Financial Accounting Ch. 6

When the terms of sale are FOB shipping point, ownership of the goods remains with the seller until the goods reach the buyer.
A. True
B. False

FALSE

Inventory items on an assembly line in various stages of production are classified as
A. finished goods.
B. work in process.
C. raw materials.
D. merchandise inventory.

B

As a result of a thorough physical inventory, Railway Company determined that it had inventory worth $180,000 at December 31. This count did not take into consideration the following facts: Rogers Consignment store currently has goods worth $35,000 on its sales floor that belong to Railway but are being sold on consignment by Rogers. The selling price of these goods is $50,000. Railway purchased $13,000 of goods that were shipped on December 27, FOB destination, that will be received by Railway on January 3. Determine the correct amount of inventory that Railway should report.
A. $230,000.
B. $215,000.
C. $228,000.
D. $193,000.

B

Companies using a periodic inventory system take a physical inventory for each of the following purposes except to determine the
A. cost of goods sold for the period.
B. inventory on hand at the balance sheet date.
C. amount of inventory lost due to shoplifting or employee theft
D. all of these are correct.

C

When the terms of sale are FOB destination, ownership of the goods remains with the seller until the goods
A. are accepted by the public carrier.
B. are shipped.
C. reach the buyer.
D. are paid for by the buyer.

C

The FIFO method assumes that the earliest goods purchased are the first to be sold.
A. True
B. False

TRUE

Inventory costing methods place primary reliance on assumptions about the flow of
A. goods.
B. costs.
C. resale prices.
D. values.

B

Cost of goods available for sale consists of two elements: beginning inventory and
A. ending inventory.
B. cost of goods purchased.
C. cost of goods sold.
D. all of these.

B

Tinker Bell Company has the following:

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

If Tinker Bell has 9,000 units on hand at December 31, the cost of the ending inventory under LIFO is:
A. $113,000.
B. $108,000.
C. $99,000.
D. $100,000.

D

The cost flow method that often parallels the actual physical flow of merchandise is the
A. FIFO method.
B. LIFO method.
C. average-cost method.
D. gross profit method.

A

Hudson Company started its year with 600 units of beginning inventory at a cost of $4.00. During the year, the company made the following purchases: May, 900 units at $5.00 and July, 500 units at $6.00. 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?
A. $2,900.
B. $4,000.
C. $3,465.
D. $5,900.

B

Some argue that the use of FIFO in a period of inflation enables a company to avoid reporting paper (phantom) profit as economic gain.
A. True
B. False

FALSE

In a period of rising prices, FIFO will have
A. lower net income than LIFO.
B. lower cost of goods sold than LIFO.
C. lower income tax expense than LIFO.
D. lower net purchases than LIFO.

B

Factors that affect the selection of an inventory costing method do not include
A. tax effects.
B. balance sheet effects.
C. income statement effects.
D. perpetual vs. periodic inventory system.

D

In a period of inflation, the cost flow method that results in the lowest income taxes is the
A. FIFO method.
B. LIFO method.
C. average-cost method.
D. gross profit method.

B

The lower of cost or market basis of valuing inventories is an example of
A. comparability.
B. the cost principle.
C. conservatism.
D. consistency.

C

Rickety Company purchased 1,000 widgets and has 200 widgets in its ending inventory at a cost of $91 each and a current replacement cost of $80 each. The ending inventory under lower of cost or market is
A. $91,000.
B. $80,000.
C. $18,200.
D. $16,000.

D

Under the LCM approach market value is defined as
A. FIFO cost.
B. LIFO cost.
C. current replacement cost.
D. selling price.

C

An error in the ending inventory of the current period will have no effect on net income of the next accounting period.
A. True
B. False

FALSE

Euler Company made an inventory count on December 31, 2012. During the count, one of the clerks made the error of counting an inventory item twice. For the balance sheet at December 31, the effects of this error are

Assets/Liabilities/Owner’s Equity
a) Overstated/understated/overstated
b)
Understated/no effect/understated
c)
Overstated/no effect/Overstated
d)
Overstated/overstated/Understated

A. Row A
B. Row B
C. Row C
D. Row D

C

Harold Company overstated its inventory by $15,000 at December 31, 2012. It did not correct the error in 2012 or 2013. As a result, Harold’s stockholders’ equity was
A. overstated at December 31, 2012, and understated at December 31, 2013.
B. overstated at December 31, 2012, and properly stated at December 31, 2013.
C. understated at December 31, 2012, and understated at December 31, 2013.
D. overstated at December 31, 2012, and overstated at December 31, 2013.

B

Understating ending inventory will overstate
A. assets.
B. cost of goods sold.
C. net income.
D. Stockholders’ equity.

B

Days in inventory measures the average number of days inventory is held.
A. True
B. False

TRUE

The following information is available for Tye Company at December 31: Beginning inventory $80,000; Ending inventory $120,000; Cost of goods sold $1,200,000; and Sales Revenue $1,600,000. Tye’s inventory turnover is
A. 16 times.
B. 15 times.
C. 12 times.
D. 10 times.

C

Carlos Company had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales of $475,000. Carlos’s days in inventory is
A. 73 days.
B. 121.7 days.
C. 102.5 days.
D. 84.5 days.

B

The results under FIFO in a perpetual system are the same as in a periodic system.
A. True
B. False

TRUE

The Nansen Company uses the perpetual inventory system and the moving -average cost method to value inventories. In August, there were 10,000 units valued at $30,000 in the beginning inventory. On August 10, 20,000 units were purchased for $6 per unit. On August 15, 24,000 units were sold for $12 per unit. The amount charged to cost of goods sold on August 15 was
A. $80,000.
B. $120,000.
C. $144,000.
D. $108,000.

B

The gross profit method can be used for all of the following reasons except
A. preparation of annual financial statements.
B. estimating inventory losses due to some casualty.
C. testing the reasonableness of the physical inventory count.
D. preparation of interim financial statements.

A

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
A. $15,000.
B. $30,000.
C. $45,000.
D. $75,000.

B

Manufacturing companies usually classify inventory into three categories.
A. True
B. False

TRUE

Cecil gives goods on consignment to Jerry who agrees to try to sell them for a 20% commission. At the end of the accounting period, which of the following parties includes the consigned goods in its inventory?
A. Cecil.
B. Jerry.
C. Both Cecil and Jerry.
D. neither Cecil nor Jerry.

A

Which of the following should not be included in the physical inventory of a company?
A. Goods held on consignment from another company.
B. Goods shipped on consignment to another company.
C. Goods in transit from another company shipped FOB shipping point.
D. None of these.

A

All of the following would be classified as inventory except
A. inventory.
B. raw materials.
C. supplies.
D. work in process.

C

Goods in transit should be included in the inventory of the buyer when the
A.
public carrier accepts the goods from the seller.
B.
goods reach the buyer.
C.
terms of sale are FOB destination.
D.
terms of sale are FOB shipping point.

D

There is an accounting requirement that the cost flow assumption be consistent with the physical movement of the goods.
A. True
B. False

FALSE

Under LIFO, companies obtain the cost of the ending inventory by taking the cost of the most recently purchased goods and working backward until all the units have been costed.
A. True
B. False

FALSE

Which of the following statements is correct with respect to inventories?
A. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold.
B. Under the FIFO method, cost of goods sold is based on the latest units purchased.
C. Under FIFO, the ending inventory is based on the latest units purchased.
D. FIFO seldom coincides with the actual physical flow of inventory.

C

Tinker Bell Company has the following:

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

If Tinker Bell has 9,000 units on hand at December 31, the cost of the ending inventory under FIFO is:
A. $99,000.
B. $108,000.
C. $113,000.
D. $117,000.

C

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, the cost of ending inventory under the average-cost method is:
A. $84,000.
B. $70,000.
C. $56,000.
D. $75,250.

D

The first costs assigned to ending inventory are the costs of the beginning inventory under the
A. FIFO method.
B. LIFO method.
C. average-cost method.
D. gross profit method.

B

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?
A. $500.
B. $4,000.
C. $2,000.
D. $3,000.

B

In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the
A. FIFO method.
B. LIFO method.
C. average cost method.
D. tax method.

A

In periods of rising prices, LIFO will produce
A. higher net income than FIFO.
B. the same net income as FIFO.
C. lower net income than FIFO.
D. higher net income than average costing.

C

In a period of inflation, which cost flow method produces the highest net income?
A. FIFO method.
B. LIFO method.
C. average-cost method.
D. gross profit method.

A

Under the lower-of-cost-or-market basis, market is defined as current replacement cost.
A. True
B. False

TRUE

Under the LCM approach, the market value is defined as
A. FIFO cost.
B. LIFO cost.
C. current replacement cost.
D. selling price.

C

When the current replacement cost of inventory is less than its cost, it is written down to
A. FIFO value.
B. LIFO value.
C. market value.
D. average-cost value.

C

Trendy Toy Company purchased 1,000 toys at a cost of $50 each. Trendy Toys has200 toys in inventory at year-end with a replacement cost of $45 each. The ending inventory at lower of cost or market is
A. $1,000.
B. $10,000.
C. $5,000.
D. $9,000.

D

Understating beginning inventory will understate
A. assets.
B. cost of goods sold.
C. net income.
D. owner’s equity.

B

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
A. understated, overstated.
B. overstated, understated.
C. overstated, overstated.
D. understated, understated.

B

Overstating beginning inventory will overstate
A. assets.
B. cost of goods sold.
C. net income.
D. stockholders’ equity.

B

After completing a physical inventory count, Winston Company determined that it had inventory valued at $200,000. However, this count did not take into consideration the following facts: Kit’s Consignment currently has merchandise valued at $30,000 on its floor that belongs to Winston Company, but is being sold on consignment by Kit. Kit’s Consignment is selling the merchandise for $35,000. Also, Winston Company purchased $15,000 of merchandise that were shipped on December 27, FOB destination with an expected delivery date of January 2. The correct amount of inventory that Winston should report on its financial statements at year-end is
A. $250,000.
B. $245,000.
C. $230,000.
D. $200,000.

C

Inventory turnover is calculated by dividing cost of goods sold by
A. beginning inventory.
B. ending inventory.
C. average inventory.
D. 365 days.

C

Which of these would cause the inventory turnover ratio to increase the most?
A. increasing the amount of inventory on hand.
B. keeping the amount of inventory on hand constant but increasing sales.
C. keeping the amount of inventory on hand constant but decreasing sales.
D. decreasing the amount of inventory on hand and increasing sales.

D

The inventory turnover ratio is computed by dividing cost of goods sold by
A. beginning inventory.
B. ending inventory.
C. average inventory.
D. 365 days.

C

A new average cost is computed each time a purchase is made in the
A. average cost method.
B. moving-average cost method.
C. weighted-average cost method.
D. all of these methods.

B

In a perpetual inventory system,
A. LIFO cost of goods sold will be the same as in a periodic inventory system.
B. moving-average costs are based entirely on unit cost averages.
C. a new average is computed under the moving-average cost method after each sale.
D. FIFO cost of goods sold will be the same as in a periodic inventory system.

D

Baylor Inc. has a gross profit rate of 45%. During the period, 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.
A. $10,000
B. $40,000
C. $0
D. $180,000

B