Test Bank for Intermediate Accounting: Fourteenth Edition

T 1. A manufacturing concern would T 11. The change in the LIFO Reserve

report the cost of units only from one period to the next is
partially processed as inventory in recorded as an adjustment to Cost
the balance sheet. of Goods Sold.

F 2. Both merchandising and F 12. Many companies use LIFO for both
manufacturing companies normally tax and internal reporting
have multiple inventory accounts. purposes.

F 3. When using a perpetual inventory F 13. LIFO liquidation often distorts net
system, freight charges on goods income, but usually leads to
purchased are debited to Freight- substantial tax savings.
In.
T 14. LIFO liquidations can occur
F 4. If a supplier ships goods f.o.b. frequently when using a specific-
destination, title passes to the goods approach.
buyer when the supplier delivers
the goods to the common carrier. T 15. Dollar-value LIFO techniques help
protect LIFO layers from erosion.
T 5. If ending inventory is understated,
then net income is understated. F 16. The dollar-value LIFO method
measures any increases and
T 6. If both purchases and ending decreases in a pool in terms of
inventory are overstated by the total dollar value and physical
same amount, net income is not quantity of the goods.
affected.
F 17. A disadvantage of LIFO is that it
F 7. Freight charges on goods does not match more recent costs
purchased are considered a period against current revenues as well
cost and therefore are not part of as FIFO.
the cost of the inventory.
T 18. The LIFO conformity rule requires
T 8. Purchase Discounts Lost is a that if a company uses LIFO for tax
financial expense and is reported purposes, it must also use LIFO for
in the “other expenses and losses” financial accounting purposes.
section of the income statement.
F 19. Use of LIFO provides a tax benefit
F 9. The cost flow assumption adopted in an industry where unit costs
must be consistent with the tend to decrease as production
physical movement of the goods. increases.

T 10. In all cases when FIFO is used, the T 20. LIFO is inappropriate where unit
cost of goods sold would be the costs tend to decrease as
same whether a perpetual or production increases.
periodic system is used.
21.Which of the following inventories carried by a manufacturer is similar to the
merchandise inventory of a retailer?
a. Raw materials.
b. Work-in-process.
c. Finished goods.
d. Supplies.

22. Where should raw materials be classified on the balance sheet?

a. Prepaid expenses.
b. Inventory.
c. Equipment.
d. Not on the balance sheet.

23. Which of the following accounts is not reported in inventory?

a. Raw materials.
b. Equipment.
c. Finished goods.
d. Supplies.

24. Why are inventories included in the computation of net income?

a. To determine cost of goods sold.
b. To determine sales revenue.
c. To determine merchandise returns.
d. Inventories are not included in the computation of net income.

25. Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to a Purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in
inventory.

26. How is a significant amount of consignment inventory reported in the balance sheet?
a. The inventory is reported separately on the consignor's balance sheet.
b. The inventory is combined with other inventory on the consignor's balance sheet.
c. The inventory is reported separately on the consignee's balance sheet.
d. The inventory is combined with other inventory on the consignee's balance sheet.

27. Where should goods in transit that were recently purchased f.o.b. destination be
included on the balance sheet?
a. Accounts payable.
b. Inventory.
c. Equipment.
d. Not on the balance sheet.
28.If a company uses the periodic inventory system, what is the impact on net income of
including goods in transit f.o.b. shipping point in purchases, but not ending
inventory?
a. Overstate net income.
b. Understate net income.
c. No effect on net income.
d. Not sufficient information to determine effect on net income.

29. If a company uses the periodic inventory system, what is the impact on the current
ratio of including goods in transit f.o.b. shipping point in purchases, but not ending
inventory?
a. Overstate the current ratio.
b. Understate the current ratio.
c. No effect on the current ratio.
d. Not sufficient information to determine effect on the current ratio.

30. What is consigned inventory?

a. Goods that are shipped, but title transfers to the receiver.
b. Goods that are sold, but payment is not required until the goods are sold.
c. Goods that are shipped, but title remains with the shipper.
d. Goods that have been segregated for shipment to a customer.

31. When using a perpetual inventory system,

a. no Purchases account is used.
b. a Cost of Goods Sold account is used.
c. two entries are required to record a sale.
d. all of these.

32. Goods in transit which are shipped f.o.b. shipping point should be
a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.

33. Goods in transit which are shipped f.o.b. destination should be

a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.

34. Which of the following items should be included in a company's inventory at the
balance sheet date?
a. Goods in transit which were purchased f.o.b. destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at his
or her convenience.
d. None of these.
Use the following information for questions 35 and 36.
During 2012 Carne Corporation transferred inventory to Nolan Corporation and agreed to
repurchase the merchandise early in 2013. Nolan then used the inventory as collateral to
borrow from Norwalk Bank, remitting the proceeds to Carne. In 2013 when Carne
repurchased the inventory, Nolan used the proceeds to repay its bank loan.

35. This transaction is known as a(n)

a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.

36. On whose books should the cost of the inventory appear at the December 31, 2012
balance sheet date?
a. Carne Corporation
b. Nolan Corporation
c. Norwalk Bank
d. Nolan Corporation, with Carne making appropriate note disclosure of the
transaction

37. Goods on consignment are

a. included in the consignee's inventory.
b. recorded in a Consignment Out account which is an inventory account.
c. recorded in a Consignment In account which is an inventory account.
d. all of these
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38. Valuation of inventories requires the determination of all of the following except
a. the costs to be included in inventory.
b. the physical goods to be included in inventory.
c. the cost of goods held on consignment from other companies.
d. the cost flow assumption to be adopted.
P
39. The accountant for the Pryor Sales Company is preparing the income statement for
2012 and the balance sheet at December 31, 2012. Pryor uses the periodic
inventory system. The January 1, 2012 merchandise inventory balance will appear
a. only as an asset on the balance sheet.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as
a current asset on the balance sheet.
d. as an addition in the cost of goods sold section of the income statement and as a
current asset on the balance sheet.
P
40. If the beginning inventory for 2012 is overstated, the effects of this error on cost of
goods sold for 2012, net income for 2012, and assets at December 31, 2013, respectively,
are

a. overstatement, understatement, overstatement.

b. overstatement, understatement, no effect.
 c. understatement, overstatement, overstatement.
d. understatement, overstatement, no effect.

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41. The failure to record a purchase of merchandise on account even though the goods
are properly included in the physical inventory results in
a. an overstatement of assets and net income.
b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an overstatement of
assets.
d. an understatement of liabilities and an overstatement of owners' equity.

42. Dolan Co. received merchandise on consignment. As of March 31, Dolan had
recorded the transaction as a purchase and included the goods in inventory. The
effect of this on its financial statements for March 31 would be
a. no effect.
b. net income was correct and current assets and current liabilities were overstated.
c. net income, current assets, and current liabilities were overstated.
d. net income and current liabilities were overstated.

43. Green Co. received merchandise on consignment. As of January 31, Green included
the goods in inventory, but did not record the transaction. The effect of this on its
financial statements for January 31 would be
a. net income, current assets, and retained earnings were overstated.
b. net income was correct and current assets were understated.
c. net income and current assets were overstated and current liabilities were
understated.
d. net income, current assets, and retained earnings were understated.

44. Feine Co. accepted delivery of merchandise which it purchased on account. As of

December 31, Feine had recorded the transaction, but did not include the
merchandise in its inventory. The effect of this on its financial statements for
December 31 would be
a. net income, current assets, and retained earnings were understated.
b. net income was correct and current assets were understated.
c. net income was understated and current liabilities were overstated.
d. net income was overstated and current assets were understated.

45. On June 15, 2012, Wynne Corporation accepted delivery of merchandise which it
pur-chased on account. As of June 30, Wynne had not recorded the transaction or
included the merchandise in its inventory. The effect of this on its balance sheet for
June 30, 2012 would be
a. assets and stockholders' equity were overstated but liabilities were not affected.
b. stockholders' equity was the only item affected by the omission.
c. assets, liabilities, and stockholders' equity were understated.
d. none of these.

46. What is the effect of a $50,000 overstatement of last year's inventory on current
years ending retained earning balance?
a. Understated by $50,000.
b. No effect.
c. Overstated by $50,000.
d. Need more information to determine.
47. Which of the following is a product cost as it relates to inventory?
a. Selling costs.
b. Interest costs.
c. Raw materials.
d. Abnormal spoilage.

48. Which of the following is a period cost?

a. Labor costs.
b. Freight in.
c. Production costs.
d. Selling costs.

49. Which method may be used to record cash discounts a company receives for paying
suppliers promptly?
a. Net method.
b. Gross method.
c. Average method.
d. a and b.

50. Which of the following is included in inventory costs?

a. Product costs.
b. Period costs.
c. Product and period costs.
d. Neither product or period costs.

51. Which of the following is correct?

a. Selling costs are product costs.
b. Manufacturing overhead costs are product costs.
c. Interest costs for routine inventories are product costs.
d. All of these.

52. All of the following costs should be charged against revenue in the period in which
costs are incurred except for
a. manufacturing overhead costs for a product manufactured and sold in the same
accounting period.
b. costs which will not benefit any future period.
c. costs from idle manufacturing capacity resulting from an unexpected plant
shutdown.
d. costs of normal shrinkage and scrap incurred for the manufacture of a product in
ending inventory.

53. Which of the following types of interest cost incurred in connection with the purchase
or manufacture of inventory should be capitalized as a product cost?
a. Purchase discounts lost
b. Interest incurred during the production of discrete projects such as ships or real
estate projects
c. Interest incurred on notes payable to vendors for routine purchases made on a
repetitive basis
 d. All of these should be capitalized.

54. The use of a Discounts Lost account implies that the recorded cost of a purchased
inventory item is its
a. invoice price.
b. invoice price plus the purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.

55. The use of a Purchase Discounts account implies that the recorded cost of a
purchased inventory item is its
a. invoice price.
b. invoice price plus any purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.

Use the following information for questions 56 and 57.

During 2012, which was the first year of operations, Oswald Company had merchandise
purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10,
n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of
the goods available had been sold at year end.

56. Which of the following recording procedures would result in the highest cost of goods
sold for 2012?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not
taken shown under "other expenses" in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same cost of goods sold.
d. Cannot be determined from the information provided.

57. Which of the following recording procedures would result in the highest net income
for 2012?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not
taken shown under "other expenses" in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same net income.
d. Cannot be determined from the information provided.

58. When using the periodic inventory system, which of the following generally would not
be separately accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cash (purchase) discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in for merchandise purchased during the period
S
59. Costs which are inventoriable include all of the following except
a. costs that are directly connected with the bringing of goods to the place of
business of the buyer.
b. costs that are directly connected with the converting of goods to a salable
condition.
c. buying costs of a purchasing department.
d. selling costs of a sales department.
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60. Which inventory costing method most closely approximates current cost for each of
the following:
Ending Inventory Cost of Goods Sold
a. FIFO FIFO
b. FIFO LIFO
c. LIFO FIFO
d. LIFO LIFO

61. In situations where there is a rapid turnover, an inventory method which produces a
balance sheet valuation similar to the first-in, first-out method is
a. average cost.
b. base stock.
c. joint cost.
d. prime cost.

62. The pricing of issues from inventory must be deferred until the end of the accounting
period under the following method of inventory valuation:
a. moving average.
b. weighted-average.
c. LIFO perpetual.
d. FIFO.

63. An inventory pricing procedure in which the oldest costs incurred rarely have an
effect on the ending inventory valuation is
a. FIFO.
b. LIFO.
c. base stock.
d. weighted-average.

64. Which method of inventory pricing best approximates specific identification of the
actual flow of costs and units in most manufacturing situations?
a. Average cost
b. First-in, first-out
c. Last-in, first-out
d. Base stock

65. Assuming no beginning inventory, what can be said about the trend of inventory
prices if cost of goods sold computed when inventory is valued using the FIFO
method exceeds cost of goods sold when inventory is valued using the LIFO
method?
 a. Prices decreased.
b. Prices remained unchanged.
c. Prices increased.
d. Price trend cannot be determined from information given.
66. In a period of rising prices, the inventory method which tends to give the highest
reported net income is
a. base stock.
b. first-in, first-out.
c. last-in, first-out.
d. weighted-average.

67. In a period of rising prices, the inventory method which tends to give the highest
reported inventory is
a. FIFO.
b. moving average.
c. LIFO.
d. weighted-average.

68. Tanner Corporation's inventory cost on its balance sheet was lower using first-in,
first-out than it would have been using last-in, first-out. Assuming no beginning
inventory, in what direction did the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot be determined

69. In a period of rising prices, the inventory method which tends to give the highest
reported cost of goods sold is
a. FIFO.
b. average cost.
c. LIFO.
d. none of these.

70. Which of the following statements is not valid as it applies to inventory costing
methods?
a. If inventory quantities are to be maintained, part of the earnings must be invested
(plowed back) in inventories when FIFO is used during a period of rising prices.
b. LIFO tends to smooth out the net income pattern by matching current cost of
goods sold with current revenue, when inventories remain at constant quantities.
c. When a firm using the LIFO method fails to maintain its usual inventory position
(reduces stock on hand below customary levels), there may be a matching of old
costs with current revenue.
d. The use of FIFO permits some control by management over the amount of net
income for a period through controlled purchases, which is not true with LIFO.

71. The acquisition cost of a certain raw material changes frequently. The book value of
the inventory of this material at year end will be the same if perpetual records are kept as it
would be under a periodic inventory method only if the book value is computed under the
a. weighted-average method.
b. moving average method.
c. LIFO method.
d. FIFO method.
72.Which of the following is a reason why the specific identification method may be
considered ideal for assigning costs to inventory and cost of goods sold?
a. The potential for manipulation of net income is reduced.
b. There is no arbitrary allocation of costs.
c. The cost flow matches the physical flow.
d. Able to use on all types of inventory.

73. In a period of rising prices which inventory method generally provides the greatest
amount of net income?
a. Average cost.
b. FIFO.
c. LIFO.
d. Specific identification.

74. In a period of falling prices, which inventory method generally provides the greatest
amount of net income?
a. Average cost.
b. FIFO.
c. LIFO.
d. Specific identification.

75. What is a LIFO reserve?

a. The difference between the LIFO inventory and the amount used for internal
reporting purposes.
b. The tax savings attributed to using the LIFO method.
c. The current effect of using LIFO on net income.
d. Change in the LIFO inventory during the year.

76. When a company uses LIFO for external reporting purposes and FIFO for internal
reporting purposes, an Allowance to Reduce Inventory to LIFO account is used. This
account should be reported
a. on the income statement in the Other Revenues and Gains section.
b. on the income statement in the Cost of Goods Sold section.
c. on the income statement in the Other Expenses and Losses section.
d. on the balance sheet in the Current Assets section.

77. What happens when inventory in base year dollars decreases?

a. LIFO reserve increases.
b. LIFO layer is created.
c. LIFO layer is liquidated.
d. LIFO price index decreases.

78. How might a company obtain a price index in order to apply dollar-value LIFO?
a. Calculate an index based on recent inventory purchases.
b. Use a general price level index published by the government.
c. Use a price index prepared by an industry group.
d. All of the above.
79.In the context of dollar-value LIFO, what is a LIFO layer?
a. The difference between the LIFO inventory and the amount used for internal
reporting purposes.
b. The LIFO value of the inventory for a given year.
c. The inventory in base year dollars.
d. The LIFO value of an increase in the inventory for a given year.
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80. Which of the following statements is not true as it relates to the dollar-value LIFO
inventory method?
a. It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with
specific goods pooled LIFO.
b. Under the dollar-value LIFO method, it is possible to have the entire inventory in
only one pool.
c. Several pools are commonly employed in using the dollar-value LIFO inventory
method.
d. Under dollar-value LIFO, increases and decreases in a pool are determined and
measured in terms of total dollar value, not physical quantity.
S
81. Which of the following is not considered an advantage of LIFO when prices are
rising?
a. The inventory will be overstated.
b. The more recent costs are matched against current revenues.
c. There will be a deferral of income tax.
d. A company's future reported earnings will not be affected substantially by future
price declines.

82. Which of the following is true regarding the use of LIFO for inventory valuation?
a. If LIFO is used for external financial reporting, then it must also be used for
internal reports.
b. For purposes of external financial reporting, LIFO may not be used with the lower
of cost or market approach.
c. If LIFO is used for external financial reporting, then it cannot be used for tax
purposes.
d. None of these.

83. If inventory levels are stable or increasing, an argument which is not an advantage of
the LIFO method as compared to FIFO is
a. income taxes tend to be reduced in periods of rising prices.
b. cost of goods sold tends to be stated at approximately current cost on the income
statement.
c. cost assignments typically parallel the physical flow of goods.
d. income tends to be smoothed as prices change over time.

134. How should the following costs affect a retailer's inventory valuation?
Freight-in Interest on Inventory Loan
a. Increase No effect
b. Increase Increase
c. No effect Increase
 d. No effect No effect

143. During periods of rising prices, a perpetual inventory system would result in the
same dollar amount of ending inventory as a periodic inventory system under which
of the following inventory cost flow methods?
FIFO LIFO
a. Yes No
b. Yes Yes
c. No Yes
d. No No

144. Hite Co. was formed on January 2, 2012, to sell a single product. Over a two-year
period, Hite's acquisition costs have increased steadily. Physical quantities held in
inventory were equal to three months' sales at December 31, 2012, and zero at
December 31, 2013. Assuming the periodic inventory system, the inventory cost
method which reports the highest amount of each of the following is
Inventory Cost of Sales
December 31, 2012 2013
a. LIFO FIFO
b. LIFO LIFO
c. FIFO FIFO
d. FIFO LIFO
146. When the double extension approach to the dollar-value LIFO inventory cost flow
method is used, the inventory layer added in the current year is multiplied by an
index number. How would the following be used in the calculation of this index
number?
Ending inventory Ending inventory
at current year cost at base year cost
a. Numerator Denominator
b. Numerator Not used
c. Denominator Numerator
d. Not used Denominator

IFRS QUESTIONS
1. Under IFRS, an entity should initially recognize inventory when
a. it has control of the inventory
b. it expects it to provide future economic benefits
c. the cost of the inventory can be reliably measured
d. all of these choices are correct

2. With respect to accounting for inventories, which of the following is a difference that
exists for IFRS, as opposed to U.S. GAAP?
a. There is required recognition of certain development costs.
b. The FIFO method of inventories is prohibited.
c. The specific identification method of inventories is only allowed when goods are
interchangeable.
d. The weighted average method of inventories is prohibited.
 3. Under IFRS, which of the following would be included in the cost of inventories?
a. Product specific designer costs
b. Abnormal waste materials
c. Selling costs
d. All of these would be included in the cost of inventories.

4. Which of the following best describes the IFRS requirement for applying the same
cost formula to all inventories?
a. When they are purchased from different suppliers.
b. When they are purchased from the same geographic region.
c. When they are similar in nature or use.
d. When they sell for the same price.

5. Under IFRS, inventories are classified as

a. noncurrent assets
b. current assets
c. stockholders' equity
d. current liabilities
Use the following information to answer questions 6-8.

Barton Company uses a periodic inventory system. On January 1, 2012, Barton Company
had 600 units of inventory on hand at a cost of $8 per unit. During 2012, Barton made the
following inventory purchases.

April 1 Purchased 200 units at $10

June 1 Purchased 150 units at $12
September 1 Purchased 400 units at $14
November 1 Purchased 500 units at $15
Assume Barton Company sold 1,150 units of inventory during 2012.

6. If you assume that Barton follows IFRS and uses the FIFO method, what is the
ending inventory and cost of goods sold, respectively?
a. Ending inventory = $5,800; Cost of Goods Sold = $15,900
b. Ending inventory = $8,260; Cost of Goods Sold = $13,440
c. Ending inventory = $8,211; Cost of Goods Sold = $13,489
d. Ending inventory = $10,300; Cost of Goods Sold = $11,400

7. If you assume that Barton follows IFRS and uses the Average-cost method, what is
the ending inventory and cost of goods sold, respectively?
a. Ending inventory = $5,800; Cost of Goods Sold = $15,900
b. Ending inventory = $8,260; Cost of Goods Sold = $13,440
c. Ending inventory = $8,211; Cost of Goods Sold = $13,489
d. Ending inventory = $10,300; Cost of Goods Sold = $11,400

8. Based on your answers to Questions 6 and 7, which of the following is a

disadvantage of using the IFRS FIFO method, as compared to Average-cost under U.S.
GAAP?
 a. Under FIFO, during periods of inflation, inventory costs matched against sales
are greater than the inventory replacement cost.
b. When price levels increase and inventory quantities do not decrease, taxes are
greater under FIFO
c. FIFO may cause poorer buying habits as management attempts to manipulate
net income.
d. FIFO typically causes lower reported earnings.

9. Which of the following is an advantage for U.S. companies with international

operations to use LIFO for U.S. purposes, as opposed to using FIFO for foreign
subsidiaries?
a. LIFO creates paper profits.
b. LIFO generally approximates the physical flow of items.
c. Under LIFO, inventory is less vulnerable to price declines.
d. LIFO eliminates balance sheet distortion.

10. Both U.S. GAAP and IFRS exclude which of the following from the cost of inventory?
a. Selling costs
b. General administrative costs
c. Most storage costs
d. All of these are excluded by U.S. GAAP and IFRS.
Test Bank for Intermediate Accounting: IFRS Edition

T 1. A manufacturing concern would report and therefore are not part of the cost of
the cost of units only partially processed the inventory.
as inventory in the statement of financial
position. T 11. Purchase Discounts Lost is a
financial expense and is reported in the
F 2. Both merchandising and “other income and expense” section of the
manufacturing companies normally have income statement.
multiple inventory accounts.
F 12. Interest costs incurred to
T 3. IFRS requires manufacturers to manufacture large quantities of inventory
disclose their inventory components on that are produced routinely should be
the statement of financial position or in capitalized.
related notes.
F 13. A trade discount that is granted as
T 4. Goods in transit, shipped FOB an incentive for a first-time customer or as
shipping point, are included in the buyer’s a reward for large order should be
statement of financial position at the time accounted for by the purchaser as
of delivery to the common carrier. revenue.

F 5. Tang, Inc. sells collectible jewelry on F 14. Freight costs incurred by the seller
consignment from various manufacturers to ship merchandise to the purchaser are
and accounted for by the seller as part of
should include this consigned inventory on inventory on the statement of financial
its statement of financial position. position.

T 6. Companies must allocate the cost of T 15. Abnormal freight costs are not
all the goods available for sale (or use) included on the statement of financial
between the income statement and the position as part of the cost of inventory.
statement of financial position.
T 16. Under IFRS, agricultural inventories,
F 7. When using a perpetual inventory such as wheat, oranges, etc., are
system, freight charges on goods recorded at their fair value less estimated
purchased are debited to Freight-In. selling costs at the point of harvest

F 8. If a supplier ships goods f.o.b. T 17. The International Accounting

destination, title passes to the buyer when Standards Board (IASB) requires the
the supplier delivers the goods to the specific identification method of inventory
common carrier. costing where individual items of inventory
can be identified and costed.
T 9. If both purchases and ending
inventory are overstated by the same F 18. The International Accounting
amount, net income is not affected. Standards Board requires the specific
identification method when unit price is
F 10. Freight charges on goods low, inventory turnover is high, and
purchased are considered a period cost inventory quantities are large.
F 19. The cost flow assumption adopted
must be consistent with the physical
movement of the goods.
T 20. In all cases when FIFO is used, the F *26. The dollar-value LIFO method
cost of goods sold would be the same measures any increases and decreases in
whether a perpetual or periodic system is a pool in terms of total dollar value and
used. physical quantity of the goods.

F *21. The LIFO perpetual method results F *27. A disadvantage of LIFO is that it
in the same ending inventory and cost of does not match more recent costs against
goods sold amounts as under the LIFO current revenues as well as FIFO.
periodic method.
T *28. The LIFO conformity rule requires
T *22. The change in the LIFO Reserve that if a company uses LIFO for tax
from one period to the next is recorded as purposes, it must also use LIFO for
an adjustment to Cost of Goods Sold. financial accounting purposes.

F *23. Many companies use LIFO for both F *29. Use of LIFO provides a tax benefit
tax and internal reporting purposes. in an industry where unit costs tend to
decrease as production increases.
F *24. LIFO liquidation often distorts net
income, but usually leads to substantial T *30. LIFO is inappropriate where unit
tax savings. costs tend to decrease as production
increases
T *25. LIFO liquidations can occur
frequently when using a specific-goods
approach.

31. Which of the following inventories carried by a manufacturer is similar to the

merchandise inventory of a retailer?
a. Raw materials.
b. Work-in-process.
c. Finished goods.
d. Supplies.

32. Where should raw materials be classified on the statement of financial position?
a. Prepaid expenses.
b. Inventory.
c. Equipment.
d. Not on the statement of financial position.

33. Which of the following accounts is not reported in inventory?

a. Raw materials.
b. Equipment.
c. Finished goods.
d. Supplies.
34. Computers For You is a retailer specializing in selling computers and related equipment.
Which of the following would not be reported in the merchandise inventory account reported
on the statement of financial position for Computers For You at December 31, 2011?
a. Computer purchased for resale during November 2011.
b. Shelving materials purchased during December 2011.
c. Freight costs related to the computers purchased in November.
d. All of the choices are included in the merchandise inventory account at December 31,
2011.

35. Culver Company purchases the majority of its inventory from three primary suppliers for
re-sale to customers around the world. Culver Company’s statement of financial position will
include
a. Finished goods inventory.
b. Work-in-process inventory.
c. Merchandise inventory.
d. All of the choices are correct.

36. Companies must allocate the cost of all the goods available for sale (or use) between
a. The cost goods on hands at the beginning of the period as reported on the statement of
financial position and the cost of goods acquired or produced during the period.
b. The cost of goods on hand at the end of the period as reported on the statement of
financial position and the cost of goods acquired or produced during the period.
c. The income statement and the statement of financial position.
d. All of the choices are correct.

37. Mineral Makers (MM) Company keeps its inventory records using a perpetual system. At
December 31, 2011, the unadjusted balance in the inventory account is $64,000. Through a
physical count on December 31, 2011, MM determines that its actual merchandise inventory
at year-end is $62,500. Which of the following is true regarding the statement of financial
position and the income statement of MM at December 31, 2011?
a. Inventory is increased and cost of goods sold is decreased by $1,500.
b. Inventory is decreased and cost of goods sold is increased by $1,500.
c. Inventory is increased and cost of goods sold is increased by $1,500.
d. Inventory is decreased and cost of goods sold is decreased by $1,500.

38. Tang, Inc. sells collectible jewelry on consignment from various manufacturers.
Additionally, Tang sells its own line of specialty jewelry manufactured in-house. On
December 31, 2011, during Tang, Inc 's annual inventory count, an inexperienced new staff
member included in Tang’s ending inventory $350,000 worth of inventory held on
consignment from Metcalf Associates. Which of the following is correct regarding the impact
of this error on Tang’s income statement and statement of financial position at December
31, 2011?
a. Ending inventory is understated by $350,000.
b. Retained earnings is overstated by $350,000.
c. Cost of goods sold is overstated by $350,000.
d. The financial statements are correctly stated.

39. Why are inventories included in the computation of net income?

a. To determine cost of goods sold.
b. To determine sales revenue.
c. To determine merchandise returns.
d. Inventories are not included in the computation of net income.

40. Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to a Purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in
inventory.

41. How is a significant amount of consignment inventory reported in the statement of

financial position?
a. The inventory is reported separately on the consignor's statement of financial position.
b. The inventory is combined with other inventory on the consignor's statement of financial
position.
c. The inventory is reported separately on the consignee's statement of financial position.
d. The inventory is combined with other inventory on the consignee's statement of financial
position.

42. Where should goods in transit that were recently purchased f.o.b. destination be
included on the statement of financial position?
a. Accounts payable.
b. Inventory.
c. Equipment.
d. Not on the statement of financial position.

43. If a company uses the periodic inventory system, what is the impact on net income of
including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate net income.
b. Understate net income.
c. No effect on net income.
d. Not sufficient information to determine effect on net income.

44. If a company uses the periodic inventory system, what is the impact on the current ratio
of including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate the current ratio.
b. Understate the current ratio.
c. No effect on the current ratio.
d. Not sufficient information to determine effect on the current ratio.

45. What is consigned inventory?

a. Goods that are shipped, but title transfers to the receiver.
b. Goods that are sold, but payment is not required until the goods are sold.
c. Goods that are shipped, but title remains with the shipper.
d. Goods that have been segregated for shipment to a customer.

46. When using a perpetual inventory system,

a. no Purchases account is used.
b. a Cost of Goods Sold account is used.
c. two entries are required to record a sale.
d. all of these.

47. Goods in transit which are shipped f.o.b. shipping point should be
a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.

48. Goods in transit which are shipped f.o.b. destination should be

a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.

49. Which of the following items should be included in a company's inventory at the
statement of financial position date?
a. Goods in transit which were purchased f.o.b. destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at his or her
convenience.
d. None of these.

Use the following information for questions

50 and 51. During 2010 Carne Corporation transferred inventory to Nolan Corporation and
agreed to repurchase the merchandise early in 2011. Nolan then used the inventory as
collateral to borrow from Norwalk Bank, remitting the proceeds to Carne. In 2011 when
Carne repurchased the inventory, Nolan used the proceeds to repay its bank loan.

50. This transaction is known as a(n)

a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.

51. On whose books should the cost of the inventory appear at the December 31, 2010
statement of financial position date?
a. Carne Corporation
b. Nolan Corporation
c. Norwalk Bank
d. Nolan Corporation, with Carne making appropriate note disclosure of the transaction

52. Valuation of inventories requires the determination of all of the following except
a. the costs to be included in inventory.
b. the physical goods to be included in inventory.
c. the cost of goods held on consignment from other companies.
d. the cost flow assumption to be adopted.

53. The accountant for the Pryor Sales Company is preparing the income statement for
2010 and the statement of financial position at December 31, 2010. Pryor uses the periodic
inventory system. The January 1, 2010 merchandise inventory balance will appear
a. only as an asset on the statement of financial position.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a current
asset on the statement of financial position.
d. as an addition in the cost of goods sold section of the income statement and as a current
asset on the statement of financial position.

54. If the beginning inventory for 2010 is overstated, the effects of this error on cost of
goods sold for 2010, net income for 2010, and assets at December 31, 2011, respectively,
are
a. overstatement, understatement, overstatement.
b. overstatement, understatement, no effect.
c. understatement, overstatement, overstatement.
d. understatement, overstatement, no effect.

55. The failure to record a purchase of merchandise on account even though the goods are
properly included in the physical inventory results in
a. an overstatement of assets and net income.
b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an overstatement of assets.
d. an understatement of liabilities and an overstatement of equity.

56. Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded
the transaction as a purchase and included the goods in inventory. The effect of this on its
financial statements for March 31 would be
a. no effect.
b. net income was correct and current assets and current liabilities were overstated.
c. net income, current assets, and current liabilities were overstated.
d. net income and current liabilities were overstated.

57. Green Co. received merchandise on consignment. As of January 31, Green included the
goods in inventory, but did not record the transaction. The effect of this on its financial
statements for January 31 would be
a. net income, current assets, and retained earnings were overstated.
b. net income was correct and current assets were understated.
c. net income and current assets were overstated and current liabilities were understated.
d. net income, current assets, and retained earnings were understated.

58. Feine Co. accepted delivery of merchandise which it purchased on account. As of

December 31, Feine had recorded the transaction, but did not include the merchandise in
its inventory. The effect of this on its financial statements for December 31 would be
a. net income, current assets, and retained earnings were understated.
b. net income was correct and current assets were understated.
c. net income was understated and current liabilities were overstated.
d. net income was overstated and current assets were understated.

59. On June 15, 2010, Wynne Corporation accepted delivery of merchandise which it
purchased on account. As of June 30, Wynne had not recorded the transaction or included
the merchandise in its inventory. The effect of this on its statement of financial position for
June 30, 2010 would be
a. assets and equity were overstated but liabilities were not affected.
b. equity was the only item affected by the omission.
c. assets, liabilities, and equity were understated.
d. none of these.

60. What is the effect of a $50,000 overstatement of last year's inventory on current years
ending retained earning balance?
a. Understated by $50,000.
b. No effect.
c. Overstated by $50,000.
d. Need more information to determine.

61. When inventory is misstated, its presentation lacks?

a. Relevance.
b. Faithful representation.
c. Comparability.
d. All of the choices are correct
62. Which of the following costs should not be included on the statement of financial
position as part of the cost of inventory?
a. Abnormal freight.
b. Import duties.
c. Conversion costs.
d. All of the choices are included on the statement of financial position as part of the cost of
inventory.

63. Jarvis, Inc. manufactures cruise ships for sale. Each ship costs approximately
$25,000,000 to build and takes 3 years to fully construct. During the time it takes to
construct one cruise ship, Jarvis incurs $2,400,000 in interest cost related to the
construction. The interest cost is incurred evenly throughout the construction period. During
the first year of construction, Jarvis builds a shell that can be customized for any purchaser
according to specifications; construction during the final 2 years is all based on client
specification. The International Accounting Standards Board requires that Jarvis account for
this interest cost as
a. $2,400,000 is recorded as interest expense as incurred.
b. $2,400,000 is capitalized to the cruise ship.
c. $800,000 incurred in 1st year is expensed as incurred; the remaining amount is
capitalized to the cruise ship.
d. $800,000 is capitalized to the cruise ship; the remaining amount is expensed as incurred.

64. Oats Company offers a trade discount to its customers as a reward for large orders.
According to the International Accounting Standards Board (IASB) how should the
customers of Oats Company account for these trade discounts?
a. As an expense.
b. As a revenue.
c. As a reduction in the cost of inventory.
d. The IASB allows any of these treatments so long as the company applies it consistently.

65. Amazon.com (USA) and other e-tailers account for certain selling costs––fulfillment
costs related to inventory shipping and warehousing––as part of administrative expenses,
instead of as cost of goods sold. Which of the following is incorrect regarding this
treatment?
a. IFRS allows this treatment as long as it’s applied consistently and adequately disclosed.
b. The practice does not affect the bottom line.
c. The practice does not affect gross margins.
d. U.S. GAAP allows this treatment as long as it’s applied consistently and adequately
disclosed.

66. Computers For You is a retailer specializing in selling computers and related equipment.
During 2011, Computers For You sells $200,000 of merchandise to Sandcastles, Inc.
Computers For You incurs $24,000 of freight costs associated with these sales. Which of
the following is true regarding how this $24,000 is treated on the financial statements?
a. Computers For You will report the $24,000 as part of merchandise inventory on the
statement of financial position.
b. Sandcastles, Inc. will report the $24,000 as part of merchandise inventory on the
statement of financial position.
c. Computers For You will report the $24,000 as part of operating expenses on the income
statement.
d. Sandcastles, Inc. will report the $24,000 as an accounts receivable on the statement of
financial position.

67. Which of the following is a product cost as it relates to inventory?

a. Selling costs.
b. Interest costs.
c. Raw materials.
d. Abnormal spoilage.

68. Which of the following is a period cost?

a. Labor costs.
b. Freight in.
c. Production costs.
d. Selling costs.

69. Which method may be used to record cash discounts a company receives for paying
suppliers promptly?
a. Net method.
b. Gross method.
c. Average method.
d. a and b.

70. Which of the following is included in inventory costs?

a. Product costs.
b. Period costs.
c. Product and period costs.
d. Neither product or period costs.

71. Which of the following is correct?

a. Selling costs are product costs.
b. Manufacturing overhead costs are product costs.
c. Interest costs for routine inventories are product costs.
d. All of these.

72. Costs which are inventoriable include all of the following except
a. costs that are directly connected with the bringing of goods to the place of business of the
buyer.
b. costs that are directly connected with the converting of goods to a salable condition.
c. buying costs of a purchasing department.
d. selling costs of a sales department.

73. Which of the following types of interest cost incurred in connection with the purchase or
manufacture of inventory should be capitalized as a product cost?
a. Purchase discounts lost
b. Interest incurred during the production of discrete projects such as ships or real estate
projects
c. Interest incurred on notes payable to vendors for routine purchases made on a repetitive
basis
d. All of these should be capitalized.

74. The use of a Discounts Lost account implies that the recorded cost of a purchased
inventory item is its
a. invoice price.
b. invoice price plus the purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.

75. The use of a Purchase Discounts account implies that the recorded cost of a purchased
inventory item is its
a. invoice price.
b. invoice price plus any purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.

Use the following information for questions

76 and 77. During 2010, which was the first year of operations, Oswald Company had
merchandise purchases of $985,000 before cash discounts. All purchases were made on
terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of
purchase. All of the goods available had been sold at year end.

76. Which of the following recording procedures would result in the highest cost of goods
sold for 2010?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown
under "other income and expense" in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same cost of goods sold.
d. Cannot be determined from the information provided.

77. Which of the following recording procedures would result in the highest net income for
2010?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown
under "other income and expense" in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same net income.
d. Cannot be determined from the information provided.

78. When using the periodic inventory system, which of the following generally would not be
separately accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cash (purchase) discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in for merchandise purchased during the period

79. Which inventory costing method most closely approximates current cost for ending
inventory?
a. Average
b. FIFO
c. LIFO
d. Specific identification

80. The pricing of issues from inventory must be deferred until the end of the accounting
period under the following method of inventory valuation:
a. moving average.
b. weighted-average.
c. specific identification.
d. FIFO.

81. An inventory pricing procedure in which the oldest costs incurred rarely have an effect
on the ending inventory valuation is
a. FIFO.
b. LIFO.
c. specific identification.
d. weighted-average.

82. Which method of inventory pricing best approximates specific identification of the actual
flow of costs and units in most manufacturing situations?
a. Average cost
b. First-in, first-out
c. moving-average
d. weighted-average
83. Assuming no beginning inventory, what can be said about the trend of inventory prices if
cost of goods sold computed when inventory is valued using the FIFO method exceeds cost
of goods sold when inventory is valued using the average cost method?
a. Prices decreased.
b. Prices remained unchanged.
c. Prices increased.
d. Price trend cannot be determined from information given.

84. In a period of rising prices, the inventory method which tends to give the highest
reported net income is
a. moving-average.
b. first-in, first-out.
c. specific identification.
d. weighted-average.

85. In a period of rising prices, the inventory method which tends to give the highest
reported inventory is
a. FIFO.
b. moving average.
c. specific identification.
d. weighted-average.

86. Tanner Corporation's inventory cost on its statement of financial position was lower
using first-in, first-out than it would have been using average cost. Assuming no beginning
inventory, in what direction did the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot be determined

87. In a period of declining prices, the inventory method which tends to give the highest
reported cost of goods sold is
a. specific identification.
b. average cost.
c. FIFO.
d. none of these.

88. The acquisition cost of a certain raw material changes frequently. The book value of the
inventory of this material at year end will be the same if perpetual records are kept as it
would be under a periodic inventory method only if the book value is computed under the
a. weighted-average method.
b. moving average method.
c. FIFO method.
d. None of these.
89. Which of the following is a reason why the specific identification method may be
considered ideal for assigning costs to inventory and cost of goods sold?
a. The potential for manipulation of net income is reduced.
b. There is no arbitrary allocation of costs.
c. The cost flow matches the physical flow.
d. Able to use on all types of inventory.

90. In a period of falling prices which inventory method generally provides the lowest
reported inventory?
a. Average cost.
b. FIFO.
c. Moving average.
d. Specific identification.

91. In a period of falling prices, which inventory method generally provides the lowest
amount of net income?
a. Average cost.
b. Moving average.
c. FIFO.
d. Specific identification.

92. The International Accounting Standards Board requires the specific identification
method in certain circumstances. Which of the following is likely to be a circumstance where
the specific identification criteria can be met?
a. Unit price is low.
b. Inventory turnover is low.
c. Inventory quantities are large.
d. All of the choices are circumstances where the criteria are likely to be met

93. Homes 4 You builds single-family homes throughout the United States and Europe. The
International Accounting Standards Board (IASB) Requires Homes 4 You to use which of
the following cost flow assumptions for its inventory?
a. FIFO (first-in, first-out).
b. Specific identification.
c. Weighted-average.
d. The IASB allows any of these cost flow assumptions as long as the company uses it
consistently.

94. Oats and Honey Company produces healthy snacks for sale throughout the United
States and Europe. The International Accounting Standards Board (IASB) prohibits Oats
and Honey from using which of the following cost flow assumptions for its inventory?
a. LIFO (last-in, first-out).
b. Specific identification.
c. Weighted-average.
d. The IASB allows any of these cost flow assumptions as long as the company uses it
consistently.

*95. What is a LIFO reserve?

a. The difference between the LIFO inventory and the amount used for internal reporting
purposes.
b. The tax savings attributed to using the LIFO method.
c. The current effect of using LIFO on net income.
d. Change in the LIFO inventory during the year.

*96. When a company uses LIFO for external reporting purposes and FIFO for internal
reporting purposes, an Allowance to Reduce Inventory to LIFO account is used. This
account should be reported
a. on the income statement in the Other Revenues and Gains section.
b. on the income statement in the Cost of Goods Sold section.
c. on the income statement in the Other Expenses and Losses section.
d. on the balance sheet in the Current Assets section.

*97. What happens when inventory in base year dollars decreases?

a. LIFO reserve increases.
b. LIFO layer is created.
c. LIFO layer is liquidated.
d. LIFO price index decreases.

*98. How might a company obtain a price index in order to apply dollar-value LIFO?
a. Calculate an index based on recent inventory purchases.
b. Use a general price level index published by the government.
c. Use a price index prepared by an industry group.
d. All of the above.

*99. In the context of dollar-value LIFO, what is a LIFO layer?

a. The difference between the LIFO inventory and the amount used for internal reporting
purposes.
b. The LIFO value of the inventory for a given year.
c. The inventory in base year dollars.
d. The LIFO value of an increase in the inventory for a given year.

100. Which of the following statements is not true as it relates to the dollar-value LIFO
inventory method?
a. It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with specific
goods pooled LIFO.
b. Under the dollar-value LIFO method, it is possible to have the entire inventory in only one
pool.
c. Several pools are commonly employed in using the dollar-value LIFO inventory method.
d. Under dollar-value LIFO, increases and decreases in a pool are determined and
measured in terms of total dollar value, not physical quantity. *

101. Which of the following is not considered an advantage of LIFO when prices are rising?
a. The inventory will be overstated.
b. The more recent costs are matched against current revenues.
c. There will be a deferral of income tax.
d. A company's future reported earnings will not be affected substantially by future price
declines.

*102. Which of the following is true regarding the use of LIFO for inventory valuation?
a. If LIFO is used for external financial reporting, then it must also be used for internal
reports.
b. For purposes of external financial reporting, LIFO may not be used with the lower-ofcost-
or-net realizable value approach.
c. If LIFO is used for external financial reporting, then it cannot be used for tax purposes.
d. None of these.

*103. If inventory levels are stable or increasing, an argument which is not an advantage of
the LIFO method as compared to FIFO is
a. income taxes tend to be reduced in periods of rising prices.
b. cost of goods sold tends to be stated at approximately current cost on the income
statement.
c. cost assignments typically parallel the physical flow of goods.
d. income tends to be smoothed as prices change over time.

154. How should the following costs affect a retailer's inventory valuation?
Freight-in Interest on Inventory Loan
a. Increase No effect
b. Increase Increase
c. No effect Increase
d. No effect No effect

163. During periods of rising prices, a perpetual inventory system would result in the same
dollar amount of ending inventory as a periodic inventory system under which of the
following inventory cost flow methods?
FIFO Average
a. Yes No
b. Yes Yes
c. No Yes
d. No No

164. Hite Co. was formed on January 2, 2010, to sell a single product. Over a two-year
period, Hite's acquisition costs have increased steadily. Physical quantities held in inventory
were equal to three months' sales at December 31, 2010, and zero at December 31, 2011.
Assuming the periodic inventory system, the inventory cost method which reports the
highest amount of each of the following is
Inventory Cost of Sales
2010 2011
a. Average FIFO
b. Average Average
c. FIFO FIFO
d. FIFO Average

*166. When the double extension approach to the dollar-value LIFO inventory cost flow
method is used, the inventory layer added in the current year is multiplied by an index
number. How would the following be used in the calculation of this index number?
Ending inventory Ending inventory
at current year cost at base year cost
a. Numerator Denominator
b. Numerator Not used
c. Denominator Numerator
d. Not used Denominator
Test Bank for Intermediate Accounting: IFRS Edition

T 1. A company should abandon the valuing commodities held by broker-

historical cost principle when the future traders.
utility of the inventory item falls below its
original cost.

F 2. The lower-of-cost-or-net realizable T 9. Under International Financial

method is used for inventory despite being Reporting Standards (IFRS), separate
less conservative than valuing inventory at reporting of reversals of inventory write-
net realizable value. downs in the period of sale are required.

T 3. Application of the lower-of-cost-or-net T 10. Under International Financial

realizable value rule results in Reporting Standards (IFRS), agricultural
inconsistency because a company may activity can result in the production of both
value inventory at cost in one year and at agricultural produce and biological assets.
net realizable value in the next year. T 11. An inventory of wheat held by a
F 4. International Financial Reporting broker-trader is valued at net realizable
Standards (IFRS) require that a company value.
record an inventory write-down as part of T 12. Agricultural produce is harvested
cost of goods sold. from biological assets and is measured at
F 5. Under International Financial fair value less costs to sell at the point of
Reporting Standards (IFRS), when harvest.
companies value inventory using the T 13. In a basket purchase, the cost of the
lower-of-cost-or-net realizable value individual assets acquired is determined
(LCNRV), in most situations, companies on the basis of their relative sales value.
price inventory on a total–inventory basis.
F 14. A basket purchase occurs when a
T 6. Biological assets, such as milking company agrees to buy inventory weeks
cows, are reported as non-current assets or months in advance.
at fair value less costs to sale (net
realizable value). F 15. Most purchase commitments must
be recorded as a liability.
F 7. The unrealized gains and losses
related to recording biological assets at T 16. If the contract price on a
their correct valuation are reported as part noncancelable purchase commitment
of other comprehensive income on the exceeds the market price, the buyer
statement of comprehensive income. should recognize a liability and
corresponding loss in the period in which
T 8. Under International Financial the market decline takes place.
Reporting Standards (IFRS), net
realizable value is the general rule for
F 17. When a buyer enters into a formal, F 23. When the conventional retail method
noncancelable purchase contract, an includes both net markups and net
asset and a liability are recorded at the markdowns in the cost-to-retail ratio, it
inception of the contract. approximates a lower-of-cost-or-net
realizable value valuation.

F 24. In the retail inventory method, the

term markup means a markup on the
T 18. In late 2011, Daisy Company original cost of an inventory item.
entered into a noncancelable purchase T 25. In the retail inventory method,
contract for which the contract price is abnormal shortages are deducted from
now greater than the market price, and both the cost and retail amounts and
Daisy expects that losses will occur when reported as a loss.
the purchase is executed in early 2012.
Under IFRS, Daisy should recognize a F 26. The inventory turnover ratio is
liability and corresponding loss in 2011. computed by dividing the cost of goods
sold by the ending inventory on hand.
F 19. Under International Financial
Reporting Standards (IFRS), a company T 27. The average days to sell inventory
who recorded a loss on a purchase represents the average number of days’
commitment in 2011 cannot record a sales for which a company has inventory
recovery of that loss in 2012 if price on hand.
improve.
F 28. Under IFRS, LIFO is permitted for
T 20. The gross profit method can be financial reporting purposes if the
used to approximate the dollar amount of company’s host country permits it for tax
inventory on hand. purposes.

F 21. In most situations, the gross profit T 29. Under U.S. GAAP, if inventory is
percentage is stated as a percentage of written down under lower-of-cost-or-
cost. market, it may not be written back up to its
original cost in a subsequent period.
T 22. A disadvantage of the gross profit
method is that it uses past percentages in T 30. IFRS requires inventory to be written
determining the markup. down below its original cost in some
situations, but inventory cannot be written
up above its original cost.
31. LCNRV of inventory
a. is always either the net realizable value or its cost.
b. should always be equal to net realizable value.
c. may sometimes be less than net realizable value.
d. should always be equal to net realizable value less costs to complete.

32. Lower-of-cost-or-net realizable value

a. gives the lowest valuation if applied to the total inventory.
b. gives the lowest valuation if applied to major groups of inventory.
c. gives the lowest valuation if applied to individual items of inventory.
d. must be applied to major groups for taxes.

33. When the cost-of-goods-sold method is used to record inventory at net realizable value
a. there is a direct reduction in the selling price of the product that results in a loss being
recorded on the income statement prior to the sale.
b. a loss is recorded directly in the inventory account by crediting inventory and debiting
loss on inventory decline.
c. only the portion of the loss attributable to inventory sold during the period is recorded in
the financial statements.
d. the net realizable value figure for ending inventory is substituted for cost and the loss is
buried in cost of goods sold.

34. Lower-of-cost-or-net realizable value as it applies to inventory is best described as the

a. reporting of a loss when there is a decrease in the future utility below the original cost.
b. method of determining cost of goods sold.
c. assumption to determine inventory flow.
d. change in inventory value to net realizable value.

35. Why are inventories stated at lower-of-cost-or-net realizable value?

a. To report a loss when there is a decrease in the future utility.
b. To be conservative.
c. To report a loss when there is a decrease in the future utility below the original cost.
d. To permit future profits to be recognized.

36. Which of the following is not an acceptable method of applying the lower-of-cost-or-net
realizable value method to inventory?
a. Inventory location.
b. Groups of inventory items.
c. Individual item.
d. Total of the inventory.

37. Which method(s) may be used to record a loss due to a price decline in the value of
inventory?
a. Loss method.
b. Sales method.
c. Cost-of-goods-sold method.
d. Both a and c.
38. When inventory declines in value below original (historical) cost what is the maximum
amount that the inventory can be valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Sales price reduced by estimated costs to sell

39. Net realizable value is

a. fair value plus estimated costs to complete and make a sale.
b. selling price.
c. selling price plus estimated costs to complete and make a sale.
d. selling price less estimated costs to complete and make a sale.

40. Shake Company’s inventory experienced a decline in value necessitating a write-down

to lower of cost or net realizable value (LCNRV) of $230,000. This amount is material to
Shake’s income statement and the company follows IFRS. Where should Shake Company
report this decline in value according to IFRS?
I. As a loss on the income statement.
II. As a separate component of other comprehensive income on the statement of
comprehensive income.
III. As part of cost of goods sold on the income statement.
a. Shake must use I.
b. Shake must use I, II or III.
c. Shake must use I, or III.
d. Shake must use III.

41. Which of the following statements is incorrect regarding the lower-of-cost-or-net

realizable value (LCNRV)?
a. Net realizable value (NRV) is the selling price less estimated costs to complete and
estimated costs to make a sale.
b. In most situations, companies price inventory on a total-inventory basis.
c. One of two methods may be used to record the income effect of valuing inventory at net
realizable value.
d. Companies use an allowance account, the “Allowance to Reduce Inventory to Net
Realizable Value.”

42. Under International Financial Reporting Standards (IFRS), which of the following is true
regarding inventory write-downs and/or recovery of a write-down?
a. Recovery of inventory write-downs is prohibited under IFRS.
b. IFRS requires separate reporting of reversals of inventory write-downs.
c. IFRS requires companies to record write-downs in a separate loss account.
d. All of the choices are correct regarding IFRS and write-downs and/or recoveries.

43. Under International Financial Reporting Standards (IFRS), net realizable value is the
general rule for valuing which of the following types of inventory?
a. Commodities held by broker-traders.
b. Computer components held for sale to manufacturers.
c. Inventories priced on an item by-item basis, but not those priced on a total-inventory
basis.
d. All of the choices are held at NRV under IFRS.

44. Under International Financial Reporting Standards (IFRS), agricultural activity results in
which of the following types of assets?
I. Agricultural produce
II. Biological assets
a. I only.
b. II only.
c. I and II.
d. Neither I nor II.

45. Agricultural produce is

a. Harvested from biological assets.
b. Valued at the time of harvest at its cost to produce.
c. Valued at each reporting period at its fair value less costs to sell.
d. All of the choices are correct regarding agricultural produce.

46. Commodity broker-traders

a. Produce or raise commodities such as corn, wheat, or precious metals.
b. Hold their inventory primarily to sell the commodities in the near term and generate a
profit from price fluctuations.
c. Value their inventories at the lower-of-cost-or-net realizable value (LCNRV).
d. All of the choices are correct regarding broker-traders.

47. Situations in which net realizable value is used to value inventory include
a. agricultural inventory.
b. minerals and mineral products.
c. commodities held by broker-traders.
d. all of these.

48. If a material amount of inventory has been ordered through a formal purchase contract
at the statement of financial position date for future delivery at firm prices,
a. this fact must be disclosed.
b. disclosure is required only if prices have declined since the date of the order.
c. disclosure is required only if prices have since risen substantially.
d. an appropriation of retained earnings is necessary.

49. The credit balance that arises when a net loss on a purchase commitment is recognized
should be
a. presented as a current liability.
b. subtracted from ending inventory.
c. presented as an appropriation of retained earnings.
d. presented in the income statement.

50. In 2010, Orear Manufacturing signed a contract with a supplier to purchase raw
materials in 2011 for $700,000. Before the December 31, 2010 statement of financial
position date, the market price for these materials dropped to $510,000. The journal entry to
record this situation at December 31, 2010 will result in a credit that should be reported
a. as a valuation account to Inventory on the statement of financial position.
b. as a current liability.
c. as an appropriation of retained earnings.
d. on the income statement.

51. At the end of the fiscal year, Apha Airlines has an outstanding non-cancellable purchase
commitment for the purchase of 1 million gallons of jet fuel at a price of $4.10 per gallon for
delivery during the coming summer. The company prices its inventory at the LCNRV. If the
market price for jet fuel at the end of the year is $4.50, how would this situation be reflected
in the annual financial statements?
a. Record unrealized gains of $400,000 and disclose the existence of the purchase
commitment.
b. No impact.
c. Record unrealized losses of $400,000 and disclose the existence of the purchase
commitment.
d. Disclose the existence of the purchase commitment.

52. At the end of the fiscal year, Apha Airlines has an outstanding purchase commitment for
the purchase of 1 million gallons of jet fuel at a price of $4.60 per gallon for delivery during
the coming summer. The company prices its inventory at the LCNRV. If the market price for
jet fuel at the end of the year is $4.25, how would this situation be reflected in the annual
financial statements?
a. Record unrealized gains of $350,000 and disclose the existence of the purchase
commitment.
b. No impact.
c. Record unrealized losses of $35 and disclose the existence of the purchase commitment.

d. Disclose the existence of the purchase commitment.

53. How is the gross profit method used as it relates to inventory valuation?
a. Verify the accuracy of the perpetual inventory records.
b. Verity the accuracy of the physical inventory.
c. To estimate cost of goods sold.
d. To provide an inventory value of LIFO inventories.

54. Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus the purchases equal total goods to be accounted for.
b. Goods not sold must be on hand.
c. If the sales, reduced to the cost basis, are deducted from the sum of the opening
inventory plus purchases, the result is the amount of inventory on hand.
d. The total amount of purchases and the total amount of sales remain relatively unchanged
from the comparable previous period.

55. The gross profit method of inventory valuation is invalid when

a. a portion of the inventory is destroyed.
b. there is a substantial increase in inventory during the year.
c. there is no beginning inventory because it is the first year of operation.
d. none of these.

56. Which statement is not true about the gross profit method of inventory valuation?
a. It may be used to estimate inventories for interim statements.
b. It may be used to estimate inventories for annual statements.
c. It may be used by auditors.
d. None of these.

57. A major advantage of the retail inventory method is that it

a. provides reliable results in cases where the distribution of items in the inventory is
different from that of items sold during the period.
b. hides costs from competitors and customers.
c. gives a more accurate statement of inventory costs than other methods.
d. provides a method for inventory control and facilitates determination of the periodic
inventory for certain types of companies.

58. An inventory method which is designed to approximate inventory valuation at the lower
of cost or net realizable value is
a. last-in, first-out.
b. first-in, first-out.
c. conventional retail method.
d. specific identification.

59. The retail inventory method is based on the assumption that the
a. final inventory and the total of goods available for sale contain the same proportion of
high-cost and low-cost ratio goods.
b. ratio of gross margin to sales is approximately the same each period.
c. ratio of cost to retail changes at a constant rate.
d. proportions of markups and markdowns to selling price are the same.

60. Which statement is true about the retail inventory method?

a. It may not be used to estimate inventories for interim statements.
b. It may not be used to estimate inventories for annual statements.
c. It may not be used by auditors.
d. None of these.

61. When the conventional retail inventory method is used, markdowns are commonly
ignored in the computation of the cost to retail ratio because
a. there may be no markdowns in a given year.
b. this tends to give a better approximation of the lower of cost or net realizable value.
c. markups are also ignored.
d. this tends to result in the showing of a normal profit margin in a period when no
markdown goods have been sold.

62. To produce an inventory valuation which approximates the lower-of-cost-or-net

realizable value using the conventional retail inventory method, the computation of the ratio
of cost to retail should
a. include markups but not markdowns.
b. include markups and markdowns.
c. ignore both markups and markdowns.
d. include markdowns but not markups.

63. Which of the following is not required when using the retail inventory method?
a. All inventory items must be categorized according to the retail markup percentage which
reflects the item's selling price.
b. A record of the total cost and retail value of goods purchased.
c. A record of the total cost and retail value of the goods available for sale.
d. Total sales for the period.

64. Which of the following is not a reason the retail inventory method is used widely?
a. As a control measure in determining inventory shortages
b. For insurance information
c. To permit the computation of net income without a physical count of inventory
d. To defer income tax liability

65. What condition is not necessary in order to use the retail method to provide inventory
results?
a. Retailer keeps a record of the total costs of products sold for the period.
b. Retailer keeps a record of the total costs and retail value of goods purchased.
c. Retailer keeps a record of the total costs and retail value of goods available for sale.
d. Retailer keeps a record of sales for the period.

66. What method yields results that are essentially the same as those of the conventional
retail method?
a. FIFO.
b. Lower-of-average-cost-or-net realizable value.
c. Average cost.
d. LIFO.

67. What is the effect of net markups on the cost-retail ratio when using the conventional
retail method?
a. Increases the cost-retail ratio.
b. No effect on the cost-retail ratio.
c. Depends on the amount of the net markdowns.
d. Decreases the cost-retail ratio.

68. What is the effect of freight-in on the cost-retail ratio when using the conventional retail
method?
a. Increases the cost-retail ratio.
b. No effect on the cost-retail ratio.
c. Depends on the amount of the net markups.
d. Decreases the cost-retail ratio.
69. Which of the following is not a common disclosure for inventories?
a. Inventory composition.
b. Inventory location.
c. Inventory financing arrangements.
d. Inventory costing methods employed.

70. Which of the following statements is false regarding an assumption of inventory cost
flow?
a. The cost flow assumption need not correspond to the actual physical flow of goods.
b. The assumption selected may be changed each accounting period.
c. The FIFO assumption uses the earliest acquired prices to cost the items sold during a
period.
d. The LIFO assumption uses the earliest acquired prices to cost the items on hand at the
end of an accounting period.

71. The average days to sell inventory is computed by dividing

a. 365 days by the inventory turnover ratio.
b. the inventory turnover ratio by 365 days.
c. net sales by the inventory turnover ratio.
d. 365 days by cost of goods sold.

72. The inventory turnover ratio is computed by dividing the cost of goods sold by
a. beginning inventory.
b. ending inventory.
c. average inventory.
d. number of days in the year.

73. Replenish, Inc. develops and produces sports drinks for sale throughout the United
States and Europe. The International Accounting Standards Board (IASB) prohibits
Replenish, Inc. from using which of the following cost flow assumptions for its inventory?
a. LIFO (last-in, first-out).
b. Specific identification.
c. Weighted-average.
d. The IASB allows any of these cost flow assumptions as long as the company uses it
consistently.

74. Which of the following statements is correct regarding International Financing Reporting
Standards (IFRS) and U.S. GAAP with regard to inventory?
a. LIFO (last-in, first-out) is permitted under IFRS but not under U.S. GAAP..
b. When applying lower-of-cost-or-market, U.S. GAPP defines market as net realizable
value.
c. IFRS permits valuing inventories at fair value, similar to the accounting for property, plant,
and equipment.
d. Under U.S. GAPP, if inventory is written down under lower-of-cost-or-market, it may not
be written back up its original cost in a subsequent period.