Financial Accounting: Tools for Business Decision Making, 5th Edition Chapter 6

1. When the terms of a sale are FOB destination, legal title to the goods passes to the buyer
when they reach the buyer's place of business.
True
A.
False
B.
Sales terms of FOB destination indicate that the seller holds title until the goods reach the
destination (Goods in Transit).

2. Merchandising firms usually classify their inventory into raw materials, work in process and
finished goods.
True
A.
False
B.
Manufacturers, not merchandisers usually classify their inventory as raw materials, work in
process and finished goods (Classifying Inventory).

3. Under FIFO, cost of goods sold consists of the units with the oldest costs.
True
A.
False
B.
Under first-in, first-out, the cost of the oldest unit on hand is used to determine the cost of
the next unit sold (First-In, First-Out).

4. In a period of inflation, LIFO produces a higher net income than FIFO.

True
A.
False
B.
Since LIFO utilizes the higher market price of the last units purchased, the cost of goods
sold will be higher, thus reducing the net income (Financial Statement and Tax Effects of
Cost Flow Methods - Income Statement Effects).

5. The days in inventory is calculated by dividing the inventory turnover ratio by 365.
True
A.
False
B.
This ratio is calculated by dividing 365 by the inventory turnover ratio (Inventory Turnover
Ratio).

6. LIFO reserve is necessary for companies using the FIFO inventory method.
True
A.
False
B.
LIFO reserve is necessary for companies using the LIFO method of inventory (Analysts'
Adjustment For LIFO Reserve).

7. If Inventory in 2006 is $30,000 and 2007 is $40,000 and Cost of Goods Sold is $276,000
and $290,000 respectively, the Inventory Turnover Ratio for 2007 is 8.3 times.
True
A.
False
B.
Inventory Turnover Ratio is computed by dividing cost of goods sold by average inventory
(Inventory Turnover Ratio).

8.

Which of the following is not an inventory account?

Work in Process.
A.
Finished Goods.
B.
Equipment.
C.
Raw Materials.
D.

9. Which of the following is not a legitimate business reason for taking a physical inventory?
A. To check the accuracy of the perpetual inventory records.
To determine cost of goods sold.
B.
C. To determine if any inventory has been lost from waste, shoplifting or employee theft.
D. To keep the employees busy during a slow time in the business.

10. Ownership passes to the buyer when the goods are received from the public carrier if the
goods are shipped:
FOB shipping point.
A.
FOB buyer.
B.
FOB shipper.
C.
FOB destination.
D.

11. Ownership passes to the buyer when the public carrier accepts the goods if the goods are
shipped:
FOB shipping point.
A.

B.
C.
D.

12.

FOB buyer.
FOB shipper.
FOB destination.

Which of the following is an acceptable inventory costing method?

Average cost.
A.
Last-in, first-out.
B.
First-in, first-out.
C.
All of the above.
D.

13. The FIFO inventory method assumes that the cost of the earliest units purchased are the
first to be allocated to the ending inventory.
A.
last to be allocated to the cost of goods sold.
B.
last to be allocated to the beginning inventory.
C.
first to be allocated to the cost of goods sold.
D.

14. A company just starting business made the following purchases in August:

A physical count of the inventory on August 31 reveals that there are 500 units on hand.
Using the FIFO inventory method, the value of the ending inventory on August 31 is:
$2,730.
A.
$5,670.
B.
$5,160.
C.
$3,240.
D.

15. A company just starting business made the following purchases in August:

A physical count of the inventory on August 31 reveals that there are 500 units on hand.
Using the LIFO inventory method, the cost of goods sold for August is:
$3,240.
A.
$2,730.
B.
$5,670.
C.
$5,160.
D.

16. A company just starting business made the following purchases in August:

A physical count of the inventory on August 31 reveals that there are 500 units on hand.
Using the average cost method, the cost of goods sold for August is:
$5,400.
A.
$8,400.
B.
$2,300.
C.
$3,000.
D.

17. A company just starting business made the following purchases in August:

A physical count of the inventory on August 31 reveals that there are 500 units on hand.
The inventory method that produces the lowest gross profit for August is:
the average cost method.
A.
the LIFO method.
B.
the FIFO method.
C.
not determinable.
D.

18. Which of the following would most likely employ the specific identification method of
inventory costing?

A.
B.
C.
D.

Grocery store.
Hardware store.
Gasoline station.
Jewelry store.

19. In a period of rising prices which inventory method will result in the greatest amount of
income tax expense?
LIFO.
A.
Specific identification.
B.
FIFO.
C.
Average cost.
D.

20. S. Hagger Sounds has accumulated the following cost and market data on March 31:

Using the lower of cost or market, the value of the ending inventory is:
$71,000.
A.
$64,000.
B.
$65,000.
C.
$70,000.
D.

21. The following information came from the income statement of the Wilkens Company at
December 31, 2010: sales $1,800,000; beginning inventory $160,000; ending inventory
$240,000; and gross profit $600,000. Wilkens' inventory turnover ratio for 2010 is:
3.0 times.
A.
2.5 times.
B.
3.75 times.
C.
6.0 times.
D.

22. The following information came from the income statement of the Wilkens Company at
December 31, 2010: sales $1,800,000; beginning inventory $160,000; ending inventory
$240,000; and gross profit $600,000. Wilkens' days in inventory for 2010 is:
60.8 days.
A.

B.
C.
D.

121.7 days.
146 days.
97.3 days.

23. From the choices below, select the one correct response.
A. A merchandising company would normally have raw materials and merchandise
inventory as inventory account classifications.
A
B. manufacturing company would normally have raw materials, work in process, and
merchandise inventory as inventory account classifications.
C. A manufacturing company would normally have raw materials, work in process, and
finished goods as inventory account classifications.
D. A merchandising company would normally have raw materials, work in process, and
finished goods as inventory account classifications.

24. From the choices below, select the one correct response.
A. LIFO inventory valuation requires physical flow of goods to be representative of the
cost flow.
B. FIFO inventory valuation requires physical flow of goods to be representative of the
cost flow.
C. Specific identification method inventory valuation requires physical flow of goods to
be representative of the cost flow.
All of the above statements are correct.
D.

25. From the choices below, select the one correct response.
A. GAAP dictates the method FIFO, LIFO, or specific identification method, of
inventory valuation a company must use.
The
IRS dictates the method FIFO, LIFO, or specific identification method, of
B.
inventory valuation a company must use.
C. The SEC dictates the method FIFO, LIFO, or specific identification method, of
inventory valuation a company must use.
D. Company management selects the method FIFO, LIFO, or specific identification
method, of inventory valuation a company will use.

26. With the assumption of costs and prices generally rising, select the correct statement from
the following.
A. LIFO provides the closest valuation of inventory on the balance sheet to replacement
cost.
B. FIFO provides the closest cost of goods sold to replacement cost.

C. Specific identification method provides the closest cost of goods sold to replacement
cost on the income statement.
D. LIFO provides the closest valuation of cost of goods sold to replacement cost of
inventory sold.

27.

If the ending inventory is overstated then:

A. assets are overstated and stockholders' equity is overstated.
B. assets are overstated and the cost of goods sold is overstated.
assets are overstated and the net income is understated.
C.
assets are overstated and the liabilities are understated.
D.