Deck 6: Cost Of Goods Sold and Inventory

Question 1

With the perpetual inventory system, the inventory account is updated after each sale or purchase.

Answer 1

True

Question 2

During periods of declining purchase prices, LIFO produces the lowest amount of ending inventory relative to the other inventory costing methods.

Answer 2

False

Question 3

A company using a periodic inventory system must total the selling prices of the units on hand at the end of the period in order to value the ending inventory.

Answer 3

False

Question 4

A LIFO reserve represents the amount by which cost of goods sold on a FIFO basis exceeds the cost of goods sold on a LIFO basis for the current year.

Question 5

If cost of goods sold does not equal the cost of merchandise purchased during the period, an adjustment must be made to correct the error.

Question 6

Under a perpetual inventory system, each time goods are purchased, the inventory account is transferred to sales revenue.

Question 7

For a merchandising company, the cost of goods sold is subtracted from net sales to arrive at gross profit.

Question 8

Under the LIFO method of inventory costing, the units in the ending inventory represent the most recent purchase(s).

Question 9

Under the FIFO method of inventory costing, the units in the ending inventory represent the oldest purchase(s).

Question 10

Sales discounts decrease the cost of inventory acquired.

Question 11

Under the periodic inventory system, a physical inventory must be taken to determine cost of goods sold.

Question 12

A LIFO liquidation occurs when a company sells more units than it buys during the period.

Question 13

During periods of stable purchase prices, FIFO produces the highest ending inventory relative to the other inventory costing methods.

Question 14

The weighted average cost is calculated by adding the units' costs from each purchase and then dividing by the number of purchases.

Question 15

When merchandise is sold FOB destination, the seller is responsible for the shipping costs.

Question 16

The buyer must include goods purchased FOB shipping point in its inventory account if the goods are still in transit.

Question 17

Cost of goods sold is the difference between costs of goods available for sale and ending inventory.

Question 18

The difference between the FIFO, LIFO, and average cost methods is that each of these methods of inventory costing makes a specific assumption about the flow of costs.

Question 19

The lower of cost or market (LCM) rule violates the historical cost principle.

Question 20

Cost of goods sold represents an outflow of a resource, inventory, which is caused by the sale of products.

Question 21

The weighted average cost per unit must be continually updated under the perpetual inventory system.

Question 22

A Purchases account is not needed under a periodic inventory system.

Question 23

A loss in inventory value caused by application of the lower of cost or market (LCM) rule is recorded in a "Loss from Impairment" account.

Question 24

When the shipping terms are FOB destination, the buyer must record transportation costs as an additional cost of acquiring the inventory under the perpetual inventory system.

Question 25

If ending inventory is overstated, then net income is overstated as well.

Question 26

If ending inventory is understated, then cost of goods sold is understated.

Question 27

A departure from the cost basis of accounting may be necessary when the ____________________ of the inventory is less than its cost to the company.

Question 28

Accountants define the market value of inventory as its ____________________.

Question 29

The amount recognized on the balance sheet as the cost of inventory will ultimately be recognized as a(n) ____________________.

Question 30

Cost of goods sold is equal to beginning inventory plus the net cost of purchases minus _____.

Question 31

The inventory turnover ratio is a measure of how many times during a period a company sells off its inventory.

Question 32

The inventory turnover ratio is defined as cost of goods sold divided by average inventory.

Question 33

Shipping terms of ____________________ mean that the buyer pays shipping costs.

Question 34

Shipping terms of FOB Destination means that the shipping costs are paid by the ______.

Question 35

When a company using LIFO experiences a partial or complete liquidation of its older, lower-priced inventory, its gross margin will be ____________________ for the period.

Question 36

The excess of an inventory's value stated on a FIFO basis over its value stated on a LIFO basis is called a(n) ____________________.

Question 37

Under the periodic method, the information on sales can be combined within any period because all purchases are assumed to occur before any sales transactions.

Question 38

The inventory of a(n) ____________________ consists of three categories: raw materials, work-in-process, and finished goods.

Question 39

Under a periodic inventory system, the Purchases account accumulates the cost of the inventory acquired during the period.

Question 40

Under the _______________ inventory system, the inventory account is updated after each purchase or sale.

Question 41

Items should be included as part of the company's inventory if they are

A)purchased from a creditor, although not paid for by year end.
B)held in anticipation of an increase in market value.
C)determined to be part of cost of goods sold.
D)sold during the period.

Question 42

A company can calculate its average days to sell inventory by dividing 365 days per year by its _____.

Question 43

Under the periodic inventory system, all purchases are assumed to occur before any ______.

Question 44

In order to determine inventory for its balance sheet, a company must count the inventory at the end of its accounting period according to

A)the periodic inventory system.
B)the perpetual inventory system.
C)both the periodic and perpetual inventory systems.
D)neither the periodic nor perpetual inventory systems.

Question 45

The inventory account a manufacturer uses to record the cost of products completed and available for sale is called

A)raw materials inventory
B)work in process inventory
C)finished goods inventory
D)merchandise inventory

Question 46

Under the periodic inventory system, Net purchases = Purchases + ______________ - Purchase Discounts - Purchase Returns and Allowances.

Question 47

The understatement of ending inventories in one period leads to a(n) ____________________ of cost of goods sold in the same period.

Question 48

Which of the following accounts would most likely appear on the income statement of a merchandise company, but not on the income statement of a service company?

A)cost of goods sold
B)selling expenses
C)administrative expenses
D)income tax expense

Question 49

Under a periodic inventory system, shipping costs are not charged to the inventory asset account. Instead, such costs are charged to the ____________________ account.

Question 50

The ratio of a company's cost of goods sold to its average inventory is called its __________.

Question 51

Bihary Company has a beginning balance in its inventory account of $2,250 and the ending balance is $1,500. Cost of goods sold is $9,750. According to the cost of goods sold model, what was the amount of inventory purchased during the year?

A)$ 750
B)$ 9,000
C)$10,500
D)$11,250

Question 52

Cost of goods sold is equal to

A)the total amount of merchandise purchased during the year.
B)the cost of merchandise purchased plus transportation costs less ending inventory.
C)the cost of merchandise purchased plus transportation costs plus beginning inventory minus purchase returns and allowances and purchased discounts minus ending inventory.
D)the cost of merchandise purchased plus transportation costs plus beginning inventory minus purchase returns and allowances and purchase discounts.

Question 53

Under a periodic inventory system, the ____________________ account accumulates the cost of inventory acquired during the period.

Question 54

An overstatement error in the inventory account in the current period will result in an understatement of ____________________ in the subsequent period.

Question 55

Which of the following statements is true?

A)Inventory data can be identified and controlled better under the perpetual system.
B)Inventory can only be sold at the end of an accounting period under the periodic system.
C)There is no difference in cost to implement a perpetual as compared to a periodic system.
D)The perpetual system eliminated the need for an annual inventory count.

Question 56

Which of the following types of inventory accounts would be used by a wholesaler or retailer?

A)merchandise inventory
B)raw materials inventory
C)work in process inventory
D)finished goods inventory

Question 57

Which of the following statements is false?

A)The inventory account is updated after every sale and after every merchandise purchase under the perpetual inventory system.
B)The inventory account is updated only at the end of the accounting period under the periodic inventory system.
C)A cost of goods sold account is updated after each sale of merchandise under the periodic inventory system.
D)A purchases account is used only under the periodic inventory system.

Question 58

In a periodic inventory system, the cost of purchases is recognized as

A)an integral part of the calculation of cost of goods sold.
B)the only part of the calculation of cost of goods sold.
C)an increase in the inventory account.
D)an increase in an asset account.

Question 59

Which of the following best describes "cost of goods available for sale"?

A)Cost of goods available for sale is an expense account.
B)Cost of goods available for sale is added to beginning inventory to determine cost of purchases during the period.
C)Cost of goods available for sale is subtracted from net sales to arrive at the gross margin.
D)Cost of goods available for sale is allocated into cost of ending inventory and cost of goods sold.

Question 60

The cost of goods sold is equal to

A)purchases less beginning inventory plus ending inventory.
B)the inventory account as reported on the balance sheet.
C)the cost of goods available for sale less ending inventory.
D)the amount of inventory on hand at the end of the accounting period.

Question 61

Coffski, Inc. sold merchandise to a customer on credit. The invoice amount was $1,000; the invoice date was June 10th; credit terms were 1/10, n/30. Which of the following statements is true?

A)The customer can take a 10% discount if the invoice is paid by June 30th.
B)The customer should pay $1,000 if the invoice is paid on July 9th.
C)The customer must pay a $10 penalty if payment is made after July 9th.
D)The customer must pay $1,010 if payment is made after June 20th.

Question 62

Eli Company sells novelty items and offers terms of 1/10, n/30 to credit customers. One customer, Faulkner, Inc., purchased 100 Sweet-16 party decor packs with a list price of $20 each on March 5, 2019.
Refer to the information provided for Eli Company. If the customer pays the invoice on March 31, 2013, how much sales discount will Eli Company recognize?

A)$ -0-
B)$ 20
C)$200
D)$600

Question 63

Which of the following statements is false regarding the reason that inventory costs are recorded as expenses when sold rather than when incurred?

A)It gives the user's of the company's financial statements a clearer picture of profitability.
B)It helps the company achieve a better matching of expenses with related revenues.
C)It gives the company's accounting personnel more time to record inventory transactions.
D)Inventory is an asset at the time it is acquired.

Question 64

Dietz, Inc. sells merchandise on credit. If a customer pays its balance due within the discount period, what is the effect of the payment on Dietz's accounting equation?

A)Assets and stockholders' equity decrease.
B)Assets and stockholders' equity increase.
C)Assets decrease and liabilities increase.
D)Stockholders' equity decreases and liabilities increase.

Question 65

Transportation-in is

A)an operating expense.
B)part of purchase returns and allowances.
C)added to transportation-out as part of the calculation of cost of goods sold.
D)part of the net cost of purchases.

Question 66

The following information is from Gbane Company's accounting records for the year ended December 31:

Refer to the information provided for Gbane Company. Using the cost of goods sold model, how much will the company report as its cost of goods sold in its income statement for the year ended December 31?

A)$215,880
B)$218,760
C)$224,280
D)$228,840

Question 67

The amount recognized on the balance sheet as the cost of inventory will ultimately be recognized as

A)sales revenue.
B)cost of goods sold.
C)operating expenses.
D)administrative expenses.

Question 68

Ending inventory is equal to the cost of items on hand plus

A)merchandise in transit sold to customers with terms FOB shipping point.
B)merchandise in transit sold to customers with terms FOB destination.
C)merchandise returned to sellers in transit with terms FOB shipping point.
D)merchandise purchased from buyers in transit with terms FOB destination.

Question 69

Dollar Town is a merchandising company that uses the periodic inventory system. Selected account balances are listed below:

Refer to the information provided for Dollar Town. Calculate net sales.

A)$97,200
B)$100,200
C)$102,000
D)$105,000

Question 70

What effects on a retail store's accounting equation occur when merchandise returned by customers is recorded?

A)Assets and stockholders' equity decrease.
B)Assets and stockholders' equity increase.
C)Assets decrease and liabilities increase.
D)Stockholders' equity decreases and liabilities increase.

Question 71

Gools, Inc. buys designer clothing to sell in its retail stores. Since much of the merchandise comes from Europe, Gools, Inc. must pay freight charges. Which of the following statements must be true?

A)Transportation-in is added to the inventory account under the periodic system.
B)Transportation-in is subtracted from purchases under the periodic system.
C)Freight charges are only paid by a buyer in a periodic system.
D)Transportation-in is included in the total cost of purchases used to determine cost of goods sold in a periodic system.

Question 72

Eli Company sells novelty items and offers terms of 1/10, n/30 to credit customers. One customer, Faulkner, Inc., purchased 100 Sweet-16 party decor packs with a list price of $20 each on March 5, 2019.
Refer to the information provided for Eli Company. If the customer pays the amount of the invoice for its purchase on March 14, 2019, how much cash will Eli Company receive?

A)$1,400
B)$1,800
C)$1,980
D)$2,000

Question 73

The following information is from Gbane Company's accounting records for the year ended December 31:

Refer to the information provided for Gbane Company. How much will the company report as net purchases for the year ended December 31?

A)$221,520
B)$231,600
C)$241,680
D)$253,320

Question 74

Which of the following statements is true regarding just-in-time inventory management?

A)It requires a perpetual inventory system.
B)It requires an average cost inventory costing method.
C)It requires detailed information about profitability and the users of the company's financial statements.
D)It requires detailed information about order-to-delivery times, receiving-to-sales times, and inventory quantities.

Question 75

Dollar Town is a merchandising company that uses the periodic inventory system. Selected account balances are listed below:

Refer to the information provided for Dollar Town. Calculate the company's gross margin.

A)$40,800
B)$43,200
C)$46,800
D)$51,000

Question 76

Harris Corp. sold merchandise to Ichay Company on December 28, 2019, with shipping terms of FOB destination. The buyer received the merchandise on January 3, 2020. Which of the following is true?

A)The seller should record the sales revenue on December 28, 2019.
B)The buyer should pay the transportation costs.
C)The buyer should include the merchandise in its inventory at December 31, 2019.
D)The buyer should record a liability for the purchase on January 3, 2020.

Question 77

A customer returned damaged goods for credit. Under a perpetual system, which of the seller's accounts decreases?

A)purchase returns
B)accounts receivable
C)sales returns
D)sales revenue

Question 78

Dollar Town is a merchandising company that uses the periodic inventory system. Selected account balances are listed below:

Refer to the information provided for Dollar Town. Calculate the net cost of goods purchased.

A)$50,400
B)$54,000
C)$61,800
D)$70,200

Question 79

Echols Company sells merchandise on credit. If a customer pays its balance due after the discount period has passed, what is the effect of the payment on seller's accounting equation?

A)Assets and stockholders' equity decrease.
B)Assets and stockholders' equity increase.
C)Assets decrease and liabilities increase.
D)No net effect.

Question 80

What effects on a retail store's accounting equation occur when it records merchandise purchased for cash, assuming the use of a perpetual inventory system?

A)Assets and stockholders' equity increase.
B)Assets and stockholders' equity decrease.
C)Assets and liabilities increase.
D)No net effect.