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 InventoryTask 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