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Chapter 10: Inventory

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Chapter 10: Inventory

15 problems · 0 figures

Multiple Choice 10.1 §10.1 source ↗

If a company has four lots of products for sale, purchase 1 (earliest) for $17, purchase 2 (middle) for $15, purchase 3 (middle) for $12, and purchase 4 (latest) for $14, which cost would be assumed to be sold first using LIFO costing?
  1. a.
    $17
  2. b.
    $15
  3. c.
    $12
  4. d.
    $14

Answer

D. $14

Multiple Choice 10.3 §10.1 source ↗

When inventory items are highly specialized, the best inventory costing method is ________.
  1. a.
    specific identification
  2. b.
    first-in, first-out
  3. c.
    last-in, first-out
  4. d.
    weighted average

Answer

A. specific identification

Multiple Choice 10.5 §10.1 source ↗

On which financial statement would the merchandise inventory account appear?
  1. a.
    balance sheet
  2. b.
    income statement
  3. c.
    both balance sheet and income statement
  4. d.
    neither balance sheet nor income statement

Answer

A. balance sheet

Multiple Choice 10.7 §10.1 source ↗

Which accounting rule serves as the primary basis for the lower-of-cost-or-market methodology for inventory valuation?
  1. a.
    conservatism
  2. b.
    consistency
  3. c.
    optimism
  4. d.
    pessimism

Answer

A. conservatism

Multiple Choice 10.9 §10.2 source ↗

Which of these statements is false?
  1. a.
    If cost of goods sold is incorrect, ending inventory is usually incorrect too.
  2. b.
    beginning inventory + purchases = cost of goods sold
  3. c.
    ending inventory + cost of goods sold = goods available for sale
  4. d.
    goods available for sale – beginning inventory = purchases

Answer

B. beginning inventory + purchases = cost of goods sold

Multiple Choice 10.11 §10.3 source ↗

Which of the following describes features of a perpetual inventory system?
  1. a.
    Technology is normally used to record inventory changes.
  2. b.
    Merchandise bought is recorded as purchases.
  3. c.
    An adjusting journal entry is required at year end, to match physical counts to the asset account.
  4. d.
    Inventory is updated at the end of the period.

Answer

A. Technology is normally used to record inventory changes.

Multiple Choice 10.13 §10.4 source ↗

Which of the following would cause periodic ending inventory to be overstated?
  1. a.
    Goods held on consignment are omitted from the physical count.
  2. b.
    Goods purchased and delivered, but not yet paid for, are included in the physical count.
  3. c.
    Purchased goods shipped FOB destination and not yet delivered are included in the physical count.
  4. d.
    None of the above

Answer

C. Purchased goods shipped FOB destination and not yet delivered are included in the physical count.

Question 10.1 §10.1 source ↗

What is meant by the term gross margin?

Answer

Gross margin refers to the net profit from sale of goods. It is calculated by subtracting cost of goods sold from sales revenue.

Question 10.3 §10.1 source ↗

Why do consignment arrangements present a challenge in inventory management? Explain.

Answer

Consigned goods are owned by the consignor, but the goods are physically present in the business of the consignee. Care must be taken not to count goods held on consignment in the company’s physical inventory tally.

Question 10.5 §10.1 source ↗

When would a company use the specific identification method of inventory cost allocation?

Answer

Specific identification works best for highly differentiated goods, large ticket items, customization, and small lot sizes. In all these cases, it is reasonably easy to keep track of the actual cost of each item, to be used to offset the sales price, when the goods are sold.

Question 10.7 §10.1 source ↗

Describe the goal of the lower-of-cost-or-market concept.

Answer

LCM sets out to record a conservative value for inventory by ensuring that goods that have decreased in value since their purchase can be revalued to match their current replacement market value.

Question 10.9 §10.3 source ↗

Describe costing inventory using first-in, first-out. Address the different treatment, if any, that must be given for periodic and perpetual inventory updating.

Answer

The FIFO method assumes the first units acquired are sold first. On a periodic basis, that means that ending inventory can be determined by calculating the number of units remaining, and assuming that the cost of those units is the amount paid for the latest purchase; cost of goods sold is all inventory cost that is not in the ending inventory. For perpetual, inventory held at the time of each sale is evaluated and units acquired earliest are costed out against that particular sale.

Question 10.11 §10.3 source ↗

Describe costing inventory using weighted average. Address the different treatment, if any, that must be given for periodic and perpetual inventory updating.

Answer

The weighted-average method requires that the average cost be computed for all units that are available for sale. For periodic weighted average, the total dollar amount of goods available for sale should be divided by the total number of units available for sale, to obtain the average cost for the entire period. For perpetual, the average cost would be recalculated each time the total number of units changes, using the same strategy as described for periodic, but using the cost and number of units that are available at the time of sale.

Question 10.13 §10.4 source ↗

What type of issues would arise that might cause inventory errors?

Answer

Causes of inventory errors might be related to consigned goods, goods delivered before or after the title transfers, sloppy inventory counts, lost records, calculation errors, and any other circumstance that causes inaccuracy in the counts.

Question 10.15 §10.5 source ↗

What insights can be gained from inventory ratio analysis, such as inventory turnover ratio and number of days’ sales in inventory ratio?

Answer

The inventory turnover ratio reveals the liquidity of the inventory by highlighting how many times during the year the entire inventory cycle could be rotated, based on the cost of the inventory sold, compared to the average cost of the unsold inventory. Days’ sales in inventory reveals how many days it typically takes to turn inventory around, from date of purchase to date of sale.

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Problems and answers are adapted from Principles of Accounting, Volume 1: Financial Accounting by Mitchell Franklin, Patty Graybeal and Dixon Cooper, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.