File:ch06,Chapter6:ReportingandAnalyzingInventory

MultipleChoice

1.Whenisaphysicalinventoryusuallytaken?
a)Whenthecompanyhasitsgreatestamountofinventory.
b)Whengoodsarenotbeingsoldorreceived.
c)Attheendofthecompanysfiscalyear.
d)Bothb)andc).

Ans:d
ResponseA:Aphysicalinventorycountisusuallytakenattheendofthecompanysfiscalyear,not
whenthecompanyhasthegreatestamountofinventory(DeterminingInventoryQuantities).
ResponseB:Whenaphysicalinventorycountistaken,thecompanyusuallyshutsdownoperationsfora
shorttime.Duringthistime,goodsareusuallyneithersoldnorreceived.However,disabetteranswer
(DeterminingInventoryQuantities).
ResponseC:Aphysicalinventorycountisusuallytakenattheendofthecompanysfiscalyear,butdis
abetteranswer(DeterminingInventoryQuantities).
ResponseD:Correct!

2.Whichofthefollowingshouldnotbeincludedinthephysicalinventoryofacompany?
a)Goodsheldonconsignmentfromanothercompany.
b)Goodsshippedonconsignmenttoanothercompany.
c)GoodsintransitfromanothercompanyshippedFOBshippingpoint.
d)Alloftheaboveshouldbeincluded.

Ans:a
ResponseA:Correct!
ResponseB:Goodsshippedonconsignmenttoanothercompanyshouldbeincludedinthephysical
inventoryofthefirmthatshippedtheconsignedgoods(ConsignedGoods).
ResponseC:GoodsintransitfromanothercompanyshippedFOBshippingpointshouldbeincludedin
thephysicalinventoryofthefirmtowhomthegoodsarebeingshippedbecausethetitlepasseswhenthe
goodsleavethesellersplaceofbusiness(Illustration61).
ResponseD:Becauseansweraiscorrect,thisanswercannotbecorrect.

3.KamCompanyhasthefollowingunitsandcosts:
 Units UnitCost
Inventory,Jan.1 8,000 $11
Purchase,June19 13,000 12
Purchase,Nov.8 5,000 13

If9,000unitsareonhandatDecember31,whatisthecostoftheendinginventoryunderFIFO?
a)$99,000.
b)$108,000.
c)$113,000.
d)$117,000.

Ans:c
ResponseA:Thisfigurecomesfrommultiplying9,000unitstimestheearliestcostof$11perunit.
EndinginventoryunderFIFOusesthemostrecentcostsincomputingendinginventory.Itiscomputed
asfollows:$65,000(5,000X$13)+$48,000(4,000X$12)=$113,000(FirstIn,Firstout,FIFO).
ResponseB:Thisfigurecomesfrommultiplying9,000unitstimesthecostof$12perunit.Ending
inventoryunderFIFOusesthemostrecentcostsincomputingendinginventory.Itiscomputedas
follows:$65,000(5,000X$13)+$48,000(4,000X$12)=$113,000(FirstIn,Firstout,FIFO).
ResponseC:Correct!
ResponseD:Thisfigurecomesfrommultiplying9,000unitstimesthemostrecentcostof$13perunit.
EndinginventoryunderFIFOusesthemostrecentcostsincomputingendinginventory.Itiscomputed
asfollows:$65,000(5,000X$13)+$48,000(4,000X$12)=$113,000(FirstIn,Firstout,FIFO).

4.KamCompanyhasthefollowingunitsandcosts.
Units Unit Cost
Inventory, Jan. 1 8,000 $11
Purchase, June 19 13,000 12
Purchase, Nov. 8 5,000 13

WhatisthecostoftheendinginventoryunderLIFO?
a)$113,000.
b)$108,000.
c)$99,000.
d)$100,000.

Ans:d
ResponseA:ThisvalueisendinginventoryunderFIFO(Firstin,Firstout,FIFO).Endinginventory
underLIFOusestheearliestcostsincomputingendinginventory.Itiscomputedasfollows:$88,000
(8,000X$11)+$12,000(1,000X$12)=$100,000(LastIn,Firstout,LIFO).
ResponseB:Thisfigurecomesfrommultiplying9,000unitstimesthecostof$12perunit.Ending
inventoryunderLIFOusestheearliestcostsincomputingendinginventory.Itiscomputedasfollows:
$88,000(8,000X$11)+$12,000(1,000X$12)=$100,000(LastIn,Firstout,LIFO).
ResponseC:Thisfigurecomesfrommultiplying9,000unitstimestheearliestcostof$11perunit.
EndinginventoryunderLIFOusestheearliestcostsincomputingendinginventory.Itiscomputedas
follows:$88,000(8,000X$11)+$12,000(1,000X$12)=$100,000(LastIn,Firstout,LIFO).
ResponseD:Correct!

5.Inperiodsofrisingprices,LIFOwillproduce:
a)highernetincomethanFIFO.
b)thesamenetincomeasFIFO.
c)lowernetincomethanFIFO.
d)highernetincomethanaveragecosting.

Ans:c
ResponseA:Inperiodsofrisingprices,LIFOproducesthelowestnetincomeofallthecostflow
methodsbecausecostofgoodssoldincludesthehigher,morerecentcosts.Becausecostofgoodssold
underLIFOishigherthanalltheothercostflowmethods,netincomeunderLIFOwillbelower
(IncomeStatementEffects).
ResponseB:Inperiodsofrisingprices,LIFOproducesthelowestnetincomeofallthecostflow
methodsbecausecostofgoodssoldincludesthehigher,morerecentcosts.Becausecostofgoodssold
underLIFOishigherthanalltheothercostflowmethods,netincomeunderLIFOwillbelower
(IncomeStatementEffects).
ResponseC:Correct!
ResponseD:Inperiodsofrisingprices,LIFOproducesthelowestnetincomeofallcostflowmethods
becausecostofgoodssoldincludesthehigher,morerecentcosts.Becausecostofgoodssoldunder
LIFOishigherthanalltheothercostflowmethods,netincomeunderLIFOwillbelower(Income
StatementEffects).

6.Considerationsthataffecttheselectionofaninventorycostingmethoddonotinclude:
a)taxeffects.
b)balancesheeteffects.
c)incomestatementeffects.
d)perpetualversusperiodicinventorysystem.

Ans:d
ResponseA:Taxeffectscanbeanimportantconsiderationintheselectionofacostflowmethod
(FinancialStatementandTaxEffectsofCostFlowMethods).
ResponseB:Balancesheeteffectscanbeanimportantconsiderationintheselectionofacostflow
method(FinancialStatementandTaxEffectsofCostFlowMethods).
ResponseC:Incomestatementeffectscanbeanimportantconsiderationintheselectionofacostflow
method(FinancialStatementandTaxEffectsofCostFlowMethods).
ResponseD:Correct!
7.Thelowerofcostormarketruleforinventoryisanexampleoftheapplicationof:
a)theconservatismconstraint.
b)thehistoricalcostprinciple.
c)thematerialityconstraint.
d)theeconomicentityassumption.

Ans:a
ResponseA:Correct!
ResponseB:Theuseofthelowerofcostormarketruleforinventoryisanexampleoftheapplicationof
theconservatismconstraint,notthehistoricalcostprinciple(ValuingInventoryattheLowerofCostor
Market).
ResponseC:Theuseofthelowerofcostormarketruleforinventoryisanexampleoftheapplicationof
theconservatismconstraint,notthematerialityconstraint(ValuingInventoryattheLowerofCostor
Market).
ResponseD:Theuseofthelowerofcostormarketruleforinventoryisanexampleoftheapplicationof
theconservatismconstraint,nottheeconomicentityassumption(ValuingInventoryattheLowerof
CostorMarket).

8.Whichofthesewouldcausetheinventoryturnoverratiotoincreasethemost?
a)Increasingtheamountofinventoryonhand.
b)Keepingtheamountofinventoryonhandconstantbutincreasingsales.
c)Keepingtheamountofinventoryonhandconstantbutdecreasingsales.
d)Decreasingtheamountofinventoryonhandandincreasingsales.

Ans:d
ResponseA:Increasinginventoryonhandwillcausetheinventoryturnoverratiotodecrease,not
increase(InventoryTurnoverRatio).
ResponseB:Increasingsaleswillcausetheinventoryturnoverratiotoincreaseiftheamountof
inventoryonhandstaysthesame.However,theincreasewillbesmallerthanthecasewheninventory
onhandisalsodecreased,asnotedinanswerd(InventoryTurnoverRatio).
ResponseC:Decreasingsaleswillcausetheinventoryturnoverratiotodecreaseiftheamountof
inventoryonhandstaysthesame.(InventoryTurnoverRatio).
ResponseD:Correct!

9.TheLIFOreserveis:
a)thedifferencebetweenthevalueoftheinventoryunderLIFOandthevalueunderFIFO.
b)anamountusedtoadjustinventorytothelowerofcostormarket.
c)thedifferencebetweenthevalueoftheinventoryunderLIFOandthevalueunderaveragecost.
d)anamountusedtoadjustinventorytohistoricalcost.

Ans:a
ResponseA:Correct!
ResponseB:TheLIFOreserveistheamountofdifferenceinendinginventoryifthefirmhadbeen
usingFIFOinsteadofLIFO,nottheamountusedtoadjustinventorytothelowerofcostormarket
(AnalystsAdjustmentforLIFOReserve).
ResponseC:TheLIFOreserveistheamountofdifferenceinendinginventoryifthefirmhadbeen
usingFIFOinsteadofLIFO,notthedifferencebetweenLIFOandaveragecost(AnalystsAdjustment
forLIFOReserve).
ResponseD:TheLIFOreserveistheamountofdifferenceinendinginventoryifthefirmhadbeen
usingFIFOinsteadofLIFO,nottheamountusedtoadjusttohistoricalcost(AnalystsAdjustmentfor
LIFOReserve).

*10.Inaperpetualinventorysystem,
a)LIFOcostofgoodssoldwillbethesameasinaperiodicinventorysystem.
b)averagecostsarebasedentirelyonunitcostsimpleaverages.
c)anewaverageiscomputedundertheaveragecostmethodaftereachsale.
d)FIFOcostofgoodssoldwillbethesameasinaperiodicinventorysystem.

Ans:d
ResponseA:ThereisadifferencebetweenthecostofgoodssoldamountsbetweenLIFOappliedina
periodicsystemandLIFOappliedinaperpetualsystem(InventoryCostFlowMethodsinPerpetual
InventorySystems,LastIn,FirstOut).
ResponseB:Inaperpetualinventorysystem,averagecostsarebasedonamovingaverage,notsimple
averages(InventoryCostFlowMethodsinPerpetualInventorySystems,AverageCost).
ResponseC:Inaperpetualinventorysystem,anewaverageiscomputedaftereachpurchase,notafter
eachsale(InventoryCostFlowMethodsinPerpetualInventorySystems,AverageCost).
ResponseD:Correct!

*11.FranCompanysendinginventoryisunderstatedby$4,000.Theeffectsofthiserroronthecurrent
yearscostofgoodssoldandnetincome,respectively,are:
a)understatedandoverstated.
b)overstatedandunderstated.
c)overstatedandoverstated.
d)understatedandunderstated.

Ans:b
ResponseA:Ifendinginventoryisunderstatedby$4,000,theamountsubtractedfromgoodsavailable
forsaleisunderstated.Thiscausescostofgoodstobeoverstated.Thisinturncausesnetincometobe
understated(InventoryErrors,IncomeStatementEffects).
ResponseB:Correct!
ResponseC:Ifendinginventoryisunderstatedby$4,000,theamountsubtractedfromgoodsavailable
forsaleisunderstated.Thiscausescostofgoodstobeoverstated.Thisinturncausesnetincometobe
understated(InventoryErrors,IncomeStatementEffects).
ResponseD:Ifendinginventoryisunderstatedby$4,000,theamountsubtractedfromgoodsavailable
forsaleisunderstated.Thiscausescostofgoodstobeoverstated.Thisinturncausesnetincometobe
understated(InventoryErrors,IncomeStatementEffects).