Chap 007

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Chapter 007: Reporting and Interpreting Cost of Goods Sold and Inventory
True / False Questions

1. Ownership of goods passes from the seller to the buyer after the buyer has paid for the goods.
FALSE
AACSB Tag: Relative Thinking

Difficulty: Easy
L.O.: 1
2. If transportation costs are the responsibility of the buyer, they should be added to the cost of
inventory purchases for the period.
TRUE

Difficulty: Medium
L.O.: 1
3. The weighted average method of inventory costing results in a valuation between that determined
by the FIFO and LIFO costing methods.
TRUE

Difficulty: Medium
L.O.: 2
4. When the weighted average inventory method is used, ending inventory and cost of goods sold are
valued at a different cost per unit.
FALSE

Difficulty: Medium
L.O.: 2
7-1
2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e
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5. LIFO will always result in highest income when costs are rising in comparison to specific
identification, FIFO and weighted average.
FALSE

Difficulty: Medium
L.O.: 2
6. LIFO can be used for income tax purposes and FIFO can be used for financial reporting purposes
for a company in a given year.
FALSE
AACSB Tag: Communications

Difficulty: Hard
L.O.: 3
7. A large retail department store probably would use the specific identification inventory costing
method for most of the items in its inventory.
FALSE

Difficulty: Easy
L.O.: 3
8. The lower-of-cost-or-market (LCM) rule is used because of the conservatism constraint, which
allows a departure from the historical cost principle.
TRUE

Difficulty: Medium
L.O.: 4
7-2
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9. If Dell Computer has 10,000 Pentium disks in stock at a cost of $300 per chip when they can be
purchased at a replacement cost of $250 each. Dell will recognize this decline in cost when the chips
are sold as part of their computers.
FALSE

Difficulty: Medium
L.O.: 4
10. Inventory turnover is computed as cost of goods sold divided by ending inventory.
FALSE

Difficulty: Medium
L.O.: 5
11. Reducing inventory can free up cash and allow for reduced borrowing.
TRUE

Difficulty: Medium
L.O.: 5
12. If a company sells their inventory every 87 days then their inventory turnover ratio must be 4.2
times.
TRUE
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 5
7-3
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13. If a company has a decrease in inventory equal to $3 million and a decrease in accounts payable
of $2 million, then cash flow from operating activities will increase by $1 million.
TRUE
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 5
14. The LIFO Reserve is a contra-asset account for the excess of FIFO inventory costs over the LIFO
inventory costs.
TRUE

Difficulty: Medium
L.O.: 6
15. In a period of rising costs, the LIFO Reserve account would be deducted from the ending
inventory under LIFO costing to convert it to ending inventory under FIFO costing.
FALSE

Difficulty: Hard
L.O.: 6
16. The beginning inventory of one accounting period becomes the beginning inventory amount of
the next accounting period.
FALSE

Difficulty: Easy
L.O.: 7
7-4
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17. An understatement error in the ending inventory causes an overstatement of both net income and
current assets in that year.
FALSE

Difficulty: Medium
L.O.: 7
18. When a company using LIFO costing reduces its inventory levels at the end of the year, it can
lead to a LIFO liquidation.
TRUE

Difficulty: Medium
L.O.: Sup A
19. When a perpetual inventory system is used, the purchases returns and allowances account will not
be part of the general ledger accounts.
TRUE

Difficulty: Medium
L.O.: Sup B
20. Under the periodic inventory system, the balance in the inventory account changes each time a
purchase or sale of inventory is recorded.
FALSE

Difficulty: Medium
L.O.: Sup C
7-5
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Multiple Choice Questions

21. Which of the following best describes inventory?
A. They are held for resale.
B. They are tangible property.
C. They are used in the operations of the company.
D. They are held for resale and are tangible property.

Difficulty: Medium
L.O.: 1
22. Which of the following statements about inventory is true?

A. It is acquired for use in operating the company.
B. It is intangible property.
C. It is a current asset on the balance sheet.
D. Manufacturers have four inventory accounts.

Difficulty: Easy
L.O.: 1
23. Rockwell Company reported the following amounts on its 2009 income statement: Purchases,
$100,000; Beginning inventory, $20,000; and Cost of goods sold, $110,000. Therefore, the 2009
ending inventory was
A. $10,000.
B. $25,000.
C. $15,000.
D. $27,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 1
7-6
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24. The 2009 records of Coleman Company showed beginning inventory, $100,000; cost of goods
sold, $450,000; and ending inventory, $80,000. The purchases for 2009 equal
A. $450,000.
B. $410,000.
C. $430,000.
D. $420,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 1
25. When goods are sold on credit, revenue usually should be recognized at the date of
A. receipt of the sales order.
B. passage of title from the seller to the buyer.
C. receipt of the goods by the buyer.
D. manufacture of the goods.

Difficulty: Medium
L.O.: 1
26. Which of the following types of inventory usually is not held by a manufacturing business?
A. Finished goods inventory
B. Raw material inventory
C. Merchandise inventory
D. Work in process inventory

Difficulty: Easy
L.O.: 1
7-7
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27. Which of the following is true about a manufacturing company's inventory?

A. Components purchased from vendors will be added to a raw material inventory account.
B. Direct labor and factory overhead are added to the materials in the raw material inventory account.
C. Cost of storing finished units in a separate warehouse will be added to the finished goods
inventory account.
D. Direct labor and factory overhead are subtracted from the materials in the raw material inventory
account.

Difficulty: Hard
L.O.: 1
28. Thorton Co. reported the following data at year-end. Sales, $500,000; beginning inventory,
$40,000; ending inventory, $45,000; cost of goods sold, $350,000; and gross margin, $150,000. What
was the amount of merchandise purchased during the year?
A. $370,000
B. $355,000
C. $348,000
D. $341,000
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 1
29. The following information was taken from the 2010 income statement of Cobra Company: Pretax
income, $12,000; Total operating expenses (not including income taxes), $20,000; Sales revenue,
$120,000. Compute cost of goods sold.
A. $ 88,000
B. $100,000
C. $108,000
D. $112,000
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 1
7-8
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30. The following information was taken from the 2010 income statement of Milburn Company:
Pretax income, $12,000; Total operating expenses (not including income taxes), $20,000; Sales
revenue, $120,000; Beginning inventory, $8,000; and Purchases, $90,000. Compute the amount of
the ending inventory.
A. $88,000
B. $10,000
C. $ 8,000
D. $18,000
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 1
31. Which of the following is true?

A. Factory overhead consists of manufacturing costs other than direct materials and direct labor.
B. Net realizable value is the expected sales price plus selling costs.
C. LIFO Reserve is a contra sales account for the excess of LIFO over FIFO inventory.
D. Purchases discounts increase sales revenue to arrive at net sales.

Difficulty: Medium
L.O.: 1
32. Sheffield Company had the following information taken from its 2009 adjusted trial balance:
Sales, $400,000; Sales Discounts, $12,000; Beginning Inventory, $20,000; and Purchases, $200,000.
Ending inventory was determined to be $25,000. Compute the gross margin (gross profit) that would
appear in the income statement.
A. $162,000.
B. $180,000.
C. $193,000.
D. $205,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 1
7-9
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33. On March 10, Anthony Company received merchandise for resale from its normal supplier. The
price was $3,600 with terms of 2/10, n/30 for 100 units of Part #345. The invoice was paid on March
17. Freight costs were $120 and the company paid $108 of interest on a loan to buy the inventory.
What is the unit cost that should be recorded for each of the 100 units of Part # 345?
A. $36.48
B. $37.20
C. $36.00
D. $37.56
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 1
34. Which of the following is correct?

A. Beginning Inventory + Purchases Cost of Goods Sold = Ending Inventory.
B. Sales + Cost of Goods Sold = Gross Margin.
C. Beginning Inventory + Ending Inventory Purchases = Cost of Goods Sold.
D. Income Before Taxes Operating Expenses = Cost of Goods Sold.

Difficulty: Easy
L.O.: 1
35. Which of the following costs while includable in inventory, is usually expensed as incurred
instead of being assigned to the inventory units?
A. Freight costs
B. Inspection and preparation costs
C. Purchases discounts
D. Purchase returns

Difficulty: Medium
L.O.: 1
7-10
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36. Which of the following costs would not be part of product inventory costs for a manufacturer
such as Harley Davidson?
A. Costs to advertise the newest model.
B. Kickstands purchased for use in manufacturing the motorcycles
C. The factory manager's salary and benefits
D. The wages and benefits of an employee in the welding department

Difficulty: Medium
L.O.: 1
37. Which of the following businesses would not have cost of goods sold?
A. A jewelry store
B. A grocery store
C. A law firm
D. A manufacturer of batteries

Difficulty: Easy
L.O.: 1
38. Which of the following inventory costing methods is subject to manipulation with regard to the
resulting inventory cost?
A. LIFO.
B. FIFO.
C. Weighted-average cost.
D. All of the inventory methods are subject to manipulation.

Difficulty: Hard
L.O.: 2
7-11
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39. Lauer Corporation uses the periodic inventory system and the following information about their
laptop computer is available:
During the year, 750 laptop computers were sold.

What was ending inventory and cost of goods sold on 12/31 under the FIFO cost flow assumption?
A. $60,000 and $710,000.
B. $52,500 and $717,500.
C. $52,000 and $718,000.
D. None of the answers is correct.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
40. Lauer Corporation uses the periodic inventory system and the following information about their
laptop computer is available:
During the year, 750 laptop computers were sold.

What was ending inventory and cost of goods sold on 12/31 under the LIFO cost flow assumption?
A. $56,000 and $714,000.
B. $45,000 and $725,000.
C. $40,000 and $730,000.
D. None of the answers is correct.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
7-12
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41. Under the FIFO cost flow assumption during a period of inflation, which of the following is
false?
A. Income tax expense will be higher than under LIFO.
B. Gross margin will be higher than under LIFO.
C. Ending inventory will be lower than under LIFO.
D. Cost of goods sold will be lower than under LIFO.

Difficulty: Hard
L.O.: 2
42. Under the LIFO cost flow assumption during a period of inflation, which of the following is
false?
A. Cost of goods sold will be lower than under FIFO.
B. Gross margin will be lower than under FIFO.
C. Income tax expense will be lower than under FIFO.
D. Ending inventory will be lower than under FIFO.

Difficulty: Hard
L.O.: 2
43. When prices are rising:

A. LIFO will result in lower net income and a higher inventory valuation than will FIFO.
B. LIFO will result in higher net income and lower inventory valuation than will FIFO.
C. FIFO will result in lower net income and a lower inventory valuation than will LIFO.
D. FIFO will result in higher net income and a higher inventory valuation than will LIFO.

Difficulty: Medium
L.O.: 3
7-13
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44. When prices are rising, the method of inventory valuation that results in the highest relative net
cash inflow is:
A. FIFO.
B. LIFO.
C. weighted average.
D. inventory methods cannot affect cash flows.

Difficulty: Medium
L.O.: 3
45. Which of the following statements is correct?

A. FIFO reports lower income amounts than LIFO when prices are rising.
B. LIFO reports a higher income amount than FIFO when prices are rising.
C. LIFO reports a higher income amount than FIFO when prices are decreasing.
D. LIFO reports the same amount of income as FIFO when prices are rising.

Difficulty: Medium
L.O.: 3
46. Which of the following statements is true?

A. Applying the lower of cost or market (LCM) rule is optional and depends on whether a company
wants to write off inventory when it loses its value or prefers to delay the write off until the inventory
is sold.
B. The LIFO conformity rule requires use of LIFO for financial reports if it is adopted for tax
purposes.
C. LIFO liquidation occurs when a company switches from LIFO to another cost method.
D. The LIFO conformity rule requires use of LIFO for taxes if it is adopted for financial reports.

Difficulty: Medium
L.O.: 3
7-14
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47. The LIFO costing method is more costly and time consuming than a FIFO system. Which of the
following would be a valid justification for choosing LIFO?
A. It usually provides for more control over inventory
B. It usually provides managers with more useful information about the level of inventory by
monitoring the cost level in the inventory account
C. The tax savings from using LIFO during an inflationary period exceeds the cost of using a LIFO
costing system
D. It usually produces a higher net income when unit costs of inventory are rising

Difficulty: Hard
L.O.: 3
48. Moore Company purchased an item for inventory that cost $20 per unit and was marked to sell at
$30. It was determined that the replacement cost is $18 per unit. No purchases in the near future are
anticipated. Using the lower-of-cost-or- market rule, the per unit valuation for inventory should be
A. $18.00.
B. $20.00.
C. $25.00.
D. $30.00.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 4
49. On December 31, 2009, the end of the accounting period, Cruise Company has on hand 10,000
units of a resale item which cost $40 per unit when purchased on June 15, 2009. The selling price is
$70 per unit. On December 30, 2009, the cost had dropped to $38 per unit. In view of the large
quantity of units on hand, no purchases are anticipated in the next six to nine months. At what
inventory amount should the 10,000 units be reported?
A. $100,000.
B. $120,000.
C. $350,000.
D. $380,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 4
7-15
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50. Under the lower-of-cost-or-market basis for valuing inventory if replacement cost of an item in
inventory has declined during a given accounting period,
A. pretax income and the amount of ending inventory will be reduced for the period in which the
merchandise is sold.
B. pretax income and the amount of ending inventory will be reduced for the period during which the
decline in market value occurred.
C. pretax income will be reduced for the period during which the decline in market value occurred
and the amount of ending inventory will decline for the period in which the merchandise is sold.
D. pretax income will be reduced for the period during which the merchandise is sold and the amount
of ending inventory will decline for the period in which the decline in market value occurred

Difficulty: Medium
L.O.: 4
51. Which of the following is a true statement about lower of cost or market (LCM)?
A. It is optional under generally accepted accounting principles, whether you apply LCM in the year
in which net realizable value declines below cost or the company waits until the inventory is sold.
B. LCM can be applied to all cost methods under generally accepted accounting principles except for
LIFO.
C. For tax purposes, the LIFO cost flow method cannot have LCM applied.
D. Under LCM, market equals the current selling price to the retail customer.

Difficulty: Hard
L.O.: 4
52. Tinker's Toys had cost of goods sold in 2009 of $7,506 million and $7,646 million in 2008. Their
merchandise inventory at the end of 2009 was $1,884 million and $2,094 million at the end of 2008.
What was their inventory turnover in 2009?
A. 3.77
B. 3.89
C. 3.97
D. 3.58
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 5
7-16
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53. Tinker's Toys had cost of goods sold in 2009 of $7,506 million and $7,646 million in 2008. Their
merchandise inventory in 2009 was $1,884 million and $2,094 million in 2008. How long were their
average days to sell inventory in 2009?
A. 104.52 days
B. 100.31 days
C. 96.82 days
D. 101.96 days
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 5
54. A company reports its 2010 cost of goods sold at $15.0 million. Its ending inventory for 2010 is
$1.6 million and for 2009, ending inventory was $1.2 million. How much inventory did the company
purchase during 2009?
A. $14.6 million
B. $15.0 million
C. $15.4 million
D. $15.8 million
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 5
55. A company recorded net purchases on credit of $15.7 million for 2010. In 2009, ending accounts
payable was $1.4 million and in 2010, it was $1.9 million. How much cash was paid to suppliers in
2010?
A. $14.8 million
B. $15.0 million
C. $15.2 million
D. $15.7 million
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 5
7-17
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56. A company reports its cost of goods sold as $15.0 billion in 2009. It has $2.9 billion in inventory
and reports accounts payable at $1.2 billion at the end of 2009. At the end of 2008 ending inventory
was reported at $3.1 billion and accounts payable was $1.4 billion. How much cash was paid to
suppliers for 2009?
A. $14.8 billion
B. $15.0 billion
C. $15.2 billion
D. $15.7 billion
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 5
57. In 2010, QV-TV, Inc. provided the following items in their footnotes. Their cost of goods sold
was $22 billion under FIFO costing and their inventory value under FIFO costing was $2.1 billion.
Their LIFO Reserve figure for year end 2009 was a $0.6 billion credit balance and at year end 2010 it
had increased to a credit balance of $0.8 billion. How much is LIFO inventory value at year end
2010?
A. $1.9 billion
B. $2.9 billion
C. $2.3 billion
D. $1.3 billion
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 6
58. In 2010, Terry Inc. provided the following items in their footnotes. Their cost of goods sold was
$22 billion under FIFO costing and their inventory value under FIFO costing was $2.1 billion. Their
LIFO Reserve account balance for year end 2009 had a $0.6 billion credit balance and then at year
end 2010, it had a credit balance of $0.8 billion. How much would they report as LIFO cost of goods
sold?
A. $22.2 billion
B. $19.8 billion
C. $22.8 billion
D. $19.2 billion
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 6
7-18
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59. Which of the following statements is false?

A. The LIFO Reserve is a contra-asset account for the excess of FIFO over LIFO inventory costs.
B. When the LIFO Reserve account increases from one year to the next, then FIFO cost of goods sold
will be less than LIFO cost of goods sold.
C. The LIFO Reserve account balance at the end of the year would be deducted from ending LIFO
inventory cost to convert to FIFO ending inventory cost.
D. We want to convert LIFO cost of goods sold and LIFO inventory balances to FIFO cost of goods
sold and inventory balances to obtain a more realistic inventory turnover ratio.

Difficulty: Hard
L.O.: 6
60. A $25,000 overstatement of the 2010 ending inventory was discovered after the financial
statements for 2010 were prepared. The effect of the inventory error on the 2010 financial statements
was
A. current assets were overstated and net income was understated.
B. current assets were understated and net income was understated.
C. current assets were overstated and net income was overstated.
D. current assets were understated and net income was overstated.

Difficulty: Medium
L.O.: 7
61. Wilmington Company reported pretax income amounts of: 2010, $25,000; and 2011, $30,000.
Later it was discovered that the ending inventory for 2010 was understated by $2,000 (and not
corrected in 2011). The correct pretax income for each year was:
A.
B.
C.
D.
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 7
7-19
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62. At the end of 2009, a $5,000 understatement was discovered in the amount of the 2009 ending
inventory as reflected in the perpetual inventory records. What were the 2009 effects of the $5,000
inventory error (before correction)?
A. Assets (inventory) were understated by $5,000 and pretax income was understated by $5,000.
B. Assets (inventory) were understated by $5,000 and pretax income was overstated by $5,000.
C. Cost of goods sold was understated by $5,000 and pretax income was understated by $5,000.
D. Cost of goods sold was overstated by $5,000 and pretax income was overstated by $5,000.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 7
63. An understatement of the ending inventory in Year 1, if not corrected, will cause
A. Year 1 net income to be understated and Year 2 net income to be overstated.
B. Year 1 net income to be overstated and Year 2 net income to be overstated.
C. Year 1 net income to be overstated and Year 2 net income will be correct.
D. Year 1 net income to be overstated and Year 2 net income to be understated.

Difficulty: Medium
L.O.: 7
64. If beginning inventory is understated by $1,300 and ending inventory is understated by $700,
pretax income for the period will be:
A. understated by $600.
B. understated by $2,000.
C. overstated by $600.
D. overstated by $2,000.
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 7
7-20
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65. On December 15, 2009, Transport Company accepted delivery of merchandise which it
purchased on credit. As of December 31, 2009, the company had neither recorded the transaction nor
included the merchandise in its ending inventory amount because the seller's invoice had not been
received. The effect of this omission on its balance sheet at December 31, 2009, (end of the
accounting period) was that
A. assets and stockholder's equity were overstated but liabilities were not affected.
B. stockholder's equity was the only item affected by the omission.
C. assets and liabilities were understated but stockholders' equity was not affected.
D. assets and stockholders' equity were understated but liabilities were not affected.

Difficulty: Hard
L.O.: 7
66. A company using the periodic inventory system correctly recorded a purchase of merchandise,
but the merchandise was not included in the physical inventory count at the end of the accounting
period. The error caused an:
A. understatement of both net income and assets.
B. overstatement of inventory, purchases, and accounts payable.
C. understatement of inventory, purchases, and accounts payable.
D. overstatement of net income and assets.

Difficulty: Medium
L.O.: 7
67. At the end of 2010, XYZ Company failed to include some goods in its ending inventory and
failed to record the purchase of these goods. For 2010, these two errors caused
A. goods available for sale, cost of goods sold, and income to be overstated.
B. ending inventory, cost of goods sold, and retained earnings to be understated.
C. ending inventory, goods available for sale, and retained earnings to be understated.
D. no effect on income, working capital, or retained earnings.

Difficulty: Hard
L.O.: 7
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68. Hollander Company hired some students to help count inventory during their semester break.
Unfortunately, the students added incorrectly and ending inventory was overstated by $5,000. What
would be the effect of this error in ending inventory?
A. Income would be overstated.
B. Income would be understated.
C. Ending retained earnings would be understated.
D. Cost of goods sold would be overstated.

Difficulty: Medium
L.O.: 7
69. During the audit of Montane Company's 2010 financial statements, the auditors discovered that
the 2010 ending inventory had been overstated by $8,000. Before the effect of this error, 2010 pretax
income had been computed as $100,000. What should be reported as the correct 2010 pretax income
before taxes?
A. $ 92,000.
B. $100,000.
C. None of the other answers is correct.
D. $108,000.
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 7
70. Under the periodic method, cost of goods sold is computed by

A. adding the cost of purchases during the period to the cost of the inventory on hand at the
beginning of the period and adding this figure to the cost of the inventory on hand at the end of the
period.
B. adding the cost of purchases during the period to the cost of the inventory on hand at the end of the
period and subtracting the inventory on hand at the beginning of the period.
C. subtracting the cost of the inventory on hand at the ending of the period from the cost of goods
available for sale.
D. carefully matching selling and administrative expenses with the sales to which they are related and
then reporting these expenses in the same period the associated revenue is reported.

Difficulty: Medium
L.O.: 7
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71. Under the perpetual inventory system:

A. one entry is required to record a sales return.
B. cost of goods sold cannot be determined unless a physical inventory is taken.
C. one entry is required to record a sale.
D. a separate account for purchases is not required.

Difficulty: Medium
L.O.: 7
72. Under the periodic inventory system:

A. a transaction by transaction unit inventory record is maintained.
B. the cost of goods sold for each sale is recorded at the time each sale is made.
C. a separate account for purchases is used.
D. a continuous inventory record provides the amount of ending inventory and the cost of goods sold
throughout the period.

Difficulty: Medium
L.O.: 7
73. Which of the following may be used to calculate ending inventory (EI) under the periodic
inventory system?
A. BI + P + CGS = EI.
B. BI + P CGS = EI.
C. BI P + CGS = EI.
D. BI + P + GM = EI.

Difficulty: Medium
L.O.: 7
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74. On March 15, 2009, Ryan Company purchased $10,000 of merchandise on credit subject to
terms, 2/10, n/30. Ryan Company records its purchases using the gross amount. The periodic
inventory system is used. If Ryan Company pays for these goods on March 30, the entry made to
record the payment should include
A. $200 credit to Purchase discounts.
B. debit of $9,800 to Accounts payable.
C. debit of $10,000 to Accounts payable.
D. $9,800 credit to cash.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 7
75. Two systems are used in accounting for inventoryperpetual and periodic. Which of the
following statements is correct?
A. In a perpetual inventory system, the inventory account is not changed for each purchase during the
accounting period.
B. In a perpetual inventory system, cost of goods sold is recorded at the time of each sale during the
accounting period.
C. In a periodic inventory system, cost of goods sold is developed from a comparison of beginning
inventory and ending inventory only.
D. In a periodic inventory system, the inventory account is increased for each purchase during the
accounting period.

Difficulty: Medium
L.O.: 7
76. Which one of the following statements concerning the periodic and perpetual inventory systems is
true?
A. The periodic system uses a purchases account.
B. Inventory controls are only needed for the periodic inventory systems.
C. None of the accounting entries vary between the two systems.
D. Due to advances in computers, many businesses recently have begun to use the periodic inventory
system.

Difficulty: Medium
L.O.: 7
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77. When a company uses the periodic inventory system in accounting for its merchandise inventory,
which of the following is true?
A. Purchases are recorded in the cost of goods sold account.
B. The inventory account is updated after each sale.
C. Cost of goods sold is computed at the end of the accounting periods rather than at each sale.
D. The inventory account is updated throughout the year as purchases are made.

Difficulty: Medium
L.O.: 7
78. A LIFO liquidation occurs when a company

A. goes out of business.
B. converts from LIFO to FIFO.
C. converts from the periodic to the perpetual inventory system.
D. sells more units than it purchased during the year.

Difficulty: Medium
L.O.: Sup A
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79. Carrie Company sold merchandise with an invoice price of $1,000 to Underwood, Inc., with
terms of 2/10, n/30. Which of the following is the correct entry to record the payment by Underwood
Inc., within the 10 days if the company uses the periodic inventory system and the gross method to
record purchases?
A.
B.
C.
D.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: Sup B
80. On September 20, 2009, Precision Electric Company purchased $10,000 of stereo equipment for
resale on credit, subject to the terms 2/15, n/30. The periodic inventory system is used. If the
company paid for these goods on October 18, the entry made to record the payment should include
a/an
A. $200 debit to Purchases discounts.
B. $10,000 debit to Accounts payable.
C. $9,800 credit to Cash.
D. $10,000 debit to Purchases.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: Sup C
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Essay Questions
81. McMillan Company uses the periodic inventory system. It has compiled the following
information in order to prepare the financial statements at December 31, 2009:
Calculate (A.) Goods available for sale (B.) Cost of goods sold and (C.) Gross margin on sales.
A. $100,000 + $750,000 = $850,000
B. $850,000
$120,000 = $730,000
C. $2,000,000
$50,000
$730,000 = $1,220,000
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 1
82. The records of Jimmy Company show 2009 purchases of $90,000. An actual count revealed a
2009 ending inventory of $8,000. The 2009 beginning inventory was $5,000. What was cost of goods
sold for 2009?
$5,000 + $90,000
$8,000 = $87,000
AACSB Tag: Analytic

Difficulty: Easy
L.O.: 1
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83. The following income statement is complete except for a few captions with bold lines on the left,
and amounts with dotted lines on the right. You are to fill in the most likely captions and amounts
(ignore income taxes):
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 1
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84. The Latimer Company's income statement for 2009 reported the following: Cost of goods sold,
$250,000; beginning inventory, $20,000; and ending inventory, $25,000. Calculate purchases.
Purchases = $250,000 + $25,000
$20,000 = $255,000
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 1
85. Assume the following data are available: Sales revenue, $500,000; purchases, $310,000;
beginning inventory, $22,000; and a gross margin, $200,000. Calculate ending inventory.
Ending inventory = $22,000 + $310,000 ($500,000
$200,000) = $32,000
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 1
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86. Compute the missing amounts for the income statement for each independent case.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 1
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87. Coulter Company uses the LIFO inventory method under the periodic inventory system. The
following data were available for the month of January, 2009:
Compute the following:

1. Beginning inventory
2. Ending inventory
3. Goods available for sale
4. Cost of goods sold
5. Gross margin
1. 200
$5.00 = $1,000
2. (200
$5.00) + (100
$5.50) = $1,550
3. (200
$5.00) + (400
$5.50) + (700
$6.00) = $7,400
4. $7,400 $1,550 = $5,850
5. (500
$12.00) + (500
$13.00)
$5,850 = $6,650
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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88. William Company uses the periodic inventory system and the accounts reflected the following
data:
Requirement 1:
If the company wants to compare amounts using the (1) FIFO and (2) LIFO inventory methods,
compute the following amounts:
Requirement 2:
Conceptually, how does pretax income using FIFO (in times of rising prices) compare to LIFO pretax
income? Explain your answer.
Requirement 1:
Requirement 2:
FIFO pretax income is higher than LIFO pretax income in times of rising prices. FIFO matches older
lower prices to current period sales providing for higher gross margin and net income.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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89. Jennings Company uses the periodic inventory system and applied FIFO inventory costing. At
the end of the annual accounting period, December 31, 2009, the accounting records for the best
selling item in inventory showed:
Calculate the following: (round to the nearest dollar.)

2. Ending inventory
Goods available for sale: (500
$100) + (600
$105) + (400
$110) = $157,000
Ending inventory: 300 units
$110 = $33,000
Cost of goods sold: GAFS
EI = COGS $157,000
$33,000 = $124,000
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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90. Freeman Company uses the periodic inventory system and applied LIFO inventory costing. At
the end of the annual accounting period, December 31, 2009, the accounting records in inventory
showed
Calculate the following: (round to the nearest dollar.)

2. Ending inventory
$20) + (500
$21) + (400
$22) = $25,300
Ending inventory: 300 units
$20 = $6,000
Cost of goods sold: GAFS
EI = COGS, $25,300
$6,000 = $19,300
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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91. A. Compute the missing amounts in the income statement under three different inventory costing
methods: (Round your answers to the nearest dollar).
B. Explain the results of the weighted-average inventory costing method compared to the FIFO and
LIFO costing methods.
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a.
Computations:
A. 2,000 units
$12 = $24,000
B. (1,000 units
$10) + (1,000 units
$12) = $22,000
C. ($70,000
6,000) units
2,000 units = $23,333
OR $70,000
6,000 units = $11.67 (rounded)
$11.67
2,000 units = $23,340
b. Net income under the weighted average method will fall between the results of FIFO and LIFO
costing because it averages the unit cost over all the units available for sale. Under FIFO, we assign
the more recent, higher unit costs to ending inventory units an under LIFO, we assign the older, lower
unit costs to ending inventory units.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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92. Hopkins Company reported the following information related to inventory and sales
Sales8,000 units at $35 per unit.

Compute the following amounts assuming a periodic inventory system:
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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93. The inventory records of Martin Corporation reflected the following information for the month
of August:
A. Determine the amount of the ending inventory and cost of goods sold under each of the following
methods assuming the periodic inventory system.
B. Why would cash flow considerations relate to the choice of an inventory method?
A. a. EI: $28,800 4,000 units = $7.20; 1,400
$7.20 = $10,080;
COGS: $28,800 10,080 = $18,720
b. EI: (1,200
$9) + (200
$7) = $12,200; COGS: $28,800
$12,200 = $16,600
c. EI: (400
$5) + (400
$5) + (600
$7) = $8,200
COGS: $28,800
$8,200 = $20,600
B. Cash flow considerations would relate to the choice of an inventory method because of income
taxes levied on a corporation. In times of rising prices, LIFO would produce a lower net income and
taxable income than the other methods. Therefore, less cash would be required to pay the taxes.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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94. The records of Atlantis Company reflected the following for the month of February:
Determine the amount of ending inventory and cost of goods sold using the following methods:
$3) + (500
Computations:
A. EI = (600
$3) + (500
$4) + (100
COGS = $12,200 $4,300 = $7,900
B. EI = (900
$6) + (300
$5)
COGS = $12,200 $6,900 = $5,300
$4) + (600
$5) + (900
$6) = 12,200
$5)
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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95. Rio Company uses the FIFO inventory costing method and has a perpetual inventory system. All
purchases and sales were cash transactions. The records reflected the following for January, 2010:
Determine the following:

A. 2010 goods available for sale
B. 2010 ending inventory
C. 2010 cost of goods sold
D. Prepare the journal entries for January 6 and 10.
A. $100 + $240 + $130 = $470 (400 units)
B. 400 280 = 120 units; (100 at $1.30) + (20 at $1.20) = $154
C. 110 + 170 = 280 units; (100 at $1.00) + (180 at $1.20) + (170 at $1.20) = $316
D.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 2
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96. Given a particular set of facts and assumptions, the following pairs of amounts were computed
using FIFO and LIFO. For each pair of amounts, indicate which amount resulted from applying
FIFO, and which amount resulted from applying LIFO.
A. Prices are rising, ending inventory is:
1. $20,650
2. $19,400
B. Prices are rising, cost of goods sold is:
1. $10,650
2. $9,400
C. Prices are falling, ending inventory is:
1. $5,500
2. $5,000
D. Prices are falling, cost of goods sold is:
1. $6,200
2. $7,000
A. 1. FIFO 2. LIFO
B. 1. LIFO 2. FIFO
C. 1. LIFO 2. FIFO
D. 1. LIFO 2. FIFO
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 3
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97. The single-step income statement for Clinton Company for 2009 reported the following under
two different assumptions
Answer the following questions (assume a 40% income tax rate):

A. Were merchandise inventory costs rising, or falling? Explain your answer.
B. What was the amount of the LIFO ending inventory?
C. Calculate net income (after tax) for both LIFO and FIFO.
D. Under FIFO, would retained earnings on the balance sheet be more or less than under LIFO?
A. Rising; Cost of goods sold increased under LIFO with the same volume.
B. $120,000
$100,000 = $20,000
C. FIFO: $120,000; LIFO: $60,000
D. More
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 3
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98. Boulder, Inc. is computing its inventory at December 31, 2009. The following information relates
to the five major inventory items regularly stocked for resale
A. Using the lower-of-cost-or-market rule, compute the total valuation for each inventory item at
December 31, 2009, and the total inventory valuation.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 4
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99. Cutting Edge Technologies reported the following information in their 2010 annual report:
1. Determine the inventory turnover ratio

2. Determine the average days to sell inventory
3. Explain the meaning of each number.
1. 6.50, ($11,010/$1,695)
2. 56.2 days, (365 days/6.50)
3. The inventory turnover ratio identifies how many times the inventory was sold or liquidated during
the year's time while the average days to sell shows the volume of sales that can be supported in
terms of number of days' stock on hand. As the inventory turnover increases, the company will carry
less stock in terms of days' sales.
AACSB Tag: Analytic

Difficulty: Easy
L.O.: 5
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100. Sports Style Inc. manufactures sporting equipment and clothing. Its recent annual report
included the following on its balance sheet:
In addition to the above balance sheet information, All Sports Style Inc., reported cost of goods sold
on their income statement of $53,800,000.All purchases of inventory were made on credit.
Calculate:
1. Inventory purchased during 2010
2. Cash paid to suppliers during 2010
1. $53,850,520 ($53,800,000 + ($610,850 minus $560,330),
2. $53,845,820 ($53,850,520 minus ($90,500 minus $85,800)
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 5
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101. Quest Inc. provided the following footnote in their annual report:
Inventories are stated at the lower of cost or market. The cost of inventories has been determined
using last in first out (LIFO) method. Cost of goods sold under LIFO costing were $22.2 billion for
2010 and ending inventory under LIFO was $1.3 billion. Inventory in 2009 under LIFO costing was
$1.2 billion. The LIFO Reserve account carried a credit balance of $0.8 billion in 2010 and $0.6
billion in 2009.
1. $1.8 billion, ($1.2 billion LIFO inventory plus $0.6 billion LIFO reserve).
2. $2.1 billion, ($1.3 billion plus $0.8 billion LIFO reserve).
3. $22.0 billion, ($22.2 billion LIFO COGS minus $0.2 billion increase in the LIFO reserve).
4. 17.76, ($22.2 billion divided by [$1.3 + $1.2 billion divided by 2])
5. 11.28, ($22.0 billion divided by [$2.1 + $1.8 billion divided by 2]).
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 6
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102. Dows Company prepared income statements that reflected pretax income of $21,000 for 2009
and $30,000 for 2010. An audit has determined that there were two errors in the inventory amounts as
follows
Determine the correct pretax income amount for each year (show computations assuming the errors
were not corrected:
2009: $21,000
$1,000 = $20,000
2010: $30,000 + $1,000
$2,000 = $29,000
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 7
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103. For each independent situation given below, determine the effect on pretax income for each.
Enter "+" to indicate pretax income is overstated, " " to indicate pretax income is understated, or
"NA" to indicate that pretax income is not affected.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 7
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104. Redford Company hired a new store manager in October 2011, who determined the ending
inventory on December 31, 2011, to be $50,000. In March, 2012 the company discovered that the
December 31, 2011 ending inventory should have been $58,000. The December 31, 2012, inventory
was correct. Ignore income taxes.
Complete the following table to show the effects of the inventory error on the four amounts listed.
Give the amount of the discrepancy and indicate whether it was overstated (O), understated (U), or
had no effect (N).
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 7
105. Sideline Company reported net income for 2009 of $70,000, and in 2010 $84,000 (both after
income taxes at a 30% rate). It was discovered in 2011 that the ending inventory for 2009 was
understated by $2,000 (before any income tax effect). Calculate the correct net income (after income
tax of 20%) for 2009 and 2010
2009$70,000
($2,000
.70) = $68,600; 2010$84,000 + ($2,000
.70) = $85,400
AACSB Tag: Analytic

Difficulty: Hard
L.O.: 7
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106. Tech Star Company reported net income in 2009 of $50,000 and in 2010 of $54,000. Later it
was discovered that the 2009 ending inventory was overstated by $1,000. Compute the correct
amount of net income (disregard income tax) for 2009 and 2010.
2009$51,000; 2010$53,000
AACSB Tag: Analytic

Difficulty: Medium
L.O.: 7
107. A company provided the following footnote in its most recent annual report:
During the current and prior year, the company reduced certain inventory quantities that were
valued at lower LIFO costs prevailing in prior years. The effect of these physical reductions was to
increase after tax earnings this year by $90 million, $.30 per share, and $98 million, or $.327 per
share last year.
1. Explain why the reduction in inventory quantity increased after tax earnings for this company.
2. If the company had been using FIFO costing, would the reductions in inventory quantity during
the two years have increased after tax earnings? Explain.
1. The reduction of the physical level of inventory forced the release of older costs assigned to those
units from the balance sheet to the income statement once they were sold. Obviously the company
had been in a period of inflation and these older costs attached to the inventory units were far below
the current inventory replacement costs.
2. The reductions in inventory would not have increased after tax earnings because the costs that
would have been released from the balance sheet for the units sold would have been reflecting current
costs and not older, lower costs as they were under LIFO.

Difficulty: Medium
L.O.: Sup A
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108. Assume Webster Company buys compact disks at a unit cost of $20 and sells them at a unit
price of $26. There was no beginning inventory.
Provide the journal entries required below by entering the account code of the appropriate account
and the amount for each debit and credit:
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AACSB Tag: Analytic

Difficulty: Medium
L.O.: Sup C
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109. Give the journal entries for the transactions listed below under each of the two inventory
systems.
A. Purchased merchandise for cash, $1,000.
B. Sold merchandise for $600 cash that had cost $480 (cost is 80% of the sales price.
C. Accepted a sales return from a customer: sales price $30. A cash refund was given to the customer.
The goods were returned to regular inventory.
D. Returned goods to the vendor because they did not meet our specification; $50 cash refund was
received.
AACSB Tag: Analytic

Difficulty: Medium
L.O.: Sup C
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Matching Questions
110. For each of the following types of inventory, enter a letter to indicate the type of business in
which the inventory is more likely to appear.
1. Raw materials
2. Merchandise
3. Finished goods
4. Work in progress
Manufacturing
Retail
Manufacturing
Manufacturing
1
2
3
4

Difficulty: Easy
L.O.: 1
111. Match the descriptions with inventory costing methods.

1. Requires computation of a new unit cost after each
purchase and after each sale
2. Tends to match older costs with current revenue
3. Cost of goods sold and inventory are costed at the
oldest costs
4. Inventory is costed at the newest unit costs
5. Inventory is costed at the oldest unit cost
6. Tends to match current costs with current revenue
7. Cost of goods sold is costed at the oldest unit costs
8. Subject to manipulation by arbitrary choice of unit
costs when sold or issued
9. Requires computation of an average cost for the
entire period excluding beginning inventory
10. Inventory and cost of goods sold are valued at the
same unit cost
FIFO 2
None of the answers
is correct 3
LIFO
Weighted average
LIFO
None of the answers
is correct
None of the answers
is correct
Specific
identification
5
10
6
9
1
8
FIFO 7
FIFO 4

Difficulty: Medium
L.O.: 2
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112. Relate each situation to the direction of prices.

1. LIFO provides a lower inventory amount than FIFO
when
2. FIFO provides a higher net income than LIFO when
3. FIFO provides a lower inventory amount than LIFO
when
4. LIFO provides a higher net income than FIFO when
Costs are rising 2

Costs are rising 1
Costs are falling 3
Costs are falling 4

Difficulty: Medium
L.O.: 3
113. Match the inventory systems with the appropriate statement.

1. Cost of goods sold cannot be determined
until a physical count is taken
2. Uses a separate account for recording
purchases
3. Requires that two concurrent journal
entries be made to record a purchase
4. Used to reveal any inventory shortages and
shrinkage that occur during the period
5. Requires that purchases be recorded at
their cash equivalent cost
6. Inventory account is increased for each
purchase and decreased for each sale
The periodic inventory

system
Both the perpetual and
periodic inventory systems
Neither the perpetual nor the
periodic inventory systems
The periodic inventory
system
The perpetual inventory
system
The perpetual inventory
system
2
5
3
1
4
6

Difficulty: Medium
L.O.: 7
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114. Match the inventory systems with the appropriate statement.

Perpetual inventory
system.
Periodic inventory
system.
Neither the perpetual nor
the periodic inventory
systems
Periodic inventory
system.
Perpetual inventory
system.
Perpetual inventory
system.
Neither the perpetual nor
the periodic inventory
systems
Perpetual inventory
system.
1. A sale requires one journal entry

2. Cost of goods sold is computed as a residual
amount after an inventory count
3. A sale requires two journal entries

4. A purchase requires two journal entries
5. The inventory system that provides more
control features
6. Merchandise inventory is debited when goods
are purchased
7. A return of a purchase requires two journal
entries
8. A physical inventory count is never taken
9. The inventory system that requires adjusting
(or closing) entries for the beginning and ending
inventories
5
9
4
1
6
7
8
3
Periodic inventory
system. 2

Difficulty: Medium
L.O.: 7
7-56

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True / False Questions

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Multiple Choice Questions

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22. Which of the following statements about inventory is true?

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27. Which of the following is true about a manufacturing company's inventory?

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31. Which of the following is true?

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34. Which of the following is correct?

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During the year, 750 laptop computers were sold.

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During the year, 750 laptop computers were sold.

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43. When prices are rising:

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45. Which of the following statements is correct?

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46. Which of the following statements is true?

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