Question 1

Merchandise inventory is

Accepted Answer

Merchandise inventory is considered a current asset because it is expected to be sold or converted into cash within one year or the operating cycle, whichever is longer. It is usually reported at cost or lower of cost and net realizable value. It is not reported as property, plant, and equipment or as a miscellaneous expense on the income statement.

Question 2

In a period of falling prices, the average-cost method results in a lower cost of goods sold than the FIFO method.

Accepted Answer

The average-cost method calculates the cost of goods sold based on the average cost of all the inventory purchased, whereas the FIFO method assumes that the first goods received are the first goods sold. In a period of falling prices, the average cost is likely to be lower than the cost of the goods purchased earlier, which would result in a lower cost of goods sold under the average-cost method compared to FIFO.

Question 3

In a perpetual inventory system, the cost of goods sold under the FIFO method is based on the cost of the latest goods on hand during the period.

Accepted Answer

In a perpetual inventory system using the FIFO (First-In, First-Out) method, the cost of goods sold is based on the cost of the oldest inventory items purchased or produced, not the latest.

Question 4

The lower-of-cost-or-net realizable value basis is an example of the accounting concept of prudence.

Accepted Answer

The lower-of-cost-or-net realizable value basis requires that inventory be valued at the lower of its cost or net realizable value. This principle is a manifestation of the accounting concept of prudence, which requires that losses be recognized as soon as they are probable and gains be recognized only when they are certain.

Question 5

Manufacturers usually classify inventory into all the following general categories except

Accepted Answer

The general categories for inventory are work in process, finished goods, and raw materials. Merchandise inventory is not a category used by manufacturers, but rather retailers who purchase products from manufacturers to sell to customers.

Question 6

The term "FOB" denotes

Accepted Answer

FOB stands for "free on board" and refers to the point in a shipment's journey when ownership and liability transfer from the seller to the buyer. At the FOB point, the seller relinquishes all responsibility for the shipment, including any fees or damages that may occur during transport.

Question 7

Inventories affect

Accepted Answer

Inventories are usually reported on both the statement of financial position (balance sheet) and the income statement. On the statement of financial position, inventories are reported as a current asset, while on the income statement, they are reported as a cost of goods sold. Therefore, inventories affect both the statement of financial position and the income statement.

Question 8

Chang Company took a physical inventory at December 31, 2013 and determined that ¥3,950,000 of goods were on hand. Included in the count was inventory of ¥700,000 on consignment from Keiko Company. On December 30, Chang sold and shipped F.o.b. destination ¥820,000 worth of inventory. These goods arrived at the buyer's place of business on January 2, 2014. What amount should Chang report for inventory on its December 31, 2013 statement of financial position?

Accepted Answer

The answer of Chang Company took a physical inventory at...

Question 9

Inventories are reported in the current assets section of the statement of financial position immediately before receivables.

Accepted Answer

Inventories are reported as a current asset because they are expected to be sold or used within the next 12 months. They are reported before receivables, which are also a current asset but represent money owed to the company by customers or clients.

Question 10

An auto manufacturer would classify vehicles in various stages of production as

Accepted Answer

Vehicles in various stages of production are not yet finished and cannot be classified as finished goods. They have already gone through some production processes and are not simply raw materials. They are also not ready for sale, so they cannot be classified as merchandise inventory. Therefore, the best classification for these vehicles is work in process.

Question 11

In a manufacturing business, inventory that is ready for sale is called

Accepted Answer

Finished goods inventory refers to products that have been completed and are ready for sale. Raw materials inventory refers to materials that have not yet been used in the production process, work in process inventory refers to products that are still in the process of being manufactured, and store supplies inventory refers to items used for running the business, such as office supplies or cleaning materials.

Question 12

As a result of a thorough physical inventory, Hastings Company determined that it had inventory worth $570,000 at December 31, 2014. This count did not take into consideration the following facts: Carlin Consignment store currently has goods worth $104,000 on its sales floor that belong to Hastings but are being sold on consignment by Carlin. The selling price of these goods is $150,000. Hastings purchased $40,000 of goods that were shipped on December 27 FOB destination, that will be received by Hastings on January 3. Determine the correct amount of inventory that Hastings should report.

Accepted Answer

The amount of inventory Hastings should report is:
$570,000 (physical inventory) 
+ $104,000 (goods on consignment) 
- $40,000 (goods in transit) 
= $634,000 
Therefore, the correct answer is choice C: $674,000.

Question 13

The factor which determines whether goods in transit should be included in a physical count of inventory is

Accepted Answer

Legal title is the determining factor for whether goods in transit should be included in a physical count of inventory. Legal title refers to ownership of the goods, and it determines which party is responsible for the goods in transit. If legal title has passed to the buyer, the goods should be included in the physical count of inventory, even if they have not yet been physically received. If legal title has not yet passed to the buyer, the goods should not be included in the physical count of inventory.

Question 14

Keiko Company took a physical inventory at December 31, 2013 and determined that ¥3,530,000 of goods were on hand. In addition, the company had goods consigned with Chang Company that had a cost of ¥700,000. On December 29, Keiko sold and shipped F.o.b. shipping point ¥600,000 worth of inventory. These goods arrived at the buyer's place of business on January 4, 2014. What amount should Keiko report as inventory on its December 31, 2013 statement of financial position?

Accepted Answer

The inventory on hand at December 31, 2013 is ¥3,530,000. In addition, the consigned goods of ¥700,000 should also be included in the inventory since it is owned by Keiko but held by the consignee. Therefore, the total inventory should be ¥4,230,000 (¥3,530,000 + ¥700,000). The sold goods F.o.b. shipping point on December 29 should not be included in the inventory since title passed to the buyer when the goods were shipped.

Question 15

The gross profit method is based on the assumption that the rate of gross profit remains constant from one year to the next.

Accepted Answer

The gross profit method is a quick way to estimate the cost of goods sold and ending inventory. It assumes that the rate of gross profit (gross profit as a percentage of sales) will remain consistent from one year to the next. This allows for an estimation of the cost of goods sold by subtracting the estimated gross profit from the sales figures, and an estimation of the ending inventory by subtracting the estimated cost of goods sold from the beginning inventory.

Question 16

Items not yet placed into production are considered to be

Accepted Answer

Items not yet placed into production are considered to be raw materials, as they still need to undergo a manufacturing process to become finished goods or work in process. Finished goods are products that have already completed manufacturing and are ready for sale, while work in process refers to products that are currently undergoing manufacturing but are not yet finished. Merchandise inventory typically refers to finished goods that have already been purchased and are ready for sale.

Question 17

If goods in transit are shipped FOB destination

Accepted Answer

Under FOB (Free On Board) destination terms, the seller retains ownership and legal title of the goods until they are delivered to the buyer's specified location. This means the risk of loss or damage remains with the seller until delivery is completed.

Question 18

Which of the following should be included in the physical inventory of a company?

Accepted Answer

Goods in transit from another company shipped FOB shipping point should be included in the inventory because the ownership transfers to the buyer at the shipping point.

Question 19

Blosser Company's goods in transit at December 31 include: sales made purchases made
(1) FOB destination (3) FOB destination
(2) FOB shipping point (4) FOB shipping point
Which items should be included in Blosser's inventory at December 31?

Accepted Answer

The answer of Blosser Company's goods in transit at December...

Question 20

Bellingham Inc. took a physical inventory at the end of the year and calculated that £1,450,000 of goods were on hand. Bellingham determined that £25,000 of goods were in transit. The goods were shipped F.o.b. shipping point and were received by Bellingham two days after the inventory count. The company also had £275,000 of goods out on consignment. What amount should Bellingham report for inventory on its statement of financial position?

Accepted Answer

Goods shipped F.o.b. shipping point should be included in the inventory as they are considered owned by Bellingham once shipped. Additionally, goods out on consignment should also be included in the inventory. Therefore, the inventory should include the physical count (£1,450,000), the goods in transit (£25,000), and the consignment goods (£275,000), totaling £1,750,000.

Quiz 6: Inventories