8-2 Test Bank for Intermediate Accounting: IFRS Edition, 3e

CHAPTER 8 TRUE FALSE—Conceptual

VALUATION OF INVENTORIES: 1. A manufacturing concern would report the cost of units only partially processed as
inventory in the statement of financial position.
A COST-BASIS APPROACH
2. Both merchandising and manufacturing companies normally have multiple inventory
accounts.
CHAPTER LEARNING OBJECTIVES
3. IFRS requires manufacturers to disclose their inventory components on the statement of
1. Describe inventory classifications and different inventory systems. financial position or in related notes.

2. Identify the goods and costs included in inventory. 4. Goods in transit, shipped FOB shipping point, are included in the buyer’s statement of
financial position at the time of delivery to the common carrier.
3. Compare the cost flow assumptions used to account for inventories.
5. Tang, Inc. sells collectible jewelry on consignment from various manufacturers and should
4. Determine the effects of inventory errors on the financial statements. include this consigned inventory on its statement of financial position.

*5. Describe the LIFO cost flow assumption. 6. Companies must allocate the cost of all the goods available for sale (or use) between the
income statement and the statement of financial position.

7. When using a perpetual inventory system, freight charges on goods purchased are
debited to Freight-In.

8. If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier
delivers the goods to the common carrier.

9. If both purchases and ending inventory are overstated by the same amount, net income is
not affected.

10. Freight charges on goods purchased are considered a period cost and therefore are not
part of the cost of the inventory.

11. Purchase Discounts Lost is a financial expense and is reported in the “other income and
expense” section of the income statement.

12. Interest costs incurred to manufacture large quantities of inventory that are produced
routinely should be capitalized.

13. A trade discount that is granted as an incentive for a first-time customer or as a reward for
large order should be accounted for by the purchaser as revenue.

14. Freight costs incurred by the seller to ship merchandise to the purchaser are accounted
for by the seller as part of inventory on the statement of financial position.

15. Abnormal freight costs are not included on the statement of financial position as part of
the cost of inventory.

16. Under IFRS, agricultural inventories, such as wheat, oranges, etc., are recorded at their
fair value less estimated selling costs at the point of harvest.
 Valuation of Inventories: A Cost-Basis Approach 8-3 8-4 Test Bank for Intermediate Accounting: IFRS Edition, 3e

17. The International Accounting Standards Board (IASB) requires the specific identification
method of inventory costing where individual items of inventory can be identified and
costed.

18. The International Accounting Standards Board requires the specific identification method
when unit price is low, inventory turnover is high, and inventory quantities are large.

19. The cost flow assumption adopted must be consistent with the physical movement of the
goods.

*20. The LIFO perpetual method results in the same ending inventory and cost of goods sold
amounts as under the LIFO periodic method.

True False Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. T 5. F 9. T 13. F 17. T
2. F 6. T 10. F 14. F 18. F
3. T 7. F 11. T 15. T 19. F
4. T 8. F 12. F 16. T *20. F

MULTIPLE CHOICE—Conceptual
21. Which of the following inventories carried by a manufacturer is similar to the merchandise
inventory of a retailer?
a. Raw materials.
b. Work-in-process.
c. Finished goods.
d. Supplies.

22. Where should raw materials be classified on the statement of financial position?
a. Prepaid expenses.
b. Inventory.
c. Equipment.
d. Not on the statement of financial position.

23. Which of the following accounts is not reported in inventory?

a. Raw materials.
b. Equipment.
c. Finished goods.
d. Supplies.

24. Computers For You is a retailer specializing in selling computers and related equipment.
Which of the following would not be reported in the merchandise inventory account
reported on the statement of financial position for Computers For You at December 31,
2019?
a. Computer purchased for resale during November 2019.
b. Shelving materials purchased during December 2019.
c. Freight costs related to the computers purchased in November.
d. All of the choices are included in the merchandise inventory account at December 31,
2019.
 Valuation of Inventories: A Cost-Basis Approach 8-5 8-6 Test Bank for Intermediate Accounting: IFRS Edition, 3e

25. Culver Company purchases the majority of its inventory from three primary suppliers for 31. How is a significant amount of consignment inventory reported in the statement of
re-sale to customers around the world. Culver Company’s statement of financial position financial position?
will include a. The inventory is reported separately on the consignor's statement of financial position.
a. Finished goods inventory. b. The inventory is combined with other inventory on the consignor's statement of
b. Work-in-process inventory. financial position.
c. Merchandise inventory. c. The inventory is reported separately on the consignee's statement of financial position.
d. All of the choices are correct. d. The inventory is combined with other inventory on the consignee's statement of
financial position.
26. Companies must allocate the cost of all the goods available for sale (or use) between
a. The cost goods on hands at the beginning of the period as reported on the statement 32. Where should goods in transit that were recently purchased f.o.b. destination be included
of financial position and the cost of goods acquired or produced during the period. on the statement of financial position?
b. The cost of goods on hand at the end of the period as reported on the statement of a. Accounts payable.
financial position and the cost of goods acquired or produced during the period. b. Inventory.
c. The income statement and the statement of financial position. c. Equipment.
d. All of the choices are correct. d. Not on the statement of financial position.
33. If a company uses the periodic inventory system, what is the impact on net income of
27. Mineral Makers (MM) Company keeps its inventory records using a perpetual system. At
including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
December 31, 2019, the unadjusted balance in the inventory account is €64,000. Through
a. Overstate net income.
a physical count on December 31, 2019, MM determines that its actual merchandise
b. Understate net income.
inventory at year-end is €62,500. Which of the following is true regarding the statement of
c. No effect on net income.
financial position and the income statement of MM at December 31, 2019?
d. Not sufficient information to determine effect on net income.
a. Inventory is increased and cost of goods sold is decreased by €1,500.
b. Inventory is decreased and cost of goods sold is increased by €1,500. 34. If a company uses the periodic inventory system, what is the impact on the current ratio of
c. Inventory is increased and cost of goods sold is increased by €1,500. including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
d. Inventory is decreased and cost of goods sold is decreased by €1,500. a. Overstate the current ratio.
b. Understate the current ratio.
28. Tang, Inc. sells collectible jewelry on consignment from various manufacturers. c. No effect on the current ratio.
Additionally, Tang sells its own line of specialty jewelry manufactured in-house. On d. Not sufficient information to determine effect on the current ratio.
December 31, 2019, during Tang, Inc 's annual inventory count, an inexperienced new
staff member included in Tang’s ending inventory €350,000 worth of inventory held on 35. What is consigned inventory?
consignment from Metcalf Associates. Which of the following is correct regarding the a. Goods that are shipped, but title transfers to the receiver.
impact of this error on Tang’s income statement and statement of financial position at b. Goods that are sold, but payment is not required until the goods are sold.
December 31, 2019? c. Goods that are shipped, but title remains with the shipper.
a. Ending inventory is understated by €350,000. d. Goods that have been segregated for shipment to a customer.
b. Retained earnings is overstated by €350,000.
c. Cost of goods sold is overstated by €350,000. 36. When using a perpetual inventory system,
d. The financial statements are correctly stated. a. no Purchases account is used.
b. a Cost of Goods Sold account is used.
29. Why are inventories included in the computation of net income? c. two entries are required to record a sale.
a. To determine cost of goods sold. d. All of these are correct.
b. To determine sales revenue. 37. Goods in transit which are shipped f.o.b. shipping point should be
c. To determine merchandise returns. a. included in the inventory of the seller.
d. Inventories are not included in the computation of net income. b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
30. Which of the following is a characteristic of a perpetual inventory system? d. None of these are correct.
a. Inventory purchases are debited to a Purchases account.
b. Inventory records are not kept for every item. 38. Goods in transit which are shipped f.o.b. destination should be
c. Cost of goods sold is recorded with each sale. a. included in the inventory of the seller.
d. Cost of goods sold is determined as the amount of purchases less the change in b. included in the inventory of the buyer.
inventory. c. included in the inventory of the shipping company.
d. None of these are correct.
 Valuation of Inventories: A Cost-Basis Approach 8-7 8-8 Test Bank for Intermediate Accounting: IFRS Edition, 3e
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45. The failure to record a purchase of merchandise on account even though the goods are
39. Which of the following items should be included in a company's inventory at the statement properly included in the physical inventory results in
of financial position date? a. an overstatement of assets and net income.
a. Goods in transit which were purchased f.o.b. destination. b. an understatement of assets and net income.
b. Goods received from another company for sale on consignment. c. an understatement of cost of goods sold and liabilities and an overstatement of
c. Goods sold to a customer which are being held for the customer to call for at his or her assets.
convenience. d. an understatement of liabilities and an overstatement of equity.
d. None of these are correct.
46. Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded
Use the following information for questions 40 and 41. the transaction as a purchase and included the goods in inventory. The effect of this on its
financial statements for March 31 would be
During 2018 Carne Corporation transferred inventory to Nolan Corporation and agreed to
a. no effect.
repurchase the merchandise early in 2019. Nolan then used the inventory as collateral to borrow
b. net income was correct and current assets and current liabilities were overstated.
from Norwalk Bank, remitting the proceeds to Carne. In 2019 when Carne repurchased the
c. net income, current assets, and current liabilities were overstated.
inventory, Nolan used the proceeds to repay its bank loan.
d. net income and current liabilities were overstated.
40. This transaction is known as a(n)
a. consignment. 47. Green Co. received merchandise on consignment. As of January 31, Green included the
b. installment sale. goods in inventory, but did not record the transaction. The effect of this on its financial
c. assignment for the benefit of creditors. statements for January 31 would be
d. product financing arrangement. a. net income, current assets, and retained earnings were overstated.
b. net income was correct and current assets were understated.
41. On whose books should the cost of the inventory appear at the December 31, 2018 c. net income and current assets were overstated and current liabilities were
statement of financial position date? understated.
a. Carne Corporation d. net income, current assets, and retained earnings were understated.
b. Nolan Corporation
c. Norwalk Bank 48. Feine Co. accepted delivery of merchandise which it purchased on account. As of
d. Nolan Corporation, with Carne making appropriate note disclosure of the transaction December 31, Feine had recorded the transaction, but did not include the merchandise in
its inventory. The effect of this on its financial statements for December 31 would be
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42. Valuation of inventories requires the determination of all of the following except a. net income, current assets, and retained earnings were understated.
a. the costs to be included in inventory. b. net income was correct and current assets were understated.
b. the physical goods to be included in inventory. c. net income was understated and current liabilities were overstated.
c. the cost of goods held on consignment from other companies. d. net income was overstated and current assets were understated.
d. the cost flow assumption to be adopted.
49. On June 15, 2019, Wynne Corporation accepted delivery of merchandise which it
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43. The accountant for the Pryor Sales Company is preparing the income statement for 2019 purchased on account. As of June 30, Wynne had not recorded the transaction or
and the statement of financial position at December 31, 2019. Pryor uses the periodic included the merchandise in its inventory. The effect of this on its statement of financial
inventory system. The January 1, 2019 merchandise inventory balance will appear position for June 30, 2019 would be
a. only as an asset on the statement of financial position. a. assets and equity were overstated but liabilities were not affected.
b. only in the cost of goods sold section of the income statement. b. equity was the only item affected by the omission.
c. as a deduction in the cost of goods sold section of the income statement and as a c. assets, liabilities, and equity were understated.
current asset on the statement of financial position. d. None of these answers are correct.
d. as an addition in the cost of goods sold section of the income statement and as a
current asset on the statement of financial position. 50. What is the effect of a €50,000 overstatement of last year's inventory on current year’s
ending retained earning balance?
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44. If the beginning inventory for 2018 is overstated, the effects of this error on cost of goods a. Understated by €50,000.
sold for 2018, net income for 2018, and assets at December 31, 2019, respectively, are b. No effect.
a. overstatement, understatement, overstatement. c. Overstated by €50,000.
b. overstatement, understatement, no effect. d. Need more information to determine.
c. understatement, overstatement, overstatement.
d. understatement, overstatement, no effect.
 Valuation of Inventories: A Cost-Basis Approach 8-9 8 - 10 Test Bank for Intermediate Accounting: IFRS Edition, 3e

51. When inventory is misstated, its presentation lacks? 56. Computers For You is a retailer specializing in selling computers and related equipment.
a. Relevance. During 2019, Computers For You sells €200,000 of merchandise to Sandcastles, Inc.
b. Faithful representation. Computers For You incurs €24,000 of freight costs associated with these sales. Which of
c. Comparability. the following is true regarding how this €24,000 is treated on the financial statements?
d. All of the choices are correct. a. Computers For You will report the €24,000 as part of merchandise inventory on the
statement of financial position.
52. Which of the following costs should not be included on the statement of financial position b. Sandcastles, Inc. will report the €24,000 as part of merchandise inventory on the
as part of the cost of inventory? statement of financial position.
a. Abnormal freight. c. Computers For You will report the €24,000 as part of operating expenses on the
b. Import duties. income statement.
c. Conversion costs. d. Sandcastles, Inc. will report the €24,000 as an accounts receivable on the statement
d. All of the choices are included on the statement of financial position as part of the cost of financial position.
of inventory.
57. Which of the following is a product cost as it relates to inventory?
53. Jarvis, Inc. manufactures cruise ships for sale. Each ship costs approximately a. Selling costs.
€25,000,000 to build and takes 3 years to fully construct. During the time it takes to b. Interest costs.
construct one cruise ship, Jarvis incurs €2,400,000 in interest cost related to the c. Raw materials.
construction. The interest cost is incurred evenly throughout the construction period. d. Abnormal spoilage.
During the first year of construction, Jarvis builds a shell that can be customized for any
purchaser according to specifications; construction during the final 2 years is all based on 58. Which of the following is a period cost?
client specification. The International Accounting Standards Board requires that Jarvis a. Labor costs.
account for this interest cost as b. Freight in.
a. €2,400,000 is recorded as interest expense as incurred. c. Production costs.
b. €2,400,000 is capitalized to the cruise ship. d. Selling costs.
c. €800,000 incurred in 1st year is expensed as incurred; the remaining amount is
capitalized to the cruise ship. 59. Which method may be used to record cash discounts a company receives for paying
d. €800,000 is capitalized to the cruise ship; the remaining amount is expensed as suppliers promptly?
incurred. a. Net method.
b. Gross method.
54. Oats Company offers a trade discount to its customers as a reward for large orders. c. Average method.
According to the International Accounting Standards Board (IASB) how should the d. Both the net method and the gross method.
customers of Oats Company account for these trade discounts?
a. As an expense. 60. Which of the following is included in inventory costs?
b. As a revenue. a. Product costs.
c. As a reduction in the cost of inventory. b. Period costs.
d. The IASB allows any of these treatments so long as the company applies it c. Product and period costs.
consistently. d. Neither product or period costs.

55. Margo, Inc. purchased goods from Fairlane Industries. If Margo’s accounts show a 61. Which of the following is correct?
Purchase Discount account related to this purchase, which of the following is true? a. Selling costs are product costs.
a. Margo considers purchase discounts lost as a financial expense. b. Manufacturing overhead costs are product costs.
b. Margo uses the gross method and a periodic inventory system. c. Interest costs for routine inventories are product costs.
c. Margo’s management can measure inefficiency by holding management responsible d. All of these are correct.
for discounts not taken.
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d. All of these are correct regarding Margo, Inc. 62. Costs which are inventoriable include all of the following except
a. costs that are directly connected with the bringing of goods to the place of business of
the buyer.
b. costs that are directly connected with the converting of goods to a salable condition.
c. buying costs of a purchasing department.
d. selling costs of a sales department.
 Valuation of Inventories: A Cost-Basis Approach 8 - 11 8 - 12 Test Bank for Intermediate Accounting: IFRS Edition, 3e

63. Which of the following types of interest cost incurred in connection with the purchase or 68. When using the periodic inventory system, which of the following generally would not be
manufacture of inventory should be capitalized as a product cost? separately accounted for in the computation of cost of goods sold?
a. Purchase discounts lost a. Trade discounts applicable to purchases during the period
b. Interest incurred during the production of discrete projects such as ships or real estate b. Cash (purchase) discounts taken during the period
projects c. Purchase returns and allowances of merchandise during the period
c. Interest incurred on notes payable to vendors for routine purchases made on a d. Cost of transportation-in for merchandise purchased during the period
repetitive basis
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d. All of these should be capitalized. 69. Which inventory costing method most closely approximates current cost for ending
inventory?
64. The use of a Discounts Lost account implies that the recorded cost of a purchased a. Average
inventory item is its b. FIFO
a. invoice price. c. LIFO
b. invoice price plus the purchase discount lost. d. Specific identification
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not. 70. The pricing of issues from inventory must be deferred until the end of the accounting
period under the following method of inventory valuation
65. The use of a Purchase Discounts account implies that the recorded cost of a purchased a. moving average.
inventory item is its b. weighted-average.
a. invoice price. c. specific identification.
b. invoice price plus any purchase discount lost. d. FIFO.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not. 71. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on
the ending inventory valuation is
Use the following information for questions 66 and 67. a. FIFO.
b. LIFO.
During 2019, which was the first year of operations, Oswald Company had merchandise c. specific identification.
purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. d. weighted-average.
Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods
available had been sold at year end. 72. Which method of inventory pricing best approximates specific identification of the actual
flow of costs and units in most manufacturing situations?
66. Which of the following recording procedures would result in the highest cost of goods sold a. Average cost
for 2019? b. First-in, first-out
1. Recording purchases at gross amounts c. Moving-average
2. Recording purchases at net amounts, with the amount of discounts not taken d. Weighted-average
shown under "other income and expense" in the income statement
a. 1 73. Assuming no beginning inventory, what can be said about the trend of inventory prices if
b. 2 cost of goods sold computed when inventory is valued using the FIFO method exceeds
c. Either 1 or 2 will result in the same cost of goods sold. cost of goods sold when inventory is valued using the average cost method?
d. Cannot be determined from the information provided. a. Prices decreased.
b. Prices remained unchanged.
67. Which of the following recording procedures would result in the highest net income for c. Prices increased.
2019? d. Price trend cannot be determined from information given.
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken 74. In a period of rising prices, the inventory method which tends to give the highest reported
shown under "other income and expense" in the income statement net income is
a. 1 a. moving-average.
b. 2 b. first-in, first-out.
c. Either 1 or 2 will result in the same net income. c. specific identification.
d. Cannot be determined from the information provided. d. weighted-average.
 Valuation of Inventories: A Cost-Basis Approach 8 - 13 8 - 14 Test Bank for Intermediate Accounting: IFRS Edition, 3e

75. In a period of rising prices, the inventory method which tends to give the highest reported 82. The International Accounting Standards Board requires the specific identification method
inventory is in certain circumstances. Which of the following is likely to be a circumstance where the
a. FIFO. specific identification criteria can be met?
b. moving average. a. Unit price is low.
c. specific identification. b. Inventory turnover is low.
d. weighted-average. c. Inventory quantities are large.
d. All of the choices are circumstances where the criteria are likely to be met.
76. Tanner Corporation's inventory cost on its statement of financial position was lower using
first-in, first-out than it would have been using average cost. Assuming no beginning 83. Homes 4 You builds single-family homes throughout the United States and Europe. The
inventory, in what direction did the cost of purchases move during the period? International Accounting Standards Board (IASB) Requires Homes 4 You to use which of
a. Up the following cost flow assumptions for its inventory?
b. Down a. FIFO (first-in, first-out).
c. Steady b. Specific identification.
d. Cannot be determined c. Weighted-average.
d. The IASB allows any of these cost flow assumptions as long as the company uses it
77. In a period of declining prices, the inventory method which tends to give the highest consistently.
reported cost of goods sold is
a. specific identification. *84. Oats and Honey Company produces healthy snacks for sale throughout the United States
b. average cost. and Europe. The International Accounting Standards Board (IASB) prohibits Oats and
c. FIFO. Honey from using which of the following cost flow assumptions for its inventory?
d. None of these are correct. a. LIFO (last-in, first-out).
b. Specific identification.
78. The acquisition cost of a certain raw material changes frequently. The book value of the c. Weighted-average.
inventory of this material at year end will be the same if perpetual records are kept as it d. The IASB allows any of these cost flow assumptions as long as the company uses it
would be under a periodic inventory method only if the book value is computed under the consistently.
a. weighted-average method.
b. moving average method.
c. FIFO method.
d. None of these are correct. Multiple Choice Answers—Conceptual

79. Which of the following is a reason why the specific identification method may be Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans
considered ideal for assigning costs to inventory and cost of goods sold?
a. The potential for manipulation of net income is reduced. 21. c 31. a 41. a 51. b 61. b 71. a 81. c.
b. There is no arbitrary allocation of costs. 22. b 32. d 42. c 52. a 62. d 72. b 82. b
c. The cost flow matches the physical flow. 23. b 33. b 43. b 53. b 63. b 73. a 83. b
d. Able to use on all types of inventory. 24. b 34. b 44. b 54. c 64. d 74. b *84. a
25. c 35. c 45. d 55. c 65. a 75. a
80. In a period of falling prices which inventory method generally provides the lowest reported 26. c 36. d 46. b 56. c 66. a 76. b
inventory? 27. b 37. b 47. a 57. c 67. c 77. c
a. Average cost.
28. b 38. a 48. a 58. d 68. a 78. c
b. FIFO.
c. Moving average. 29. a 39. d 49. d 59. d 69. b 79. c
d. Specific identification. 30. c 40. d 50. b 60. a 70. b 80. b
Solutions to those Multiple Choice questions for which the answer is “none of these answers is
81. In a period of falling prices, which inventory method generally provides the lowest amount
correct.”
of net income?
a. Average cost. 39. Goods in transit which were purchased f.o.b. shipping point.
b. Moving average. 49. Assets and liabilities were understated but equity was not affected.
c. FIFO.
d. Specific identification.