Q&A Hero

Q: The understatement of the beginning inventory balance causes: A. Cost of goods sold to be understated and net income to be understated. B. Cost of goods sold to be understated and net income to be overstated. C. Cost of goods sold to be overstated and net income to be overstated. D. Cost of goods sold to be overstated and net income to be understated. E. Cost of goods sold to be overstated and net income to be correct.

Q: The understatement of the ending inventory balance causes: A. Cost of goods sold to be overstated and net income to be understated. B. Cost of goods sold to be overstated and net income to be overstated. C. Cost of goods sold to be understated and net income to be understated. D. Cost of goods sold to be understated and net income to be overstated. E. Cost of goods sold to be overstated and net income to be correct.

Q: An error in the period-end inventory causes an offsetting error in the next period and therefore: A. Managers can ignore the error. B. It is sometimes said to be self-correcting. C. It affects only income statement accounts. D. If affects only balance sheet accounts. E. Is immaterial for managerial decision making.

Q: The full disclosure principle: A. Requires that when a change in inventory valuation method is made, the notes to the financial statements report the type of change, why it was made, and its effect on net income. B. Requires that companies use the same accounting method for inventory valuation period after period. C. Is not subject to the materiality principle. D. Is only applied to retailers. E. Is also called the consistency principle.

Q: A. Requires a company to consistently use the same accounting method of inventory valuation unless a change will improve financial reporting. B. Requires a company to use one method of inventory valuation exclusively. C. Requires that all companies in the same industry use the same accounting methods of inventory valuation. D. Is also called the full disclosure concept. E. Is also called the matching concept

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

Q: Which inventory valuation method assigns a value to the inventory on the balance sheet that approximates current cost and also mimics the actual flow of goods for most businesses? A. FIFO B. Weighted average C. LIFO D. Specific identification E. First in still here

Q: 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

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

Q: Physical inventory counts: A. Are not necessary under the perpetual system. B. Are necessary to measure and adjust for inventory shrinkage. C. Must be taken at least once a month. D. Require the use of hand-held portable computers. E. Are not necessary under the cost-to benefit constraint.

Q: Given the following items and costs as of the balance sheet date, determine the value of Light Company's merchandise inventory. - $2,000 goods sold by Light to another company. The goods are in transit and shipping terms are FOB shipping point. - $3,000 goods sold by another company to Light. The goods are in transit and shipping terms are FOB shipping point. - $4,000 owned by Light but in the possession of another company, the consignee. - Damaged goods owned by Light that originally cost $5,000 but now have an $800 net realizable value. A. $7,000 B. $7,800 C. $9,800 D. $9,000 E. $6,800

Q: Given the following items and costs as of the balance sheet date, determine the value of Faltron Company's merchandise inventory. - $1,000 goods sold by Faltron to another company. The goods are in transit and shipping terms are FOB destination. - $2,000 goods sold by another company to Faltron. The goods are in transit and shipping terms are FOB destination. - $3,000 owned by Faltron but in the possession of another company, the consignee. - Damaged goods owned by Faltron that originally cost $4,000 but now have a $500 net realizable value. A. $10,000 B. $6,500 C. $5,500 D. $5,000 E. $4,500

Q: Goods on consignment: A. Are goods shipped by the owner to the consignee who sells the goods for the owner. B. Are reported in the consignee's books as inventory. C. Are goods shipped to the consignor who sells the goods for the owner. D. Are not reported in the consignor's inventory since they do not have possession of the inventory. E. Are always paid for by the consignee when they take possession of the goods.

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

Q: 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 items that are on the shelf.

Q: Damaged and obsolete goods: A. Are never included in 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.

Q: Using the retail inventory method, if the cost to retail ratio is 60% and ending inventory at retail is $45,000, then estimated ending inventory at cost is $27,000.

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

Q: In the retail inventory method of inventory valuation, the retail amount of inventory refers to the dollar amount measured by looking at the selling prices of inventory items.

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

Q: The reasoning behind the retail inventory method is that if an accurate estimate of the cost-to-retail ratio is made, it can be multiplied by the ending inventory at retail to estimate ending inventory at cost.

Q: The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.

Q: Monthly or quarterly statements are called interim statements because they are prepared between the traditional annual statement dates.

Q: When LIFO is used with the periodic inventory system, cost of goods sold is assigned costs from the most recent purchases at the point of each sale, rather than from the most recent purchases for the period.

Q: A company's cost of inventory was $317,500. Due to phenomenal demand for this product, the market value of its inventory increased to $323,000. According to the consistency principle, this company should write up the value of its inventory.

Q: The conservatism constraint requires that when more than one estimate of the amounts that are to be received or paid in the future exist and these estimates are about equally likely, then the less optimistic amount is used.

Q: The lower of cost or market rule for inventory valuation must be applied to each individual unit separately and not to major categories of inventory or to the entire inventory.

Q: A company has inventory with a market value of $217,000 and a cost of $241,000. According to the lower of cost or market, the inventory should be written down to $217,000.

Q: In applying the lower of cost or market method to inventory valuation, market is defined as the current selling price.

Q: In applying the lower of cost or market method to inventory valuation, market is defined as the current replacement cost.

Q: The choice of an inventory valuation method can have a major impact on gross profit and cost of sales.

Q: The matching principle requires that the inventory valuation method follow the physical flow of inventory.

Q: Under LIFO, the most recent costs are assigned to ending inventory.

Q: The assignment of costs to the cost of goods sold and to inventory under FIFO is the same for both the perpetual and periodic inventory systems.

Q: The dollar value assigned to goods purchased will differ under the different inventory valuation methods of specific identification, FIFO, LIFO, and weighted average.

Q: The assignment of costs to cost of goods sold and to inventory using specific identification is the same for both the perpetual and periodic systems.

Q: Three key variables determine the dollar value of inventory: (1) inventory quantity, (2) costs of inventory, and (3) cost flow assumption.

Q: The FIFO inventory method assumes that costs for the most recently purchased items are the first to be charged to the cost of goods sold.

Q: The assignment of costs to cost of goods sold and inventory using weighted average usually yields different results depending on whether a perpetual or periodic system is used

Q: LIFO assumes that inventory costs flow in the order they were incurred.

Q: When units are purchased at different costs over time, it is simple to determine the cost per unit assigned to inventory.

Q: The four methods of inventory valuation are SIFO, FIFO, LIFO, and average cost.

Q: One of the most important decisions in accounting for inventory is determining the unit costs assigned to each inventory item.

Q: Toys "R" Us had cost of goods sold of $8,321 million and ending inventory of $2,027 million. Based on this, its days' sales in inventory is equal to 89 days.

Q: A company's cost of goods sold was $15,500 and its average merchandise inventory was $4,500. Its inventory turnover equals 3.4.

Q: It can be expected that companies that sell perishable goods have higher inventory turnover than companies that sell nonperishable goods.

Q: There is no simple rule for inventory turnover, except that a high ratio is preferable provided inventory is adequate to meet demand.

Q: The days' sales in inventory ratio is computed by dividing ending inventory by cost of goods sold and multiplying the result by 365.

Q: The inventory turnover ratio is computed by dividing average merchandise inventory by cost of goods sold.

Q: A company's ability to pay its short-term obligations depends on many factors including how quickly it is able to sell its merchandise inventory.

Q: An overstatement of ending inventory will cause an overstatement of assets and an understatement of equity on the balance sheet.

Q: An understatement of ending inventory will cause an understatement of assets and equity on the balance sheet.

Q: Neither GAAP nor IFRS allow inventory to be adjusted upward beyond the original cost.

Q: An understatement of the ending inventory balance will understate cost of goods sold and overstate net income.

Q: Managers are able to make important decisions correctly using erroneous inventory balances because inventory errors are self-correcting and, as a result, are less serious.

Q: An inventory error is sometimes said to be self-correcting because it causes an offsetting error in the next period.

Q: Errors in the period-end inventory balances only have an impact on the current period's records and financial statements.

Q: GAAP and IFRS differ on the rules regarding LIFO as GAAP allows LIFO to assign costs to inventory and IFRS does not.

Q: According to IRS requirements, companies are allowed to use FIFO for financial reporting and LIFO for tax reporting.

Q: An advantage of LIFO is that it assigns the most recent costs to cost of goods sold and does a better job of matching current costs with revenues on the income statement.

Q: The full disclosure principle requires that the notes to the financial statements report a change in accounting method for inventory costing.

Q: Under the ___________ system, each purchase, purchase return and allowance, purchase discount, and transportation-in transaction is recorded in a separate temporary account.

Q: When a company has no reportable nonoperating activities, its income from operations is reported as ___________________.

Q: ______________________ are nonoperating activities that include interest expense, losses from asset disposals, and casualty losses.

Q: _______________________ are nonoperating activities that include interest, dividend and rent revenues, and gains from asset disposals.

Q: A ______________________ income statement includes cost of goods sold as another expense and shows only one subtotal for total expenses.

Q: A _____________________ income statement format shows detailed computations of net sales and other costs and expenses and reports subtotals for various classes of items.

Q: ___________ expenses are those expenses that support a company's overall operations and include expenses related to accounting, human resource management, and financial management.

Q: Inventory shrinkage can be computed by comparing the ___________ of inventory with recorded quantities and amounts.

Q: Sales discounts can benefit a seller by decreasing the delay in receiving cash and ___________.

Q: A seller usually prepares a ____________________ to confirm a buyer's return or allowance that informs the buyer of the seller's credit to the buyer's account receivable on the seller's books.

Q: ___________________ refer to reductions in the selling price of merchandise sold to customers, often involving damaged or defective merchandise that a customer is willing to purchase with a decrease in the selling price.

Q: ____________________ refer to merchandise that customers return to the seller after a sale.

Q: FOB _________________ means ownership of goods transfers to the buyer when the goods arrive at the buyer's place of business. The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit.

Q: FOB _________________ means the buyer accepts ownership when the goods depart the seller's place of business. The buyer is responsible for paying shipping costs and bears the risk of damage or loss when goods are in transit.

Q: A _______________________ is a document the buyer issues to inform the seller of a debit made to the seller's account in the buyer's records.

Q: The agreement regarding the amounts and timing of payment from a buyer to a seller are the ____________________.

Q: A company purchased $8,750 worth of merchandise, with terms of 2/10, n/30. The invoice was paid within the cash discount period. Accordingly, the company received a cash discount of _______________.

Q: The gross margin ratio equals net sales less ___________ divided by net sales.

Q: The acid-test ratio reflects the ___________ of a company.