Question 1

The inventory valuation method that results in the lowest taxable income in a period of inflation is the:
A)LIFO method.
B)FIFO method.
C)Weighted-average cost method.
D)Specific identification method.
E)Gross profit method.

Accepted Answer

LIFO method (last-in, first-out) assumes that the goods sold are the ones that were most recently purchased or produced, so the cost of goods sold is based on the higher prices of more recently bought goods. This results in a higher cost of goods sold and lower ending inventory, which in turn leads to a lower taxable income. Therefore, LIFO is the best choice in a period of inflation.

Question 2

Merchandise inventory includes:
A)All goods owned by a company and held for sale.
B)All goods in transit.
C)All goods on consignment.
D)Only damaged goods.
E)Only non-damaged goods.

Accepted Answer

Merchandise inventory includes all goods owned by a company and held for sale. This can include goods that are currently in the possession of the company, as well as goods that are being held in a warehouse or other location until they are ready to be sold. Goods that are in transit or on consignment would not be included in merchandise inventory until they are actually received by the company and are ready to be sold. Damaged goods may or may not be included, depending on whether or not they are still able to be sold. Therefore, the only option that includes all goods owned by the company and held for sale is choice A.

Question 3

Buffalo Company reported a December 31 ending inventory balance of $412,000.The following additional information is also available:
-The ending inventory balance of $412,000 did not include goods costing $48,000 that were purchased by Buffalo on December 28 and shipped FOB destination on that date.Buffalo did not receive the goods until January 2 of the following year.
-The ending inventory balance of $412,000 included damaged goods at their original cost of $38,000.The net realizable value of the damaged goods was $10,000.
Based on this information,the correct balance for ending inventory on December 31 is:
A)$374,000
B)$384,000
C)$460,000
D)$422,000
E)$438,000

Accepted Answer

The answer of Buffalo Company reported a December 31 ending...

Question 4

Using the retail inventory method,if the cost to retail ratio is 70% and ending inventory at retail is $145,000,then estimated ending inventory at cost is $207,143.

Accepted Answer

The estimated ending inventory at cost is calculated by multiplying the ending inventory at retail by the cost-to-retail ratio. Therefore, $145,000 * 70% = $101,500, not $207,143.

Question 5

Goods in transit are included in a purchaser's inventory:
A)At any time during transit.
B)If the goods are shipped FOB shipping point.
C)When the supplier is responsible for freight charges.
D)If the goods are shipped FOB destination.
E)After the half-way point between the buyer and seller.

Accepted Answer

Goods in transit are included in a purchaser's inventory if they are shipped FOB (Free On Board) shipping point, meaning the buyer takes ownership of the goods once they are shipped.

Question 6

Internal controls that should be applied when a business takes a physical count of inventory should include all of the following except:
A)Prenumbered inventory tickets.
B)A manager confirms that all inventories are ticketed only once.
C)Counters confirm the validity of inventory existence,amounts,and quality.
D)Second counts by a different counter.
E)Counters of inventory should be those who are responsible for the inventory.

Accepted Answer

Counters of inventory should be independent from those who are responsible for the inventory in order to reduce the risk of fraud or errors. Therefore, all other options (A, B, C, and D) are internal controls that should be applied during a physical count of inventory.

Question 7

Physical counts of inventory:
A)Are not necessary under the perpetual system.
B)Are necessary to adjust the Inventory account to the actual inventory available.
C)Must be taken at least once a month.
D)Requires the use of hand-held portable computers.
E)Are not necessary under the cost-to benefit constraint.

Accepted Answer

Physical counts of inventory are necessary to adjust the Inventory account to the actual inventory available under both perpetual and periodic inventory systems. It is important to have an accurate inventory count to ensure that financial statements are presented fairly and accurately. The other choices are incorrect; A is false since physical counts are necessary even under perpetual inventory systems, C is not a requirement but can be done more frequently depending on the needs of the business, D is not a requirement either but can be a helpful tool to ease the process of physical counting, and E is false since physical counts of inventory are necessary under the cost-to-benefit constraint.

Question 8

To avoid the time-consuming process of taking an inventory each year,most companies use the gross profit method to estimate ending inventory.

Accepted Answer

Most companies use the gross profit method for estimating inventory primarily for interim financial reports or when an inventory loss occurs due to events like theft or natural disasters, not as a substitute for annual physical inventory counts. Regular physical inventory counts are necessary for accurate financial reporting and compliance with accounting standards.

Question 9

In the retail inventory method of inventory valuation,the retail amount of inventory refers to its dollar amount measured using selling prices of inventory items.

Accepted Answer

The retail inventory method values inventory based on the selling prices of items, which gives the dollar amount of inventory at retail value.

Question 10

The inventory valuation method that has the advantages of assigning an amount to inventory on the balance sheet that approximates its current cost,and also mimics the actual flow of goods for most businesses is:
A)FIFO.
B)Weighted average.
C)LIFO.
D)Specific identification.
E)Lower of cost or market.

Accepted Answer

FIFO (First-In, First-Out) assigns an amount to inventory that approximates its current cost because the oldest costs are assigned to the cost of goods sold, leaving the most recent costs in inventory. It also mimics the actual flow of goods for most businesses, as it assumes that the first items purchased are the first ones sold.

Question 11

The reliability of the gross profit method depends on a good estimate of the gross profit ratio.

Accepted Answer

The gross profit method is based on the assumption that the relationship between sales revenue and gross profit is relatively consistent over time. Therefore, an accurate estimate of the gross profit ratio is essential to determine the cost of goods sold and the value of the ending inventory using the gross profit method. A good estimate of the gross profit ratio provides reliable results and vice versa.

Question 12

Costs included in the Merchandise Inventory account can include all of the following except:
A)Invoice price minus any discount.
B)Transportation-in.
C)Storage.
D)Insurance.
E)Damaged inventory that cannot be sold.

Accepted Answer

Damaged inventory that cannot be sold would not be included in the Merchandise Inventory account because it is not considered sellable inventory. Only items that are expected to be sold to customers are included in the Merchandise Inventory account.

Question 13

Damaged and obsolete goods that can be sold:
A)Are never counted as inventory.
B)Are included in inventory at their full cost.
C)Are included in inventory at their net realizable value.
D)Should be disposed of immediately.
E)Are assigned a value of zero.

Accepted Answer

Damaged and obsolete goods that can be sold should be included in inventory at their net realizable value, which is the estimated selling price minus any costs of disposal. This ensures that inventory is stated at a more realistic value and avoids overstating the amount of inventory on hand.

Question 14

During a period of steadily rising costs,the inventory valuation method that yields the highest reported net income is:
A)Specific identification method.
B)Average cost method.
C)Weighted-average method.
D)FIFO method.
E)LIFO method.

Accepted Answer

During a period of steadily rising costs, the FIFO (first-in, first-out) method yields the highest reported net income as it assumes that the earliest inventory purchased is sold first, resulting in the sale of lower-priced inventory and higher profit margins. This is advantageous when costs are rising as it allows businesses to report higher profits.

Question 15

The inventory valuation method that results in the highest taxable income in a period of inflation is the:
A)LIFO method.
B)FIFO method.
C)Weighted-average cost method.
D)Specific identification method.
E)Gross profit method.

Accepted Answer

In a period of inflation, the FIFO method will result in the highest taxable income because it assumes that the older, lower-cost inventory items are sold before the newer, higher-cost items. As prices increase, this leads to a higher cost of goods sold and therefore higher taxable income. The LIFO method, on the other hand, will result in a lower cost of goods sold and lower taxable income in a period of inflation, as it assumes the newer, higher-cost inventory items are sold first.

Question 16

On December 31 of the current year,Plunkett Company reported an ending inventory balance of $215,000.The following additional information is also available: 
-Plunkett sold and shipped goods costing $38,000 to Savannah Enterprises on December 28 with shipping terms of FOB shipping point.The goods were not included in the ending inventory amount of $215,000.
-Plunkett purchased goods costing $44,000 on December 29.The goods were shipped FOB destination and were received by Plunkett on January 2 of the following year.The shipment was a rush order that was supposed to arrive by December 31.These goods were included in the ending inventory balance of $215,000.
-Plunkett's ending inventory balance of $215,000 included $15,000 of goods being held on consignment from Carole Company.(Plunkett Company is the consignee.)
-Plunkett's ending inventory balance of $215,000 did not include goods costing $95,000 that were shipped to Plunkett on December 27 with shipping terms of FOB destination and were still in transit at year-end.
Based on the above information,the amount that Plunkett should report in ending inventory on December 31 is:
A)$194,000
B)$209,000
C)$200,000
D)$171,000
E)$156,000

Accepted Answer

The answer of On December 31 of the current year,Plunkett...

Question 17

The inventory valuation method that tends to smooth out erratic changes in costs is:
A)FIFO.
B)Weighted average.
C)LIFO.
D)Specific identification.
E)WIFO.

Accepted Answer

The weighted average method takes into account all costs of the inventory accumulated over a period of time, and calculates an average cost per unit. This method tends to smooth out erratic changes in costs, as it includes all purchases at different costs. Conversely, FIFO and LIFO tend to have more drastic fluctuations in the cost of goods sold and ending inventory, as they rely on the most recent or oldest costs. Specific identification is only applicable for items with unique and identifiable costs. WIFO is not a commonly used inventory valuation method.

Question 18

Consignment goods are:
A)Goods shipped by the owner to the consignee who sells the goods for the owner.
B)Reported in the consignee's books as inventory.
C)Goods shipped to the consignor who sells the goods for the owner.
D)Not reported in the consignor's inventory since they do not have possession of the inventory.
E)Always paid for by the consignee when they take possession.

Accepted Answer

Consignment goods are items sent by their owner (the consignor) to another party (the consignee) who holds and sells the goods on behalf of the owner. The consignee does not own the goods but acts as an agent for the consignor.

Question 19

Regardless of the inventory costing system used,cost of goods available for sale must be allocated at the end of the period between
A)beginning inventory and net purchases during the period.
B)ending inventory and beginning inventory.
C)net purchases during the period and ending inventory.
D)ending inventory and cost of goods sold.
E)beginning inventory and cost of goods sold.

Accepted Answer

The cost of goods available for sale must be allocated between the ending inventory and cost of goods sold. This is because the cost of goods available for sale represents the total amount of inventory costs that a company has incurred during the accounting period, and this amount must be allocated between the inventory that remains (the ending inventory) and the inventory that has been sold (the cost of goods sold).

Question 20

Bedrock Company reported a December 31 ending inventory balance of $412,000.The following additional information is also available: 
-The ending inventory balance of $412,000 included $72,000 of consigned inventory for which Bedrock was the consignor.
-The ending inventory balance of $412,000 included $22,000 of office supplies that were stored in the warehouse and were to be used by the company's supervisors and managers during the coming year.
Based on this information,the correct balance for ending inventory on December 31 is:
A)$412,000
B)$340,000
C)$318,000
D)$362,000
E)$390,000

Accepted Answer

The answer of Bedrock Company reported a December 31 ending...

Quiz 5: Reporting and Analyzing Inventories

The inventory valuation method that results in the lowest taxable income in a period of inflation is the:

Merchandise inventory includes:

Using the retail inventory method,if the cost to retail ratio is 70% and ending inventory at retail is $145,000,then estimated ending inventory at cost is $207,143.

Goods in transit are included in a purchaser's inventory:

Internal controls that should be applied when a business takes a physical count of inventory should include all of the following except:

Physical counts of inventory:

To avoid the time-consuming process of taking an inventory each year,most companies use the gross profit method to estimate ending inventory.

In the retail inventory method of inventory valuation,the retail amount of inventory refers to its dollar amount measured using selling prices of inventory items.

The inventory valuation method that has the advantages of assigning an amount to inventory on the balance sheet that approximates its current cost,and also mimics the actual flow of goods for most businesses is:

The reliability of the gross profit method depends on a good estimate of the gross profit ratio.

Costs included in the Merchandise Inventory account can include all of the following except:

Damaged and obsolete goods that can be sold:

During a period of steadily rising costs,the inventory valuation method that yields the highest reported net income is:

The inventory valuation method that results in the highest taxable income in a period of inflation is the:

The inventory valuation method that tends to smooth out erratic changes in costs is:

Consignment goods are:

Regardless of the inventory costing system used,cost of goods available for sale must be allocated at the end of the period between