Chapter 5Multiple Choice and True False Questions

1.Which inventory costing method will produce an amount for cost of goods sold that is closest to current

market value?

A.Weighted average. B.Specific identification. C.FIFO. D.LIFO.

2.When the cost of inventory is rising, which inventory cost flow method will produce the lowest amount

of cost of goods sold?

A.FIFO B.Weighted Average. C.All methods will produce the same amount of cost of goods sold. D.LIFO

3.What is meant by "market" in lower-of-cost-or-market calculations?

A.The amount of gross margin earned by selling merchandise. B.The amount the goods were sold for during the period. C.The amount that would have to be paid to replace the merchandise. D.The amount originally paid for the merchandise.

4.Reichart Company has four different categories of inventory. Quantity, cost, market value for each

inventory category is shown below:

Cost Market Value Item QuantityPer UnitPer Unit

1 220$ 4.40$ 4.60

2 130$ 6.20$ 6.00

3 100$10.00$ 9.25

4 25$20.50$25.00

The company carries inventory at lower-of-cost-or-market applied to each individual item. The

implementation of the lower-of-cost-or-market rule would:

A.increase assets and equity by $55.50. B.reduce assets and equity by $101.00. C.reduce assets and equity by $79.00. D.None of these.

5.Why are the inventory and cost of goods sold accounts attractive targets for managerial fraud?

A.There are few if any procedures that can check for fraud in these accounts. B.These accounts are more significant than most other accounts. C.There are no adequate methods of record keeping for inventory. D.Cost of goods sold and Inventory accounts are not attractive targets of fraud.

6.Which of the following statements is correct in regard to the importance of inventory turnover to a

company's profitability?

A.Most companies prefer to have a low inventory turnover than a high inventory turnover. B.It is sometimes more desirable to sell a large amount of merchandise with a small amount of gross margin

than a small amount of merchandise with a large amount of gross margin. C.A company's profitability is affected by how rapidly inventory sells as well as by the spread between cost

and selling price. D.Both B and C are correct.

True / False Questions

7. In most businesses, the physical flow of goods occurs on a FIFO basis, but a different cost flow method

is allowed under generally accepted accounting principles.

TRUEFALSE

8.During a period of rising prices the FIFO cost flow method will result in higher total assets than LIFO.

TRUEFALSE

9.During a period of rising prices, the amount of ending inventory reported on the balance sheet will be

lower using the LIFO cost flow method than with FIFO.

TRUEFALSE

10.Generally accepted accounting principles would not allow a company to use FIFO for part of its

inventory and the weighted-average cost flow assumption for the rest of its inventory.

TRUEFALSE

11.The Internal Revenue Service allows a company to use LIFO for income tax purposes only if it also

uses LIFO for financial reporting.

TRUEFALSE

12. Gross margin can be found on single step income statement.

TRUEFALSE

13. GAAP requires companies to disclose the sales returns and allowance on their Income Statement.

TRUEFALSE

Chapter 5 Problems

1. Benson Company purchased two identical inventory items. The item purchased first cost $14.00, and

the item purchased second cost $15.00. Benson sold one of the items for $24.00. Using the schedule provided, determine the gross margin on the sale and the ending inventory balance using these

inventory costs flow methods: FIFO, LIFO and Weighted Average

FIFO LIFO Weighted Average

Sales

Cost of goods sold

Gross Margin

-------------------------------------------------------------------------------------------

Ending Inventory

2. Indicate how each event affects the elements of financial statements. Use the following letters to record

your answer in the box shown below each element. You do not need to enter amounts.

Increase = IDecrease = DNo Effect = N Kelly's Children's Bookstore purchased 5 Babar books for $3 each. Later it purchased 2 more Babar books

for $5 each. Kent uses the perpetual inventory system. Assume that 6 Babar books were sold during the

period for $10 cash each.

a). Assume that Kelly's Bookstore purchased the first five books on account. How would the purchase

transaction affect its financial statements?

b).Assume that Kelly's Bookstore made the second purchase for cash. How would that purchase affect

the financial statements?

c).How would the sale affect the financial statements if Kelly's Bookstore uses the LIFO inventory

cost flow method?

3. Using the schedules below, complete Exercise 5-3A found on page 294 of your textbook.

The Cortez Company Inventory Purchases
Beginning Inventory	100	@	$60	=	$ 6,000
First Purchase	150	@	68	=	10,200
Second Purchase	200	@	72	=	14,400
Goods Available for Sale	450				$30,600

a.

Cost of Goods Sold:

FIFO	Units		Unit Cost		Cost of Goods Sold
From Beginning Inventory		@		=
From First Purchase		@		=
From Second Purchase		@		=
Total

Ending Inventory:

FIFO	Units		Unit Cost		Ending Inventory
From Second Purchase		@		=

b. Cost of Goods Sold

LIFO	Units		Unit Cost		Cost of Goods Sold
From Second Purchase		@		=
From First Purchase		@		=
Total

Ending Inventory

LIFO	Units		Unit Cost		Ending Inventory
From Beginning Inventory		@		=
From First Purchase		@		=
Total Ending Inventory

c.

Weighted Average:
Total Cost		Total Units	=	Cost per Unit
			=

Cost of Goods Sold		@		=
Ending Inventory:

4.On January 1, 2017, Hart Company carried inventory at the lower of cost or market on an aggregate basis.

The cost of the inventory was $19,456 but the current market value is $18,500. Assuming the perpetual

inventory system is used:

(A) Prepare the journal entry needed to recognize the write down: [4points]

Account Title DebitCredit

(B) How will the write-down affect the elements of the financial statements? Use the following letters

to record your answer in the box shown below each element. You do not need to enter amounts.

Increase = IDecrease = DNo Effect = N

Chapter 5 Multiple Choice and True False Questions 1. Which inventory costing method will produce an amount for cost of goods sold that is closest to current market value? A. Weighted average. B. Specific identification. C. FIFO. D. LIFO. 2. When the cost of inventory is rising, which inventory cost flow method will produce the lowest amount of cost of goods sold? A. FIFO B. Weighted Average. C. All methods will produce the same amount of cost of goods sold. D. LIFO 3. What is meant by "market" in lower-of-cost-or-market calculations? A. The amount of gross margin earned by selling merchandise. B. The amount the goods were sold for during the period. C. The amount that would have to be paid to replace the merchandise. D. The amount originally paid for the merchandise. 4. Reichart Company has four different categories of inventory. Quantity, cost, market value for each inventory category is shown below: Cost Market Value Item Quantity Per Unit Per Unit 1 220 $ 4.40 $ 4.60 2 130 $ 6.20 $ 6.00 3 100 $10.00 $ 9.25 4 25 $20.50 $25.00 The company carries inventory at lower-of-cost-or-market applied to each individual item. The implementation of the lower-of-cost-or-market rule would: A. increase assets and equity by $55.50. B. reduce assets and equity by $101.00. C. reduce assets and equity by $79.00. D. None of these. 5. Why are the inventory and cost of goods sold accounts attractive targets for managerial fraud? A. There are few if any procedures that can check for fraud in these accounts. B. These accounts are more significant than most other accounts. C. There are no adequate methods of record keeping for inventory. D. Cost of goods sold and Inventory accounts are not attractive targets of fraud. 6. Which of the following statements is correct in regard to the importance of inventory turnover to a company's profitability? A. Most companies prefer to have a low inventory turnover than a high inventory turnover. B. It is sometimes more desirable to sell a large amount of merchandise with a small amount of gross margin than a small amount of merchandise with a large amount of gross margin. C. A company's profitability is affected by how rapidly inventory sells as well as by the spread between cost and selling price. D. Both B and C are correct. True / False Questions 7. In most businesses, the physical flow of goods occurs on a FIFO basis, but a different cost flow method is allowed under generally accepted accounting principles. TRUE FALSE 8. During a period of rising prices the FIFO cost flow method will result in higher total assets than LIFO. TRUE FALSE 9. During a period of rising prices, the amount of ending inventory reported on the balance sheet will be lower using the LIFO cost flow method than with FIFO. TRUE FALSE 10. Generally accepted accounting principles would not allow a company to use FIFO for part of its inventory and the weighted-average cost flow assumption for the rest of its inventory. TRUE FALSE 11. The Internal Revenue Service allows a company to use LIFO for income tax purposes only if it also uses LIFO for financial reporting. TRUE FALSE 12. Gross margin can be found on single step income statement. TRUE FALSE 13. GAAP requires companies to disclose the sales returns and allowance on their Income Statement. TRUE FALSE Chapter 5 Problems 1. Benson Company purchased two identical inventory items. The item purchased first cost $14.00, and the item purchased second cost $15.00. Benson sold one of the items for $24.00. Using the schedule provided, determine the gross margin on the sale and the ending inventory balance using these inventory costs flow methods: FIFO, LIFO and Weighted Average FIFO LIFO Weighted Average Sales Cost of goods sold Gross Margin ------------------------------------------------------------------------------------------Ending Inventory 2. Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. Increase = I Decrease = D No Effect = N Kelly's Children's Bookstore purchased 5 Babar books for $3 each. Later it purchased 2 more Babar books for $5 each. Kent uses the perpetual inventory system. Assume that 6 Babar books were sold during the period for $10 cash each. a). Assume that Kelly's Bookstore purchased the first five books on account. How would the purchase transaction affect its financial statements? b). Assume that Kelly's Bookstore made the second purchase for cash. How would that purchase affect the financial statements? c). How would the sale affect the financial statements if Kelly's Bookstore uses the LIFO inventory cost flow method? 3. Using the schedules below, complete Exercise 5-3A found on page 294 of your textbook. The Cortez Company Inventory Purchases Beginning Inventory First Purchase Second Purchase Goods Available for Sale a. 100 150 200 450 Cost of Goods Sold: FIFO @ @ @ Units From Beginning Inventory From First Purchase From Second Purchase Total Ending Inventory: FIFO From Second Purchase $60 68 72 = = = Unit Cost @ @ @ Units Unit Cost Unit Cost @ @ Ending Inventory LIFO From Beginning Inventory From First Purchase Total Ending Inventory Ending Inventory = Units From Second Purchase From First Purchase Total Cost of Goods Sold = = = @ b. Cost of Goods Sold LIFO $ 6,000 10,200 14,400 $30,600 Cost of Goods Sold = = Units Unit Cost @ @ Ending Inventory = = c. Weighted Average: Total Cost Cost of Goods Sold Ending Inventory: Total Units @ = = Cost per Unit = 4. On January 1, 2017, Hart Company carried inventory at the lower of cost or market on an aggregate basis. The cost of the inventory was $19,456 but the current market value is $18,500. Assuming the perpetual inventory system is used: (A) Prepare the journal entry needed to recognize the write down: [4points] Account Title Debit Credit (B) How will the write-down affect the elements of the financial statements? Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. Increase = I Decrease = D No Effect = N