Import Settings:

Base Settings: Brownstone Default

Information Field: Difficulty
Information Field: LO
Highest Answer Letter: E
ultiple !eywords in Same "aragraph: #o
$hapter: $hapter %: erchandise In&entory and $ost of Sales
'rue(False
)* +oods in transit are automatically included in in&entory*
Ans: False
Difficulty: Easy
LO: )
,* Damaged goods are not counted in in&entory if they cannot -e sold*
Ans: 'rue
Difficulty: Easy
LO: )
.* +oods on consignment are goods shipped -y their owner/ called the consignee/ to another
party called the consignor*
Ans: False
Difficulty: oderate
LO: )
0* If o-solete or damaged goods can -e sold/ they will -e included in in&entory at their net
reali1a-le &alue if it is less than cost*
Ans: 'rue
Difficulty: oderate
LO: )
2* If the supplier pays freight charges/ then ownership of in&entory passes when goods arri&e at
their destination*
Ans: 'rue
Difficulty: Hard
LO: )
3* #et reali1a-le &alue for damaged or o-solete goods is sales price plus the cost of ma4ing the
sale*
Ans: False
Difficulty: Hard
LO: )
%* One of the most important decisions in accounting for in&entory is determining the per5unit
costs assigned to in&entory items*
Ans: 'rue
Difficulty: Easy
LO: )
6* 'he cost of an in&entory item includes its in&oice price plus any added or incidental costs
necessary to put it in a place and condition for sale*
Ans: 'rue
Difficulty: Easy
LO: )
7* 8hen ta4ing a physical count of in&entory/ the use of prenum-ered in&entory tic4ets assists in
the control process*
Ans: 'rue
Difficulty: Easy
LO: )
)9* 'he total dollar &alue of in&entory on hand is determined -y: :); estimating the units on
hand/ :,; multiplying the count -y cost per unit/ and :.; adding the costs for all products*
Ans: False
Difficulty: oderate
LO: )
))* Incidental costs added to the &alue of in&entory include import duties/ transportation5in/
storage/ and insurance*
Ans: 'rue
Difficulty: oderate
LO: )
),* All material incidental costs of in&entory ac<uisition and handling are assigned to in&entory*
Ans: 'rue
Difficulty: Hard
LO: )
).* 'he matching principle is used -y some companies to =ustify allocating incidental in&entory
costs to cost of goods sold*
Ans: False
Difficulty: Hard
LO: )
)0* 'he consistency principle re<uires a company to use the same accounting methods period
after period unless economic circumstances ha&e changed*
Ans: 'rue
Difficulty: Easy
LO: .
)2* A company can change its in&entory &aluation without mentioning the change in its financial
statements -ecause it is an internal decision*
Ans: False
Difficulty: Easy
LO: .
)3* An ad&antage of the weighted5a&erage method is that it tends to smooth out price changes*
Ans: 'rue
Difficulty: oderate
LO: ,
)%* In a period of inflation/ FIFO usually gi&es a lower ta>a-le income and thus a ta> ad&antage*
Ans: False
Difficulty: oderate
LO: .
)6* 'he full disclosure principle allows companies to use different in&entory &aluation methods
period to period as long as the changes are fully disclosed*
Ans: False
Difficulty: Hard
LO: .
)7* 'he ad&antage of LIFO is that it assigns the most recent costs to cost of goods sold/ and
-etter matches current costs with re&enues on the income statement*
Ans: 'rue
Difficulty: Hard
LO: .
,9* 'he four methods of in&entory &aluation are SIFO/ FIFO/ LIFO/ and a&erage cost*
Ans: False
Difficulty: Easy
LO: ,
,)* 'he assignment of costs to cost of goods sold and in&entory using weighted a&erage usually
gi&es different results depending on whether a perpetual or periodic system is used*
Ans: 'rue
Difficulty: oderate
LO: ,
,,* 'he FIFO method assumes that costs for the most recently purchased items are reco&ered
first*
Ans: False
Difficulty: oderate
LO: ,
,.* 'he consistency principle re<uires that the in&entory &aluation method follow the flow of
goods*
Ans: False
Difficulty: Hard
LO: .
,0* 'he choice of an in&entory cost flow assumption can ha&e a dramatic impact on amounts in
financial statements*
Ans: 'rue
Difficulty: Hard
LO: .
,2* 'he in&entory cost flow assumption that is used cannot ha&e a material impact on the
financial statements*
Ans: False
Difficulty: Easy
LO: .
,3* 'he necessary financial statement disclosure is accomplished if the amount presented is
properly calculated*
Ans: False
Difficulty: oderate
LO: .
,%* 'he necessary financial statement disclosure is accomplished if the amount disclosed is
properly calculated and the costing method used is stated*
Ans: 'rue
Difficulty: oderate
LO: .
,6* 'he full disclosure principle means that all financial information should -e disclosed*
Ans: False
Difficulty: oderate
LO: .
,7* 'he full disclosure principle means that all rele&ant financial information should -e
disclosed*
Ans: 'rue
Difficulty: Easy
LO: .
.9* 'he in&entory cost flow assumption that assigns the highest cost to ending in&entory in a
period of rising prices is LIFO*
Ans: False
Difficulty: Hard
LO: .
.)* 'he in&entory cost flow assumption that assigns the highest cost to cost of sales in a period
of rising prices is LIFO*
Ans: 'rue
Difficulty: Hard
LO: .
.,* 8hen preparing the financial statements management can choose the in&entory cost flow
assumption it will use for a particular year in order to impact the reported net income*
Ans: False
Difficulty: oderate
LO: .
..* 'he consistency principle is to help ensure that financial statements are compara-le across
periods*
Ans: 'rue
Difficulty: Easy
LO: .
.0* In applying L$ in $anada/ mar4et is usually defined as net reali1a-le &alue*
Ans: 'rue
Difficulty: Easy
LO: 0
.2* In applying L$/ mar4et is defined as the sales price*
Ans: False
Difficulty: Easy
LO: 0
.3* 'he conser&atism principle re<uires that when more than one estimate of amounts to -e
recei&ed or paid in the future are a-out e<ually li4ely/ then the less optimistic amount should -e
used*
Ans: 'rue
Difficulty: oderate
LO: 0
.%* 're44ing $ompany?s total cost of in&entory was @.92/999* 'he mar4et &alue is @,7%/999*
Ander L$/ the amount reported should -e @.92/999*
Ans: False
Difficulty: oderate
LO: 0
.6* 're44ing $ompany has in&entory with a mar4et &alue of @,)%/999 and a cost of @,0)/999*
According to the full disclosure principle/ the in&entory should -e written down to @,)%/999*
Ans: False
Difficulty: Hard
LO: 0
.7* 're44ing $ompany?s cost of in&entory was @.)%/299* Due to phenomenal demand the
mar4et &alue has increased to @.,./999* 're44ing $ompany should write up the &alue of
in&entory under the L$ rule*
Ans: False
Difficulty: Hard
LO: 0
09* An error in &aluing in&entory will cause an error in the amount of cost of goods sold*
Ans: 'rue
Difficulty: Easy
LO: 2
0)* Errors in in&entory &aluation only affect the current period?s records and financial
statements*
Ans: False
Difficulty: Easy
LO: 2
0,* Because an in&entory error causes an offsetting error in the ne>t period/ it is sometimes said
to -e self5correcting*
Ans: 'rue
Difficulty: oderate
LO: 2
0.* Because in&entory errors are self5correcting in following accounting periods/ managers will
-e a-le to ma4e correct decisions -ased on changes in net income and cost of goods sold*
Ans: False
Difficulty: oderate
LO: 2
00* An understatement of ending in&entory will understate cost of goods sold and o&erstate net
income*
Ans: False
Difficulty: Hard
LO: 2
02* An understatement of -eginning in&entory will understate cost of goods sold and o&erstate
net income*
Ans: 'rue
Difficulty: Hard
LO: 2
03* 'he conser&atism principle re<uires that in&entory -e reported at mar4et &alue when mar4et
is lower than cost*
Ans: 'rue
Difficulty: Easy
LO: 0
0%* 'he conser&atism principle is a pessimistic way of ma4ing a choice*
Ans: False
Difficulty: oderate
LO: 0
06* ost -usinesses use replacement cost :current purchasing price; as the definition of mar4et*
Ans: False
Difficulty: oderate
LO: 0
07* ost -usinesses apply the lower of cost and mar4et rule to the whole in&entory*
Ans: 'rue
Difficulty: Easy
LO: 0
29* 8hen -usinesses apply the lower of cost and mar4et rule separately to each indi&idual item
they will report the least in&entory &alue possi-le*
Ans: 'rue
Difficulty: oderate
LO: 0
2)* 'he retail in&entory method estimates the cost of ending in&entory -y applying the gross
profit ratio to net sales*
Ans: False
Difficulty: Easy
LO: 3
2,* 'he retail amount of in&entory refers to its dollar amount measured using selling prices of
in&entory items*
Ans: 'rue
Difficulty: oderate
LO: 3
2.* 'o a&oid the time5consuming process of ta4ing an in&entory each month/ some companies
use the gross profit method to estimate ending in&entory*
Ans: False
Difficulty: oderate
LO: 3
20* If the cost to retail ratio is 39B and ending in&entory at retail is @02/999/ then estimated
ending in&entory at cost is @,%/999*
Ans: 'rue
Difficulty: Hard
LO: 3
22* 're44ing $ompany?s in&entory in its Ci&er Oa4s store was destroyed -y a flood* Its gross
profit ratio was 32B and net sales were @.9/999* 'he estimated cost of goods a&aila-le for sale
was @.,/299* 'he estimated &alue of the lost in&entory was @)6/999*
Ans: False
Difficulty: Hard
LO: 3
23* 'he gross profit ratio measures how much of net sales is gross profit*
Ans: 'rue
Difficulty: Easy
LO: 3
2%* 'he gross profit ratio measures how much of each dollar of gross sales is gross profit*
Ans: False
Difficulty: Easy
LO: 3
26* If your in&entory is destroyed -y fire you can estimate the amount of in&entory destroyed if
you 4now: -eginning in&entory/ purchases/ net sales/ and gross profit ratio*
Ans: 'rue
Difficulty: oderate
LO: 3
27* All -usinesses should ta4e an in&entory count once each year to a&oid in&entory errors or
shortages*
Ans: False
Difficulty: oderate
LO: 3
39* All -usinesses should ta4e an in&entory count once each year to identify in&entory errors or
shortages*
Ans: 'rue
Difficulty: Easy
LO: 3
3)* 'he retail in&entory method of estimating in&entory uses the ratio of goods a&aila-le for sale
at cost to goods a&aila-le for sale at retail*
Ans: 'rue
Difficulty: Easy
LO: 3
3,* 'he retail in&entory method of estimating in&entory can -e used to estimate the amount of
in&entory shortage if a physical count is also done*
Ans: 'rue
Difficulty: oderate
LO: 3
3.* 'here is no difference in the amount of in&entory calculated -y the periodic and perpetual
in&entory systems when using LIFO or weighted a&erage cost flow assumptions*
Ans: False
Difficulty: oderate
LO: %
30* 'here is no difference in the amount of in&entory calculated -y the periodic and perpetual
in&entory systems when using the FIFO cost flow assumption*
Ans: 'rue
Difficulty: oderate
LO: %
32* A company?s a-ility to pay its short5term o-ligations depends on how <uic4ly it sells its
merchandise in&entory*
Ans: 'rue
Difficulty: Easy
LO: 7
33* 'he merchandise turno&er ratio is used to measure profita-ility*
Ans: False
Difficulty: Easy
LO: 7
3%* 'he merchandise turno&er ratio is calculated -y di&iding a&erage merchandise in&entory -y
cost of goods sold*
Ans: False
Difficulty: oderate
LO: 7
36* 'he day?s sales in in&entory are calculated -y di&iding ending in&entory -y cost of goods
sold and multiplying the result -y .32*
Ans: 'rue
Difficulty: oderate
LO: 7
37* 're44ing $ompany?s cost of goods sold was @)2/229* Its a&erage merchandise in&entory
was @0/2%2* Its merchandise turno&er was .*0*
Ans: 'rue
Difficulty: Hard
LO: 7
%9* 'oys DCD As had cost of goods sold of @3/799 million* Its ending in&entory was @,/999
million* 'herefore its num-er of days in in&entory was 79 days*
Ans: False
Difficulty: Hard
LO: 7
ultiple $hoice
%)* Damaged or o-solete goods:
A; Are not counted as salea-le in&entory*
B; Are counted at full cost*
$; Are included in in&entory at net reali1a-le &alue if less than cost*
D; Both are not counted as salea-le in&entory and are counted at full cost*
E; Both are not counted as salea-le in&entory and are included in in&entory at net reali1a-le
&alue if less than cost*
Ans: $
Difficulty: Easy
LO: )
%,* erchandise in&entory includes:
A; All goods owned -y a company and held for sale*
B; +oods in transit*
$; +oods on consignment*
D; Damaged goods*
E; All of these answers are correct*
Ans: A
Difficulty: oderate
LO: )
%.* +oods in transit are included in in&entory:
A; At any time in transit*
B; 8hen the purchaser is responsi-le for paying freight charges*
$; 8hen the supplier pays the freight charges*
D; 8hen ownership has passed to the purchaser*
E; Both when the purchaser is responsi-le for paying freight charges and when ownership has
passed to the purchaser*
Ans: E
Difficulty: oderate
LO: )
%0* +oods on consignment:
A; Are goods shipped -y the owner to the consignee who sells the goods for the owner*
B; Are reported in the consignee?s -oo4s as in&entory*
$; Are reported on the consignor?s -oo4s as in&entory*
D; Are goods shipped -y the owner to the consignee who sells the goods for the owner and are
reported in the consignee?s -oo4s as in&entory*
E; Are goods shipped -y the owner to the consignee who sells the goods for the owner and are
reported on the consignor?s -oo4s as in&entory*
Ans: E
Difficulty: Hard
LO: )
%2* "hysical counts of in&entory:
A; Are not necessary under the perpetual system*
B; Are necessary to ad=ust for shrin4age*
$; Should -e ta4en at least once a month*
D; Are necessary to ad=ust for shrin4age and should -e ta4en at least once a month*
E; Are not necessary under the perpetual system and should -e ta4en at least once a month*
Ans: B
Difficulty: oderate
LO: )
%3* $osts included in the &alue of in&entory are:
A; "urchase price less discounts*
B; 'ransportation5in*
$; Storage*
D; Insurance*
E; All of these answers are correct*
Ans: E
Difficulty: Easy
LO: )
%%* 'he accepted method for &aluing in&entory includes:
A; $ounting the units of each product on hand*
B; ultiplying the count for each product -y its cost per unit*
$; Adding the costs for all products*
D; $ounting the units of each product on hand and multiplying the count for each product -y its
cost per unit*
E; All of these answers are correct*
Ans: E
Difficulty: Easy
LO: )
%6* Incidental costs of in&entory:
A; $an -e assigned to e&ery unit*
B; ay -e immaterial*
$; $an -e allocated to cost of goods sold*
D; Are su-=ect to the materiality principle*
E; All of these answers are correct*
Ans: E
Difficulty: Hard
LO: )
%7* A form attached to the counted items in the process of ta4ing a physical in&entory is a:n;:
A; Sales tag*
B; Su-sidiary record*
$; In&entory tic4et*
D; $redit in&oice*
E; Sales receipt*
Ans: $
Difficulty: Easy
LO: )
69* anagement must include which of the following considerations when accounting for
in&entory:
A; $osting method*
B; In&entory system*
$; Items to -e included and their cost*
D; Ase of lower of cost or mar4et*
E; All of these answers are correct*
Ans: E
Difficulty: Easy
LO: ,/0
6)* 'he pricing of an in&entory where the purchase in&oice of each item in the ending in&entory
is identified and used to determine the cost assigned to the in&entory is:
A; 8eighted5a&erage in&entory method*
B; First5in/ first5out method*
$; Last5in/ first5out method*
D; Specific identification method*
E; Cetail method*
Ans: D
Difficulty: oderate
LO: ,
6,* 're44ing $ompany mar4ets a clim-ing 4it and uses a perpetual in&entory system to account
for its merchandise* 'he -eginning -alance of the in&entory and transactions during arch were
as follows:
Eanuary ): Balance: )6 units at @).
Eanuary ),: "urchased .9 units at @)0
Eanuary )7: Sold ,0 units at @)%
Eanuary ,9: "urchased ,0 units at @)%
Eanuary ,%: Sold ,% units
If the ending in&entory is &alued at @,%3/ what in&entory cost flow assumption was usedF
A; LIFO*
B; FIFO*
$; 8eighted5a&erage*
D; Specific identification*
E; Cetail*
Ans: A
Difficulty: Hard
LO: ,
6.* Accepta-le in&entory cost flow assumptions include:
A; LIFO*
B; FIFO*
$; Specific identification*
D; 8eighted5a&erage method*
E; All of these answers are correct*
Ans: E
Difficulty: Easy
LO: ,
60* 8hich in&entory cost flow assumption results in the lowest ta> e>pense in a period of
inflation if it were permitted -y the $anada Ce&enue AgencyF
A; LIFO*
B; FIFO*
$; A&erage cost*
D; Specific identification*
E; o&ing 8eighted A&erage $ost
Ans: A
Difficulty: oderate
LO: ,
62* 'he consistency principle:
A; Ce<uires a company to use the same accounting methods period after period*
B; Doesn?t re<uire a company to use one method e>clusi&ely*
$; Both re<uires a company to use the same accounting methods period after period and doesn?t
re<uire a company to use one method e>clusi&ely*
D; Is also called the full disclosure principle*
E; Both re<uires a company to use the same accounting methods period after period and is also
called the full disclosure principle*
Ans: $
Difficulty: oderate
LO: .
63* 'he full disclosure principle:
A; Ce<uires that when a change in in&entory cost flow assumption is made/ the notes to the
statements report the type of change*
B; Ce<uires that when a change in in&entory cost flow assumption is made/ the notes to the
statements report the =ustification for the change*
$; Ce<uires that any change in net income due to changes in the in&entory cost assumption -e
disclosed*
D; All of these answers are correct*
E; Both re<uires that when a change in in&entory cost flow assumption is made/ the notes to the
statements report the type of change and re<uires that when a change in in&entory cost flow
assumption is made/ the notes to the statements report the =ustification for the change*
Ans: D
Difficulty: Hard
LO: .
6%* During a period of steadily rising prices/ which in&entory cost flow assumption results in
reporting the lowest net incomeF
A; Specific in&oice pricing*
B; A&erage cost*
$; 8eighted5a&erage*
D; FIFO*
E; LIFO*
Ans: E
Difficulty: Easy
LO: .
66* During a period of steadily rising prices/ which in&entory cost flow assumption results in
reporting the lowest in&entory &alueF
A; Specific identification
B; A&erage cost
$; 8eighted5a&erage
D; FIFO
E; LIFO
Ans: E
Difficulty: oderate
LO: .
67* In applying lower of cost or mar4et/ how would mar4et usually -e defined in $anadaF
A; Historical cost*
B; $urrent replacement cost*
$; $urrent sales price*
D; #et reali1a-le &alue*
E; "urchase price*
Ans: D
Difficulty: Easy
LO: 0
79* +enerally accepted accounting principles re<uire that the in&entory of a company -e
reported at:
A; ar4et &alue*
B; Historical cost*
$; Lower of cost or mar4et*
D; Ceplacement cost*
E; Either $ or D*
Ans: $
Difficulty: Easy
LO: 0
7)* 'he conser&atism principle:
A; Ce<uires that when more than one estimate of amounts to -e recei&ed or paid in the future
are e<ually li4ely/ then the less optimistic amount should -e used*
B; Ce<uires that a company use the same accounting methods period after period*
$; Ce<uires that re&enues and costs -e reported in the period in which they are earned or
incurred*
D; Ce<uires that all items of a material nature -e included in financial statements*
E; Ce<uires that all in&entory items -e reported at full cost*
Ans: A
Difficulty: oderate
LO: 0
7,* "ac4er "itons usually sell for @)0 per unit/ and ha&e a profit margin of ,2B* Howe&er/ the
e>pected selling price has fallen to @7 per unit* 'he 're44ing $ompany current in&entory
includes ,99 units purchased at @)9 per unit* Ceplacement cost is now down to @%* $alculate
the &alue of the in&entory at the lower of cost or mar4et using the approach ta4en -y most
$anadian companies*
A; @)/.29*
B; @)/099*
$; @)/299*
D; @)/699*
E; @,/999*
Ans: B
Difficulty: oderate
LO: 0
7.* 'he $oronado $orporation had the following original costs and replacement costs for its
in&entory:
A; @)/)69*99*
B; @)/9%2*99*
$; @)/)),*29 or @)/9%2*99*
D; @)/)),*29*
E; @)/)69*99 or @)/9%2*99*
Ans: $
Difficulty: Hard
LO: 0
70* If an in&entory amount is reported in error/ it can cause a misstatement in:
A; $ost of goods sold*
B; +ross profit*
$; #et income*
D; $urrent assets*
E; All of these answers are correct*
Ans: E
Difficulty: Easy
LO: 2
72* An in&entory error carried forward into the ne>t period causes misstatements in:
A; $ost of goods sold*
B; +ross profit*
$; #et income*
D; All of these answers are correct*
E; +ross profit and net income*
Ans: D
Difficulty: Easy
LO: 2
73* Because an in&entory error causes an offsetting error in the ne>t period:
A; anagers can ignore the error*
B; It is sometimes said to -e self5correcting*
$; It affects only income statement accounts*
D; If affects only -alance sheet accounts*
E; anagers can ignore the error and it is sometimes said to -e self5correcting*
Ans: B
Difficulty: oderate
LO: 2
7%* Anderstatement of ending in&entory causes:
A; $ost of goods sold to -e o&erstated and net income to -e understated*
B; $ost of goods sold to -e o&erstated and net income to -e o&erstated*
$; $ost of goods sold to -e understated and net income to -e understated*
D; $ost of goods sold to -e understated and net income to -e o&erstated*
E; $ost of goods sold to -e o&erstated and net income to -e accurate*
Ans: A
Difficulty: Hard
LO: 2
76* Anderstatement of -eginning in&entory causes:
A; $ost of goods sold to -e understated and net income to -e understated*
B; $ost of goods sold to -e understated and net income to -e o&erstated*
$; $ost of goods sold to -e o&erstated and net income to -e o&erstated*
D; $ost of goods sold to -e o&erstated and net income to -e understated*
E; $ost of goods sold to -e o&erstated and net income to -e accurate*
Ans: B
Difficulty: Hard
LO: 2
77* On Septem-er .9/ arlee $ompany needed to estimate its ending in&entory in order to
prepare its third5<uarter financial statements* 'he following information is a&aila-le:
:); In&entory/ Euly ): @),/299
:,; #et sales: @09/999
:.; #et purchases: @)%/299
arlee?s gross profit rate is )2B* $ost of goods sold would -e:
A; @ 3/999*
B; @.0/999*
$; @ 0/999*
D; @)9/999*
E; #one of these answers is correct
Ans: B
Difficulty: Hard
LO: 3
)99* arlee $ompany was destroyed -y a tornado on arch )2* 'he following was the only
information sal&aged:
:); In&entory/ Eanuary ): @,6/999
:,; "urchases: @)3/999
:.; 'ransportation5in: @)/999
:0; Sales: @22/999
:2; Sales returns: @%99
arlee?s a&erage gross profit was .2B* 8hat was the estimated &alue of the lost in&entoryF
A; @ 7/%92*
B; @,2/772*
$; @,7/,29*
D; @00/999*
E; @02/999*
Ans: A
Difficulty: oderate
LO: 3
)9)* "atel "ac4ing had the following information for its in&entory:
Beginning in&entory: cost @6%/999G retail @).9/999
#et purchases: cost @29/999G retail @),9/999
Sales at retail: @)02/999
'he year5end in&entory showed @)90/,99 worth of merchandise on hand at retail* 8hat is the
ending cost of the in&entoryF
A; @00/)66*
B; @2%/)9,*
$; @2%/%29*
D; @%9/,37*
E; @)9/0,9*
Ans: B
Difficulty: oderate
LO: 3
)9,* A company that has operated with a .9B a&erage gross profit margin for a num-er of years
had @)99/999 in sales during the first <uarter of this year* If it -egan the <uarter with an @)6/999
in&entory at cost and purchased @%,/999 of merchandise during the <uarter/ its estimated ending
in&entory -y the gross profit method is:
A; @.9/999*
B; @,)/999*
$; @,9/999*
D; @)6/999*
E; @,%/999*
Ans: $
Difficulty: Hard
LO: 3
)9.* On Decem-er .)/ Bri>ell Inc* needed to estimate its ending in&entory to prepare its second5
<uarter financial statements* 'he following information is currently a&aila-le:
:); In&entory as of Octo-er ): @),/299
:,; #et sales: @09/999
:.; #et purchases: @,%/299
Bri>ell typically achie&es a gross profit of )2B* $ost of goods sold under the gross profit
method would -e:
A; @ 3/999*
B; @.0/999*
$; @ 0/999*
D; @)9/999*
E; @)3/999*
Ans: B
Difficulty: Hard
LO: 3
)90* Interim statements:
A; Are re<uired -y the $I$A*
B; Are necessary to achie&e full disclosure a-out a -usiness?s operations*
$; Are usually monthly or <uarterly statements prepared in -etween the traditional/ annual
statements*
D; Are re<uired -y the $I$A and are necessary to achie&e full disclosure a-out a -usiness?s
operations*
E; All of these answers are correct*
Ans: $
Difficulty: Easy
LO: 3
)92* 8hich ratio measures the portion of net sales that is gross profitF
A; +ross margin ratio
B; #et sales ratio
$; +ross profit ratio
D; All of these answers are correct
E; +ross margin ratio and gross profit ratio
Ans: E
Difficulty: oderate
LO: 3
)93* 're44ing $ompany had the following purchases during the year:
Eanuary ): )9 units at @),9
Fe-ruary ): ,9 units at @).9
ay ): )2 units at @)09
Septem-er ): ), units at @)29
#o&em-er ): )9 units at @)39
On Decem-er .)/ there were ,3 units in ending in&entory* 'hese ,3 units consisted of , from
Eanuary/ 0 from Fe-ruary/ 3 from ay/ 0 from Septem-er/ and )9 from #o&em-er* Asing the
specific identification method/ what is the cost of the ending in&entoryF
A; @./299*
B; @./699*
$; @./739*
D; @./,69*
E; @./309*
Ans: B
Difficulty: oderate
LO: %
)9%* artoc4 $ompany uses the periodic in&entory system* 'he following information is
a&aila-le for the period ending Decem-er .):
:); Sales: @.9/999
:,; Beginning in&entory: @%/299
:.; Ending in&entory: @3/999
:0; "urchases: @,9/999
'he cost of goods sold for the period is:
A; @,%/299*
B; @,3/299*
$; @,)/299*
D; @,2/)99*
E; @,)/999*
Ans: $
Difficulty: Easy
LO: %
)96* 'he merchandise turno&er ratio:
A; Is used to analy1e profita-ility*
B; Is used to measure sol&ency*
$; easures how <uic4ly a firm sells its merchandise in&entory*
D; Halidates the acid5test ratio*
E; Depends on the type of in&entory &aluation method*
Ans: $
Difficulty: Easy
LO: 7
)97* Days? sales in in&entory:
A; Is a ratio that estimates how many days it will ta4e to con&ert in&entory on hand to accounts
recei&a-le or cash*
B; Is a ratio that tells us how much in&entory a firm has on hand in terms of days? sales*
$; Is the num-er of days we can sell from in&entory if no new items are purchased*
D; All of these answers are correct*
E; Is a ratio that estimates how many days it will ta4e to con&ert in&entory on hand to accounts
recei&a-le or cash and is a ratio that tells us how much in&entory a firm has on hand in terms of
days? sales*
Ans: D
Difficulty: Easy
LO: 7
))9* 'he merchandise turno&er ratio:
A; Is calculated -y di&iding cost of goods sold -y a&erage merchandise in&entory*
B; Is calculated -y di&iding a&erage merchandise in&entory -y cost of goods sold*
$; Is ending in&entory di&ided -y cost of goods sold*
D; Is cost of goods sold di&ided -y ending in&entory*
E; Is cost of goods sold di&ided -y ending in&entory times .32*
Ans: A
Difficulty: oderate
LO: 7
)))* Days? sales in in&entory is calculated -y:
A; Di&iding a&erage merchandise in&entory -y cost of goods sold*
B; Di&iding cost of goods sold -y a&erage merchandise in&entory*
$; Di&iding in&entory -y cost of goods sold times .32*
D; Di&iding cost of goods sold -y ending in&entory times .32*
E; Di&iding ending in&entory -y cost of goods sold*
Ans: $
Difficulty: oderate
LO: 7
)),* 'oys DCD As had cost of goods sold of @3/999 million/ ending in&entory of @,/299 million/
and a&erage in&entory of @,/999 million* 'he merchandise turno&er is:
A; ,*09*
B; .*
$; *..*
D; *0,*
E; ),*
Ans: B
Difficulty: Hard
LO: 7
)).* 'oys DCD As had cost of goods sold of @3/999 million/ ending in&entory of @,/299 million/
and a&erage in&entory turno&er of @,/999 million* 'he days? sales in in&entory is:
A; )2,*)*
B; ),)*%*
$; 6%3*
D; )/972*
E; .9*2*
Ans: A
Difficulty: Hard
LO: 7
Short Answer
))0* atch each of the following terms with the appropriate definition*
:a; Specific identification method
:-; Days? sales in in&entory
:c; $onser&atism principle
:d; erchandise turno&er
:e; Cetail in&entory method
:f; +ross profit ratio
:g; #et reali1a-le &alue
:h; LIFO
:i; 8eighted a&erage in&entory cost flow assumption
:=; FIFO
IIIII :); 'he accounting principle that guides accountants to select the less
optimistic estimate when two estimates of amounts to -e recei&ed or
paid are a-out e<ually li4ely*
IIIII :,; 'he e>pected sales price of an item minus the cost of ma4ing the sale*
IIIII :.; A method for estimating an ending in&entory -ased on the ratio of the
amount of goods for sale at cost to the amount of goods for sale at
mar4ed selling price*
IIIII :0; An estimate of how many days it will ta4e to con&ert the in&entory on
hand at the end of the period into accounts recei&a-le or cash*
IIIII :2; An in&entory cost flow assumption in which the unit prices of the
-eginning in&entory and of each purchase are weighted -y the
num-er of units in the -eginning in&entory and each purchase*
IIIII :3; easures how much of net sales is gross profit*
IIIII :%; 'he pricing of an in&entory under the assumption that costs for the
most recent items purchased are sold first and charged to cost of
goods sold*
IIIII :6; 'he pricing of an in&entory where the purchase in&oice of each item
in the ending in&entory is identified and used to determine the cost
assigned to the in&entory*
IIIII :7; 'he pricing of an in&entory under the assumption that in&entory items
are sold in the order ac<uired*
IIIII :)9; 'he num-er of times a company?s a&erage in&entory was sold during
an accounting period*
Ans: :); c :,; g :.; e :0; - :2; i :3; f :%; h :6; a :7; = :)9; d
Difficulty: oderate
LO: )57
))2* atch the following terms with the appropriate definition*
:a; $onsignee
:-; $onser&atism principle
:c; Lower of cost or mar4et
:d; +ross profit method
:e; erchandise turno&er
:f; $onsistency principle
:g; Specific identification method
:h; Days? sales in in&entory
:i; $onsignor
:=; Cetail in&entory method
IIIII :); An owner of goods who ships them to another party who will then
sell the goods for the owner*
IIIII :,; A procedure for estimating an ending in&entory in which the past
gross profit rate is used to estimate the cost of goods sold/ which is
then su-tracted from the cost of goods a&aila-le for sale to determine
the estimated ending in&entory*
IIIII :.; 'he accounting re<uirement that a company use the same accounting
methods period after period so that the financial statements of
succeeding periods will -e compara-le*
IIIII :0; An estimate of how many days it will ta4e to con&ert the in&entory on
hand at the end of the period into accounts recei&a-le or cash*
IIIII :2; One who recei&es and holds goods owned -y another party for the
purpose of selling the goods for the owner*
IIIII :3; 'he pricing of an in&entory where the purchase in&oice of each item
in the ending in&entory is identified and used to determine the cost
assigned to the in&entory*
IIIII :%; 'he num-er of times a company?s a&erage in&entory was sold during
an accounting period*
IIIII :6; 'he re<uired method of reporting merchandise in&entory in the
-alance sheet where mar4et &alue is reported when mar4et is lower
than cost*
IIIII :7; A method for estimating an ending in&entory -ased on the ratio of the
amount of goods for sale at cost to the amount of goods for sale at
mar4ed selling prices*
IIIII :)9; 'he accounting principle that guides accountants to select the less
optimistic estimate when two estimates of amounts to -e recei&ed or
paid are a-out e<ually li4ely*
Ans: :); i :,; d :.; f :0; h :2; a :3; g :%; e :6; c :7; = :)9; -
Difficulty: oderate
LO: )57
))3* $arter $ompany reported @299/999 in sales during the current year* It purchased
merchandise that cost @,69/999* 'he company?s -eginning in&entory and ending in&entory was
@39/999* $alculate the gross profit ratio*
Ans: @299/999 5 @,69/999 J @,,9/999 gross profit*
@,,9/999(299*999 J 00B
Difficulty: oderate
LO: 3
))%* 'he costs of which items are included in merchandise in&entory* F
Ans: erchandise in&entory is goods owned -y a company and held for resale* 'hree special
cases in&ol&ing ownership decisions are goods in transit/ consigned goods/ and damaged goods*
+oods in transit are included in the in&entory of the company that owns the goods* $onsigned
goods are included in the in&entory of the consignor* Damaged goods are &alued at net
reali1a-le &alue if it is less than cost*
Difficulty: Easy
LO: )
))6* 8hat types of costs are assigned to merchandise in&entoryF
Ans: $osts of merchandise in&entory include the purchase price less discounts/ plus any added
or incidental costs necessary to put the in&entory in place and ready to sell*
Difficulty: Easy
LO: )
))7* 8hat are the effects of in&entory methods on financial and ta> reporting :assuming all
methods are allowa-le for ta> purposes;F*
Ans: 'he specific identification method e>actly matches e>penses and re&enues* 'he weighted
a&erage method smoothes out changes in prices* Howe&er/ LIFO and FIFO pro&ide different
amounts in periods of rising or falling prices* For e>ample/ in periods of rising prices/ LIFO
pro&ides a lower income and thus lower ta>es* In periods of falling prices/ LIFO pro&ides a
higher income and thus higher ta>es* FIFO calculations pro&ide higher income and ta>es in
periods of rising prices and lower income and ta>es in periods of declining prices*
Difficulty: Hard
LO: .
),9* 8hat are the four types of in&entory cost flow assumptionsF
Ans: 'he specific identification method assigns costs to each in&entory item -ased on specific
in&oices* 'he weighted a&erage method assigns costs -y using the total -alance in in&entory and
di&iding it -y the num-er of units to arri&e at a cost per unit* 'his cost per unit is then multiplied
-y the num-er of units in ending in&entory* 'he first5in/ first5out method assigns cost to items
sold assuming that the cost of the first units purchased are the first to -e reco&ered* 'he last5in/
first5out method assumes that the cost of the last units purchased are the first to -e reco&ered*
Difficulty: oderate
LO: ,
),)* During Eanuary/ a company that uses a perpetual in&entory system had -eginning in&entory/
purchases/ and sales as follows:
8hat was the FIFO cost of the Eanuary .) in&entoryF
Ans:
Difficulty: oderate
LO: ,
),,* A company that uses a perpetual in&entory system made the following cash purchases and
sales:
Eanuary ) "urchased )99 units at @)9 per unit*
Fe-ruary 2 "urchased 39 units at @), per unit*
arch )3 Sold 09 units for @)3 per unit*
"resent general =ournal entries to record the sale assuming a FIFO method is used*
Ans:
Difficulty: oderate
LO: ,
),.* A company made the following purchases during the year:
Ean* )9 )2 units at @.39
ar* )2 ,2 units at @.79
Apr* ,2 )9 units at @0,9
Euly .9 ,9 units at @029
Oct* )9 )2 units at @069
On Decem-er .)/ there were ,6 units in ending in&entory* 'hese ,6 units consisted of ) from
the Eanuary )9 shipment/ , from the arch )2 shipment/ 2 from the April ,2 shipment/ )2 from
the Euly .9 shipment/ and 2 from the Octo-er )9 shipment* Asing specific identification/
calculate the cost of the ending in&entory*
Ans:
Difficulty: oderate
LO: ,/%
),0* A company sells a single product and had the following -eginning in&entory/ purchases/
and sales during Eanuary:
$alculate the cost of the ending in&entory under each assumption -elow:
:); 'he company uses a periodic in&entory system and determines cost on a FIFO
-asis*
Ending in&entory cost IIIIIIIIIIII
:,; 'he company uses a periodic in&entory system and determines cost on a LIFO
-asis*
Ending in&entory cost IIIIIIIIIIII
:.; 'he company uses a perpetual in&entory system and determines cost on a FIFO
-asis*
Ending in&entory cost IIIIIIIIIIII
Ans:
Difficulty: oderate
LO: ,/%
),2* E>plain why the lower of cost or mar4et rule is used to &alue in&entory*
Ans: 'he principle of conser&atism re<uires that if there is more than one estimate of the &alue
of an asset/ then the lower of the two should -e used* 'he lower of cost or mar4et rule compares
the ac<uisition cost of in&entory with the current replacement cost* 'he lower of the two &alues
is the amount to -e reported*
Difficulty: oderate
LO: 0
),3* Bethel $o* has collected the following data related to its ending in&entory:
$alculate the lower of cost or mar4et on the:
:); In&entory as a whole*
:,; In&entory applied separately to each product*
Ans:
Difficulty: oderate
LO: 0
),%* Isaiah?s +ear had the following ending in&entory costs:
Instructions:
:); $alculate the lower of cost or mar4et :L$; for the whole in&entory*
:,; $alculate the lower of cost or mar4et :L$; for each indi&idual item*
Ans:
Difficulty: oderate
LO: 0
),6* E>plain the effect of an error in in&entory &aluation on financial statements*
Ans: An error in the amount of ending in&entory affects assets/ net income/ and owner?s e<uity
of the current period* Since ending in&entory affects the following period?s -eginning in&entory/
an error in ending in&entory affects the following period?s cost of goods sold and net income*
'he financial statement effects of errors in one period are offset in the following statement
period*
Difficulty: Hard
LO: 2
),7* E&aluate each in&entory error and determine whether it o&erstates or understates each item*
In&entory Error $ost of +oods Sold #et Income
Anderstate -eginning in&entory
Anderstate ending in&entory
O&erstate -eginning in&entory
O&erstate ending in&entory
Ans: In&entory Error $ost of +oods Sold #et Income
Anderstate -eginning in&entory Anderstate O&erstate
Anderstate ending in&entory O&erstate Anderstate
O&erstate -eginning in&entory O&erstate Anderstate
O&erstate ending in&entory Anderstate O&erstate
Difficulty: Hard
LO: 2
).9* E>plain how to calculate the gross profit ratio and interpret its meaning*
Ans: 'he gross profit ratio measures how much of net sales is gross profit* It is calculated -y
di&iding gross profit -y net sales*
Difficulty: oderate
LO: 3
).)* E>plain the difference -etween the retail method and gross profit method for &aluing
in&entory*
Ans: 'he retail method is generally used to prepare interim statements* It uses the cost to retail
ratio in order to gi&e an estimated ending in&entory at cost* 'he gross profit method is used to
reconstruct the &alue of lost/ stolen/ or destroyed in&entory* It uses the gross profit ratio to
estimate cost of goods sold and the &alue of ending in&entory*
Difficulty: oderate
LO: 3
).,* A company?s store was destroyed -y a fire on Fe-ruary )9* 'he only information that could
-e sal&aged included the following:
:); In&entory/ Eanuary ): @.0/999
:,; "urchases: @))6/999
:.; Sales: @)09/999
'he company?s gross profit rate was .9B* $alculate the estimated &alue of the destroyed
in&entory*
Ans:
Difficulty: oderate
LO: 3
)..* Apply the retail method to the following information and calculate the cost of the ending
in&entory:
$ost Cetail
Beginning in&entory @)3/699 @.)/399
#et purchases 0%/299 7%/999
Sales 67/999
Ans:
Difficulty: oderate
LO: 3
).0* Harlingen Store uses the retail method and has the following information a&aila-le
concerning their most recent accounting period:
At $ost At Cetail
Beginning5of5period in&entory @)06/399 @ ,02/,99
#et purchases 3%%/099 )/,,7/699
Sales )/,99/999
:); 8hat is the cost ratio using the retail methodF
:,; 8hat is the estimated cost of the ending in&entoryF
Ans:
Difficulty: oderate
LO: 3
).2* Ba4street/ Inc* wants to estimate in&entory destroyed -y flood* Its a&erage gross profit
percentage is .%B* 'he following information is a&aila-le:
:); Beginning in&entory: @)),/.29
:,; "urchases: @2,9/629
:.; "urchases returns and allowances: @2/999
:0; 'ransportation5in: @0/%,2
:2; Sales: @662/729
:3; Sales returns and allowances: @7/%39
Instructions: $alculate the &alue of the destroyed ending in&entory using the gross profit
method*
Ans: #et sales: @662/729 5 @7/%39 J @6%3/)79
Beginning In&entory @)),/.29
"urchases 2,9/629
"urchases C K A :2/999;
'ransportation5in 0/%,2
$O+A @3.,/7,2
$+S :@6%3/)79 3.B; 22,/999
Ending In&entory @ 69/7,2
Difficulty: Hard
LO: 3
).3* Descri-e the accounting aspects of a periodic in&entory system*
Ans: Each purchase of merchandise is de-ited to the "urchases account* $ost of goods sold is
not recorded at the time of sale* Instead/ a physical count of in&entory at the end of the
accounting period is used to determine the amount of in&entory sold* $ertain costs of in&entory
such as transportation5in/ purchases discounts/ and purchases returns and allowances are
recorded in separate accounts*
Difficulty: Hard
LO: %
).%* 'he Cudd $orporation made the following merchandise purchases during the current year:
Ean* ) .69 units at @)2*99
ay ) ,%9 units at @,9*99
Eune ) .99 units at @,0*99
Oct* ) ,29 units at @.9*99
'here was no -eginning in&entory/ -ut ending in&entory consisted of 099 units* If Cudd uses the
weighted5a&erage cost method and the periodic in&entory system/ what would -e the cost of the
ending in&entoryF
Ans:
Difficulty: oderate
LO: %
).6* 'he "layer $orporation made the following merchandise purchases during the current year:
Ean* ) .69 units at @)2*99
ay ) ,%9 units at @,9*99
Eune ) .99 units at @,0*99
Oct* ) ,29 units at @.9*99
'here was no -eginning in&entory/ -ut ending in&entory consisted of 099 units* If "layer uses
the first5in/ first5out method and the periodic in&entory system/ what would -e the cost of the
ending in&entoryF
Ans:
Difficulty: oderate
LO: %
).7* 'he Bean $orporation made the following merchandise purchases during the current year:
Ean* ) .69 units at @)2*99
ay ) ,%9 units at @,9*99
Eune ) .99 units at @,0*99
Oct* ) ,29 units at @.9*99
'here was no -eginning in&entory/ -ut ending in&entory consisted of 099 units* If Bean uses the
last5in/ first5out method and the periodic in&entory system/ what would -e the cost of the ending
in&entoryF
Ans:
Difficulty: oderate
LO: %
)09* #ormandy/ Inc* has collected the following in&entory data prior to preparing financial
statements for the month of Octo-er* All purchases and sales are on credit*
Assuming the periodic in&entory system is used/ determine the cost of the ending in&entory and
cost of goods sold using the LIFO -asis*
"repare the appropriate =ournal entries to record:
:A; 'he Octo-er 3 purchase*
:B; 'he Octo-er ), sale*
:$; 'he entries to close the Octo-er income statement items to Income Summary* :Assume that
sales re&enue and the elements of cost of goods sold are the only income statement items*;
Ans:
Difficulty: oderate
LO: %
)0)* E>plain how in&entory management is e&aluated using the merchandise turno&er and days?
sales in in&entory ratios*
Ans: 'he goal in in&entory management is to ha&e a high turno&er as long as in&entory is not
out of stoc4 and customers? needs are met* erchandise turno&er measures the num-er of times
per year in&entory is sold* Days? sales in in&entory measures the num-er of days it ta4es to sell
in&entory and reali1e cash from the sale* $om-ined/ these ratios help analysts to measure
in&entory management and to e&aluate a company?s short5term li<uidity*
Difficulty: oderate
LO: 7
)0,* 're44ing $ompany reported the following data:
LC ) LC , LC .
$ost of goods sold @.0%/399 @.%7/329 @00./799
A&erage in&entory @ 62/999 @ 7)/929 @ 76/.29
Instructions:
:); $alculate 're44ing $ompany?s merchandise turno&er for each year to two decimal places*
:,; $omment on the company?s efficiency in managing its in&entory*
Ans:
Difficulty: oderate
LO: 7
)0.* Annie?s Attic reported the following data:
LC ) LC , LC .
$ost of goods sold @,.6/999 @.%2/999 @072/999
Ending in&entory @),9/999 @)29/999 @)69/999
Instructions:
:); $alculate the days? sales in in&entory for each year rounded to the nearest full day*
:,; $omment on the trend in in&entory management*
Ans:
Difficulty: oderate
LO: 7
Fill5In5'he5Blan4
)00* 'he cost of an in&entory item includes IIIIIIIIIIIIIIIIIIIII/ plus IIIIIIIIIIIIII
costs necessary to put it in a place and condition for sale*
Ans: In&oice price minus any discount/ plus any added or incidental
Difficulty: Hard
LO: )
)02* 8hen a count of merchandise in&entory is ta4en for the purpose of reconciling goods
actually on hand to the in&entory control account in the general ledger it is 4nown as ta4ing a:n;
IIIIIIIIIIIIIIII*
Ans: "hysical count
Difficulty: Easy
LO: )
)03* A ma=or goal in accounting for in&entory is IIIIIIIIIIIIIIIIII rele&ant costs with
re&enues*
Ans: atching
Difficulty: oderate
LO: )
)0%* An ad&antage of the IIIIIIIIIIIIIIIIIIIII method of in&entory &aluation is that it
tends to smooth out price changes*
Ans: 8eighted a&erage
Difficulty: oderate
LO: ,
)06* 8hen the IIIIIIIIIIIIII cost flow assumption is used with a periodic system/ cost of
goods sold is assigned costs from the most recent purchases for the period*
Ans: LIFO
Difficulty: Hard
LO: %
)07* 'he current cost of purchasing an item is called the IIIIIIIIIIIIII*
Ans: Ceplacement cost
Difficulty: Easy
LO: 0
)29* +oods on consignment are goods shipped -y their owner/ called the IIIIIIIIIIIIIII/ to
another party called the IIIIIIIIIIIIIII*
Ans: $onsignor/ consignee
Difficulty: oderate
LO: )
)2)* IIIIIIIIIIIIIIIII is the current cost of purchasing the same in&entory items in the usual
manner*
Ans: Ceplacement cost
Difficulty: Easy
LO: 0
)2,* An o&erstatement of -eginning in&entory will IIIIIIIIIIIIIIIIII cost of goods sold/
and IIIIIIIIIIIIIIIII net income*
Ans: O&erstate/ understate
Difficulty: Hard
LO: 2
)2.* 'he IIIIIIIIIIIIIIIIIIIII method is used to estimate the &alue of in&entory that has
-een destroyed/ lost/ or stolen*
Ans: +ross profit
Difficulty: oderate
LO: 3
)20* 'he IIIIIIIIIIIIIIIIIIIIIIII ratio measures how much in&entory is on hand in terms
of days? sales*
Ans: Days? sales in in&entory
Difficulty: Easy
LO: 7