MGMT 210 CH 5
Determine cost of goods sold for X-mart, assuming that beginning inventory was $5,000. Net purchases were $20,000 and ending inventory was $9,000. Multiple choice question. $6,000 $16,000 $24,000 $20,000
$16,000 . Reason: (5,000 + $20,000) - $9,000 = $16,000
Recall the formula for figuring Days' Sales in Inventory. Multiple choice question. (Ending inventory/Cost of goods sold) x 365 (Ending inventory/Average inventory) x 365 (Ending inventory/Gross profit) x 365
(Ending inventory/Cost of goods sold) x 365
XYZ Company made a mistake in counting its ending inventory. Determine which of the items below will be affected by this error. (Check all that apply.) Multiple select question. Current assets Net income Cost of goods sold Revenues Long-term assets
Current assets Net income Cost of goods sold
When purchase costs are (rising/declining) LIFO will report the lowest cost of goods sold yielding the highest gross profit and net income.
declining
The _____ principle states that inventory costs are expensed as cost of goods sold when inventory is sold. Multiple choice question. expense recognition revenue recognition inventory recognition cost
expense recognition
The LIFO cost flow assumption assumes that the cost of items purchased ______ are the costs that will be transferred first to cost of goods sold on the ______ ______. Multiple choice question. latest/income statement earliest/balance sheet
latest/income statement
Damaged goods which can be sold are reported in inventory at Multiple choice question. normal selling price net realizable value realizable value cost
net realizable value
The FIFO cost flow assumption assumes that the cost of items purchased (earliest/latest) are the costs that will be transferred first to cost of goods sold on the (balance sheet/income statement).
Blank 1: earliest Blank 2: income statement
Assume that three identical units are purchased separately on the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the LIFO perpetual cost flow assumption. Multiple choice question. The June 2 at $15 and the July 4 at $20 are both sold; the June 1 at $10 remains in ending inventory. The June 1 at $10 is sold; the June 2 at $15 and the July 4 at $20 remains in ending inventory. The June 1 at $10 and the June 2 at $15 are both sold; the July 4 unit remains in ending inventory.
The June 2 at $15 and the July 4 at $20 are both sold; the June 1 at $10 remains in ending inventory.
Determine which of the following statements is correct regarding the relationship of ending inventory and beginning inventory. Multiple choice question. The beginning inventory of the previous period is the ending inventory of the current period. The ending inventory of the previous period is the beginning inventory of the current period. The ending inventory of the previous period is the ending inventory of the current period. The beginning inventory of the current period is the beginning inventory of the previous period.
The ending inventory of the previous period is the beginning inventory of the current period.
Which of the following statements correctly explains what the inventory turnover ratio assesses. Multiple choice question. The inventory turnover ratio assesses what percentage of a company's assets are tied up in its inventory. The inventory turnover ratio assesses how quickly a company is selling its merchandise. The inventory turnover ratio assesses the company's ability to generate a profit from the sales of its inventory.
The inventory turnover ratio assesses how quickly a company is selling its merchandise.
Which of the following statements is correct regarding goods in transit? Multiple choice question. Goods shipped FOB shipping point will be included in the buyer's inventory. Goods shipped FOB destination will be included in the buyer's inventory. Goods shipped FOB purchaser will be included in the buyer's inventory. Goods shipped FOB shipping point will be included in the seller's inventory.
Goods shipped FOB shipping point will be included in the buyer's inventory.
Sometimes companies must estimate ending inventory. Review the reasons given below for estimating inventory and choose all of the correct responses. (Check all that apply.) Multiple select question. Interim financial statements need to be prepared. Taking a physical count is too tedious. The store was flooded. Fire destroyed the inventory warehouse.
Interim financial statements need to be prepared. The store was flooded. Fire destroyed the inventory warehouse.
Explain what lower of cost or market means in regards to reporting merchandise inventory on the balance sheet. Multiple choice question. Inventory should be reported at the current market value of replacing it when lower than cost. Inventory should be reported at the original cost paid for it and not what it can be sold for in the market place. Inventory should be reported at its original cost if the replacement market value (cost) is less.
Inventory should be reported at the current market value of replacing it when lower than cost.
Determine which of the following statements are correct regarding the difference between physical flow and the cost flow of inventory. (Check all that apply.) Multiple select question. A business may adopt any cost flow assumption when accounting for perishable items. Perishable items must have an actual physical flow of LIFO. Physical flow is focused on the actual movement of goods. Perishable items must have an actual physical flow of FIFO. Cost flow is an assumption about which goods/items are sold.
A business may adopt any cost flow assumption when accounting for perishable items. Physical flow is focused on the actual movement of goods. Perishable items must have an actual physical flow of FIFO. Cost flow is an assumption about which goods/items are sold.
The owner of consigned goods is called the __________and the one who sells goods for the owner is called the ___________.
Blank 1: consignor Blank 2: consignee
In year 1, Shell Company understated their ending inventory. What is the effect of this error in year 2?
Cost of goods sold is understated. Beginning inventory is understated.
Why would the physical count of inventory be different than what is shown in perpetual inventory records? (Check all that apply.) Multiple select question. Events such as theft Events such as errors Events such as loss Events such as sales discounts Events such as damage
Events such as theft Events such as errors Events such as loss Events such as damage
Which of the costs below would be included in the recorded cost of merchandise inventory? (Check all that apply.) Multiple select question. Selling costs Wages costs Invoice cost Insurance costs Storage costs
Invoice cost Insurance costs Storage costs
One identical unit is purchased on each of the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the FIFO cost flow assumption.
The June 1 at $10 and the June 2 at $15 are both sold; the July 4 unit remains in ending inventory.
Q-mart failed to include inventory that was kept in a separate warehouse in its 12/31 end-of-the-period inventory count. Consequently, the ending inventory on 12/31 was understated on the balance sheet. Explain how this error will effect the income statement. (Check all that apply.)
The current year's net income will be too low. The current year's cost of goods sold will be too high.
Recount the methods used to assign costs to inventory and cost of goods sold under both a perpetual and a periodic system. (Check all that apply.) Multiple select question. Last-in, last-out Weighted average Specific identification First-in, last-out Last-in, first-out First-in, first-out
Weighted average Specific identification Last-in, first-out First-in, first-out
The adjusting entry to decrease merchandise inventory due to LCM computations, includes Multiple choice question. credit to Merchandise Inventory debit to Merchandise Inventory credit to Cost of Goods Sold
credit to Merchandise Inventory
Review the steps below that apply LCM to individual items of inventory. Place them in the correct order of occurrence.
list the number of units of each product list the cost of each item list the market price of each item compute total cost and total market value for each item compare recorded cost of each inventory item with its replacement cost. list lower of cost or market adjust inventory downward when market is less than cost
Estimates of inventory are not usually required when a company uses a (FIFO/LIFO/periodic/perpetual) inventory system because they would presumably have updated inventory data
perpetual
All of the following are safeguards for inventory except: Multiple choice question. preventing risk authorized requisitions security measures restricted access
preventing risk
An advantage of the weighted average method under a periodic inventory system is that it: Multiple choice question. smooths out erratic changes in costs approximates current costs on the income statement matches the costs with the revenues they generate approximates current costs on the balance sheet
smooths out erratic changes in costs
Storm Windows Company understated their ending inventory during their first year of operations by $2,000. What is the effect of this error at the end of the year? Select all answers which apply.
$2,000 understatement of net income. $2,000 overstatement of cost of goods sold.
The kind of business that would use the specific identification method of inventory costing includes: Multiple choice question. A car dealership A grocery store A department store
A car dealership
Show your understanding of the ownership of goods in transit by completing the following statement. If goods are shipped FOB shipping point, then the (purchaser/seller) is responsible for paying freight charges and the (purchaser/seller) will not include the merchandise in their inventory.
Blank 1: purchaser Blank 2: seller
When purchase costs are (rising/declining) , FIFO will report the lowest cost of goods sold yielding the highest gross profit and net income.
Blank 1: rising
FIFO LIFO Weighted Average Specific Identification
Choice, Assumes costs flow in the order incurred Assumes costs flow in the order incurred Assumes costs flow in the reverse order incurred Choice, Assumes costs flow at an average of the costs available Assumes costs flow at an average of the costs available Assumes costs flow can be specifically matched with the physical flow of items
Which of the statements below explain why LCM is used? (Check all that apply.) Multiple select question. Companies never want to report inventory on a balance sheet that is higher than replacement cost. LCM allows companies to recognize a gain in value of an asset in the period the gain occurs. LCM allows companies to recognize a loss in value of an asset in the period the loss occurs. Assets are not shown at an inflated value on the balance sheet, but rather at lower of cost or replacement cost.
Companies never want to report inventory on a balance sheet that is higher than replacement cost. LCM allows companies to recognize a loss in value of an asset in the period the loss occurs. Assets are not shown at an inflated value on the balance sheet, but rather at lower of cost or replacement cost.
Assuming purchase costs are rising in a periodic inventory system, determine which of the statements below are correct regarding the cost of goods sold under FIFO, LIFO and weighted average cost flow methods. (Check all that apply.) Multiple select question. Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold. Companies using LIFO will report the smallest cost of goods sold. Companies using FIFO will report the highest gross profit and net income. Companies using FIFO will report the smallest cost of goods sold.
Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold. Companies using FIFO will report the highest gross profit and net income. Companies using FIFO will report the smallest cost of goods sold.
Assuming purchase costs are declining and a periodic inventory system is used, determine the statements below which correctly describe what is happening to cost of goods sold under FIFO, LIFO and weighted average cost flow methods. (Check all that apply.) Multiple select question. Companies using FIFO will report the smallest cost of goods sold compared to companies using LIFO or weighted average. Companies using LIFO will report the lowest cost of goods sold. Companies using LIFO will report the highest ending inventory on their balance sheets, as compared to companies using FIFO or weighted average. Companies using FIFO will report the highest gross profit and net income. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.
Companies using LIFO will report the lowest cost of goods sold. Companies using LIFO will report the highest ending inventory on their balance sheets, as compared to companies using FIFO or weighted average. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.
Determine which of the following statements is correct regarding consigned goods. Multiple choice question. Consigned goods are owned by the consignee. Consigned goods should be included in the consignor's inventory. Consigned goods are located on the premises of the consignor where customers can see the product. Consigned goods should be included in the consignee's inventory.
Consigned goods should be included in the consignor's inventory.
Identify the safeguards that companies implement to protect their inventory. (Check all that apply.) Multiple select question. Allow all warehouse personnel to order inventory. Control access to inventory records. Allow multiple workers access to inventory areas. Restrict access to inventory. Implement security measures, such as cameras. Match inventory received with purchase orders.
Control access to inventory records. Restrict access to inventory. Implement security measures, such as cameras. Match inventory received with purchase orders.
Which statement(s) below correctly describe(s) the relationship of cost of goods sold and ending inventory? (Check all that apply.) Multiple select question. Cost of goods available for sale must be allocated between cost of goods sold and ending inventory. Cost of goods sold plus goods available for sale will equal total goods in ending inventory. Cost of goods sold will equal total ending inventory. Cost of goods sold plus ending inventory will equal the total goods available for sale.
Cost of goods available for sale must be allocated between cost of goods sold and ending inventory. Cost of goods sold plus ending inventory will equal the total goods available for sale.
In year 1 ending inventory is overstated by $2,000. Explain the effect on cost of goods sold, gross profit and net income in year 1 and year 2 Select all answers that apply. Multiple select question. Cost of goods sold in the current year, year 1, will be understated. Net income in the next year, year 2, will be overstated. Gross profit in the current year, year 1, will be overstated. Net income in the next year, year 2, will not be affected by the error. Gross profit in the next year, year 2, will be understated. Cost of goods sold in the following year, year 2, will be overstated. Cost of goods sold in the current year, year 1, will be overstated.
Cost of goods sold in the current year, year 1, will be understated. Gross profit in the current year, year 1, will be overstated. Gross profit in the next year, year 2, will be understated. Cost of goods sold in the following year, year 2, will be overstated.
In year 1, Shell Company understated their ending inventory. What is the effect of this error in year 2? Multiple select question. Cost of goods sold is understated. Beginning inventory is understated. Cost of goods sold is overstated. Beginning inventory is overstated.
Cost of goods sold is understated. Beginning inventory is understated.
If ending inventory at the end of the year is understated, what is the effect on cost of goods sold and net income? Multiple choice question. Cost of goods sold will be understated and net income will be understated. Cost of goods sold will be overstated and net income will be overstated. Cost of goods sold will be overstated and net income will be understated.
Cost of goods sold will be overstated and net income will be understated.
Cake Mart understated its ending inventory in the current year by $5,000. The company incorrectly reported net income of $100,000. Determine the effect of the error on the financial statements.
Cost of goods sold will be too high by $5,000, and this caused net income to be understated by $5,000. Reason: Cost of goods sold will be too high, so net income will be too low.
Guns R Us overstated its ending inventory in the current year by $5,000. The company incorrectly reported $100,000 of net income. Explain the consequences of this error on the current period's income statement. Multiple choice question. Cost of goods sold will be too low by $5,000. Cost of goods sold will be too high by $5,000. The correct net income amount should have been $105,000.
Cost of goods sold will be too low by $5,000
Determine which of the following statements are correct regarding damaged or obsolete goods. (Check all that apply.) Multiple select question. Damaged goods are included in inventory at their net realizable value. Net realizable value of damaged goods is determined solely by the sales price of the good. A loss in value is reported in the period when goods are damaged or become obsolete. If damaged goods can be sold at a reduced price, they are included in inventory. Damaged goods are not included in inventory if they cannot be sold.
Damaged goods are included in inventory at their net realizable value. A loss in value is reported in the period when goods are damaged or become obsolete. If damaged goods can be sold at a reduced price, they are included in inventory. Damaged goods are not included in inventory if they cannot be sold.
There are advantages to using each of the four inventory costing methods. Identify the statements below that are correct regarding these advantages. (Check all that apply.) Multiple select question. LIFO mimics the actual flow of goods for most businesses. FIFO assigns an amount to inventory on the balance sheet that approximates its current cost. FIFO assigns an amount to cost of goods sold on the income statement that approximates its current replacement cost. Weighted average tends to smooth out erratic changes in costs.
FIFO assigns an amount to inventory on the balance sheet that approximates its current cost. Weighted average tends to smooth out erratic changes in costs.
Which of the following lists the four methods used to assign costs to inventory and to cost of goods sold? Multiple choice question. FIFO, LIFO, weighted average and specific Identification LIFO, LILO, weighted average and specific identification FIFO, FILO, weighted average and Individual FIFO, FILO, weighted average and specific identification
FIFO, LIFO, weighted average and specific Identification
Demonstrate how inventory costs are treated both as assets and expenses by selecting the correct statement(s) below. (Check all that apply.) Multiple select question. Inventory costs are treated as an asset when they are sold. Inventory items sold are considered part of cost of goods sold on the income statement. Inventory items retained at the end of the period are considered part of Merchandise Inventory on the balance sheet. Inventory costs are treated as an expense when they are sold. Inventory costs are initially treated as an expense when they are purchased.
Inventory items sold are considered part of cost of goods sold on the income statement. Inventory items retained at the end of the period are considered part of Merchandise Inventory on the balance sheet. Inventory costs are treated as an expense when they are sold.
Recall the formula for figuring a company's inventory turnover ratio. Multiple choice question. Inventory turnover = Cost of goods sold/Gross profit Inventory turnover = Cost of goods sold/Average inventory Inventory turnover = Merchandise Inventory/Average inventory Inventory turnover = Merchandise Inventory/Cost of goods sold
Inventory turnover = Cost of goods sold/Average inventory
Identify the ways in which lower of cost or market can be applied to merchandise inventory. (Check all that apply.) Multiple select question. It can be applied to individual sales departments. It can be applied to the inventory as a whole. It can be applied to major categories of items. It can be applied to each item individually.
It can be applied to the inventory as a whole. It can be applied to major categories of items. It can be applied to each item individually.
Which statement(s) below is(are) correct regarding the purpose of taking a physical inventory count? (Check all that apply.) Multiple select question. The physical count is used to determine if customers are paying within the discount period. The physical count is used to determine if management needs to reassign sales responsibilities. The physical count of inventory is optional under U.S. GAAP and required under IFRS. The physical count is used to determine if there has been any theft, loss, damage or errors in inventory. The physical count is used to adjust the Inventory account balance to the actual inventory available.
The physical count is used to determine if there has been any theft, loss, damage or errors in inventory. The physical count is used to adjust the Inventory account balance to the actual inventory available.
Review the statements below and select the ones that are correct regarding the days' sales in inventory ratio. (Check all that apply.) Multiple select question. The ratio is often viewed as a measure of the buffer against out-of-stock inventory. The ratio reveals how much inventory is available in terms of the number of days' sales. The ratio estimates how many days it will take to convert inventory into accounts receivable or cash. The ratio measures what percentage of profit the company is making for every dollar of inventory it sells. The ratio is useful in evaluating liquidity of inventory.
The ratio is often viewed as a measure of the buffer against out-of-stock inventory. The ratio reveals how much inventory is available in terms of the number of days' sales. The ratio estimates how many days it will take to convert inventory into accounts receivable or cash. The ratio is useful in evaluating liquidity of inventory.
Sparky's incorrectly included inventory that was on consignment in its ending inventory count. Consequently, the ending inventory was overstated on the balance sheet. Explain how this error will affect this year's income statement. (Check all that apply.) Multiple select question. This year's net income will be too high. This year's net income will be too low. This year's cost of goods sold will be too low. This year's cost of goods sold will be too high.
This year's net income will be too high. This year's cost of goods sold will be too low.
Q-mart failed to include inventory that was kept in a separate warehouse in its end-of-the-period inventory count. Explain how this error will affect this year's balance sheet. (Check all that apply.)
This year's total assets will be understated. This year's total equity will be understated.
True or false: If Dogs R Us overstates ending inventory on the balance sheet, then total equity on the balance sheet will be overstated as well. True false question. True False
True Reason: Remember that Assets = Liabilities + Equity. If assets are too high, then equity must also be too high in order to keep the equation equal. If ending inventory is too high, then cost of goods sold is too low, hence net income and equity will be too high.
Which of the following summarizes the weighted average cost flow assumption? Multiple choice question. Weighted average assumes that costs flow in the order incurred. Weighted average assumes that cost flow is allocated by the physical weight of items purchased. Weighted average assumes that costs flow in the reverse order incurred. Weighted average assumes that costs flow at an average of the costs available.
Weighted average assumes that costs flow at an average of the costs available.
The journal entry for a sale on account under the periodic inventory system includes: Multiple choice question. a debit to cost of goods sold and a credit to merchandise inventory; and a debit to accounts receivable and a credit to sales a debit to cost of goods sold and a credit to merchandise inventory a debit to sales and a credit to accounts receivable a debit to accounts receivable and a credit to sales
a debit to accounts receivable and a credit to sales
An advantage of the LIFO method is that it best matches Multiple choice question. erratic changes in costs the flow of goods for most businesses the costs of items with the revenues they generate current costs with revenues
current costs with revenues
An inventory error not only affects the current year's cost of goods sold, gross profit, net income, current assets and equity, but also the next period's statements because Multiple choice question. beginning inventory of one period is the ending inventory of the next period. ending inventory of one period is the beginning inventory of the next period. net purchases in one period is also the net purchases in the next period. cost of goods sold of one period is the cost of goods sold in the next period.
ending inventory of one period is the beginning inventory of the next period.
The formula to compute cost of goods sold is Multiple choice question. merchandise available for sale plus beginning inventory merchandise available for sale minus ending inventory merchandise available for sale plus ending inventory merchandise available for sale plus net purchases.
merchandise available for sale minus ending inventory
In step 2 of the gross profit method, the estimated cost of goods sold are Multiple choice question. subtracted from the goods available for sale at cost subtracted from the goods available for sale at selling price added to the goods available for sale at cost multiplied by the goods available for sale at cost
subtracted from the goods available for sale at cost