Q: Under the weighted-average method, how is the cost per unit calculated after each purchase?

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

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

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

Question 1

Which of the following best describes the consistency principle in accounting for merchandise inventory?

Accepted Answer

A business should use the same accounting methods and procedures from period to period, and any changes must be disclosed in the notes to the financial statements.

Question 2

Under the lower-of-cost-or-market (LCM) rule, how should inventory be valued on the balance sheet?

Accepted Answer

At the lower of its historical cost or current market value.

Question 3

A company using the perpetual inventory system has 100 units on hand at a unit cost of $5. If 40 units are sold, what is the ending inventory value?

Accepted Answer

$300

Question 4

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

Accepted Answer

First-in, first-out (FIFO)

Question 5

A company’s merchandise inventory is overstated by $5,000 at year-end. What is the effect on cost of goods sold and net income?

Accepted Answer

Cost of goods sold is understated by $$5,000 and net income is overstated by 5$$,000.

Question 6

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

Accepted Answer

Recording inventory purchases without proper authorization.

Question 7

Under the weighted-average method, how is the cost per unit calculated 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 8

If a company uses LIFO during a period of rising prices, which of the following statements is true?

Accepted Answer

Cost of goods sold will be higher and ending inventory will be lower compared to FIFO.

Question 9

Which inventory costing method is most appropriate for unique, high-value items such as automobiles or jewelry?

Accepted Answer

Specific identification

Question 10

A company’s inventory turnover ratio is calculated as:

Accepted Answer

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

Question 11

If a company’s days’ sales in inventory is calculated as 120 days, what does this indicate?

Accepted Answer

On average, inventory is held for 120 days before being sold.

Question 12

Which of the following best describes the materiality concept?

Accepted Answer

Only items significant enough to influence decisions should be accounted for strictly.

Question 13

Which journal entry is required when inventory is written down under the lower-of-cost-or-market rule?

Accepted Answer

Debit Cost of Goods Sold; Credit Merchandise Inventory

Question 14

Which of the following is a result of an inventory error that overstates ending inventory in the current period?

Accepted Answer

Net income is overstated in the current period and understated in the next period.

Question 15

Which inventory method would a company likely choose if it wants to minimize income taxes during a period of rising prices?

Accepted Answer

LIFO

Question 16

A company has the following inventory data: Beginning inventory: 10 units at $$20 each; Purchases: 20 units at 22 $$each; Sales: 15 units. Using FIFO, what is the cost of goods sold?

Accepted Answer

$$ (10 	imes 20) + (5 	imes 22) = 200 + 110 = 310 $$

Question 17

Which of the following statements about the disclosure principle is correct?

Accepted Answer

Financial statements should report enough information for outsiders to make knowledgeable decisions about the company.

Question 18

Under a periodic inventory system, when is the ending inventory balance determined?

Accepted Answer

At the end of the period, after a physical count.

Question 19

Which of the following is true regarding the conservatism principle?

Accepted Answer

When in doubt, record an expense rather than an asset.

Unit 5: Inventory Methods – Principles, Controls, and Financial Statement Effects

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