ACCT 2121 Chapter 6 – Flashcards

The factor which determines whether or not goods should be included in a physical count of inventory is a. physical possession b. legal title c. management's judgment d. whether or not the purchase price has been paid

If goods in transit are shipped FOB destination a. the seller has legal title to the goods until they are delivered b. the buyer has legal title to the goods until they are delivered c. the transportation company has legal title to the goods while the goods are in transit d. no one has legal title to the goods until they are delivered

Independent internal verification of the physical inventory process occurs when a. the employee is required to count all items twice for sake of verification b. the items counted are compared to the inventory account balance c. a second employee counts the inventory and compares the result to the count made by the first employee d. all prenumbered inventory tags are accounted for

An employee assigned to counting computer monitors in boxes should a. estimate the number if there is a large quantity to be counted b. read each box and rely on the box description for the contents c. determine that the box contains a monitor d. rely on the warehouse records of the number of computer monitors

After the physical inventory is completed, a. quantities are listed on inventory summary sheets b. quantities are entered into various general ledger inventory accounts c. the accuracy of the inventory summary sheets is checked by the person listing the quantities on the sheets d. unit costs are determined by dividing the quantities on the summary sheets by the total inventory costs.

When is a physical inventory usually taken? a. When goods are not being sold or received b. When the company has its greatest amount of inventory c. At the end of the company's fiscal year d. When the company has its greatest amount of inventory and at the end of the company's fiscal year

Which of the following should not be included in the physical inventory of a company? a. Goods held on consignment from another company b. Goods in transit from another company shipped FOB shipping point c. Goods shipped on consignment to another company d. All of these answer choices should be included

Tidwell Company's goods in transit at December 31 include sales made (1) FOB destination (2) FOB shipping point and purchases made (3) FOB destination (4) FOB shipping point. Which items should be included in Tidwell's inventory at December 31? a. Sales made FOB shipping point and purchase made FOB destination b. (1) and (4) c. (1) and (3) d. (2) and (4)

The term "FOB" denotes a. free on board b. freight on board c. free only (to) buyer d. freight charge on buyer

Goods held on consignment are a. never owned by the consignee b. included in the consignee's ending inventory c. kept for sale on the premises of the consignor d. included as part of no one's ending inventory

Many companies use just-in-time inventory methods. Which of the following is not an advantage of this method? a. It limits the risk of having obsolete items in inventory b. Companies may not have quantities to meet customer demand c. It lowers inventory levels and costs d. Companies can respond to individual customer requests

When a perpetual inventory system is used, which of the following is a purpose of taking a physical inventory? a. To check the accuracy of the perpetual inventory records b. To determine cost of goods sold for the accounting period c. To compute inventory ratios d. All are a purpose of taking a physical inventory when a perpetual inventory system is used

Which statement is false? a. Taking a physical inventory involves actually counting, weighing, or measuring each kind of inventory on hand b. No matter whether a periodic or perpetual inventory system is used, all companies need to determine inventory quantities at the end of each accounting period c. An inventory count is generally more accurate when goods are not being sold or received during the counting. d. Companies that use a perpetual inventory system must take a physical inventory to determine inventory on hand on the balance sheet date and to determine cost of goods sold for the accounting period

Reeves Company is taking a physical inventory on March 31, the last day of its fiscal year. Which of the following must be included in this inventory count? a. Goods in transit to Reeves, FOB destination b. Goods that Reeves is holding on consignment for Parker Company c. Goods in transit that Reeves has sold to Smith Company, FOB shipping point d. Goods that Reeves is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due

Manufacturers usually classify inventory into all the following general categories except: a. work in process b. finished goods c. merchandise inventory d. raw materials

For companies that use a perpetual inventory system, all of the following are purposes for taking a physical inventory except to: a. check the accuracy of the records b. determine the amount of wasted raw materials c. determine losses due to employee theft d. determine ownership of the goods

Inventory costing methods place primary reliance on assumptions about the flow of a. goods b. costs c. resale prices d. values

The LIFO inventory method assumes that the cost of the latest units purchased are a. the last to be allocated to cost of goods sold b. the first to be allocated to ending inventory c. the first to be allocated to cost of goods sold d. not allocated to cost of goods sold or ending inventory

Echo Sound Company just began business and made the following four inventory purchases in June: June 1 150 units $ 780 June 10 200 units 1,170 June 15 200 units 1,260 June 28 150 units 990 $4,200 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. The inventory method which results in the highest gross profit for June is a. the FIFO method b. the LIFO method c. the average cost method d. not determinable

Which of the following is an inventory costing method? a. Periodic b. Specific identification c. Perpetual d. Lower of cost or market

Inventory costing methods place primary reliance on assumptions about the flow of a. good b. costs c. resale prices d. values

Which of the following terms best describes the assumption made in applying the four inventory methods? a. Goods flow b. Cost flow c. Asset flow d. Physical flow

An assumption about cost flow is necessary a. because it is required by the income tax regulation b. even when there is no change in the purchase price on inventory c. only when the flow of goods cannot be determined d. because prices usually change, and tracking which units have been sold is difficult

Which of the following items will increase inventoriable costs for the buyer of goods? a. Purchase returns and allowances granted by the seller b. Purchase discounts taken by the purchaser c. Freight charges paid by the seller d. Freight charges paid by the purchaser

Of the following companies, which one would not likely employ the specific identification method for inventory costing? a. Music store specializing in organ sales b. Farm implement dealership c. Antique shop d. Hardware store

A problem with the specific identification method is that a. inventories can be reported at actual costs b. management can manipulate income c. matching is not achieved d. the lower of cost or market basis cannot be applied

The selection of an appropriate inventory cost flow assumption for an individual company is made by a. the external auditors b. the SEC c. the internal auditors d. management

Which of the following is not a common cost flow assumption used in costing inventory? a. First-in, first-out b. Middle-in, first-out c. Last-in, first-out d. Average cost

The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is a. called the matching principle b. called the consistency principle c. nonexistent; that is, there is no such accounting requirement d. called the physical flow assumption

Which of the following statements is true regarding inventory cost flow assumptions? a. A company may use more than one costing method concurrently b. A company must comply with the method specified by industry standards. . A company must use the same method for domestic and foreign operations d. A company may never change its inventory costing method once it has chosen a method

Which of the following statements is correct with respect to inventories? a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold b. It is generally good business management to sell the most recently acquired goods first c. Under FIFO, the ending inventory is based on the latest units purchased d. FIFO seldom coincides with the actual physical flow of inventory

Given equal circumstances, which inventory method would probably be the most time consuming? a. FIFO b. LIFO c. Average cost d. Specific identification

Which inventory costing method should a gasoline retailer use? a. Average cost b. LIFO c. FIFO d. Either LIFO or FIFO

In periods of rising prices, which is an advantage of using the LIFO inventory costing method? a. Ending inventory will include latest (most recent) costs and thus be more realistic b. Cost of goods sold will include latest (most recent) costs and thus will be more realistic c. Net income will be the highest and thus reflect the prosperity of the company d. Phantom profits are reported

In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the a. FIFO method b. LIFO method c. average-cost method d. tax method

In a period of declining prices, which of the following inventory methods generally results in the lowest balance sheet figure for inventory? a. Average cost method b. LIFO method c. FIFO method d. Need more information to answer

In a period of rising prices, which of the following inventory methods generally results in the lowest net income figure? a. Average cost method b. LIFO method c. FIFO method d. Need more information to answer

Which inventory method generally results in costs allocated to ending inventory that will approximate their current cost? a. LIFO b. FIFO c. Average cost method d. Whichever method that produces the highest ending inventory figure

Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using a. LIFO will have the highest ending inventory b. FIFO will have the highest cost of goods sold c. FIFO will have the highest ending inventory d. LIFO will have the lowest cost of goods sold

If companies have identical inventoriable costs but use different inventory flow assumptions when the price of goods have not been constant, then the a. cost of goods sold of the companies will be identical b. cost of goods purchased during the year will be identical c. ending inventory of the companies will be identical d. net income of the companies will be identical

In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense? a. FIFO b. LIFO c. Average cost method d. Income tax expense for the period will be the same under all assumptions

Given equal circumstances and generally rising costs, which inventory method will increase the tax expense the most? a. FIFO b. LIFO c. Average cost d. Income tax expense for the period will be the same under all assumptions

The specific identification method of costing inventories is used when the a. physical flow of units cannot be determined b. company sells large quantities of relatively low cost homogeneous items c. company sells large quantities of relatively low cost heterogeneous items d. company sells a limited quantity of high-unit cost items

The specific identification method of inventory costing a. always maximizes a company's net income b. always minimizes a company's net income c. has no effect on a company's net income d. may enable management to manipulate net income

The managers of Hong Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices? a. LIFO b. Average Cost c. FIFO d. Physical inventory method

In periods of inflation, phantom or paper profits may be reported as a result of using the a. perpetual inventory method b. FIFO costing assumption c. LIFO costing assumption d. periodic inventory method

Selection of an inventory costing method by management does not usually depend on a. the fiscal year end b. income statement effects c. balance sheet effects d. tax effects

The consistent application of an inventory costing method enhances a. conservatism b. accuracy c. comparability d. efficiency

Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants to maintain a high current ratio. Which inventory costing method should Ace consider using? a. LIFO b. Average c. FIFO d. No inventory costing method directly affects the current ratio

Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic cost of goods sold. Which inventory costing method should Ace consider using? a. Average because all inventory costs will then represent an average amount b. Specific identification is the most realistic method because it involves the actual costs c. LIFO because cost of goods sold represents the latest costs d. FIFO because cost of goods sold represents the earliest costs

Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic ending inventory. Which inventory costing method should Ace consider using? a. Average because all inventory costs will then represent an average amount b. Specific identification is the most realistic method because it involves the actual costs c. LIFO because ending inventory represents the earliest costs d. FIFO because ending inventory represents the latest costs

The lower of cost or market basis of valuing inventories is an example of a. comparability b. the historical cost principle c. conservatism d. consistency

When applying the lower of cost or market rule to inventory valuation, market generally means a. current replacement cost b. original cost c. resale value d. original cost, less physical deterioration

The situation that requires a departure from the cost basis of accounting to the lower of cost or market basis in valuing inventory is necessitated by a. a decline in the value of the inventory b. an increase in selling price c. an increase in the value of the inventory d. a desire for more profit

Which statement concerning lower of cost or market (LCM) is incorrect? a. LCM is an example of a company choosing the accounting method that will be least likely to overstate assets and income b. Under the LCM basis, market does not apply because assets are always recorded and maintained at cost c. The LCM basis uses current replacement cost because a decline in this cost usually leads to a decline in the selling price of the inventory item d. LCM is applied after one of the cost flow assumptions has been applied

Johnson Company has a high inventory turnover that has increased over the last year. All of the following statements are true regarding this situation except Johnson County: a. is minimizing funds tied up in inventory b. is increasing the amount of inventory on hand relative to sales c. may be losing sales due to inventory shortages d. has a cost of goods sold that is increasing relative to its average inventory

Which of the following companies would most likely have the highest inventory turnover? a. An art gallery b. An automobile manufacturer c. A piano manufacturer d. A bakery

An aircraft company would most likely have a a. high inventory turnover b. low profit margin c. high volume d. low inventory turnover

The inventory turnover is calculated by dividing cost of goods sold by a. beginning inventory b. ending inventory c. average inventory d. 365 days

Days in inventory is calculated by dividing 365 days by a. average inventory. b. beginning inventory c. ending inventory d. the inventory turnover

Which of these would cause the inventory turnover ratio to increase the most? a. Increasing the amount of inventory on hand b. Keeping the amount of inventory on hand constant but increasing sales c. Keeping the amount of inventory on hand constant but decreasing sales d. Decreasing the amount of inventory on hand and increasing sales

A low number of days in inventory may indicate all of the following except a. Sales opportunities may be lost because of inventory shortages b. There is less chance of having obsolete inventory items c. The company has fewer funds tied up in inventory d. Management has achieved the best balance between too much and too little inventory levels

The difference between ending inventory using LIFO and ending inventory using FIFO is referred to as the a. FIFO reserve b. inventory reserve c. LIFO reserve d. periodic reserve

The LIFO reserve is a. the difference between the value of the inventory under LIFO and the value under FIFO b. an amount used to adjust inventory to the lower of cost or market c. the difference between the value of the inventory under LIFO and the value under average cost d. the amount used to adjust inventory to history cost

Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods? a. FIFO reserve b. Inventory turnover c. LIFO reserve d. Current replacement cost

To adjust a company's LIFO cost of goods sold to FIFO cost of goods sold a. the ending LIFO reserve is added to LIFO cost of goods sold b. the ending LIFO reserve is subtracted from LIFO cost of goods sold c. an increase in the LIFO reserve is subtracted from LIFO cost of goods sold d. a decrease in the LIFO reserve is subtracted from LIFO cost of goods sold

All of the following statements are true regarding the LIFO reserve except: a. Companies using LIFO are required to report the LIFO reserve b. The equation (LIFO inventory - LIFO reserve = FIFO inventory) adjusts the inventory balance from LIFO to FIFO c. The financial statement differences of using LIFO normally increase the longer a company uses LIFO d. Current ratios and the inventory turnover can be significantly affected if a company has material LIFO reserves

In a perpetual inventory system, a. LIFO cost of goods sold will be the same as in a periodic inventory system b. average costs are based entirely on unit cost simple averages c. a new average is computed under the average cost method after each sale d. FIFO cost of goods sold will be the same as in a periodic inventory system.

An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated

If beginning inventory is understated by $10,000, the effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated

A company uses the periodic inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are Asset Stockholders' Equity a. Overstated Overstated b. Correct Correct c. Understated Understated d. Overstated Correct

An overstatement of the beginning inventory results in a. no effect on the period's net income b. an overstatement of net income c. an understatement of net income d. a need to adjust purchases

An overstatement of ending inventory in one period results in a. no effect on net income of the next period b. an overstatement of net income of the next period c. an understatement of net income of the next period d. an overstatement of the ending inventory of the next period