Chapter 5 Questions

Question 1

Merchandise inventory includes all of the following except: Goods held for sale, Goods located in the warehouse, Goods sold, Goods located in an off-site warehouse

Answer 1

Goods Sold

Question 2

Goods in transit shipped to Abbey (purchaser) FOB Destination. How would this item be handled in Abbey Company’s inventory?

Answer 2

Exclude from inventory

Question 3

Goods in transit shipped to Abbey (purchaser) FOB Shipping Point. How would this item be handled in Abbey Company’s inventory?

Answer 3

Include in inventory

Question 4

Goods in transit shipped by Abbey (seller) FOB Destination. How would this item be handled in Abbey Company’s inventory?

Answer 4

Include in inventory

Question 5

Goods in transit shipped by Abbey (seller) FOB Shipping Point. How would this item be handled in Abbey Company’s inventory?

Answer 5

Exclude from inventory

Question 6

Goods on consignment (Abbey is consignee). How would this item be handled in Abbey Company’s inventory?

Answer 6

Exclude from inventory

Question 7

Goods on consignment (Abbey is consignor). How would this item be handled in Abbey Company’s inventory?

Answer 7

Included in inventory

Question 8

Obsolete inventory that can be sold. How would this item be handled in Abbey Company’s inventory?

Answer 8

Include in inventory

Question 9

Damaged inventory that cannot be resold. How would this item be handled in Abbey Company’s inventory?

Answer 9

Exclude from inventory

Question 10

If a perpetual inventory system is in use _____.

Answer 10

a physical inventory count should be taken at least annually.

Question 11

During a period of regularly rising purchase costs, this method yields the highest reported cost of goods sold amount on the income statement.

Answer 11

LIFO

Question 12

During a period of regularly rising purchase costs, this method yields the lowest income tax expense.

Answer 12

LIFO

Question 13

During a period of steadily rising costs, this method results in the highest amount of inventory reported on the balance sheet.

Answer 13

FIFO

Question 14

An advantage of the _____ costing method is that the cost of goods sold approximates its current cost.

Answer 14

LIFO

Question 15

Under the conformity rule, companies who use the _____ method for tax reporting, are required by the IRS to also use it in their financial statements.

Answer 15

LIFO

Question 16

Market value is replacement cost for LIFO, but net ___ value is used for FIFO, Specific Identification and Weighted Average methods.

Answer 16

realizable

Question 17

An error in the ending inventory balance in Year 1 will also affect:

Answer 17

Year 1 Cost of Goods
Year 2 Beginning Inventory
Year 2 Cost of Goods Sold

Question 18

Colman Company reports ending inventory in year 1 of $25,000 instead of the correct amount of $20,000. The effects of this error include: (x2 only year 1)

Answer 18

Year 1 ending inventory is overstated and year 1 cost of goods sold is understated

Question 19

A company overstated its ending inventory at the end of Year 1. If the error was not detected, cost of goods sold would be _____ for Year 1.

Answer 19

Understated

Question 20

A company overstated its ending inventory at the end of Year 1. If the error was not detected, cost of goods sold would be _____ for Year 2.

Answer 20

Overstated

Question 21

A company overstated its ending inventory for Year 1. If the error was not detected, total assets would be _____ for Year 1.

Answer 21

Overstated

Question 22

If all units are purchased at the same unit cost, cost of goods sold will ____?

Answer 22

be the same for all four methods

Question 23

What are the two reasons that inventory must be estimated?

Answer 23

1. A company experiences a casualty
2. Interim financial statements are prepared

Question 24

The formula for Step 1 of the retail inventory method is:

Answer 24

Goods available for sale at retail minus net sales at retail.

Question 25

The gross profit method estimates the cost of ending inventory by applying:

Answer 25

Gross profit ratio to net sales.