Q: Under the perpetual inventory system, which formula is used to calculate the weighted-average cost per unit after each purchase?

$$\text{Weighted-average cost per unit} = \frac{\text{Cost of goods available for sale}}{\text{Number of units available}}$$

Q: Which formula is used to calculate days’ sales in inventory?

$$\text{Days' sales in inventory} = \frac{365}{\text{Inventory turnover}}$$

Question 1

Which accounting principle requires that a business use the same inventory costing method from period to period unless a change is justified and disclosed?

Accepted Answer

Consistency principle

Question 2

A jewelry store tracks the cost of each diamond ring individually. Which inventory costing method is most appropriate for this business?

Accepted Answer

Specific identification method

Question 3

Under the perpetual inventory system, which formula is used to calculate the weighted-average cost per unit after each purchase?

Accepted Answer

$$	ext{Weighted-average cost per unit} = \frac{	ext{Cost of goods available for sale}}{	ext{Number of units available}}$$

Question 4

When inventory costs are rising, which inventory costing method will result in the highest net income?

Accepted Answer

First-in, first-out (FIFO)

Question 5

A company purchased inventory for $$3,000, but by year-end, the replacement cost dropped to 2$$,200. According to the lower-of-cost-or-market rule, at what value should the inventory be reported?

Accepted Answer

$2,200

Question 6

If ending inventory is overstated by $5,000 in one period, what is the effect on cost of goods sold and net income for that period?

Accepted Answer

Cost of goods sold is understated and net income is overstated

Question 7

Which inventory control procedure helps prevent theft and errors by verifying the actual inventory on hand?

Accepted Answer

Performing annual physical counts

Question 8

A company using the LIFO method under a perpetual inventory system will assign which costs to cost of goods sold?

Accepted Answer

The most recent costs available

Question 9

Which formula is used to calculate days’ sales in inventory?

Accepted Answer

$$	ext{Days' sales in inventory} = \frac{365}{	ext{Inventory turnover}}$$

Question 10

Which of the following best describes the effect of inventory errors over two consecutive periods?

Accepted Answer

The error cancels out after two periods

Question 11

A company’s inventory turnover ratio is significantly lower than the industry average. What does this most likely indicate?

Accepted Answer

The company is having difficulty selling inventory

Question 12

Under a periodic inventory system using FIFO, which costs are assigned to ending inventory?

Accepted Answer

The newest costs

Question 13

Which inventory costing method is most likely to result in the lowest taxable income during periods of rising prices?

Accepted Answer

Last-in, first-out (LIFO)

Question 14

Which accounting principle requires that all probable losses be recorded and no gains anticipated?

Accepted Answer

Conservatism

Question 15

A company’s ending inventory is understated by $2,000. What is the effect on the company’s net income for the period?

Accepted Answer

Net income is understated by $2,000

Question 16

Which of the following is NOT a control over merchandise inventory?

Accepted Answer

Recording inventory sales only at year-end

Question 17

Which inventory costing method would be most appropriate for a car dealership selling unique vehicles?

Accepted Answer

Specific identification

Question 18

If a company switches from FIFO to LIFO during a period of rising prices, what is the likely effect on its balance sheet inventory value?

Accepted Answer

Inventory value will decrease

Question 19

Which of the following best describes the materiality concept?

Accepted Answer

Only significant items need to be accounted for strictly properly

Question 20

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

Accepted Answer

$$	ext{Inventory turnover} = \frac{\50$$,000}{\$$10,000} = 5$$

Merchandise Inventory: Principles, Methods, and Financial Impacts

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