Q: Given the equation $$\text{Beginning Inventory} + \text{Purchases} = \text{Inventory Sold} + \text{Ending Inventory}$$, which formula correctly calculates Cost of Goods Sold (COGS)?

$$\text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory}$$

Q: Which formula is used to calculate gross profit percentage?

$$\text{Gross Profit Percentage} = \frac{\text{Gross Profit}}{\text{Net Sales Revenue}}$$

Q: Inventory turnover is calculated using which formula?

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

Q: Days Inventory Outstanding (DIO) is calculated as:

$$\text{DIO} = \frac{365}{\text{Inventory Turnover}}$$

Question 1

Which of the following best describes inventory in financial accounting?

Accepted Answer

Goods purchased for resale, classified as an asset until sold.

Question 2

A merchandising company has two accounts that a service company does NOT need. What are they?

Accepted Answer

Inventory on the balance sheet and cost of goods sold on the income statement.

Question 3

Given the equation $$	ext{Beginning Inventory} + 	ext{Purchases} = 	ext{Inventory Sold} + 	ext{Ending Inventory}$$, which formula correctly calculates Cost of Goods Sold (COGS)?

Accepted Answer

$$	ext{COGS} = 	ext{Beginning Inventory} + 	ext{Purchases} - 	ext{Ending Inventory}$$

Question 4

If a company purchases inventory at different prices throughout the year, which inventory costing method averages the cost of all units available for sale?

Accepted Answer

Average-cost (weighted-average) method

Question 5

Under the perpetual inventory system, what are the two entries made when a sale occurs?

Accepted Answer

Debit Cash/Accounts Receivable and credit Sales Revenue; debit Cost of Goods Sold and credit Inventory

Question 6

Which inventory costing method results in the lowest cost of goods sold and highest gross profit when inventory costs are rising?

Accepted Answer

First-in, first-out (FIFO)

Question 7

A company using LIFO during a period of rising prices will most likely experience which of the following effects?

Accepted Answer

Lower taxable income and lower income tax expense

Question 8

Under U.S. GAAP, the lower-of-cost-or-market (LCM) rule requires inventory to be reported at:

Accepted Answer

The lower of its historical cost or market value (net realizable value)

Question 9

If Under Armour paid $$3,000,000 for inventory but its market value at year-end is 2$$,000,000, what value should be reported on the balance sheet under the LCM rule?

Accepted Answer

$2,000,000

Question 10

Which formula is used to calculate gross profit percentage?

Accepted Answer

$$	ext{Gross Profit Percentage} = \frac{	ext{Gross Profit}}{	ext{Net Sales Revenue}}$$

Question 11

Inventory turnover is calculated using which formula?

Accepted Answer

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

Question 12

Days Inventory Outstanding (DIO) is calculated as:

Accepted Answer

$$	ext{DIO} = \frac{365}{	ext{Inventory Turnover}}$$

Question 13

Which of the following is NOT included in the cost of inventory under U.S. GAAP?

Accepted Answer

Freight out (cost to ship goods to customers)

Question 14

Which inventory costing method is most appropriate for businesses with unique, high-value items?

Accepted Answer

Specific identification method

Question 15

A company’s gross profit plus cost of goods sold equals:

Accepted Answer

Sales revenue

Question 16

Which of the following is a reason why companies might choose LIFO over FIFO?

Accepted Answer

To reduce taxable income during periods of rising prices

Question 17

Which statement about inventory on consignment is correct?

Accepted Answer

Inventory on consignment at a retailer’s location is included in the seller’s accounting records.

Question 18

Which Excel function is commonly used to analyze inventory records by matching identifiers to transaction data?

Accepted Answer

XLOOKUP

Question 19

If a company’s inventory is subject to environmental, social, and governance (ESG) risks, what is a likely financial accounting impact?

Accepted Answer

Inventory may need to be written down to reflect lower market value.

Chapter 6

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