CHAPTER 8

VALUATION OF INVENTORIES:
A COST-BASIS APPROACH
CHAPTER LEARNING OBJECTIVES

1. Describe inventory classifications and different inventory systems.

2. Identify the goods and costs included in inventory.

3. Compare the cost flow assumptions used to account for inventories.

4. Determine the effects of inventory errors on the financial statements.

*5. Describe the LIFO cost flow assumption.

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

TRUE FALSE—Conceptual
1. A manufacturing concern would report the cost of units only partially processed as
inventory in the statement of financial position.

2. Both merchandising and manufacturing companies normally have multiple inventory

accounts.

3. IFRS requires manufacturers to disclose their inventory components on the statement of

financial position or in related notes.

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.

5. Tang, Inc. sells collectible jewelry on consignment from various manufacturers and should
include this consigned inventory on its statement of financial position.

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

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.
8-4 Test Bank for Intermediate Accounting: IFRS Edition, 3e
 Valuation of Inventories: A Cost-Basis Approach 8-5

25. Culver Company purchases the majority of its inventory from three primary suppliers for
re-sale to customers around the world. Culver Company’s statement of financial position
will include
a. Finished goods inventory.
b. Work-in-process inventory.
c. Merchandise inventory.
d. All of the choices are correct.

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
of financial position and the cost of goods acquired or produced during the period.
b. The cost of goods on hand at the end of the period as reported on the statement of
financial position and the cost of goods acquired or produced during the period.
c. The income statement and the statement of financial position.
d. All of the choices are correct.

27. Mineral Makers (MM) Company keeps its inventory records using a perpetual system. At
December 31, 2019, the unadjusted balance in the inventory account is €64,000. Through
a physical count on December 31, 2019, MM determines that its actual merchandise
inventory at year-end is €62,500. Which of the following is true regarding the statement of
financial position and the income statement of MM at December 31, 2019?
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.
c. Inventory is increased and cost of goods sold is increased by €1,500.
d. Inventory is decreased and cost of goods sold is decreased by €1,500.

28. Tang, Inc. sells collectible jewelry on consignment from various manufacturers.
Additionally, Tang sells its own line of specialty jewelry manufactured in-house. On
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
consignment from Metcalf Associates. Which of the following is correct regarding the
impact of this error on Tang’s income statement and statement of financial position at
December 31, 2019?
a. Ending inventory is understated by €350,000.
b. Retained earnings is overstated by €350,000.
c. Cost of goods sold is overstated by €350,000.
d. The financial statements are correctly stated.

29. Why are inventories included in the computation of net income?

a. To determine cost of goods sold.
b. To determine sales revenue.
c. To determine merchandise returns.
d. Inventories are not included in the computation of net income.

30. Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to a Purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in
inventory.
8-6 Test Bank for Intermediate Accounting: IFRS Edition, 3e

31. How is a significant amount of consignment inventory reported in the statement of

financial position?
a. The inventory is reported separately on the consignor's statement of financial position.
b. The inventory is combined with other inventory on the consignor's statement of
financial position.
c. The inventory is reported separately on the consignee's statement of financial position.
d. The inventory is combined with other inventory on the consignee's statement of
financial position.
32. Where should goods in transit that were recently purchased f.o.b. destination be included
on the statement of financial position?
a. Accounts payable.
b. Inventory.
c. Equipment.
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
including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate net income.
b. Understate net income.
c. No effect on net income.
d. Not sufficient information to determine effect on net income.
34. If a company uses the periodic inventory system, what is the impact on the current ratio of
including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate the current ratio.
b. Understate the current ratio.
c. No effect on the current ratio.
d. Not sufficient information to determine effect on the current ratio.
35. What is consigned inventory?
a. Goods that are shipped, but title transfers to the receiver.
b. Goods that are sold, but payment is not required until the goods are sold.
c. Goods that are shipped, but title remains with the shipper.
d. Goods that have been segregated for shipment to a customer.
36. When using a perpetual inventory system,
a. no Purchases account is used.
b. a Cost of Goods Sold account is used.
c. two entries are required to record a sale.
d. All of these are correct.
37. Goods in transit which are shipped f.o.b. shipping point should be
a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. None of these are correct.
38. Goods in transit which are shipped f.o.b. destination should be
a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. None of these are correct.
 Valuation of Inventories: A Cost-Basis Approach 8-7

39. Which of the following items should be included in a company's inventory at the statement
of financial position date?
a. Goods in transit which were purchased f.o.b. destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at his or her
convenience.
d. None of these are correct.

Use the following information for questions 40 and 41.

During 2018 Carne Corporation transferred inventory to Nolan Corporation and agreed to
repurchase the merchandise early in 2019. Nolan then used the inventory as collateral to borrow
from Norwalk Bank, remitting the proceeds to Carne. In 2019 when Carne repurchased the
inventory, Nolan used the proceeds to repay its bank loan.

40. This transaction is known as a(n)

a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.

41. On whose books should the cost of the inventory appear at the December 31, 2018
statement of financial position date?
a. Carne Corporation
b. Nolan Corporation
c. Norwalk Bank
d. Nolan Corporation, with Carne making appropriate note disclosure of the transaction
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42. Valuation of inventories requires the determination of all of the following except
a. the costs to be included in inventory.
b. the physical goods to be included in inventory.
c. the cost of goods held on consignment from other companies.
d. the cost flow assumption to be adopted.
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43. The accountant for the Pryor Sales Company is preparing the income statement for 2019
and the statement of financial position at December 31, 2019. Pryor uses the periodic
inventory system. The January 1, 2019 merchandise inventory balance will appear
a. only as an asset on the statement of financial position.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a
current asset on the statement of financial position.
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.
P
44. If the beginning inventory for 2018 is overstated, the effects of this error on cost of goods
sold for 2018, net income for 2018, and assets at December 31, 2019, respectively, are
a. overstatement, understatement, overstatement.
b. overstatement, understatement, no effect.
c. understatement, overstatement, overstatement.
d. understatement, overstatement, no effect.
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
properly included in the physical inventory results in
a. an overstatement of assets and net income.
b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an overstatement of
assets.
d. an understatement of liabilities and an overstatement of equity.

46. Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded
the transaction as a purchase and included the goods in inventory. The effect of this on its
financial statements for March 31 would be
a. no effect.
b. net income was correct and current assets and current liabilities were overstated.
c. net income, current assets, and current liabilities were overstated.
d. net income and current liabilities were overstated.

47. Green Co. received merchandise on consignment. As of January 31, Green included the
goods in inventory, but did not record the transaction. The effect of this on its financial
statements for January 31 would be
a. net income, current assets, and retained earnings were overstated.
b. net income was correct and current assets were understated.
c. net income and current assets were overstated and current liabilities were
understated.
d. net income, current assets, and retained earnings were understated.

48. Feine Co. accepted delivery of merchandise which it purchased on account. As of

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
a. net income, current assets, and retained earnings were understated.
b. net income was correct and current assets were understated.
c. net income was understated and current liabilities were overstated.
d. net income was overstated and current assets were understated.

49. On June 15, 2019, Wynne Corporation accepted delivery of merchandise which it
purchased on account. As of June 30, Wynne had not recorded the transaction or
included the merchandise in its inventory. The effect of this on its statement of financial
position for June 30, 2019 would be
a. assets and equity were overstated but liabilities were not affected.
b. equity was the only item affected by the omission.
c. assets, liabilities, and equity were understated.
d. None of these answers are correct.

50. What is the effect of a €50,000 overstatement of last year's inventory on current year’s
ending retained earning balance?
a. Understated by €50,000.
b. No effect.
c. Overstated by €50,000.
d. Need more information to determine.
 Valuation of Inventories: A Cost-Basis Approach 8-9

51. When inventory is misstated, its presentation lacks?

a. Relevance.
b. Faithful representation.
c. Comparability.
d. All of the choices are correct.

52. Which of the following costs should not be included on the statement of financial position
as part of the cost of inventory?
a. Abnormal freight.
b. Import duties.
c. Conversion costs.
d. All of the choices are included on the statement of financial position as part of the cost
of inventory.

53. Jarvis, Inc. manufactures cruise ships for sale. Each ship costs approximately
€25,000,000 to build and takes 3 years to fully construct. During the time it takes to
construct one cruise ship, Jarvis incurs €2,400,000 in interest cost related to the
construction. The interest cost is incurred evenly throughout the construction period.
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
client specification. The International Accounting Standards Board requires that Jarvis
account for this interest cost as
a. €2,400,000 is recorded as interest expense as incurred.
b. €2,400,000 is capitalized to the cruise ship.
c. €800,000 incurred in 1st year is expensed as incurred; the remaining amount is
capitalized to the cruise ship.
d. €800,000 is capitalized to the cruise ship; the remaining amount is expensed as
incurred.

54. Oats Company offers a trade discount to its customers as a reward for large orders.
According to the International Accounting Standards Board (IASB) how should the
customers of Oats Company account for these trade discounts?
a. As an expense.
b. As a revenue.
c. As a reduction in the cost of inventory.
d. The IASB allows any of these treatments so long as the company applies it
consistently.

55. Margo, Inc. purchased goods from Fairlane Industries. If Margo’s accounts show a
Purchase Discount account related to this purchase, which of the following is true?
a. Margo considers purchase discounts lost as a financial expense.
b. Margo uses the gross method and a periodic inventory system.
c. Margo’s management can measure inefficiency by holding management responsible
for discounts not taken.
d. All of these are correct regarding Margo, Inc.
8 - 10 Test Bank for Intermediate Accounting: IFRS Edition, 3e

56. Computers For You is a retailer specializing in selling computers and related equipment.
During 2019, Computers For You sells €200,000 of merchandise to Sandcastles, Inc.
Computers For You incurs €24,000 of freight costs associated with these sales. Which of
the following is true regarding how this €24,000 is treated on the financial statements?
a. Computers For You will report the €24,000 as part of merchandise inventory on the
statement of financial position.
b. Sandcastles, Inc. will report the €24,000 as part of merchandise inventory on the
statement of financial position.
c. Computers For You will report the €24,000 as part of operating expenses on the
income statement.
d. Sandcastles, Inc. will report the €24,000 as an accounts receivable on the statement
of financial position.

57. Which of the following is a product cost as it relates to inventory?

a. Selling costs.
b. Interest costs.
c. Raw materials.
d. Abnormal spoilage.

58. Which of the following is a period cost?

a. Labor costs.
b. Freight in.
c. Production costs.
d. Selling costs.

59. Which method may be used to record cash discounts a company receives for paying
suppliers promptly?
a. Net method.
b. Gross method.
c. Average method.
d. Both the net method and the gross method.

60. Which of the following is included in inventory costs?

a. Product costs.
b. Period costs.
c. Product and period costs.
d. Neither product or period costs.

61. Which of the following is correct?

a. Selling costs are product costs.
b. Manufacturing overhead costs are product costs.
c. Interest costs for routine inventories are product costs.
d. All of these are correct.
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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

63. Which of the following types of interest cost incurred in connection with the purchase or
manufacture of inventory should be capitalized as a product cost?
a. Purchase discounts lost
b. Interest incurred during the production of discrete projects such as ships or real estate
projects
c. Interest incurred on notes payable to vendors for routine purchases made on a
repetitive basis
d. All of these should be capitalized.

64. The use of a Discounts Lost account implies that the recorded cost of a purchased
inventory item is its
a. invoice price.
b. invoice price plus the purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.

65. The use of a Purchase Discounts account implies that the recorded cost of a purchased
inventory item is its
a. invoice price.
b. invoice price plus any purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.

Use the following information for questions 66 and 67.

During 2019, which was the first year of operations, Oswald Company had merchandise
purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30.
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.

66. Which of the following recording procedures would result in the highest cost of goods sold
for 2019?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken
shown under "other income and expense" in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same cost of goods sold.
d. Cannot be determined from the information provided.

67. Which of the following recording procedures would result in the highest net income for
2019?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken
shown under "other income and expense" in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same net income.
d. Cannot be determined from the information provided.
8 - 12 Test Bank for Intermediate Accounting: IFRS Edition, 3e

68. When using the periodic inventory system, which of the following generally would not be
separately accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cash (purchase) discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in for merchandise purchased during the period
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69. Which inventory costing method most closely approximates current cost for ending
inventory?
a. Average
b. FIFO
c. LIFO
d. Specific identification

70. The pricing of issues from inventory must be deferred until the end of the accounting
period under the following method of inventory valuation
a. moving average.
b. weighted-average.
c. specific identification.
d. FIFO.

71. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on
the ending inventory valuation is
a. FIFO.
b. LIFO.
c. specific identification.
d. weighted-average.

72. Which method of inventory pricing best approximates specific identification of the actual
flow of costs and units in most manufacturing situations?
a. Average cost
b. First-in, first-out
c. Moving-average
d. Weighted-average

73. Assuming no beginning inventory, what can be said about the trend of inventory prices if
cost of goods sold computed when inventory is valued using the FIFO method exceeds
cost of goods sold when inventory is valued using the average cost method?
a. Prices decreased.
b. Prices remained unchanged.
c. Prices increased.
d. Price trend cannot be determined from information given.

74. In a period of rising prices, the inventory method which tends to give the highest reported
net income is
a. moving-average.
b. first-in, first-out.
c. specific identification.
d. weighted-average.
 Valuation of Inventories: A Cost-Basis Approach 8 - 13

75. In a period of rising prices, the inventory method which tends to give the highest reported
inventory is
a. FIFO.
b. moving average.
c. specific identification.
d. weighted-average.

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
inventory, in what direction did the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot be determined

77. In a period of declining prices, the inventory method which tends to give the highest
reported cost of goods sold is
a. specific identification.
b. average cost.
c. FIFO.
d. None of these are correct.

78. The acquisition cost of a certain raw material changes frequently. The book value of the
inventory of this material at year end will be the same if perpetual records are kept as it
would be under a periodic inventory method only if the book value is computed under the
a. weighted-average method.
b. moving average method.
c. FIFO method.
d. None of these are correct.

79. Which of the following is a reason why the specific identification method may be
considered ideal for assigning costs to inventory and cost of goods sold?
a. The potential for manipulation of net income is reduced.
b. There is no arbitrary allocation of costs.
c. The cost flow matches the physical flow.
d. Able to use on all types of inventory.

80. In a period of falling prices which inventory method generally provides the lowest reported
inventory?
a. Average cost.
b. FIFO.
c. Moving average.
d. Specific identification.

81. In a period of falling prices, which inventory method generally provides the lowest amount
of net income?
a. Average cost.
b. Moving average.
c. FIFO.
d. Specific identification.
8 - 14 Test Bank for Intermediate Accounting: IFRS Edition, 3e

82. The International Accounting Standards Board requires the specific identification method
in certain circumstances. Which of the following is likely to be a circumstance where the
specific identification criteria can be met?
a. Unit price is low.
b. Inventory turnover is low.
c. Inventory quantities are large.
d. All of the choices are circumstances where the criteria are likely to be met.

83. Homes 4 You builds single-family homes throughout the United States and Europe. The
International Accounting Standards Board (IASB) Requires Homes 4 You to use which of
the following cost flow assumptions for its inventory?
a. FIFO (first-in, first-out).
b. Specific identification.
c. Weighted-average.
d. The IASB allows any of these cost flow assumptions as long as the company uses it
consistently.

*84. Oats and Honey Company produces healthy snacks for sale throughout the United States
and Europe. The International Accounting Standards Board (IASB) prohibits Oats and
Honey from using which of the following cost flow assumptions for its inventory?
a. LIFO (last-in, first-out).
b. Specific identification.
c. Weighted-average.
d. The IASB allows any of these cost flow assumptions as long as the company uses it
consistently.

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans
21. c 31. a 41. a 51. b 61. b 71. a 81. c.
22. b 32. d 42. c 52. a 62. d 72. b 82. b
23. b 33. b 43. b 53. b 63. b 73. a 83. b
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
26. c 36. d 46. b 56. c 66. a 76. b
27. b 37. b 47. a 57. c 67. c 77. c
28. b 38. a 48. a 58. d 68. a 78. c
29. a 39. d 49. d 59. d 69. b 79. c
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
correct.”
39. Goods in transit which were purchased f.o.b. shipping point.
49. Assets and liabilities were understated but equity was not affected.