Chapter 6

COG SOLD

(Beginning Inventory + Purchases) - Ending Inventory=

D

(LO 2) From the data in Question 4, what is the cost of the ending inventory under LIFO? (a) $113,000. (b) $108,000. (c) $99,000. (d) $100,000.

B

A the difference between beginning inventory using LIFO and ending inventory when a company has switched to the use of FIFO B the difference between ending inventory using LIFO and ending inventory if FIFO were used instead C the difference between beginning inventory using FIFO and ending inventory when a company has switched to the use of LIFO D the difference between ending inventory using FIFO and ending inventory if LIFO were used instead

A

A company using a perpetual inventory system that returns goods previously purchased on credit would a. debit Accounts Payable and credit Inventory. b. debit Sales and credit Accounts Payable. c. debit Cash and credit Accounts Payable. d. debit Accounts Payable and credit Purchases.

B

As a result of a thorough physical inventory, Railway Company determined that it had inventory worth $180,000 at December 31, 2014. 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

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.

D

Considerations 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 versus periodic inventory system.

Inventory Turnover

Cost of Goods Sold/ Average Inventory

D

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.

B

Fran Company's ending inventory is understated by $4,000. The effects of this error on the current year's cost of goods sold and net income, respectively, are: (a) understated and overstated. (b) overstated and understated. (c) overstated and overstated. (d) understated and understated.

B

Harold Company overstated its inventory by $15,000 at December 31, 2014. It did not correct the error in 2014 or 2015. As a result, Harold's stockholders' equity was: (a) overstated at December 31, 2014, and understated at December 31, 2015. (b) overstated at December 31, 2014, and properly stated at December 31, 2015. (c) understated at December 31, 2014, and understated at December 31, 2015. (d) overstated at December 31, 2014, and overstated at December 31, 2015.

D

If a company determines cost of goods sold each time a sale occurs, it a. must have a computer accounting system. b. uses a combination of the perpetual and periodic inventory systems. c. uses a periodic inventory system. d. uses a perpetual inventory system.

C

If a company reported the following numbers at year end, then what is their inventory turnover for the same period? beginning inventory $2,000 ending inventory $1,200 cost of goods sold $5,500 sales $8,500. A 3.8 times B 1.7 times C 3.44 times D 21.25 times

A

If a purchaser using a perpetual inventory system pays the transportation costs, then the a. Inventory account is increased. b. Inventory account is not affected. c. Freight-out account is increased. d. Delivery Expense account is increased.

D

In a perpetual inventory system, (a) LIFO cost of goods sold will be the same as in a periodic inventory system. (b) average costs are based entirely on unit-cost simple averages. (c) a new average is computed under the average-cost method after each sale. (d) FIFO cost of goods sold will be the same as in a periodic inventory system.

C

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-cost.

C

In valuing inventory under the lower-of-cost-or-market basis, how is market defined? A : purchase price B : selling price C : current replacement cost D : conservative estimate

Days in Inventory

Inventory Turnover/365 Days

A

The LIFO reserve is: (a) the difference between the value of the inventory under LIFO and the value under FIFO. (b) an amount used to adjust inventory to the lower-of-cost-or-market. (c) the difference between the value of the inventory under LIFO and the value under average-cost. (d) an amount used to adjust inventory to historical cost.

B

The Music Shoppe has five guitars that have not sold for more than two years. Each guitar cost $300 and originally retailed for $500. Each guitar has a current replacement cost of $200. What loss should they report for the year? A : $2,500 B : $500 C : $1,500 D : $1,000

A

The difference between ending inventory using LIFO and ending inventory if FIFO were used instead is the This is correct answer : A LIFO reserve B FIFO adjustment C FIFO reserve D LIFO adjustment

A

The lower-of-cost-or-market rule for inventory is an example of the application of: (a) the conservatism convention. (b) the historical cost principle. (c) the materiality concept. (d) the economic entity assumption.

A

The periodic inventory system is used most commonly by companies that sell a. low-priced, high-volume merchandise. b. high-priced, high-volume merchandise. c. high-priced, low-volume merchandise. d. high-priced, low and high-volume merchandise.

A

Under a perpetual inventory system a. accounting records continuously disclose the amount of inventory. b. increases in inventory resulting from purchases are debited to purchases. c. there is no need for a year-end physical count. d. the account purchase returns and allowances is credited when goods are

C

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? (a) $99,000. (b) $108,000. (c) $113,000. (d) $117,000.

C

When applying the ________ to inventory valuation, the market value is generally determined by current replacement cost. A last-in, first-out method B first-in, first-out method C lower-of-cost-or-market rule D average-cost method

D

When is a physical inventory usually taken? (a) When the company has its greatest amount of inventory. (b) When a limited number of goods are being sold or received. (c) At the end of the company's fiscal year. (d) Both (b) and (c).

C

When is the lower-of-cost-or-market (LCM) rule applied? A : when assets and income are most likely to be overstated B : after the current replacement cost has declined C : after one of the cost flow assumptions has been applied D : when an increase in cost leads to an increase in selling price

A and B

Which of the following companies would be most likely to use the LCM basis to determine the value of their inventory? Select all that apply. A : T-shirt retailers, because fads change often B : cookware manufacturers, because brands remain stable over time C : paper manufacturers, because products change little over time D : high-tech companies, because technology changes rapidly

C

Which of the following is divided into the cost of goods sold to compute the inventory turnover ? A beginning inventory B 365 days C average inventory D ending inventory

C

Which of the following items does not result in an adjustment in the merchandise inventory account under a perpetual system? a. A purchase of merchandise. b. A return of merchandise inventory to the supplier c. Payment of freight costs for goods shipped to a customer d. Payment of freight costs for goods received from a supplier

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) All of the above should be included.

D

Which of these would cause inventory turnover 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

Which situation requires a departure from the cost basis of accounting to the lower-of-cost-or-market basis of inventory valuation? A : a decline in the value of the inventory B : an increase in selling price C : a desire for more profit D : an increase in the value of the inventory

FOB destination

• Ownership of the goods remains with the seller until the goods reach the buyer.