ch 6 pracice questions Flashcards
Manufacturing companies usually classify inventory into three categories.
T/F
true
Inventory items on an assembly line in various stages of production are classified as
work in process
Which of the following should not be included in the physical inventory of a company?
Goods held on consignment from another company
All of the following would be classified as inventory except A.) supplies. B.) work in process. C.) raw materials. D.) finished goods.
supplies
Companies using a periodic inventory system take a physical inventory for each of the following purposes except to determine the
amount of inventory lost due to shoplifting or employee theft
Goods in transit should be included in the inventory of the buyer when the
terms of sale are FOB shipping point
When the terms of sale are FOB destination, ownership of the goods remains with the seller until the goods
reach the buyer.
There is an accounting requirement that the cost flow assumption be consistent with the physical movement of the goods.
T/F
false
Inventory costing methods place primary reliance on assumptions about the flow of
costs
Which of the following statements is correct with respect to inventories?
Under FIFO, the ending inventory is based on the latest units purchased.
Cost of goods available for sale consists of two elements: beginning inventory and
cost of goods purchased
The cost flow method that often parallels the actual physical flow of merchandise is the
FIFO method.
The first costs assigned to ending inventory are the costs of the beginning inventory under the
LIFO method.
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?
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.]
Under IFRS, if inventory is written down under the lower-of-cost-or-market valuation,
the write-down may be reversed in a subsequent period up to the amount of the previous write-down.
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
overstated, understated
Under the lower-of-cost-or-market basis, market is defined as current replacement cost.
T/F
true
Overstating beginning inventory will overstate
cost of goods sold
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
overstated at December 31, 2014, and properly stated at December 31, 2015.
An error in the ending inventory of the current period will have no effect on net income of the next accounting period.
T/F
false
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
9,000
[ending inventory at lower-of-cost-or-market is $50 x 200 toys. The correct valuation should be $45 x 200 toys]
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?
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.]
When the current replacement cost of inventory is less than its cost, it is written down to
market value
In a period of rising prices, FIFO will result in
lower cost of goods sold than LIFO.
In periods of rising prices, LIFO will produce
lower net income than FIFO
Factors that affect the selection of an inventory costing method do not include
perpetual vs. periodic inventory system
In a period of inflation, which cost flow method produces the highest net income?
FIFO method
In a period of inflation, the cost flow method that results in the lowest income taxes is the
LIFO method
Understating ending inventory will overstate
cost of goods sold.
Days in inventory measure the average number of days inventory is held.
T/F
true
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.
$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.]
Inventory turnover is calculated by dividing cost of goods sold by
average inventory
For inventory valuation, IFRS permits the use of
both the FIFO and average-cost flow assumptions
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 choices are correct.
IFRS prohibits the use of the LIFO cost flow assumption in accounting and reporting for inventories.
T/F
true
Which of the following is used to estimate the cost of ending inventory?
Retail inventory method
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
$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.]
The gross profit method can be used for all of the following reasons, except
preparation of annual financial statements.
A new average cost is computed each time a purchase is made in the
moving-average method.
The results under FIFO in a perpetual system are the same as in a periodic system.
T/F
true
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
121.7 days
[365/Inventory Turnover = 365/ ($285,000/ ($80,000 + $110,000)/2)).]
