Question 1

Which of the following best describes the main difference between the perpetual and periodic inventory systems as shown in the diagram?

Accepted Answer

The perpetual system records cost of goods sold at the time of sale, while the periodic system records it only at the end of the period.

Question 2

A company using the LIFO method for inventory costing would report which of the following effects during a period of rising prices?

Accepted Answer

Lower ending inventory and lower net income compared to FIFO.

Question 3

Based on the Yoga Day income statement, what is the formula for calculating gross profit?

Accepted Answer

$$Gross\ Profit = Net\ Sales\ Revenue - Cost\ of\ Goods\ Sold$$

Question 4

Given the following data for a company: Cost of Goods Sold = $$315,287, Beginning Inventory = 32$$,713, Ending Inventory = $36,318. What is the inventory turnover ratio?

Accepted Answer

$$Inventory\ Turnover = \frac{315,287}{\frac{36,318 + 32,713}{2}} = 9.13$$

Question 5

If a company’s inventory turnover ratio is 9.13, how many days on average does it take to sell its inventory?

Accepted Answer

$$Days\ in\ Inventory = \frac{365}{9.13} \approx 40\ days$$

Question 6

A company has beginning inventory of $$10,000, purchases of 50$$,000, and ending inventory of $12,000. What is the cost of goods sold?

Accepted Answer

$$Cost\ of\ Goods\ Sold = 10,000 + 50,000 - 12,000 = 48,000$$

Question 7

Which inventory costing method is most likely to result in the highest taxable income during periods of inflation?

Accepted Answer

FIFO

Question 8

Under the lower-of-cost-or-market rule, how should inventory be reported if the market value is less than the historical cost?

Accepted Answer

Inventory should be reported at market value.

Question 9

A company using the periodic inventory system will compute and record cost of goods sold:

Accepted Answer

At the end of the accounting period.

Question 10

Which of the following is NOT a reason companies choose different inventory costing methods?

Accepted Answer

To comply with the perpetual versus periodic inventory system.

Question 11

If a company wants to minimize its tax liability during a period of rising prices, which inventory costing method should it choose?

Accepted Answer

LIFO

Question 12

Which principle requires a company to use the same inventory valuation method from period to period for comparability?

Accepted Answer

Consistency principle

Question 13

A company has cost of goods sold of $$59,040 and average inventory of 12$$,480. What is the inventory turnover ratio?

Accepted Answer

$$Inventory\ Turnover = \frac{59,040}{12,480} = 4.73$$

Question 14

Which inventory costing method is most appropriate for a car dealership selling unique, high-value items?

Accepted Answer

Specific identification

Question 15

If a company’s inventory turnover ratio increases significantly, what does this most likely indicate?

Accepted Answer

The company is selling inventory more quickly.

Question 16

Which of the following best describes the effect of using FIFO during a period of rising prices?

Accepted Answer

Lower cost of goods sold and higher ending inventory.

Question 17

A company’s beginning inventory is $$15,000, purchases are 40$$,000, and ending inventory is $$10,000. What is the gross profit if sales revenue is 70$$,000?

Accepted Answer

$$Gross\ Profit = 70,000 - (15,000 + 40,000 - 10,000) = 70,000 - 45,000 = 25,000$$

Question 18

Which inventory costing method allocates the cost of goods available for sale on the basis of weighted-average unit cost?

Accepted Answer

Average-cost method

Question 19

If a company’s inventory value drops below its historical cost before sale, what accounting action is required?

Accepted Answer

Write down inventory to market value.

Question 20

Which of the following is a potential risk of maintaining high inventory levels?

Accepted Answer

Increased risk of obsolescence and higher storage costs.

Reporting and Analyzing Inventory: Principles of Accounting Study Guide

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