Ch.6 Wiley Plus MC

question

When is a physical inventory usually taken?
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Both B and C -When goods are not being sold or received. -At the end of the company’s fiscal year.
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Which of the following should not be included in the physical inventory of a company?
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A.Goods held on consignment from another company
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As a result of a thorough physical inventory, Railway Company determined that it had inventory worth $180,000 at December 31, 2010. This count did not take into consideration the following transactions: • Rogers Consignment store currently has goods worth $35,000 on its sales floor that belong to Railway but are being sold on consignment by Rogers. The selling price of these goods is $50,000. • Railway purchased $13,000 of goods that were shipped on December 27, FOB destination, that will be received by Railway on January 3. Determine the correct amount of inventory that Railway should report.
answer

$215,000 (Inventory should include all goods owned by the company regardless if the company holds physical possession or not. The correct amount of inventory that should be reported by Railway should be the $180,000 cost of goods in possession plus the $35,000 of cost of the goods that are on consignment. The title to the goods in shipment will transfer on January 3 and should not be reported on December 31, 2010. $180,000 + $35,000 = $215,000)
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Which of the following is not an inventory account?
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Equipment.
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Which of the following is not a legitimate business reason for taking a physical inventory?
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To verify the profitability of individual inventory items.
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Ownership passes to the buyer when purchased goods are received from a public carrier if the goods are shipped
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FOB destination.
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Ownership passes to the buyer when the public carrier accepts the goods if the goods are shipped
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FOB shipping point.
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Which one of the following statements is true?
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A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications.
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Ceil gives goods on consignment to Jerry who agrees to try to sell them for a 25% commission. At the end of the accounting period, which of the following parties includes in its inventory the consigned goods?
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Ceil.
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At December 31, 2012, Sunrise Company’s inventory records indicated a balance of $752,000. Upon further investigation it was determined that this amount included the following: • $112,000 in inventory purchases made by Sunrise shipped from the seller December 27, 2012 terms FOB destination, but not due to be received until January 2, 2013 • $74,000 in goods sold by Sunrise with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6, 2013 • $6,000 of goods received on consignment from Wallwood Company
answer

$634,000 (The balance of $752,000 should not include the $112,000 since ownership passes at destination on January 2. It should include the $74,000 because ownership passes at the shipping point on December 27. It should not include the $6,000 on consignment because these goods are not owned by Sunrise. Corrected balance = $752,000 – $412,000 – $6,000 = $634,000.)
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Inventory costing methods place primary reliance on assumptions about the flow of
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Costs.
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Cost of goods purchased is $540,000, ending inventory is $20,000, and cost of goods sold is $560,000. How much is beginning inventory?
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$40,000.
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Which of the following not an acceptable inventory costing method?
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Last-in, last-out.
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Which of the following is true of the FIFO inventory method?
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It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold.
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Which of the following would most likely employ the specific identification method of inventory costing?
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Jewelry store. (Jewelry stores use the specific identification method because of the high value and uniqueness of many of the inventory items.)
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Which of the following statements is true?
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Specific identification method inventory valuation requires physical flow of goods to be representative of the cost flow.
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Which of the following statements is true?
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Company management selects the method of inventory costing method a company will use.
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Kam Company has the following units and costs: Units Unit Cost Inventory, Jan. 1 8,000 $11 Purchase, June 19 13,000 $12 Purchase, Nov. 8 5,000 $13 If 9,000 units are on hand at December 31, what is the cost of the ending inventory under FIFO using a periodic inventory system?
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$113,000 (Ending inventory under FIFO uses the most recent costs in computing ending inventory. (5,000 × $13) + (4,000 × $12) = $113,000.)
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Kam Company has the following units and costs: Units Unit Cost Inventory, Jan. 1 8,000 $11 Purchase, June 19 13,000 $12 Purchase, Nov. 8 5,000 $13 If 9,000 units are on hand at December 31, what is the cost of the ending inventory under LIFO using a periodic system?
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$100,000 (Ending inventory under LIFO uses the earliest costs in computing ending inventory. (8,000 × $11) + (1,000 × $12) = $100,000.)
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Davidson Electronics has the following: Units Unit Cost Inventory, Jan. 1 5,000 $ 8 Purchase, April 2 15,000 $10 Purchase, Aug. 28 20,000 $12 If Davidson has 7,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?
answer

$75,250 (Ending inventory cost equals average-cost per unit times 7,000 units. Average cost per unit equals the total cost of all inventory amounts divided by the number of inventory units. Average inventory = [(5,000 × $8) + (15,000 × $10) + (20,000 × $12)] ÷ (5,000 + 15,000 + 20,000) = $430,000 ÷ 40,000 units = $10.75 per unit. $10.75 × 7,000 units = $75,250)
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In periods of rising prices, what will LIFO produce?
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Lower net income than FIFO.
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Which one of the following is not a consideration that affects the selection of an inventory costing method?
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Perpetual versus periodic inventory system.
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A company just starting business made the following purchases in August: August 1 300 units $1,560 August 12 400 units 2,340 August 24 400 units 2,520 August 30 300 units 1,980 1,400 units $8,400 A physical count of the inventory on August 31 reveals that there are 500 units on hand. What inventory method produces the lowest gross profit for August?
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LIFO method. (The LIFO method will produce the lowest gross profit because LIFO results in the highest cost goods sold in periods of rising prices.)
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In a period of rising prices which inventory method will result in the greatest amount of income tax expense?
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FIFO.
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With the assumption of costs and prices generally rising, which of the following is correct?
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LIFO provides the closest valuation of cost of goods sold to replacement cost of inventory sold.
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In a period of falling prices, which of the following methods will give the largest net income?
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LIFO.
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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, which statement is true? The company using
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The company using FIFO will have the highest ending inventory.
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Which situation requires a departure from the cost basis of accounting to the lower-of-cost-or-market basis in valuing inventory?
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A decline in the value of the inventory.
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What accounting concept is employed when using the lower-of-cost-or-market valuation?
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Conservatism.
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Hagger Sounds has accumulated the following cost and market data on March 31: Cost Data Market Data iPods $24,000 $20,400 Cell phones 18,000 19,000 DVD’s 28,000 25,600 Using the lower-of-cost-or-market , how much is the value of the ending inventory?
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$64,000 (Cost is compared to market for each inventory item as follows: iPods $20,400 + cell phones $18,000 + DVDs $25,600 = $64,000.)
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What is the underlying concept of the lower-of-cost-or-market rule?
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The conservatism constraint.
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Which of these tranasctions would cause the inventory turnover ratio to increase the most?
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Decreasing the amount of inventory on hand and increasing sales.
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Carlos Company had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales of $475,000. How much is Carlos’ days in inventory?
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121.7 days (Days in inventory equals 365 days ÷ (cost of goods sold ÷ average inventory). 365 ÷ ($285,000 ÷ [($80,000 + $110,000) ÷ 2]) = 121.7 days)
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The following information came from the income statement of the Wilkens Company at December 31, 2012: sales $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. How much is Wilkens’ inventory turnover ratio for 2012?
answer

6.0 times (Cost of goods sold is the difference between sales and gross profit: $1,800,000 – $600,000 = $1,200,000 Inventory turnover ratio = Cost of goods sold divided by average inventory: $1,200,000 / [($160,000 + $240,000) / 2] = 6.0)
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The following information came from the income statement of the Wilkens Company at December 31, 2012: sales $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. Inventory turnover is 6 times per year. How much is Wilkens’ days in inventory for 2012?
answer

60.8 days (Dividing 365 days of the year by the inventory turnover of 6 rsults in an average of 60.8 days in inventory.)
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Net sales are $2,000,000, cost of goods sold is $960,000, and average inventory is $30,000. How many days sales are in inventory?
answer

11.4 (Days sales in inventory is calculated as 365 days divided by inventory turnover. Inventory turnover = $960,000 / $30,000 = 32 times Days sales in inventory = 365 / 32 = 11.4 days)
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The inventory turnover ratio is calculated by dividing cost of goods sold by
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Average inventory.
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Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods?
answer

LIFO reserve.
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In 2012, a company shows inventory of $250,000 using LIFO. If the company had used FIFO, its inventories would have been higher by $40,000 and $30,000 in 2012 and 2011, respectively. How much is the company’s LIFO reserve in 2012?
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$40,000.
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What is the LIFO reserve?
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The difference between the value of the inventory under LIFO and the value under FIFO.
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Which is true if the ending inventory is overstated?
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Net income will be overstated and the stockholders’ equity will be overstated.
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If there is an error in the ending inventory affecting the net income of the current period, what will happen to the net income of the next accounting period?
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It will have the reverse effect on the net income during the next accounting period.
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If the ending inventory is overstated, what occurs?
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Assets are overstated and stockholders’ equity is overstated.
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Fran Company’s ending inventory is understated by $4,000. What are the effects of this error on the current year’s cost of goods sold and net income, respectively?
answer

Overstated and understated.
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Harold Company overstated its inventory by $15,000 at December 31, 2011. It did not correct the error in 2011 or 2012. As a result, what was the effect of Harold’s owner’s equity?
answer

Overstated at December 31, 2011, and properly stated at December 31, 2012.

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