Test Bank Ch7 ACCT

Financial Accounting, 10e (Libby)
Chapter 7 Reporting and Interpreting Cost of Goods Sold and Inventory
1) The use of raw materials in the manufacturing process is reported as an operating expense on
the income statement.
Answer: FALSE
Explanation: Raw materials become part of work in process inventory.
Difficulty: 1 Easy
Topic: Items in inventory and costs of purchases
Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be
included in inventory and cost of goods sold for typical retailers, wholesalers, and manufacturers.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) Manufactured goods transferred out of work in process become part of finished goods
inventory.
Answer: TRUE
Explanation: Items transferred from work in process inventory become finished goods
inventory.
Difficulty: 1 Easy
Bloom's: Remember
3) Generally, inventory inspection costs are reported as operating expenses on the income
statement.
Answer: FALSE
Explanation: Generally, inventory inspection costs are reported as a component of the cost of the
inventory.
Difficulty: 1 Easy
Bloom's: Remember
1
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4) Direct material costs are a component of the cost of the work in process inventory.
Answer: TRUE
Explanation: Work in process inventory includes direct materials, direct labor, and factory
overhead.
Difficulty: 1 Easy
Bloom's: Remember
5) A decrease in the merchandise inventory account occurs when units of inventory purchased
are greater than units of goods sold.
Answer: FALSE
Explanation: An increase in the merchandise inventory account occurs when inventory
purchases are greater than goods sold.
Difficulty: 3 Hard
Bloom's: Analyze
AACSB: Analytical Thinking
6) Goods available for sale are allocated to both ending inventory and cost of goods sold.
Answer: TRUE
Explanation: Cost of goods available for sale minus ending inventory equals cost of goods sold.
Difficulty: 1 Easy
Topic: Cost of goods sold equation
Bloom's: Remember
2
7) The LIFO inventory method will result in the lowest gross profit in comparison with the FIFO
method when unit costs are decreasing.
Answer: FALSE
Explanation: LIFO reports the lowest cost of goods sold because the newest units which are the
lower cost units are sold first. Therefore, LIFO has the highest gross profit during periods of
decreasing unit costs.
Difficulty: 2 Medium
Topic: Inventory methods - Financial statement effects
Learning Objective: 07-02 Report inventory and cost of goods sold using the four inventory
costing methods.
Bloom's: Analyze
8) The FIFO inventory method will result in the lowest net income in comparison with the LIFO
method when costs are decreasing.
Answer: TRUE
Explanation: FIFO reports the highest cost of goods sold because higher-cost units are sold first.
Therefore, FIFO has the lowest net income during periods of decreasing unit costs.
Difficulty: 1 Easy
costing methods.
Bloom's: Analyze
9) A company can use the LIFO inventory method for income tax purposes and the FIFO
inventory method for financial reporting purposes during a given year.
Answer: FALSE
Explanation: The LIFO conformity rule requires the use of LIFO for financial statement
preparation if LIFO is used for tax purposes.
Difficulty: 1 Easy
Topic: Managers' choice of inventory method
Learning Objective: 07-03 Decide when the use of different inventory costing methods is
beneficial to a company.
Bloom's: Remember
3
10) A grocery store would likely use the specific identification inventory costing method for
most of the items in its inventory.
Answer: FALSE
Explanation: The specific identification method is used when expensive unique items are sold.
Difficulty: 1 Easy
Topic: Inventory methods - Specific identification
costing methods.
Bloom's: Remember
11) The FIFO inventory method allocates the earliest inventory purchase costs to ending
inventory.
Answer: FALSE
Explanation: FIFO ending inventory consists of the newest inventory acquisitions.
Difficulty: 1 Easy
Topic: Inventory methods - FIFO
costing methods.
Bloom's: Remember
12) The LIFO inventory method allocates the oldest inventory purchase costs to cost of goods
sold.
Answer: FALSE
Explanation: LIFO cost of goods sold consists of the newest inventory costs.
Difficulty: 1 Easy
Topic: Inventory methods - LIFO
costing methods.
Bloom's: Remember
4
13) During periods of decreasing unit costs, use of the LIFO inventory method will result in a
higher amount of ending inventory than will the use of the FIFO inventory method.
Answer: TRUE
Explanation: LIFO ending inventory consists of the older inventory purchases, which were at
higher unit costs.
costing methods.
Bloom's: Understand
14) During periods of increasing unit costs, the LIFO inventory method will result in a higher
inventory amount on the balance sheet and a lower net income than will the FIFO inventory
method.
Answer: FALSE
Explanation: During periods of increasing unit costs, LIFO cost of goods sold is at newest, i.e.,
higher, unit costs which results in a lower net income. However, LIFO ending inventory consists
of the older purchases, which were at lower unit costs. Therefore during periods of increasing
unit costs, LIFO will result in a lower ending inventory than FIFO for the balance sheet.
costing methods.
Bloom's: Analyze
15) During periods of increasing unit costs, the LIFO inventory method results in lower income
taxes.
Answer: TRUE
Explanation: LIFO cost of goods sold results in a lower taxable income and, therefore, lower
income taxes.
Difficulty: 1 Easy
Topic: Inventory methods - Financial statement effects; Managers' choice of inventory method
costing methods.; 07-03 Decide when the use of different inventory costing methods is beneficial
to a company.
Bloom's: Remember
5
16) During periods of decreasing unit costs, use of the FIFO inventory method results in lower
gross profit than would use of the LIFO method.
Answer: TRUE
Explanation: FIFO cost of goods sold is higher than LIFO when unit costs are decreasing. A
higher cost of goods sold results in a lower gross profit.
Difficulty: 1 Easy
costing methods.
Bloom's: Analyze
17) The lower of cost or net realizable value rule is used due to the conservatism constraint, and
therefore an inventory calculation may result in a departure from the historical cost principle.
Answer: TRUE
Explanation: GAAP requires inventories to be valued at the lower of cost or net realizable value
in order to avoid overstated assets and net income.
Topic: LCM-Net realizable value
Learning Objective: 07-04 Report inventory at the lower of cost or net realizable value.
Bloom's: Understand
18) The journal entry to write down inventory under the lower of cost or net realizable value rule
results in a decrease in both ending inventory and cost of goods sold.
Answer: FALSE
Explanation: The journal entry to write down inventory has a debit to cost of goods sold and a
credit to inventory. A debit to cost of goods sold increases cost of goods sold and a credit to
inventory reduces inventory.
Bloom's: Understand
6
results in a debit to cost of goods sold and a credit to inventory.
Answer: TRUE
Explanation: When inventory is written down, the journal entry credits inventory to reduce that
amount, and offsets the entry with a debit to cost of goods sold.
Difficulty: 1 Easy
Bloom's: Remember
results in a credit to cost of goods sold and a debit to inventory.
Answer: FALSE
Explanation: When inventory is written down, the journal entry credits inventory to reduce that
amount, and offsets the entry with a debit to cost of goods sold.
Difficulty: 1 Easy
Bloom's: Remember
21) Inventory turnover is calculated as cost of goods sold divided by average inventory.
Answer: TRUE
Explanation: Cost of goods sold divided by average inventory equals inventory turnover.
Difficulty: 1 Easy
Topic: Ratio analysis - Inventory turnover
Learning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio.
Bloom's: Remember
7
22) Inventory turnover under LIFO is greater than inventory turnover under FIFO when unit
costs are increasing.
Answer: TRUE
Explanation: Cost of goods sold divided by average inventory equals inventory turnover. When
unit costs are increasing, LIFO has the highest cost of goods sold and the lowest inventory and
therefore the greater inventory turnover.
Topic: Ratio analysis - Inventory turnover; Converting inventory to FIFO
Learning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio.;
07-06 Compare companies that use different inventory costing methods.
Bloom's: Understand
23) The average days to sell inventory decreases as inventory turnover increases.
Answer: TRUE
Explanation: Average days to sell inventory is calculated by dividing 365 by inventory turnover.
An increasing inventory turnover indicates more times that average inventory was produced and
sold in the period and therefore there were fewer average days to sell inventory.
Bloom's: Analyze
24) An increase in inventory is subtracted from net income when determining cash flow from
operating activities.
Answer: TRUE
Explanation: An increase in inventory means that sales of inventory are less than purchases.
Topic: Cash flows - Inventory
Learning Objective: 07-07 Understand methods for controlling inventory, analyze the effects of
inventory errors on financial statements, and analyze the effects of inventory on cash flows.
Bloom's: Understand
8
25) An increase in accounts payable is added to net income when determining cash flows from
Answer: TRUE
Explanation: An increase in accounts payable means that payments to suppliers are less than
amounts purchased.
Bloom's: Understand
26) When there is a $3,000,000 decrease in inventory and a $2,000,000 decrease in accounts
payable, cash flow from operating activities increases by $1,000,000.
Answer: TRUE
Explanation: The decrease in inventory ($3,000,000) is added to net income and the decrease in
accounts payable ($2,000,000) is subtracted from net income when calculating cash flow from
Difficulty: 3 Hard
Bloom's: Apply
AACSB: Knowledge Application
27) The LIFO Reserve represents the excess of FIFO inventory costs over LIFO inventory costs.
Answer: TRUE
Explanation: The LIFO Reserve is reported in the notes to the financial statements and is also
referred to as "Excess of FIFO over LIFO." It represents the difference in cost of goods sold had
the company used the FIFO inventory method because under FIFO, inventory values would be
higher and cost of goods sold would be lower.
Topic: Converting inventory to FIFO
Learning Objective: 07-06 Compare companies that use different inventory costing methods.
Bloom's: Remember
9
28) In a period of increasing costs, the LIFO Reserve would be deducted from the ending
inventory under LIFO costing to convert it to ending inventory under FIFO costing.
Answer: FALSE
Explanation: LIFO ending inventory is less than FIFO ending inventory when unit costs are
increasing. Therefore, the LIFO Reserve would be added to the LIFO ending inventory.
Bloom's: Analyze
29) An understatement of ending inventory results in an overstatement of net income.
Answer: FALSE
Explanation: An understatement of ending inventory results in an overstatement of cost of goods
sold and therefore an understatement of net income.
Topic: Errors in measuring ending inventory
Bloom's: Understand
30) In the year of an overstatement of ending inventory, cost of goods sold will be understated
and net income will be overstated.
Answer: TRUE
Explanation: An overstatement of ending inventory results in an understatement of cost of goods
sold and therefore an overstatement of net income.
Bloom's: Understand
10
31) An overstatement of the 2018 ending inventory results in an understatement of net income
during 2019.
Answer: TRUE
Explanation: An overstatement of 2018 ending inventory causes the 2019 beginning inventory
to be overstated and 2019 cost of goods sold to be overstated, and, therefore, 2019 net income
will be understated.
Bloom's: Understand
32) LIFO liquidation results when a company has a lower level of inventory at the end of the
year than it had at the beginning of the year.
Answer: TRUE
Explanation: LIFO liquidation will occur when a company sells more units than it buys or
manufactures.
Topic: LIFO liquidation - Supp A
Learning Objective: 07-(S)(A): LIFO Liquidations.
Bloom's: Understand
33) An overstatement of the 2018 ending inventory results in an overstatement of stockholders'

equity as of the end of 2019.
Answer: FALSE
Explanation: The overstatement of the 2018 ending inventory causes the 2018 net income to be
overstated, the 2019 beginning inventory to be overstated, and the 2019 net income will be
understated. Stockholders' equity as of the end of 2019 is correct because the 2018 net income
overstatement is counter-balanced by the understatement of the 2019 net income.
Bloom's: Understand
11
34) An overstatement of the 2019 ending inventory results in an overstatement of stockholders'
equity as of the end of 2019.
Answer: TRUE
overstated. Net income closes to retained earnings and therefore stockholders' equity as of the
end of 2019 is overstated.
Bloom's: Understand
35) A company reported the following information for its most recent year of operation:
purchases, $100,000; beginning inventory, $20,000; and cost of goods sold, $110,000. How
much was the company's ending inventory?
A) $10,000.
B) $20,000.
C) $15,000.
D) $30,000.
Answer: A
Explanation: Beginning inventory + Purchases – Cost of Goods Sold = Ending inventory.
$20,000 + $100,000 – $110,000 = X; Ending inventory = X = $10,000.
Bloom's: Apply
12
36) Coleman Company has provided the following information: beginning inventory, $100,000;
cost of goods sold, $450,000; and ending inventory, $80,000. How much were Coleman's
inventory purchases?
A) $450,000.
B) $410,000.
C) $430,000.
D) $420,000.
Answer: C
Explanation: Beginning inventory + Purchases (X) – Cost of Goods Sold = Ending inventory.
$100,000 + X – $450,000 = $80,000. Purchases = X = $430,000.
Bloom's: Apply
37) Which of the following statements is incorrect?

A) Ending inventory exceeds beginning inventory when purchases are greater than cost of goods
sold.
B) Cost of goods sold exceeds purchases when ending inventory is less than beginning
inventory.
C) Cost of goods available for sale will always be equal to or greater than cost of goods sold.
D) Ending inventory is greater than beginning inventory when purchases are less than cost of
goods sold.
Answer: D
Explanation: Ending inventory exceeds beginning inventory when purchases are greater than
cost of goods sold.
Difficulty: 3 Hard
Topic: Items in inventory and costs of purchases; Cost of goods sold equation
Bloom's: Analyze
13
38) Which of the following costs is not included as inventory on the balance sheet?
A) Raw materials to be used in the manufacturing process.
B) Work in process.
C) Finished goods.
D) Freight-out costs for finished goods sent to retailers.
Answer: D
Explanation: Freight-in costs for delivery to the warehouse are included in inventory. Freight-
out costs for delivery to retailers are not included in inventory. Freight-out costs are a component
of operating expenses. Conversely, raw materials, work in process, and finished goods are
inventory categories.
Difficulty: 1 Easy
Bloom's: Understand
39) Which of the following costs will not affect cost of goods sold?
A) Inventory inspection costs.
B) Inventory preparation costs.
C) Inventory-related selling costs.
D) Freight charges incurred to bring inventory to the warehouse.
Answer: C
Explanation: Selling costs are operating costs and do not affect cost of goods sold.
Bloom's: Understand
14
40) Which of the following would not be a component of the year-end inventory balance?
A) Freight-in costs.
B) Inventory inspection costs.
C) Inventory preparation costs.
D) Inventory-related selling costs.
Answer: D
Explanation: Inventory selling costs are considered to be selling, general and administrative
expenses.
Bloom's: Understand
41) Which of the following is correct?

A) The raw materials inventory account is used to record inventory purchased by a retailer for
resale.
B) Work in process is an expense account used by a manufacturing company.
C) Finished goods is an asset account used by a manufacturing company to record the cost of
inventory ready for sale.
D) Retailers use a purchases account to record raw materials inventory.
Answer: C
Explanation: Manufacturers have a final product, which is accounted for in a finished goods
inventory account. Retailers do not use raw materials. Work in process is an inventory account
and not an expense account.
Bloom's: Understand
15
42) Which of the following statements is incorrect for a manufacturing entity?
A) Inventory is transferred from work in process to finished goods.
B) Raw materials used are transferred to work in process.
C) Finished goods inventory eventually becomes cost of goods sold.
D) Cost of goods sold is recognized when the manufacturing process is complete.
Answer: D
Explanation: Cost of goods sold is recognized when the inventory is taken from finished goods
and sold to the customer.
Bloom's: Understand
43) A company provided the following data: sales, $500,000; beginning inventory, $40,000;
ending inventory, $45,000; and gross profit, $150,000. What was the amount of inventory
purchased during the year?
A) $385,000.
B) $355,000.
C) $345,000.
D) $145,000.
Answer: B
Explanation: Sales – Cost of goods sold = Gross profit. $500,000 – Cost of goods sold =
$150,000. Cost of goods sold = $350,000. Beginning inventory + Purchases – Ending inventory
= Cost of goods sold. $40,000 + Purchases – $45,000 = $350,000. Purchases = $355,000.
Difficulty: 3 Hard
Bloom's: Apply
16
44) Lauer Corporation has provided the following information about one of its laptop computers:
Number
Date Transaction of Units Cost per Unit
1/1 Beginning Inventory 100 $ 800
5/5 Purchase 200 $ 900
8/10 Purchase 300 $ 1,000
10/15 Purchase 200 $ 1,100
During the year, Lauer sold 750 laptop computers.
What was ending inventory using the FIFO cost flow assumption?
A) $60,000.
B) $55,000.
C) $45,000.
D) $40,000.
Answer: B
Explanation: Ending inventory, $55,000 = $1,100 × 50.
costing methods.
Bloom's: Apply
17
45) Lauer Corporation provided the following information about one of its laptop computers:
Number
5/5 Purchase 200 $ 900
8/10 Purchase 300 $ 1,000
10/15 Purchase 200 $ 1,100
What was cost of goods sold using the FIFO cost flow assumption?
A) $725,000.
B) $740,000.
C) $735,000.
D) $720,000.
Answer: A
Explanation: Cost of goods sold = $725,000 = (100 × $800) + (200 × $900) + (300 × $1,000) +
(150 × $1,100).
costing methods.
Bloom's: Apply
18
Number
5/5 Purchase 200 $ 900
8/10 Purchase 300 $ 1,000
10/15 Purchase 200 $ 1,100
What was cost of goods sold using the LIFO cost flow assumption?
A) $725,000.
B) $740,000.
C) $735,000.
D) $720,000.
Answer: B
Explanation: Cost of goods sold = $740,000 = (200 × $1,100) + (300 × $1,000) + (200 × $900)
+ (50 × $800).
costing methods.
Bloom's: Apply
19
Number
5/5 Purchase 200 $ 900
8/10 Purchase 300 $ 1,000
10/15 Purchase 200 $ 1,100
What was ending inventory using the LIFO cost flow assumption?
A) $40,000.
B) $45,000.
C) $55,000.
D) $60,000.
Answer: A
Explanation: Ending inventory = $40,000 = ($800 × 50).
costing methods.
Bloom's: Apply
48) Under the FIFO cost flow assumption during a period of rising costs, which of the following
is false?
A) Income tax expense will be higher under FIFO than under LIFO.
B) Net income will be higher under FIFO than under LIFO.
C) Ending inventory will be lower under FIFO than under LIFO.
D) Cost of goods sold will be lower under FIFO than under LIFO.
Answer: C
Explanation: Ending inventory comes from the most recent inventory purchases, which are at
higher unit costs, and, therefore, ending inventory under FIFO is higher than under LIFO.
to a company.
Bloom's: Analyze
20
49) Under the LIFO cost flow assumption during a period of rising costs, which of the following
is false?
A) Cost of goods sold will be lower under LIFO than under FIFO.
B) Net income will be lower under LIFO than under FIFO.
C) Income tax expense will be lower under LIFO than under FIFO.
D) Ending inventory will be lower under LIFO than under FIFO.
Answer: A
Explanation: Cost of goods sold comes from the most recent inventory purchases. Since most
recent costs are higher, the cost of goods sold under LIFO is higher than under FIFO.
to a company.
Bloom's: Analyze
50) Which of the following statements is correct when inventory unit costs are increasing?
A) LIFO will result in lower net income and a higher inventory valuation than will FIFO.
B) LIFO will result in higher net income and lower inventory valuation than will FIFO.
C) FIFO will result in lower net income and a lower inventory valuation than will LIFO.
D) FIFO will result in higher net income and a higher inventory valuation than will LIFO.
Answer: D
Explanation: When unit costs are increasing, FIFO reports a higher ending inventory because it
includes newest (higher) costs. This results in a lower cost of goods sold which results in a
higher net income.
costing methods.
Bloom's: Analyze
21
51) Which of the following statements is correct when inventory unit costs are decreasing?
A) LIFO will result in lower net income and a higher inventory valuation than will FIFO.
B) LIFO will result in higher net income and a higher inventory valuation than will FIFO.
C) FIFO will result in higher net income and a higher inventory valuation than will LIFO.
D) FIFO will result in higher net income and a lower inventory valuation than will LIFO.
Answer: B
Explanation: When unit costs are decreasing, LIFO reports a higher ending inventory because it
includes oldest (higher) costs. This results in a lower cost of goods sold which results in a higher
net income.
costing methods.
Bloom's: Analyze
52) Which of the following statements is correct?

A) FIFO reports lower net income amounts than LIFO when unit costs are increasing.
B) LIFO reports a higher net income amount than FIFO when unit costs are increasing.
C) LIFO reports a higher net income amount than FIFO when unit costs are decreasing.
D) LIFO reports the same amount of net income as FIFO when unit costs are increasing.
Answer: C
Explanation: When unit costs are decreasing, LIFO reports a higher ending inventory because it
includes oldest (higher) costs. This results in a lower cost of goods sold which results in a higher
net income.
costing methods.
Bloom's: Analyze
22
A) The choice of an inventory costing method is dependent upon the actual physical flow of the
goods in inventory.
B) LIFO should be used during a period of increasing unit costs when the objective is to
maximize the ending inventory value on the balance sheet.
C) FIFO should be used during a period of decreasing unit costs when the objective is to
maximize the gross profit reported on the income statement.
D) The average cost method will result in an ending inventory balance which is somewhere
between LIFO and FIFO when inventory unit costs are changing.
Answer: D
Explanation: Use of the average cost method results in cost of goods sold and ending inventory
being reported at amounts between the LIFO and FIFO extremes.
costing methods.
Bloom's: Understand
23
54) Maxim Corp. has provided the following information about one of its products:
Number of
Date Transaction Units Cost per Unit
Beginning
200 $ 140
1/1 Inventory
6/5 Purchase 400 $ 160
11/10 Purchase 100 $ 20
During the year, Maxim sold 400 units.
What is ending inventory using the average cost method?

A) $48,000.
B) $64,000.
C) $50,000.
D) $62,000.
Answer: A
Explanation: Average cost = $160 = [(200 × $140) + (400 × $160) + (100 × $200)] ÷ 700 units
Ending inventory = $48,000 = Average cost, $160 × 300 units.
Topic: Inventory methods - Average cost
costing methods.
Bloom's: Apply
24
55) Maxim Corp. has provided the following information about one of its products:
Number of
Beginning
1/1 200 $ 140
Inventory
6/5 Purchase 400 $ 160
11/10 Purchase 100 $ 200
During the year, Maxim sold 400 units.
What is cost of goods sold using the average cost method?

A) $48,000.
B) $64,000.
C) $50,000.
D) $62,000.
Answer: B
Explanation: Average cost = $160 = [(200 × $140) + (400 × $160) + (100 × $200)] ÷ 700 units
Cost of goods sold = $64,000 = Average cost, $160 × 400 units.
costing methods.
Bloom's: Apply
25
56) Which of the following statements is false?
A) Companies do not have to use the same inventory method for all items of inventory.
B) Companies do not have to consistently use the same inventory costing methods over time.
C) Use of the LIFO inventory method during a period of increasing unit costs may create a
conflict of interest between the owners and managers.
D) A company choosing to maximize stockholders' equity during a period of increasing unit
costs should use the FIFO inventory method.
Answer: B
Explanation: GAAP requires companies to consistently apply their inventory costing methods
over time.
Topic: Managers' choice of inventory method
Learning Objective: 07-03 Decide when the use of different inventory costing methods is
beneficial to a company.
Bloom's: Understand
57) Moore Company purchased an item for inventory that cost $20 per unit and was priced to
sell at $30. It was determined that the cost to sell is $12 per unit. Using the lower of cost or net
realizable value rule, what amount should be reported on the balance sheet for inventory?
A) $18.
B) $20.
C) $10.
D) $8.
Answer: A
Explanation: Net realizable value = $30 – $12 = $18. Inventory is reported on the balance sheet
at net realizable value when that amount is less than cost.
Difficulty: 1 Easy
Bloom's: Remember
26
58) On December 31, 2019, Cruise Company has 10,000 units of an inventory item, which cost
$40 per unit when purchased on June 15, 2019. The selling price was $60 per unit. On December
30, 2019, it was determined that the cost to sell is $24 per unit. At what amount should the
10,000 units of inventory be reported at on the December 31, 2019 balance sheet?
A) $400,000.
B) $360,000.
C) $160,000.
D) $40,000.
Answer: B
Explanation: Inventory is reported on the balance sheet at net realizable value of $36 per unit
(selling price $60 less cost to sell of $24) when that amount is less than cost of $40. The
inventory cost of $360,000 equals net realizable value of $36 multiplied by 10,000 units.
Bloom's: Apply
59) Which of the following statements does not accurately describe the lower of cost or net
realizable value valuation method for inventory?
A) The journal entry to write down inventory decreases gross profit.
B) The journal entry to write down inventory decreases current assets.
C) The journal entry to write down inventory does not affect pretax income.
D) The journal entry to write down inventory increases cost of goods sold.
Answer: C
Explanation: The journal entry increases cost of goods sold and therefore decreases gross profit
and pretax income. The journal entry also decreases inventory.
Bloom's: Understand
27
60) Which of the following statements does not accurately describe the effects of a write-down
of inventory on December 31, 2018 using the lower of cost or net realizable value valuation
method?
A) The 2018 gross profit decreases.
B) The 2019 cost of goods sold is effectively decreased if the inventory is sold during 2019.
C) The 2018 ending inventory is decreased.
D) The 2019 gross profit is not affected if the inventory is sold during 2019.
Answer: D
Explanation: In the year of the write-down, 2018, cost of goods sold is increased by the
adjustment to net realizable value. If the goods are sold in the next year, 2019, the 2019 cost of
goods sold is decreased because of the lower value of inventory sold as a result of the write-
down of the inventory during the prior year (2018). Therefore, the gross profit in 2019 is affected
if the goods are sold in 2019.
Bloom's: Understand
61) Abel Company must write down its inventory by $30,000 to the net realizable value of
$450,000 at December 31, 2019. What is the effect of this write-down on the year 2019 financial
statements?
A) Decrease cost of goods sold.
B) Decrease ending inventory on the balance sheet.
C) Increase pretax income.
D) Decrease accounts payable.
Answer: B
Explanation: In the year of the write-down, 2019, ending inventory is decreased in order to
reflect the lower value, and cost of goods sold is increased by the adjustment to net realizable
value. An increase in cost of goods sold decreases gross profit, which decreases pretax income.
Accounts payable is not affected by an inventory write-down.
Bloom's: Understand
28
62) Barrington Company must write down its inventory from its cost of $260,000 to its net
realizable value of $248,000 at December 31, 2018. The inventory will all be sold in the year
2019. Which of the following provides a correct effect of the write-down?
A) The 2018 gross profit decreases by $12,000.
B) The 2019 cost of goods sold increases by $12,000.
C) The 2019 ending inventory increases by $12,000.
D) The 2019 gross profit is not affected if the inventory is sold during 2019.
Answer: A
Explanation: In the year of the write-down, 2018, cost of goods sold is increased by the
adjustment to net realizable value. An increase in cost of goods sold decreases gross profit. In
2019, the goods are sold and the 2019 cost of goods sold is decreased because the write-down in
2018 reduced the inventory value of those goods. Therefore, since the 2019 cost of goods sold is
decreased, the gross profit in 2019 is increased.
Bloom's: Understand
63) Tinker's cost of goods sold in the year of sale (2019) was $750,000 and 2018 cost of goods
sold was $770,000. The inventory at the end of 2019 was $188,000 and at the end of 2018 the
inventory was $208,000.
Tinker's inventory turnover during 2019 was closest to:

A) 3.99
B) 3.79
C) 3.84
D) 3.89
Answer: B
Explanation: Inventory turnover = 3.79 = Cost of goods sold ÷ Average inventory = $750,000 ÷
[($188,000 + $208,000) ÷ 2].
Bloom's: Apply
29
64) Tinker's cost of goods sold in the year of sale (2019) was $750,000 and 2018 cost of goods
sold was $770,000. The inventory at the end of 2019 was $188,000 and at the end of 2018 the
inventory was $208,000.
Tinker's average number of days to sell its inventory during 2019 is closest to: (Use 365 days a
year.)
A) 96
B) 92
C) 95
D) 94
Answer: A
Explanation: Inventory turnover = 3.79 = Cost of goods sold ÷ Average inventory = $750,000 ÷
[($188,000 + $208,000) ÷ 2]. Average days to sell inventory = 96.3 = 365 days ÷ Inventory
turnover = 365 ÷ 3.79.
Bloom's: Apply
65) The inventory turnover

A) reflects how many times, on average, that the inventory balance was sold during the year.
B) is increased when accounts receivable increases.
C) is decreased if inventory balances decrease from the beginning of the year to the end of the
year.
D) is improved if cost of goods sold decreases and inventory balances increase from one year to
the next.
Answer: A
Explanation: The inventory turnover is calculated by cost of goods sold divided by average
inventory reported on the balance sheet. It reflects how many times, on average, that the
inventory balance was sold during the year. The turnover is not affected by accounts receivable.
An increase in cost of goods sold and/or a decrease in average inventory balances will increase
the turnover ratio.
Bloom's: Understand
30
66) Cranchey Company reported a LIFO ending inventory of $670,000 on its balance sheet at
December 31, 2019. Cranchey's disclosure notes to the financial statements reported that the
LIFO Reserve at December 31, 2018 was $32,000 and the LIFO Reserve at December 31, 2019
was $40,000. Which of the following statements is correct for Cranchey Company for the effect
of the LIFO Reserve in 2019 in converting LIFO amounts to FIFO amounts?
A) Cost of goods sold would have been higher by $40,000 under FIFO.
B) Pretax income would have been higher by $32,000 under FIFO.
C) Pretax income would have been higher by $8,000 under FIFO.
D) Cost of goods sold would have been higher by $8,000 under FIFO.
Answer: C
Explanation: When LIFO is used for the financial statements, the LIFO Reserve is used to
calculate inventory and cost of goods sold on a FIFO basis. When the LIFO Reserve is positive,
then FIFO inventory is higher than LIFO. A positive beginning inventory LIFO Reserve
increases cost of goods sold and a positive ending inventory LIFO Reserve decreases cost of
goods sold of the current year.
Beginning LIFO reserve – Ending LIFO Reserve = $32,000 – $40,000 = ($8,000) net effect of
LIFO Reserve. The positive ending inventory reserve is larger than the beginning inventory
reserve, which decreases cost of goods sold on a FIFO basis. This would increase gross profit
and pretax income on a FIFO basis by $8,000.
Difficulty: 3 Hard
Bloom's: Apply
67) If two companies each use different inventory accounting methods, the companies can be
made comparable from information reported in the financial statements by
A) converting the FIFO Reserve to a LIFO inventory.
B) converting inventory at cost to inventory at lower of cost or market (net realizable value).
C) converting cost of goods sold to lower of cost or market (net realizable value).
D) converting inventory on a LIFO basis to a FIFO basis using the LIFO Reserve.
Answer: D
Explanation: The LIFO Reserve is disclosed in notes to the financial statements and can be used
to convert inventory reported on a LIFO basis to what inventory would have been using a FIFO
basis. Then if one company reports using FIFO and one company reports using LIFO, after
conversion, the companies can be analyzed on a comparable basis.
Difficulty: 1 Easy
Bloom's: Remember
31
68) QV-TV, Inc. provided the following items in its notes to the financial statements for the
year-end 2019: Cost of goods sold was $22 billion under FIFO costing and the inventory value
under FIFO costing was $2.1 billion. The LIFO Reserve for year-end 2018 was $0.6 billion and
at year-end 2019 it had increased to $0.8 billion.
What is the LIFO inventory value at year-end 2019?

A) $1.9 billion.
B) $2.9 billion.
C) $2.3 billion.
D) $1.3 billion.
Answer: D
Explanation: The LIFO Reserve at the end of the year is used to adjust inventory either to LIFO
or to FIFO, depending on which method is used in the financial statements. QV-TV uses FIFO in
its financial statements. Therefore, the LIFO Reserve would be subtracted from the FIFO
inventory to find the lower amount of LIFO inventory.
FIFO inventory – LIFO reserve = $2.1 billion – $0.8 billion = $1.3 billion LIFO inventory.
Difficulty: 3 Hard
Bloom's: Apply
32
69) QV-TV, Inc. provided the following items in its notes to the financial statements for the
year-end 2019: Cost of goods sold was $22 billion under FIFO costing and the inventory value
under FIFO costing was $2.1 billion. The LIFO Reserve for year-end 2018 was $0.6 billion and
at year-end 2019 it had increased to $0.8 billion.
How much is the 2019 LIFO cost of goods sold?

A) $22.2 billion.
B) $19.8 billion.
C) $22.8 billion.
D) $19.2 billion.
Answer: A
Explanation: The change in the LIFO Reserve from the beginning to the end of the reporting
year is used to adjust cost of goods sold to either a LIFO or FIFO basis, depending on which
method is used in the financial statements. QV-TV uses FIFO in its financial statements. Its
LIFO Reserve increased from $0.6 billion to $0.8 billion and the difference is $0.2 billion. Since
cost of goods sold is larger on a LIFO basis, FIFO cost of goods sold + the increase in LIFO
reserve = $22 billion + $0.2 billion = $22.2 billion LIFO cost of goods sold.
Difficulty: 3 Hard
Bloom's: Apply
70) A $25,000 overstatement of the 2019 ending inventory was discovered after the financial
statements for 2019 were prepared. Which of the following describes the effect of the inventory
error on the 2019 financial statements?
A) Current assets were overstated and net income was understated.
B) Current assets were understated and net income was understated.
C) Current assets were overstated and net income was overstated.
D) Current assets were understated and net income was overstated.
Answer: C
Explanation: An overstatement of ending inventory overstates current assets and understates
cost of goods sold and therefore overstates net income.
Bloom's: Understand
33
71) A $25,000 overstatement of the 2018 ending inventory was discovered after the financial
statements for 2018 were prepared. Which of the following describes the effect of the inventory
error on the 2019 financial statements?
A) Net income and stockholders' equity are both understated.
B) Net income is understated and stockholders' equity is correct.
C) Net income and stockholders' equity are both overstated.
D) Net income and stockholders' equity are both unaffected.
Answer: B
overstated and the 2019 net income to be understated. Stockholders' equity at the end of 2019 is
correct because inventory errors are counter-balancing.
Difficulty: 3 Hard
Bloom's: Analyze
34
72) Wilmington Company reported pretax income of $25,000 during 2018 and $30,000 during
2019. Later it was discovered that the ending inventory for 2018 was understated by $2,000 (and
not corrected in 2018). What is the correct pretax income for each year?
2018 2019
A. $ 23,000 $ 32,000
B. $ 27,000 $ 32,000
C. $ 27,000 $ 28,000
D. $ 23,000 $ 28,000
A) Option A
B) Option B
C) Option C
D) Option D
Answer: C
Explanation: 2018 Net income ($27,000) = Reported pretax income ($25,000) + Understatement
of ending inventory ($2,000). 2019 Net income = $28,000 = Reported pretax income –
Understatement of beginning inventory = $30,000 – $2,000.
Difficulty: 3 Hard
Bloom's: Apply
73) At the end of 2019, a $5,000 understatement was discovered in the 2019 ending inventory as
reflected in the inventory records. What were the 2019 effects of the $5,000 inventory error
(before correction)?
A) Assets were understated by $5,000 and pretax income was understated by $5,000.
B) Assets were understated by $5,000 and pretax income was overstated by $5,000.
C) Cost of goods sold was understated by $5,000 and pretax income was understated by $5,000.
D) Cost of goods sold was overstated by $5,000 and pretax income was overstated by $5,000.
Answer: A
Explanation: The understatement of the 2019 ending inventory causes the 2019 assets to be
understated, cost of goods sold to be overstated, and the 2019 pretax income to be understated.
Bloom's: Apply
35
74) An understatement of the ending inventory in Year 1, if not corrected, will cause which of
the following?
A) The year 1 net income to be understated and Year 2 net income to be overstated.
B) The year 1 net income to be overstated and Year 2 net income to be overstated.
C) The year 1 net income to be overstated and Year 2 net income will be correct.
D) The year 1 net income to be overstated and Year 2 net income to be understated.
Answer: A
Explanation: The understatement of the year 1 ending inventory causes the year 1 cost of goods
sold to be overstated and the year 1 net income is therefore understated. The year 2 cost of goods
sold is understated because beginning inventory is understated, which causes the year 2 net
income to be overstated.
Bloom's: Understand
75) Which of the following is correct when, in the same year, beginning inventory is understated
by $1,300 and ending inventory is understated by $700?
A) Net income is understated by $600.
B) Net income is understated by $2,000.
C) Net income is overstated by $600.
D) Net income is overstated by $2,000.
Answer: C
Explanation: The understatement of the beginning inventory causes net income to be overstated
by $1,300 and the understatement of the ending inventory causes net income to be understated by
$700. The total overstatement is $600.
Difficulty: 3 Hard
Bloom's: Apply
36
76) Which of the following is correct when, in the same year, beginning inventory is overstated
by $1,300 and ending inventory is understated by $700?
A) Net income is understated by $600.
B) Net income is understated by $2,000.
C) Net income is overstated by $600.
D) Net income is overstated by $2,000.
Answer: B
Explanation: The overstatement of the beginning inventory causes net income to be understated
by $1,300 and the understatement of the ending inventory causes net income to be understated by
$700. The total understatement is $2,000.
Difficulty: 3 Hard
Bloom's: Apply
77) On December 15, 2019, Transport Company accepted delivery of merchandise that it
purchased on credit. As of December 31, 2019, the company had neither recorded the transaction
nor included the merchandise in its ending inventory amount because the seller's invoice had not
been received. The effect of this omission on its balance sheet at December 31, 2019, (end of the
accounting period) was that
A) inventory and net income were overstated but liabilities were correct.
B) net income was the only item affected by the omission.
C) inventory and accounts payable were understated but net income was correct.
D) assets and stockholders' equity were understated but liabilities were correct.
Answer: C
Explanation: The understatement of the ending inventory causes cost of goods sold to be
overstated. However, the understatement of purchases causes cost of goods sold to be
understated by the same amount and this nets to a zero effect on cost of goods sold. Therefore,
cost of goods sold is correct and net income is correct, but on the balance sheet, inventory
(assets) and accounts payable (liabilities) are understated.
Difficulty: 3 Hard
Bloom's: Analyze
37
78) A company using the periodic inventory system correctly recorded a purchase of
merchandise, but the merchandise was not included in the physical inventory count at the end of
the accounting period. The error caused which of the following?
A) An understatement of both net income and inventory.
B) An overstatement of inventory, purchases, and accounts payable.
C) An understatement of inventory, purchases, and accounts payable.
D) An overstatement of net income and inventory.
Answer: A
Explanation: The understatement of the ending inventory causes both net income and assets to
be understated.
Bloom's: Analyze
79) Hollander Company hired some students to help count inventory during their semester break.
Unfortunately, the students added incorrectly and the 2019 ending inventory was overstated by
$5,000. What would be the effect of this error in ending inventory?
A) 2019 net income would be overstated.
B) 2019 net income would be understated.
C) 2019 ending retained earnings would be understated.
D) 2019 cost of goods sold would be overstated.
Answer: A
Explanation: The overstatement of the ending inventory causes cost of goods sold to be
understated and net income to be overstated.
Difficulty: 1 Easy
Bloom's: Remember
38
80) During the audit of Montane Company's 2019 financial statements, the auditors discovered
that the 2019 ending inventory had been overstated by $8,000 and that the 2019 beginning
inventory was overstated by $5,000. Before the effect of these errors, 2019 pretax income had
been computed as $100,000. What should be reported as the correct 2019 pretax income before
taxes?
A) $113,000.
B) $87,000.
C) $105,000.
D) $97,000.
Answer: D
Explanation: The overstatement of the beginning inventory causes cost of goods sold to be
overstated by $5,000; the overstatement of the ending inventory causes cost of goods sold to be
understated by $8,000. Therefore, cost of goods sold is understated by a net of $3,000 and net
income is overstated by $3,000.
Difficulty: 3 Hard
Bloom's: Apply
39
81) RJ Corporation has provided the following information about one of its inventory items:
Number of
1/1 Beginning Inventory 400 $ 3,200
6/6 Purchase 800 $ 3,600
9/10 Purchase 1,200 $ 4,000
11/15 Purchase 800 $ 4,200
During the year, RJ sold 3,000 units.
What was ending inventory using the LIFO cost flow assumption?
A) $640,000.
B) $840,000.
C) $770,000.
D) $880,000.
Answer: A
Explanation: Ending inventory = $640,000 = ($3,200 × 200).
costing methods.
Bloom's: Apply
40
Number of
6/6 Purchase 800 $ 3,600
9/10 Purchase 1,200 $ 4,000
11/15 Purchase 800 $ 4,200
What was ending inventory using the FIFO cost flow assumption?
A) $640,000.
B) $840,000.
C) $960,000.
D) $880,000.
Answer: B
Explanation: Ending inventory = $840,000 = ($4,200 × 200).
costing methods.
Bloom's: Apply
41
Number of
6/6 Purchase 800 $ 3,600
9/10 Purchase 1,200 $ 4,000
11/15 Purchase 800 $ 4,200
What was ending inventory using the average cost flow assumption?
A) $640,000.
B) $840,000.
C) $770,000.
D) $880,000.
Answer: C
Explanation: Average unit cost = $3,850 = [{(400 × $3,200) + (800 × $3,600) + (1,200 ×
$4,000) + (800 × $4,200)} ÷ 3,200 units]. Ending inventory = $770,000 = $3,850 × 200 units.
costing methods.
Bloom's: Apply
42
Number of
6/6 Purchase 800 $ 3,600
9/10 Purchase 1,200 $ 4,000
11/15 Purchase 800 $ 4,200
What was cost of goods sold using the average cost flow assumption?
A) $11,680,000.
B) $11,590,000.
C) $11,480,000.
D) $11,550,000.
Answer: D
Explanation: Average unit cost = $3,850 = [{(400 × $3,200) + (800 × $3,600) + (1,200 ×
$4,000) + (800 × $4,200)} ÷ 3,200 units].
Cost of goods sold = $11,550,000 = 3,000 × $3,850.
costing methods.
Bloom's: Apply
43
Number of
6/6 Purchase 800 $ 3,600
9/10 Purchase 1,200 $ 4,000
11/15 Purchase 800 $ 4,200
What was cost of goods sold using the LIFO cost flow assumption?
A) $11,680,000.
B) $11,590,000.
C) $11,480,000.
D) $11,550,000.
Answer: A
Explanation: Cost of goods sold = $11,680,000 = (800 × $4,200) + (1,200 × $4,000) + (800 ×
$3,600) + (200 × $3,200).
costing methods.
Bloom's: Apply
44
Number of
6/6 Purchase 800 $ 3,600
9/10 Purchase 1,200 $ 4,000
11/15 Purchase 800 $ 4,200
What was cost of goods sold using the FIFO cost flow assumption?
A) $11,680,000.
B) $11,590,000.
C) $11,480,000.
D) $11,550,000.
Answer: C
Explanation: Cost of goods sold = $11,480,000 = (400 × $3,200) + (800 × $3,600) + (1,200 ×
$4,000) + (600 × $4,200).
costing methods.
Bloom's: Apply
45
87) On March 15, 2019, Ryan Company purchased $10,000 of merchandise on credit subject to
terms of 2/10, n/30. Ryan Company records its purchases using the gross amount.
Which of the following journal entries is correct when Ryan Company pays for these goods on
March 30, 2019?
A)
Accounts payable 9,800
Cash 9,800
B)
Cash 10,000
C)
Inventory 200
Cash 9,800
D)
Inventory 200
Cash 10,000
Answer: B
Explanation: The payment was after 10 days, so the discount is not available.
Topic: Purchase discounts-returns-allowances - Supp C
Learning Objective: 07-(S)(C): Additional Issues in Measuring Purchases.
Bloom's: Apply
46
88) On March 15, 2019, Ryan Company purchased $10,000 of merchandise on credit subject to
terms of 2/10, n/30. Ryan Company records its purchases using the gross amount.
Which of the following journal entries is correct when Ryan Company pays for these goods on
March 20, 2019?
A)
Cash 9,800
B)
Cash 10,000
C)
Cash 9,800
Inventory 200
D)
Inventory 200
Cash 10,000
Answer: C
Explanation: The payment was within 10 days, so the 2% discount can be taken.
Bloom's: Apply
47
89) JJ Enterprises began the year with 480 units of one of its most popular products. During the
year JJ purchased 1,000 units and sold 1,100 units for $500 each. What is the pre-tax effect of
JJ's LIFO liquidation?
Number of
Beginning
1/1 480 $ 384
Inventory
5/6 Purchase 1000 $ 432
A) $38,400
B) $9,600
C) $4,800
D) $11,600
Answer: C
Explanation: The LIFO liquidation is computed as the number of units liquidated times the
excess gross profit. The gross profit per unit on the newly purchased units is $500 – $432 = $68.
Because the cost of the old units is only $384, the gross profit per old unit is $500 – $384 =
$116. The pretax effect of the LIFO liquidation = 100 old units liquidated × ($116 – $68) =
$4,800.
Bloom's: Understand
48
90) Seattle, Co. began the year with 480 units of one of its most popular products. During the
year Seattle purchased 1,000 units and sold 1,100 units for $750 each. What is the pre-tax effect
of Seattle's LIFO liquidation?
Number of
Beginning
1/1 480 $ 576
Inventory
8/6 Purchase 1000 $ 648
A) $57,600
B) $7,200
C) $14,400
D) $17,400
Answer: B
Explanation: The LIFO liquidation is computed as the number of units liquidated times the
excess gross profit. The gross profit per unit on the newly purchased units is $750 – $648 =
$102. Because the cost of the old units is only $576, the gross profit per old unit is $750 – $576
= $174. The pretax effect of the LIFO liquidation = 100 old units liquidated × ($174 – $102) =
$7,200.
Bloom's: Understand
49
91) Which of the following statements is correct regarding either the perpetual or periodic
inventory systems?
A) In a perpetual inventory system, the amount of inventory is not known until the end of the
period when the inventory count is taken.
B) In a perpetual inventory system, cost of goods sold is recorded at the time of each sale during
the accounting period.
C) In a periodic inventory system, cost of goods sold is developed only from a comparison of
beginning inventory and ending inventory.
D) In a periodic inventory system, the inventory account is increased for each purchase during
the accounting period.
Answer: B
Explanation: When using a perpetual inventory system, cost of goods sold is debited when
inventory is sold.
Topic: Periodic and perpetual inventory systems
Bloom's: Understand
92) When a company uses the periodic inventory system, which of the following is true?
A) Purchases are recorded in the cost of goods sold account.
B) The inventory account is updated after each sale.
C) Cost of goods sold is computed at the end of the accounting period rather than at each sale
date.
D) The inventory account is updated throughout the year as purchases are made.
Answer: C
Explanation: Cost of goods sold is recorded periodically, at the end of the accounting period,
under a periodic inventory system.
Topic: Periodic and perpetual inventory systems
Bloom's: Understand
50
93) Carrie Company sold merchandise with an invoice price of $1,000 to Underwood, Inc., with
terms of 2/10, n/30. Which of the following is the correct entry to record the payment by
Underwood Inc., within 10 days if the company uses the perpetual inventory system and the
gross method to record purchases?
A)
Cash 980
Inventory 20
B)
Accounts Payable 1,000
Cash 980
Inventory 20
C)
Accounts Payable 1,000
Cash 1,000
D)
Purchases 980
Cash 980
Answer: B
Explanation: The purchase discount is applicable given that payment was within the ten-day
period. Inventory is reduced by $20 since perpetual inventory system is used
Bloom's: Apply
51
94) Iris Company has provided the following information regarding two of its items of inventory
at year-end:
• There are 100 units of Item A, having a cost of $20 per unit, a selling price of $24 and a cost to
sell of $6 per unit.
• There are 50 units of Item B, having a cost of $50 per unit, a selling price of $56 and a cost to
sell of $4 per unit.
How much is the ending inventory using lower of cost or net realizable value?
A) $4,100.
B) $4,300.
C) $4,400.
D) $4,500.
Answer: B
Explanation: Item A net realizable value = $24 − $6 = $18 which is lower than cost.
Item B net realizable value = $56 – 4 = $52 which is not lower than cost.
Ending inventory = $4,300 = (100 × $18) + (50 × $50).
Bloom's: Apply
95) Carr Corporation has provided the following information for its most recent month of
operation: sales $8,000; beginning inventory $1,000; ending inventory $2,000 and gross profit
$5,000. How much were Carr's inventory purchases during the period?
A) $9,000.
B) $5,000.
C) $6,000.
D) $4,000.
Answer: D
Explanation: Sales, $8,000 – Cost of goods sold, $3,000 = Gross profit, $5,000. Beginning
inventory, $1,000 + Purchases, $4,000 – Ending inventory, $2,000 = Cost of goods sold, $3,000.
Difficulty: 3 Hard
Bloom's: Apply
52
96) Carp Corporation has provided the following information for its most recent month of
operation: sales $16,000; ending inventory $4,000, purchases $8,000 and gross profit $10,000.
How much was Carp's beginning inventory?
A) $2,000.
B) $18,000.
C) $6,000.
D) $12,000.
Answer: A
inventory, $2,000 + Purchases, $8,000 – Ending inventory, $4,000 = Cost of goods sold, $6,000.
Difficulty: 3 Hard
Bloom's: Apply
97) Cassie Corporation has provided the following information for its most recent month of
operation: sales $32,000, beginning inventory $8,000, purchases $16,000 and gross profit
$20,000. How much was Cassie's ending inventory?
A) $4,000.
B) $8,000.
C) $6,000.
D) $12,000.
Answer: D
inventory, $8,000 + Purchases, $16,000 – Ending inventory, $12,000 = Cost of goods sold,
$12,000.
Difficulty: 3 Hard
Bloom's: Apply
53
98) Atomic Company did not record a December 2019 purchase of inventory on credit until
January 2020. Assume that the December 31, 2019 ending inventory was correctly determined.
What is the effect of this error on the financial statements for the year ended December 31,
2019?
A) Net income is correct.
B) Stockholders' equity is understated.
C) Net income is overstated.
D) Current assets are understated.
Answer: C
Explanation: The 2019 purchases are understated, which causes cost of goods sold to be
understated and net income to be overstated in 2019.
Difficulty: 3 Hard
Bloom's: Analyze
99) Atomic Company did not record a December 2019 purchase of inventory on credit until
January 2020. Assume that the December 31, 2019 ending inventory was correctly determined.
What is the effect of this error on the financial statements for the year ended December 31,
2020?
A) Net income is correct.
B) Stockholders' equity is correct.
C) Net income is overstated.
D) Stockholders' equity is overstated.
Answer: B
Explanation: Inventory related errors including purchase cutoff errors are self-correcting on the
balance sheet after two periods.
Bloom's: Understand
54
100) Which of the following costs does not become a part of inventory of a manufacturer?
A) The cost of raw materials used.
B) The cost of factory overhead.
C) The cost of rent on the factory building.
D) Rent on corporate headquarters.
Answer: D
Explanation: Rent on corporate headquarters is not a factory cost and is therefore not part of any
inventory of a manufacturer.
Difficulty: 1 Easy
Bloom's: Remember

A) Cost of goods available for sale is allocated between costs of goods sold and inventory at
year-end.
B) A purchase of inventory on credit increases both cost of goods available for sale and cost of
goods sold.
C) Purchases of inventory during a period less that period's cost of goods sold equals ending
inventory regardless of the beginning inventory amount.
D) Cost of goods available for sale equals ending inventory plus purchases.
Answer: A
Explanation: Cost of goods available for sale minus ending inventory equals cost of goods sold.
Difficulty: 1 Easy
Bloom's: Remember
55
102) Which of the following businesses would not be as likely to use the specific identification
method of inventory valuation?
A) An automobile dealer.
B) A custom jewelry store.
C) A grocery store.
D) An art dealer.
Answer: C
Explanation: A grocery store likely has many large quantities of similar items, which makes it
impractical to use the specific identification method.
Topic: Inventory methods - Specific identification
costing methods.
Bloom's: Remember
103) Which of the following statements is incorrect?

A) A year-end purchase of inventory increases the LIFO cost of goods sold when unit costs are
increasing.
B) A year-end purchase of inventory increases the FIFO ending inventory when unit costs are
increasing.
C) The choice of an inventory costing method is dependent on the actual flow of goods when
inventory is sold.
D) A year-end purchase of inventory has an impact on the weighted-average ending inventory
when unit costs are increasing.
Answer: C
Explanation: The actual flow of goods is irrelevant when choosing an inventory costing method.
costing methods.
Bloom's: Understand
56
104) Which of the following statements is incorrect when inventory unit costs are increasing?
A) LIFO's cost of goods sold will be the largest among the inventory costing methods.
B) LIFO's income tax will be the lowest among the inventory costing methods.
C) Ending inventory using the average cost method will be larger than the ending inventory
when the LIFO method is used.
D) Cost of goods sold using the average cost method will be less than cost of goods sold when
the FIFO method is used.
Answer: D
Explanation: FIFO has the lowest cost of goods sold during a period of increasing unit costs.
costing methods.
Bloom's: Understand
A) FIFO's cost of goods sold will be the largest among the inventory costing methods.
B) LIFO's income tax will be the lowest among the inventory costing methods.
C) Ending inventory using the FIFO cost method will be higher than the ending inventory when
the LIFO method is used.
D) Cost of goods sold using the average cost method will be less than cost of goods sold when
the LIFO method is used.
Answer: A
Explanation: FIFO has the largest cost of goods sold during a period of decreasing unit costs.
costing methods.
Bloom's: Analyze
57
106) Which of the following statements is correct when inventory unit costs are increasing?
A) LIFO's ending inventory will be the largest among the inventory costing methods.
B) FIFO's gross profit will be the lowest among the inventory costing methods.
C) Inventory turnover will be the largest when the LIFO inventory method is used.
D) Use of the LIFO method will result in lower cash flows due to an increased cost of goods
sold.
Answer: C
Explanation: LIFO has the largest cost of goods sold and the lowest ending inventory and
therefore the largest inventory turnover ratio.
Difficulty: 3 Hard
Topic: Inventory methods - Financial statement effects; Ratio analysis - Inventory turnover
costing methods.; 07-05 Evaluate inventory management using the inventory turnover ratio.
Bloom's: Analyze
A) Inventory turnover will be the greatest when the average cost inventory method is used.
B) FIFO's gross profit will be the highest among the inventory costing methods.
C) Inventory turnover will be the largest when the LIFO inventory method is used.
D) Use of the LIFO method will result in lower cash flows due to a decreased cost of goods sold.
Answer: D
Explanation: LIFO has the lowest cost of goods sold, the highest gross profit and taxable
income. LIFO will therefore result in a higher tax burden and lower cash flows.
Difficulty: 3 Hard
Topic: Inventory methods - Financial statement effects; Managers' choice of inventory method;
Ratio analysis - Inventory turnover
to a company.; 07-05 Evaluate inventory management using the inventory turnover ratio.
Bloom's: Analyze
58
108) Which of the following statements is correct with respect to the determination of cash flows
from operating activities?
A) A decrease in inventory is subtracted from net income.
B) An increase in accounts payable is subtracted from net income.
C) An increase in inventory is subtracted from net income.
D) A decrease in accounts payable is added to net income.
Answer: C
Explanation: An increase in inventory is subtracted from net income because purchases exceed
cost of goods sold.
Bloom's: Analyze
109) What is the net adjustment to net income with respect to the determination of cash flows
from operating activities when inventory increases $100,000 and accounts payable increases
$20,000?
A) An increase of $120,000.
B) A decrease of $120,000.
C) An increase of $80,000.
D) A decrease of $80,000.
Answer: D
Explanation: An increase in inventory is deducted from net income and an increase in accounts
payable is added to net income.
Bloom's: Apply
59
110) Of the following, which is not a reason for having controls to safeguard inventories?
A) Protect inventory items from theft.
B) Avoid stock-outs from not having enough inventory on hand.
C) Reduce costs of maintaining the LIFO Reserve.
D) Keep track of overstocked items.
Answer: C
Explanation: Safeguarding inventory requires controls for the care of the physical goods. The
cost of maintaining the LIFO Reserve is an accounting cost and not a safeguard.
Topic: Control of inventory
Bloom's: Understand
111) Of the following, which is not a control for safeguarding inventories?

A) Storing inventory in a locked warehouse.
B) Having the person responsible for receiving inventory purchases also be responsible for
shipping inventory sales.
C) Limiting inventory access to authorized employees.
D) Separating inventory accounting from inventory handling duties.
Answer: B
Explanation: Safeguarding inventory requires controls for the care of the physical goods. If a
person who receives inventory is also responsible for shipping inventory, there is an increased
likelihood of goods not being properly guarded and, ultimately, theft.
Topic: Control of inventory
Bloom's: Understand
60
112) McMillan Company uses the periodic inventory system. It has compiled the following
information in order to prepare the financial statements at December 31, 2019:
Gross sales during 2019 $2,000,000

Sales returns and allowances during 2019 50,000
Beginning inventory, January 1, 2019 100,000
Ending inventory, December 31, 2019 120,000
Purchases during 2019 750,000
Calculate each of the following:

A. Cost of goods available for sale
B. Cost of goods sold
C. Gross profit
Answer: A. Cost of goods available for sale, $850,000 = Beginning inventory, $100,000 +
Purchases, $750,000.
B. Cost of goods sold, $730,000 = Cost of goods available for sale, $850,000 — Ending
Inventory, $120,000.
C. Gross profit, $1,220,000 = Net sales, ($2,000,000 — $50,000) — Cost of goods sold,
$730,000.
included in inventory and the cost of goods sold for typical retailers, wholesalers, and
manufacturers.
Bloom's: Apply
113) The records of Jimmy Company show 2019 purchases of $90,000. An actual count revealed
a 2019 ending inventory of $8,000. The 2019 beginning inventory was $5,000. What was cost of
goods sold for 2019?
Answer: Cost of goods sold = $87,000 = Beginning inventory, $5,000 + Purchases, $90,000 —
Ending inventory, $8,000.
Difficulty: 1 Easy
manufacturers.
Bloom's: Remember
61
114) The following income statement is complete except for a few missing titles (bold lines on
the left), and amounts (dotted lines on the right).
Prepare a complete income statement using the format and amounts provided. Fill in all items
that are missing titles and amounts (ignore income taxes).
Karl Company
Income Statement
For the Year Ended December 31, 2019
Gross sales revenue $----------
Less: ________ $3,000
Less: Sales discounts -------- $5,000
________ 101,000
Cost of goods sold:
________ 12,000
________ --------
________ 77,000
Less: Ending inventory --------
________ --------
________ 38,000
Operating expenses ---------
Net income $16,000
62
Answer:
Karl Company
Income Statement
For the Year Ended December 31, 2019
Gross sales revenue ($101,000 + $5,000) $106,000
Less: Sales and returns allowances $3,000
Less: Sales discounts ($5,000 — $3,000) 2,000 5,000
Net sales $101,000
Cost of goods sold:
Beginning inventory $12,000
Purchases ($77,000 — $12,000) 65,000
Goods available for sale 77,000
Less: Ending inventory
($77,000 — $63,000) 14,000
Cost of goods sold ($101,000 —
$38,000) 63,000
Gross profit 38,000
Operating expenses ($38,000 — $16,000) 22,000
Net Income $16,000
Topic: Cost of goods sold equation; Inventory methods-Financial statement effects
manufacturers.; 07-02 Report inventory and cost of goods sold using the four inventory costing
methods.
Bloom's: Apply
115) How much were inventory purchases when cost of goods sold was $250,000, beginning
inventory was $20,000, and ending inventory was $25,000?
Answer: Beginning inventory, $20,000 + Purchases, $255,000 — Ending inventory, $25,000 =

Cost of goods sold, $250,000.
Difficulty: 1 Easy
manufacturers.
Bloom's: Remember
63
116) How much was ending inventory when sales revenue was $500,000, purchases were
$310,000, beginning inventory was $22,000, and gross profit was $200,000.
Answer: Beginning inventory, $22,000 + Purchases, $310,000 — Ending inventory, $32,000 =

Cost of goods sold, ($500,000 - $200,000).
manufacturers.
Bloom's: Apply
117) Compute the missing amounts that are numbered in parentheses for the income statement of
each independent case. (Hint: Each case need not be calculated in the numerical order of the
missing numbers.)
Case A Case B Case C

Sales revenue $800 $800 (9)
Beginning inventory 100 (5) 90
Purchases 500 420 (10)
Total goods available for sale (1) (6) (11)
Ending inventory 150 110 160
Cost of goods sold (2) (7) 340
Gross profit (3) (8) (12)
Expenses 300 400 420
Net Income (4) (50) 60
64
Answer:
Case A Case B Case C
Sales revenue $800 $800 (9) $820
Beginning inventory 100 (5) 140 90
Purchases 500 420 (10) 410
Total goods available for sale (1) 600 (6) 560 (11) 500
Ending inventory 150 110 160
Cost of goods sold (2) 450 (7) 450 340
Gross profit (3) 350 (8) 350 (12) 480
Expenses 300 400 420
Net Income (4)50 (50) 60
manufacturers.
Bloom's: Apply
65
118) Coulter Company uses the LIFO inventory method. The following data were available for
the month of January, 2019:
Units Cost per Unit

Inventory, January 1 200 $5.00
Purchase No. 1 400 5.50
Purchase No. 2 700 6.00
Sale No. 1 (sold at $12.00 per unit) 500
Sale No. 2 (sold at $13.00 per unit) 500
Compute the following:

1. Beginning inventory
2. Ending inventory
3. Cost of goods available for sale
4. Cost of goods sold
5. Gross profit
Answer:
1. 200 × $5.00 = $1,000.
2. (200 × $5.00) + (100 × $5.50) = $1,550.
3. (200 × $5.00) + (400 × $5.50) + (700 × $6.00) = $7,400.
4. $7,400 — $1,550 = $5,850.
5. (500 × $12.00) + (500 × $13.00) — $5,850 = $6,650.
Topic: Inventory methods-LIFO
costing methods.
Bloom's: Apply
66
119) William Company has provided the following data:
Units Amount
Beginning inventory 6,000 $30,000
Purchases 32,000 192,000
Sales 28,000 280,000
A. Calculate the following using both: FIFO and LIFO inventory methods.
FIFO LIFO
1. Ending inventory $_______ $_______
2. Cost of Goods Sold $_______ $_______
3. Gross profit $_______ $_______
B. In times of rising unit costs, how does pretax income using FIFO compare to pretax income
using LIFO? Explain your answer.
Answer:
A.
FIFO LIFO
(6,000 × $5) +
1. 10,000 × $6 = $60,000 (4,000 × $6) = $54,000
$222,000 — $222,000 —
2. $60,000 = $162,000 $54,000 = $168,000
$280,000 — $280,000 —
3. $162,000 = $118,000 $168,000 = $112,000
B. FIFO pretax income is higher than LIFO pretax income in times of rising unit costs. FIFO
matches older lower unit costs to current period sales providing for higher gross profit and net
income.
Topic: Inventory methods-FIFO; Inventory methods-Financial statement effects; Inventory
methods-LIFO
costing methods.
Bloom's: Apply
AACSB: Communication; Knowledge Application
67
120) Jennings Company uses FIFO inventory costing. At the end of the annual accounting
period, December 31, 2019, the accounting records for the best-selling item in inventory showed
the following:
Unit
Transactions Units Cost
Beginning inventory, Jan. 1, 2019 500 $100
1. Purchase, Feb. 1 600 105
2. Sale, March 15 (sold at $20 each) (700)
3. Purchase, May 15 400 110
4. Sale, July 31 (sold at $25 each) (500)
Calculate the following:

1. Goods available for sale
2. Ending inventory
Answer:
1. Goods available for sale: (500 × $100) + (600 × $105) + (400 × $110) = $157,000.
2. Ending inventory: 300 units × $110 = $33,000.
3. Cost of goods sold: $157,000 — $33,000 = $124,000.
Topic: Inventory methods-FIFO
costing methods.
Bloom's: Apply
68
121) Freeman Company uses LIFO inventory costing. At the end of the annual accounting
period, December 31, 2019, the accounting records in inventory showed:
Transactions Units Unit Cost

Beginning inventory, Jan. 1, 2019 300 $20
Purchase, Feb. 1 500 21
Purchase, May 15 400 22
Sale, March 15 (sold at $20 each) (400)
Sale, July 31 (sold at $25 each) (500)
Calculate the following:

1. Cost of goods available for sale
2. Ending inventory
Answer:
1. Cost of goods available for sale: (300 × $20) + (500 × $21) + (400 × $22) = $25,300.
2. Ending inventory: 300 units × $20 = $6,000.
3. Cost of goods sold: GAFS - EI = COGS, $25,300 — $6,000 = $19,300.
Topic: Inventory methods-LIFO
costing methods.
Bloom's: Apply
69
122) A. Compute the missing amounts in the income statement under three different inventory
costing methods: (Ignore income taxes.)
Average
FIFO LIFO Cost
Sales revenue (3,000 units) $90,000 $90,000 $90,000
Cost of goods sold:
Beginning inventory (1,000 units @ $10
per unit) 10,000 10,000 10,000
Purchases (4,000 units @ $12 per unit) (1) (7) (13)
Goods available for sale (2) (8) (14)
Ending inventory (2,000 units) (3) (9) (15)
Cost of goods sold (4) (10) (16)
Gross profit (5) (11) (17)
Operating expenses 20,000 20,000 20,000
Net operating income (pretax) (6) (12) (18)
B. Explain the results of the weighted-average inventory costing method compared to the FIFO
and LIFO costing methods during a period of increasing unit costs.
70
Answer:
A.
Average
FIFO LIFO Cost
Sales revenue (3,000 units) $90,000 $90,000 $90,000
Cost of goods sold:
Beginning inventory (1,000) 10,000 10,000 10,000
Purchases (4,000 units) 48,000 48,000 48,000
Goods available for sale 58,000 58,000 58,000
Ending inventory 24,000(A) 22,000(B) 23,200(C)
Cost of goods sold 34,000 36,000 34,800
Gross profit 56,000 54,000 55,200
Operating expenses 20,000 20,000 20,000
Net operating income
(pretax) $36,000 $34,000 $35,200
A. 2,000 units × $12 = $24,000.

B. (1,000 units × $10) + (1,000 units × $12) = $22,000.
C. ($58,000 ÷ 5,000 units) × 2,000 units = $23,200.
or, $58,000 ÷ 5,000 units = $11.60 (rounded).
$11.60 × 2,000 units = $23,200.
B. During times of rising unit prices, early dates of purchases have lower costs and later dates
have higher costs. Under FIFO, the more recent, higher unit costs are assigned to ending
inventory units. Under LIFO, the older, lower unit costs are assigned to ending inventory units.
Net income under the weighted average method will fall between the results of FIFO and LIFO
costing because rather than using specific costs for specific units, it averages the unit cost over
all the units available for sale.
Topic: Inventory methods-Average cost; Inventory methods-FIFO; Inventory methods-LIFO
costing methods.
Bloom's: Apply
71
123) Hopkins Company reported the following information related to inventory and sales:
Units Unit Cost

Beginning inventory 1,000 $20
Purchase No. 1 7,000 22
Purchase No. 2 2,000 23
Sales–8,000 units at $35 per unit.
Compute the following amounts:
Inventory
Costing Sales Cost of Gross Balance Sheet
Method Revenue Goods Sold Profit Inventory
Average cost ________ ________ ________ ________
FIFO ________ ________ ________ ________
LIFO ________ ________ ________ ________
Answer:
Inventory
Costing Sales Cost of Gross Ending
Method Revenue Goods Sold Profit Inventory
Average cost $280,000 $176,000 $104,000 $44,000
FIFO $280,000 $174,000 $106,000 $46,000
LIFO $280,000 $178,000 $102,000 $42,000
Topic: Inventory methods-Average cost; Inventory methods-FIFO; Inventory methods-LIFO
costing methods.
Bloom's: Apply
72
124) The inventory records of Martin Corporation reflected the following information for the
month of August:
Number of Unit
Date Transaction Units Cost
Beginning
8/1 inventory 400 $5
8/3 Purchase No. 1 400 $5
8/5 Sale No. 1 600
8/7 Sale No. 2 100
8/11 Purchase No. 2 1,000 $7
8/17 Sale No. 3 700
8/19 Purchase No. 3 1,000 $7
8/21 Sale No. 4 600
8/28 Sale No. 5 600
8/29 Purchase No. 4 1,200 $9
8/30 Ending inventory
A. Determine the amount of the ending inventory and cost of goods sold under each of the
following methods assuming the periodic inventory system.
Ending
Method Inventory Cost of Goods Sold
a. Average cost $ $
b. FIFO $ $
c. LIFO $ $
B. Why would cash flow considerations relate to the choice of an inventory method?
73
Answer:
A.
a. EI: $28,800 ÷ 4,000 units = $7.20; 1,400 × $7.20 = $10,080.
COGS: $28,800 — 10,080 = $18,720.
EI: (1,200 × $9) + (200 × $7) = $12,200; COGS: $28,800 — $12,200 =
b. $16,600.
c. EI: (400 × $5) + (400 × $5) + (600 × $7) = $8,200.
COGS: $28,800 — $8,200 = $20,600.
B. Cash flow considerations would relate to the choice of an inventory method because of
income taxes levied on a corporation. In times of rising unit costs, LIFO would produce a higher
cost of goods sold, and a lower net income and taxable income than the other methods.
Therefore, less cash would be required to pay the taxes.
Topic: Inventory methods-Average cost; Inventory methods-FIFO; Inventory methods-Financial
statement effects; Inventory methods-LIFO
costing methods.
Bloom's: Apply
74
125) The records of Atlantis Company reflected the following for the month of February:
Number of Unit
Date Transaction Units Cost
Beginning
2/1 inventory 600 $3
2/2 Purchase No.1 500 $4
2/5 Sale No. 1 700
2/12 Purchase No. 2 600 $5
2/15 Sale No. 2 700
2/23 Purchase No. 3 900 $6
2/28 Ending inventory ?
Determine the amount of ending inventory and cost of goods sold using the following periodic
system inventory costing methods:
Method Inventory Cost of Goods Sold

A. LIFO $ $
B. FIFO $ $
Answer: Goods available for sale: (600 × $3) + (500 × $4) + (600 × $5) + (900 × $6) = $12,200.
Cost of Goods
Method Inventory Sold
A. LIFO $4,300 $7,900
B. FIFO $6,900 $5,300
EI = (600 × $3) + (500 × $4) + (100 × $5).

A. COGS = $12,200 — $4,300 = $7,900.
EI = (900 × $6) + (300 × $5).
B. COGS = $12,200 — $6,900 = $5,300.
Topic: Inventory methods-FIFO; Inventory methods-LIFO
costing methods.
Bloom's: Apply
75
126) Rio Company uses the FIFO inventory costing method and has a perpetual inventory
system. All purchases and sales were cash transactions. The records reflected the following for
January, 2019:
Units Unit Cost
Beginning inventory 100 $1.00
Purchase, January 6 200 1.20
Sale, January 10 (at $2.40 per unit) 110
Purchase, January 14 100 1.30
Sale, January 29 (at $2.60 per unit) 170
Determine the following:

A. 2019 cost of goods available for sale
B. 2019 cost of goods sold
C. 2019 ending inventory
D. The journal entries for January 6 and 10.
Answer:
A. $100 + $240 + $130 = $470 (400 units).
B. 110 + 170 = 280 units; (100 at $1.00) + (180 at $1.20) = $316.
C. 400 — 280 = 120 units; (100 at $1.30) + (20 at $1.20) = $154.
D.
January 6 Inventory 240

Cash 240
January 10 Cash (110 at $2.40) 264
Sales revenue 264
Cost of goods sold 112
Inventory (100 at $1.00) + (10 at
$1.20) 112
Topic: Inventory methods-FIFO; Periodic v perpetual inventory systems-Supp B
Learning Objective: 07-(S)(B): FIFO and LIFO Cost of Goods Sold under Periodic versus
Perpetual Inventory Systems.; 07-02 Report inventory and cost of goods sold using the four
inventory costing methods.
Bloom's: Apply
76
127) Given a particular set of facts and assumptions, the following pairs of amounts were
computed using FIFO and LIFO. For each pair of amounts, indicate which amount resulted from
applying FIFO, and which amount resulted from applying LIFO.
A. Unit costs are increasing; ending inventory is:

1. $20,650
2. $19,400
B. Unit costs are increasing; cost of goods sold is:
1. $10,650
2. $9,400
C. Unit costs are decreasing; ending inventory is:
1. $5,500
2. $5,000
D. Unit costs are decreasing; cost of goods sold is:
1. $6,200
2. $7,000
Answer:
A. 1. FIFO 2. LIFO
B. 1. LIFO 2. FIFO
C. 1. LIFO 2. FIFO
D. 1. LIFO 2. FIFO
Topic: Inventory methods-Financial statement effects
costing methods.
Bloom's: Analyze
77
128) Boulder, Inc. is computing its inventory at December 31, 2019. The following information
relates to the five major inventory items regularly stocked for resale:
Ending Inventory,
Quantity on December 31, 2019 Net Realizable Value
Item
Hand Unit Cost when (Market) at December 31,
Acquired (FIFO) 2019
A 100 $40 $35
B 150 $50 $52
C 25 $100 $80
D 300 $60 $62
E 700 $15 $12
Using the lower of cost or net realizable value, compute the total valuation for each inventory
item at December 31, 2019, and the total inventory valuation.
Answer:
Inventory
Item Valuation Computations
A $3,500 100 × $35
B 7,500 150 × $50
C 2,000 25 × $80
D 18,000 300 × $60
E 8,400 700 × $12
Total $39,400
Bloom's: Apply
78
129) Cutting Edge Technologies reported the following information in its 2019 annual report:
(In millions)
Net sales revenue $18,860
Cost of sales 11,010
December 31, 2018 inventory 1,840
December 31, 2019 inventory 1,550
1. Determine the inventory turnover ratio. (Round your answer to two decimal places.)
2. Determine the average days to sell inventory. (Round your answer to a whole number.)
3. Explain the meaning of each ratio.
Answer:
1. 6.50 = ($11,010/$1,695 average inventory). Average inventory = [(1,840 + 1,550)/2].
2. 56 days, (365 days/6.50).
3. The inventory turnover ratio identifies how many times the inventory was sold or liquidated
during the year's time while the average days to sell shows the volume of sales that can be
supported in terms of number of days' stock on hand. As the inventory turnover increases, the
company will carry less stock in terms of days' sales.
Topic: Ratio analysis-Inventory turnover
Bloom's: Apply
79
130) Quest Inc. provided the following disclosure note to the financial statements in its annual
report:
Inventories are stated at the lower of cost or market. The cost of inventories has been determined
using last in first out (LIFO) method. Cost of goods sold under LIFO costing were $22.2 billion
for 2019 and ending inventory under LIFO was $1.3 billion. Inventory in 2018 under LIFO
costing was $1.2 billion. The LIFO Reserve account carried a credit balance of $0.8 billion in
2019 and $0.6 billion in 2018.
Compute the following:
1. FIFO ending inventory balance at year end 2018 ________

2. FIFO ending inventory balance at year end 2019 ________
3. FIFO cost of goods sold for year end 2019 ________
4. Inventory turnover under LIFO costing for 2019 ________
5. Inventory turnover under FIFO costing for 2019 ________
Answer:
1. $1.8 billion, ($1.2 billion LIFO inventory plus $0.6 billion LIFO reserve).
2. $2.1 billion, ($1.3 billion plus $0.8 billion LIFO reserve).
3. $22.0 billion, ($22.2 billion LIFO COGS minus $0.2 billion increase in the LIFO reserve).
4. 17.76, ($22.2 billion divided by [$1.3 + $1.2 billion divided by 2]).
5. 11.28, ($22.0 billion divided by [$2.1 + $1.8 billion divided by 2]).
Difficulty: 3 Hard
Topic: Converting inventory to FIFO; Ratio analysis-Inventory turnover
Learning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio.;
07-06 Compare companies that use different inventory costing methods.
Bloom's: Apply
80
131) Dows Company prepared income statements that reflected pretax income of $21,000 for
2018 and $30,000 for 2019. An audit has determined that there were two errors in the inventory
amounts as follows:
Amount Correct
Reported Amount
Ending inventory, 2018 $15,000 $14,000
Ending inventory, 2019 18,000 16,000
Determine the correct pretax income amount for each year (show computations; assume the
errors were not corrected):
Answer: 2018: $21,000 - $1,000 = $20,000.

2019: $30,000 + $1,000 - $2,000 = $29,000.
Difficulty: 3 Hard
Bloom's: Apply
81
132) For each independent situation given below, determine the effect on pretax income for each.
Enter "O" to indicate pretax income is overstated, "U" to indicate pretax income is understated,
or "NA" to indicate that pretax income is not affected.
Effect on Pretax
Independent Situations Income
2018 2019
A. 2018 ending inventory is overstated.
B. 2018 ending inventory is understated.
C. 2019 ending inventory is overstated.
D. 2019 beginning inventory is overstated.
E. 2018 beginning inventory is understated.
2019 beginning inventory is understated
and 2019 ending inventory is understated
F. by the same amount.
Answer:
Effect on Pretax
Independent Situations Income
2018 2019
A. 2018 ending inventory is overstated. O U
B. 2018 ending inventory is understated. U O
C. 2019 ending inventory is overstated. NA O
D. 2019 beginning inventory is overstated. O U
E. 2018 beginning inventory is understated. O NA
2019 beginning inventory is understated
and 2019 ending inventory is understated
F. by the same amount. NA NA
Difficulty: 3 Hard
Bloom's: Apply
82
133) Redford Company hired a new store manager in October 2018, who determined the ending
inventory on December 31, 2018, to be $50,000. In March, 2019, the company discovered that
the December 31, 2018 ending inventory should have been $58,000. The December 31, 2019,
inventory was correct. Ignore income taxes.
Complete the following table to show the effects of the inventory error on the four amounts
listed. Give the amount of the discrepancy and indicate whether it was overstated (O),
understated (U), or had no effect (N).
Ending Cost of Goods Net

Year Inventory Sold Income
2018 ________ ________ ________
2019 ________ ________ ________
Answer:
Ending Cost of Goods Net
Year Inventory Sold Income
2018 8,000 (U) 8,000 (O) 8,000 (U)
2019 (N) 8,000 (U) 8,000 (O)
Difficulty: 3 Hard
Bloom's: Apply
134) Sideline Company reported net income for 2018 of $70,000 and in 2019 of $84,000 (both
after income taxes at a 30% rate). It was discovered in 2019 that the ending inventory for 2018
was understated by $2,000 (before any income tax effect).
Calculate the correct net income (after income tax of 30%) for 2018 and 2019.
Answer: 2018: $70,000 + ($2,000 × .70) = $71,400; 2019: $84,000 - ($2,000 × .70) = $82,600.
Difficulty: 3 Hard
Bloom's: Apply
83
135) A company provided the following disclosure note to the financial statements in its newest
annual report:
During the current and prior year, the company reduced certain inventory quantities that were
valued at lower LIFO costs prevailing in prior years. The effect of these physical reductions was
to increase after-tax earnings this year by $90 million, $.30 per share, and $98 million, or $.327
per share last year.
1. Explain why the reduction in inventory quantity increased after-tax earnings for this company.
2. If the company had been using FIFO costing, would the reductions in inventory quantity
during the two years have increased after-tax earnings? Explain.
Answer:
1. The reduction of the physical level of inventory forced the release of older costs assigned to
those units from the balance sheet to the income statement once they were sold. Obviously the
company had been in a period of rising costs and these older costs attached to the inventory units
were far below the current inventory replacement costs. Therefore, cost of goods sold was lower
and net income was higher.
2. The reductions in inventory would not have increased after tax earnings because the costs that
would have been released from the balance sheet for the units sold would have been reflecting
current costs and not older, lower costs as they were under LIFO.
Topic: LIFO liquidation-Supp A
Bloom's: Understand
AACSB: Communication
84
136) Assume Webster Company buys bicycle helmets at a unit cost of $30 and sells them at a
unit price of $52. There was no inventory at the beginning of the period.
Provide the journal entries required below by entering the account code of the appropriate
account and the amount for each debit and credit:
Account Name Account Code

Inventory A
Purchases B
Cost of goods sold C
Sales revenue D
Cash E
Transactions Debits Credits

Code Amount Code Amount
Purchased 100 units for cash assuming the
A. perpetual inventory system is used.
Purchased 100 units for cash assuming the
B. periodic inventory system is used.
Sold 100 units for cash assuming the
C. perpetual inventory system is used.
D. periodic inventory system is used.
Answer:
Transactions Debits Credits
Code Amount Code Amount
Purchased 100 units for cash assuming
A. the perpetual inventory system is used.A 3,000 E 3,000
Purchased 100 units for cash assuming
B. the periodic inventory system is used. B 3,000 E 3,000
Sold 100 units for cash assuming the E 5,200 D 5,200
C. perpetual inventory system is used. C 3,000 A 3,000
D. periodic inventory system is used. E 5,200 D 5,200
Topic: Periodic v perpetual inventory systems-Supp B
Perpetual Inventory Systems.
Bloom's: Understand
137) Prepare the journal entries for the transactions listed below under both the periodic
inventory system and the perpetual inventory system.
85
A. Purchased merchandise for cash, $1,000.
Sold merchandise for $600 cash that had cost $480 (cost is
B. 80% of the sales price).
Accepted a sales return from a customer: sales price $30. A
cash refund was given to the customer. The goods were
C. returned to regular inventory.
Returned goods to the vendor because they did not meet
D. our specification; $50 cash refund was received.
Answer:
Perpetual
Inventory Periodic Inventory
Account Amount Account Amount
Debit Credit Debit Credit
A. Merch. Inv. 1,000 Purchases 1,000
Cash 1,000Cash 1,000
B. Cash 600 Cash 600
Sales Rev. 600Sales Rev. 600
COGS 480
Merch. Inv. 480
C. Sales R&As 30 Sales R&As 30
Cash 30Cash 30
Merch. Inv. 24
COGS 24
D. Cash 50 Cash 50
Purchases
Merch. Inv. 50R&As 50
Topic: Periodic v perpetual inventory systems-Supp B; Purchase discounts-returns-allowances-
Supp C
Perpetual Inventory Systems.; 07-(S)(C): Additional Issues in Measuring Purchases.
Bloom's: Understand
86

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Financial Accounting, 10e (Libby)

Chapter 7 Reporting and Interpreting Cost of Goods Sold and Inventory

29) An understatement of ending inventory results in an overstatement of net income.

33) An overstatement of the 2018 ending inventory results in an overstatement of stockholders'

37) Which of the following statements is incorrect?

41) Which of the following is correct?

During the year, Lauer sold 750 laptop computers.

During the year, Lauer sold 750 laptop computers.

During the year, Lauer sold 750 laptop computers.

During the year, Lauer sold 750 laptop computers.

52) Which of the following statements is correct?

During the year, Maxim sold 400 units.

What is ending inventory using the average cost method?

During the year, Maxim sold 400 units.

What is cost of goods sold using the average cost method?

Tinker's inventory turnover during 2019 was closest to:

65) The inventory turnover

What is the LIFO inventory value at year-end 2019?

How much is the 2019 LIFO cost of goods sold?

During the year, RJ sold 3,000 units.

During the year, RJ sold 3,000 units.

During the year, RJ sold 3,000 units.

During the year, RJ sold 3,000 units.

During the year, RJ sold 3,000 units.

During the year, RJ sold 3,000 units.

5/6 Purchase 1000 $ 432

8/6 Purchase 1000 $ 648

101) Which of the following statements is correct?

103) Which of the following statements is incorrect?

111) Of the following, which is not a control for safeguarding inventories?

Gross sales during 2019 $2,000,000

Calculate each of the following:

Answer: Beginning inventory, $20,000 + Purchases, $255,000 — Ending inventory, $25,000 =

Answer: Beginning inventory, $22,000 + Purchases, $310,000 — Ending inventory, $32,000 =

Case A Case B Case C

Units Cost per Unit

Compute the following:

Calculate the following:

Transactions Units Unit Cost

Calculate the following:

A. 2,000 units × $12 = $24,000.

Units Unit Cost

Sales–8,000 units at $35 per unit.

Compute the following amounts:

Method Inventory Cost of Goods Sold

EI = (600 × $3) + (500 × $4) + (100 × $5).

Determine the following:

January 6 Inventory 240

A. Unit costs are increasing; ending inventory is:

Compute the following:

1. FIFO ending inventory balance at year end 2018 ________

Answer: 2018: $21,000 - $1,000 = $20,000.

Ending Cost of Goods Net

Account Name Account Code

Transactions Debits Credits

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