Q: Under the perpetual inventory system, which formula is used to calculate ending merchandise inventory?

$$\text{Ending Merchandise Inventory} = \text{Units in Ending Inventory} \times \text{Cost per Unit}$$

Q: Which formula is used to calculate inventory turnover?

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

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

$$\text{Days' Sales in Inventory} = \frac{\text{Ending Inventory}}{\text{Cost of Goods Sold}} \times 365$$

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

$$\text{Weighted-Average Cost per Unit} = \frac{\text{Total Cost of Goods Available for Sale}}{\text{Number of Units Available}}$$

Question 1

Which accounting principle requires a business to use the same accounting methods and procedures from period to period, thereby enabling comparability of financial statements?

Accepted Answer

Consistency Principle

Question 2

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 3

Under the perpetual inventory system, which formula is used to calculate ending merchandise inventory?

Accepted Answer

$$	ext{Ending Merchandise Inventory} = 	ext{Units in Ending Inventory} 	imes 	ext{Cost per Unit}$$

Question 4

Which inventory costing method assigns the cost of the most recent purchases to cost of goods sold?

Accepted Answer

Last-In, First-Out (LIFO)

Question 5

If a company overstates its ending inventory, what is the effect on net income for the period?

Accepted Answer

Net income is overstated

Question 6

Which formula is used to calculate inventory turnover?

Accepted Answer

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

Question 7

A jewelry store uses the specific identification method for inventory costing. What is the primary reason for using this method?

Accepted Answer

Inventory items are unique and high-value

Question 8

During a period of rising inventory costs, which inventory costing method results in the highest net income?

Accepted Answer

First-In, First-Out (FIFO)

Question 9

Which concept states that only information that would influence the decisions of a reasonable person needs to be disclosed in financial statements?

Accepted Answer

Materiality Concept

Question 10

A company has an average inventory of $$500,000 and cost of goods sold of 4$$,000,000. What is the inventory turnover ratio?

Accepted Answer

8

Question 11

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

Accepted Answer

$$	ext{Days' Sales in Inventory} = \frac{	ext{Ending Inventory}}{	ext{Cost of Goods Sold}} 	imes 365$$

Question 12

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

Accepted Answer

$$	ext{Weighted-Average Cost per Unit} = \frac{	ext{Total Cost of Goods Available for Sale}}{	ext{Number of Units Available}}$$

Question 13

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

Accepted Answer

Last-In, First-Out (LIFO)

Question 14

Under a periodic inventory system, when is the ending inventory and cost of goods sold calculated?

Accepted Answer

At the end of each period

Question 15

Which principle requires that financial statements report enough information for outsiders to make informed decisions about the company?

Accepted Answer

Disclosure Principle

Question 16

A company’s inventory error resulted in an understatement of ending inventory in Year 1. What is the effect on cost of goods sold and net income in Year 1?

Accepted Answer

Cost of goods sold is overstated; net income is understated

Question 17

Which inventory costing method is best suited for businesses with unique, high-value items such as real estate or automobiles?

Accepted Answer

Specific Identification

Question 18

If a company’s inventory turnover ratio is significantly lower than the industry average, what does this indicate?

Accepted Answer

The company is having difficulty selling inventory

Question 19

Which principle states that when two or more options are presented, the business should report the least optimistic figures in the financial statements?

Accepted Answer

Conservatism

Question 20

A company uses the FIFO method under a periodic inventory system. Which units are used to calculate ending inventory?

Accepted Answer

The most recent units purchased

Merchandise Inventory: Principles, Methods, and Financial Impacts

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