Chapter F9: Challenging Issues under Accrual Accounting:
Merchandise Inventory and Cost of Good Sold
Multiple Choice
1.
*
Goods Available for Sale equals --
ending inventory + cost of goods sold.
purchases - beginning inventory.
revenues - expenses.
assets - liabilities.
Hint for question 1
Goods available for sale (GAFS) comes from two sources - beginning inventory
and purchases. Only two things can happen to goods available for sale, to be
sold (COGS) or to remain unsold as ending inventory.
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2.
The perpetual inventory system --
is easy to maintain even without the use of computer technology and
scanners that read UPC codes.
does not require a physical inventory count every year.
calculates cost of goods sold only at the end of the accounting
period.
*
makes it easier to uncover errors in the recording process,
shoplifting, and employee theft than the periodic system.
Hint for question 2
The perpetual inventory system updates inventory records after each sale. The
physical count at the end of the year is compared to the accounting records to
determine accuracy and to uncover theft, damage, or spoilage of inventory.
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3.
In a period of rising prices, the following statement is true regarding
LIFO:
The most recent inventory costs are allocated to ending inventory.
Ending inventory is generally overvalued.
Cost of goods sold will be the same amount whether calculated
using a perpetual system or a periodic system.
*
Taxable income is lower so the company pays less income tax.
Hint for question 3
LIFO stands for last-in, first-out. This means the most recent units purchased
(the last units, the higher-priced units) are assumed sold. Units purchased
earlier are assumed unsold and those costs allocated to ending inventory.
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4.
In a period of rising prices, the following statement is true regarding
FIFO:
The units purchased later in the accounting period are allocated to
COGS.
A different amount for cost of goods sold is calculated depending on
whether the periodic or perpetual inventory system is used.
*
The higher-priced unit costs are allocated to ending inventory.
Reported net income is lower than if the LIFO inventory method was
used.
Hint for question 4
FIFO stands for first-in, first-out. This means the first units purchased (the lowerpriced units) are assumed sold. Units purchased later in the accounting period
are assumed unsold and those costs allocated to ending inventory.
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5.
*
The one inventory costing method in which the physical flow of goods is
always mirrored in the accounting records is --
specific identification cost method.
average cost method.
FIFO cost method.
LIFO cost method.
Hint for question 5
LIFO, FIFO, and average cost are assumptions used to allocate the dollar
amount in goods available for sale to either cost of goods sold or ending
inventory.
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6.
Assume a periodic inventory system:
Beginning inventory 10 units at $10 each
January 20th purchase 10 units at $20 each
January 30th purchase 5 units at $30 each
15 of the 25 units are sold.
Cost of goods sold using the FIFO costing method equals --
$150.
*
$200.
$350.
none of the above.
Hint for question 6
FIFO means first-in, first-out. The costs of the first units purchased are allocated
to COGS.
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7.
Assume a periodic inventory system:
Beginning inventory 10 units at $10 each
January 20th purchase 10 units at $20 each
January 30th purchase 5 units at $30 each
15 of the 25 units are sold.
Cost of Goods Sold using the LIFO costing method equals --
$200.
*
$350.
$450.
none of the above.
Hint for question 7
LIFO means last-in, first-out. The costs of the last units purchased are allocated
to COGS.
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8.
Assume a periodic inventory system:
Beginning inventory 10 units at $10 each
January 20th purchase 10 units at $20 each
January 30th purchase 5 units at $30 each
15 of the 25 units are sold.
Cost of goods sold using the average costing method equals --
$200.
*
$270.
$300.
none of the above.
Hint for question 8
Average costing assumes all units were purchased at the average unit price.
Cost of GAFS divided by the number of units available to sell = average unit
cost.
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9.
Total sales price of merchandise sold to customers $10,000; beginning
inventory $1,000; inventory purchases $4,000; and inventory sold
$3,000. Gross margin equals --
$2,000.
$5,000.
*
$7,000.
none of the above.
Hint for question 9
Sales price refers to the retail price. Inventory records are kept at wholesale
prices. Sales revenue - COGS = gross margin.
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10.
Which of the following statements is true regarding a physical count of
inventory?
When using the periodic inventory system, it establishes the correct
amount for ending inventory.
When using the perpetual inventory system, it serves as a check on
the accounting records for inventory.
It is required for all inventory systems/methods at least once a year.
*
All of the above are correct.
Hint for question 10
A physical count of inventory is the very costly process of counting all inventory
in stock at a particular time. It is usually conducted at the end of the fiscal year.
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11.
Lucy Company and Fred Company are identical except for the fact that
Lucy Company uses the LIFO inventory method and Fred Company
uses the FIFO inventory method. In a period of rising prices, the amount
that will be greater for Lucy Company is --
gross margin.
net income.
*
cost of goods sold.
ending inventory.
Hint for question 11
LIFO allocates the higher, more recent costs to cost of goods sold. Cost of
goods sold is an expense. Higher expenses lead to lower net income.
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12.
*
The following statement is true regarding inventory:
A company may use more than one inventory costing method.
LIFO is the most commonly used inventory costing method.
A manufacturing firm reports only one inventory account while a
merchandising firm may report three different inventory accounts titled:
raw materials, work-in-process, and finished goods inventory.
In a period of rising prices, LIFO will report a greater net income than
FIFO.
Hint for question 12
FIFO is the most commonly used inventory costing method. Many
companies use more than one inventory costing method. A
manufacturing firm may report three different inventory accounts titled:
raw materials, work-in-process, and finished goods inventory.
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Submit for Grade
Chapter F9: Challenging Issues under Accrual Accounting:
Merchandise Inventory and Cost of Good Sold
True or False
1.
If a grocery store does not adopt the FIFO cost flow assumption for
bottles of milk, there will be a lot of sour milk at that store.
TRUE
*
FALSE
Hint for question 1
Accounting rules do not require that the inventory cost flow assumption mirror
the physical flow of inventory.
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2.
The choice of inventory method changes the ultimate profitability of the
company.
TRUE
*
FALSE
Hint for question 2
From the time a firm purchases its first item of inventory to the time it sells its
last item of inventory, total gross profit will be the same regardless of the
inventory method or system adopted.
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3.
LIFO matches the most recent inventory costs to current revenues.
*
TRUE
FALSE
Hint for question 3
LIFO allocates the higher costs of the most recently purchased units to cost of
goods sold.
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4.
In a period of rising prices, FIFO allocates the higher inventory costs to
the income statement.
TRUE
*
FALSE
Hint for question 4
FIFO allocates the cost of the first units purchased to cost of goods sold. In a
period of rising prices, the first units are the lower priced units.
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5.
*
Firms that deal with expensive and unique inventory such as automobiles
and real estate typically use a specific identification cost method.
TRUE
FALSE
Hint for question 5
Inventory costing methods that use assumptions are LIFO, FIFO, and
the average costing methods. Specific identification makes no
assumptions about the cost of inventory.
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Submit for Grade
Chapter F9: Challenging Issues under Accrual Accounting:
Merchandise Inventory and Cost of Good Sold
Fill In The Blanks
1.
Beginning inventory plus purchases equals __________.
COGS
*
GAFS
COGM
GM
Hint for question 1
COGS, COGM, GAFS, or GM?
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2.
A grocery store uses a scanner for checkout, and a computerized
inventory system is in place that adjusts inventory records after each
sale. This grocery store is using a __________ inventory system.
LIFO
*
perpetual
FIFO
periodic
Hint for question 2
Which inventory system adjusts inventory after each sale?
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3.
The financial statement to consult to find gross margin is the
__________.
balance sheet
*
income statement
statement of cash flows
statement of retained earnings
Hint for question 3
Sales - COGS = gross margin.
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4.
When using the FIFO inventory costing method, the most recent
inventory costs will be found on the __________ (financial statement).
*
balance sheet
income statement
statement of cash flows
statement of retained earnings
Hint for question 4
FIFO stands for first-in, first-out.
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5.
Under accrual accounting in a perpetual inventory system, when a
company purchases inventory it is recorded as an asset on the balance
sheet. As inventory is sold, its cost is transferred from the asset account
to a(n) __________ account.
equity
liability
revenue
*
expense
Hint for question 5
Costs are also referred to as what?
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Submit for Grade
Chapter F9: Challenging Issues under Accrual Accounting:
Merchandise Inventory and Cost of Good Sold
Essay Questions
1.
2.
Compare and contrast the perpetual and the periodic inventory accounting
systems.
A company wants to borrow a significant sum of money from a local bank.
Explain how the choice of either the LIFO or FIFO inventory costing
method affects amounts reported on the income statement and the
balance sheet. Which inventory costing method may be better to use
when seeking loan approval? Explain. Assume it is a period of rising
prices.
3.
Lucy Company and Fred Company are identical except for the fact that
Lucy Company uses the LIFO inventory method and Fred Company uses
the FIFO inventory method. Beginning inventory 10 units at $10 each,
January 20th purchase 10 units at $20 each, and January 30th purchase 5
units at $30 each. Both companies sold 15 units to customers for $60
each. For both companies calculate goods available for sale, cost of
goods sold, ending inventory, sales revenue, and gross profit.
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