Question 1

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
-Prices are declining; income taxes are higher with this method.

Accepted Answer

LIFO achieves the effect of lower net income and higher income taxes when prices are declining. This is because LIFO assumes that the last units purchased are the first ones sold, leading to higher cost of goods sold and lower ending inventory value. As a result, the company reports lower profits, leading to higher income tax expense.

Question 2

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
-Prices are rising; ending inventory best approximates replacement cost with this method.

Accepted Answer

Prices rising is an inventory cost and should be added to the cost of inventory to reflect replacement cost.

Question 3

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
-Freight costs incurred by the buyer to ship goods to its place of business.

Accepted Answer

Freight costs incurred by the buyer to ship goods to its place of business should be added to the inventory cost as they are necessary costs incurred to bring the inventory to the buyer's place of business.

Question 4

Match the terms with the descriptions provided.
-Arrangement whereby goods owned by one party are held and offered for sale by another party.

Accepted Answer

Consignment is the arrangement whereby goods owned by one party (consignor) are held and offered for sale by another party (consignee).

Answer: C) Inventory
 Inventory refers to the goods that a company has on hand and is available for sale.

Answer: D) LIFO Reserve
 LIFO Reserve is an accounting term that refers to the difference between the value of inventory calculated using the LIFO (last in, first out) method and the value of inventory calculated using another method.

Answer: E) Lower of cost or market rule
 Lower of cost or market rule is an accounting principle that requires companies to value their inventory at the lower of its cost or its current market value.

Answer: F) Purchase allowance
 Purchase allowance is a discount that a supplier offers to a customer in exchange for keeping faulty merchandise instead of returning it.

Answer: G) Purchase discounts
 Purchase discounts refer to discounts that a supplier offers to a customer for paying an invoice within a specified time period.

Answer: H) Purchase returns
 Purchase returns refer to goods that a customer returns to a supplier.

Answer: I) Purchases
 Purchases refer to the goods that a company has bought from a supplier and intends to sell to customers.

Note: B) Discount period is not a directly related term to the given descriptions.

Question 5

Match the terms with the descriptions provided.
-For a given level of sales, the higher the cost of goods sold, the lower this measure.

Accepted Answer

Gross profit ratio is calculated by dividing gross profit by sales. For a given level of sales, the higher the cost of goods sold, the lower the gross profit ratio.

Question 6

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
-Prices are rising; profits are higher under this method.

Accepted Answer

Costs that are directly related to the acquisition or production of inventory should be added to the inventory cost to determine the total cost of inventory. When prices are rising, the cost of purchasing or producing the inventory increases, and including those costs in the inventory cost will result in higher reported profits through the higher cost of goods sold.

Question 7

Match the terms with the descriptions provided.
-A reduction in the amount of goods available for sale caused by defective merchandise.

Accepted Answer

Purchase returns involve sending back defective or unsatisfactory goods to the supplier, which directly reduces the amount of goods available for sale.

Question 8

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
-Prices are declining; ending inventory is lower with this method.

Accepted Answer

In a declining price environment, using a method like LIFO (Last-In, First-Out) results in a lower ending inventory value because the most recent, lower-cost items are considered sold first, leaving the older, higher-cost items in inventory.

Question 9

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
-Prices are declining; ending inventory with this method falls between the amounts for the other two methods.

Accepted Answer

The answer of Match the costs that might be included...

Question 10

Match the terms with the descriptions provided.
-Measures how quickly merchandise is purchased and sold.

Accepted Answer

Inventory turnover ratio measures how quickly merchandise is purchased and sold. A measures the average number of days it takes to sell inventory, B and C measure profitability, and E and F are related to shipping costs.

Question 11

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
-Prices are rising; ending inventory is lower with this method.

Accepted Answer

Prices are rising, which means that the cost of inventory is increasing. Therefore, any costs that are subtracted from inventory cost would result in a lower ending inventory value, reflecting the higher prices. This could include things like purchase returns, discounts, or allowances.

Question 12

Match the terms with the descriptions provided.
-Generally speaking, the lower this measure the better.

Accepted Answer

A lower average days to sell inventory indicates that a company is selling its inventory quickly, which is generally a positive sign of efficiency and demand.

Question 13

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
-Returned goods to the seller.

Accepted Answer

Returned goods to the seller would reduce the cost of inventory, so it should be subtracted from inventory cost.

Question 14

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
-Freight costs incurred by the seller to ship goods to its customers.

Accepted Answer

Freight costs incurred by the seller to ship goods to its customers are considered a selling expense, not a part of inventory cost. These costs are typically recorded as an expense in the period they are incurred, rather than being capitalized as part of the inventory's cost.

Question 15

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
-Prices are rising; cost of goods sold is lower with this method.

Accepted Answer

When prices are rising, using methods such as FIFO (First In, First Out) results in older, cheaper costs being allocated to the cost of goods sold, while the more recent, higher costs are added to the inventory value. This leads to a lower cost of goods sold and a higher ending inventory value.

Question 16

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
-Prices are declining; gross margin is higher with this method.

Accepted Answer

The answer of Match the costs that might be included...

Question 17

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.)
-Paid for purchased goods within the discount period.

Accepted Answer

When goods are purchased within the discount period, the discount is subtracted from the inventory cost because it reduces the total cost of the inventory.

Question 18

Match the terms with the descriptions provided.
-Transportation costs paid by the buyer.

Accepted Answer

Freight-in refers to transportation costs paid by the buyer. The other terms relate to inventory turnover and profitability ratios.

Question 19

Match the terms with the descriptions provided.
-Term referring to transportation costs paid by the seller.

Accepted Answer

Freight-out refers to the transportation costs that are paid by the seller to deliver goods to the buyer.

Question 20

Match the terms with the descriptions provided.
-The difference between a company's net sales and its cost of goods sold.

Accepted Answer

Gross margin is the difference between a company's net sales and its cost of goods sold.

Quiz 6: Cost Of Goods Sold and Inventory

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.) -Prices are declining; income taxes are higher with this method.

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.) -Prices are rising; ending inventory best approximates replacement cost with this method.

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.) -Freight costs incurred by the buyer to ship goods to its place of business.

Match the terms with the descriptions provided. -Arrangement whereby goods owned by one party are held and offered for sale by another party.

Match the terms with the descriptions provided. -For a given level of sales, the higher the cost of goods sold, the lower this measure.

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.) -Prices are rising; profits are higher under this method.

Match the terms with the descriptions provided. -A reduction in the amount of goods available for sale caused by defective merchandise.

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.) -Prices are declining; ending inventory is lower with this method.

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.) -Prices are declining; ending inventory with this method falls between the amounts for the other two methods.

Match the terms with the descriptions provided. -Measures how quickly merchandise is purchased and sold.

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.) -Prices are rising; ending inventory is lower with this method.

Match the terms with the descriptions provided. -Generally speaking, the lower this measure the better.

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.) -Returned goods to the seller.

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.) -Freight costs incurred by the seller to ship goods to its customers.

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.) -Prices are rising; cost of goods sold is lower with this method.

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.) -Prices are declining; gross margin is higher with this method.

Match the costs that might be included as part of the cost of inventory to the listed accounting treatment. (Choices may be used more than once.) -Paid for purchased goods within the discount period.

Match the terms with the descriptions provided. -Transportation costs paid by the buyer.

Match the terms with the descriptions provided. -Term referring to transportation costs paid by the seller.

Match the terms with the descriptions provided. -The difference between a company's net sales and its cost of goods sold.