FAR THEORY - INVENTORIES

Question 1

Under a perpetual inventory system, the amount of each type of merchandise on hand is available in the

a. creditor’s ledger
b. inventory ledger
c. merchandise inventory account
d. customer’s ledger

Answer 1

b. inventory ledger

Question 2

Taking a physical count of inventory

a. is a detective control
b. is not necessary when a perpetual
inventory system is used
c. has no internal control relevance
d. is not necessary when a periodic inventory
system is used

Answer 2

a. is a detective control

Question 3

Inventory control should begin as soon as the inventory is received. Which internal control steps are not done to meet this goal?

a. check the invoice for the purchase order
b. check the invoice extensions and totals
c. check the invoice to the receiving report
d. check the invoice with the person who
specifically purchased the item

Answer 3

d. check the invoice with the person who
specifically purchased the item

Question 4

Which of the following is not an example of safeguarding inventory?

a. Physical devices such as two-way mirrors,
cameras, and alarms.

b. Matching receiving documents, purchase
orders, and vendor invoices.

c. Returning inventory that is defective or
broken.

d. Storing inventory in restricted areas.

Answer 4

c. Returning inventory that is defective or
broken.

Question 5

Which of the following is not true about taking physical inventories?

a. Physical inventories are taken when
inventory levels are at their lowest.

b. Physical inventories deter employee thefts
and inventory misuses.

c. Physical inventories are taken when
inventory levels are at their highest.

d. Large variances may require
investigations and implementation of
corrective actions.

Answer 5

c. Physical inventories are taken when
inventory levels are at their highest.

Question 6

Inventory costing methods place primary emphasis on assumptions about

a. the flow of goods or costs depending on
the method
b. flow of goods
c. flow of costs
d. flow of values

Answer 6

c. flow of costs

Question 7

Under a perpetual inventory system, when a shortage is discovered

a. Merchandise Inventory is credited
b. Merchandise Inventory is debited
c. Cost of Merchandise Sold is credited
d. Inventory Shortages are credited

Answer 7

a. Merchandise Inventory is credited

Question 8

In recording the cost of merchandise sold for cash, based on data available from perpetual inventory
records, the journal entry is

a. debit Cost of Merchandise Sold; credit
Merchandise Inventory

b. debit Cost of Merchandise Sold; credit
Sales

c. debit Accounts Receivable; credit Sales

d. debit Merchandise Inventory; credit Cost
of Merchandise Sold

Answer 8

a. debit Cost of Merchandise Sold; credit
Merchandise Inventory

Question 9

The inventory system employing accounting records that continuously disclose the amount of
inventory is called

a. physical
b. periodic
c. perpetual
d. retail

Answer 9

c. perpetual

Question 10

Under a periodic inventory system

a. a physical inventory is taken at the end of the period
b. accounting records continuously disclose the amount of inventory
c. a separate account for each type of merchandise is maintained in a subsidiary ledger
d. merchandise inventory is debited when goods are returned to vendors

Answer 10

a. a physical inventory is taken at the end of the period

Question 11

If a manufacturer ships merchandise to a retailer on consignment, the unsold merchandise should be
included in the inventory of the

a. manufacturer
b. shipper
c. consignee
d. retailer

Answer 11

a. manufacturer

Question 12

Merchandise inventory at the end of the year was inadvertently overstated. Which of the following statements correctly states the effect of the error on net income, assets, and stockholders’ equity?

a. net income is understated; assets are understated, and stockholders’ equity is understated

b. net income is understated; assets are understated, stockholders’ equity is overstated

c. net income is overstated, assets are overstated, stockholders’ equity is understated

d. net income is overstated, assets are overstated, stockholders’ equity is overstated

Answer 12

d. net income is overstated, assets are overstated, stockholders’ equity is overstated

Question 13

Merchandise inventory at the end of the year was understated. Which of the following statements
correctly states the effect of the error?

a. cost of merchandise sold is understated
b. merchandise inventory reported on the balance sheet is overstated
c. net income is overstated
d. net income is understated

Answer 13

d. net income is understated

Question 14

Merchandise inventory at the end of the year is overstated. Which of the following statements correctly states the effect of the error?

a. stockholders’ equity is overstated
b. net income is understated
c. cost of merchandise sold is overstated
d. gross profit is understated

Answer 14

a. stockholders’ equity is overstated

Question 15

Becky’s Boutiques has identified the following items for possible inclusion in its December 31, 2017 inventory. Which of the following would not be included in the year-end inventory?

a. Becky has sent merchandise to various retailers on a consignment basis

b. Merchandise purchased FOB shipping point was picked up by the freight company but had still not arrived at
Becky’s Boutique as of December 31, 2017.

c. Becky has merchandise on hand that customers have returned because of the wrong size.

d. Becky’s has in its warehouse merchandise
on consignment from ABC Co.

Answer 15

d. Becky’s has in its warehouse merchandise
on consignment from ABC Co

Question 16

During the taking of its physical inventory on December 31, 2017, Albert’s Bike Shop incorrectly counted its inventory as P210,000 instead of the correct amount of P180,000. The effect on the balance sheet and income statement would be as follows:

a. assets and retained earnings overstated by P30,000; net income overstated by P30,000.

b. Assets are overstated by P30,000; retained earnings are understated by P30,000; no effect on the income statement.

c. Assets are overstated by P30,000; retained earnings are understated by P30,000; net income statement is understated by P30,000.

d. assets and retained earnings overstated by P30,000; net income understated by P30,000.

Answer 16

a. assets and retained earnings overstated by P30,000; net income overstated by P30,000

Question 17

If the company counts their inventory figures more than the actual amount while taking a physical inventory. How will the error affect their bottom line?

a. Net income will be overstated
b. No change to net income.
c. Net income will be understated.
d. Only gross profit will be affected.

Answer 17

a. Net income will be overstated

Question 18

If the company counts their inventory figures less than the actual amount while taking a physical inventory. How will the error affect the cost of merchandise sold?

a. No change.
b. Overstated
c. Understated
d. Only inventory is affected.

Answer 18

b. Overstated

Question 19

Too much inventory on hand

a. increases the losses due to price declines
b. reduces solvency
c. increases the cost to safeguard the assets
d. all of the above

Answer 19

d. all of the above

Question 20

Inventory turnover

a. increases the risk of loss from damaged merchandise

b. measures the relationship between the volume of goods sold and the amount of inventory carried

c. is computed by dividing the beginning inventory plus the ending inventory by two

d. is computed by dividing average inventory by the cost of merchandise sold

Answer 20

b. measures the relationship between the volume of goods sold and the amount of inventory carried

Question 21

The number of days’ sales in inventory

a. measures the length of time it takes to sell the merchandise on credit and collect the account receivable

b. is computed by dividing the cost of merchandise sold by 365

c. measures the length of time it takes to acquire, sell, and replace the inventory

d. is about the same for all industries

Answer 21

c. measures the length of time it takes to acquire, sell, and replace the inventory

Question 22

A company will most likely use an estimated method of estimating inventory when

a. the company has not kept up with its inventory records.

b. the company decides not to do a physical inventory.

c. a natural disaster has destroyed most of their inventory.

d. trying to determine the amount of theft that has taken place.

Answer 22

c. a natural disaster has destroyed most of their inventory.