Q: Which formula correctly calculates Inventory Turnover?

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

Question 1

A merchandiser's multi-step income statement shows Gross Profit and Total Operating Expense. What is the term for Gross Profit less Total Operating Expense?

Accepted Answer

Operating Income

Question 2

Which account is typically found on the Balance Sheet of a merchandising firm but NOT on the Balance Sheet of a service business?

Accepted Answer

Merchandise Inventory

Question 3

Which principle requires that financial statements provide enough information for outsiders to make knowledgeable decisions about a company?

Accepted Answer

Disclosure Principle

Question 4

When inventory costs are rising, which inventory costing method results in the highest Cost of Goods Sold reported on the Income Statement?

Accepted Answer

LIFO

Question 5

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

Accepted Answer

FIFO

Question 6

Inventory turnover is a measure of:

Accepted Answer

How rapidly merchandise inventory is sold

Question 7

A company overstated its ending Merchandise Inventory in Year 1. What is the effect on net income in Year 1 and Year 2?

Accepted Answer

Net income is overstated in Year 1 and understated in Year 2

Question 8

When inventory costs are rising, which method would a company prefer to use in the perpetual system to pay the lowest amount of taxes?

Accepted Answer

LIFO

Question 9

Which of the following is NOT a component of internal control?

Accepted Answer

Audits

Question 10

When an order is placed for merchandise, what document does the purchaser send to the vendor?

Accepted Answer

Purchase order

Question 11

Which of the following is NOT part of the definition of internal control?

Accepted Answer

Encourage employees to change the company policies

Question 12

Who uses remittance advices to record journal entries to Cash and customer accounts?

Accepted Answer

Bookkeeper

Question 13

The Sarbanes-Oxley Act requires companies to:

Accepted Answer

Conduct a review of internal controls and take responsibility for the accuracy and completeness of their financial reports

Question 14

Which item is added to the bank balance during a bank reconciliation?

Accepted Answer

Deposits in transit

Question 15

Which item is subtracted from the book balance during a bank reconciliation?

Accepted Answer

Bank service charges

Question 16

A company using the LIFO method in a period of rising prices will report which of the following on its income statement?

Accepted Answer

Higher Cost of Goods Sold

Question 17

If a company wants to maximize net income during a period of rising inventory costs, which inventory costing method should it use?

Accepted Answer

FIFO

Question 18

Which of the following would NOT appear on a single-step income statement for a merchandiser?

Accepted Answer

Operating Income

Question 19

Which formula correctly calculates Inventory Turnover?

Accepted Answer

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

Question 20

A company discovers an inventory error that overstated ending inventory in Year 1. What is the effect on the financial statements over two periods?

Accepted Answer

The error will cancel out after two periods

Principles of Accounting: Merchandising, Inventory, and Internal Control Study Guide

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