Question 1

Company A is identical to Company B in every regard except that Company A uses FIFO and Company B uses LIFO.In an extended period of rising inventory costs,which of the following is true of Company A compared to Company B?

Accepted Answer

In a period of rising inventory costs, the cost of goods sold (COGS) will be higher for both companies. However, since Company A is using FIFO, its COGS will reflect the older, lower cost inventory items, resulting in a higher gross profit compared to Company B. However, since FIFO assumes that older inventory items are sold first, the value of its ending inventory (which is based on the cost of the most recent purchases) will be higher, resulting in a lower inventory turnover compared to Company B. Therefore, Company A's gross profit is higher and inventory turnover is lower compared to Company B.

Question 2

Nu Company reported the following data for its first year of operations: What is Nu's gross profit ratio?
$$\begin{array} { | l | r | } 
\hline \text { Net sales } & \$ 2,800 \
\hline \text { Cost of goods sold } & 1,680 \
\hline \text { Operating expenses } & 880 \
\hline \text { Ending inventories } & 820 \
\hline
\end{array}$$

Accepted Answer

Gross profit ratio is calculated as (Net Sales - Cost of Goods Sold) / Net Sales. Here, it is (2800 - 1680) / 2800 = 0.40 or 40%.

Question 3

In a periodic inventory system,the entry at the time of a sale to record the cost of inventory sold includes a:

Accepted Answer

In a periodic inventory system, the cost of goods sold is not recorded at the time of sale. Instead, it is calculated at the end of the accounting period.

Question 4

The following balances come from the financial statements of Way Industries: Given this information,what is the company's inventory turnover ratio?
$$\begin{array} { | l | r | } 
\hline \text { Sales revenue } & \$ 860,000 \
\hline \text { Accounts receivable } & \$ 280,000 \
\hline \text { Beginning inventory } & \$ 50,000 \
\hline \text { Ending inventory } & \$ 30,000 \
\text { Net purchases } & \$ 460,000 \
\hline \text { Sales returns } & \$ 50,000 \
\hline \text { Sales discount } & \$ 20,000 \
\hline
\end{array}$$

Accepted Answer

The answer of The following balances come from the financial...

Question 5

Anthony Corporation reported the following amounts for the year: Anthony's average days in inventory is (round to the nearest whole day):
$$\begin{array} { | l | r | } 
\hline \text { Net sales } & \$ 296,000 \
\hline \text { Cost of goods sold } & 138,000 \
\text { Average inventory } & 50,000 \
\hline
\end{array}$$

Accepted Answer

The average days in inventory is calculated using the formula: $ \text{Average Days in Inventory} = \frac{365}{\text{Inventory Turnover}} $, where Inventory Turnover is $ \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} $. Here, Inventory Turnover is $ \frac{138,000}{50,000} = 2.76 $. Thus, Average Days in Inventory is $ \frac{365}{2.76} \approx 132 $ days.

Question 6

The inventory turnover ratio is measured as:

Accepted Answer

The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory during a certain period of time. This ratio measures how quickly a company is able to sell its inventory and replace it with new inventory. Therefore, the best choice is A, which shows the formula for calculating the inventory turnover ratio. Choice B and C are not correct because they do not involve the cost of goods sold or the average inventory.

Question 7

Consider the following inventory data: What is the average days in inventory for the year?
$$\begin{array} { | l | r | } 
\hline \text { Beginning inventory } & \$ 150,000 \
\hline \text { Ending inventory } & 100,000 \
\text { Purchases } & 310,000 \
\hline
\end{array}$$

Accepted Answer

The average inventory is $(150,000 + 100,000) / 2 = 125,000$. The cost of goods sold (COGS) is $150,000 + 310,000 - 100,000 = 360,000$. Days in inventory is $(125,000 / 360,000) \times 365 = 126.7$ days.

Question 8

Northwest Fur Co.started the year with $94,000 of merchandise inventory on hand.During the year,$400,000 in merchandise was purchased on account with credit terms of 1/15,n/45.All discounts were taken.Northwest paid freight-in charges of $7,500.Merchandise with an invoice amount of $5,000 was returned for credit.Cost of goods sold for the year was $380,000.What is ending inventory?

Accepted Answer

The answer of Northwest Fur Co.started the year with $94,000...

Question 9

The gross profit ratio measures:

Accepted Answer

The gross profit ratio measures the amount by which the sale of inventory exceeds its cost per dollar of sales. It is calculated by dividing the gross profit (sales minus cost of goods sold) by net sales. It is a measure of the profitability of a company's sales and is often used to analyze trends or compare performance against industry competitors. Choices A and B are incorrect because they do not accurately describe the gross profit ratio.

Question 10

Martha Inc.'s sales equal $60,000 and cost of goods sold equals $20,000.Its beginning inventory was $1,600 and its ending inventory is $2,400.Martha's inventory turnover ratio equals:

Accepted Answer

Inventory turnover ratio = Cost of goods sold/Average inventory
Average inventory = (Beginning inventory + Ending inventory)/2
= ($1,600 + $2,400)/2
= $2,000
Inventory turnover ratio = $20,000/$2,000
= 10 times

Question 11

In a periodic inventory system,the purchase of inventory is debited to:

Accepted Answer

In a periodic inventory system, the purchase of inventory is debited to the Purchases account. This account is used to accumulate all the purchases of inventory made during the period. At the end of the period, the cost of goods sold is calculated by adding the beginning inventory to the purchases made during the period and then subtracting the ending inventory.

Question 12

Anthony Corporation reported the following amounts for the year: Anthony's gross profit ratio is:
$$\begin{array} { | l | r | } 
\hline \text { Net sales } & \$ 296,000 \
\hline \text { Cost of goods sold } & 138,000 \
\text { Average inventory } & 50,000 \
\hline
\end{array}$$

Accepted Answer

Gross profit ratio is calculated as (Net Sales - Cost of Goods Sold) / Net Sales. Here, it is ($296,000 - $138,000) / $296,000 = 53.4%.

Question 13

The gross profit ratio will typically be higher for companies that:

Accepted Answer

The gross profit ratio is higher for companies that sell products that are more highly specialized because these products often have higher margins. Specialized products can command higher prices due to their unique features or brand value, leading to a higher gross profit ratio. Collecting cash more quickly (A) and purchasing inventory more frequently (B) affect cash flow and inventory turnover but not directly the gross profit ratio.

Question 14

Anthony Corporation reported the following amounts for the year: Anthony's inventory turnover ratio is:
$$\begin{array} { | l | r | } 
\hline \text { Net sales } & \$ 296,000 \
\hline \text { Cost of goods sold } & 138,000 \
\text { Average inventory } & 50,000 \
\hline
\end{array}$$

Accepted Answer

The inventory turnover ratio is calculated as Cost of Goods Sold divided by Average Inventory. Thus, $138,000 / $50,000 = 2.76.

Question 15

Lebaron Co.'s beginning inventory is $2,000 and its ending inventory is $1,000.The inventory turnover is 6 times.Cost of goods sold for the year must equal:

Accepted Answer

Inventory turnover = Cost of goods sold / Average inventory6 = Cost of goods sold / ((2,000 + 1,000) / 2)Cost of goods sold = 6 * 1,500 = $9,000

Question 16

Truman Co.sells a large number of common household items,while Stapleton sells a small number of expensive items.The two companies report the same dollar amount for ending inventory and gross profit for the year.Which of the following is most likely true?

Accepted Answer

Since Truman sells a large number of common household items, they are likely to have a higher inventory turnover ratio as compared to Stapleton, which sells expensive items. However, since both companies report the same dollar amount for ending inventory and gross profit for the year, it means that Stapleton has a higher gross profit ratio. Thus, Option B is the most likely scenario.

Question 17

The inventory turnover ratio measures:

Accepted Answer

The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory balance. This ratio reflects how many times in a given period the company sells its entire inventory. Therefore, the correct answer is C: The times per period the average inventory balance is sold. Option A is incorrect because the inventory turnover ratio does not measure the portion of obsolete inventory. Option B is incorrect because the inventory turnover ratio does not measure how many times the company purchases inventory during the current reporting period.

Question 18

Good Inc. ,sold inventory for $1,200 that was purchased for $700.Good records which of the following when it sells inventory using a periodic inventory system?

Accepted Answer

In a periodic inventory system, the cost of goods sold is not recorded at the time of sale. Instead, it is calculated at the end of the period.

Question 19

Consider the following inventory data for two companies: Which of these companies had the higher inventory turnover ratio?
$$\begin{array} { | l | r | r | } 
\hline & \text { Nichols Inc., } & \text { Winters Inc., } \
\hline \text { Beginning inventory } & \$ 120,000 & \$ 150,000 \
\hline \text { Ending inventory } & 80,000 & 100,000 \
\hline \text { Purchases } & 240,000 & 310,000 \
\hline
\end{array}$$

Accepted Answer

The inventory turnover ratio is calculated as Cost of Goods Sold (COGS) divided by Average Inventory. For both companies, COGS can be estimated as Beginning Inventory + Purchases - Ending Inventory. For Nichols Inc., COGS = $120,000 + $240,000 - $80,000 = $280,000, and Average Inventory = ($120,000 + $80,000) / 2 = $100,000, giving a turnover ratio of 2.8. For Winters Inc., COGS = $150,000 + $310,000 - $100,000 = $360,000, and Average Inventory = ($150,000 + $100,000) / 2 = $125,000, giving a turnover ratio of 2.88. Thus, Winters Inc. had the higher inventory turnover ratio.

Question 20

Which of the following would increase the gross profit ratio?

Accepted Answer

An increase in gross profit ratio occurs when the sales price of a product increases by a higher percentage than does its cost of goods sold. This means the company is able to generate more profit per unit sold, increasing the overall gross profit ratio.

Quiz 6: Inventory and Cost of Goods Sold