INVENTORIES REVIEWER c.

Cost of goods sold is recorded with

each sale.
Theories. d. Cost of goods sold is determined as
1. Which of the following inventories the amount of purchases less the
carried by a manufacturer is similar to change in inventory.
the merchandise inventory of a retailer?
a. Raw materials. 6. How is a significant amount of
b. Work-in-process. consignment inventory reported in the
c. Finished goods. balance sheet?
d. Supplies. a. The inventory is reported separately
on the consignor's balance sheet.
2. Where should raw materials be b. The inventory is combined with other
classified on the balance sheet? inventory on the consignor's balance
a. Prepaid expenses. sheet.
b. Inventory. c. The inventory is reported separately
c. Equipment. on the consignee's balance sheet.
d. Not on the balance sheet. d. The inventory is combined with other
inventory on the consignee's balance
3. Which of the following accounts is sheet.
not reported in inventory?
a. Raw materials. 7. Where should goods in transit that
b. Equipment. were recently purchased f.o.b. desti-
c. Finished goods. nation be included on the balance
d. Supplies. sheet?
a. Accounts payable.
4. Why are inventories included in the b. Inventory.
computation of net income? c. Equipment.
a. To determine cost of goods sold. d. Not on the balance sheet.
b. To determine sales revenue.
c. To determine merchandise returns. 8. If a company uses the periodic
d. Inventories are not included in the inventory system, what is the impact on
computation of net income. net income of including goods in transit
f.o.b. shipping point in purchases, but
5. Which of the following is a not ending inventory?
characteristic of a perpetual inventory a. Overstate net income.
system? b. Understate net income.
a. Inventory purchases are debited to a c. No effect on net income.
Purchases account. d. Not sufficient information to
b. Inventory records are not kept for determine effect on net income.
every item.
9. If a company uses the periodic a. included in the inventory of the seller.
inventory system, what is the impact on b. included in the inventory of the
the current ratio of including goods in buyer.
transit f.o.b. shipping point in purchases, c. included in the inventory of the
but not ending inventory? shipping company.
a. Overstate the current ratio. d. none of these.
b. Understate the current ratio.
c. No effect on the current ratio. 14. Which of the following items should
d. Not sufficient information to be included in a company's inventory at
determine effect on the current ratio. the balance sheet date?
a. Goods in transit which were
10. What is consigned inventory? purchased f.o.b. destination.
a. Goods that are shipped, but title b. Goods received from another
transfers to the receiver. company for sale on consignment.
b. Goods that are sold, but payment is c. Goods sold to a customer which are
not required until the goods are sold. being held for the customer to call for at
c. Goods that are shipped, but title his or her convenience.
remains with the shipper. d. None of these.
d. Goods that have been segregated
for shipment to a customer. Use the following information for
questions 15 and 16.
11. When using a perpetual inventory
system, During 2010 Carne Corporation
a. no Purchases account is used. transferred inventory to Nolan
b. a Cost of Goods Sold account is Corporation and agreed to
used. repurchase the merchandise early in
c. two entries are required to record a 2011. Nolan then used the inventory as
sale. collateral to borrow from Norwalk Bank,
d. all of these. remitting the proceeds to Carne. In
2011 when Carne repurchased the
12. Goods in transit which are shipped inventory, Nolan used the proceeds to
f.o.b. shipping point should be repay its bank loan.
a. included in the inventory of the seller.
b. included in the inventory of the 15. This transaction is known as a(n)
buyer. a. consignment.
c. included in the inventory of the b. installment sale.
shipping company. c. assignment for the benefit of
d. none of these. creditors.
d. product financing arrangement.
13. Goods in transit which are shipped
f.o.b. destination should be
16. On whose books should the cost of c. as a deduction in the cost of goods
the inventory appear at the December sold section of the income statement
31, 2010 balance sheet date? and as a current asset on
a. Carne Corporation the balance sheet.
b. Nolan Corporation d. as an addition in the cost of goods
c. Norwalk Bank sold section of the income statement
d. Nolan Corporation, with Carne and as a current asset on
making appropriate note disclosure of the balance sheet.
the transaction
20. If the beginning inventory for 2010 is
17. Goods on consignment are overstated, the effects of this error on
a. included in the consignee's inventory. cost of goods sold for 2010, net income
b. recorded in a Consignment Out for 2010, and assets at December 31,
account which is an inventory account. 2011, respectively, are
c. recorded in a Consignment In a. overstatement, understatement,
account which is an inventory account. overstatement.
d. all of these b. overstatement, understatement, no
effect.
18. Valuation of inventories requires the c. understatement, overstatement,
determination of all of the following overstatement.
except d. understatement, overstatement, no
a. the costs to be included in inventory. effect.
b. the physical goods to be included in
inventory. 21. The failure to record a purchase of
c. the cost of goods held on merchandise on account even though
consignment from other companies. the goods are properly included in the
d. the cost flow assumption to be physical inventory results in
adopted. a. an overstatement of assets and net
income.
19. The accountant for the Pryor Sales b. an understatement of assets and net
Company is preparing the income income.
statement for 2010 and the balance c. an understatement of cost of goods
sheet at December 31, 2010. Pryor uses sold and liabilities and an overstatement
the periodic inventory system. The of assets.
January 1, 2010 merchandise inventory d. an understatement of liabilities and
balance will appear an overstatement of owners' equity.
a. only as an asset on the balance
sheet. 22. Dolan Co. received merchandise on
b. only in the cost of goods sold section consignment. As of March 31, Dolan
of the income statement. had recorded the transaction as a
purchase and included the goods in
inventory. The effect of this on its c. net income was understated and
financial statements for March 31 would current liabilities were overstated.
be d. net income was overstated and
a. no effect. current assets were understated.
b. net income was correct and current
assets and current liabilities were 25. On June 15, 2010, Wynne
overstated. Corporation accepted delivery of
c. net income, current assets, and merchandise which it purchased on
current liabilities were overstated. account. As of June 30, Wynne had not
d. net income and current liabilities recorded the transaction or included
were overstated. the merchandise in its inventory. The
effect of this on its balance sheet for
23. Green Co. received merchandise June 30, 2010 would be
on consignment. As of January 31, a. assets and stockholders' equity were
Green included the goods in inventory, overstated but liabilities were not
but did not record the transaction. The affected.
effect of this on its financial statements b. stockholders' equity was the only
for January 31 would be item affected by the omission.
a. net income, current assets, and c. assets, liabilities, and stockholders'
retained earnings were overstated. equity were understated.
b. net income was correct and current d. none of these.
assets were understated.
c. net income and current assets were 26. What is the effect of a $50,000
overstated and current liabilities were overstatement of last year's inventory
understated. on current years ending retained
d. net income, current assets, and earning balance?
retained earnings were understated. a. Understated by $50,000.
b. No effect.
24. Feine Co. accepted delivery of c. Overstated by $50,000.
merchandise which it purchased on d. Need more information to determine.
account. As of December 31, Feine
had recorded the transaction, but did 27. Which of the following is a product
not include the merchandise in its cost as it relates to inventory?
inventory. The effect of this on its a. Selling costs.
financial statements for December 31 b. Interest costs.
would be c. Raw materials.
a. net income, current assets, and d. Abnormal spoilage.
retained earnings were understated.
b. net income was correct and current 28. Which of the following is a period
assets were understated. cost?
a. Labor costs.
b. Freight in. d. costs of normal shrinkage and
c. Production costs. scrap incurred for the manufacture
d. Selling costs. of a product in ending inventory.

29. Which method may be used to 33. Which of the following types of
record cash discounts a company interest cost incurred in connection with
receives for paying the purchase or manufacture of
suppliers promptly? inventory should be capitalized as a
a. Net method. product cost?
b. Gross method. a. Purchase discounts lost
c. Average method. b. Interest incurred during the
d. a and b. production of discrete projects such as
ships or real estate projects
30. Which of the following is included in c. Interest incurred on notes payable to
inventory costs? vendors for routine purchases made on
a. Product costs. a repetitive basis
b. Period costs. d. All of these should be capitalized.
c. Product and period costs.
d. Neither product or period costs. 34. The use of a Discounts Lost account
implies that the recorded cost of a
31. Which of the following is correct? purchased inventory item is its
a. Selling costs are product costs. a. invoice price.
b. Manufacturing overhead costs are b. invoice price plus the purchase
product costs. discount lost.
c. Interest costs for routine inventories c. invoice price less the purchase
are product costs. discount taken.
d. All of these. d. invoice price less the purchase
discount allowable whether taken or
32. All of the following costs should be not.
charged against revenue in the period
in which costs are incurred except for 35. The use of a Purchase Discounts
a. manufacturing overhead costs for account implies that the recorded cost
a product manufactured and sold in of a purchased inventory item is its
the same accounting period. a. invoice price.
b. costs which will not benefit any future b. invoice price plus any purchase
period. discount lost.
c. costs from idle manufacturing c. invoice price less the purchase
capacity resulting from an unexpected discount taken.
plant shutdown. d. invoice price less the purchase
discount allowable whether taken or
not.
Use the following information for c. Either 1 or 2 will result in the same net
questions 36 and 37. income.
d. Cannot be determined from the
During 2010, which was the first year of information provided.
operations, Oswald Company had
merchandise purchases of $985,000 38. When using the periodic inventory
before cash discounts. All purchases system, which of the following generally
were made on terms of 2/10, n/30. would not be separately accounted for
Three-fourths of the items purchased in the computation of cost of goods
were paid for within 10 days of sold?
purchase. All of the goods available a. Trade discounts applicable to
had been sold at year end. purchases during the period
b. Cash (purchase) discounts taken
36. Which of the following recording during the period
procedures would result in the highest c. Purchase returns and allowances of
cost of goods sold for 2010? merchandise during the period
1. Recording purchases at gross d. Cost of transportation-in for
amounts merchandise purchased during the
2. Recording purchases at net amounts, period
with the amount of discounts not taken
shown under "other expenses" in the 39. Costs which are inventoriable
income statement include all of the following except
a. 1 a. costs that are directly connected
b. 2 with the bringing of goods to the place
c. Either 1 or 2 will result in the same of business of the buyer.
cost of goods sold. b. costs that are directly connected
d. Cannot be determined from the with the converting of goods to a
information provided. salable condition.
c. buying costs of a purchasing
37. Which of the following recording department.
procedures would result in the d. selling costs of a sales department.
highest net income for 2010?
1. Recording purchases at gross 40. Which inventory costing method
amounts most closely approximates current cost
2. Recording purchases at net amounts, for each of the following:
with the amount of discounts not taken Ending Inventory Cost of Goods Sold
shown under "other expenses" in the a. FIFO FIFO
income statement b. FIFO LIFO
a. 1 c. LIFO FIFO
b. 2 d. LIFO LIFO
41. In situations where there is a rapid goods sold when inventory is valued
turnover, an inventory method which using the LIFO method?
produces a balance sheet valuation a. Prices decreased.
similar to the first-in, first-out method is b. Prices remained unchanged.
a. average cost. c. Prices increased.
b. base stock. d. Price trend cannot be determined
c. joint cost. from information given.
d. prime cost.
46. In a period of rising prices, the
42. The pricing of issues from inventory inventory method which tends to give
must be deferred until the end of the the highest reported net income is
accounting period under the following a. base stock.
method of inventory valuation: b. first-in, first-out.
a. moving average. c. last-in, first-out.
b. weighted-average. d. weighted-average.
c. LIFO perpetual.
d. FIFO. 47. In a period of rising prices, the
inventory method which tends to give
43. An inventory pricing procedure in the highest reported inventory is
which the oldest costs incurred rarely a. FIFO.
have an effect on the ending inventory b. moving average.
valuation is c. LIFO.
a. FIFO. d. weighted-average.
b. LIFO.
c. base stock. 48. Tanner Corporation's inventory cost
d. weighted-average. on its balance sheet was lower using
first-in, first-out than it would have been
44. Which method of inventory pricing using last-in, first-out. Assuming no
best approximates specific identification beginning inventory, in what direction
of the actual flow of costs and units in did the cost of purchases move during
most manufacturing situations? the period?
a. Average cost a. Up
b. First-in, first-out b. Down
c. Last-in, first-out c. Steady
d. Base stock d. Cannot be determined

45. Assuming no beginning inventory, 49. In a period of rising prices, the

what can be said about the trend of inventory method which tends to give
inventory prices if cost of goods sold the highest reported cost of goods sold
computed when inventory is valued is
using the FIFO method exceeds cost of a. FIFO.
b. average cost. 52. Which of the following is a reason
c. LIFO. why the specific identification method
d. none of these. may be considered ideal for assigning
costs to inventory and cost of goods
50. Which of the following statements is sold?
not valid as it applies to inventory a. The potential for manipulation of net
costing methods? income is reduced.
a. If inventory quantities are to be b. There is no arbitrary allocation of
maintained, part of the earnings must costs.
be invested (plowed back) in c. The cost flow matches the physical
inventories when FIFO is used during a flow.
period of rising prices. d. Able to use on all types of inventory.
b. LIFO tends to smooth out the net
income pattern by matching current 53. In a period of rising prices which
cost of goods sold with current revenue, inventory method generally provides the
when inventories remain at constant greatest amount of net income?
quantities. a. Average cost.
c. When a firm using the LIFO method b. FIFO.
fails to maintain its usual inventory c. LIFO.
position (reduces stock on hand below d. Specific identification.
customary levels), there may be a
matching of old costs with current 54. In a period of falling prices, which
revenue. inventory method generally provides the
d. The use of FIFO permits some control greatest amount of net income?
by management over the amount of a. Average cost.
net income for a period through b. FIFO.
controlled purchases, which is not true c. LIFO.
with LIFO. d. Specific identification.

51. The acquisition cost of a certain raw 55. What is a LIFO reserve?
material changes frequently. The book a. The difference between the LIFO
value of the inventory of this material at inventory and the amount used for
year end will be the same if perpetual internal reporting purposes.
records are kept as it would be under a b. The tax savings attributed to using
periodic inventory method only if the the LIFO method.
book value is computed under the c. The current effect of using LIFO on
a. weighted-average method. net income.
b. moving average method. d. Change in the LIFO inventory during
c. LIFO method. the year.
d. FIFO method.
56. When a company uses LIFO for d. The LIFO value of an increase in the
external reporting purposes and FIFO for inventory for a given year.
internal reporting purposes, an
Allowance to Reduce Inventory to LIFO 60. Which of the following statements is
account is used. This account should be not true as it relates to the dollar-value
reported LIFO inventory method?
a. on the income statement in the Other a. It is easier to erode LIFO layers using
Revenues and Gains section. dollar-value LIFO techniques than it is
b. on the income statement in the Cost with specific goods pooled LIFO.
of Goods Sold section. b. Under the dollar-value LIFO method, it
c. on the income statement in the Other is possible to have the entire inventory in
Expenses and Losses section. only one pool.
d. on the balance sheet in the Current c. Several pools are commonly
Assets section. employed in using the dollar-value LIFO
inventory method.
57. What happens when inventory in d. Under dollar-value LIFO, increases
base year dollars decreases? and decreases in a pool are
a. LIFO reserve increases. determined and measured in terms of
b. LIFO layer is created. total dollar value, not physical quantity.
c. LIFO layer is liquidated.
d. LIFO price index decreases. 61. Which of the following is not
considered an advantage of LIFO when
58. How might a company obtain a prices are rising?
price index in order to apply dollar- a. The inventory will be overstated.
value LIFO? b. The more recent costs are matched
a. Calculate an index based on recent against current revenues.
inventory purchases. c. There will be a deferral of income tax.
b. Use a general price level index d. A company's future reported earnings
published by the government. will not be affected substantially by
c. Use a price index prepared by an future price declines.
industry group.
d. All of the above. 62. Which of the following is true
regarding the use of LIFO for inventory
59. In the context of dollar-value LIFO, valuation?
what is a LIFO layer? a. If LIFO is used for external financial
a. The difference between the LIFO reporting, then it must also be used for
inventory and the amount used for internal reports.
internal reporting purposes. b. For purposes of external financial
b. The LIFO value of the inventory for a reporting, LIFO may not be used with
given year. the lower of cost or market approach.
c. The inventory in base year dollars.
c. If LIFO is used for external financial
reporting, then it cannot be used for tax
purposes.
d. None of these.

63. If inventory levels are stable or

increasing, an argument which is not an
advantage of the LIFO method as
compared to FIFO is
a. income taxes tend to be reduced in
periods of rising prices.
b. cost of goods sold tends to be stated
at approximately current cost on the
income statement.
c. cost assignments typically parallel
the physical flow of goods.
d. income tends to be smoothed as
prices change over time.