Inventory
Medium Practice Test
Financial Accounting
Inventory
Medium Practice Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. When purchase prices are falling
a. LIFO results in a lower income than FIFO
b. LIFO results in a higher income than FIFO
c. FIFO results in a lower inventory valuation than LIFO
d. Weighted average gives the highest inventory valuation
Check Your Answer
B. Falling prices mean the last items purchased have the lowest cost. LIFO means those sold have the lowest cost which gives the highest net income.
2. Which inventory method will result in inventory valued at the closest to fair market value?
a. FIFO
b. LIFO
c. Weighted average
d. all methods value inventory the same amount
Check Your Answer
A. Inventory valued at the latest cost will be closest to fair market value. The method which records last purchases as still in inventory is FIFO. The first ones purchased are sold first leaving the last ones purchased still on the shelf.
3. The company reported the value of inventory too high on the balance sheet. As a result of this
a. cost of goods sold is reported too high
b. net income is reported too low
c. gross profit is reported too low
d. none of the above
Check Your Answer
D. Ending inventory is subtracted to get cost of goods sold. When you subtract a higher amount you get a lower cost of goods sold. Lower cost of goods sold is higher gross profit and higher net income.
4. The company purchased two identical items, the first at a cost of $4 and the second at a cost of $3.75. As a result of this
a. FIFO will give a higher net income
b. LIFO will give a higher net income
c. FIFO will give a higher gross profit
d. FIFO will give a higher ending inventory value
Check Your Answer
B. This situation is deflation, prices falling. With LIFO, last purchases become cost of goods sold, which is a lower cost in this situation. A lower cost of goods sold gives a higher gross profit and a higher net income. FIFO gives higher cost of goods sold and lowers net income in times of deflation.
5. Beginning inventory was $29,000. Gross profit is $52,000 for the period. Ending
inventory was $36,000. Sales totaled $100,000. Purchases were
a. $ 48,000
b. $ 55,000
c. $117,000
d. $ 88,000
Check Your Answer
B. Sales – CGS = GP so CGS must be $48,000. Beg Inv + Pur – End inv = CGS 100,000 – ? = 52,000 and 29,000 + ? – 36,000 = 48,000
Purchases must equal 55,000 for CGS to be 48,000
6. A company purchased an item in inventory for $5 per unit and sells the item for $11. Replacement cost is currently $6 per unit. Using lower of cost or market, inventory should be valued at
a. $11 per unit
b. $6 per unit
c. $5 per unit
d. $1 per unit
Check Your Answer
C. Inventory is never increased above historical cost and it is decreased to replacement cost under lower of cost or market if replacement cost is lower than historical cost. In this case, market is higher, so inventory value is not changed.
7. A purchase return
a. increases cost of goods sold
b. increases inventory ending balance
c. decreases net income
d. decreases cost of goods sold
Check Your Answer
D. Purchase returns decrease purchases. Purchases are added to get to cost of goods sold. Adding less decreases cost of goods sold. Lower cost of goods sold increases net income (c).
8. Which of the following is a correct statement relative to lower of cost or market?
a. inventory is always adjusted to fair market value
b. inventory is adjusted to fair market value if fair market value is lower than cost
c. inventory is adjusted to fair market value if replacement cost is higher than cost
d. lower of cost or market always increases net income
Check Your Answer
B. Inventory is adjusted to replacement cost (fair market value) when the inventory has lost value and replacement cost is lower than historical cost. Inventory is never increased to fair market value. Reducing inventory is an expense that reduces net income (d).
9. When using the perpetual inventory method, inventory is debited when
a. inventory is sold
b. inventory is purchased
c. inventory is returned to the supplier
d. only at the end of the period
Check Your Answer
B. The perpetual method records all changes to inventory when it occurs in the inventory account. A debit is an increase. Inventory increases when it is purchased. (a. & c.) decrease inventory recorded with a credit. (d) is the periodic method.
10. Ending inventory is equal to the cost of inventory in the warehouse plus
a. in transit items shipped F.O.B. destination
b. in transit items shipped F.O.B. shipping
c. items held on consignment
d. all of the above
Check Your Answer
A. The company must add all inventory it has title to. Inventory in the warehouse is owned and inventory that is shipped F.O.B destination is owned by the company until it is received by the customer. Items held on consignment are not owned by the company. (b) is owned by the customer at the point of shipment and in transit. Items held on consignment are not owned by the company (c.)
11. The Company had the following transactions during the first quarter of the
current year
| Units | Cost Per Unit | ||
| January 1 | Beginning Balance | 900 | $11 |
| January 15 | Purchased | 500 | $10 |
| February 5 | Purchased | 400 | $12 |
| March 15 | Purchased | 600 | $11 |
| Sales during the quarter | 1,600 | ?? | |
Units are sold for $15 each. Compute gross profit reported on the income statement
and ending inventory reported on the balance sheet for the quarter 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.
| Inventory on 1/1 | 900 | x $11 = | $9,900 |
| 1/5 | 500 | x $10 = | $5,000 |
| 2/5 | 400 | x $12 = | $4,800 |
| 3/15 | 600 | x $11 = | $6,600 |
| Available | 2,400 | $26,300 | |
| -Sales during quarter | ($1,600) | ?? | |
| =Ending Inventory 3/31 | 800 | ?? |
A. FIFO First ones purchased are the first ones sold. Start from the top and go down
until you get to 1,600 units sold.
| Inventory on 1/1 | 900 | x $11 = | $9,900 |
| Purchase 1/15 | 500 | x $10 = | $5,000 |
| Purchase 2/5 | 200 | x $12 = | $2,400 |
| Total Sold | 1,600 | = | $17,300 COGS |
You only use 200 of the 2/5 purchase because that is all you need to get you to 1,600 sold.
Sales 24,000 ($15 x 1,600)
– Cost of goods sold (17,300)
= Gross Profit 6,700
Once you have determined the cost of goods sold, ending inventory is always
Available $26,300 see above
– Cost of goods sold ($17,300)
= Ending inventory $9,000
B. LIFO Last ones purchased are the first ones sold. Start at the bottom and go up
until you get to a total of 1,600 units sold.
| Purchase 3/15 | 600 | x $11 = | $6,600 |
| Purchase 2/5 | 400 | x $12 = | $4,800 |
| Purchase 1/15 | 500 | x $10 = | $5,000 |
| Beginning Inv 1/1 | 100 | x $11 = | $1,100 |
| Total Sold | 1,600 | = | $17,500 COGS |
You only use 100 of the beginning inventory because that is all you need to get you to 1,600 sold.
Sales 24,000
– Cost of goods sold (17,500)
= Gross Profit 6,500
Once you have determined the cost of goods sold, ending inventory is always
Available $26,300
– Cost of goods sold ($17,500)
= Ending inventory $8,800
C. Weighted Average method: Use “Available” to get the average cost per unit
Total $ Available $26,300 = $10.9583
Total Quantity Available 2,400
Units sold 1,600
x Average cost per unit $10.9583
= Cost of goods sold $17,533
Sales 24,000
– Cost of goods sold (17,533)
= Gross Profit 6,467
Once you have determined the cost of goods sold, ending inventory is always
Available $26,300
– Cost of goods sold ($17,533)
= Ending inventory $8,767
12. The company purchased inventory on account for a cost of $65,000 on June 1 st of the current year. On June 14, goods with a cost of $21,000 were sold for a price of
$33,000. On June 18th , $1,000 of goods was returned to the supplier. On June 26th, a customer paid $39,000 for goods that cost the company $26,000. Inventory actually counted at the end of June was valued at a cost of $50,000. Beginning inventory on June 1st was $29,000.
Make the appropriate journal entries for inventory during the month of June using
A. The periodic method
B. The perpetual method
Check Your Answer
Periodic:
Purchases 6/1:
Purchases 65,000
Accounts Payable 65,000
Sales 6/14:
Accounts receivable (cash) 33,000
Sales 33,000
(cost of inventory sold is not recorded)
Return 6/18:
Accounts Payable 1,000
Purchase Returns 1,000
Sales 6/26:
Cash 39,000
Sales 39,000
(cost of inventory sold is not recorded)
Adjustment at end of period:
Cost of Goods sold 43,000
Inventory (ending) 50,000
Purchase Returns 1,000
Purchases 65,000
Inventory (beginning) 29,000
Or
Cost of Goods sold 43,000
Purchase Returns 1,000
Inventory 21,000
Purchases 65,000
1st : Make purchases must be 0; credit purchases for the total amount debited
2nd : Make ending inventory equal to what you really have on hand.
3rd : Cost of goods sold is debited for the amount it takes to make the j/e balance
Perpetual:
Purchases 6/1:
Inventory 65,000
Accounts Payable 65,000
Sales 6/14:
Accounts receivable (cash) 33,000
Sales 33,000
Cost of Goods Sold 21,000
Inventory 21,000
Returns 6/18:
Accounts Payable 1,000
Inventory 1,000
Sales 6/26:
Cash 39,000
Sales 39,000
Cost of Goods Sold 26,000
Inventory 26,000
Adjustment at end of period:
Inventory 4,000
Cost of Goods Sold 4,000
| Beginning Inventory | 29,000 | |
| = purchases | 65,000 | |
| – purchase returns | (1,000) | |
| – sales (cost) | (21,000) | |
| – sales (cost) | (26,000) | |
| = ending inventory per account | 46,000 | |
| Compared to ending inventory counted | (50,000) | |
| = Adjustment to inventory | 4,000 | more |
Inventory must be increased by 4,000 to get the balance to what is really on hand
Important: The total cost of goods sold recorded must be the same for both methods: The perpetual method identifies shrink with the adjusting entry and the periodic method does not identify shrink.
13. A company gathered the following information after counting and valuing inventory at the end of the period:
| Item | Quantity on Hand | Unit Cost | Replacement Cost |
| A | 1,000 | $11.50 | $10.50 |
| B | 2,000 | $12.00 | $13.00 |
| C | 3,000 | $5.00 | $4.50 |
A. Determine lower of cost or market using by item.
B. Determine lower of cost or market for inventory in total
Check Your Answer
By Item: Determine a lower of cost or market amount for each item. Compare total LCM adjustment to total cost to determine if a write-down is required.
| Item | Quantity on Hand | Unit Cost | Total Cost | Repl Cost | Total R.C. | LCM Adjust. |
| A | 1,000 | 11.50 | 11,500 | 10.50 | 10,500 | 1,000 |
| B | 2,000 | 12.00 | 24,000 | 13.00 | 26,000 | 0 |
| C | 3,000 | 5.00 | 15,000 | 4.50 | 13,500 | 1,500 |
| Total | 2,500 |
Put the difference in cost and R.C. in the LCM column only if the replacement cost is
lower.
Lower of cost or market is lower than historical cost, so inventory must be written down for the total difference (LCM column); 2,500
Loss on Market Adjustment (CGS) 2,500
Inventory 2,500
In Total: Compare total cost to replacement cost for totals only.
| Item | Quantity on Hand | Unit Cost | Total Cost | Repl Cost | Total R.C. | LCM Adjust. |
| A | 1,000 | 11.50 | 11,500 | 10.50 | 10,500 | |
| B | 2,000 | 12.00 | 24,000 | 13.00 | 26,000 | |
| C | 3,000 | 5.00 | 15,000 | 4.50 | 13,500 | |
| Total | 50,500 | 50,000 | 500 |
Total replacement cost is lower than total historical cost, so inventory must be written
down for the difference 50,500 – 50,000 = 500
Loss on Market Adjustment (CGS) 500
Inventory 500