Inventory

Easy Test

Easy Test

Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. Which of the following accounts is not included when computing cost of goods sold?

a. purchase discounts
b. freight in
c. freight out
d. finished goods inventory

Answer
C. Freight out is a selling expense. It is not a cost of purchasing the inventory and is not included when computing the cost of inventory sold.
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

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

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

Answer
A. Cost of goods sold = beginning inventory plus net 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.
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

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

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 had net purchases of inventory for $31,000 during the year. Cost of goods sold is

a. $96,000
b. $34,000
c. $24,000
d. $60,000

Answer
C. Beginning inventory plus net 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

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 to generate revenues.
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

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

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 $4.30 $21,500
 
Sales during January 9,000    

Compute the value of ending inventory and cost of goods sold under the periodic method using
A. FIFO
B. LIFO
C. Average cost

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                                     (9,000)                           ??
= Ending Inventory 1/31      3,000                             ??

11.A. FIFO Periodic
The date sold does not matter.
First ones purchased are the first ones sold.
Go down from the top (first purchases) until the total is 9,000 units sold.

Beg Inventory        4,000 x $4.00 = $16,000
1/9 Purchases        3,000 x $4.25 = $12,750
1/24 Purchases      2,000 x $4.30 = $ 8,600
Total sold: CGS      9,000               = $37,350

Use only 2,000 of the 1/24 purchase because that is all that is needed to total 9,000.

Ending inventory is always

Available                            $50,250
– Cost of goods sold         ($37,350)
= Ending inventory           $12,900

11. B. LIFO Periodic
Last ones purchased are the first ones sold.
Go up from the last purchase (bottom) until the total is 9,000 units sold.
The date sold does not matter.

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: CGS            9,000 =                $38,250

Use only 1,000 of the beginning inventory because that is all that is needed total 9,000

Ending inventory is always

Available                         $50,250
– Cost of goods sold     ($38,250)
= Ending inventory       $12,000

11.C. Periodic Weighted Average:

     Total $ Available                 $50,250 =
Total Quantity Available          12,000

= $4.1875 average cost per unit

    Units sold                               9,000
x Average cost per unit            $4.1875
= Cost of goods sold                 $37,687.50

Ending inventory is always

Available                              $50,250
– Cost of goods sold           ($37,687.50)
= Ending inventory             $12,562.50

12. 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 $4.30 $21,500
 
Sales during January      
1/11 5,000    
1/29 4,000    

Compute the value of ending inventory and cost of goods sold under the perpetual method using
A. FIFO
B. LIFO
C. Average cost

Answer
12.A) FIFO Perpetual

FIFO is the same for periodic and perpetual. Do the easier periodic computation.
See the answer to 11.A. for FIFO. It is the same for perpetual.

12.B) LIFO Perpetual

1st Set up purchases and sales in date order.
Only units on hand before the sale are included in units sold.
Start with the last units purchased just before the sale.

                                                                     Purchases                            Sales

                                                                         Cost                                   Cost
                                                                    Units    per-unit       Sold      per unit      CGS

January 1            Beginning Balance          4,000       $4
January 9            Purchased                       3,000       $4.25

January 11          Sold                                 5,000                    3,000       $4.25        $12,750 from 1/9
                                                                                                 2,000       $4             $ 8,000 from BI
January 24          Purchased                       5,000        $4.30

January 29          Sold                                 4,000                     4,000      $4.30        $17,200 from 1/24
                                                                                                                                   _______
                                                                                           Total CGS:                       $37,950

January 11 sales:
The last ones purchased before the sale are the 3,000 units at $4.25.
Sell those units first and then sell the other 2,000 (to get to 5,000 total) from the next one up, BI.

Beginning inventory has only 2,000 units after the sale.

January 29 sales:
The last ones purchased before the sale are the 5,000 units at $4.30).
Sell 4,000 of the units purchased on 1/24, leaving 1,000 from the 1/24 purchase available.

Ending Inventory:
Beginning Inventory             2,000 x $4.00 = $ 8,000
1/24 Purchase                     1,000 x  $4.30 = $ 4,300
Total Ending Inventory         3,000                 $12,300

The total available from the periodic method less cost of goods sold must equal ending inventory.

Total Available                  $50,250
– Cost of Goods Sold       ($37,950)
Ending Inventory              $12,300

12.C) Perpetual Moving Average:

A new moving average is computed after each purchase.
The cost of the sale is the most recent moving average cost per unit.
Sales do not change the moving average.

                                                                            Purchases                              Sales

                                                                            Cost                 Moving                 Cost
                                                     Units x per-unit = Total           Average          Sold x per unit = CGS

January 1         Beginning                4,000     $4.00 = $16,000
January 9         Purchased               3,000     $4.25 = $12,750
                  Moving Average             7,000                  $28,750        $4.11

January 11       Sold                         (5,000)                $(20,550)                       5,000    $4.11     $20,550
                 Inventory Balance            2,000                 $ 8,200

January 24       Purchased                5,000 $4.30       $ 21,500
                 Moving Average               7,000                 $ 29,700     $4.24

January 29       Sold                           (4,000)              $(16,960)                       4,000   $4.24   $16,960
                 Inventory Balance              3,000                $ 12,740                                                _______
                                                                                                 Total CGS:                                   $37,510

Units in Ending Inventory:          3,000
x Last moving Average Cost     $ 4.24
= Ending Inventory                 $12,720

Total available less cost of goods sold must equal ending inventory.

Total Available                   $50,250
– Cost of Goods Sold      ($37,510)
Ending Inventory               $12,740

The $20 difference is from rounding in the moving average cost.
An accountant would make a $20 adjustment either to CGS or to the Inventory balance. CGS plus ending inventory must equal total available.

13. 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
Purchase Discounts 8,000
Freight In 16,000
Selling Expense 450,000
Depreciation Expenses 110,000
Freight Out 29,000
Beginning Inventory 420,000
Purchases 1,350,000

Calculate cost of goods sold:

Answer
Cost of goods sold is computed:

Beginning Inventory 420,000
+ Purchases 1,350,000
– Purchase Returns (40,000)
– Purchase Discounts ( 8,000)
+ Freight in 16,000
– Ending Inventory (785,000)
= Cost of Goods Sold 953,000

Sales and operating expenses are reported separately from cost of goods sold.
Freight Out is an operating/selling expense.

14. A company had the following account balances and transactions during the year:

  During the Year Beginning of Year
Sales 200,000  
Cost of goods sold 100,000  
Purchases 85,000  
Inventory   45,000
Operating Expense 63,000  
Shipping Expense 12,000  
Purchase Returns 6,000  

At the end of the year the company counted inventory and determined the value using FIFO to be $28,000. The company uses the gross method to record inventory.

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.

Answer
Shipping expense is a selling expense and is not recorded with inventory transactions.
Operating expenses are not recorded with inventory transactions.

14.A Periodic – gross method:

Sales:
Accounts receivable (cash)   200,000
          Sales                                    200,000

(cost of inventory sold is not recorded)

Purchases:
Purchases                        85,000
              Accounts Payable           85,000

Purchase Returns:
Accounts Payable             6,000
         Purchase Returns            6,000

Adjustment at end of period:

Cost of Goods sold       96,000
Purchase Returns           6,000
Inventory (ending)         28,000
          Purchases                      85,000
           Inventory (beginning)    45,000

                         Or

Cost of Goods sold       96,000
Purchase Returns           6,000
            Purchases                     85,000
            Inventory                       17,000

Move purchases and purchase returns to cost of goods sold (make the balance = 0)
Ending inventory must be equal to what you really have on hand. (17,000 adjustment)
Cost of goods sold is the debit amount required to make the entry balance

 

14.B Perpetual – gross method:

Sales:
Accounts receivable (cash)        200,000
           Sales                                      200,000

Cost of Goods Sold          100,000
             Inventory                       100,000

Purchases:
Inventory                             85,000
            Accounts Payable          85,000


Purchase Returns:

Accounts Payable               6,000
           Inventory                         6,000

Adjustment at end of period:
Inventory                              4,000
         Cost of Goods Sold           4,000

 

Beginning inventory                         45,000
+ Purchases                                     85,000
– Purchase returns                            (6,000)
– Sales                                           (100,000)
= Ending inventory per account        24,000
– Ending inventory counted             (28,000)
= Adjustment to inventory                   4,000

Inventory must increase by 4,000 to get the balance in the inventory account to the amount actually on hand