Task Team of FUNdaMENTAL aCCOUNtIng School of Business. Sun Yat-sen University L 7 Merchandise Inventories and cost of sales . True and false Questions 1. The inventory of a merchandising company may include manufactured products, but not perishable products such as fruits and vegetables 2. Any business which knows the cost of each individual item in its inventory may use the specific identification method 3. Any business which sells numerous units of identical products may determine its cost of goods sold using a flow assumption rather than the specific identification method 4. A perpetual inventory system eliminates the need for periodically taking a physical inventory 5. Inventory shrinkage is recorded by crediting the Inventory account. 6. The cost of goods available for sale during the period exceeds the cost of goods sold by the amount of the beginning inventory 7. In a periodic inventory system, understating the amount of ending inventory will cause an understatement of gross profit in the current year. 8. In a periodic inventory system, overstating the amount of ending inventory will cause an understatement of gross profit in the followi 9. Companies which use periodic inventory systems are more likely to use the gross profit method in their monthly fiancial statements than are companies with perpetual inventory systems 10. If a retailer uses the retail method, its inventory will appear in the balance sheet at its estimated ost. rather than its sales value Il. Multiple Choice Questions 1. Which of the following should not be classified as inventory in the balance sheet of a large automobile dealership? A. Pickup trucks offered for sale Used cars taken in trade and offered for sale on the company's used-car lot C. Spark plugs, oil filters, and other parts which are intended for use by the service department in repairing and servicing customers'cars D. "Company cars" provided to specific company executives for their personal use 2. Inventory is considered a current asset because it A. Often reflects the most current trends and styles. B. Usuall C. Will be converted into cash in the course of the company's operating cycle D Can be returned to the supplier for a cash refund 3. In a perpetual inventory system, two entries are normally made to record each sales transaction The purpose of these entries is best described as follows A One entry recognizes the sales revenue and the other recognizes the cost of goods sold B. One entry records the purchase of merchandise and the other records the sale C. One entry records the cost of goods sold and the other reduces the balance in the Inventory
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University 1 Lesson 7 Merchandise Inventories and Cost of Sales Self-Test I. True and False Questions 1. The inventory of a merchandising company may include manufactured products, but not perishable products such as fruits and vegetables. 2. Any business which knows the cost of each individual item in its inventory may use the specific identification method. 3. Any business which sells numerous units of identical products may determine its cost of goods sold using a flow assumption rather than the specific identification method. 4. A perpetual inventory system eliminates the need for periodically taking a physical inventory. 5. Inventory shrinkage is recorded by crediting the Inventory account. 6. The cost of goods available for sale during the period exceeds the cost of goods sold by the amount of the beginning inventory. 7. In a periodic inventory system, understating the amount of ending inventory will cause an understatement of gross profit in the current year. 8. In a periodic inventory system, overstating the amount of ending inventory will cause an understatement of gross profit in the following year. 9. Companies which use periodic inventory systems are more likely to use the gross profit method in their monthly financial statements than are companies with perpetual inventory systems. 10. If a retailer uses the retail method, its inventory will appear in the balance sheet at its estimated cost, rather than its sales value. II. Multiple Choice Questions 1. Which of the following should not be classified as inventory in the balance sheet of a large automobile dealership? A. Pickup trucks offered for sale. B. Used cars taken in trade and offered for sale on the company’s used-car lot. C. Spark plugs, oil filters, and other parts which are intended for use by the service department in repairing and servicing customers’ cars. D. “Company cars” provided to specific company executives for their personal use. 2. Inventory is considered a current asset because it: A. Often reflects the most current trends and styles. B. Usually was purchased during the current year. C. Will be converted into cash in the course of the company’s operating cycle. D. Can be returned to the supplier for a cash refund. 3. In a perpetual inventory system, two entries are normally made to record each sales transaction. The purpose of these entries is best described as follows: A. One entry recognizes the sales revenue and the other recognizes the cost of goods sold. B. One entry records the purchase of merchandise and the other records the sale. C. One entry records the cost of goods sold and the other reduces the balance in the Inventory
Task Team of FUNdaMENTAL aCCOUNtIng School of Business. Sun Yat-sen University accoun D One entry updates the subsidiary ledger and the other updates the general ledger. 4. In a perpetual inventory system, recording a sale on account involves crediting which of the following accounts? A Only Sales B. Sales and Inventory C. Sales and Cost of Goods Sold D Sales, Inventory, and Cost of Goods Sold. 5. In a periodic inventory system, recording a sale on account involves crediting which of the following accounts? A Only Sales B. Sales and Inventory C Sales and Cost of Goods Sold D. Sales, Inventory, and Cost of Goods Sold. 6. The specific identification method is more appropriate than a flow assumption: A. For a large inventory of identical low-priced items B. If each item in the inventory is unique C If purchase costs are rising D. If purchase costs are falling 7. When the liFo costing method is in use the seller A Must sell the most recently acquired units first B. Must sell the oldest unit in inventory first C. Assumes that the most recently acquired units are sold first D. Assumes that the oldest units in inventory are sold first 8. Which of the following methods of measuring the cost of goods sold most closely parallels the actual physical flow of the merchandise? A LIFO B FIFO C. Average cost D. Specific identification. 9. The only method of pricing inventory in which all items are assigned the same unit cost is A LIFO B FIFO C. Average D. Specific identification. 10. Which of the following results in the inventory being stated at the most current acquisition costs? A. Specific identification
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University 2 account. D. One entry updates the subsidiary ledger and the other updates the general ledger. 4. In a perpetual inventory system, recording a sale on account involves crediting which of the following accounts? A. Only Sales. B. Sales and Inventory. C. Sales and Cost of Goods Sold. D. Sales, Inventory, and Cost of Goods Sold. 5. In a periodic inventory system, recording a sale on account involves crediting which of the following accounts? A. Only Sales. B. Sales and Inventory. C. Sales and Cost of Goods Sold. D. Sales, Inventory, and Cost of Goods Sold. 6. The specific identification method is more appropriate than a flow assumption: A. For a large inventory of identical low-priced items. B. If each item in the inventory is unique. C. If purchase costs are rising. D. If purchase costs are falling. 7. When the LIFO costing method is in use, the seller: A. Must sell the most recently acquired units first. B. Must sell the oldest unit in inventory first. C. Assumes that the most recently acquired units are sold first. D. Assumes that the oldest units in inventory are sold first. 8. Which of the following methods of measuring the cost of goods sold most closely parallels the actual physical flow of the merchandise? A. LIFO. B. FIFO. C. Average cost. D. Specific identification. 9. The only method of pricing inventory in which all items are assigned the same unit cost is: A. LIFO. B. FIFO. C. Average cost. D. Specific identification. 10. Which of the following results in the inventory being stated at the most current acquisition costs? A. Specific identification
Task Team of FUNdaMENTAL aCCOUNtIng School of Business. Sun Yat-sen University B LIFO C FIFo D. Average cost 1. During a period of steadily rising prices, which of the following methods of measuring the cost of goods sold is likely to result in reporting the highest gross profit? A FIFO B LIFO C. Specific identification D. Average cost 12. During a period of steadily falling prices, which of the following methods of measuring the cost of goods sold is likely to result in reporting the highest gross profit? A. Specific identification. B. Average cost C. LIFO D. FIFO 13. In a period of rising prices, a company is most likely to use the specific identification method of pricing inventory if A. Each item in the inventory is unique B. Management wants the same unit cost assigned to items sold and items remaining in inventory C Managements primary objective is to minimize income taxes D. Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income 14. As a result of taking an annual physical inventory, it usually is necessary in a perpetual inventory system to make an entry A. Reducing assets and increasing the cost of goods sold B Reducing assets and increasing liabilities C. Reducing the cost of goods sold D. None of the above, a physical inventory usually does not indicate the need for any entries in the accounting record 15. The logic behind the lower-of-cost-or-market rule is: A Inventory gradually becomes obsolete B. Iny alue) C. An asset is not worth more than it would cost the owner to replace it D Inventory which is unsalable should be written down to its replacement cost 16. If goods are shipped FO B shipping point, which party to the transaction is normally responsible for the shipping charges? A. The seller B. The buyer
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University 3 B. LIFO. C. FIFO. D. Average cost. 11. During a period of steadily rising prices, which of the following methods of measuring the cost of goods sold is likely to result in reporting the highest gross profit? A. FIFO. B. LIFO. C. Specific identification. D. Average cost. 12. During a period of steadily falling prices, which of the following methods of measuring the cost of goods sold is likely to result in reporting the highest gross profit? A. Specific identification. B. Average cost. C. LIFO. D. FIFO. 13. In a period of rising prices, a company is most likely to use the specific identification method of pricing inventory if: A. Each item in the inventory is unique. B. Management wants the same unit cost assigned to items sold and items remaining in inventory. C. Management’s primary objective is to minimize income taxes. D. Management wants the company’s income statement to indicate the highest possible amounts of gross profit and net income. 14. As a result of taking an annual physical inventory, it usually is necessary in a perpetual inventory system to make an entry: A. Reducing assets and increasing the cost of goods sold. B. Reducing assets and increasing liabilities. C. Reducing the cost of goods sold. D. None of the above; a physical inventory usually does not indicate the need for any entries in the accounting records. 15. The logic behind the lower-of-cost-or-market rule is: A. Inventory gradually becomes obsolete. B. Inventory which is unsalable should be written down to zero (or its scrap value). C. An asset is not worth more than it would cost the owner to replace it. D. Inventory which is unsalable should be written down to its replacement cost. 16. If goods are shipped F.O.B. shipping point, which party to the transaction is normally responsible for the shipping charges? A. The seller. B. The buyer
Task Team of FUNdaMENTAL aCCOUNtIng School of Business. Sun Yat-sen University C The freight company D. None of the above 17. Goods in transit between the buyer and the seller belong to A. The seller B. The buyer C. The freight company D. The answer depends upon whether the goods were shipped F.O.B. shipping point or F.O. B destination 18. In a periodic inventory system, the cost of goods sold is determined as follows A. Year-end inventory, plus purchases during the year, less the inventory at the beginning of the year B. Net sales, less the balance in the Gross Profit account C Cost of goods available for sale during the year, less the ending inventory D. a physical count is made of all items sold throughout the year, and a cost flow assumption is applied at year-end 19. If the inventory at the end of the current year is understated and the error is never caught, the effect is to A. Understate income this year and overstate income next year B Overstate income this year and understate income next year C Understate income this year with no effect on income next yo D. Overstate the cost of goods sold, but have no effect on net income. 20. Companies with periodic inventory systems often use techniques such as the goss profit method and the retail method to A. Prepare financial statements without taking a complete physical inventory B. Increase gross profit C. Value inventory at its sales price instead of its cost D. Reduce taxable income during a period of rising prices
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University 4 C. The freight company. D. None of the above. 17. Goods in transit between the buyer and the seller belong to: A. The seller. B. The buyer. C. The freight company. D. The answer depends upon whether the goods were shipped F.O.B. shipping point or F.O.B. destination. 18. In a periodic inventory system, the cost of goods sold is determined as follows: A. Year-end inventory, plus purchases during the year, less the inventory at the beginning of the year. B. Net sales, less the balance in the Gross Profit account. C. Cost of goods available for sale during the year, less the ending inventory. D. A physical count is made of all items sold throughout the year, and a cost flow assumption is applied at year-end. 19. If the inventory at the end of the current year is understated and the error is never caught, the effect is to: A. Understate income this year and overstate income next year. B. Overstate income this year and understate income next year. C. Understate income this year with no effect on income next year. D. Overstate the cost of goods sold, but have no effect on net income. 20. Companies with periodic inventory systems often use techniques such as the gross profit method and the retail method to: A. Prepare financial statements without taking a complete physical inventory. B. Increase gross profit. C. Value inventory at its sales price instead of its cost. D. Reduce taxable income during a period of rising prices
