Unit 7 Inventory

Question 1

What happens when ending inventory is understated?

Answer 1

Balance Sheet
Inventory - understated
Retain Earnings - understated
Working Capital - understated
Current Ratio - understated

Income Statement
Cost of Goods Sold - Overstated
Net Income - understated

Question 2

What is the effect on financial Statements if a company does not record a purchase on certain goods and does not count them in ending inventory?

Answer 2

Balance Sheet
Inventory - Understated
Retained Earnings - No Effect
Account Payable - Understated
Current Ratio - Overstated

Income Statement
Purchases - Understated
Cost of Goods Sold - No Effect
Net Income - No Effect
Ending Inventory - Understated

Question 3

What happens when ending inventory is overstated?

Answer 3

Balance Sheet
Inventory - Overstated
Retain Earnings - Overstated
Working Capital - Overstated
Current Ratio - Overstated

Income Statement
Cost of Goods Sold - Understated
Net Income - Overstated

Question 4

What is the result of the failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results?

Answer 4

Accounts Payable - Understated
Net Income - Overstated
Inventory Asset - No Effect
Cost of Goods Sold - No Effect
Owners Equity - Overstated

Question 5

What is the result of the failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results?

Answer 5

Accounts Payable - Understated
Net Income - Overstated
Inventory Asset - No Effect
Cost of Goods Sold - No Effect
Owners Equity - Overstated

Question 6

If the beginning inventory for 2020 is Overstated, what are the effects of this error on cost of goods sold for 2020, net income 2020, and assets at December 31 2020, respectively?

Answer 6

Cost of Goods Sold - Overstated
Net Income 2020 - Understated
Assets at December 31, 2020 - No Effects

Question 7

Average-cost Method

Answer 7

An inventory costing method that assumes that the goods available for sale are homogeneous.

Question 8

Average Days to Sell Inventory

Answer 8

The average number of days’ sales for which a company has inventory on hand.

Question 9

Consigned Goods

Answer 9

Goods shipped by a consignor who retains ownership to another party called the consignee.

Question 10

Cost of Goods Sold

Answer 10

The difference between the cost of goods available for sale during the period and the cost of goods on hand at the end of the period.

Question 11

Designated Market Value

Answer 11

The amount that a company compares to cost.

Question 12

F.o.b Destination

Answer 12

The terms for shipping goods which state that title does not pass until the buyer receives the goods from the common carrier.

Question 13

F.o.b Shipping Point

Answer 13

The terms for shipping goods which state that title passes to the buyer when the seller delivers the goods to the common carrier who acts as an agent for the buyer

Question 14

Finished Goods Inventory

Answer 14

The costs identified with the completed but unsold units on hand at the end of the fiscal period.

Question 15

First-in, First-out (FIFO) Method

Answer 15

An inventory costing method that assumes that the costs of the earliest goods acquired are the first to be recognized as cost of goods sold.

Question 16

Inventories

Answer 16

Asset items that a company holds for sale in the ordinary course of business, or goods that it will use or consume in the production of goods to be sold.

Question 17

Inventory Turnover

Answer 17

The number of times on average a company sells the inventory during the period.

Question 18

Last-in, First-out (LIFO) Method

Answer 18

An inventory costing method that assumes that the costs of the latest units purchased are the first to be allocated to cost of goods sold.

Question 19

Loss Method

Answer 19

An accounting method that debits a loss account for the write-down of the inventory to NRV.

Question 20

Lower Limit (Floor)

Answer 20

In applying the lower-of-cost-of-market method, the market cannot be valued less than net realizable value less a normal profit margin.

Question 21

Lower-of-cost-or-market (LCM)

Answer 21

A basis whereby inventory is stated at the lower of cost or market (current replacement cost).

Question 22

Lower-of-cost-or-net Realizable Value (LCNRV)

Answer 22

NRV is the net amount that a company expects to realize from the sale of inventory. Specifically, it is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

Question 23

Modified Perpetual Inventory System

Answer 23

A memorandum device outside the double-entry system provides detailed inventory records of increases and decreases in quantities only—not dollar amounts.

Question 24

Moving-average Method

Answer 24

An inventory costing method that uses the average cost method for perpetual inventory records.

Question 25

Period Costs

Answer 25

Costs that are not considered to be directly related to the acquisition or production of goods including selling expenses and general administrative expenses.

Question 26

Periodic Inventory System

Answer 26

An inventory system in which the quantity of inventory on hand is determined periodically.

Question 27

Perpetual Inventory System

Answer 27

An inventory system in which the quantity and cost of each inventory item is maintained and the records continuously show the inventory that should be on hand at any time.

Question 28

Product Costs

Answer 28

Costs that are directly connected with the bringing of goods to the place of business of the buyer and converting such goods to a salable condition.

Question 29

Purchase Discounts

Answer 29

A reduction in the purchase price when the payment of goods is made within a stated period of time.

Question 30

Raw Materials Inventory

Answer 30

The cost of goods and materials on hand but not yet placed into production.

Question 31

Specific Identification

Answer 31

An actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory.

Question 32

Upper Limit (Ceiling)

Answer 32

In applying the lower-of-cost-or-market method, the market cannot be valued more than net realizable value.

Question 33

Work in Process Inventory

Answer 33

The cost of the raw material on which production has been started but not completed, plus the direct labor cost applied specifically to this material.

Question 34

What is the relationship of COGS and Net Income if ending inventory if is understated?

Answer 34

If ending inventory is understated, then COGS is overstated, and net income is understated. COGS and ending inventory have a negative relationship.

Question 35

What is the relationship between COGS and Net Income if the beginning inventory is Overstated?

Answer 35

If Beginning inventory is overstated, then the cost of goods is overstated, and then Net Income is understated. COGS and beginning inventory have a positive relationship.

Question 36

What is the relationship of COGS and Net Income if ending inventory if is Overstated?