Q: Which formula is used to calculate the weighted average unit cost under the average cost method?

$$\frac{\text{Cost of Goods Available for Sale}}{\text{Units Available for Sale}}$$

Q: A company’s inventory turnover ratio is calculated as:

$$\frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}$$

Question 1

Which of the following statements best describes the purpose of a physical inventory count at the end of an accounting period?

Accepted Answer

To check the accuracy of perpetual inventory records and identify inventory lost to shrinkage or theft.

Question 2

A company ships goods to a customer under FOB shipping point terms. At year-end, the goods are in transit. Who owns the goods and should include them in inventory?

Accepted Answer

The buyer, because ownership transfers when the goods leave the seller's premises.

Question 3

Which inventory cost formula is most appropriate for a business selling unique, high-value items such as custom jewelry?

Accepted Answer

Specific Identification

Question 4

Under the perpetual inventory system using FIFO, which cost is assigned to cost of goods sold?

Accepted Answer

The cost of the oldest inventory purchased.

Question 5

A company has the following inventory data: Beginning inventory: 100 units at $$10 each; Purchases: 200 units at 11 $$each; Sales: 150 units. Using the average cost method, what is the weighted average unit cost after the purchase?

Accepted Answer

$10.67

Question 6

If a company overstates its ending inventory in the current year, what is the effect on cost of goods sold and net income for that year?

Accepted Answer

Cost of goods sold is understated; net income is overstated.

Question 7

Which formula is used to calculate the weighted average unit cost under the average cost method?

Accepted Answer

$$\frac{	ext{Cost of Goods Available for Sale}}{	ext{Units Available for Sale}}$$

Question 8

In a period of rising prices, which inventory cost formula will result in the highest net income?

Accepted Answer

FIFO (First-in, First-out)

Question 9

A company has inventory with a cost of $$16,000 and a net realizable value of 15$$,500. According to the lower of cost and net realizable value (LCNRV) rule, at what amount should the inventory be reported?

Accepted Answer

$15,500

Question 10

Which of the following is NOT a control activity related to taking inventory?

Accepted Answer

Calculating depreciation expense for inventory.

Question 11

If inventory is understated at the end of Year 1, what is the effect on net income in Year 1 and Year 2, assuming the error is corrected in Year 2?

Accepted Answer

Net income is understated in Year 1 and overstated in Year 2.

Question 12

Which inventory cost formula best smooths the effects of price changes by assigning all units the same average cost, recalculated after each purchase?

Accepted Answer

Average Cost

Question 13

A company’s inventory turnover ratio is calculated as:

Accepted Answer

$$\frac{	ext{Cost of Goods Sold}}{	ext{Average Inventory}}$$

Question 14

Which of the following is TRUE regarding consigned goods?

Accepted Answer

Consigned goods remain the property of the consignor until sold.

Question 15

If a company applies the LCNRV rule and later the net realizable value increases, what should the company do?

Accepted Answer

Reverse the previous write-down to the extent of the recovery.

Question 16

Which of the following is NOT typically disclosed in the notes to the financial statements regarding inventory?

Accepted Answer

The names of suppliers.

Question 17

A company using FIFO has rising purchase prices throughout the year. What is the effect on ending inventory and cost of goods sold compared to the average cost method?

Accepted Answer

Ending inventory is higher and cost of goods sold is lower under FIFO.

Question 18

Which of the following best describes the effect of inventory errors on the statement of financial position?

Accepted Answer

Inventory errors affect merchandise inventory and retained earnings.

Question 19

A company has an inventory turnover ratio of 8. What does this indicate?

Accepted Answer

The company sells and replaces its inventory 8 times per year.

Question 20

Which inventory cost formula is most likely to result in the lowest taxable income during a period of rising prices?

Accepted Answer

LIFO (Last-in, First-out)

Chapter 6: Reporting and Analyzing Inventory – Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards