Deck 17: Merchandise Inventory

Question 1

Following the consistency principle, once a firm adopts a method of inventory valuation, it should use that method consistently from one period to the next.

Answer 1

True

Question 2

The gross profit ratio is calculated by dividing Gross Profit by Net Sales.

Answer 2

True

Question 3

Average costing is advantageous to use when a company's inventory is composed of many similar items that are not subject to significant price and style changes.

Answer 3

True

Question 4

In a period of falling prices, the LIFO method of inventory valuation results in a lower reported net income than the FIFO method.

Question 5

Under the gross profit method of estimating inventory, the ending inventory is determined by subtracting the estimated cost of goods sold from the cost of goods available for sale.

Question 6

The average cost method of inventory valuation will always result in the lowest reported net income.

Question 7

Inventory costing methods are influenced by industry practice and the types of merchandise available for sale.

Question 8

If a firm uses the FIFO method of inventory valuation for tax purposes, it must use the FIFO method for financial accounting.

Question 9

In highly competitive businesses where inventory is subject to price fluctuations and model or style upgrades, it is desirable to utilize the weighted average method costing method.

Question 10

Specific identification is an inventory costing method used to value inventory where the merchandise identified as sold or on hand is typically a high-priced or one-of-a-kind item.

Question 11

Point-of-sale cash registers and scanners assist in tracking inventory units purchased and sold under a periodic inventory system.

Question 12

Under a periodic inventory system, cost of goods sold is calculated based on the cost of
available-for-sale units less the cost of ending inventory as identified through a physical inventory.

Question 13

With the onset of universal product codes and bar-code scanners that track inventory purchased and sold, a physical inventory is no longer necessary to verify inventory on hand.

Question 14

The use of the FIFO method of inventory valuation results in a matching of current inventory costs against current sales revenue.

Question 15

The inventory valuation used will affect the net income or net loss reported on the income statement.

Question 16

The disclosure principle requires a company to reveal the costing method used to value inventory.

Question 17

The FIFO method of inventory valuation focuses on the balance sheet as the most current costs are in ending inventory.

Question 18

In order to apply the matching concept, inventory costing methods, once selected, cannot be changed to an alternative method.

Question 19

The LIFO method of inventory valuation assigns the cost of the most recent purchases to the cost of goods sold.

Question 20

Inventory can only be valued at the lower of cost or net realizable value if the inventory cost was determined using the FIFO methods.

Question 21

Under the gross profit method, the cost of the ending inventory is determined by applying the gross profit ratio to net sales and then subtracting the cost of goods sold from the cost of goods available for sale.

Question 22

Inventory valuation is very important in computing federal income tax because the value placed on the inventory determines the net income reported.

Question 23

Under FIFO costing, the most recent costs are assigned to ending inventory.

Question 24

Under the retail inventory method, if the gross profit ratio is 40% and ending inventory at retail is
$45,000, then estimated ending inventory is $27,000.

Question 25

To calculate the cost-to-retail ratio, the beginning inventory at cost is divided by the merchandise available for sale at retail.

Question 26

Under the gross profit method, the cost of the ending inventory is determined by applying the gross profit ratio to net sales and then subtracting the gross profit calculated from the cost of goods available for sale.

Question 27

To calculate the cost-to-retail ratio, merchandise available for sale at retail prices is divided by the merchandise available for sale at cost.

Question 28

When the replacement cost of an item is below its original purchase cost, it is necessary to value the inventory at net realizable value in order to reflect the lower current value in the firm's financial records.

Question 29

A business is required to apply the lower of cost or net realizable value rule by comparing and reporting inventory values on an item-by-item basis.

Question 30

The lower of cost or net realizable value rule can be applied on an item-by-item basis, by group or by comparing total inventory at cost to total inventory valued at net realizable value.

Question 31

The most conservative method of applying the lower of cost or net realizable value rule is to use the lower of total cost or total net realizable value by groups.

Question 32

The gross profit method of estimating inventory enables managers to prepare budgets and pro-forma (forecast or anticipated)financial statements.

Question 33

The lower of cost or net realizable value rule requires a business to report inventory at original cost or its current replacement cost, whichever is lower.

Question 34

Under the retail inventory method, if the gross profit ratio is 45% and ending inventory at retail is
$67,000, then estimated ending inventory is $36,850.

Question 35

In periods of rising prices, the LIFO method of inventory valuation gives a lower taxable income and thus provides a tax advantage.

Question 36

Under the retail inventory method, if the cost-to-retail ratio is 60% and ending inventory at retail is
$105,000, then estimated ending inventory is $42,000.

Question 37

Many retail stores take a periodic inventory at retail values, using the sales price marked on the merchandise.

Question 38

A company has inventory with a sales value of $34,000, current net realizable value of $22,000 and a total cost of $23,400. Since the sales value exceeds both cost and net realizable value, no write down in inventory value is required.

Question 39

In applying the lower of cost or net realizable value rule, "net realizable value" is defined as the price at which the last unit was purchased.

Question 40

The fundamental assumption of the gross profit method of estimating inventory is that the rate of gross profit on sales is fairly consistent from period to period.

Question 41

When inventory is valued at the lower of cost or net realizable value, the accountant is applying the principle or convention called .

Question 42

The method of estimating ending inventory involves estimating the cost of goods sold by applying a company's cost/sales ratio to its sales for the current period.

Question 43

Under a periodic inventory system, the account is the one account that appears on both the balance sheet and the income statement.

Question 44

In the method of inventory valuation, inventory cost is determined by multiplying the number of units in inventory by a unit cost, which is calculated by dividing the cost of goods available for sale by the units of merchandise available for sale.

Question 45

In periods of rising prices, the inventory valuation procedure that results in the highest net income is

A)the FIFO method.
B)the LIFO method.
C)the average cost method.
D)the lower of cost or net realizable value method.

Question 46

The lower the ending inventory valuation, the the cost of goods sold.

Question 47

When the method is used, the cost of the ending inventory is computed by using the cost of the most recent purchases.

Question 48

The price the business would have to pay to buy an item of inventory through usual channels in usual quantities is defined as cost.

Question 49

The method of inventory valuation is a procedure developed for charging the current costs of goods against current sales prices.

Question 50

The lower the ending inventory valuation, the the reported net income.

Question 51

In periods of rising prices, use of the method of inventory valuation results in the lowest inventory cost on the balance sheet.

Question 52

A price reduction below the original markon is a .

Question 53

For internal control, unit counts used to compute the inventory should be verified by thorough spot checks.

Question 54

Net Sales minus Gross Profit equals .

Question 55

A firm that sells a single product had a beginning inventory of 5,000 units with a total cost of
$35,000. Early in the year, 12,000 units were purchased at $9 each. Using FIFO, what is the value of the ending inventory of 4,000 units?

A)$27,000
B)$24,000
C)$21,000
D)$36,000

Question 56

A physical inventory should be taken annually, at a minimum, to verify the quantity of goods on hand.

Question 57

If other items remain the same, the larger the ending inventory valuation, the

A)higher the reported net income.
B)higher the cost of goods sold.
C)lower the reported gross profit on sales.
D)lower the reported net income.

Question 58

A merchant who deals in one-of-a-kind items with large unit costs may account for inventory by the method.

Question 59

The method of inventory costing must be used for financial accounting purposes if it is chosen for federal income tax purposes.

Question 60

The method of estimating inventory requires the use of data about both cost and selling prices.

Question 61

The company's gross profit ratio is 40%. With beginning inventory of $64,000, additional purchases of $27,000 and net sales for the quarter of $102,000, the controller estimated ending inventory values at:

A)$40,800.
B)$61,200.
C)$29,800.
D)$27,000.

Question 62

A firm that sells a single product had a beginning inventory of 9,000 units with a total cost of
$45,000. Early in the year, 15,000 units were purchased at $6 each. Using LIFO, what is the value of the ending inventory of 4,000 units?

A)$20,000
B)$16,000
C)$54,000
D)$24,000

Question 63

The price a business would pay for its inventory is

A)assessed value.
B)sales price.
C)replacement cost.
D)discount price.

Question 64

The inventory valuation method which tends to smooth out periodic fluctuations in cost is:

A)the LIFO method
B)the weighted average method
C)the FIFO method
D)the specific identification method

Question 65

Which inventory valuation method most closely matches the actual flow of goods for most businesses?

A)the specific identification method
B)the average cost method
C)the LIFO method
D)the FIFO method

Question 66

The modifying convention of conservatism requires that inventory be presented on the balance sheet at

A)cost.
B)net realizable value.
C)average cost during the period.
D)either cost or net realizable value, whichever is lower.

Question 67

The cost of the earliest merchandise purchased is assigned to ending inventory when a company uses

A)the FIFO method.
B)the LIFO method.
C)the average cost method.
D)the lower of cost or net realizable value method.

Question 68

A matching of the most recent costs to revenue results from the use of

A)the FIFO method.
B)the LIFO method.
C)the average cost method.
D)the lower of cost or net realizable value method.

Question 69

The Lower of Cost or Net Realizable rule is based on which accounting principle?

A)conservatism
B)revenue recognition
C)matching
D)full disclosure

Question 70

The steps and proper order for estimating EI cost using the gross profit method are as follows:

A)determine COGA, estimate COGS, subtract COGS from COGA.
B)determine COGA, estimate COGS, subtract COGA from COGS.
C)estimate COGS, determine COGA, subtract COGA from COGS.
D)estimate COGS, determine COGA, subtract COGS from COGA.

Question 71

The use of the LIFO method of inventory valuation

A)assigns the cost of the most recent purchases to the ending inventory.
B)results in the same valuation as the specific identification method in a time of rising prices.
C)results in the lowest reported net income in a time of rising prices.
D)results in the highest reported net income in a time of rising prices.

Question 72

The accountant for a company whose inventory was destroyed by fire determined from undamaged records that the cost of goods available for sale was $140,000 and the net sales were $100,000 up to the date of the fire. The accountant also determined that the company's normal gross profit rate is 40 percent of net sales. From this data, the accountant estimated the cost of the inventory destroyed by the fire to be

A)$80,000.
B)$60,000.
C)$56,000.
D)$84,000.

Question 73

The gross profit method of determining ending inventory cost

A)requires that a firm keep inventory and purchases data at retail value as well as at cost.
B)provides accurate information about the number of units in inventory.
C)can be used without taking a physical count of merchandise.
D)requires that the inventory be classified into groups of items of about the same rate of markon.

Question 74

The use of the FIFO method of inventory valuation

A)results in a matching of current inventory costs against sales revenue.
B)results in the most current costs in ending inventory.
C)results in a lowest reported net income in a time of rising prices.
D)results in a highest reported net income in a time of falling prices.

Question 75

The firm had a beginning inventory of 50 units with a unit cost of $12. Purchases during the year were as follows: March-65 units with a unit cost of $13; July-60 units with a unit cost of $16. Assuming a periodic inventory system and the average cost method is used, the value of the ending inventory of 55 units is: (Round to two decimal places.)

A)$660.00
B)$1,648.80
C)$755.70
D)$720.00

Question 76

Which of the following is NOT a way to apply the lower of cost or net realizable value rule?

A)by item
B)by size
C)in total
D)by group

Question 77

The weighted average cost of an inventory item is calculated by

A)dividing the sum of the unit cost on the purchase invoices by the number of units purchased.
B)dividing the cost of goods available for sale by the number of units on the ending inventory.
C)dividing the cost of goods available for sale by the number of units available during the period.
D)dividing the cost of goods sold by the number of units available during the period.

Question 78

Inventory valuation methods that are acceptable internationally include all of the following except:

A)Specific identification
B)Weighted average
C)FIFO
D)LIFO

Question 79

The merchandise available for sale was $90,000 and was marked to sell at a retail price of
$125,000. Sales during the period totaled $80,000. If the retail method is used, the estimated cost of the ending inventory is

A)$12,600.
B)$32,400.
C)$22,400.
D)$45,000.

Question 80

Which of the following inventory costing procedures requires a physical count of merchandise a minimum of once a year at year end?

A)the Last-in-first-out method
B)the average cost method
C)the First-in-first-out method
D)a physical count at a minimum of once a year is required for all inventory costing procedures