Chapter 7-Inventories PDF

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Chapter 7--Inventories Student: ___________________________________________________________________________ 1. One of the two internal control procedures over inventory is to properly report inventory on the financial statements. True False

2. A purchase order establishes an initial record of the receipt of the inventory. True False

3. A perpetual inventory system is an effective means of control over inventory. True False

4. A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels. True False

5. Safeguarding inventory and proper reporting of the inventory in the books are the reasons for controlling the inventory. True False

6. Inventory controls start when the merchandise is shelved in the store area. True False

7. A physical inventory should be taken at the end of every month. True False

8. The specific identification inventory method should be used when the inventory consists of identical, low cost units that are purchased and sold frequently. True False

9. The selection of an inventory costing method has no significant impact on the financial statements. True False

10. Of the three widely used inventory costing methods (FIFO, LIFO, and average cost), the LIFO method of costing inventory assumes costs are charged based on the most recent purchases first. True False

11. When using the FIFO inventory costing method, the most recent costs are assigned to the cost of goods sold. True False

12. FIFO is the inventory costing method that follows the physical flow of the goods. True False

13. Under the LIFO inventory costing method, the most recent costs are assigned to ending inventory. True False

14. The average cost inventory method is the rarely used with a perpetual inventory system. True False

15. If the perpetual inventory system is used, the account entitled Merchandise Inventory is debited for purchases of merchandise. True False

16. Under the periodic inventory system, the merchandise inventory account continuously discloses the amount of inventory on hand. True False

17. Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of the merchandise sold. True False

18. The three inventory costing methods will normally each yield different amounts of net income. True False

19. The average cost method will always yield results between FIFO and LIFO. True False

20. During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO cost method. True False

21. During periods of increasing costs, the use of the FIFO method of costing inventory will yield an inventory amount for the balance sheet that is higher than LIFO would produce. True False

22. During periods of rapidly rising costs, the use of the LIFO method results in illusory or inventory profits. True False

23. During periods of decreasing costs the use of the LIFO method of costing inventory will result in a lower amount of net income than would result from the use of the FIFO method. True False

24. During periods of increasing costs, an advantage of the LIFO inventory cost method is that it matches more recent costs against current revenues. True False

25. In valuing damaged merchandise for inventory purposes, net realizable value is the estimated selling price less any direct costs of disposal. True False

26. Unsold consigned merchandise should be included in the consignee's inventory. True False

27. If ending inventory for the year is understated, net income for the year is overstated. True False

28. If ending inventory for the year is overstated, owner's equity reported on the balance sheet at the end of the year is understated. True False

29. The lower of cost or market is a method of inventory valuation. True False

30. "Market," as used in the phrase "lower of cost or market" for valuing inventory, refers to the price at which the inventory is being offered for sale by its owner. True False

31. A consignor who has goods out on consignment with an agent should include the goods in ending inventory even though they are not in the possession of the consignor. True False

32. The use of the lower-of-cost-or-market method of inventory valuation increases net income for the period in which the inventory replacement price declined. True False

33. The lower-of-cost-or-market method of determining the value of ending inventory can be applied on an item by item, by major classification of inventory, or by the total inventory. True False

34. When merchandise inventory is shown on the balance sheet, both the method of determining the cost of the inventory and the method of valuing the inventory should be shown. True False

35. Most large companies will use only one inventory costing methods for all of its different segments. True False

36. Direct disposal costs do not include special advertising or sales commissions. True False

37. Inventory errors, if not discovered, will self-correct in two years. True False

38. Generally, the lower the number of days' sales in inventory, the better. True False

39. One negative effect of carrying too much inventory is risk that customers will change their buying habits. True False

40. Average inventory is computed by adding the inventory at the beginning of the period to the inventory at the end of the period and dividing by two. True False

41. Inventory turnover measures the length of time is takes to acquire, sell and replace the inventory. True False

42. In the retail inventory method, the cost to retail ratio is equal to the cost of goods sold divided by the retail price of the good sold. True False

43. Use of the retail inventory method requires taking a physical count of inventory. True False

44. If a fire destroys the merchandise inventory, the gross profit method can be used to estimate the cost of merchandise destroyed. True False

45. If a company uses the periodic inventory system to cost its inventory, the gross profit method is a method that can be used to check on theft when the actual inventory is taken by the company. True False

46. Match the following documents used for inventory control: 1. last document in the chain, use to compare all three for accuracy 2. establishes an initial record of the receipt of inventory 3. authorizes the purchase of inventory from an approved vendor

Vendor’s Invoice ____ Purchase Order ____ Receiving Report ____

47. Match the following cost flow assumption to their inventory costing method: 1. Cost flow matches the unit sold to the unit purchased. 2. Cost flow is in the reverse order in which the cost were incurred. 3. Cost flow is an average of the costs. 4. Cost flow is in the order in which the costs were incurred.

Average Cost Last-in, Last-out (LIFO) Specific Identification First-in, First-out (FIFO)

____ ____ ____ ____

48. Under a perpetual inventory system, the amount of each type of merchandise on hand is available in the A. customer's ledger B. creditor's ledger C. inventory ledger D. purchase ledger

49. Taking a physical count of inventory A. is not necessary when a periodic inventory system is used B. should be done near year-end C. has no internal control relevance D. is not necessary when a perpetual inventory system is used

50. Control of inventory should begin as soon as the inventory is received. Which of the following internal control steps is not done to meet this goal? A. check the invoice to the receiving report B. check the invoice to the purchase order C. check the invoice with the person who specifically purchased the item D. check the invoice extensions and totals

51. Which of the following is not an example for safeguarding inventory? A. Storing inventory in restricted areas. B. Physical devices such as two-way mirrors, cameras, and alarms. C. Matching receiving documents, purchase orders, and vendor’s invoice. D. Returning inventory that is defective or broken.

52. Which of the following methods is appropriate for a business whose inventory consists of a relatively small number of unique, high-cost items? A. FIFO B. LIFO C. average D. specific identification

53. Ending inventory is made up of the oldest purchases when a company uses A. first-in, first-out B. last-in, first-out C. average cost D. retail method

54. When merchandise sold is assumed to be in the order in which the purchases were made, the company is using A. first-in, last-out B. last-in, first-out C. first-in, first-out D. average cost

55. The two most widely used methods for determining the cost of inventory are A. FIFO and LIFO B. FIFO and average C. LIFO and average D. gross profit and average

56. Cost flow is in the order in which costs were incurred when using A. average cost B. last-in, first-out C. first-in, first-out D. weighted average

57. Cost flow is in the reverse order in which costs were incurred when using A. weighted average B. last-in, first-out C. first-in, first-out D. average cost

58. The inventory method that assigns the most recent costs to cost of goods sold is A. FIFO B. LIFO C. average D. specific identification

59. Inventory costing methods place primary emphasis on assumptions about A. flow of goods B. flow of costs C. flow of goods or flow of costs depending on the method D. neither flow of goods or flow of costs

60. The inventory costing method that reports the most current prices in ending inventory is A. FIFO B. Specific identification C. LIFO D. Average cost

61. The inventory costing method that reports the earliest costs in ending inventory is A. FIFO B. LIFO C. Average cost D. Specific identification

62. Which of the following companies would be more likely to use the specific identification inventory costing method? A. Gordon’s Jewelers B. Lowe’s C. Best Buy D. Wal-Mart

63. Addison, Inc. uses a perpetual inventory system. The following is information about one inventory item for the month of September:

Sep. 1 4 10 17 30

Inventory Sold Purchased Sold Purchased

20 units at $20 10 units 30 units at $25 20 units 10 units at $30

If Addison uses FIFO, the cost of the ending merchandise inventory on September 30 is

A. $800 B. $650 C. $750 D. $700 64. Addison, Inc. uses a perpetual inventory system. The following is information about one inventory item for the month of September:

Sep. 1 4 10 17 30

Inventory Sold Purchased Sold Purchased

20 units at $20 10 units 30 units at $25 20 units 10 units at $30

If Addison uses LIFO, the cost of the ending merchandise inventory on September 30 is

A. $800 B. $650 C. $750 D. $700 65. When using a perpetual inventory system, the journal entry to record the cost of merchandise sold is: A. debit Cost of Merchandise Sold; credit Sales B. debit Cost of Merchandise Sold; credit Merchandise Inventory C. debit Merchandise Inventory; credit Cost of Merchandise Sold D. No journal entry is made to record the cost of merchandise sold.

66. Under the _________ inventory method, accounting records maintain a continuously updated inventory value. A. retail B. periodic C. physical D. perpetual

67. The inventory data for an item for November are:

Nov. 1 4 10 17 30

Inventory Sold Purchased Sold Purchased

20 units at $19 10 units 30 units at $20 20 units 10 units at $21

Using a perpetual system, what is the cost of the merchandise sold for November if the company uses LIFO?

A. $610 B. $600 C. $590 D. $580 68. The inventory data for an item for November are:

Nov. 1 4 10 17 30

Inventory Sold Purchased Sold Purchased

20 units at $19 10 units 30 units at $20 20 units 10 units at $21

Using a perpetual system, what is the cost of the merchandise sold for November if the company uses FIFO?

A. $610 B. $600 C. $590 D. $580

69. Use the following information to answer the following questions. The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1.

Date May 3 May 10 May 17 May 20 May 23 May 30

Product Z Purchase Sale Purchase Sale Sale Purchase

Units 5 3 10 6 3 10

Cost $20 $24

$30

Assuming that the company uses the perpetual inventory system, determine the cost of merchandise sold for the sale of May 20 using the LIFO inventory cost method.

A. $136 B. $144 C. $180 D. $120 70. Use the following information to answer the following questions. The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1.

Date May 3 May 10 May 17 May 20 May 23 May 30

Product Z Purchase Sale Purchase Sale Sale Purchase

Units 5 3 10 6 3 10

Cost $20 $24

$30

Assuming that the company uses the perpetual inventory system, determine the cost of merchandise sold for the sale of May 20 using the FIFO inventory cost method.

A. $120 B. $180 C. $136 D. $144

71. Use the following information to answer the following questions. The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1.

Date May 3 May 10 May 17 May 20 May 23 May 30

Product Z Purchase Sale Purchase Sale Sale Purchase

Units 5 3 10 6 3 10

Cost $20 $24

$30

Assuming that the company uses the perpetual inventory system, determine the ending inventory value for the month of May using the FIFO inventory cost method.

A. $364 B. $372 C. $324 D. $320 72. Use the following information to answer the following questions. The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1.

Date May 3 May 10 May 17 May 20 May 23 May 30

Product Z Purchase Sale Purchase Sale Sale Purchase

Units 5 3 10 6 3 10

Cost $20 $24

$30

Assuming that the company uses the perpetual inventory system, determine the gross profit for the sale of May 23 using the FIFO inventory cost method.

A. $108 B. $120 C. $72 D. $180

73. Use the following information to answer the following questions. The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1.

Date May 3 May 10 May 17 May 20 May 23 May 30

Product Z Purchase Sale Purchase Sale Sale Purchase

Units 5 3 10 6 3 10

Cost $20 $24

$30

Assuming that the company uses the perpetual inventory system, determine the ending inventory for the month of May using the LIFO inventory cost method.

A. $324 B. $372 C. $320 D. $364 74. Use the following information to answer the following questions. The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1.

Date May 3 May 10 May 17 May 20 May 23 May 30

Product Z Purchase Sale Purchase Sale Sale Purchase

Units 5 3 10 6 3 10

Cost $20 $24

$30

Assuming that the company uses the perpetual inventory system, determine the Gross Profit for the month of May using the LIFO cost method

A. $348 B. $452 C. $444 D. $356 75. The following units of an inventory item were available for sale during the year:

Beginning inventory First purchase Second purchase Third purchase

10 units at $55 25 units at $60 30 units at $65 15 units at $70

The firm uses the periodic inventory system. During the year, 60 units of the item were sold. The value of ending inventory using FIFO is:

A. $1,250 B. $1,350 C. $1,375 D. $1,150 76. The following units of an inventory item were available for sale during the year:

Beginning inventory First purchase Second purchase Third purchase

10 units at $55 25 units at $60 30 units at $65 15 units at $70

The firm uses the periodic inventory system. During the year, 60 units of the item were sold. The value of ending inventory using LIFO is:

A. $1,250 B. $1,350 C. $1,375 D. $1,150 77. The following units of an inventory item were available for sale during the year:

Beginning inventory First purchase Second purchase Third purchase

10 units at $55 25 units at $60 30 units at $65 15 units at $70

The firm uses the periodic inventory system. During the year, 60 units of the item were sold. The value of ending inventory using average cost is:

A. $1,353 B. $1,263 C. $1,375 D. $1,150 78. The following lots of a particular commodity were available for sale during the year:

Beginning inventory First purchase Second purchase Third purchase

10 units at $30 25 units at $32 30 units at $34 10 units at $35

The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end of the year according to the LIFO method?

A. $655 B. $620 C. $690 D. $659 79. The following lots of a particular commodity were available for sale during the year:

Beginning inventory First purchase Second purchase Third purchase

10 units at $30 25 units at $32 30 units at $34 10 units at $35

The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end of the year according to the FIFO method?

A. $655 B. $620 C. $690 D. $659 80. The following lots of a particular commodity were available for sale during the year:

Beginning inventory First purchase Second purchase Third purchase

10 units at $30 25 units at $32 30 units at $34 10 units at $35

The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end of the year according to the average cost method?

A. $655 B. $620 C. $690 D. $659 81. The following lots of a particular commodity were available for sale during the year:

Beginning inventory First purchase Second purchase Third purchase

5 units at $61 15 units at $63 10 units at $74 10 units at $77

The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year. What is the amount of cost of good sold for the year according to the average cost method?

A. $1,380 B. $1,375 C. $1,510 D. $1,250 82. The following lots of a particular commodity were available for sale during the year:

Beginning inventory First purchase Second purchase Third purchase

5 units at $61 15 units at $63 10 units at $74 10 units at $77

The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year. What is t...