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Chapter 08 - Inventories and the Cost of Goods Sold

Multiple Choice Questions

26. During the course of an audit of a company's financial statements, an auditor will be concerned that the company's inventory: A. Physically exists B. Is valued correctly C. Both of the above D. None of the above 27. Inventory A. Consists of all goods owned and held for sale to customers. B. Is a non-financial asset C. Both A and B D. Neither A nor B 28. The lower of cost or market rule may be applied by comparing the market value of the inventory to the cost of the inventory based on: A. Individual inventory items B. Major inventory categories C. The entire inventory D. All of the above 29. Which of the following is not considered an acceptable inventory cost method according to GAAP? A. First-in, first-out B. First-in, last-out C. Last-in, first-out D. Average cost 30. When prices are increasing which inventory method will produce the highest cost of goods sold? A. FIFO B. LIFO C. Average D. Cost of goods sold will not change 31. Kent Company has used the same inventory method for many years. This is an example of which principle? A. Matching B. Realization C. Cost D. Consistency 32. Gross profit rate is equal to. A. Net sales divided by gross profit. B. Gross sales divided by gross profit. C. Gross profit divided by net sales. D. Gross profit divided by gross sales.

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Chapter 08 - Inventories and the Cost of Goods Sold

33. In which of these three inventory cost flow assumptions is it important to determine the actual cost of a particular inventory item being sold in order to determine cost of goods sold? A. LIFO. B. FIFO. C. Specific identification. D. All three assumptions.

34. In a perpetual inventory system, two entries are normally made to record each sales transaction. The purpose of these entries is best described as follows: A. One entry recognizes the sales revenue and the other recognizes the cost of goods sold. B. One entry records the purchase of merchandise and the other records the sale. C. One entry records the cost of goods sold and the other reduces the balance in the Inventory account. D. One entry updates the subsidiary ledger and the other updates the general ledger. 35. Which of the four inventory cost flow assumptions is best suited to inventories of high-priced, low-volume items? A. LIFO. B. FIFO. C. Average. D. Specific identification. 36. If the ending inventory is overstated in the current year: A. Net income will also be overstated in the current year. B. Next year's beginning inventory will also be overstated. C. Next year's net income will be understated. D. All three of the above statements are correct. 37. In a periodic inventory system, recording a sale on account involves debiting which of the following accounts? A. Only Accounts Receivable. B. Accounts Receivable and Inventory. C. Accounts Receivable and Cost of Goods Sold. D. Accounts Receivable, Cost of Goods Sold, and Inventory. 38. In a periodic inventory system, recording a sale on account involves crediting which of the following accounts? A. Only Sales. B. Sales and Inventory. C. Sales and Cost of Goods Sold. D. Sales, Inventory, and Cost of Goods Sold.

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39. In a perpetual inventory system, an inventory flow assumption is used primarily for determining which costs to use in: A. Recording purchases of inventory. B. Recording the cost of goods sold. C. Recording sales revenue. D. Forecasts of future operating results.

40. Which of the four inventory cost flow assumptions transfers the most recent purchase cost to the cost of goods sold and the remaining items in inventory are valued at the oldest acquisition costs? A. LIFO B. FIFO C. Average D. Specific identification 41. If the beginning inventory of the current year and the ending inventory of the past year were overstated by the same amount: A. Retained earnings at the end of the current year would be correct. B. Retained earnings at the end of the current year would be overstated. C. Retained earnings at the end of the current year would be understated. D. Net income for the current year would be correct. 42. Harris Corporation's inventory of a particular product includes 200 units purchased at a per-unit cost of $50, and another 100 units purchased at a unit cost of $60. If Harris sells 10 units of this product, the cost of goods sold will be: A. $500. B. $550. C. $660. D. The answer will depend upon the inventory flow assumption in use. 43. During periods of inflation, when comparing LIFO with FIFO: A. LIFO inventory and cost of sales would be higher. B. LIFO inventory and cost of sales would be lower. C. LIFO inventory would be lower and cost of sales would be higher. D. LIFO inventory would be higher and cost of sales would be lower.

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44. The specific identification method is more appropriate than a flow assumption method: A. For a large inventory of identical low-priced items. B. If each item in the inventory is unique. C. If purchase costs are rising. D. If purchase costs are falling. 45. When the LIFO costing method is in use, the seller: A. Must sell the most recently acquired units first. B. Must sell the oldest unit in inventory first. C. Assumes that the most recently acquired units are sold first. D. Assumes that the oldest units in inventory are sold first.

46. Which of the following statements is not a characteristic of the LIFO method of pricing inventory? A. During a period of rising prices, LIFO tends to minimize the amounts of income taxes owed. B. The cost of goods sold is measured in relatively current costs. C. Inventory is valued at relatively current costs. D. None of the above; these statements all describe characteristics of the LIFO method. 47. Which of the following will cause net income to be overstated for the following year? A. Current year's ending inventory is understated. B. Current year's ending inventory is overstated. C. Next year's beginning inventory is overstated. D. Next year's ending inventory is understated. 48. Which of the following methods of measuring the cost of goods sold most closely parallels the actual physical flow of the merchandise? A. LIFO. B. FIFO. C. Average cost. D. Specific identification.

49. In a perpetual inventory system, the flow of inventory cost is: A. First through the income statement, then through the balance sheet. B. First through the balance sheet, then through the income statement. C. Only through the balance sheet and not the income statement. D. Only through the income statement and not the balance sheet. 50. Which of the following results in the cost of goods sold being stated at the most current acquisition costs? A. Average cost. B. Specific identification. C. FIFO. D. LIFO.

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51. Which of the following results in the inventory being stated at the most current acquisition costs? A. Specific identification. B. LIFO. C. FIFO. D. Average cost. 52. During periods of inflation which method would yield the largest ending inventory and cost of goods sold? A. LIFO. B. FIFO. C. Average. D. None of the above. 53. The write-down of inventory: A. Only affects the balance sheet and not the income statement. B. Only affects the income statement and not the balance sheet. C. Affects both the income statement and the balance sheet. D. Affects neither the income statement nor the balance sheet. 54. During a period of steadily falling prices, which of the following methods of measuring the cost of goods sold is likely to result in reporting the highest gross profit? A. Specific identification. B. Average cost. C. LIFO. D. FIFO.

55. During a period of steadily falling prices, which of the following methods of measuring the cost of goods sold is likely to result in the lowest taxable income? A. LIFO. B. FIFO. C. Average cost. D. Specific identification. 56. Which of the following inventory valuation methods is only an estimate of actual costs? A. The retail method. B. The gross profit method. C. Both retail and gross profit methods are only estimations. D. Neither the retail nor the gross profit methods are estimations. 57. In a period of rising prices, a company is most likely to use the specific identification method of pricing inventory if: A. Each item in the inventory is unique. B. Management wants the same unit cost assigned to items sold and items remaining in inventory. C. Management's primary objective is to minimize income taxes. D. Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income.

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Chapter 08 - Inventories and the Cost of Goods Sold

58. During periods of inflation which method will yield the smallest ending inventory and the largest cost of goods sold? A. LIFO. B. FIFO. C. Average. D. None of the above. 59. In a period of rising prices, a company is most likely to use the FIFO method of pricing inventory if: A. Each item in the inventory is unique. B. Management wants the same unit cost assigned to items sold and items remaining in inventory. C. Management's primary objective is to minimize income taxes. D. Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income.

60. Which of the following inventory cost flow assumptions is not in accord with the physical flow of merchandise in most businesses? A. LIFO. B. FIFO. C. Specific identification. D. All three must be in accord with the physical flow of merchandise. 61. A store that sells expensive custom-made jewelry is most likely to determine its cost of goods sold using: A. Specific identification. B. Average cost. C. First-in, first-out. D. Last-in, last-out. 62. A company with a liquid inventory will have: A. A high inventory turnover and a high average number of days to sell inventory. B. A high inventory turnover and a low average number of days to sell inventory. C. A low inventory turnover and a high average number of days to sell inventory. D. A low inventory turnover and a low average number of days to sell inventory.

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Chapter 08 - Inventories and the Cost of Goods Sold

63. The choice of inventory valuation method can help achieve each of the following independent goals, except: A. Reduce cost of merchandise acquired from suppliers. B. Increase reported net income. C. Increase the inventory turnover rate. D. Reduce the amount of income taxes owed. 64. With respect to the valuation of inventory and measurement of the cost of goods sold, the principle of consistency means that the same method should be applied: A. In successive accounting periods. B. By all companies in a given industry. C. To all products in the inventory. D. In financial statements and income tax returns. 65. In a manufacturing company, the "just-in-time" concept of inventory management is best illustrated by: A. Receiving deliveries of materials from suppliers just before the materials are used in the production process. B. Completing the manufacturing process just before the deadline established by the customer. C. An automated factory that reduces production time below that of other companies in the industry. D. Selling finished products before they go out of style.

66. The "just-in-time" concept of inventory management is best illustrated by: A. A clothing manufacturer that sells all of its finished goods before they go out of style. B. A defense contractor that completes its projects within the deadlines set by its customer (the federal government). C. A pharmaceutical firm that consistently brings new products to market ahead of its competitors. D. A homebuilder who has its suppliers deliver lumber and other building materials to the building site the night before these materials will be used by the company's construction crews.

67. The primary advantage of a just-in-time inventory system is: A. The amount of money tied up in inventory is minimized. B. Customers are afforded a wider selection of merchandise available for immediate delivery. C. The company is able to use the specific identification method of inventory pricing. D. The risks of losing sales opportunities or of having to shut down manufacturing operations because of inventory shortages are minimized.

68. The principle of consistency states that: A. Companies are prohibited from ever changing their accounting methods. B. Every company in the same industry must use the same accounting principle. C. There must be a consistent blend to the accounting principles. D. If changes in accounting principles are made the reasons for the change and the effects on the company's net income must be disclosed.

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69. From an accounting point of view, one implication of an effective just-in-time inventory system is that: A. Sales transactions must be recorded using on-line point-of-sale terminals. B. Inventories are less material in dollar amount and alternative inventory flow assumptions will produce more similar results. C. The cost of goods sold is significantly reduced. D. Purchases of merchandise are recorded as cash payments are made, and sales transactions are recorded as cash is received. 70. As a result of taking an annual physical inventory, it usually is necessary in a perpetual inventory system to make an entry: A. Reducing assets and increasing the cost of goods sold. B. Reducing assets and increasing liabilities. C. Reducing the cost of goods sold. D. None of the above; a physical inventory usually does not indicate the need for any entries in the accounting records.

71. If all things are equal except one company uses LIFO during inflation and the other uses FIFO then: A. The LIFO company will have a higher inventory turnover. B. The FIFO company will have a higher inventory turnover. C. The two companies will have the same inventory turnover. D. Inventory valuation methods do not effect inventory turnover calculations.

72. An advocate of just-in-time inventory system would say: A. Maintain a large inventory selection for customers. B. Leave extra time in order to make inventory deadlines. C. Maintain a small inventory supply. D. LIFO is preferred over FIFO. 73. The logic behind the lower-of-cost-or-market rule is: A. Inventory gradually becomes obsolete. B. Inventory that is unsalable should be written down to zero (or its scrap value). C. An asset is not worth more than it would cost the owner to replace it. D. Inventory that is unsalable should be written down to its replacement cost. 74. Many companies state in their annual reports that inventory is shown at the lower of its cost or market value. This means that the inventory: A. Is obsolete. B. Has been written down to a carrying value below cost. C. Is shown at the lesser of cost or sales value. D. None of the above.

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Chapter 08 - Inventories and the Cost of Goods Sold

75. The lower-of-cost-or-market rule: A. Is used in conjunction with the other inventory cost flow assumptions. B. Cannot be used if LIFO or FIFO are also used. C. Can be used in conjunction with LIFO but not FIFO. D. Can only be used with the specific identification cost flow assumption. 76. Goods in transit between the buyer and the seller belong to: A. The seller. B. The buyer. C. The freight company. D. The answer depends upon whether the goods were shipped F.O.B. shipping point or F.O.B. destination.

77. In a periodic inventory system, the cost of goods sold is determined as follows: A. Year-end inventory, plus purchases during the year, less the inventory at the beginning of the year. B. Net sales, less the balance in the Gross Profit account. C. Cost of goods available for sale during the year, less the ending inventory. D. A physical count is made of all items sold throughout the year, and a cost flow assumption is applied at year-end.

78. During periods of rising prices, and being primarily concerned with tax implications, most companies would select: A. LIFO. B. FIFO. C. Specific identification. D. The inventory valuation does not affect taxation.

79. For the purpose of delaying income taxes, during an inflationary period, which method would be best? A. LIFO. B. FIFO. C. Average. D. Taxes would be the same under each assumption. 80. Some companies that use a perpetual inventory system and the LIFO flow assumption restate their inventories at year-end to the amount indicated by periodic LIFO costing procedures. The primary reason for this adjustment is that: A. Periodic LIFO often results in a higher valuation of inventory, thus reducing taxable income. B. This adjustment is necessary to record shrinkage losses. C. Periodic LIFO often results in a lower valuation of inventory, thus reducing taxable income. D. None of the above. Periodic and perpetual costing procedures produce the same results if the yearend inventory has been counted properly.

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Chapter 08 - Inventories and the Cost of Goods Sold

81. If the inventory at the end of the current year is understated and the error is never caught, the effect is to: A. Understate income this year and overstate income next year. B. Overstate income this year and understate income next year. C. Understate income this year with no effect on income next year. D. Overstate the cost of goods sold, but have no effect on net income.

82. The CPA firm auditing Capri Corporation found that net income had been overstated. Which of the following could be the cause? A. Failure to take advantage of purchase discounts by paying within the discount period. B. Overstatement of inventory at year-end. C. Use of the last-in, first-out (LIFO) method of valuing inventory in a period of rising prices. D. Failure to record payment of an account payable to a supplier on the last day of the year.

83. If an error in valuing inventory occurs in one year: A. It has no effect upon income in the following year. B. It has no effect upon the income statement, only on the balance sheet. C. It is self-correcting after two years. D. Retained earnings will be adversely affected until corrected.

84. Companies with periodic inventory systems often use techniques such as the gross profit method and the retail method to: A. Prepare interim financial statements without taking a complete physical inventory. B. Increase gross profit. C. Value inventory at its sales price instead of its cost. D. Reduce taxable income during a period of rising prices. 85. The inventory turnover rate provides an indication of how quickly the average quantity of inventory on hand: A. Spoils. B. Sells. C. Increases. D. Converts into cash.

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Chapter 08 - Inventories and the Cost of Goods Sold

86. Busch, Inc. is a successful company, but has a lower inventory turnover rate than the industry average. Of the following, the most likely explanation is that Busch A. Has a just-in-time inventory system. B. Uses LIFO (assume rising purchase costs). C. Offers its customers an unusually large selection of merchandise. D. Sells unusually popular items. 87. The gross profit method of valuing inventory: A. Is the most accurate of the commonly used methods. B. Is a satisfactory substitute for taking a physical inventory for annual financial statements. C. Assumes that the gross profit rate will remain the same for the current year as it has in the past year or so. D. A, B, and C are all true statements. 88. Short-term creditors are likely to view a higher-than-average inventory turnover rate as indicating that: A. A company is in financial difficulty. B. The company is able to sell its inventory quickly. C. The company probably has an excessive amount of inventory. D. The company has a longer-than-average operating cycle. 89. Which of the following types of businesses would you expect to have the highest inventory tur...