Chapter 6

Question 1

When is a physical inventory usually taken?

Answer 1

At the end of the company’s fiscal year.

Question 2

Which of the following is not an inventory account?
	Raw materials
	Work in process
	Finished goods
	Equipment

Answer 2

Equipment

Question 3

Which of the following is not a legitimate business reason for taking a physical inventory?
To check the accuracy of the perpetual inventory records

To determine cost of goods sold

To determine if any inventory has been lost from waste, shoplifting, or employee theft

To verify the profitability of individual inventory items

Answer 3

To verify the profitability of individual inventory items

Question 4

Ownership passes to the buyer when the public carrier accepts the goods if the goods are shipped

Answer 4

FOB shipping point.

Question 5

Which one of the following statements is true?
A merchandising company will normally have raw materials, work in process, and finished goods as inventory account classifications.
A merchandising company will normally have raw materials and merchandise inventory as inventory account classifications.
A manufacturing company will normally have raw materials, work in process, and merchandise inventory as inventory account classifications.
A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications.

Answer 5

A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications.

Question 6

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

Answer 6

costs

Question 7

Cost of goods purchased is $540,000, ending inventory is $20,000, and cost of goods sold is $560,000. How much is beginning inventory?

Answer 7

$40,000
Correct! Ending inventory plus cost of goods sold minus purchases results in beginning inventory: $20,000 + $560,000 -$540,000 = $40,000.

Question 8

Which of the following is not an acceptable inventory costing method?
	Last-in, first-out
	Average cost
	First-in, first-out
	Last-in, last-out

Answer 8

Last-in, last-out

Question 9

Which of the following is true of the FIFO inventory method?

Answer 9

It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold.

Question 10

Which of the following would most likely employ the specific identification method of inventory costing?
Gasoline station

Jewelry store

Grocery store

Hardware store

Answer 10

Jewelry store
Correct! Jewelry stores use the specific identification method because of the high value and uniqueness of many of the inventory items.

Question 11

Which of the following statements is true?

LIFO inventory valuation requires physical flow of goods to be representative of the cost flow.

FIFO inventory valuation requires physical flow of goods to be representative of the cost flow.

Specific identification method inventory valuation requires physical flow of goods to be representative of the cost flow.

All of these answer choices are correct.

Answer 11

Specific identification method inventory valuation requires physical flow of goods to be representative of the cost flow.

Question 12

Which of the following statements is true?
The IRS dictates the method of inventory costing method a company must use.

The SEC dictates the method of inventory costing method a company must use.

Company management selects the method of inventory costing method a company will use.

GAAP dictates the method of inventory costing method a company must use.

Answer 12

Company management selects the method of inventory costing method a company will use.

Question 13

Kam Company has the following units and costs:

Units Unit Cost

Inventory, Jan. 1 8,000 $11
Purchase, June 19 13,000 12
Purchase, Nov. 8 5,000 13

If 9,000 units are on hand at December 31, what is the cost of the ending inventory under FIFO using a periodic inventory system?

Answer 13

Correct! Ending inventory under FIFO uses the most recent costs in computing ending inventory. Ending inventory = (5,000 × $13) + (4,000 × $12) = $113,000.

Question 14

Davidson Electronics has the following:

Units Unit Cost

Inventory, Jan. 1 5,000 $ 8
Purchase, April 2 15,000 10
Purchase, Aug. 28 20,000 12

If Davidson has 7,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?

Answer 14

Ending inventory cost equals average-cost per unit times 7,000 units. Average cost per unit equals the total cost of all inventory amounts divided by the number of inventory units. Average inventory = [(5,000 × $8) + (15,000 × $10) + (20,000 × $12)] ÷ (5,000 + 15,000 + 20,000) = $430,000 ÷ 40,000 units = $10.75 per unit. Ending inventory = $10.75 × 7,000 units = $75,250.

Question 15

In periods of rising prices, what will LIFO produce?

Answer 15

Lower net income than FIFO
Because cost of good sold includes the most recent costs which are the highest costs, net income under LIFO will be the lowest.

Question 16

Which one of the following is not a consideration that affects the selection of an inventory costing method?
Income statement effects
Tax effects
Balance sheet effects
Perpetual versus periodic inventory system

Answer 16

Perpetual versus periodic inventory system

The type of inventory system is not a consideration. All other choices can be important considerations in the selection of a cost flow method.

Question 17

In a period of rising prices which inventory method will result in the greatest amount of income tax expense?

Answer 17

FIFO

FIFO will result in the lowest cost of goods sold, highest net income, and highest income tax expense.

Question 18

In a period of falling prices, which of the following methods will give the largest net income?

Answer 18

LIFO

LIFO will provide the highest net income during a period of falling prices.