Inventory
Easy Practice Test
Financial Accounting
Inventory
Easy Practice Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. What is the definition of “market” in lower of cost or market?
a. cost of goods sold
b. price to the customer
c. cost of replacing the goods on the balance sheet date
d. amount paid for the inventory
Check Your Answer
C. Market means what it costs to buy it now, which is the cost of replacing the goods. (d) is the historical cost.
2. Which inventory method will give a value of cost of goods sold closest to
current market value?
a. FIFO
b. LIFO
c. Weighted average
d. each method listed will give the same cost of goods sold
Check Your Answer
B. Current market value is closest to the last cost. The last cost will be sold first when LIFO is used.
3. The balance in the inventory account at any given time should represent the cost of
inventory on hand when the company uses
a. the periodic method
b. the perpetual method
c. either method
d. neither method
Check Your Answer
B. The perpetual method records all movement of inventory in the inventory account. You can look at the balance at any time to get an approximation of the value of inventory on hand. The periodic method shows the beginning balance during the entire period and then is adjusted at the end.
4. The company reported inventory too low on the balance sheet for the current year.
As a result of this error, cost of goods sold is reported
a. too high
b. too low
c. the correct amount
d. higher than last period
Check Your Answer
A. Cost of goods sold = Beginning inventory plus purchases less ending inventory. Inventory reported on the balance sheet is the ending inventory balance. When you subtract a lower amount, it makes cost of goods sold higher. You either still have the goods or you sold them. If you have less, you sold more.
5. When using the periodic inventory method, the best way to determine the value of inventory at the end of the period is
a. the ending balance in the purchases account
b. the ending balance in the inventory account
c. add beginning inventory balance to purchases
d. count the inventory and multiply by cost
Check Your Answer
D. When using this method you do not record changes to inventory when purchased or sold. The only way you know what you have is to count it. (a. & c) does not consider what was sold. Inventory will still show the beginning balance since the periodic method does not record inventory movement that occurred during the period to the inventory account. (b)
6. A physical inventory count to determine the actual quantity of inventory on hand is
required at least
a. at the end of every month
b. at the end of every fiscal year
c. at the end of every quarter
d. it is not required and estimates may always be used
Check Your Answer
B. Financial statements must be prepared at least annually. A count at the end of the fiscal year is required to know the amount to report on the balance sheet as of year end. It is common for companies to count every quarter, but not required. It is expensive to count. Poor controls over inventory increase the need to count more often.
7. Beginning inventory was $29,000 and ending inventory was $36,000. The company purchased inventory for $31,000 during the year. Cost of goods sold is
a. $96,000
b. $34,000
c. $24,000
d. $60,000
Check Your Answer
C. Beginning inventory plus purchases less ending inventory = cost of goods sold 29,000 + 31,000 – 36,000 = 24,000
8. Which of the following is a characteristic of inventory held for sale?
a. it is a physical tangible asset
b. it is used in the day to day operations of the company
c. it is held for resale ONLY
d. all of the above
Check Your Answer
D. Inventory is an asset you can touch that is held only to sell to the customer only and is used in the day to day operations of the business when provided to the customer.
9. When using the periodic inventory method, the balance in the inventory account changes
a. every time inventory is purchased or sold
b. at the end of the period only
c. when inventory is purchased only
d. when shrink is determined
Check Your Answer
B. For the periodic method, the inventory account is only used at the end of the period to adjust the inventory account to what is actually on hand at the end of the period. Purchases and sales are not recorded in the inventory account. It is not possible to determine the value of shrink using the periodic method.
10. Which of the following are typically included in the cost of inventory?
a. the invoice price per unit
b. sales tax paid
c. purchase (volume) discounts
d. all of the above
Check Your Answer
D. All of the above are included in the cost of inventory.
11. The company accountant has given you the following information from the inventory records.
| Units | Cost per Unit | Total Cost | |
| Inventory on 1/1 | 4,000 | $4 | $16,000 |
| Purchases of inventory on | |||
| 1/9 | 3,000 | $4.25 | $12,750 |
| 1/24 | 5,000 | $.30 | $21,500 |
| Sales during January | 9,000 |
Compute the value of ending inventory and cost of goods sold using
A. FIFO
B. LIFO
C. Average cost
Check Your Answer
First: Reformat the information to list the inventory in order and determine the quantity and dollar amount that is available. You will need to know the total quantity and amount available.
| Inventory on 1/1 | 4,000 | x $4.00 | =$16,000 |
| 1/9 | 3,000 | x $4.25 | =$12,750 |
| 1/24 | 5,000 | x $4.30 | =$21,500 |
| Available | 12,000 | $50,250 | |
| – Sales during January | (9,000) | ?? | |
| =Ending Inventory | 3,000 | ?? |
A. FIFO First ones purchased are the first ones sold. Go down from the top until you
cover 9,000 units sold.
| Beg Inventory | 4,000 | x $4 | =$16,000 |
| 1/9 Purchases | 3,000 | x $4.25 | =$12,750 |
| 1/24 Purchases | 2,000 | x $4.30 | =$8,600 |
| Total Sold | 9,000 | $37,350 CGS |
You only use 2,000 of the 1/24 purchase because that is all you need to get you to
9,000 sold.
Once you have determined the cost of goods sold, ending inventory is always
Available $50,250
– Cost of goods sold ($37,350)
= Ending inventory $12,900
B. LIFO Last ones purchased are the first ones sold. Go up from the bottom until you
cover 9,000 units sold.
| 1/24 Purchases | 5,000 | x $4.30 | =$21,500 |
| 1/9 Purchases | 3,000 | x $4.25 | =$12,750 |
| Beginning Inventory | 1,000 | x $4.00 | =$4,000 |
| Total Sold | 9,000 | $38,250 CGS |
You only use 1,000 of the beginning inventory because that is all you need to get you to 9,000 sold.
Once you have determined the cost of goods sold, ending inventory is always
Available $50,250
– Cost of goods sold ($38,250)
= Ending inventory $12,000
C. Weighted Average method: Use “Available” to get the average cost per unit
| Total $ Available | $50,250 | =$4.1875 |
| Total Quantity Available | 12,000 | |
| Units Sold | 9,000 | |
| x Average Cost per Unit | $4.1875 | |
| = Cost of Goods Sold | $37,687.50 |
Once you have determined the cost of goods sold, ending inventory is always
Available $50,250
– Cost of goods sold ($37,687.50)
= Ending inventory $12,562.50
12. The following information was taken from the accounting records of the company for the current year.
| Sales | 2,800,000 |
| Ending Inventory | 785,000 |
| Purchase Returns | 40,000 |
| Administrative Expense | 80,000 |
| Selling Expense | 450,000 |
| Depreciation Expenses- sales | 110,000 |
| Beginning Inventory | 420,000 |
| Purchases | 1,850,000 |
| Shipping Expense | 120,000 |
Calculate cost of goods sold:
Check Your Answer
Cost of goods sold is computed:
| Beginning Inventory | 420,000 |
| = Purchases | 1,850,000 |
| – Purchase discounts & returns | (40,000) |
| + Freight in | 0 |
| – Ending Inventory | (785,000) |
| = Cost of Goods Sold | 1,445,000 |
Sales and operating expenses are never included in cost of goods sold.
Shipping expense is an operating/selling expense.
13. A company had the following account balances and transactions during the year:
| Sales | 200,000 |
| Cost of Goods Sold | 10,000 |
| Purchases | 85,000 |
| Operating Expense | 63,000 |
| Shipping Expense | 12,000 |
At the end of the year the company counted inventory and determined the value using
FIFO to be $28,000. Beginning Inventory was $45,000.
A. Record all journal entries necessary to record inventory transactions using the
periodic method.
B. Record all journal entries necessary to record inventory transactions using the
perpetual method.
Check Your Answer
Shipping expense is a selling expense and is not recorded with inventory transactions.
Operating expenses are not recorded with inventory transactions.
Periodic:
Sales:
Accounts receivable (cash) 200,000
Sales 200,000
(cost of inventory sold is not recorded)
Purchases:
Purchases 85,000
Accounts Payable (cash) 85,000
Adjustment at end of period:
Cost of Goods sold 102,000 plug
Inventory (ending) 28,000
Purchases 85,000
Inventory (beginning) 45,000
Or
Cost of Goods sold 102,000 plug
Purchases 85,000
Inventory 17,000
Purchases must be 0, so credit purchases for the total debit balance.
Ending inventory must be equal to what you really have on hand.
Cost of goods sold is a plug, debit what it takes to make the j/e balance.
Perpetual:
Sales:
Accounts receivable (cash) 200,000
Sales 200,000
Cost of Goods Sold 100,000
Inventory 100,000
Purchases:
Inventory 85,000
Accounts Payable (cash) 85,000
Adjustment at end of period:
Cost of Goods sold 2,000
Inventory 2,000
| Beginning Inventory | 45,000 |
| = purchases | 85,000 |
| – sales | (100,000) |
| = Ending inventory per account | 30,000 |
| – Ending inventory counted | (28,000) |
| = Adjustment to inventory | 2,000 less |
Inventory must be decreased by 2,000 to get the balance currently in the inventory
account to be what is really on hand