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

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

Question 1

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

Accepted Answer

Consistency principle

Question 2

A company purchases inventory at $$10 per unit and later the market value drops to 7 $$per unit. According to the lower-of-cost-or-market rule, at what value should the inventory be reported on the balance sheet?

Accepted Answer

$7 per unit

Question 3

Which inventory costing method results in the highest net income during periods of rising inventory costs?

Accepted Answer

First-in, first-out (FIFO)

Question 4

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

Accepted Answer

Specific identification

Question 5

If ending inventory is overstated by $2,000, what is the effect on net income for the period?

Accepted Answer

Net income is overstated by $2,000

Question 6

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

Accepted Answer

Report the least favorable figures when options are available

Question 7

A company using the perpetual inventory system has the following data: Beginning inventory: 10 units at $$5 each. Purchase: 20 units at 6 $$each. Sold: 15 units. Using the FIFO method, what is the cost of goods sold?

Accepted Answer

$85

Question 8

Which inventory costing method most closely matches the current replacement cost of inventory on the balance sheet during periods of rising prices?

Accepted Answer

First-in, first-out (FIFO)

Question 9

Calculate the weighted-average cost per unit if a company has 5 units at $$8 each and 15 units at 12 $$each.

Accepted Answer

$11

Question 10

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

Accepted Answer

Allowing unauthorized purchases of inventory

Question 11

A company’s inventory turnover ratio is calculated as:

Accepted Answer

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

Question 12

If a company’s days’ sales in inventory is 50 days, what does this indicate?

Accepted Answer

It takes 50 days to sell all inventory on average

Question 13

During a period of declining inventory costs, which method will result in the lowest net income?

Accepted Answer

First-in, first-out (FIFO)

Question 14

Which of the following statements about inventory errors is correct?

Accepted Answer

An overstatement of ending inventory in one period will understate net income in the next period

Question 15

A company’s merchandise inventory cost is $$3,000, but the current replacement cost is 2$$,200. According to the lower-of-cost-or-market rule, what adjusting journal entry should be made?

Accepted Answer

Debit Loss on Inventory $$800; Credit Merchandise Inventory 800$$

Question 16

Which inventory costing method results in the lowest ending inventory value during periods of rising prices?

Accepted Answer

Last-in, first-out (LIFO)

Question 17

A company has the following inventory transactions: Beginning inventory: 5 units at $$20 each; Purchase: 10 units at 25 $$each; Sold: 8 units. Using the weighted-average method, what is the cost of goods sold?

Accepted Answer

$$21.67 	imes 8 = 173.36$

Question 18

Which of the following best describes the disclosure principle?

Accepted Answer

Financial statements should report enough information for outsiders to make knowledgeable decisions

Question 19

If a company changes its inventory costing method, what must it do according to the consistency principle?

Accepted Answer

Disclose the change in the notes to the financial statements

Question 20

Which of the following is a real-world application of data analytics in inventory management?

Accepted Answer

Using real-time data to sell excess inventory and avoid spoilage

Merchandise Inventory: Principles, Methods, and Financial Impacts

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