Question 1

Which of the following best describes the main objective of inventory management for a retail company?

Accepted Answer

To sell inventory at a higher price than it was purchased for by selecting appropriate suppliers, maintaining necessary inventory levels, pricing for profit, and protecting inventory from damage and theft.

Question 2

A company purchases goods with shipping terms FOB shipping point. When should the buyer include these goods in their inventory?

Accepted Answer

When the goods are shipped from the seller's premises.

Question 3

Which of the following is NOT a classification of inventory for a manufacturing company?

Accepted Answer

Merchandise inventory

Question 4

Under a perpetual inventory system, which of the following statements is TRUE?

Accepted Answer

Inventory and cost of goods sold are updated after every transaction.

Question 5

A company has the following data for the year: Beginning Inventory = $$10,000$$, Purchases = $$25,000$$, Ending Inventory = $$8,000. $$What is the cost of goods sold (COGS)?

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

Accepted Answer

$$27,000$$

Question 6

Which cost formula assigns the actual cost of each specific item to cost of goods sold and ending inventory?

Accepted Answer

Specific identification

Question 7

A company uses the weighted-average cost formula under a perpetual inventory system. If it purchases 10 units at $$5 each and later 10 units at 7 $$each, what is the weighted-average cost per unit after both purchases?

$$	ext{Weighted\ Average\ Cost} = \frac{	ext{Total\ Cost}}{	ext{Total\ Units}}$$

Accepted Answer

$$6.00$$

Question 8

If a company’s inventory is recorded at a cost of $$4,500$$ but its net realizable value (NRV) is $$4,000$$, what journal entry is required under the lower of cost and NRV rule?

Accepted Answer

Dr. Cost of Goods Sold $$500$$; Cr. Inventory $$500$$

Question 9

Which of the following errors will cause both the statement of financial position and the income statement to be misstated?

Accepted Answer

Incorrectly including goods on consignment as inventory.

Question 10

A company has sales revenue of $$100,000$$ and cost of goods sold of $$60,000. $$What is the gross margin ratio?

$$	ext{Gross Margin} = 	ext{Sales Revenue} - 	ext{COGS}$$

$$	ext{Gross Margin Ratio} = \frac{	ext{Gross Margin}}{	ext{Sales Revenue}}$$

Accepted Answer

$$0.40$$

Question 11

Which of the following is NOT a responsibility of management regarding inventory internal controls?

Accepted Answer

Recording inventory at the highest possible value.

Question 12

A company has cost of goods sold of $$50,000$$ and average inventory of $$10,000. $$What is the inventory turnover ratio?

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

Accepted Answer

$$5.0$$

Question 13

If a company’s inventory turnover ratio is 8, how many days on average does it take to sell its inventory?

$$	ext{Days to Sell Inventory} = \frac{365}{	ext{Inventory Turnover Ratio}}$$

Accepted Answer

$$45.6$$ days

Question 14

Which of the following statements about the periodic inventory system is TRUE?

Accepted Answer

Inventory purchases are recorded in a Purchases account.

Question 15

A company’s beginning inventory is $$5,000$$, purchases during the period are $$15,000$$, and ending inventory is $$4,000. $$What is the cost of goods sold?

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

Accepted Answer

$$16,000$$

Question 16

Which of the following best describes the effect of an inventory writedown to net realizable value?

Accepted Answer

It immediately reduces net income by the amount of the writedown.

Question 17

Which of the following is a disadvantage of the periodic inventory system compared to the perpetual system?

Accepted Answer

It does not provide up-to-date information on inventory quantities or costs.

Question 18

A company uses FIFO under a perpetual inventory system. If it purchases 100 units at $$10 each, then 100 units at 12 $$each, and sells 150 units, what is the cost of goods sold?

$$	ext{COGS} = (100 	imes 10) + (50 	imes 12)$$

Accepted Answer

$$1,800$$

Question 19

Which of the following is a reason why cost formulas are necessary in inventory accounting?

Accepted Answer

Inventory purchase costs change, requiring a method to allocate costs between ending inventory and cost of goods sold.

Financial Accounting: Chapter 7 – Inventory (Study Notes)

Study Guide - Practice Questions

Study Guide - Flashcards