Acc201 Chapter 6 Interactive Quiz

Under IFRSs, if inventory that previously had been written down to market subsequently increases in value, the write down should:

Be reversed. Under IFRSs, if inventory that previously had been written down to market subsequently increases in value, the write down is reversed.

When a firm uses the LIFO method on its GAAP financial statements because it wants to use the LIFO method on its annual tax returns, such a procedure is an application of the:

LIFO conformity rule. When a company uses the LIFO method for tax purposes, the Internal Revenue Service also requires that it use the LIFO method for GAAP purposes. This requirement is called the LIFO conformity rule.

Heavenly Interiors had beginning merchandise inventory of $75,000. It made purchases of $160,000 and recorded sales of $220,000 during November. Its estimated gross profit on sales was 30%. On November 30, the store was destroyed by fire. What was the value of the merchandise inventory loss?

$81,000. Beginning inventory of $75,000 + purchases of $160,000 = cost of goods available for sale of $235,000. Sales of $220,000 - gross profit on sales $66,000 (or sales of $220,000 x gross profit percentage of 30%) = cost of goods sold of $154,000. Cost of goods available for sale of $235,000 ? cost of goods sold of $154,000 = ending inventory of $81,000.

Beginning inventory is $50,000 and ending inventory is $70,000. Net sales totals $600,000 and cost of goods sold is $360,000. What is the inventory turnover ratio?

6.0. Cost of goods sold of $360,000 divided by the average inventory of $60,000 equals an inventory turnover of 6.0

When the weighted average method of perpetual inventory tracking is used, at what point is the new average cost calculated?

After each new purchase of the same inventory item. The new weighted average inventory cost per unit is calculated after each new purchase of an inventory item.

A company's ending inventory amount is overstated by $10,000. What will be the effect of this overstatement on Cost of Goods Sold and Net Income?

Cost of Goods Sold is understated by $10,000 and Net Income is overstated by $10,000. Ending inventory is subtracted in the calculation of cost of goods sold (an expense account). If ending inventory is overstated, the cost of goods sold is too low or understated, and when an expense is understated, net income is overstated.

A merchandising business discovers that its ending inventory is overstated by $5,000. If the company does not correct this error, what will the effect be on the company's Cost of Goods Sold and Net Income?

Cost of goods sold is understated and net income is overstated. Ending inventory is deducted in the calculation of cost of goods sold. If the ending inventory is overstated by $5,000, cost of goods sold will be understated by $5,000. Cost of goods sold is deducted in the calculation of net income. If cost of goods sold is understated by $5,000, net income will be overstated by $5,000.

When the cost of buying an item of inventory from a supplier is steadily increasing or steadily decreasing, it is possible to make some generalizations as to what the effects on cost of goods sold will be, given the use of any particular cost flow assumption. In periods of rising prices, which of the following statements is true?

LIFO will assign higher inventory costs to cost of goods sold than will FIFO, and LIFO will assign lower inventory costs to the ending inventory than will FIFO. If inventory purchase prices are increasing, costs of goods sold will be higher using LIFO because the most recent prices (the higher prices) are the ones being assigned to cost of goods sold. Thus, the older and lower inventory costs are the ones being assigned to the ending inventory.

In theory, when a periodic system is in use, which inventory cost flow assumption could assign inventory cost to cost of goods sold even though the inventory has not yet been purchased by the merchandiser?

LIFO. The LIFO method assumes that the costs of the last items added to the company's inventory are the costs that are first assigned to Cost of Goods Sold. Thus, for a calendar year accounting period, the cost of items purchased in December might be the very costs used to calculate the Cost of Goods Sold for items actually sold during the previous January.

When inventory prices are decreasing, which of the following will result in the highest amount of income tax expense?

LIFO. The highest amount of income tax expense will result when net income is the highest. The method that results in the highest net income when inventory prices are falling is LIFO. Thus, LIFO will also result in the highest income tax expense.

Under the periodic inventory system, which accounts are adjusted at the end of the period?

Merchandise Inventory, Income Summary. The adjusting entry involves the Merchandise Inventory and Income Summary accounts.

A company understates its ending inventory by $5,000. It never discovers this error. The company is a sole proprietorship. Which statement accurately describes the company's permanent situation?

Net income for the current year is understated. Net income for the next year will be overstated by $5,000, but the balance in the owner's equity account will be correct at the end of year 2. Most errors, if not discovered, will have a permanent effect on the owner's equity. However, errors in the inventory account are self-correcting over two successive accounting periods since the dollar amount of inventory at the end of one accounting period carries over to the next accounting period as the value of the beginning inventory. Thus, an understatement of the ending inventory by $5,000 will overstate cost of goods sold for the current year. Because last year's ending inventory becomes next year's beginning inventory, the cost of goods sold will be understated in the second year. The error will correct itself by the end of the second year and the balance in the owner's equity account will be correct from that point forward.

Even though the amount of cost of goods sold and the amount of ending inventory can vary dramatically depending on which inventory cost flow assumption is used, which one of the following amounts will always be the same, regardless of which inventory cost flow assumption is used?

The amount of cost of goods available for sale. The cost of inventory available for sale during a given time period is the same amount, regardless of which inventory cost flow assumption is used. However, the portion of this total that is allocated to cost of goods sold and to the ending inventory will differ depending on the cost flow assumption that is used.

Which of the following objectives are legitimate reasons for taking a physical inventory count?

To check the accuracy of the perpetual inventory records. AND To determine cost of goods sold. To check the accuracy of the perpetual inventory records (answer A) and to determine the cost of goods sold (answer B) are both legitimate reasons to take a physical inventory.

A merchandising business discovers that its ending inventory is understated by $6,000. If the company does not correct this error, what will the effect be on the company's Total Expenses and Net Income?

Total expenses are overstated and net income is understated. Remember that cost of goods sold is an expense. Ending Inventory is deducted in the calculation of cost of goods sold. If the ending inventory is understated by $6,000, cost of goods sold (and total expenses) will be overstated by $6,000. Cost of goods sold is deducted in the calculation of net income. If cost of goods sold is overstated by $6,000, net income will be understated by $6,000.