Chapter 7--Inventories
Student: ___________________________________________________________________________
1. One of the two internal control procedures over inventory is to properly report inventory on the financial
statements.
True False

2. A purchase order establishes an initial record of the receipt of the inventory.
True False

3. A perpetual inventory system is an effective means of control over inventory.
True False

4. A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels.
True False

5. Safeguarding inventory and proper reporting of the inventory in the books are the reasons for controlling the
inventory.
True False

6. Inventory controls start when the merchandise is shelved in the store area.
True False

7. A physical inventory should be taken at the end of every month.
True False

8. The specific identification inventory method should be used when the inventory consists of identical, low
cost units that are purchased and sold frequently.
True False


9. The selection of an inventory costing method has no significant impact on the financial statements.



18. The three inventory costing methods will normally each yield different amounts of net income.
True False

19. The average cost method will always yield results between FIFO and LIFO.
True False

20. During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater
amount of net income than would result from the use of the LIFO cost method.
True False

21. During periods of increasing costs, the use of the FIFO method of costing inventory will yield an inventory
amount for the balance sheet that is higher than LIFO would produce.
True False

22. During periods of rapidly rising costs, the use of the LIFO method results in illusory or inventory profits.
True False

23. During periods of decreasing costs the use of the LIFO method of costing inventory will result in a lower
amount of net income than would result from the use of the FIFO method.
True False

24. During periods of increasing costs, an advantage of the LIFO inventory cost method is that it matches more
recent costs against current revenues.
True False

25. In valuing damaged merchandise for inventory purposes, net realizable value is the estimated selling price
less any direct costs of disposal.
True False


34. When merchandise inventory is shown on the balance sheet, both the method of determining the cost of the
inventory and the method of valuing the inventory should be shown.
True False

35. Most large companies will use only one inventory costing methods for all of its different segments.
True False


36. Direct disposal costs do not include special advertising or sales commissions.
True False

37. Inventory errors, if not discovered, will self-correct in two years.
True False

38. Generally, the lower the number of days' sales in inventory, the better.
True False

39. One negative effect of carrying too much inventory is risk that customers will change their buying habits.
True False

40. Average inventory is computed by adding the inventory at the beginning of the period to the inventory at the
end of the period and dividing by two.
True False

41. Inventory turnover measures the length of time is takes to acquire, sell and replace the inventory.
True False

42. In the retail inventory method, the cost to retail ratio is equal to the cost of goods sold divided by the retail
price of the good sold.

purchased.
2. Cost flow is in the reverse order in which the
cost were incurred.
3. Cost flow is an average of the costs.
4. Cost flow is in the order in which the costs were
incurred.

Average Cost
Last-in, Last-out
(LIFO)
Specific
Identification
First-in, First-out
(FIFO)

____
____
____
____

48. Under a perpetual inventory system, the amount of each type of merchandise on hand is available in the
A. customer's ledger
B. creditor's ledger
C. inventory ledger
D. purchase ledger

49. Taking a physical count of inventory
A. is not necessary when a periodic inventory system is used
B. should be done near year-end
C. has no internal control relevance

using
A. first-in, last-out
B. last-in, first-out
C. first-in, first-out
D. average cost

55. The two most widely used methods for determining the cost of inventory are
A. FIFO and LIFO
B. FIFO and average
C. LIFO and average
D. gross profit and average


56. Cost flow is in the order in which costs were incurred when using
A. average cost
B. last-in, first-out
C. first-in, first-out
D. weighted average

57. Cost flow is in the reverse order in which costs were incurred when using
A. weighted average
B. last-in, first-out
C. first-in, first-out
D. average cost

58. The inventory method that assigns the most recent costs to cost of goods sold is
A. FIFO
B. LIFO
C. average
D. specific identification

Sep. 1
4
10
17
30

Inventory
Sold
Purchased
Sold
Purchased

20 units at $20
10 units
30 units at $25
20 units
10 units at $30

If Addison uses FIFO, the cost of the ending merchandise inventory on September 30 is

A. $800
B. $650
C. $750
D. $700
64. Addison, Inc. uses a perpetual inventory system. The following is information about one inventory item for
the month of September:

Sep. 1
4
10

A. retail
B. periodic
C. physical
D. perpetual

67. The inventory data for an item for November are:

Nov. 1
4
10
17
30

Inventory
Sold
Purchased
Sold
Purchased

20 units at $19
10 units
30 units at $20
20 units
10 units at $21

Using a perpetual system, what is the cost of the merchandise sold for November if the company uses LIFO?

A. $610
B. $600
C. $590

The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records
during May. The company had no beginning inventory on May 1.

Date
May 3
May 10
May 17
May 20
May 23
May 30

Product Z
Purchase
Sale
Purchase
Sale
Sale
Purchase

Units
5
3
10
6
3
10

Cost
$20
$24

Units
5
3
10
6
3
10

Cost
$20
$24

$30

Assuming that the company uses the perpetual inventory system, determine the cost of merchandise sold for the sale of May 20 using the FIFO
inventory cost method.

A. $120
B. $180
C. $136
D. $144


71. Use the following information to answer the following questions.
The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records
during May. The company had no beginning inventory on May 1.

Date
May 3
May 10

A. $364
B. $372
C. $324
D. $320
72. Use the following information to answer the following questions.
The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records
during May. The company had no beginning inventory on May 1.

Date
May 3
May 10
May 17
May 20
May 23
May 30

Product Z
Purchase
Sale
Purchase
Sale
Sale
Purchase

Units
5
3
10
6
3

Purchase
Sale
Purchase
Sale
Sale
Purchase

Units
5
3
10
6
3
10

Cost
$20
$24

$30

Assuming that the company uses the perpetual inventory system, determine the ending inventory for the month of May using the LIFO inventory
cost method.

A. $324
B. $372
C. $320
D. $364
74. Use the following information to answer the following questions.
The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records

$30

Assuming that the company uses the perpetual inventory system, determine the Gross Profit for the month of May using the LIFO cost method

A. $348
B. $452
C. $444
D. $356
75. The following units of an inventory item were available for sale during the year:

Beginning inventory
First purchase
Second purchase
Third purchase

10 units at $55
25 units at $60
30 units at $65
15 units at $70


The firm uses the periodic inventory system. During the year, 60 units of the item were sold.
The value of ending inventory using FIFO is:

A. $1,250
B. $1,350
C. $1,375
D. $1,150
76. The following units of an inventory item were available for sale during the year:


The value of ending inventory using average cost is:

A. $1,353
B. $1,263
C. $1,375
D. $1,150
78. The following lots of a particular commodity were available for sale during the year:

Beginning inventory
First purchase
Second purchase
Third purchase

10 units at $30
25 units at $32
30 units at $34
10 units at $35


The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end
of the year according to the LIFO method?

A. $655
B. $620
C. $690
D. $659
79. The following lots of a particular commodity were available for sale during the year:

Beginning inventory
First purchase

A. $655
B. $620
C. $690
D. $659
81. The following lots of a particular commodity were available for sale during the year:

Beginning inventory
First purchase
Second purchase
Third purchase

5 units at $61
15 units at $63
10 units at $74
10 units at $77


The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year.
What is the amount of cost of good sold for the year according to the average cost method?

A. $1,380
B. $1,375
C. $1,510
D. $1,250
82. The following lots of a particular commodity were available for sale during the year:

Beginning inventory
First purchase
Second purchase
Third purchase

C. $1,510
D. $1,250
84. Under a periodic inventory system
A. accounting records continuously disclose the amount of inventory
B. a separate account for each type of merchandise is maintained in a subsidiary ledger
C. a physical inventory is taken at the end of the period
D. merchandise inventory is debited when goods are returned to vendors


85. The following lots of a particular commodity were available for sale during the year:

Beginning inventory
First purchase
Second purchase
Third purchase

10 units at $60
25 units at $65
30 units at $68
15 units at $75

The firm uses the periodic system and there are 25 units of the commodity on hand at the end of the year.
What is the amount of the inventory at the end of the year using the FIFO method?

A. $1,685
B. $1,575
C. $1,805
D. $3,585
86. The following lots of a particular commodity were available for sale during the year:


What is the amount of the inventory at the end of the year using the average cost method?

A. $1,685
B. $1,575
C. $1,805
D. $3,705


88. If Beginning Inventory (BI) + Purchases (P) - Ending Inventory (EI) = Cost of Goods Sold (COGS), an
equivalent equation can be written as?
A. BI + P = COGS - EI
B. BI - P = COGS + EI
C. BI + P = COGS + EI
D. EI + P = COGS - BI

89. During a period of consistently rising prices, the method of inventory that will result in reporting the
greatest cost of merchandise sold is
A. FIFO
B. LIFO
C. average cost
D. weighted average

90. During times of rising prices, which of the following is not an accurate statement?
A. Average costing will yield results that are between those of FIFO and LIFO.
B. LIFO will result in a higher cost of goods sold than FIFO.
C. FIFO will result in a higher net income than LIFO.
D. LIFO will result in higher income taxes than FIFO.

91. If the revenues are correctly reported and the Gross Profit of a company is understated, what is the effect on
Owner’s Equity?

C. FIFO
D. average

96. If a manufacturer ships merchandise to a retailer on consignment, the unsold merchandise should be
included in the inventory of the
A. consignee
B. retailer
C. manufacturer
D. shipper

97. Merchandise inventory at the end of the year was inadvertently overstated. Which of the following
statements correctly states the effect of the error on net income, assets, and owner's equity?
A. net income is overstated, assets are overstated, owner's equity is understated
B. net income is overstated, assets are overstated, owner's equity is overstated
C. net income is understated, assets are understated, owner's equity is understated
D. net income is understated, assets are understated, owner's equity is overstated


98. Merchandise inventory at the end of the year was understated. Which of the following statements correctly
states the effect of the error?
A. net income is understated
B. net income is overstated
C. cost of merchandise sold is understated
D. merchandise inventory reported on the balance sheet is overstated

99. Merchandise inventory at the end of the year is overstated. Which of the following statements correctly
states the effect of the error?
A. owner's equity is overstated
B. cost of merchandise sold is overstated
C. gross profit is understated

B. Net income will be overstated
C. Net income will be understated.
D. Only gross profit will be affected.

104. If a company mistakenly counts less items during a physical inventory than actually exist, how will the
error affect the cost of merchandise sold?
A. Understated
B. Overstated
C. No change.
D. Only inventory is affected.

105. Too much inventory on hand
A. reduces solvency
B. increases the cost to safeguard the assets
C. increases the losses due to price declines
D. all of the above

106. Which of the following is used to analyze the efficiency and effectiveness of inventory management?
A. inventory turnover only
B. number of days’ sales in inventory only
C. both inventory turnover and number of days’ sales in inventory
D. neither inventory turnover or number of days’ sales in inventory

107. Which of the following measures the relationship between cost of merchandise sold and the amount of
inventory carried during the period?
A. inventory turnover
B. Fixed asset turnover
C. retail method of inventory costing
D. gross profit method of inventory costing


using the retail method?

May 1
May 1-31
May 1-31

Merchandise Inventory
Purchases (net)
Sales (net)

Cost
$125,000
235,000

Retail
$166,667
313,333
230,000

A. $250,000
B. $360,000
C. $172,500
D. $187,500
113. If the estimated rate of gross profit is 30%, what is the estimated cost of the merchandise inventory on
September 30, based on the following data?

Sep. 1
Sep. 1-30
Sep. 1-30


A. the company decides not to do a physical inventory.
B. a natural disaster has destroyed most of their inventory.
C. the company has not kept up with their inventory records.
D. the company is preparing annual financial statements.

117. Stevens Company started the year with an inventory cost of $145,000. During the month of January they
purchased inventory that cost of $53,000. January sales totaled $140,000. Estimated gross profit is 35%. The
estimated ending inventory as of January 31 is
A. $58,000
B. $91,000
C. $107,000
D. $69,300


118. Determine the total value of the merchandise using Net Realizable Value:

Item
Doll
Horse

Quantity
10
5

Selling Price
$7
9

Commission
$2

120. Safeguarding inventory from damage or theft is a primary objective for the control of inventory. If you
were running a clothing store, name three specific controls you would implement to guard inventory from theft.

121. List three different security measures taken by stores to safeguard inventory.


122. Three identical units of Item Steele Plate are purchased during March, as shown below.
Item Steele Plate
Purchase
Purchase
Purchase

Mar. 3
Mar. 10
Mar. 19
Total

Units
1
1
1
3

Cost
$830
840
880
$2,550

Assume that one unit is sold on March 23 for $1,125. Determine the gross profit for March and ending inventory on March 31 using (a) FIFO, (b)

October

Total

5
12
28

Purchase
Purchase
Purchase

Units
1
1
1
3

Cost
$5
13
15
$33