Chapter 6 Practice Questions
Rina Dhillon
Practice Questions
- To determine inventory in the balance sheet, a company must count the inventory at the end of its accounting period according to:
a. the periodic inventory system b. the perpetual inventory system c. both the periodic and perpetual inventory systems d. neither the periodic nor perpetual inventory systems - Which of the following statements is false?
a. The inventory account is updated after every sale and after every inventory purchase under the perpetual inventory system b. The inventory account is updated only at the end of the accounting period under the periodic inventory system c. A cost of goods sold account is updated after each sale of inventory under the periodic inventory system d. A purchases account is used only under the periodic inventory system - Grace Brothers is a retail organisation that uses the periodic inventory system. Selected account balances are listed below.
Sales $175 000 Gross purchases 90 000 Beginning inventory 23 000 Ending inventory 17 000 Purchase Returns and Allowances 3 000 Purchase discounts 7 000 Transportation-in 4 000 Sales discounts 8 000 Sales Returns and Allowances 5 000
Calculate Grace Brothers’ net purchases:
a. $84 000 b. $90 000 c. $103 000 d. $117 000 - GPJ Couture buys designer clothing to sell in its retail stores. Since much of the inventory comes from Milan and Paris, GPJ must pay freight charges to get the inventory shipped in. Which of the following statements must be true?
a. Transportation-in, paid by GPJ, is added to the inventory account b. Transportation-in, paid by GPJ, is subtracted from purchases c. Freight charges are only paid by the buyer d. Transportation-in is included in the total cost of purchases used to determine cost of goods sold - The following journal entry was included in the accounting records of Avesta Bespoke.
15 Oct. Accounts payable 4 000 Inventory 40 Cash 3 960
Based on this information, it is likely that Avesta:
a. Purchased inventory for cash b. Paid for inventory purchased on credit, and took advantage of a 1 per cent purchase discount c. Sold inventory for cash d. Collected cash for inventory sold on credit, and recognised a 1 per cent sales discount - Which inventory cost allocation method assigns the cost of the most recent items purchased to ending inventory?
a. Cost Of Goods Sold (COGS) b. Weighted average (WA) c. FIFO d. LIFO - Which inventory cost flow method assigns the cost of the most recent items purchased to cost of goods sold?
a. Cost Of Goods Sold (COGS) b. Weighted average cost c. FIFO d. LIFO - ABS uses a perpetual inventory system and had the following inventory transactions for the month of August.
1 Aug On hand, 50 units at $18.00 each $ 900.00 4 Purchased 115 units at $18.20 each 2 093.00 5 Sold 100 units
10 Purchased 75 units at $18.25 each 1 368.75 24 Sold 40 units Total cost of goods available for sale $4 361.75 30 On hand, 100 units
If ABS uses the FIFO inventory costing method, the amount of ending inventory reported on the balance sheet is:
a. $ 800.00 b. $1810.00 c. $1823.75 d. $1825.00 - ABS uses a perpetual inventory system and had the following inventory transactions for the month of August.
1 Aug On hand, 50 units at $18.00 each $ 900.00 4 Purchased 115 units at $18.20 each 2 093.00 5 Sold 100 units
10 Purchased 75 units at $18.25 each 1 368.75 24 Sold 40 units Total cost of goods available for sale $4 361.75 30 On hand, 100 units If ABS uses the FIFO inventory costing method, cost of goods sold for the month of August is:
a. $2520.00 b. $2538.00 c. $2540.00 d. $2550.00 - ABS uses a perpetual inventory system and had the following inventory transactions for the month of August.
1 Aug On hand, 50 units at $18.00 each $ 900.00 4 Purchased 115 units at $18.20 each 2 093.00 5 Sold 100 units
10 Purchased 75 units at $18.25 each 1 368.75 24 Sold 40 units Total cost of goods available for sale $4 361.75 30 On hand, 100 units
If ABS uses the LIFO inventory costing method, the amount of ending inventory reported on the balance sheet is:
a. $1823.75 b. $1810.00 c. $1811.75 d. $1806.25 - ABS uses a perpetual inventory system and had the following inventory transactions for the month of August.
1 Aug On hand, 50 units at $18.00 each $ 900.00 4 Purchased 115 units at $18.20 each 2 093.00 5 Sold 100 units
10 Purchased 75 units at $18.25 each 1 368.75 24 Sold 40 units Total cost of goods available for sale $4 361.75 30 On hand, 100 units If ABS uses the LIFO inventory costing method, cost of goods sold for the month of August is:
a. $2538.00 b. $2550.00 c. $2551.25 d. $2555.00 - Dhillon Ltd. has a gross profit of $400000. This is based on sales of $1000000. If cost of goods sold available for sale is $730,000 and beginning inventory is $320,000, calculate the estimated value of ending inventory under the gross profit method.
a. $600000 b. $450000 c. $130000 d. $280000 - Which inventory costing method results in the highest inventory balance during a period of rising purchase prices?
a. Weighted average cost b. FIFO c. LIFO d. Both FIFO and LIFO result in the same inventory balance. - During a period of increasing purchase prices, which inventory costing method will yield the lowest cost of goods sold?
a. Any method in which the company uses a periodic system. b. FIFO c. LIFO d. Weighted average cost - If the cost of an item of inventory is $50 and the market value is $57, the amount included in inventory according to the lower-of-cost-and-net-realisable-value is:
a. $7 b. $50 c. $57 d. $107
Solutions:
(1) a – refer to Section 6.1;
(2) c – refer to Section 6.1;
(3) a – refer to Section 6.1
Gross purchases + Transportation-in – Purchase returns and allowances – Purchase discounts = Net Purchases
$90000+4000-3000-7000 = $84000;
(4) d – refer to Section 6.1;
(5) b – refer to Section 6.1: Since 40/4000 = 1% going to a reduction in inventory cost (CR Inventory), there must have been a 1% purchase discount and the DR Accounts Payable shows payment for purchases (in this instance inventory) on credit;
(6) c – refer to Section 6.2;
(7) d – refer to Section 6.2;
(8) c – refer to Section 6.2;
Given FIFO would means selling inventory that was first in, what would be left in the ending inventory which this question is asking for is:
All the beginning inventory and initial purchases would be sold except for 25 units (50+115-100-40). So what is left is the 25 units @$18.20 (all the beginning inventory that costed $18 would have been sold already) and the 75 units purchased on 10th August leaving ending inventory to be:
(25 x $18.20) + (75 x $18.25) = $1823.75;
(9) b – refer to Section 6.2
Looking back at Q8, since this question focuses on COGS and we sold 140 units during the period, the inventory that was sold and its costs are:
(50 x $18) + (90 x $18.20) = $2538;
(10) c – refer to Section 6.2
Given LIFO would means selling inventory that was last in, what would be left in the ending inventory is all that was in the beginning inventory, the remaining 15 units that is from the inventory purchases on 4th August and the remaining 35 units from the inventory purchases on 10th August , which this question is asking for is:
(50×18) + (15 x $18.20) + (35 x $18.25) = $1811.75;
(11) b – refer to Section 6.2
Looking back at Q10, since this question focuses on COGS and we sold 140 units during the period, the inventory that was sold and its costs are:
(40 x $18.25) + (100 x $18.20) = $2550;
(12) c – refer to Section 6.4
Sales – COGS = Gross Profit
$1000000- X = $400000
COGS (X) = $600000
Cost of goods available for sale – COGS = ending inventory
$730000 – $600000 = $130000;
(13) b – refer to Section 6.2;
(14) b – refer to Section 6.2;
(15) b – refer to Section 6.4