchased first to calculate the cost of merchandise
sold first is called ____.
a. first-in, first-out
c. lower of cost or market
b. last-in, first-out
d. weighted average
____ 52. The person or business that receives goods on consignment is called the ____.
a. consignment buyer
c. consignor
b. consignee
d. owner
The following selected data is taken from the inventory records of Edwards, Inc: Inventory item T35 had
1,600 units at a unit price of $14.00 in inventory on January 1. The first purchase during the year was for
1,000 units at $15.00. The second purchase was for 1,000 units at $18.00. The December 31 inventory
consisted of 1,200 units. The market price is $15.00.
____ 53. Refer to the Edwards Inc. Inventory Item T35 Scenario. The total cost of the inventory using fifo is ____.
a. $16,800
c. $18,468
b. $18,000
d. $21,000
____ 54. Refer to the Edwards Inc. Inventory Item T35 Scenario. The weighted-average unit price is ____.
a. $14.50
c. $15.67
b. $15.39
d. $16.00
____ 55. Refer to the Edwards Inc. Inventory Item T35 Scenario. Assume the weighted-average cost method is used.
Calculate the inventory cost using the lower of cost or market method.
a. $16,800
c. $18,468
b. $18,000
d. $21,000
____ 56. If the cost of ending merchandise inventory is understated, the cost of merchandise sold will be ____.
a. understated
c. not affected
b. overstated
d. undetermined
____ 57. The weighted-average inventory costing method is based on the assumption that each item in ending
inventory has a cost equal to the ____.
a. beginning price paid for similar items
b. ending price paid for similar items
c. average price paid for similar items
d. average price for all inventory items
____ 58. Businesses that need an ending inventory cost for monthly interim financial statements usually ____.
a. estimate the inventory
c. take a monthly periodic inventory
b. use last year's ending inventory
d. use published industry standards
____ 59. The shipping terms that indicate that title to the goods passes to the buyer when the goods are received by the
buyer is ____.
a. FOB shipping point
c. FOB buyer
b. FOB destination
d. FOB seller
____ 60. Most businesses take a periodic inventory ____.
a. daily
c. monthly
b. weekly
d. yearly
Accounting III - Chapter 6 Objective Questions
Answer Section
TRUE/FALSE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
F
F
T
T
F
F
F
F
T
F
T
F
F
T
F
T
F
T
F
T
F
T
T
F
F
T
T
T
T
T
F
F
T
T
F
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
MULTIPLE CHOICE
36. ANS: B
37. ANS: C
38. ANS: C
PTS: 1
PTS: 1
PTS: 1
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
D
A
B
C
C
B
C
D
C
D
B
A
A
B
D
B
B
B
C
A
B
D
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1