Accounting principles volume 1 canadian 7th edition geygandt test bank

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CHAPTER 6 INVENTORY COSTING CHAPTER STUDY OBJECTIVES 1. Describe the steps in determining inventory quantities. The steps in determining inventory quantities are (1) taking a physical inventory of goods on hand, and (2) determining the ownership of goods in transit, on consignment, and in similar situations.

2. Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination. Costs are allocated to the Cost of Goods Sold account each time a sale occurs in a perpetual inventory system.

The cost is determined by specific identification or by one of two cost formulas: FIFO (first-in, first-out) and weighted average.

Specific identification is used for goods that are not ordinarily interchangeable. T is method tracks the actual physical flow of goods, allocating the exact cost of each merchandise item to cost of goods sold and ending inventory.

The FIFO cost formula assumes a first-in, first-out cost flow for sales. Cost of goods sold consists of the cost of the earliest goods purchased. Ending inventory is determined by allocating the cost of the most recent purchases to the units on hand.

The weighted average cost formula is used for goods that are homogeneous or non-distinguishable.

Under weighted average, a new weighted (moving) average unit cost is calculated after each purchase and applied to the number of units sold. Inventory is updated by subtracting cost of goods sold for each sale from the previous ending inventory balance.

3. Explain the financial statement effects of inventory cost determination methods. Specific identification results in the best match of costs and revenues on the income statement. When prices are rising, weighted average results in a higher cost of goods sold and lower profit than FIFO. Weighted average results in a better match on the income statement because it results in an expense amount made up of more current costs. On the balance sheet, FIFO results in an ending inventory that is closest to the current (replacement) value and the best balance sheet valuation. All three methods result in the same cash flow.

4. Determine the financial statement effects of inventory errors. An error in beginning inventory will have a reverse effect on profit in the current year (e.g., an overstatement of beginning inventory results in an overstatement of cost of goods sold and an understatement of prof t). An error in the cost of goods purchased will have a reverse effect on profit (e.g., an overstatement of purchases results in an overstatement of cost of goods sold and an understatement of profit). An error in ending inventory will have a similar effect on profit (e.g., an overstatement of ending inventory results in an understatement of cost of goods sold and an overstatement of profit). If ending inventory errors are not corrected in the following period, their effect on profit for the second period is reversed and total prof t for the two years will be correct. On the balance sheet, ending inventory errors will have the same effects on total assets and total owner’s equity, and no effect on liabilities.

5. Value inventory at the lower of cost and net realizable value. The cost of the ending inventory is compared with its net realizable value. If the net realizable value is lower, a write-down is recorded, which results in an increase in cost of goods sold, and a reduction in inventory. The write-down is reversed if the net realizable value of the inventory increases, but the value of the inventory can never be higher than its original cost.

6. Demonstrate the presentation and analysis of inventory. Ending inventory is reported as a current asset on the balance sheet at the lower of cost and net realizable value. Cost of goods sold is reported as an expense on the income statement. Additional disclosures include the cost determination method.

The inventory turnover ratio is a measure of liquidity. It is calculated by dividing the cost of goods sold by average inventory. It can be converted to days sales in inventory by dividing 365 days by the inventory turnover ratio.

7. Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas (Appendix 6A). Under the FIFO cost formula, the cost of the most recent goods purchased is allocated to ending inventory. The cost of the earliest goods on hand is allocated to cost of goods sold. Under the weighted average cost formula, the total cost available for sale is divided by the total units available to calculate a weighted average unit cost.

The weighted average unit cost is applied to the number of units on hand at the end of the period to determine ending inventory. Cost of goods sold is calculated by subtracting ending inventory from the cost of goods available for sale.

The main difference between applying cost formulas in a periodic inventory system and applying cost formulas in a perpetual inventory system is the timing of the calculations. In a periodic inventory system, the cost formula is applied at the end of the period. In a perpetual inventory system, the cost formula is applied at the date of each sale to determine the cost of goods sold.

8. Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B). Two methods of estimating inventories are the gross profit method and the retail inventory method. Under the gross prof t method, the gross profit margin is applied to net sales to determine the estimated cost of goods sold. The estimated cost of goods sold is subtracted from the cost of goods available for sale to determine the estimated cost of the ending inventory. Under the retail inventory method, a cost-to-retail ratio is calculated by dividing the cost of goods available for sale by the retail value of the goods available for sale. This ratio is then applied to the ending inventory at retail to determine the estimated cost of the ending inventory.

TRUE-FALSE STATEMENTS 1. In a periodic system inventory quantities are continuously updated.

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

2. All companies need to count their inventory at least once a year.

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

3. Determining ownership of goods is one of the steps in taking inventory.

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

4. Only smaller companies need to do an annual physical count of inventory.

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

5. Only companies who use a periodic method of inventory need to have an annual physical inventory count.

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

6. Goods out on consignment should be included in the inventory of the consignor.

Answer: True Bloomcode: Comprehension Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

7. Goods that have been purchased FOB destination point but are in transit at year end should be included in the seller’s physical inventory count.

Answer: True Bloomcode: Comprehension Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

8. Goods that have been purchased FOB shipping point and are in transit at the year end should be included in the buyer’s physical count of goods.

Answer: True Bloomcode: Knowledge Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

9. Goods which have been removed from the warehouse and sent to a customer on approval do NOT need to be included in a seller’s inventory.

Answer: False Bloomcode: Comprehension Difficulty: Medium

Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

10. Goods in transit should be ignored when performing a physical inventory count.

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

11. Internal control is the process designed and implemented by management to help their organization achieve reliable financial reporting.

Answer: True Bloomcode: Comprehension Difficulty: Hard Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

12. An inventory count is generally more accurate when goods are NOT being sold or received during the counting.

Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

13. The counting of the inventory should be done by employees who are NOT responsible for either custody of the inventory or keeping inventory records.

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

14. The Ontario Canoe Company has $10,000 in inventory in its warehouse. The company has goods in transit of $500 shipped from a supplier FOB shipping point. Excluded from the items counted in the warehouse is $120 in goods held on consignment for a local manufacturer. Craft’s correct inventory balance is $10,500.

Answer: True Bloomcode: Application Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

15. Physical inventory counts are NOT necessary under a perpetual inventory system.

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

16. The first-in first-out (FIFO) method tracks the actual physical flow (movement) of the goods in a perpetual inventory system.

Answer: False Bloomcode: Knowledge Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

17. Companies are allowed to use the specific identification cost determination method when the goods are interchangeable.

Answer: False Bloomcode: Knowledge Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

18. If the goods are produced for specific projects, then specific identification cost determination method must be used.

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

19. Automobiles are a good example of a type of inventory where the FIFO cost formula is used.

Answer: False Bloomcode: Comprehension Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

20. The FIFO and weighted average cost formula can be used in both the perpetual and periodic inventory systems.

Answer: True Bloomcode: Comprehension Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

21. The first-in, first-out (FIFO) cost formula assumes that the earliest (oldest) goods purchased are the last ones to be sold.

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

22. When using the perpetual method of accounting and the weighted average cost formula, the weighted average cost per unit will change every time a unit of inventory is sold.

Answer: False Bloomcode: Comprehension Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

23. When using the perpetual method of accounting and the weighted average cost formula, the weighted average cost per unit will change every time a unit of inventory is purchased.

Answer: True Bloomcode: Comprehension Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

24. The specific identification inventory cost determination method is desirable when a company sells a large number of low-unit cost items.

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting 25. When using FIFO, beginning inventory + purchases – cost of goods sold = ending inventory.

Answer: True Bloomcode: Knowledge Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

26. The first-in, first-out (FIFO) inventory cost formula results in an ending inventory valued at the most recent cost.

Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

27. If a company has no beginning inventory and the unit cost of inventory items does NOT change during the year, the value assigned to the ending inventory will be the same under the FIFO and weighted average cost formulas.

Answer: True Bloomcode: Comprehension Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

28. Inventory affects both the income statement and the balance sheet.

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

29. One of the considerations in choosing a cost determination method is to report an inventory cost on the balance sheet that is close to the inventory’s recent costs.

Answer: True Bloomcode: Knowledge Difficulty: Medium Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

30. One of the considerations of choosing a cost determination method is to use the same method for all inventories having a similar nature and usage in the company.

Answer: True Bloomcode: Knowledge Difficulty: Medium Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

31. A company is able to change its cost determination method from one year to the next.

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

32. A change in the inventory cost determination method can only occur if the physical flow of inventory changes and a different method would result in more relevant information in the financial statements.

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

33. If prices are falling, FIFO will report the lower profit, and weighted average the higher.

Answer: True Bloomcode: Knowledge Difficulty: Hard Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

34. If prices are stable, both weighted average and FIFO cost formulas will report the same results.

Answer: True

Bloomcode: Comprehension Difficulty: Hard Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

35. The FIFO inventory cost determination method will result in a higher cash flow to a company than weighted average.

Answer: False Bloomcode: Comprehension Difficulty: Hard Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

36. The inventory cost determination method that assigns the highest cost to ending inventory in a period of rising prices is FIFO. Answer: True Bloomcode: Comprehension Difficulty: Medium Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

37. Errors in the cost of goods sold will affect the income statement.

Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

38. If beginning inventory is understated, then the cost of goods sold will be understated if there are no other errors.

Answer: True Bloomcode: Comprehension Difficulty: Medium Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors

CPA: Financial Reporting

39. An overstatement of the cost of goods sold will result in an overstatement of gross profit.

Answer: False Bloomcode: Comprehension Difficulty: Medium Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

40. If the ending inventory is understated, then the beginning inventory of the next period will be overstated.

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

41. If the ending inventory is understated then the profit of the company will be understated.

Answer: True Bloomcode: Comprehension Difficulty: Medium Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

42. Inventory errors which affect the balance sheet will NOT affect the income statement.

Answer: False Bloomcode: Comprehension Difficulty: Medium Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

43. Net realizable value is the selling price less any costs required to make the goods ready for sale.

Answer: True

Bloomcode: Knowledge Difficulty: Medium Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting

44. When the net realizable value of inventory is lower than its cost, the inventory is written down to its net realizable value at the end of the period.

Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting

45. When there is clear evidence of an increase in net realizable value because of changed economic circumstances, the amount of a previously recorded write-down is reversed.

Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting

46. If the item of inventory that had been previously written down has been sold, a reversal should be recorded.

Answer: False Bloomcode: Comprehension Difficulty: Hard Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting

47. If there is a recovery in the net realizable value of the inventory, the write-up can NEVER be larger than the original write-down.

Answer: True Bloomcode: Comprehension Difficulty: Medium

Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting

48. In applying LCNRV, net realizable value is defined as the original purchase price less any costs required to make the goods ready for sale.

Answer: False Bloomcode: Knowledge Difficulty: Medium Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting

49. The inventory turnover ratio is the net sales divided by the average cost of goods sold.

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory CPA: Financial Reporting

50. The inventory turnover ratio is the average inventory divided by the average cost of goods sold.

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory CPA: Financial Reporting

51. The days sales in inventory ratio is the inventory ratio divided by the number of days in the year.

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory CPA: Financial Reporting

52. Inventory ratios can be used to measure how effectively a company manages its inventory.

Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory CPA: Financial Reporting

53. Under the periodic system of inventory, opening inventory will always be higher using weighted average cost of inventory than FIFO. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A) CPA: Financial Reporting

54. Under the periodic system of inventory, the weighted average unit cost is calculated by dividing the total units available for sale by the cost of goods available for sale.

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A) CPA: Financial Reporting

55. Under the periodic method, the cost of goods available for sale will be the same under the weighted average cost or FIFO. Answer: True Bloomcode: Knowledge Difficulty: Medium Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A) CPA: Financial Reporting

56. Under the periodic system of inventory, if the number of units available for sale is the same as the ending inventory, no sales have been made in the period.

Answer: True Bloomcode: Comprehension Difficulty: Medium Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A) CPA: Financial Reporting

57. There is no difference in the amount of inventory calculated by the periodic and perpetual inventory systems when using the weighted average cost formula.

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A) CPA: Financial Reporting

58. Inventory estimates are normally associated with the periodic method of accounting for inventory.

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B) CPA: Financial Reporting

59. The retail method estimates the cost of ending inventory by applying the gross profit margin to net sales.

Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B) CPA: Financial Reporting 60. To use the retail inventory method, a company’s records must show both the cost and the retail value of the goods available for sale.

Answer: True

Bloomcode: Knowledge Difficulty: Medium Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B) CPA: Financial Reporting

61. The retail inventory method is useful for estimating the amount of shrinkage due to breakage, loss, or theft.

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B) CPA: Financial Reporting

62. The major disadvantage of the retail method is that it is an averaging technique.

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B) CPA: Financial Reporting

63. If inventories are valued using the retail inventory method, they should NOT be classified as a current asset on the balance sheet.

Answer: False Bloomcode: Comprehension Difficulty: Medium Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B) CPA: Financial Reporting

64. The gross profit method of estimating inventory CANNOT be used if the gross profit margin has changed from the previous period.

Answer: False Bloomcode: Comprehension Difficulty: Medium Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B) CPA: Financial Reporting

65. If the physical inventory count shows an amount which is lower than the estimate from the calculation of the gross profit method of inventory estimation, the estimate should be used for the amount reported on the balance sheet.

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B) CPA: Financial Reporting

66. If the physical inventory is less than the amount calculated using the retail method, then there may be a theft problem.

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Estimate ending inventory using the gross profit and retail inventory methods.

Section Reference: Estimating Inventories (Appendix 6B) CPA: Financial Reporting

MULTIPLE CHOICE QUESTIONS 67. The factor which determines whether or not goods should be included in a physical count of inventory is a) physical possession. b) legal title. c) management's judgement. d) whether or not the purchase price has been paid.

Answer: b Bloomcode: Knowledge Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

68. If goods in transit are shipped FOB shipping point by a carrier named by the buyer, a) the seller has legal title to the goods until they are delivered. b) the buyer has legal title to the goods when a public carrier accepts the goods from the seller. c) the transportation company has legal title to the goods while the goods are in transit. d) no one has legal title to the goods until they are delivered.

Answer: b Bloomcode: Knowledge Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

69. If goods in transit are shipped FOB destination, a) the seller has legal title to the goods until they are delivered. b) the buyer has legal title to the goods when a public carrier accepts the goods from the seller. c) the transportation company has legal title to the goods while the goods are in transit. d) no one has legal title to the goods until they are delivered.

Answer: a Bloomcode: Knowledge Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

70. Per its January 31, 2017 physical inventory count, Pugwash Company has $24,500 in inventory on

hand at year end. In addition, at year end the company has $1,200 in merchandise in transit purchased from a supplier shipped FOB destination. Included in its physical inventory is $900 in goods held on consignment for a local manufacturer. How much inventory should be reported on the company’s January 31, 2017 balance sheet? a) $24,500 b) $25,700 c) $24,800 d) $23,600 Answer: d Bloomcode: Application Difficulty: Hard Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting 71. “Goods on Approval” a) are considered sold when removed from the seller’s premises regardless of whether or not legal title has transferred to the buyer. b) should be included in the seller’s physical inventory unless legal title has passed to the buyer. c) would be considered inventory of the buyer. d) are not considered to be sold until the buyer has paid a cash deposit to the seller.

Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

72. Independent internal verification of the physical inventory process occurs when a) the employee is required to count all items twice for sake of verification. b) the items counted are compared to the inventory account balance. c) a second employee counts the inventory and compares the result to the count made by the first employee. d) all prenumbered inventory tags are accounted for.

Answer: c Bloomcode: Knowledge Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

73. An employee assigned to counting computer monitors in boxes should

a) count the number of boxes only. b) read each box and rely on the box description for the contents. c) open each box and check that the box contains a monitor. d) rely on the warehouse records of the number of computer monitors.

Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

74. After the physical inventory is completed a) quantities are listed on inventory summary sheets. b) quantities are entered into various general ledger inventory accounts. c) the accuracy of the inventory summary sheets is checked by the person listing the quantities on the sheets. d) unit costs are determined by dividing the quantities on the summary sheets by the total inventory costs.

Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

75. All of the following are examples of strong internal control when counting inventory EXCEPT a) prenumbered inventory tags should be used. b) the inventory clerk should control all of the inventory count sheets. c) the counting should be done by employees who are not responsible for either custody of the inventory or keeping inventory records. d) there should be a second count by another employee or auditor.

Answer: b Bloomcode: Comprehension Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

76. While goods purchased FOB destination, and shipped by train and then truck, are in transit, the goods should be included in the inventory of the a) seller. b) purchaser.

c) train company. d) truck company.

Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

77. Under a consignment arrangement, the a) consignor has ownership until goods are sold to a customer. b) consignor has ownership until goods are shipped to the consignee. c) consignee has ownership when the goods are in the consignee's possession. d) consigned goods are included in the inventory of the consignee.

Answer: a Bloomcode: Comprehension Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

78. Goods in transit should be included in the inventory of a) the seller if the purchaser is responsible for paying freight charges. b) the purchaser if the seller is responsible for paying freight charges. c) either company that is party to the transaction. d) the company that has ownership of the goods.

Answer: d Bloomcode: Knowledge Difficulty: Medium Learning Objective: Describe the steps in determining inventory quantities.

Section Reference: Determining Inventory Quantities CPA: Financial Reporting

79. A company just starting in business purchased three merchandise inventory items at the following prices: first purchase, $100; second purchase, $120; third purchase, $125. If the company sold two units for a total of $400 and used FIFO, the gross profit for the period would be a) $220. b) $180. c) $245. d) $155.

Answer: b

Bloomcode: Application Difficulty: Hard Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

80. The FIFO inventory cost formula assumes that the cost of the latest units purchased is a) the last to be allocated to ending inventory. b) the first to be allocated to ending inventory. c) the first to be allocated to cost of goods sold. d) allocated to the average cost of goods sold or ending inventory.

Answer: a Bloomcode: Comprehension Difficulty: Hard Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

81. A company just starting business made the following three inventory purchases in February: Feb. 1 225 units $1,350 Feb. 10 400 units 2,800 Feb. 28 100 units 800 $4,950 On Feb 15, there were 300 units sold. The company uses a perpetual inventory system. Using the FIFO inventory cost formula, the amount allocated to cost of goods sold for the February 15 sale is a) $1,525. b) $1875. c) $4,950. d) $3,075.

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

82. A company just starting business made the following three inventory purchases in February: Feb. 1 225 units $1,350 Feb. 10 400 units 2,800 Feb. 28 100 units 800

$4,950 On Feb 15, there were 300 units sold. The company uses a perpetual inventory system. Using the weighted average cost formula, the amount allocated to the ending inventory on February 28 is a) $4,950. b) $3,075. c) $2,958. d) $1,992.

Answer: c Bloomcode: Application Difficulty: Hard Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

83. Singh Computer Shop begins operations on June 1 and uses a perpetual inventory system. During June, the company had the following purchases and sales for its Model 10 Fastback Computer System: Purchases____ Date Units Unit Cost Sales (Units) June 1 4 $2,000 5 2 9 9 $2,600 16 3 Using the FIFO cost formula, the amount allocated to cost of goods sold for June is a) $10,000. b) $10,600. c) $13,000. d) $20,800.

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

84. Singh Computer Shop begins operations on June 1 and uses a perpetual inventory system. During June, the company had the following purchases and sales for its Model 10 Fastback Computer System: Purchases____ Date Units Unit Cost Sales (Units) June 1 4 $2,000 5 2 9 9 $2,600

16 3 Using the weighted average cost formula, the amount allocated to the ending inventory on June 30 is a) $19,323. b) $14,538. c) $19,927. d) $10,600.

Answer: c Bloomcode: Application Difficulty: Hard Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

85. A company purchased inventory as follows: 200 units at $9 300 units at $10 The weighted average unit cost for inventory is a) $9.00. b) $9.50. c) $9.60. d) $10.00.

Answer: c Bloomcode: Application Difficulty: Easy Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

86. The cost of goods available for sale consists of which two elements? a) the cost of beginning inventory and the cost of ending inventory b) the cost of ending inventory and the cost of goods purchased during the year c) the cost of beginning inventory and the cost of goods purchased during the year d) the difference between the costs of goods purchased and the cost of goods sold during the year Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

87. Of the following companies, which one would NOT likely employ the specific identification method for inventory costing? a) art gallery b) farm implements dealership c) antique shop d) drug store Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

88. A problem with the specific identification method is that a) inventories can be reported at actual costs. b) management can manipulate profit. c) the physical flow of inventory is not followed. d) the lower of cost and market basis cannot be applied.

Answer: b Bloomcode: Comprehension Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

89. The selection of an appropriate inventory cost formula for an individual company is made by a) the external auditors. b) the accounting standards for private companies. c) the International Financial Reporting Standards for public companies. d) management.

Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

90. The Jeter Company uses the perpetual inventory system and the weighted average cost formula

to value inventories. On August 1, there were 5,000 units valued at $15,000 in the beginning inventory. On August 10, 10,000 units were purchased for $6 per unit. On August 15, 8,000 units were sold for $12 per unit. The amount charged to cost of goods on August 15 was a) $35,000. b) $40,000. c) $48,000. d) $36,000.

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

91. Which of the following statements is correct with respect to inventories? a) The FIFO cost formula assumes that the costs of the earliest goods acquired are the last to be sold. b) It is generally good business management to sell the most recently acquired goods first. c) Under FIFO, the ending inventory is based on the latest units purchased. d) FIFO seldom coincides with the actual physical flow of inventory.

Answer: c Bloomcode: Knowledge Difficulty: Medium Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Section Reference: Inventory Cost Determination Methods CPA: Financial Reporting

92. Casting Lures Company sells fly fishing lures and uses a perpetual inventory system. The beginning balance of the inventory and transactions during September were as follows: September 1: Balance: 10 units @ $13 September 7: Purchased 30 units @ $14 September 10: Sold 18 units @ $17 September 22: Purchased 25 units @ $17 September 29: Sold 22 units What inventory cost determination method was used if the ending inventory is determined to be $425? a) average costing b) FIFO c) weighted average d) specific identification Answer: b Bloomcode: Application Difficulty: Hard

Learning Objective: Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

CPA: Financial Reporting

93. When prices are constant, which of the following inventory cost formulas will lead to the lowest cost of goods sold figure? a) FIFO b) specific identification c) weighted average d) When prices are constant, all cost determination methods will yield the same cost of goods sold figure.

Answer: d Bloomcode: Knowledge Difficulty: Medium Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

94. Which of the following statements is true regarding inventory cost formulas? a) A company may use more than one cost formula concurrently. b) A company must comply with the method specified by industry standards. c) A company must use the same method for domestic and foreign operations. d) A company may never change its inventory cost formula once it has chosen a method.

Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

95. In a period of increasing prices, which cost determination method will result in the lowest amount of cash flow? a) FIFO b) specific identification c) weighted average d) Cash flow will be the same under all methods.

Answer: d Bloomcode: Comprehension Difficulty: Medium Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

96. The specific identification method of costing inventories is used when the a) physical flow of units cannot be determined. b) company sells large quantities of relatively low cost homogeneous items. c) company sells large quantities of relatively low cost heterogeneous items. d) company sell goods which are not interchangeable.

Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

97. In a period of rising prices, ending inventory using FIFO will be ______ ending inventory determined using weighted average. a) higher than b) lower than c) equal to d) Cost formulas have no impact on ending inventory.

Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

98. Levy's Used Cars uses the specific identification method of costing inventory. During March, Levy purchased three cars for $5,000, $6,500, and $8,000, respectively. During March, the first two cars are sold for $7,500 each. What is Levy's gross profit for March? a) $2,000 b) $3,500 c) $500 d) $7,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

99. In periods of rising prices, the ending inventory using the FIFO cost formula will be

a) higher than using the weighted average cost method. b) cannot be determined. c) lower than weighted average cost. d) the same as weighted average cost.

Answer: a Bloomcode: Comprehension Difficulty: Medium Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

100. The managers of Tong Company receive performance bonuses based on the profit of the firm.

Which cost formula are they likely to favour in periods of declining prices? a) estimating inventory method b) weighted Average c) FIFO d) physical inventory method Answer: b Bloomcode: Knowledge Difficulty: Hard Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

101. Selection of an inventory cost formula by management does NOT usually depend on a) the fiscal year end. b) income statement effects. c) balance sheet effects. d) tax effects.

Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

102. When comparing the weighted average and FIFO inventory cost formulas during a period when prices are rising, which of the following statements is correct? a) FIFO will result in a lower inventory balance reported on the balance sheet. b) Weighted average will result in a higher cash flow. c) FIFO will result in a higher profit reported on the income statement. d) Weighted average will result in a higher gross profit reported on the income statement.

Answer: c Bloomcode: Analysis Difficulty: Hard Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

103. The two inventory cost formulas will result in the following comparative effects on profit during a period when prices are rising: FIFO Weighted Average a) Higher no effect b) Higher lower c) Lower higher d) No effect No effect Answer: b Bloomcode: Analysis Difficulty: Hard Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

104. Two companies report the same cost of goods available for sale but each employs a different cost formula. If the price of goods has increased during the period, then the company using a) weighted average will have the highest ending inventory. b) FIFO will have the highest cost of good sold. c) FIFO will have the highest ending inventory. d) weighted average will have the lowest cost of goods sold.

Answer: c Bloomcode: Comprehension Difficulty: Medium Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

105. Assuming rising inventory prices, which inventory cost determination method results in reporting the lower ending inventory value? a) specific identification b) FIFO c) weighted average d) none of the above Answer: c

Bloomcode: Comprehension Difficulty: Medium Learning Objective: Explain the financial statement effects of inventory cost determination methods.

Section Reference: Financial Statement Effects CPA: Financial Reporting

106. If ending inventory is overstated in 2017, and no further errors are made in 2018, then profit will be a) overstated in 2017 and understated in 2018. b) understated in 2017 and overstated in 2018. c) overstated in both 2017 and 2018. d) overstated in 2017 and correct in 2018.

Answer: a Bloomcode: Knowledge Difficulty: Medium Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

107. If ending inventory is understated in 2017, and no further errors are made in 2018, the 2018 ending owner’s equity will be a) understated. b) overstated. c) correct. d) Owner’s equity is never affected by an inventory error.

Answer: c Bloomcode: Knowledge Difficulty: Hard Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

108. During its December 31, 2017 year-end inventory count, Jefferson Company failed to count items in transit to which it had legal title. As a result of this error, ending inventory was understated by $30,000. As a result of this error, 2017 cost of goods sold will be a) understated by $30,000. b) overstated by $30,000. c) correct. d) greater when weighted average cost is used.

Answer: b Bloomcode: Application

Difficulty: Medium Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

109. During its December 31, 2017 year-end inventory count, Jefferson Company failed to count items in transit to which it had legal title. As a result of this error, ending inventory was understated by $30,000. Assuming the company makes no errors in 2018, Jefferson’s owner’s equity at the end of December 2018 will be a) overstated by $30,000. b) understated by $30,000. c) overstated by $60,000. d) correct.

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

110. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is Cost of Goods Sold Profit a) understated understated b) overstated overstated c) understated overstated d) overstated understated Answer: c Bloomcode: Analysis Difficulty: Easy Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

111. If beginning inventory is understated by $10,000, the effect of this error in the current period is Cost of Goods Sold Profit a) understated understated b) overstated overstated c) understated overstated d) overstated understated Answer: c Bloomcode: Analysis

Difficulty: Easy Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

112. A company uses the perpetual inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000. The amounts reflected in the current end of the period balance sheet are Assets Owner's Equity a) overstated overstated b) correct correct c) understated understated d) overstated correct Answer: b Bloomcode: Analysis Difficulty: Medium Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

113. Inventory errors can result in errors in determining all of the following, EXCEPT a) ending inventory. b) sales. c) beginning inventory. d) cost of goods purchased.

Answer: b Bloomcode: Knowledge Difficulty: Medium Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

114. An error in cost of goods sold has ______ impact on gross profit and profit. a) no b) the opposite c) the same d) immaterial Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors

CPA: Financial Reporting

115. Which of the following statements is correct? a) Errors can only occur in a perpetual inventory system. b) Errors can only occur in a periodic inventory system. c) Errors can occur either in a perpetual or periodic inventory system. d) Errors will not occur if you are using a perpetual inventory system.

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting 116. Which of the following best describes why inventory errors are often said to be “self-correcting”? a) Inventory errors have no impact on the income statement. b) An inventory error in the current period will have a reverse effect in the next period. c) An inventory error in the current period will have the same effect in the next period. d) Inventory errors have no impact on the balance sheet.

Answer: b Bloomcode: Knowledge Difficulty: Medium Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

117. Overstatement of ending inventory causes a) cost of goods sold to be overstated and net income to be understated. b) cost of goods sold to be overstated and net income to be overstated. c) cost of goods sold to be understated and net income to be understated. d) cost of goods sold to be understated and net income to be overstated.

Answer: d Bloomcode: Knowledge Difficulty: Medium Learning Objective: Determine the financial statement effects of inventory errors.

Section Reference: Inventory Errors CPA: Financial Reporting

118. Revaluation of inventories to net realizable value should occur a) only if the amount is material. b) at year end only.

c) in the period during which the decline occurs. d) at management’s discretion.

Answer: c Bloomcode: Comprehension Difficulty: Medium Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting 119. If the net realizable value of a merchandising company’s inventory is higher than its cost a) no actions should be taken. b) the company’s ending owner’s equity should be increased to reflect this. c) the inventory accounts should be debited and a gain should be reported. d) the inventory account should be debited and cost of goods sold credited.

Answer: a Bloomcode: Knowledge Difficulty: Medium Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting

120. Deerfield Company developed the following information about its inventories in applying the lower of cost and net realizable value in valuing inventories: Product Cost_ NRV A $ 70,000 $ 75,000 B 50,000 48,000 C 100,000 102,000 After Deerfield Company values its inventory at the lower of cost or net realizable value, the value of the inventory reported on the balance sheet would be a) $227,000. b) $220,000. c) $225,000. d) $218,000.

Answer: d Bloomcode: Application Difficulty: Hard Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting

121. For a merchandising company, the net realizable value of its inventory is the a) original cost of the inventory.

b) current selling price. c) current selling price less any costs required to make the goods ready for sale. d) original cost of the inventory less any costs required to make the goods ready for sale.

Answer: c Bloomcode: Knowledge Difficulty: Medium Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting

122. LCNRV is an acronym for a) lower of count and net realizable value. b) lower of cost and net realizable value. c) lower of cost and non-realistic value. d) lower of cost and net retail value.

Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting

123. LCNRV is applied to inventory a) at the end of the period. b) at the beginning of the period. c) after each purchase. d) after each sale.

Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting

124. If the net realizable value declines to an amount lower than cost, the Cost of Goods Sold account will a) increase. b) decrease. c) be adjusted to the cost amount. d) stay the same.

Answer: a

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting

125. The evidence required for a reversal of a previous inventory write-down would be a) a decline in selling prices. b) an increase in selling prices. c) an increase in products/ merchandise sold. d) a decrease in products/ merchandise sold.

Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting

126. If there is a recovery in the value of inventory the write-up may a) always be greater than the original write-down. b) never be greater than the original write-down. c) always be for the fair value amount of the inventory. d) always be for the full amount of the recovery.

Answer: b Bloomcode: Knowledge Difficulty: Medium Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting 127. Karl’s Snowshoes usually sells its snowshoes for $140 per unit and allows Karl to earn a 20% profit margin. It has recently come to Karl’s attention that the expected selling price has fallen to $70 per unit. Karl’s current inventory includes 85 units purchased at $100 per unit. Calculate the value of the inventory at the lower of cost and net realizable value. a) $7,000 b) $8,500 c) $5,950 d) $9,520 Answer: c Bloomcode: Application Difficulty: Hard

Learning Objective: Value inventory at the lower of cost and net realizable value.

Section Reference: Presentation and Analysis of Inventory CPA: Financial Reporting

128. If the cost of goods sold is $250,000 and the inventory turnover is 2.8, then the average inventory and days sales in inventory are a) $89,286 and 130 days. b) $700,000 and 130 days. c) $89,286 and 1022 days. d) $700,000 and 1022 days.

Answer: a Bloomcode: Application Difficulty: Easy Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory CPA: Financial Reporting

129. Karr Company has a beginning merchandise inventory of $17,000, an ending merchandise inventory of $20,000, sales of $350,000, and a cost of goods sold of $200,000. Karr’s inventory turnover is a) 10.0 times. b) 10.8 times. c) 17.5 times. d) 18.9 times.

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory CPA: Financial Reporting

130. Which of the following best indicates that a company is managing its inventory efficiently? a) a low inventory turnover ratio b) a high inventory turnover ratio c) a high days sales in inventory ratio d) a low gross profit margin Answer: b Bloomcode: Comprehension Difficulty: Medium Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory CPA: Financial Reporting

131. In 2018, Hidey Company had average inventory of $86,000. The 2018 income statement showed net sales of $2,200,000 and gross profit of $420,000. In 2017, it was taking the company approximately 30 days to sell its inventory. The company’s inventory turnover for 2018 was approximately a) 20.7 times. b) 2.7 times. c) 25.6 times. d) 4.9 times.

Answer: a Bloomcode: Application Difficulty: Hard Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory CPA: Financial Reporting

132. In 2018, Hidey Company had average inventory of $86,000. The 2018 income statement showed net sales of $2,200,000 and gross profit of $420,000. In 2017, it was taking the company approximately 30 days to sell its inventory. In 2018, the company’s days sales in inventory a) improved. b) deteriorated. c) remained unchanged. d) More information is needed to make this determination.

Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory CPA: Financial Reporting

133. Which one of the following statements is correct? a) A merchandiser buys inventory and a manufacturer produces its inventory. b) A manufacturer buys inventory and a merchandiser produces its inventory. c) A merchandiser and a manufacturer produces their inventory. d) A merchandiser and a manufacturer buy their inventory.

Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory CPA: Financial Reporting

134. Having too much inventory can cost the company money in all the following areas EXCEPT a) storage costs. b) interest costs. c) high tech goods becoming obsolete. d) depreciation.

Answer: d Bloomcode: Knowledge Difficulty: Medium Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory CPA: Financial Reporting

135. The inventory turnover ratio measures the number of times inventory is a) purchased. b) returned. c) sold. d) written off.

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory CPA: Financial Reporting

136. Days sales in inventory is a) the number of days it takes to deliver the inventory sold. b) a measure of how many times the inventory is sold. c) the number of days it takes to purchase inventory. d) a measure of the average age of the inventory on hand.

Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory CPA: Financial Reporting

137. Days sales in inventory is calculated by a) cost of goods sold divided by average inventory. b) average inventory divided by cost of goods sold. c) days in the year divided by inventory turnover ratio. d) inventory turnover ratio divided by days in the year.

Answer: c Bloomcode: Knowledge Difficulty: Medium Learning Objective: Demonstrate the presentation and analysis of inventory.

Section Reference: Reporting and Analyzing Inventory CPA: Financial Reporting

138. When valuing ending inventory under a perpetual inventory system, the a) valuation using weighted average is the same as the valuation using weighted average under the periodic inventory system. b) weighted average cost method requires that a new weighted average unit cost be calculated after every sale. c) valuation using FIFO is the same as the valuation using FIFO under the periodic inventory system. d) most recent units purchased during the period using FIFO are allocated to the cost of goods sold when units are sold.

Answer: c Bloomcode: Comprehension Difficulty: Hard Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A) CPA: Financial Reporting

139. Which of the following statements concerning cost formulas in a periodic inventory system is INCORRECT? a) The results under FIFO in a periodic system are the same as in a perpetual system. b) The cost of goods sold would be lower using FIFO than weighted average in a period of rising prices. c) When using the weighted average cost formula, a new weighted average cost per unit is calculated after each purchase. d) The results under weighted average in a periodic system are not the same as in a perpetual system.

Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A) CPA: Financial Reporting

140. In a periodic inventory system the cost of goods available for sale is allocated between a) beginning inventory and ending inventory.

b) beginning inventory and cost of goods on hand. c) ending inventory and cost of goods sold. d) beginning inventory and cost of goods purchased.

Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A) CPA: Financial Reporting

141. The Singh Computer Shop begins operations on June 1 and uses a periodic inventory system.

During June, the company had the following purchases and sales for its Model 10 Fastback Computer System: Purchases____ Date Units Unit Cost June 1 4 $2,000 9 9 $2,600 On June 30 an inventory count showed there were 8 units on hand. Using the FIFO inventory cost formula, the amount allocated to cost of goods sold for June is a) $10,000. b) $10,600. c) $16,000. d) $20,800.

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A) CPA: Financial Reporting

142. The Singh Computer Shop begins operations on June 1 and uses a periodic inventory system.

During June, the company had the following purchases and sales for its Model 10 Fastback Computer System: Purchases____ Date Units Unit Cost June 1 4 $2,000 9 9 $2,600 On June 30 an inventory count showed there were 8 units on hand. Using the weighted average cost formula, the amount allocated to the ending inventory on June 30 is a) $19,323. b) $12,077. c) $20,800. d) $18,400.

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A) CPA: Financial Reporting

143. Which of the following statements concerning cost formulas in a periodic inventory system is correct? a) The results under FIFO in a periodic system are the same as in a perpetual system. b) In a periodic system using weighted average, the latest units purchased before each sale are allocated to the cost of goods sold. c) In a periodic system using the weighted average cost formula, a new weighted average is calculated after each purchase. d) The results under weighted average in a periodic system are the same as in a perpetual system.

Answer: a Bloomcode: Comprehension Difficulty: Medium Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A) CPA: Financial Reporting

144. In a periodic inventory system you must a) track the number or cost of units sold during the year. b) wait until the end of the year to allocate the costs of goods available for sale to ending inventory and cost of goods sold. c) adjust inventory after each purchase only. d) adjust inventory after each sale only.

Answer: b Bloomcode: Knowledge Difficulty: Medium Learning Objective: Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas.

Section Reference: Inventory Cost Formulas in Periodic Systems (Appendix 6A) CPA: Financial Reporting

145. Shareek Company uses the periodic inventory system. The following information is available for the year ending March 31: Sales $165,000 Beginning inventory $58,500