Quiz on Inventories

Part I

F 1. In a period of rising prices, the use of FIFO relates the current high costs of acquiring goods with rising
sales prices. As a result, FIFO tends to have a stabilizing effect on gross profit margins.

F 2. The gross method of accounting for purchase discounts is theoretically preferable to the net method.

F 3. The gross method of accounting for purchase discounts reflects the fact that discounts not taken are in
effect credit-related expenditures incurred for failure to pay within the discount period.

T 4. The specific identification method is a highly objective approach to matching historical costs with
revenues.

T 5. The specific identification, as an inventory method, matches the flow of recorded costs to the physical
flow of goods.

T 6. With FIFO, inventories are reported on the balance sheet at or near their current value.

T 7. Unlike other inventory cost methods, the average cost approach provides the same unit cost for items of
equal utility.

T 8. FIFO provides income tax savings during periods of falling prices.

T 9. Inventories are measured at net realizable value (NRV).

F 10. Inventory write-downs and reversals of write-downs are always recognized in profit or loss.

Part II

1. When using a perpetual inventory system,

a. no Purchases account is used.
b. a Cost of Goods Sold account is used.
c. two entries are required to record a sale.
d. all of these.

2. Goods in transit which are shipped f.o.b. shipping point should be

a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.

3. Which of the following items should be included in a company's inventory at the balance sheet date?
a. Goods in transit which were purchased f.o.b. destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at his or her convenience.
d. None of these.

Use the following information for the next two questions:

During 2004 Elway Corporation transferred inventory to Howell Corporation and agreed to repurchase the
merchandise early in 2005. Howell then used the inventory as collateral to borrow from Norwalk Bank,
remitting the proceeds to Elway. In 2005 when Elway repurchased the inventory, Howell used the proceeds
to repay its bank loan.

4. This transaction is known as a(n)

a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.

5. On whose books should the cost of the inventory appear at the December 31, 2004 balance sheet date?
 a. Elway Corporation
b. Howell Corporation
c. Norwalk Bank
d. Howell Corporation, with Elway making appropriate note disclosure of the transaction

6. Dane Co. received merchandise on consignment. As of March 31, Dane had recorded the transaction as a
purchase and included the goods in inventory. None of the consigned goods have been sold during the
period. The effect of this on its financial statements for March 31 would be
a. no effect.
b. net income was correct and current assets and current liabilities were overstated.
c. net income, current assets, and current liabilities were overstated.
d. net income and current liabilities were overstated.

7. Eller Co. received merchandise on consignment. As of January 31, Eller included the goods in inventory,
but did not record the transaction. The effect of this on its financial statements for January 31 would be
a. net income, current assets, and retained earnings were overstated.
b. net income was correct and current assets were understated.
c. net income and current assets were overstated and current liabilities were understated.
d. net income, current assets, and retained earnings were understated.

8. On June 15, 2004, Stilley Corporation accepted delivery of merchandise which it purchased on account.
As of June 30, Stilley had not recorded the transaction or included the merchandise in its inventory.
Stilley uses the periodic inventory system. The effect of the error on Stilley’s balance sheet on June 30,
2004 would be
a. assets and stockholders' equity were overstated but liabilities were not affected.
b. stockholders' equity was the only item affected by the omission.
c. assets, liabilities, and stockholders' equity were understated.
d. none of these.

9. The use of a Discounts Lost account implies that the recorded cost of a purchased inventory item is its
a. invoice price.
b. invoice price plus the purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.

10. In situations where there is a rapid turnover, an inventory method which produces a balance sheet
valuation similar to the first-in, first-out method is
a. average cost. c. joint cost.
b. base stock. d. prime cost.
Part III

1. The following information is available for Kerr Company for 2004:

Freight-in ₱ 60,000
Purchase returns 150,000
Selling expenses 300,000
Ending inventory 520,000

The cost of goods sold is equal to 300% of selling expenses. What is the cost of goods available for sale?
a. ₱900,000. c. ₱1,330,000.
b. ₱1,480,000. d. ₱1,420,000.

Use the following information for the next two questions:

Queen Co. records purchases at net amounts. On May 5 Queen purchased merchandise on account, ₱32,000,
terms 2/10, n/30. Queen returned ₱2,000 of the May 5 purchase and received credit on account. At May 31
the balance had not been paid.

2. The amount to be recorded as a purchase return is

a. ₱1,800. b. ₱2,040. c. ₱2,000. d. ₱1,960.

3. By how much should the account payable be adjusted on May 31?

a. ₱0. b. ₱680. c. ₱640. d. ₱600.
Use the following information for the next two questions:
The following information was available from the inventory records of Moen Company for January:
Units Unit Cost Total Cost
Balance at January 1 3,000 ₱9.77 ₱29,310
Purchases:
January 6 2,000 10.30 20,600
January 26 2,700 10.71 28,917

Sales:
January 7 (2,500)
January 31 (3,200)
Balance at January 31 2,000

4. Assuming that Moen does not maintain perpetual inventory records, what should be the inventory at
January 31, using the weighted-average inventory method, rounded to the nearest peso?
a. ₱21,010. b. ₱20,474. c. ₱20,520. d. ₱20,720.

5. Assuming that Moen maintains perpetual inventory records, what should be the inventory at January 31,
using the moving-average inventory method, rounded to the nearest peso?
a. ₱21,010. b. ₱20,474. c. ₱20,520. d. ₱20,720.

6. James Co. has the following data related to an item of inventory:

Inventory, March 1 200 units @ ₱4.20
Purchase, March 7 700 units @ ₱4.40
Purchase, March 16 140 units @ ₱4.50
Inventory, March 31 300 units

The value assigned to cost of goods sold if James uses FIFO is

a. ₱1,334. b. ₱1,280. c. ₱3,270. d. ₱3,216.

Use the following information for the next two questions:

Transactions for the month of June were:
Purchases Sales
June 1 (balance) 1,200 @ ₱3.20 June 2 900 @ ₱5.50
3 3,300 @ 3.10 6 2,400 @ 5.50
7 1,800 @ 3.30 9 1,500 @ 5.50
15 2,700 @ 3.40 10 600 @ 6.00
22 750 @ 3.50 18 2,100 @ 6.00
25 450 @ 6.00

7. Assuming that perpetual inventory records are kept in pesos, the ending inventory on a FIFO basis is
a. ₱5,700. b. ₱5,760. c. ₱6,195. d. ₱6,300.

8. Assuming that perpetual inventory records are kept in units only, the ending inventory on an average-
cost basis, rounded to the nearest dollar, is
a. ₱5,940. b. ₱5,868. c. ₱5,910. d. ₱5,985.

9. The following information applied to Flynn, Inc. for 2004:

Merchandise purchased for resale ₱400,000
Freight-in 16,000
Freight-out 10,000
Purchase returns 4,000

Flynn's 2004 inventoriable cost was

a. ₱400,000. b. ₱406,000. c. ₱412,000. d. ₱422,000.

10. Tysen Retailers purchased merchandise with a list price of ₱90,000, subject to trade discounts of 20%
and 10%, with no cash discounts allowable. Tysen should record the cost of this merchandise as
a. ₱63,000. b. ₱64,800. c. ₱70,200. d. ₱90,000.

Part IV
1. On October 1, 20x1, the warehouse of ABC Co. and all inventories contained therein were damaged by flood.
Off-site back up of data base shows the following information:

Inventory, Jan. 1 10,000

Accounts payable, Jan. 1 3,000
Accounts payable, Sept. 30 2,000
Payments to suppliers 50,000
Freight-in 500
Purchase returns 500
Sales from Jan. to Sept. 80,000
Sales returns 5,000
Sales discounts 2,000
Gross profit rate based on sales 30%

Additional information:
Goods in transit as of October 1, 20x1 amounted to ₱1,000, cost of goods out on consignment is ₱1,200, and
materials damaged by flood can be sold at a salvage value of ₱1,800. How much is the inventory loss due to the
flood?
a. 3,000 c. 4,400
b. 2,500 d. 4,900

2. On October 1, 20x1, the warehouse of ABC Co. and all inventories contained therein were razed by fire. Off-
site back up of data base shows the following information:
Inventory, Jan. 1 20,000
Net purchases 190,000
Net sales from Jan. to Sept. 240,000
Gross profit rate based on cost 25%

Twenty percent of the inventory contained in the warehouse has been salvaged from the fire while half is partially
damaged and can be sold as scrap at thirty percent of its cost. How much is the inventory loss due to the fire?
a. 18,000 c. 9,000
b. 5,400 d. 11,700

Use the following information for the next two questions:

Presented below is information pertaining to ABC Co.:
Cost Retail
Inventory, January 1 21,750 35,000
Purchases 138,250 200,750
Freight-In 5,000 -
Purchase discounts 1,250 -
Purchase returns 13,000 21,500
Departmental Transfers-In (Debit) 2,500 3,750
Departmental Transfers-Out (Credit) 2,000 3,000
Markups 15,000
Markup cancellations 5,000
Markdowns 30,000
Markdown cancellations 7,500
Abnormal spoilage (theft and casualty loss) 12,500 17,500
Sales 109,500
Sales returns 6,250
Sales discounts 2,500
Employee discounts 1,250
Normal spoilage (shrinkage and breakages) 500

3. How much is the ending inventory under the Average cost method?
a. 60,750
b. 60,000
c. 61,050
d. 62,400

4. How much is the ending inventory under the FIFO cost method?
a. 60,750
b. 60,000
c. 61,050
d. 62,400