Question 1

The determination of the balance sheet cost of merchandise inventory is not important to the determination of net income.

Accepted Answer

The determination of the balance sheet cost of merchandise inventory is an essential part of calculating the cost of goods sold and, therefore, has a significant impact on the determination of net income.

Question 2

A cost-to-retail percentage must be calculated when applying the gross profit method.

Accepted Answer

The cost-to-retail percentage is not used in the gross profit method; instead, it is used in the retail inventory method. The gross profit method uses the gross profit margin to estimate inventory.

Question 3

The lower the inventory turnover,the lower the days' inventory on hand.

Accepted Answer

A lower inventory turnover indicates that inventory is sold at a slower rate, leading to a higher number of days' inventory on hand.

Question 4

The higher the value assigned to ending inventory,the lower the gross margin.

Accepted Answer

The higher the value assigned to ending inventory, the higher the cost of goods sold and the higher the gross margin. This is because the cost of goods sold is subtracted from revenue to calculate gross margin, so a higher value for ending inventory means less is being subtracted from revenue to calculate cost of goods sold, resulting in a higher gross margin.

Question 5

In verifying a claim for a loss of inventory,an insurance company might use the gross profit method.

Accepted Answer

The gross profit method is a commonly used approach for verifying a claim for a loss of inventory by estimating the amount of inventory lost based on the gross profit percentage. This method takes into consideration the sales revenue, cost of goods sold, and gross profit margin to estimate the amount of inventory lost in case of a covered loss. Therefore, the statement is true, and an insurance company might use the gross profit method to verify a claim for a loss of inventory.

Question 6

The portion of cost of goods available for sale that is not assigned to ending inventory is assigned to work in process.

Accepted Answer

The portion of cost of goods available for sale that is not assigned to ending inventory is assigned to cost of goods sold, not work in process. Work in process refers to the inventory that is in the process of being manufactured or assembled.

Question 7

Days' inventory on hand equals the inventory turnover divided by 365.

Accepted Answer

Days' inventory on hand equals 365 divided by the inventory turnover ratio, not the other way around.

Question 8

An understatement of ending inventory in a period will result in an overstatement of gross margin in the next period.

Accepted Answer

An understatement of ending inventory in a period will result in an overstatement of cost of goods sold and an understatement of gross margin in the next period.

Question 9

Inventory turnover is a measure expressed in terms of a percentage.

Accepted Answer

Inventory turnover is a measure expressed as a ratio or rate, indicating how many times a company's inventory is sold and replaced over a specific period.

Question 10

Valuation of inventory on the balance sheet impacts cost of goods sold on the income statement.

Accepted Answer

The valuation of inventory affects the cost of goods sold (COGS) because the COGS is calculated as the beginning inventory plus purchases during the period minus the ending inventory. Therefore, if the inventory is overvalued, the COGS will be understated, and if the inventory is undervalued, the COGS will be overstated.

Question 11

An overstatement of beginning inventory in a period will result in an overstatement of gross margin in the next period.

Accepted Answer

An overstatement of beginning inventory leads to an overstatement of the cost of goods sold, which in turn results in an understatement of gross margin in the same period, not the next.

Question 12

The gross profit method requires that records be kept at both cost and retail.

Accepted Answer

The gross profit method estimates inventory cost by applying a historical gross profit percentage to sales, not requiring records at both cost and retail.

Question 13

The costs included in work in process and finished goods inventories would properly contain manufacturing overhead costs.

Accepted Answer

Manufacturing overhead costs such as indirect materials, indirect labor, and other production costs are typically included in work-in-process and finished goods inventories.

Question 14

When the average-cost method is applied to a perpetual inventory system,a moving average cost per unit is computed with each purchase.

Accepted Answer

The average-cost method in a perpetual inventory system uses a moving average cost, which means that with each purchase, a new average cost per unit is calculated. This is different from the periodic inventory system, where the average cost is only calculated at the end of the accounting period.

Question 15

An overstatement of ending inventory in a period will result in an understatement of gross margin in that period.

Accepted Answer

An overstatement of ending inventory will result in an overstatement of gross margin, not an understatement. This is because if ending inventory is overstated, the cost of goods sold will be understated, leading to a higher gross margin.

Question 16

Supply-chain management helps companies maintain lower levels of inventory.

Accepted Answer

By implementing efficient supply-chain practices, companies can streamline their inventory management, reduce the amount of safety stock required, and ultimately maintain lower inventory levels while still meeting customer demand.

Question 17

When taking a physical inventory under the retail method,it is necessary to know only the quantity of items on hand.

Accepted Answer

When taking a physical inventory under the retail method, it is necessary to know not only the quantity of items on hand but also the cost and retail value of those items. This is because the retail method calculates the ending inventory value by using a percentage markup on the cost of goods sold. Therefore, knowing the cost and retail value is essential for accurate inventory calculations.

Question 18

Under the perpetual inventory system,cost of goods sold is not recorded until the end of the accounting period.

Accepted Answer

Under the perpetual inventory system, cost of goods sold is updated and recorded every time a sale is made, instead of waiting until the end of the accounting period.

Question 19

To increase their levels of inventory,many merchandisers and manufacturers use supply-chain management in conjunction with a just-in-time operating environment.

Accepted Answer

Supply-chain management and just-in-time operating environments focus on minimizing inventory levels and reducing waste. Therefore, they are not typically used to increase inventory levels.

Question 20

Both the retail method and the gross profit method are useful in estimating the inventory cost.

Accepted Answer

Both the retail method and gross profit method are commonly used to estimate inventory cost. The retail method estimates the cost of inventory by using the retail selling price and a predetermined markup percentage to calculate the cost. On the other hand, the gross profit method estimates the cost of inventory based on the gross profit margin percentage. Both methods may be used depending on the circumstances and the available information.

Quiz 7: Inventories