Q: A company has 60 units available for sale at a total cost of $900. If 40 units are sold, what is the value of ending inventory using the weighted average method?

$$900 \div 60 = 15$$ per unit; $$20 \times 15 = 300$$

Q: A company has beginning inventory of $$5,000, purchases of 15$$,000, and sales of $30,000. If the gross profit percentage is 40%, what is the estimated cost of goods sold using the gross profit method?

$$30,000 \times 60\% = 18$$,000

Question 1

Which of the following statements best describes the main difference between a merchandising company and a service-type company in terms of their income statement?

Accepted Answer

Merchandising companies include a line item for cost of goods sold, which is deducted from sales to calculate gross profit, while service-type companies do not have cost of goods sold or gross profit.

Question 2

A retailer purchases merchandise for $$10,000, pays 500 in $$freight, receives $$1,000 in purchase returns, 200 in $$purchase allowances, and takes a $300 purchase discount for early payment. What is the net cost of purchases?

Accepted Answer

$$10,000 + 500$$ - $$1,000 - 200$$ - $$300 = 9$$,000

Question 3

Under the periodic inventory system, which of the following is TRUE?

Accepted Answer

A physical inventory count is required to determine the amount of goods on hand.

Question 4

If ending inventory is overstated in Year 1, what is the effect on net income and assets for Year 1?

Accepted Answer

Net income is overstated; assets are overstated.

Question 5

A company has beginning inventory of $$100,000, net purchases of 900$$,000, and ending inventory of $200,000. What is the cost of goods sold?

Accepted Answer

$$100,000 + 900$$,000 - $$200,000 = 800$$,000

Question 6

Under FOB shipping point, who includes goods in transit in their inventory at year-end?

Accepted Answer

The buyer includes the goods in inventory once they leave the seller's shipping dock.

Question 7

Which inventory method results in ending inventory being valued at more recent prices during periods of inflation?

Accepted Answer

FIFO (First-In, First-Out)

Question 8

A company has 60 units available for sale at a total cost of $900. If 40 units are sold, what is the value of ending inventory using the weighted average method?

Accepted Answer

$$900 \div 60 = 15$$ per unit; $$20 	imes 15 = 300$$

Question 9

During periods of rising prices, which inventory method yields the lowest gross profit and net income?

Accepted Answer

LIFO

Question 10

If a company writes down inventory from $$3,000,000 to 2$$,000,000 due to a decline in market value, what is the journal entry?

Accepted Answer

Debit Cost of Goods Sold $$1,000,000; Credit Inventory 1$$,000,000

Question 11

Which of the following is NOT an advantage of the FIFO inventory method?

Accepted Answer

FIFO is beneficial for tax purposes during inflation.

Question 12

A company has beginning inventory of $$5,000, purchases of 15$$,000, and sales of $30,000. If the gross profit percentage is 40%, what is the estimated cost of goods sold using the gross profit method?

Accepted Answer

$$30,000 	imes 60\% = 18$$,000

Question 13

Which inventory method is most likely to be used by an auto dealership that tracks each vehicle by its VIN number?

Accepted Answer

Specific Identification

Question 14

If a company switches from LIFO to FIFO, what must it do according to the consistency principle?

Accepted Answer

Fully justify and disclose the change in the notes to the financial statements.

Question 15

Which of the following statements about goods on consignment is correct?

Accepted Answer

The consignor includes the goods in their inventory, even though they are not in physical possession.

Question 16

Under a perpetual inventory system, what is the correct entry when merchandise is sold?

Accepted Answer

Debit Accounts Receivable, Credit Sales Revenue; Debit Cost of Goods Sold, Credit Inventory

Question 17

Which inventory method best matches recent revenues with more recent costs, resulting in a better income statement during inflation?

Accepted Answer

LIFO

Question 18

A company has 10 units at $$10, 25 units at 14$$, and 25 units at $18. If 40 units are sold using FIFO, what is the value of ending inventory?

Accepted Answer

20 units at $$18 = 360$$

Question 19

Which of the following is a disadvantage of the LIFO inventory method?

Accepted Answer

Inventory is stated at old costs on the balance sheet, resulting in poor balance sheet presentation.

Inventory and Cost of Goods Sold: Concepts, Methods, and Applications

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