Intermediate Accounting Vol 1, 3rd Edition – Test Bank

Intermediate Accounting Vol 1, 3rd Edition – Test Bank

Intermediate Accounting, Vol 1, 3e (Lo/Fisher)

Chapter 6 Inventories

Learning Objective 1

1) Which statement is not correct about the perpetual inventory system for inventory management?

1. A) This system keeps track of additions to and withdrawals from inventory.
2. B) It is not necessary to conduct an inventory count if the perpetual system is used.
3. C) This method produces timely information for management.
4. D) With this method, the company knows the inventory on hand and the related cost of goods sold at any point in time.

Answer: B

Diff: 1 Type: MC

Skill: Conceptual

Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

2) Which statement is correct about the system used to account for inventories?

1. A) Organizations must use the perpetual system to determine the amount of inventory and cost of goods sold.
2. B) The perpetual system is used to determine the amount of inventory and the periodic system is used to determine the cost of goods sold.
3. C) The perpetual and periodic system are both acceptable methods to use for inventory control.
4. D) The balance sheet under the perpetual system is different than that under the periodic system.

Answer: C

Diff: 2 Type: MC

Skill: Conceptual

Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

3) Which statement is not correct about the periodic inventory system for inventory management?

1. A) The periodic inventory system keeps continuous information about the amount of inventory on hand.
2. B) The cost of goods sold is a calculated number under the periodic inventory system.
3. C) Under both the periodic and perpetual systems, the final amounts reported in financial statements are the same.
4. D) The perpetual inventory system provides more information to allow an enterprise to better manage its inventories.

Answer: A

Diff: 1 Type: MC

Skill: Conceptual

Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

4) Using the following information, what amount of “shrinkage” would be identified under the periodic inventory system?

Inventory at the beginning of the year

$ 300,000

Inventory based on count at the end of the year

$ 650,000

Inventory purchases during the year

$ 1,000,000

1. A) $ 0
2. B) $300,000
3. C) $650,000
4. D) $700,000

Answer: A

Explanation: A) Cannot calculate; under the periodic system, the company only keeps track of a single sum of $650,000 for cost of goods sold (Beg Bal + purchase – End Bal based on count)

It is not possible to determine how much is from the actual goods sold versus the amount from shrinkage.

Diff: 3 Type: MC

Skill: Computational

Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

5) Which statement is correct for about inventory systems?

1. A) The periodic inventory system provides more information to allow an enterprise to better manage its inventories.
2. B) Cost of goods sold is a not a calculated number under the periodic inventory system.
3. C) The final amounts reported in statements are the same under both the periodic and perpetual systems.
4. D) The periodic inventory system continuously updates information about the amount of inventory on hand.

Answer: C

Diff: 1 Type: MC

Skill: Conceptual

Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

6) Which of the following is a potential journal entry required after the inventory count under the periodic inventory system?

1. A)

Dr Cost of goods sold

Cr Inventory

1. B)

Dr Cost of goods sold

Cr Inventory

Cr Purchases

1. C)

Dr Inventory

Cr Accounts Payable

1. D)

Dr Cost of goods sold

Cr Inventory shrinkage or inventory gain

Answer: B

Diff: 2 Type: MC

Skill: Conceptual

Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

7) What journal entry is required after the inventory count under the perpetual inventory system when shrinkage has been detected?

1. A)

Dr Cost of goods sold

Cr Inventory

1. B)

Dr Cost of goods sold

Cr Inventory

Cr Purchases

1. C)

Dr Inventory

Cr Accounts Payable

1. D)

Dr Purchases

Cr Accounts Payable

Answer: A

Diff: 2 Type: MC

Skill: Conceptual

Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

8) What journal entry is required when inventory is purchased under the perpetual inventory system?

1. A)

Dr Cost of goods sold

Cr Inventory

1. B)

Dr Cost of goods sold

Cr Inventory

Cr Purchases

1. C)

Dr Inventory

Cr Accounts Payable

1. D)

Dr Purchases

Cr Accounts Payable

Answer: C

Diff: 1 Type: MC

Skill: Conceptual

Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

9) What journal entry is required when inventory is purchased under the periodic inventory system?

1. A)

Dr Cost of goods sold

Cr Inventory

1. B)

Dr Cost of goods sold

Cr Inventory

Cr Purchases

1. C)

Dr Inventory

Cr Accounts Payable

1. D)

Dr Purchases

Cr Accounts Payable

Answer: D

Diff: 1 Type: MC

Skill: Conceptual

Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

10) What journal entry is required when inventory is sold during the year under the periodic inventory system?

1. A)

Dr Cost of goods sold

Cr Inventory

1. B)

Dr Cost of goods sold

Cr Inventory

Cr Purchases

1. C)

No Journal Entry is made

1. D)

Dr Purchases

Cr Accounts Payable

Answer: C

Diff: 1 Type: MC

Skill: Conceptual

Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

11) What journal entry is required when inventory is sold during the year under the perpetual inventory system?

1. A)

Dr Cost of goods sold

Cr Inventory

1. B)

Dr Cost of goods sold

Cr Inventory

Cr Purchases

1. C)

No Journal Entry is made

1. D)

Dr Purchases

Cr Accounts Payable

Answer: A

Diff: 1 Type: MC

Skill: Conceptual

Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

12) Compare the perpetual inventory control system and the periodic inventory control system. Which system provides better information for inventory management?

Answer: Perpetual inventory system: One that directly keeps track of additions to and withdrawals from inventory.

Periodic inventory system: An inventory system that relies on periodic inventory counts to infer the amounts withdrawn from inventory.

A perpetual inventory system maintains information about purchases and cost of sales (i.e., information about flows) on an ongoing basis, whereas the periodic system calculates these amounts when the enterprise completes an inventory count.

Consequently, the perpetual system is more informative and allows better inventory management.

Diff: 1 Type: ES

Skill: Conceptual

Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

13) Identify whether the following are benefits of using a perpetual inventory system (in comparison to a periodic system).

Answer:

Diff: 1 Type: ES

Skill: Conceptual

Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

14) Identify whether the following are benefits of using a perpetual inventory system (in comparison to a periodic system).

Answer:

Diff: 1 Type: ES

Skill: Conceptual

Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

Learning Objective 2

1) What costs are not included in the cost of inventories?

1. A) Raw materials.
2. B) Labour used to make the finished product.
3. C) Costs to deliver raw materials to the company.
4. D) Costs to ship goods to customers.

Answer: D

Diff: 1 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

2) Explain how manufacturing companies can manipulate earnings through its production process. What should an auditor or financial statement user do to detect this type of manipulation?

Answer: For manufacturing companies, producing more goods than the optimal amount for good inventory management can give a boost to income.

Production volume that is over the normal level results in lower per unit costs because there are more units to absorb the fixed costs.

The lower per unit cost then reduces the amount of COGS that flows through income, increasing net income.

For users and auditors, it is important to be alert to a buildup of inventory at year-end, which could indicate excessive production for the purpose of earnings management.

Diff: 2 Type: ES

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

3) Explain how a manufacturing company can manipulate earnings by including non-production costs in inventories. What does an auditor or financial statement user do to detect this type of manipulation?

Answer: When an enterprise incurs an expenditure, it either expenses that cost or capitalizes it as an asset such as inventory.

Including a cost that would otherwise be expensed would keep that cost from flowing through the income statement temporarily until the inventory itself is sold.

For example, including in inventory cost the wages of management staff who are not involved in production would inflate the cost of inventory and reduce wage expense.

Auditors need to scrutinize whether costs are production related.

Users will have a difficult task of discerning this type of earnings management, but a potential sign is a decrease in the gross margin percentage because including too much cost in inventories

would increase cost of goods sold.

Diff: 2 Type: ES

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

4) What issues arise on the initial recognition and measurement of inventory?

1. A) Determining which expenditures to capitalize into the “inventory” account.
2. B) Determining which expenditures to expense into the “cost of goods sold” account.
3. C) Determining how much of the costs recognized in inventory should be expensed in the year.
4. D) Determining the appropriate valuation of inventories that remain on hand.

Answer: A

Diff: 2 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

5) What is the meaning of the terms “F.O.B. destination point”?

1. A) The buyer has ownership of the goods only when they arrive.
2. B) The point at which the buyer takes legal possession of the goods.
3. C) The buyer has ownership of the goods as soon as they are shipped.
4. D) The buyer remains liable for any loss during shipment.

Answer: A

Diff: 1 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

6) Which goods in transit would be recorded in inventory at year end?

1. A) Goods purchased with terms F.O.B. destination point that were received after year end.
2. B) Goods sold with terms F.O.B. shipping point that were shipped before year end.
3. C) Goods purchased with terms F.O.B. shipping point that were received after year end.
4. D) Goods sold with terms F.O.B. destination point that were shipped before year end.

Answer: C

Diff: 3 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

7) Which transaction would be included in the year end inventory?

1. A) Goods received on consignment at year end.
2. B) Goods shipped out on consignment at year end.
3. C) Goods shipped out F.O.B. shipping point at year end.
4. D) Goods received after year end, shipped FOB destination.

Answer: B

Diff: 2 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

8) What costs are not included in the cost of manufactured inventories?

1. A) Raw materials.
2. B) Labour to make the finished product.
3. C) Administrative costs.
4. D) Manufacturing overhead.

Answer: C

Diff: 2 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

9) What is the meaning of the terms “F.O.B. shipping point”?

1. A) The buyer takes ownership of the goods once they arrive at their receiving location.
2. B) The point at which the buyer takes legal possession of the goods.
3. C) The buyer takes ownership of the goods as soon as they are shipped to the buyer.
4. D) The seller remains liable for any loss or damage incurred during shipment.

Answer: C

Diff: 1 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

10) Which goods in transit would be recorded in inventory at year end?

1. A) Goods sold with terms F.O.B. destination point that were shipped at year end.
2. B) Goods sold with terms F.O.B. shipping point that were shipped before year end.
3. C) Goods purchased F.O.B. destination that have not been received by year-end.
4. D) Goods returned for credit before year-end, with terms F.O.B. shipping point.

Answer: A

Diff: 3 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

11) Which goods in transit would be recorded in inventory at year end?

1. A) Goods purchased with terms F.O.B. destination point that were received after year end.
2. B) Goods purchased with terms F.O.B. shipping point that were received after year end.
3. C) Goods sold F.O.B. shipping point that were shipped two weeks before year end.
4. D) Goods returned for credit, with terms F.O.B. destination point, received two days after year end.

Answer: B

Diff: 3 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

12) Which goods in transit would not be recorded in the seller’s inventory at year end?

1. A) Goods sold with terms F.O.B. destination point that were shipped at year end.
2. B) Goods sold with terms F.O.B. shipping point that were shipped one day before year end.
3. C) Goods sold F.O.B. destination point that remained on the shipping dock until one day after year end.
4. D) Goods sold F.O.B. shipping point that were shipped two days after year end.

Answer: B

Diff: 3 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

13) Which goods in transit would not be recorded in the buyer’s inventory at year end?

1. A) Goods purchased with terms F.O.B. destination point that were received at year end.
2. B) Goods purchased with terms F.O.B. shipping point that were received at year end.
3. C) Goods purchased with terms F.O.B. destination point that were received after year end.
4. D) Goods purchased F.O.B. shipping point that were lost in shipment.

Answer: C

Diff: 3 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

14) Which statement is correct about variable costing?

1. A) Under this method, fixed overhead is considered a product cost because production cannot take place without these costs.
2. B) Under this method, fixed overhead is considered a period cost because such costs do not vary according to production level.
3. C) Under this method, variable overhead is considered a period cost because production cannot take place without these costs.
4. D) Under this method, selling costs are considered a product cost because production cannot take place without these costs.

Answer: B

Diff: 2 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

15) Which statement is correct about overhead?

1. A) Fixed overhead is expensed under absorption costing.
2. B) Fixed overhead is never capitalized.
3. C) Variable overhead is always capitalized.
4. D) Fixed overhead is capitalized under absorption costing.

Answer: D

Diff: 3 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

16) Which transaction would not be included in year end inventory?

1. A) Goods received on consignment at year end.
2. B) Goods shipped out on consignment at year end.
3. C) Goods shipped FOB shipping point after year end.
4. D) Goods received at year end.

Answer: A

Diff: 2 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

17) Which statement is correct about absorption costing?

1. A) Under this method, fixed overhead is considered a product cost because production cannot take place without these costs.
2. B) Under this method, fixed overhead is considered a period cost because such costs do not vary according to production level.
3. C) Under this method, variable overhead is considered a period cost because such costs do not vary according to production level.
4. D) Under this method, selling costs are considered a product cost because such costs do not vary according to production level.

Answer: A

Diff: 2 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

18) Which statement is not correct about overhead?

1. A) Fixed overhead is capitalized under absorption costing.
2. B) Fixed overhead is expensed under variable costing.
3. C) Variable overhead is expensed under both absorption and variable costing.
4. D) Both fixed and variable overhead are capitalized under absorption costing.

Answer: C

Diff: 2 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

19) Which statement is correct about overhead?

1. A) Fixed overhead is capitalized under absorption costing.
2. B) Fixed overhead is capitalized under variable costing.
3. C) Variable overhead is always expensed.
4. D) Selling costs are part of fixed overhead.

Answer: A

Diff: 3 Type: MC

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

20) Lean Ltd. had a balance of $52,300 in the office supplies account at the start of the year. During the year, purchases of $141,700 were made and debited to office supplies account. At the end of the year, a physical count of the office supplies indicated $41,800 on hand. What was the office supplies expense for the year?

1. A) $141,700
2. B) $152,200
3. C) $183,500
4. D) $194,000

Answer: B

Explanation: B) 52,300 + 141,700 – 41,800 = $152,200

Diff: 3 Type: MC

Skill: Computational

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

21) A company has fixed production overhead costs totalling $20,000. The normal production level is 2,000 units per year, yielding a standard fixed overhead rate of $10.00 per unit. If the actual production level is 3,200 units, how much would be the amount of fixed overhead per unit and the amount of total fixed overhead included in inventory? Select the letter for the best answer:

1. A)

Fixed overhead per unit

Fixed overhead included in inventory

10.00

32,000

1. B)

Fixed overhead per unit

Fixed overhead included in inventory

6.25

12,500

1. C)

Fixed overhead per unit

Fixed overhead included in inventory

10.00

20,000

1. D)

Fixed overhead per unit

Fixed overhead included in inventory

6.25

20,000

Answer: D

Diff: 1 Type: MC

Skill: Computational

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

22) A company has fixed production overhead costs totalling $25,000. The normal production level is 2,500 units per year, yielding a standard fixed overhead rate of $10.00 per unit. If the actual production level is 2,000 units, how much would be the amount of fixed overhead per unit and the amount of total fixed overhead included in inventory? Select the letter for the best answer:

1. A)

Fixed overhead per unit

Fixed overhead included in inventory

12.50

25,000

1. B)

Fixed overhead per unit

Fixed overhead included in inventory

10.00

25,000

1. C)

Fixed overhead per unit

Fixed overhead included in inventory

10.00

20,000

1. D)

Fixed overhead per unit

Fixed overhead included in inventory

12.50

20,000

Answer: C

Diff: 1 Type: MC

Skill: Computational

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

23) Explain the meaning of product costs and period costs. Discuss which costs should be included in the cost of inventories.

Answer:

• Product costs are those that should be capitalized in inventory because they are incurred as part of the production process.
• Period costs are those that should not be capitalized in inventory because they are not closely related to the production process.
• Product costs include materials, labour, variable overhead, and fixed overhead. For financial reporting purposes, enterprises should include all costs necessary to purchase or to produce the inventory. Manufactured inventories should include product costs but exclude period costs.
• An enterprise should allocate fixed production overhead using actual units produced unless production volume is abnormally low, in which case it should use the normal production level and expense any unallocated overhead.

Diff: 1 Type: ES

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

24) Explain why the absorption costing method is appropriate under GAAP.

Answer: While managerial accounting and internal decision-making purposes favour the variable costing method, IFRS and ASPE require the use of absorption costing for external financial reporting.

Absorption costing is consistent with the conceptual framework: enterprises incur fixed overhead costs to produce goods that generate revenue in the future, so such costs meet the definition of an asset.

In addition, the later expensing of these costs through COGS when the products are sold matches costs to the revenues generated.

Diff: 2 Type: ES

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

25) Explain what problems are created for the auditor by the use of the absorption costing method under GAAP.

Answer: While consistent with the conceptual framework, the capitalization of fixed overhead creates issues when production levels significantly deviate from normal production levels.

Under absorption costing an enterprise can lower cost of goods sold by increasing production volume. If a manager needed a little extra income to, say, meet an earnings target, then he/she could raise production at the end of the year so that ending inventories absorbed more fixed overhead.

Additionally, unusually low production volumes will result in unusually high fixed costs per unit being capitalized into inventory, and this outcome potentially overstates the value of inventory.

While absorption costing is the treatment required for financial reporting, an auditor should be alert to such manipulations, as this behaviour could be indicative of other earnings management activities.

Diff: 3 Type: ES

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

26) When can inventory be overstated under the absorption costing method? Explain the precautions within GAAP to prevent a potential overstatement of inventory under the absorption costing method.

Answer: Unusually low production volumes will result in unusually high fixed costs per unit being capitalized into inventory, and this outcome potentially overstates the value of inventory.

Under GAAP, companies should allocate fixed overhead based on the normal production level expected over several periods.

If the actual production volume is significantly below normal, some fixed overhead would remain unallocated and should be expensed.

Diff: 3 Type: ES

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

27) Explain how fixed overhead costs should be accounted for if a plant is made idle due to a prolonged strike.

Answer: Under GAAP, companies should allocate fixed overhead based on the normal production level expected over several periods.

If the actual production volume is significantly below normal, some fixed overhead would remain unallocated and should be expensed.

In a strike situation, there would be no units of production to absorb the fixed overhead incurred. The only reasonable way to account for the unallocated overhead is to expense it.

Diff: 2 Type: ES

Skill: Conceptual

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

28) Inventive Controls Ltd. was incorporated and started business early in January 2016 to manufacture electronic control devices to monitor traffic. Inventive purchased a small manufacturing plant and office building in a new industrial park and was in operation immediately. General ledger account balances at December 31, 2016 are as follows:

Sales commission

62,000

Supervisory salaries, production manager

66,000

Executive salaries

120,000

Raw material purchases

136,500

Miscellaneous plant supplies

13,700

Depreciation, office building

7,900

Depreciation, plant equipment

9,900

Property tax (80% for office building; 20% for plant building)

4,400

Sales

850,000

Direct labour

64,000

Raw material inventory, Dec 31, 2016

13,600

Utilities expense (60% related to office)

19,000

General administrative expense

42,300

At December 31, 2016, there was no work-in-process, but 30% of the units manufactured remained in ending finished goods inventory. Inventive uses the straight-line method to calculate depreciation.

Required:

1. Calculate the value of cost of goods sold and ending finished goods inventory under IFRS.
2. Prepare an income statement for Inventive for the year ended December 31, 2016.

Answer:

1. To calculate cost of goods sold and ending inventory, first calculate the cost of goods available for sale (COGAS). Since this is the first year of operations, COGAS equals the current year’s production costs. (Later years would also need to include the cost of beginning inventory.)

Cost of goods sold (70% of COGAS) 284,980 × .7 = 199,486

Ending inventory of finished goods (30% of COGAS) 284,980 × .3 = 85,494

1. Using the amounts for COGS and ending inventory from (a), and the other information given, the income statement that results would be as follows:

Diff: 2 Type: ES

Skill: Computational

Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.