Inventory

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1. The definition of inventory is

a. goods held for use in the company
b. assets held by the company
c. goods held only for sale to customer
d. assets that will be used to manufacture the product

Answer
C. Inventory is items held only for resale to customers. A company has many assets used in the business that are not for resale to customers.
2. When inventory is shipped to the customer F.O.B shipping

a. the customer owns the inventory when received
b. the customer owns the inventory when ordered
c. the customer owns the inventory when shipped
d. the customer does not own the inventory in transit

Answer
C. F.O.B. shipping means the customer owns the inventory on the date it is shipped and is the owner during transit. The word that follows FOB is when the buyer/customer takes title and is the owner.
3. Cost of goods sold is

a. the cost of making product
b. the cost of making or purchasing inventory sold this period
c. the cost of delivering goods to customers
d. the cost of selling goods to customers

Answer
B. Cost of goods sold is the cost of making/purchasing inventory that is sold this period. It must be sold this period to be part of cost of goods sold. If it is not sold this period it is still the asset inventory. The costs of delivering and selling goods are operating expenses reported as selling expenses.
4. A company will use the gross method for recording inventory purchases when

a. the company expects to take the cash discount
b. the company expects it will not take the cash discount
c. the supplier requires the company to pay before full payment is due
d. the price on the invoice is stated as gross

Answer
B. A company should record the purchase at the full amount of the purchase cost, the gross amount, when the company does not expect to take the discount offered. The company should record the purchase at the amount the company expects to pay. A supplier offers terms and does not require early payment.
5. When the same inventory items are purchased at different costs per item

a. FASB gives you a choice of FIFO, LIFO or Weighted average
b. cost is easy to determine and no method is required
c. the highest cost is used for inventory for conservatism
d. the lowest cost is used for inventory for conservatism

Answer
A. In this situation, the company does not know which cost was paid for the items sold because all items look the same on the warehouse shelf. Since a company can’t determine the exact cost of the items sold, one of the three methods must be used to estimate the cost of items sold.
6. When using the FIFO inventory method:

a. items purchased last are assumed to be sold first
b. items purchased first are assumed to be sold first
c. items purchased first are assumed to be sold last
d. net income will always be higher than when LIFO is used

Answer
B. FIFO means first purchased (in) are the first sold (out). Whether or not net income is higher or lower depends on if inventory items are incurring inflation or deflation.
7. When using the LIFO inventory method

a. items purchased last are assumed to be sold first
b. items purchased first are assumed to be sold first
c. items purchased last are assumed to be sold last
d. net income will always be higher than when FIFO is used

Answer
A. LIFO means last purchased (in) is the first sold (out). Whether or not net income is higher or lower depends on if inventory items are incurring inflation or deflation.
8. The weighted average inventory method uses the average of

a. items purchased during the period
b. total items available during the period
c. prior period ending inventory balances
d. items sold during the period

Answer
B. The average is the average of what was available during the period. Beginning inventory plus all purchases equals available.
9. Which of the following businesses would use the specific identification method to value inventory?

a. a grocery store
b. Walmart
c. a jewelry store
d. a convenience store

Answer
C. Specific identification can only be used when each item purchased has a different description and is easily identified. This occurs with jewelry inventory. The other types of retailers will purchase the same items at different costs during the period and will not be able to tell the difference in cost for what was sold.
10. Which method gives a higher cost of goods sold in times of inflation?

a. FIFO
b. LIFO
c. Weighted average
d. The same inventory is sold so the cost of goods sold is the same under all methods.

Answer
B. Cost of goods sold is the cost of items sold. LIFO means the last ones purchased are sold first. Last ones purchased have a higher cost in times of is inflation.
11. Why is it necessary to use a method to value inventory?

a. every item is the same and has the same cost
b. the same item may have different costs when purchased
c. the company wants to report income as high as possible
d. some items of inventory take longer to sell than other items

Answer
B. When the company buys the same item at different prices, it can not tell which price was sold when. The items all look the same in the warehouse. A method must be used to consistently determine which costs were sold.
12. Which method gives the highest net income?

a. FIFO
b. LIFO
c. Weighted average
d. it depends on if the items in inventory are incurring inflation or deflation

Answer
D. Net income is affected by cost of goods sold. Cost of goods sold is equal to the cost of the items sold. In times of inflation, the higher costs are purchased last, so higher cost of goods sold gives lower net income under LIFO (last ones are considered sold). In times of deflation, lower costs are purchased last, so lower cost of goods sold gives higher net income under FIFO.
13. A company will use the perpetual method of recording inventory transactions when

a. the cost of the sale can not be reliably estimated at the time of the sale
b. the company’s inventory system does not record a sale at the time of the sale
c. the company records the cost of the sale when the sale is recorded
d. none of the above

Answer
C. The perpetual inventory method records the cost of the items sold at the same time the sale is recorded. In order to do this, the cost of items available for the sale and the date the items were purchased must be tracked in the company’s inventory system.
14. Which of the following gives the same ending inventory value when using periodic and perpetual?

a. LIFO
b. FIFO
c. Weighted Average
d. none of the above

Answer
B. FIFO gives the same ending inventory value when using either the periodic or the perpetual method. The first items purchases are always the same first items sold under both methods regardless of the date of the sale.
15. The periodic method of recording inventory

a. adjusts the inventory account when inventory is purchased or sold
b. adjusts the inventory account when inventory is sold only
c. adjusts the inventory account for reductions in fair market value
d. adjusts the inventory account to the cost of inventory held at the end of the period only

Answer
D. When using the periodic method, the inventory account is not used until the end of the period adjustment to get inventory equal to what is really on hand. Purchases are recorded to the “purchases” expense account. Sales are not recorded because the company does not track the cost of what is sold at the time it is sold. (c.) is done with lower of cost or market.
16. The perpetual method of recording inventory

a. adjusts the inventory account when inventory is purchased or sold
b. adjusts the inventory account when inventory is sold only
c. adjusts the inventory account for changes in fair market value
d. adjusts the inventory account to the cost of inventory held at the end of the period only

Answer
A. When using the perpetual method, the inventory account is used to record all movement of inventory: purchases, returns, and sales. (d) is also done at the end of the period, but it is not the only thing recorded to the inventory account.
17. An unaccounted for decrease in inventory is called

a. damaged inventory
b. lost inventory
c. shrink
d. cost of goods held

Answer
C. Shrink is the word used for reduction in inventory that the company can not identify. This is usually caused by employee error or theft.
18. When using the periodic method, the purchases account is adjusted to 0 because

a. the company did not really purchase inventory this period
b. the company transfers this account to retained earnings
c. the company transfers this account to cost of goods sold which was not recorded during the period
d. the company adds the amount in this account to cost of goods sold recorded during the period

Answer
C. Under the periodic method, inventory is recorded to the expense account purchases. An expense does not occur when an asset is purchased. The expense occurs when the inventory is provided to the customer, which is cost of goods sold. The expense in the purchases account is moved to the cost of goods sold account. The adjustment is necessary to move purchases to cost of goods sold and then adjust cost of goods sold for changes in inventory.
19. The periodic method of inventory is used when

a. all inventory movement is tracked and recorded
b. the cost of inventory sold is not recorded when it is sold
c. the cost of purchases is recorded when it is sold
d. it is not known how much inventory items cost

Answer
B. Company’s that use the periodic method do not track the cost of inventory at the time it is sold. The cost of goods sold is determined using purchases and inventory balances (CGS calculation). Companies always know what they paid for inventory (d) (a. & c.) is the perpetual method.
20. When the value of ending inventory is incorrectly reported

a. only the balance sheet is incorrectly reported
b. cost of goods sold is correctly reported
c. net income is correctly reported
d. the balance sheet and income statement are incorrectly reported

Answer
D. Cost of goods sold is calculated using beginning and ending inventory. When inventory is incorrect, cost of goods sold is incorrect also. Inventory is reported on the balance sheet and cost of goods sold is reported on the income statements, so both statements will be incorrect when there is an error in inventory balances.
21. When ending inventory is overstated

a. cost of goods sold is understated
b. cost of goods sold is overstated
c. assets are understated
d. net income is understated

Answer
A. Beginning inventory + Purchases – Ending Inventory = Cost of goods sold. When ending inventory is too high too much is subtracted and cost of goods sold is too low. Ending inventory always has the opposite effect on cost of goods sold.
22. Which of the following formulas is the correct computation of cost of goods sold?

a. beginning inventory less net purchases less ending inventory
b. ending inventory plus net purchases less beginning inventory
c. gross profit plus net purchases less ending inventory
d. beginning inventory plus net purchases less ending inventory

Answer
D. Beginning inventory + Net Purchases – Ending Inventory = Cost of goods sold. Net purchases = purchases + freight in – purchase returns – purchase discounts
23. When using the perpetual method for computing the value of ending inventory value the moving average will change when

a. a sale occurs
b. a purchase occurs
c. both a. and b.
d. it does not change and is the same for the entire period

Answer
B. The moving average is the average purchase cost. The average purchase cost will change every time there is a purchase. A sale does not change the average purchase cost