TRUE FALSE—Conceptual

1. A manufacturing concern would report the cost of units only partially processed as inventory in the balance sheet. T

2. Both merchandising and manufacturing companies normally have multiple inventory accounts. F

3. When using a perpetual inventory system, freight charges on goods purchased are debited to Freight-In. F

4. If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier delivers the goods to the
common carrier. F

5. If ending inventory is understated, then net income is understated. T

6. If both purchases and ending inventory are overstated by the same amount, net income is not affected. T

7. Freight charges on goods purchased are considered a period cost and therefore are not part of the cost of the
inventory. F

8. Purchase Discounts Lost is a financial expense and is reported in the “other expenses and losses” section of the
income statement. T

9. The cost flow assumption adopted must be consistent with the physical movement of the goods. F

10. In all cases when FIFO is used, the cost of goods sold would be the same whether a perpetual or periodic system is
used. T

11. The change in the LIFO Reserve from one period to the next is recorded as an adjustment to Cost of Goods Sold. T

12. Many companies use LIFO for both tax and internal reporting purposes. F

13. LIFO liquidation often distorts net income, but usually leads to substantial tax savings. F

14. LIFO liquidations can occur frequently when using a specific-goods approach. T

15. Dollar-value LIFO techniques help protect LIFO layers from erosion. T

16. The dollar-value LIFO method measures any increases and decreases in a pool in terms of total dollar value and
physical quantity of the goods. F

17. A disadvantage of LIFO is that it does not match more recent costs against current revenues as well as FIFO. F

18. The LIFO conformity rule requires that if a company uses LIFO for tax purposes, it must also use LIFO for financial
accounting purposes. T

19. Use of LIFO provides a tax benefit in an industry where unit costs tend to decrease as production increases. F

20. LIFO is inappropriate where unit costs tend to decrease as production increases. T
MULTIPLE CHOICE—Conceptual

21. Which of the following inventories carried by a manufacturer is similar to the merchandise inventory of a retailer?
c. Finished goods.

22. Where should raw materials be classified on the balance sheet?

b. Inventory.

23. Which of the following accounts is not reported in inventory?

a. Raw materials.
Ans: b. Equipment.
c. Finished goods.
d. Supplies.

24. Why are inventories included in the computation of net income?

a. To determine cost of goods sold.

25. Which of the following is a characteristic of a perpetual inventory system?

c. Cost of goods sold is recorded with each sale.

26. How is a significant amount of consignment inventory reported in the balance sheet?
a. The inventory is reported separately on the consignor's balance sheet.

27. Where should goods in transit that were recently purchased f.o.b. destination be included on the balance sheet?
d. Not on the balance sheet.

28. If a company uses the periodic inventory system, what is the impact on net income of including goods in transit
f.o.b. shipping point in purchases, but not ending inventory?
b. Understate net income.

29. If a company uses the periodic inventory system, what is the impact on the current ratio of including goods in transit
f.o.b. shipping point in purchases, but not ending inventory?
b. Understate the current ratio.

30. What is consigned inventory?

c. Goods that are shipped, but title remains with the shipper.

31. 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.
Ans: d. all of these.

32. Goods in transit which are shipped f.o.b. shipping point should be
b. included in the inventory of the buyer.

33. Goods in transit which are shipped f.o.b. destination should be

a. included in the inventory of the seller.
34. 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.
Ans: d. None of these.
Goods in transit which were purchased f.o.b. shipping point.

Use the following information for questions 35 and 36. During 2010 Carne Corporation transferred inventory to Nolan
Corporation and agreed to repurchase the merchandise early in 2011. Nolan then used the inventory as collateral to
borrow from Norwalk Bank, remitting the proceeds to Carne. In 2011 when Carne repurchased the inventory, Nolan
used the proceeds to repay its bank loan.

35. This transaction is known as a(n)

d. product financing arrangement.

36. On whose books should the cost of the inventory appear at the December 31, 2010 balance sheet date?
a. Carne Corporation

37. Goods on consignment are

b. recorded in a Consignment Out account which is an inventory account.

38. Valuation of inventories requires the determination of all of the following except
a. the costs to be included in inventory.
b. the physical goods to be included in inventory.
Ans: c. the cost of goods held on consignment from other companies.
d. the cost flow assumption to be adopted.

39. The accountant for the Pryor Sales Company is preparing the income statement for 2010 and the balance sheet at
December 31, 2010. Pryor uses the periodic inventory system. The January 1, 2010 merchandise inventory balance will
appear
b. only in the cost of goods sold section of the income statement.

40. If the beginning inventory for 2010 is overstated, the effects of this error on cost of goods sold for 2010, net income
for 2010, and assets at December 31, 2011, respectively, are
b. overstatement, understatement, no effect

41. The failure to record a purchase of merchandise on account even though the goods are properly included in the
physical inventory results in
d. an understatement of liabilities and an overstatement of owners' equity.

42. Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded the transaction as a purchase
and included the goods in inventory. The effect of this on its financial statements for March 31 would be
b. net income was correct and current assets and current liabilities were overstated.

43. Green Co. received merchandise on consignment. As of January 31, Green 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.
 44. Feine Co. accepted delivery of merchandise which it purchased on account. As of December 31, Feine had recorded
the transaction, but did not include the merchandise in its inventory. The effect of this on its financial statements for
December 31 would be
a. net income, current assets, and retained earnings were understated.

45. On June 15, 2010, Wynne Corporation accepted delivery of merchandise which it purchased on account. As of June
30, Wynne had not recorded the transaction or included the merchandise in its inventory. The effect of this on its
balance sheet for June 30, 2010 would be
Assets and liabilities were understated but stockholders’ equity was not affected.

46. What is the effect of a $50,000 overstatement of last year's inventory on current years ending retained earning
balance?
b. No effect.

47. Which of the following is a product cost as it relates to inventory?

a. Selling costs.
b. Interest costs.
Ans: c. Raw materials.
d. Abnormal spoilage.

48. Which of the following is a period cost?

a. Labor costs.
b. Freight in.
c. Production costs.
Ans: d. Selling costs.

49. Which method may be used to record cash discounts a company receives for paying suppliers promptly?
a. Net method.
b. Gross method.
c. Average method.
Ans: d. a and b.

50. Which of the following is included in inventory costs?

Ans: a. Product costs.
b. Period costs.
c. Product and period costs.
d. Neither product or period costs.

51. Which of the following is correct?

a. Selling costs are product costs.
Ans: b. Manufacturing overhead costs are product costs.
c. Interest costs for routine inventories are product costs.
d. All of these.

52. All of the following costs should be charged against revenue in the period in which costs are incurred except for
a. manufacturing overhead costs for a product manufactured and sold in the same accounting period.
b. costs which will not benefit any future period.
c. costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
Ans: d. costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.
53. Which of the following types of interest cost incurred in connection with the purchase or manufacture of inventory
should be capitalized as a product cost?
a. Purchase discounts lost
Ans: b. Interest incurred during the production of discrete projects such as ships or real estate projects
c. Interest incurred on notes payable to vendors for routine purchases made on a repetitive basis
d. All of these should be capitalized.

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

55. The use of a Purchase Discounts account implies that the recorded cost of a purchased inventory item is its
a. invoice price.

Use the following information for questions 56 and 57.

During 2010, which was the first year of operations, Oswald Company had merchandise purchases of $985,000 before
cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for
within 10 days of purchase. All of the goods available had been sold at year end.

56. Which of the following recording procedures would result in the highest cost of goods sold for 2010?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the
income statement
a. 1

57. Which of the following recording procedures would result in the highest net income for 2010?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the
income statement
c. Either 1 or 2 will result in the same net income.

58. When using the periodic inventory system, which of the following generally would not be separately accounted for in
the computation of cost of goods sold?
Ans: a. Trade discounts applicable to purchases during the period
b. Cash (purchase) discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in for merchandise purchased during the period

59. Costs which are inventoriable include all of the following except
a. costs that are directly connected with the bringing of goods to the place of business of the buyer.
b. costs that are directly connected with the converting of goods to a salable condition.
c. buying costs of a purchasing department.
Ans: d. selling costs of a sales department.

60. Which inventory costing method most closely approximates current cost for each of the following: Ending Inventory
Cost of Goods Sold
b. FIFO LIFO
 61. 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.

62. The pricing of issues from inventory must be deferred until the end of the accounting period under the following
method of inventory valuation:
b. weighted-average.

63. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory
valuation is
a. FIFO.

64. Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in
most manufacturing situations?
b. First-in, first-out

65. Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold
computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using
the LIFO method?
a. Prices decreased.

66. In a period of rising prices, the inventory method which tends to give the highest reported net income is
b. first-in, first-out.

67. In a period of rising prices, the inventory method which tends to give the highest reported inventory is
a. FIFO.

68. Tanner Corporation's inventory cost on its balance sheet was lower using first-in, first-out than it would have been
using last-in, first-out. Assuming no beginning inventory, in what direction did the cost of purchases move during the
period?
b. Down

69. In a period of rising prices, the inventory method which tends to give the highest reported cost of goods sold is
c. LIFO

70. Which of the following statements is not valid as it applies to inventory costing methods?
a. If inventory quantities are to be maintained, part of the earnings must be invested (plowed back) in
inventories when FIFO is used during a period of rising prices.
b. LIFO tends to smooth out the net income pattern by matching current cost of goods sold with current
revenue, when inventories remain at constant quantities.
c. When a firm using the LIFO method fails to maintain its usual inventory position (reduces stock on hand below
customary levels), there may be a matching of old costs with current revenue.
Ans: d. The use of FIFO permits some control by management over the amount of net income for a period
through controlled purchases, which is not true with LIFO.

71. The acquisition cost of a certain raw material changes frequently. The book value of the inventory of this material at
year end will be the same if perpetual records are kept as it would be under a periodic inventory method only if the
book value is computed under the
d. FIFO method.
 72. Which of the following is a reason why the specific identification method may be considered ideal for assigning costs
to inventory and cost of goods sold?
c. The cost flow matches the physical flow.

73. In a period of rising prices which inventory method generally provides the greatest amount of net income? a.
Average cost. b. FIFO. c. LIFO. d. Specific identification.

74. In a period of falling prices, which inventory method generally provides the greatest amount of net income?
c. LIFO

75. What is a LIFO reserve?

a. The difference between the LIFO inventory and the amount used for internal reporting purposes.

76. When a company uses LIFO for external reporting purposes and FIFO for internal reporting purposes, an Allowance
to Reduce Inventory to LIFO account is used. This account should be reported
d. on the balance sheet in the Current Assets section.

77. What happens when inventory in base year dollars decreases?

c. LIFO layer is liquidated.

78. How might a company obtain a price index in order to apply dollar-value LIFO?
a. Calculate an index based on recent inventory purchases.
b. Use a general price level index published by the government.
c. Use a price index prepared by an industry group.
Ans: d. All of the above.

79. In the context of dollar-value LIFO, what is a LIFO layer?

d. The LIFO value of an increase in the inventory for a given year.

80. Which of the following statements is not true as it relates to the dollar-value LIFO inventory method?
a. It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with specific goods pooled LIFO.

81. Which of the following is not considered an advantage of LIFO when prices are rising?
a. The inventory will be overstated.

82. Which of the following is true regarding the use of LIFO for inventory valuation?
a. If LIFO is used for external financial reporting, then it must also be used for internal reports.
b. For purposes of external financial reporting, LIFO may not be used with the lower of cost or market approach.
c. If LIFO is used for external financial reporting, then it cannot be used for tax purposes.
Ans: d. None of these.

83. If inventory levels are stable or increasing, an argument which is not an advantage of the LIFO method as compared
to FIFO is
c. cost assignments typically parallel the physical flow of goods.