Information Field: Difficulty Information Field: LO Highest Answer Letter: E ultiple !eywords in Same "aragraph: #o $hapter: $hapter %: erchandise In&entory and $ost of Sales 'rue(False )* +oods in transit are automatically included in in&entory* Ans: False Difficulty: Easy LO: ) ,* Damaged goods are not counted in in&entory if they cannot -e sold* Ans: 'rue Difficulty: Easy LO: ) .* +oods on consignment are goods shipped -y their owner/ called the consignee/ to another party called the consignor* Ans: False Difficulty: oderate LO: ) 0* If o-solete or damaged goods can -e sold/ they will -e included in in&entory at their net reali1a-le &alue if it is less than cost* Ans: 'rue Difficulty: oderate LO: ) 2* If the supplier pays freight charges/ then ownership of in&entory passes when goods arri&e at their destination* Ans: 'rue Difficulty: Hard LO: ) 3* #et reali1a-le &alue for damaged or o-solete goods is sales price plus the cost of ma4ing the sale* Ans: False Difficulty: Hard LO: ) %* One of the most important decisions in accounting for in&entory is determining the per5unit costs assigned to in&entory items* Ans: 'rue Difficulty: Easy LO: ) 6* 'he cost of an in&entory item includes its in&oice price plus any added or incidental costs necessary to put it in a place and condition for sale* Ans: 'rue Difficulty: Easy LO: ) 7* 8hen ta4ing a physical count of in&entory/ the use of prenum-ered in&entory tic4ets assists in the control process* Ans: 'rue Difficulty: Easy LO: ) )9* 'he total dollar &alue of in&entory on hand is determined -y: :); estimating the units on hand/ :,; multiplying the count -y cost per unit/ and :.; adding the costs for all products* Ans: False Difficulty: oderate LO: ) ))* Incidental costs added to the &alue of in&entory include import duties/ transportation5in/ storage/ and insurance* Ans: 'rue Difficulty: oderate LO: ) ),* All material incidental costs of in&entory ac<uisition and handling are assigned to in&entory* Ans: 'rue Difficulty: Hard LO: ) ).* 'he matching principle is used -y some companies to =ustify allocating incidental in&entory costs to cost of goods sold* Ans: False Difficulty: Hard LO: ) )0* 'he consistency principle re<uires a company to use the same accounting methods period after period unless economic circumstances ha&e changed* Ans: 'rue Difficulty: Easy LO: . )2* A company can change its in&entory &aluation without mentioning the change in its financial statements -ecause it is an internal decision* Ans: False Difficulty: Easy LO: . )3* An ad&antage of the weighted5a&erage method is that it tends to smooth out price changes* Ans: 'rue Difficulty: oderate LO: , )%* In a period of inflation/ FIFO usually gi&es a lower ta>a-le income and thus a ta> ad&antage* Ans: False Difficulty: oderate LO: . )6* 'he full disclosure principle allows companies to use different in&entory &aluation methods period to period as long as the changes are fully disclosed* Ans: False Difficulty: Hard LO: . )7* 'he ad&antage of LIFO is that it assigns the most recent costs to cost of goods sold/ and -etter matches current costs with re&enues on the income statement* Ans: 'rue Difficulty: Hard LO: . ,9* 'he four methods of in&entory &aluation are SIFO/ FIFO/ LIFO/ and a&erage cost* Ans: False Difficulty: Easy LO: , ,)* 'he assignment of costs to cost of goods sold and in&entory using weighted a&erage usually gi&es different results depending on whether a perpetual or periodic system is used* Ans: 'rue Difficulty: oderate LO: , ,,* 'he FIFO method assumes that costs for the most recently purchased items are reco&ered first* Ans: False Difficulty: oderate LO: , ,.* 'he consistency principle re<uires that the in&entory &aluation method follow the flow of goods* Ans: False Difficulty: Hard LO: . ,0* 'he choice of an in&entory cost flow assumption can ha&e a dramatic impact on amounts in financial statements* Ans: 'rue Difficulty: Hard LO: . ,2* 'he in&entory cost flow assumption that is used cannot ha&e a material impact on the financial statements* Ans: False Difficulty: Easy LO: . ,3* 'he necessary financial statement disclosure is accomplished if the amount presented is properly calculated* Ans: False Difficulty: oderate LO: . ,%* 'he necessary financial statement disclosure is accomplished if the amount disclosed is properly calculated and the costing method used is stated* Ans: 'rue Difficulty: oderate LO: . ,6* 'he full disclosure principle means that all financial information should -e disclosed* Ans: False Difficulty: oderate LO: . ,7* 'he full disclosure principle means that all rele&ant financial information should -e disclosed* Ans: 'rue Difficulty: Easy LO: . .9* 'he in&entory cost flow assumption that assigns the highest cost to ending in&entory in a period of rising prices is LIFO* Ans: False Difficulty: Hard LO: . .)* 'he in&entory cost flow assumption that assigns the highest cost to cost of sales in a period of rising prices is LIFO* Ans: 'rue Difficulty: Hard LO: . .,* 8hen preparing the financial statements management can choose the in&entory cost flow assumption it will use for a particular year in order to impact the reported net income* Ans: False Difficulty: oderate LO: . ..* 'he consistency principle is to help ensure that financial statements are compara-le across periods* Ans: 'rue Difficulty: Easy LO: . .0* In applying L$ in $anada/ mar4et is usually defined as net reali1a-le &alue* Ans: 'rue Difficulty: Easy LO: 0 .2* In applying L$/ mar4et is defined as the sales price* Ans: False Difficulty: Easy LO: 0 .3* 'he conser&atism principle re<uires that when more than one estimate of amounts to -e recei&ed or paid in the future are a-out e<ually li4ely/ then the less optimistic amount should -e used* Ans: 'rue Difficulty: oderate LO: 0 .%* 're44ing $ompany?s total cost of in&entory was @.92/999* 'he mar4et &alue is @,7%/999* Ander L$/ the amount reported should -e @.92/999* Ans: False Difficulty: oderate LO: 0 .6* 're44ing $ompany has in&entory with a mar4et &alue of @,)%/999 and a cost of @,0)/999* According to the full disclosure principle/ the in&entory should -e written down to @,)%/999* Ans: False Difficulty: Hard LO: 0 .7* 're44ing $ompany?s cost of in&entory was @.)%/299* Due to phenomenal demand the mar4et &alue has increased to @.,./999* 're44ing $ompany should write up the &alue of in&entory under the L$ rule* Ans: False Difficulty: Hard LO: 0 09* An error in &aluing in&entory will cause an error in the amount of cost of goods sold* Ans: 'rue Difficulty: Easy LO: 2 0)* Errors in in&entory &aluation only affect the current period?s records and financial statements* Ans: False Difficulty: Easy LO: 2 0,* Because an in&entory error causes an offsetting error in the ne>t period/ it is sometimes said to -e self5correcting* Ans: 'rue Difficulty: oderate LO: 2 0.* Because in&entory errors are self5correcting in following accounting periods/ managers will -e a-le to ma4e correct decisions -ased on changes in net income and cost of goods sold* Ans: False Difficulty: oderate LO: 2 00* An understatement of ending in&entory will understate cost of goods sold and o&erstate net income* Ans: False Difficulty: Hard LO: 2 02* An understatement of -eginning in&entory will understate cost of goods sold and o&erstate net income* Ans: 'rue Difficulty: Hard LO: 2 03* 'he conser&atism principle re<uires that in&entory -e reported at mar4et &alue when mar4et is lower than cost* Ans: 'rue Difficulty: Easy LO: 0 0%* 'he conser&atism principle is a pessimistic way of ma4ing a choice* Ans: False Difficulty: oderate LO: 0 06* ost -usinesses use replacement cost :current purchasing price; as the definition of mar4et* Ans: False Difficulty: oderate LO: 0 07* ost -usinesses apply the lower of cost and mar4et rule to the whole in&entory* Ans: 'rue Difficulty: Easy LO: 0 29* 8hen -usinesses apply the lower of cost and mar4et rule separately to each indi&idual item they will report the least in&entory &alue possi-le* Ans: 'rue Difficulty: oderate LO: 0 2)* 'he retail in&entory method estimates the cost of ending in&entory -y applying the gross profit ratio to net sales* Ans: False Difficulty: Easy LO: 3 2,* 'he retail amount of in&entory refers to its dollar amount measured using selling prices of in&entory items* Ans: 'rue Difficulty: oderate LO: 3 2.* 'o a&oid the time5consuming process of ta4ing an in&entory each month/ some companies use the gross profit method to estimate ending in&entory* Ans: False Difficulty: oderate LO: 3 20* If the cost to retail ratio is 39B and ending in&entory at retail is @02/999/ then estimated ending in&entory at cost is @,%/999* Ans: 'rue Difficulty: Hard LO: 3 22* 're44ing $ompany?s in&entory in its Ci&er Oa4s store was destroyed -y a flood* Its gross profit ratio was 32B and net sales were @.9/999* 'he estimated cost of goods a&aila-le for sale was @.,/299* 'he estimated &alue of the lost in&entory was @)6/999* Ans: False Difficulty: Hard LO: 3 23* 'he gross profit ratio measures how much of net sales is gross profit* Ans: 'rue Difficulty: Easy LO: 3 2%* 'he gross profit ratio measures how much of each dollar of gross sales is gross profit* Ans: False Difficulty: Easy LO: 3 26* If your in&entory is destroyed -y fire you can estimate the amount of in&entory destroyed if you 4now: -eginning in&entory/ purchases/ net sales/ and gross profit ratio* Ans: 'rue Difficulty: oderate LO: 3 27* All -usinesses should ta4e an in&entory count once each year to a&oid in&entory errors or shortages* Ans: False Difficulty: oderate LO: 3 39* All -usinesses should ta4e an in&entory count once each year to identify in&entory errors or shortages* Ans: 'rue Difficulty: Easy LO: 3 3)* 'he retail in&entory method of estimating in&entory uses the ratio of goods a&aila-le for sale at cost to goods a&aila-le for sale at retail* Ans: 'rue Difficulty: Easy LO: 3 3,* 'he retail in&entory method of estimating in&entory can -e used to estimate the amount of in&entory shortage if a physical count is also done* Ans: 'rue Difficulty: oderate LO: 3 3.* 'here is no difference in the amount of in&entory calculated -y the periodic and perpetual in&entory systems when using LIFO or weighted a&erage cost flow assumptions* Ans: False Difficulty: oderate LO: % 30* 'here is no difference in the amount of in&entory calculated -y the periodic and perpetual in&entory systems when using the FIFO cost flow assumption* Ans: 'rue Difficulty: oderate LO: % 32* A company?s a-ility to pay its short5term o-ligations depends on how <uic4ly it sells its merchandise in&entory* Ans: 'rue Difficulty: Easy LO: 7 33* 'he merchandise turno&er ratio is used to measure profita-ility* Ans: False Difficulty: Easy LO: 7 3%* 'he merchandise turno&er ratio is calculated -y di&iding a&erage merchandise in&entory -y cost of goods sold* Ans: False Difficulty: oderate LO: 7 36* 'he day?s sales in in&entory are calculated -y di&iding ending in&entory -y cost of goods sold and multiplying the result -y .32* Ans: 'rue Difficulty: oderate LO: 7 37* 're44ing $ompany?s cost of goods sold was @)2/229* Its a&erage merchandise in&entory was @0/2%2* Its merchandise turno&er was .*0* Ans: 'rue Difficulty: Hard LO: 7 %9* 'oys DCD As had cost of goods sold of @3/799 million* Its ending in&entory was @,/999 million* 'herefore its num-er of days in in&entory was 79 days* Ans: False Difficulty: Hard LO: 7 ultiple $hoice %)* Damaged or o-solete goods: A; Are not counted as salea-le in&entory* B; Are counted at full cost* $; Are included in in&entory at net reali1a-le &alue if less than cost* D; Both are not counted as salea-le in&entory and are counted at full cost* E; Both are not counted as salea-le in&entory and are included in in&entory at net reali1a-le &alue if less than cost* Ans: $ Difficulty: Easy LO: ) %,* erchandise in&entory includes: A; All goods owned -y a company and held for sale* B; +oods in transit* $; +oods on consignment* D; Damaged goods* E; All of these answers are correct* Ans: A Difficulty: oderate LO: ) %.* +oods in transit are included in in&entory: A; At any time in transit* B; 8hen the purchaser is responsi-le for paying freight charges* $; 8hen the supplier pays the freight charges* D; 8hen ownership has passed to the purchaser* E; Both when the purchaser is responsi-le for paying freight charges and when ownership has passed to the purchaser* Ans: E Difficulty: oderate LO: ) %0* +oods on consignment: A; Are goods shipped -y the owner to the consignee who sells the goods for the owner* B; Are reported in the consignee?s -oo4s as in&entory* $; Are reported on the consignor?s -oo4s as in&entory* D; Are goods shipped -y the owner to the consignee who sells the goods for the owner and are reported in the consignee?s -oo4s as in&entory* E; Are goods shipped -y the owner to the consignee who sells the goods for the owner and are reported on the consignor?s -oo4s as in&entory* Ans: E Difficulty: Hard LO: ) %2* "hysical counts of in&entory: A; Are not necessary under the perpetual system* B; Are necessary to ad=ust for shrin4age* $; Should -e ta4en at least once a month* D; Are necessary to ad=ust for shrin4age and should -e ta4en at least once a month* E; Are not necessary under the perpetual system and should -e ta4en at least once a month* Ans: B Difficulty: oderate LO: ) %3* $osts included in the &alue of in&entory are: A; "urchase price less discounts* B; 'ransportation5in* $; Storage* D; Insurance* E; All of these answers are correct* Ans: E Difficulty: Easy LO: ) %%* 'he accepted method for &aluing in&entory includes: A; $ounting the units of each product on hand* B; ultiplying the count for each product -y its cost per unit* $; Adding the costs for all products* D; $ounting the units of each product on hand and multiplying the count for each product -y its cost per unit* E; All of these answers are correct* Ans: E Difficulty: Easy LO: ) %6* Incidental costs of in&entory: A; $an -e assigned to e&ery unit* B; ay -e immaterial* $; $an -e allocated to cost of goods sold* D; Are su-=ect to the materiality principle* E; All of these answers are correct* Ans: E Difficulty: Hard LO: ) %7* A form attached to the counted items in the process of ta4ing a physical in&entory is a:n;: A; Sales tag* B; Su-sidiary record* $; In&entory tic4et* D; $redit in&oice* E; Sales receipt* Ans: $ Difficulty: Easy LO: ) 69* anagement must include which of the following considerations when accounting for in&entory: A; $osting method* B; In&entory system* $; Items to -e included and their cost* D; Ase of lower of cost or mar4et* E; All of these answers are correct* Ans: E Difficulty: Easy LO: ,/0 6)* 'he pricing of an in&entory where the purchase in&oice of each item in the ending in&entory is identified and used to determine the cost assigned to the in&entory is: A; 8eighted5a&erage in&entory method* B; First5in/ first5out method* $; Last5in/ first5out method* D; Specific identification method* E; Cetail method* Ans: D Difficulty: oderate LO: , 6,* 're44ing $ompany mar4ets a clim-ing 4it and uses a perpetual in&entory system to account for its merchandise* 'he -eginning -alance of the in&entory and transactions during arch were as follows: Eanuary ): Balance: )6 units at @). Eanuary ),: "urchased .9 units at @)0 Eanuary )7: Sold ,0 units at @)% Eanuary ,9: "urchased ,0 units at @)% Eanuary ,%: Sold ,% units If the ending in&entory is &alued at @,%3/ what in&entory cost flow assumption was usedF A; LIFO* B; FIFO* $; 8eighted5a&erage* D; Specific identification* E; Cetail* Ans: A Difficulty: Hard LO: , 6.* Accepta-le in&entory cost flow assumptions include: A; LIFO* B; FIFO* $; Specific identification* D; 8eighted5a&erage method* E; All of these answers are correct* Ans: E Difficulty: Easy LO: , 60* 8hich in&entory cost flow assumption results in the lowest ta> e>pense in a period of inflation if it were permitted -y the $anada Ce&enue AgencyF A; LIFO* B; FIFO* $; A&erage cost* D; Specific identification* E; o&ing 8eighted A&erage $ost Ans: A Difficulty: oderate LO: , 62* 'he consistency principle: A; Ce<uires a company to use the same accounting methods period after period* B; Doesn?t re<uire a company to use one method e>clusi&ely* $; Both re<uires a company to use the same accounting methods period after period and doesn?t re<uire a company to use one method e>clusi&ely* D; Is also called the full disclosure principle* E; Both re<uires a company to use the same accounting methods period after period and is also called the full disclosure principle* Ans: $ Difficulty: oderate LO: . 63* 'he full disclosure principle: A; Ce<uires that when a change in in&entory cost flow assumption is made/ the notes to the statements report the type of change* B; Ce<uires that when a change in in&entory cost flow assumption is made/ the notes to the statements report the =ustification for the change* $; Ce<uires that any change in net income due to changes in the in&entory cost assumption -e disclosed* D; All of these answers are correct* E; Both re<uires that when a change in in&entory cost flow assumption is made/ the notes to the statements report the type of change and re<uires that when a change in in&entory cost flow assumption is made/ the notes to the statements report the =ustification for the change* Ans: D Difficulty: Hard LO: . 6%* During a period of steadily rising prices/ which in&entory cost flow assumption results in reporting the lowest net incomeF A; Specific in&oice pricing* B; A&erage cost* $; 8eighted5a&erage* D; FIFO* E; LIFO* Ans: E Difficulty: Easy LO: . 66* During a period of steadily rising prices/ which in&entory cost flow assumption results in reporting the lowest in&entory &alueF A; Specific identification B; A&erage cost $; 8eighted5a&erage D; FIFO E; LIFO Ans: E Difficulty: oderate LO: . 67* In applying lower of cost or mar4et/ how would mar4et usually -e defined in $anadaF A; Historical cost* B; $urrent replacement cost* $; $urrent sales price* D; #et reali1a-le &alue* E; "urchase price* Ans: D Difficulty: Easy LO: 0 79* +enerally accepted accounting principles re<uire that the in&entory of a company -e reported at: A; ar4et &alue* B; Historical cost* $; Lower of cost or mar4et* D; Ceplacement cost* E; Either $ or D* Ans: $ Difficulty: Easy LO: 0 7)* 'he conser&atism principle: A; Ce<uires that when more than one estimate of amounts to -e recei&ed or paid in the future are e<ually li4ely/ then the less optimistic amount should -e used* B; Ce<uires that a company use the same accounting methods period after period* $; Ce<uires that re&enues and costs -e reported in the period in which they are earned or incurred* D; Ce<uires that all items of a material nature -e included in financial statements* E; Ce<uires that all in&entory items -e reported at full cost* Ans: A Difficulty: oderate LO: 0 7,* "ac4er "itons usually sell for @)0 per unit/ and ha&e a profit margin of ,2B* Howe&er/ the e>pected selling price has fallen to @7 per unit* 'he 're44ing $ompany current in&entory includes ,99 units purchased at @)9 per unit* Ceplacement cost is now down to @%* $alculate the &alue of the in&entory at the lower of cost or mar4et using the approach ta4en -y most $anadian companies* A; @)/.29* B; @)/099* $; @)/299* D; @)/699* E; @,/999* Ans: B Difficulty: oderate LO: 0 7.* 'he $oronado $orporation had the following original costs and replacement costs for its in&entory: A; @)/)69*99* B; @)/9%2*99* $; @)/)),*29 or @)/9%2*99* D; @)/)),*29* E; @)/)69*99 or @)/9%2*99* Ans: $ Difficulty: Hard LO: 0 70* If an in&entory amount is reported in error/ it can cause a misstatement in: A; $ost of goods sold* B; +ross profit* $; #et income* D; $urrent assets* E; All of these answers are correct* Ans: E Difficulty: Easy LO: 2 72* An in&entory error carried forward into the ne>t period causes misstatements in: A; $ost of goods sold* B; +ross profit* $; #et income* D; All of these answers are correct* E; +ross profit and net income* Ans: D Difficulty: Easy LO: 2 73* Because an in&entory error causes an offsetting error in the ne>t period: A; anagers can ignore the error* B; It is sometimes said to -e self5correcting* $; It affects only income statement accounts* D; If affects only -alance sheet accounts* E; anagers can ignore the error and it is sometimes said to -e self5correcting* Ans: B Difficulty: oderate LO: 2 7%* Anderstatement of ending in&entory causes: A; $ost of goods sold to -e o&erstated and net income to -e understated* B; $ost of goods sold to -e o&erstated and net income to -e o&erstated* $; $ost of goods sold to -e understated and net income to -e understated* D; $ost of goods sold to -e understated and net income to -e o&erstated* E; $ost of goods sold to -e o&erstated and net income to -e accurate* Ans: A Difficulty: Hard LO: 2 76* Anderstatement of -eginning in&entory causes: A; $ost of goods sold to -e understated and net income to -e understated* B; $ost of goods sold to -e understated and net income to -e o&erstated* $; $ost of goods sold to -e o&erstated and net income to -e o&erstated* D; $ost of goods sold to -e o&erstated and net income to -e understated* E; $ost of goods sold to -e o&erstated and net income to -e accurate* Ans: B Difficulty: Hard LO: 2 77* On Septem-er .9/ arlee $ompany needed to estimate its ending in&entory in order to prepare its third5<uarter financial statements* 'he following information is a&aila-le: :); In&entory/ Euly ): @),/299 :,; #et sales: @09/999 :.; #et purchases: @)%/299 arlee?s gross profit rate is )2B* $ost of goods sold would -e: A; @ 3/999* B; @.0/999* $; @ 0/999* D; @)9/999* E; #one of these answers is correct Ans: B Difficulty: Hard LO: 3 )99* arlee $ompany was destroyed -y a tornado on arch )2* 'he following was the only information sal&aged: :); In&entory/ Eanuary ): @,6/999 :,; "urchases: @)3/999 :.; 'ransportation5in: @)/999 :0; Sales: @22/999 :2; Sales returns: @%99 arlee?s a&erage gross profit was .2B* 8hat was the estimated &alue of the lost in&entoryF A; @ 7/%92* B; @,2/772* $; @,7/,29* D; @00/999* E; @02/999* Ans: A Difficulty: oderate LO: 3 )9)* "atel "ac4ing had the following information for its in&entory: Beginning in&entory: cost @6%/999G retail @).9/999 #et purchases: cost @29/999G retail @),9/999 Sales at retail: @)02/999 'he year5end in&entory showed @)90/,99 worth of merchandise on hand at retail* 8hat is the ending cost of the in&entoryF A; @00/)66* B; @2%/)9,* $; @2%/%29* D; @%9/,37* E; @)9/0,9* Ans: B Difficulty: oderate LO: 3 )9,* A company that has operated with a .9B a&erage gross profit margin for a num-er of years had @)99/999 in sales during the first <uarter of this year* If it -egan the <uarter with an @)6/999 in&entory at cost and purchased @%,/999 of merchandise during the <uarter/ its estimated ending in&entory -y the gross profit method is: A; @.9/999* B; @,)/999* $; @,9/999* D; @)6/999* E; @,%/999* Ans: $ Difficulty: Hard LO: 3 )9.* On Decem-er .)/ Bri>ell Inc* needed to estimate its ending in&entory to prepare its second5 <uarter financial statements* 'he following information is currently a&aila-le: :); In&entory as of Octo-er ): @),/299 :,; #et sales: @09/999 :.; #et purchases: @,%/299 Bri>ell typically achie&es a gross profit of )2B* $ost of goods sold under the gross profit method would -e: A; @ 3/999* B; @.0/999* $; @ 0/999* D; @)9/999* E; @)3/999* Ans: B Difficulty: Hard LO: 3 )90* Interim statements: A; Are re<uired -y the $I$A* B; Are necessary to achie&e full disclosure a-out a -usiness?s operations* $; Are usually monthly or <uarterly statements prepared in -etween the traditional/ annual statements* D; Are re<uired -y the $I$A and are necessary to achie&e full disclosure a-out a -usiness?s operations* E; All of these answers are correct* Ans: $ Difficulty: Easy LO: 3 )92* 8hich ratio measures the portion of net sales that is gross profitF A; +ross margin ratio B; #et sales ratio $; +ross profit ratio D; All of these answers are correct E; +ross margin ratio and gross profit ratio Ans: E Difficulty: oderate LO: 3 )93* 're44ing $ompany had the following purchases during the year: Eanuary ): )9 units at @),9 Fe-ruary ): ,9 units at @).9 ay ): )2 units at @)09 Septem-er ): ), units at @)29 #o&em-er ): )9 units at @)39 On Decem-er .)/ there were ,3 units in ending in&entory* 'hese ,3 units consisted of , from Eanuary/ 0 from Fe-ruary/ 3 from ay/ 0 from Septem-er/ and )9 from #o&em-er* Asing the specific identification method/ what is the cost of the ending in&entoryF A; @./299* B; @./699* $; @./739* D; @./,69* E; @./309* Ans: B Difficulty: oderate LO: % )9%* artoc4 $ompany uses the periodic in&entory system* 'he following information is a&aila-le for the period ending Decem-er .): :); Sales: @.9/999 :,; Beginning in&entory: @%/299 :.; Ending in&entory: @3/999 :0; "urchases: @,9/999 'he cost of goods sold for the period is: A; @,%/299* B; @,3/299* $; @,)/299* D; @,2/)99* E; @,)/999* Ans: $ Difficulty: Easy LO: % )96* 'he merchandise turno&er ratio: A; Is used to analy1e profita-ility* B; Is used to measure sol&ency* $; easures how <uic4ly a firm sells its merchandise in&entory* D; Halidates the acid5test ratio* E; Depends on the type of in&entory &aluation method* Ans: $ Difficulty: Easy LO: 7 )97* Days? sales in in&entory: A; Is a ratio that estimates how many days it will ta4e to con&ert in&entory on hand to accounts recei&a-le or cash* B; Is a ratio that tells us how much in&entory a firm has on hand in terms of days? sales* $; Is the num-er of days we can sell from in&entory if no new items are purchased* D; All of these answers are correct* E; Is a ratio that estimates how many days it will ta4e to con&ert in&entory on hand to accounts recei&a-le or cash and is a ratio that tells us how much in&entory a firm has on hand in terms of days? sales* Ans: D Difficulty: Easy LO: 7 ))9* 'he merchandise turno&er ratio: A; Is calculated -y di&iding cost of goods sold -y a&erage merchandise in&entory* B; Is calculated -y di&iding a&erage merchandise in&entory -y cost of goods sold* $; Is ending in&entory di&ided -y cost of goods sold* D; Is cost of goods sold di&ided -y ending in&entory* E; Is cost of goods sold di&ided -y ending in&entory times .32* Ans: A Difficulty: oderate LO: 7 )))* Days? sales in in&entory is calculated -y: A; Di&iding a&erage merchandise in&entory -y cost of goods sold* B; Di&iding cost of goods sold -y a&erage merchandise in&entory* $; Di&iding in&entory -y cost of goods sold times .32* D; Di&iding cost of goods sold -y ending in&entory times .32* E; Di&iding ending in&entory -y cost of goods sold* Ans: $ Difficulty: oderate LO: 7 )),* 'oys DCD As had cost of goods sold of @3/999 million/ ending in&entory of @,/299 million/ and a&erage in&entory of @,/999 million* 'he merchandise turno&er is: A; ,*09* B; .* $; *..* D; *0,* E; ),* Ans: B Difficulty: Hard LO: 7 )).* 'oys DCD As had cost of goods sold of @3/999 million/ ending in&entory of @,/299 million/ and a&erage in&entory turno&er of @,/999 million* 'he days? sales in in&entory is: A; )2,*)* B; ),)*%* $; 6%3* D; )/972* E; .9*2* Ans: A Difficulty: Hard LO: 7 Short Answer ))0* atch each of the following terms with the appropriate definition* :a; Specific identification method :-; Days? sales in in&entory :c; $onser&atism principle :d; erchandise turno&er :e; Cetail in&entory method :f; +ross profit ratio :g; #et reali1a-le &alue :h; LIFO :i; 8eighted a&erage in&entory cost flow assumption :=; FIFO IIIII :); 'he accounting principle that guides accountants to select the less optimistic estimate when two estimates of amounts to -e recei&ed or paid are a-out e<ually li4ely* IIIII :,; 'he e>pected sales price of an item minus the cost of ma4ing the sale* IIIII :.; A method for estimating an ending in&entory -ased on the ratio of the amount of goods for sale at cost to the amount of goods for sale at mar4ed selling price* IIIII :0; An estimate of how many days it will ta4e to con&ert the in&entory on hand at the end of the period into accounts recei&a-le or cash* IIIII :2; An in&entory cost flow assumption in which the unit prices of the -eginning in&entory and of each purchase are weighted -y the num-er of units in the -eginning in&entory and each purchase* IIIII :3; easures how much of net sales is gross profit* IIIII :%; 'he pricing of an in&entory under the assumption that costs for the most recent items purchased are sold first and charged to cost of goods sold* IIIII :6; 'he pricing of an in&entory where the purchase in&oice of each item in the ending in&entory is identified and used to determine the cost assigned to the in&entory* IIIII :7; 'he pricing of an in&entory under the assumption that in&entory items are sold in the order ac<uired* IIIII :)9; 'he num-er of times a company?s a&erage in&entory was sold during an accounting period* Ans: :); c :,; g :.; e :0; - :2; i :3; f :%; h :6; a :7; = :)9; d Difficulty: oderate LO: )57 ))2* atch the following terms with the appropriate definition* :a; $onsignee :-; $onser&atism principle :c; Lower of cost or mar4et :d; +ross profit method :e; erchandise turno&er :f; $onsistency principle :g; Specific identification method :h; Days? sales in in&entory :i; $onsignor :=; Cetail in&entory method IIIII :); An owner of goods who ships them to another party who will then sell the goods for the owner* IIIII :,; A procedure for estimating an ending in&entory in which the past gross profit rate is used to estimate the cost of goods sold/ which is then su-tracted from the cost of goods a&aila-le for sale to determine the estimated ending in&entory* IIIII :.; 'he accounting re<uirement that a company use the same accounting methods period after period so that the financial statements of succeeding periods will -e compara-le* IIIII :0; An estimate of how many days it will ta4e to con&ert the in&entory on hand at the end of the period into accounts recei&a-le or cash* IIIII :2; One who recei&es and holds goods owned -y another party for the purpose of selling the goods for the owner* IIIII :3; 'he pricing of an in&entory where the purchase in&oice of each item in the ending in&entory is identified and used to determine the cost assigned to the in&entory* IIIII :%; 'he num-er of times a company?s a&erage in&entory was sold during an accounting period* IIIII :6; 'he re<uired method of reporting merchandise in&entory in the -alance sheet where mar4et &alue is reported when mar4et is lower than cost* IIIII :7; A method for estimating an ending in&entory -ased on the ratio of the amount of goods for sale at cost to the amount of goods for sale at mar4ed selling prices* IIIII :)9; 'he accounting principle that guides accountants to select the less optimistic estimate when two estimates of amounts to -e recei&ed or paid are a-out e<ually li4ely* Ans: :); i :,; d :.; f :0; h :2; a :3; g :%; e :6; c :7; = :)9; - Difficulty: oderate LO: )57 ))3* $arter $ompany reported @299/999 in sales during the current year* It purchased merchandise that cost @,69/999* 'he company?s -eginning in&entory and ending in&entory was @39/999* $alculate the gross profit ratio* Ans: @299/999 5 @,69/999 J @,,9/999 gross profit* @,,9/999(299*999 J 00B Difficulty: oderate LO: 3 ))%* 'he costs of which items are included in merchandise in&entory* F Ans: erchandise in&entory is goods owned -y a company and held for resale* 'hree special cases in&ol&ing ownership decisions are goods in transit/ consigned goods/ and damaged goods* +oods in transit are included in the in&entory of the company that owns the goods* $onsigned goods are included in the in&entory of the consignor* Damaged goods are &alued at net reali1a-le &alue if it is less than cost* Difficulty: Easy LO: ) ))6* 8hat types of costs are assigned to merchandise in&entoryF Ans: $osts of merchandise in&entory include the purchase price less discounts/ plus any added or incidental costs necessary to put the in&entory in place and ready to sell* Difficulty: Easy LO: ) ))7* 8hat are the effects of in&entory methods on financial and ta> reporting :assuming all methods are allowa-le for ta> purposes;F* Ans: 'he specific identification method e>actly matches e>penses and re&enues* 'he weighted a&erage method smoothes out changes in prices* Howe&er/ LIFO and FIFO pro&ide different amounts in periods of rising or falling prices* For e>ample/ in periods of rising prices/ LIFO pro&ides a lower income and thus lower ta>es* In periods of falling prices/ LIFO pro&ides a higher income and thus higher ta>es* FIFO calculations pro&ide higher income and ta>es in periods of rising prices and lower income and ta>es in periods of declining prices* Difficulty: Hard LO: . ),9* 8hat are the four types of in&entory cost flow assumptionsF Ans: 'he specific identification method assigns costs to each in&entory item -ased on specific in&oices* 'he weighted a&erage method assigns costs -y using the total -alance in in&entory and di&iding it -y the num-er of units to arri&e at a cost per unit* 'his cost per unit is then multiplied -y the num-er of units in ending in&entory* 'he first5in/ first5out method assigns cost to items sold assuming that the cost of the first units purchased are the first to -e reco&ered* 'he last5in/ first5out method assumes that the cost of the last units purchased are the first to -e reco&ered* Difficulty: oderate LO: , ),)* During Eanuary/ a company that uses a perpetual in&entory system had -eginning in&entory/ purchases/ and sales as follows: 8hat was the FIFO cost of the Eanuary .) in&entoryF Ans: Difficulty: oderate LO: , ),,* A company that uses a perpetual in&entory system made the following cash purchases and sales: Eanuary ) "urchased )99 units at @)9 per unit* Fe-ruary 2 "urchased 39 units at @), per unit* arch )3 Sold 09 units for @)3 per unit* "resent general =ournal entries to record the sale assuming a FIFO method is used* Ans: Difficulty: oderate LO: , ),.* A company made the following purchases during the year: Ean* )9 )2 units at @.39 ar* )2 ,2 units at @.79 Apr* ,2 )9 units at @0,9 Euly .9 ,9 units at @029 Oct* )9 )2 units at @069 On Decem-er .)/ there were ,6 units in ending in&entory* 'hese ,6 units consisted of ) from the Eanuary )9 shipment/ , from the arch )2 shipment/ 2 from the April ,2 shipment/ )2 from the Euly .9 shipment/ and 2 from the Octo-er )9 shipment* Asing specific identification/ calculate the cost of the ending in&entory* Ans: Difficulty: oderate LO: ,/% ),0* A company sells a single product and had the following -eginning in&entory/ purchases/ and sales during Eanuary: $alculate the cost of the ending in&entory under each assumption -elow: :); 'he company uses a periodic in&entory system and determines cost on a FIFO -asis* Ending in&entory cost IIIIIIIIIIII :,; 'he company uses a periodic in&entory system and determines cost on a LIFO -asis* Ending in&entory cost IIIIIIIIIIII :.; 'he company uses a perpetual in&entory system and determines cost on a FIFO -asis* Ending in&entory cost IIIIIIIIIIII Ans: Difficulty: oderate LO: ,/% ),2* E>plain why the lower of cost or mar4et rule is used to &alue in&entory* Ans: 'he principle of conser&atism re<uires that if there is more than one estimate of the &alue of an asset/ then the lower of the two should -e used* 'he lower of cost or mar4et rule compares the ac<uisition cost of in&entory with the current replacement cost* 'he lower of the two &alues is the amount to -e reported* Difficulty: oderate LO: 0 ),3* Bethel $o* has collected the following data related to its ending in&entory: $alculate the lower of cost or mar4et on the: :); In&entory as a whole* :,; In&entory applied separately to each product* Ans: Difficulty: oderate LO: 0 ),%* Isaiah?s +ear had the following ending in&entory costs: Instructions: :); $alculate the lower of cost or mar4et :L$; for the whole in&entory* :,; $alculate the lower of cost or mar4et :L$; for each indi&idual item* Ans: Difficulty: oderate LO: 0 ),6* E>plain the effect of an error in in&entory &aluation on financial statements* Ans: An error in the amount of ending in&entory affects assets/ net income/ and owner?s e<uity of the current period* Since ending in&entory affects the following period?s -eginning in&entory/ an error in ending in&entory affects the following period?s cost of goods sold and net income* 'he financial statement effects of errors in one period are offset in the following statement period* Difficulty: Hard LO: 2 ),7* E&aluate each in&entory error and determine whether it o&erstates or understates each item* In&entory Error $ost of +oods Sold #et Income Anderstate -eginning in&entory Anderstate ending in&entory O&erstate -eginning in&entory O&erstate ending in&entory Ans: In&entory Error $ost of +oods Sold #et Income Anderstate -eginning in&entory Anderstate O&erstate Anderstate ending in&entory O&erstate Anderstate O&erstate -eginning in&entory O&erstate Anderstate O&erstate ending in&entory Anderstate O&erstate Difficulty: Hard LO: 2 ).9* E>plain how to calculate the gross profit ratio and interpret its meaning* Ans: 'he gross profit ratio measures how much of net sales is gross profit* It is calculated -y di&iding gross profit -y net sales* Difficulty: oderate LO: 3 ).)* E>plain the difference -etween the retail method and gross profit method for &aluing in&entory* Ans: 'he retail method is generally used to prepare interim statements* It uses the cost to retail ratio in order to gi&e an estimated ending in&entory at cost* 'he gross profit method is used to reconstruct the &alue of lost/ stolen/ or destroyed in&entory* It uses the gross profit ratio to estimate cost of goods sold and the &alue of ending in&entory* Difficulty: oderate LO: 3 ).,* A company?s store was destroyed -y a fire on Fe-ruary )9* 'he only information that could -e sal&aged included the following: :); In&entory/ Eanuary ): @.0/999 :,; "urchases: @))6/999 :.; Sales: @)09/999 'he company?s gross profit rate was .9B* $alculate the estimated &alue of the destroyed in&entory* Ans: Difficulty: oderate LO: 3 )..* Apply the retail method to the following information and calculate the cost of the ending in&entory: $ost Cetail Beginning in&entory @)3/699 @.)/399 #et purchases 0%/299 7%/999 Sales 67/999 Ans: Difficulty: oderate LO: 3 ).0* Harlingen Store uses the retail method and has the following information a&aila-le concerning their most recent accounting period: At $ost At Cetail Beginning5of5period in&entory @)06/399 @ ,02/,99 #et purchases 3%%/099 )/,,7/699 Sales )/,99/999 :); 8hat is the cost ratio using the retail methodF :,; 8hat is the estimated cost of the ending in&entoryF Ans: Difficulty: oderate LO: 3 ).2* Ba4street/ Inc* wants to estimate in&entory destroyed -y flood* Its a&erage gross profit percentage is .%B* 'he following information is a&aila-le: :); Beginning in&entory: @)),/.29 :,; "urchases: @2,9/629 :.; "urchases returns and allowances: @2/999 :0; 'ransportation5in: @0/%,2 :2; Sales: @662/729 :3; Sales returns and allowances: @7/%39 Instructions: $alculate the &alue of the destroyed ending in&entory using the gross profit method* Ans: #et sales: @662/729 5 @7/%39 J @6%3/)79 Beginning In&entory @)),/.29 "urchases 2,9/629 "urchases C K A :2/999; 'ransportation5in 0/%,2 $O+A @3.,/7,2 $+S :@6%3/)79 3.B; 22,/999 Ending In&entory @ 69/7,2 Difficulty: Hard LO: 3 ).3* Descri-e the accounting aspects of a periodic in&entory system* Ans: Each purchase of merchandise is de-ited to the "urchases account* $ost of goods sold is not recorded at the time of sale* Instead/ a physical count of in&entory at the end of the accounting period is used to determine the amount of in&entory sold* $ertain costs of in&entory such as transportation5in/ purchases discounts/ and purchases returns and allowances are recorded in separate accounts* Difficulty: Hard LO: % ).%* 'he Cudd $orporation made the following merchandise purchases during the current year: Ean* ) .69 units at @)2*99 ay ) ,%9 units at @,9*99 Eune ) .99 units at @,0*99 Oct* ) ,29 units at @.9*99 'here was no -eginning in&entory/ -ut ending in&entory consisted of 099 units* If Cudd uses the weighted5a&erage cost method and the periodic in&entory system/ what would -e the cost of the ending in&entoryF Ans: Difficulty: oderate LO: % ).6* 'he "layer $orporation made the following merchandise purchases during the current year: Ean* ) .69 units at @)2*99 ay ) ,%9 units at @,9*99 Eune ) .99 units at @,0*99 Oct* ) ,29 units at @.9*99 'here was no -eginning in&entory/ -ut ending in&entory consisted of 099 units* If "layer uses the first5in/ first5out method and the periodic in&entory system/ what would -e the cost of the ending in&entoryF Ans: Difficulty: oderate LO: % ).7* 'he Bean $orporation made the following merchandise purchases during the current year: Ean* ) .69 units at @)2*99 ay ) ,%9 units at @,9*99 Eune ) .99 units at @,0*99 Oct* ) ,29 units at @.9*99 'here was no -eginning in&entory/ -ut ending in&entory consisted of 099 units* If Bean uses the last5in/ first5out method and the periodic in&entory system/ what would -e the cost of the ending in&entoryF Ans: Difficulty: oderate LO: % )09* #ormandy/ Inc* has collected the following in&entory data prior to preparing financial statements for the month of Octo-er* All purchases and sales are on credit* Assuming the periodic in&entory system is used/ determine the cost of the ending in&entory and cost of goods sold using the LIFO -asis* "repare the appropriate =ournal entries to record: :A; 'he Octo-er 3 purchase* :B; 'he Octo-er ), sale* :$; 'he entries to close the Octo-er income statement items to Income Summary* :Assume that sales re&enue and the elements of cost of goods sold are the only income statement items*; Ans: Difficulty: oderate LO: % )0)* E>plain how in&entory management is e&aluated using the merchandise turno&er and days? sales in in&entory ratios* Ans: 'he goal in in&entory management is to ha&e a high turno&er as long as in&entory is not out of stoc4 and customers? needs are met* erchandise turno&er measures the num-er of times per year in&entory is sold* Days? sales in in&entory measures the num-er of days it ta4es to sell in&entory and reali1e cash from the sale* $om-ined/ these ratios help analysts to measure in&entory management and to e&aluate a company?s short5term li<uidity* Difficulty: oderate LO: 7 )0,* 're44ing $ompany reported the following data: LC ) LC , LC . $ost of goods sold @.0%/399 @.%7/329 @00./799 A&erage in&entory @ 62/999 @ 7)/929 @ 76/.29 Instructions: :); $alculate 're44ing $ompany?s merchandise turno&er for each year to two decimal places* :,; $omment on the company?s efficiency in managing its in&entory* Ans: Difficulty: oderate LO: 7 )0.* Annie?s Attic reported the following data: LC ) LC , LC . $ost of goods sold @,.6/999 @.%2/999 @072/999 Ending in&entory @),9/999 @)29/999 @)69/999 Instructions: :); $alculate the days? sales in in&entory for each year rounded to the nearest full day* :,; $omment on the trend in in&entory management* Ans: Difficulty: oderate LO: 7 Fill5In5'he5Blan4 )00* 'he cost of an in&entory item includes IIIIIIIIIIIIIIIIIIIII/ plus IIIIIIIIIIIIII costs necessary to put it in a place and condition for sale* Ans: In&oice price minus any discount/ plus any added or incidental Difficulty: Hard LO: ) )02* 8hen a count of merchandise in&entory is ta4en for the purpose of reconciling goods actually on hand to the in&entory control account in the general ledger it is 4nown as ta4ing a:n; IIIIIIIIIIIIIIII* Ans: "hysical count Difficulty: Easy LO: ) )03* A ma=or goal in accounting for in&entory is IIIIIIIIIIIIIIIIII rele&ant costs with re&enues* Ans: atching Difficulty: oderate LO: ) )0%* An ad&antage of the IIIIIIIIIIIIIIIIIIIII method of in&entory &aluation is that it tends to smooth out price changes* Ans: 8eighted a&erage Difficulty: oderate LO: , )06* 8hen the IIIIIIIIIIIIII cost flow assumption is used with a periodic system/ cost of goods sold is assigned costs from the most recent purchases for the period* Ans: LIFO Difficulty: Hard LO: % )07* 'he current cost of purchasing an item is called the IIIIIIIIIIIIII* Ans: Ceplacement cost Difficulty: Easy LO: 0 )29* +oods on consignment are goods shipped -y their owner/ called the IIIIIIIIIIIIIII/ to another party called the IIIIIIIIIIIIIII* Ans: $onsignor/ consignee Difficulty: oderate LO: ) )2)* IIIIIIIIIIIIIIIII is the current cost of purchasing the same in&entory items in the usual manner* Ans: Ceplacement cost Difficulty: Easy LO: 0 )2,* An o&erstatement of -eginning in&entory will IIIIIIIIIIIIIIIIII cost of goods sold/ and IIIIIIIIIIIIIIIII net income* Ans: O&erstate/ understate Difficulty: Hard LO: 2 )2.* 'he IIIIIIIIIIIIIIIIIIIII method is used to estimate the &alue of in&entory that has -een destroyed/ lost/ or stolen* Ans: +ross profit Difficulty: oderate LO: 3 )20* 'he IIIIIIIIIIIIIIIIIIIIIIII ratio measures how much in&entory is on hand in terms of days? sales* Ans: Days? sales in in&entory Difficulty: Easy LO: 7