ch 6 pracice questions

Question 1

Manufacturing companies usually classify inventory into three categories.

T/F

Answer 1

true

Question 2

Inventory items on an assembly line in various stages of production are classified as

Answer 2

work in process

Question 3

Which of the following should not be included in the physical inventory of a company?

Answer 3

Goods held on consignment from another company

Question 4

All of the following would be classified as inventory except
A.) supplies. 
B.) work in process. 
C.) raw materials. 
D.) finished goods.

Answer 4

supplies

Question 5

Companies using a periodic inventory system take a physical inventory for each of the following purposes except to determine the

Answer 5

amount of inventory lost due to shoplifting or employee theft

Question 6

Goods in transit should be included in the inventory of the buyer when the

Answer 6

terms of sale are FOB shipping point

Question 7

When the terms of sale are FOB destination, ownership of the goods remains with the seller until the goods

Answer 7

reach the buyer.

Question 8

There is an accounting requirement that the cost flow assumption be consistent with the physical movement of the goods.

T/F

Answer 8

false

Question 9

Inventory costing methods place primary reliance on assumptions about the flow of

Answer 9

costs

Question 10

Which of the following statements is correct with respect to inventories?

Answer 10

Under FIFO, the ending inventory is based on the latest units purchased.

Question 11

Cost of goods available for sale consists of two elements: beginning inventory and

Answer 11

cost of goods purchased

Question 12

The cost flow method that often parallels the actual physical flow of merchandise is the

Answer 12

FIFO method.

Question 13

The first costs assigned to ending inventory are the costs of the beginning inventory under the

Answer 13

LIFO method.

Question 14

Hudson Company started its year with 600 units of beginning inventory at a cost of $4 per unit. During the year, the company made the following purchases: May, 900 units at $5 per unit and July, 500 units at $6 per unit. A physical count of inventory at year-end indicates that there are 700 units in ending inventory. What is the cost of the ending inventory if Hudson Company uses the FIFO method for valuing inventory?

Answer 14

4,000

[Cost of goods sold using the FIFO method instead of ending inventory ($9,900 - $4,000). Under the FIFO method of inventory valuation, the correct ending inventory is: (500 units x $6) + (200 units x $5) =$4,000.]

Question 15

Under IFRS, if inventory is written down under the lower-of-cost-or-market valuation,

Answer 15

the write-down may be reversed in a subsequent period up to the amount of the previous write-down.

Question 16

Atlantis Company’s ending inventory is understated $4,000. The effects of this error on the current year’s cost of goods sold and net income, respectively, are

Answer 16

overstated, understated

Question 17

Under the lower-of-cost-or-market basis, market is defined as current replacement cost.
T/F

Answer 17

true

Question 18

Overstating beginning inventory will overstate

Answer 18

cost of goods sold

Question 19

Harold Company overstated its inventory by $15,000 at December 31, 2014. It did not correct the error in 2014 or 2015. As a result, Harold’s stockholders’ equity was

Answer 19

overstated at December 31, 2014, and properly stated at December 31, 2015.

Question 20

An error in the ending inventory of the current period will have no effect on net income of the next accounting period.

T/F

Answer 20

false

Question 21

Trendy Toy Company purchased 1,000 toys at a cost of $50 each. Trendy Toys has 200 toys in inventory at year-end with a replacement cost of $45 each. The ending inventory at lower-of-cost-or-market is

Answer 21

9,000

[ending inventory at lower-of-cost-or-market is $50 x 200 toys. The correct valuation should be $45 x 200 toys]

Question 22

Sheldon’s Jewelers uses the specific identification method of inventory costing. During May, Sheldon purchased 3 gemstones for $4,000, $5,000, and $6,000 respectively. During May, Sheldon sold two of the gemstones for $6,500 each. At the end of May, Sheldon determined that the $6,000 gemstone was still in his inventory. What is Sheldon’s gross profit for the month of May?

Answer 22

4,000

[ gross profit as sales (2 x $6,500) – cost of goods sold ($5,000 + $6,000). The correct gross profit = sales (2 x $6,500) – cost of goods sold ($4,000 + $5,000) =$4,000.]

Question 23

When the current replacement cost of inventory is less than its cost, it is written down to

Answer 23

market value

Question 24

In a period of rising prices, FIFO will result in

Answer 24

lower cost of goods sold than LIFO.

Question 25

In periods of rising prices, LIFO will produce

Answer 25

lower net income than FIFO

Question 26

Factors that affect the selection of an inventory costing method do not include

Answer 26

perpetual vs. periodic inventory system

Question 27

In a period of inflation, which cost flow method produces the highest net income?

Answer 27

FIFO method

Question 28

In a period of inflation, the cost flow method that results in the lowest income taxes is the

Answer 28

LIFO method

Question 29

Understating ending inventory will overstate

Answer 29

cost of goods sold.

Question 30

Days in inventory measure the average number of days inventory is held.

T/F

Answer 30

true

Question 31

Baylor Inc. has a gross profit rate of 45%. During the year the company had net sales of $400,000 and goods available for sale of $260,000. Beginning inventory was $35,000. Compute the dollar amount of the ending inventory.

Answer 31

$40,000

[If the gross profit rate is 45%, the cost of goods sold is 55% of net sales. Cost of goods sold = $400,000 x 55% = $220,000. Ending inventory = goods available for sale - cost of goods sold = $260,000 - $220,000 = $40,000.]

Question 32

Inventory turnover is calculated by dividing cost of goods sold by

Answer 32

average inventory

Question 33

For inventory valuation, IFRS permits the use of

Answer 33

both the FIFO and average-cost flow assumptions

Question 34

Under IFRS, inventory is defined as

A.) assets held-for-sale in the ordinary course of business.
B.) assets in the process of production for sale.
C.) assets to be consumed in the production of goods or services.
D.) all of these answer choices are correct.

Answer 34

answer choices are correct.

Question 35

IFRS prohibits the use of the LIFO cost flow assumption in accounting and reporting for inventories.

T/F

Answer 35

true

Question 36

Which of the following is used to estimate the cost of ending inventory?

Answer 36

Retail inventory method

Question 37

Songbird Company has sales of $150,000 and cost of goods available for sale of $135,000. If the gross profit rate is 30%, the estimated cost of the ending inventory under the gross profit method is

Answer 37

$30,000

[Estimated cost of ending inventory is computed as follows: Sales - Gross profit = COGS or $150,000 - ($150,000 X 30%) = $105,000. Cost of goods available for sale - COGS = Ending inventory or $135,000 - $105,000 = $30,000.]

Question 38

The gross profit method can be used for all of the following reasons, except

Answer 38

preparation of annual financial statements.

Question 39

A new average cost is computed each time a purchase is made in the

Answer 39

moving-average method.

Question 40

The results under FIFO in a perpetual system are the same as in a periodic system.

T/F

Answer 40

true

Question 41

Carlos Company had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales revenue of $475,000. Carlos’s days in inventory is

Answer 41

121.7 days

[365/Inventory Turnover = 365/ ($285,000/ ($80,000 + $110,000)/2)).]