Q: Which of the following is the correct formula for calculating inventory turnover?

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

Q: Which of the following is the correct formula for gross profit?

$$\text{Gross Profit} = \text{Net Sales} - \text{Cost of Goods Sold}$$

Question 1

Which inventory costing method assumes that the first units purchased are the first units sold, and what is the effect on cost of goods sold during a period of rising prices?

Accepted Answer

First-in, first-out (FIFO); cost of goods sold will be lowest

Question 2

A company has the following inventory data: Beginning inventory: 5 units at $$10 each; Purchases: 10 units at 12 $$each; Sales: 8 units. Using the weighted-average method, what is the cost per unit of ending inventory? (Round to two decimals)

Accepted Answer

$11.33

Question 3

Which of the following best describes the accounting principle of conservatism?

Accepted Answer

Choosing the accounting treatment that is least likely to overstate assets or net income

Question 4

If ending inventory is overstated by $5,000 in Year 1, what is the effect on gross profit in Year 1 and Year 2, assuming all other amounts are correct?

Accepted Answer

Year 1: Overstated; Year 2: Understated

Question 5

Which of the following is the correct formula for calculating inventory turnover?

Accepted Answer

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

Question 6

A company’s merchandise inventory is reported at the lower of cost or market. If the market value falls below the historical cost, what is the journal entry to record the write-down?

Accepted Answer

Debit Cost of Goods Sold; Credit Merchandise Inventory

Question 7

Which inventory costing method results in the highest net income during a period of declining inventory costs?

Accepted Answer

FIFO

Question 8

Which of the following is NOT a required internal control for inventory?

Accepted Answer

Ignoring inventory shrinkage

Question 9

If a company uses the specific identification method, what is being tracked?

Accepted Answer

The specific cost of particular units of inventory

Question 10

Which of the following statements about the effect of inventory errors is correct?

Accepted Answer

An overstatement of ending inventory in one period will result in an understatement of net income in the next period

Question 11

Which of the following best describes the weighted-average inventory method?

Accepted Answer

It assigns the same weighted average cost per unit to both ending inventory and cost of goods sold

Question 12

A company has beginning inventory of $$2,000, purchases of 8$$,000, and ending inventory of $3,000. What is the cost of goods sold?

Accepted Answer

$7,000

Question 13

Which of the following is the correct formula for gross profit?

Accepted Answer

$$	ext{Gross Profit} = 	ext{Net Sales} - 	ext{Cost of Goods Sold}$$

Question 14

Which inventory method would you expect a jewelry store to use for its high-value, unique items?

Accepted Answer

Specific identification

Question 15

If a company’s inventory turnover is 7.85, what is the average number of days inventory is held? (Use 365 days in a year, round to the nearest whole number)

Accepted Answer

46 days

Question 16

Which of the following is NOT a qualitative characteristic of useful financial information?

Accepted Answer

Favorability

Question 17

Which of the following is true about the effect of inventory costing methods on the balance sheet during a period of rising prices?

Accepted Answer

FIFO results in the highest ending inventory

Question 18

Which of the following is the correct formula for cost of goods sold?

Accepted Answer

$$	ext{Cost of Goods Sold} = 	ext{Beginning Inventory} + 	ext{Net Purchases} - 	ext{Ending Inventory}$$

Question 19

Which inventory method would result in the lowest income tax expense during a period of rising prices?

Accepted Answer

LIFO

CH 6 Inventory Accounting Methods and Their Financial Impacts

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