Multiple Choice Questions

1. The primary purpose for using an inventory cost flow assumption is to:

a. Parallel the physical flow of units of merchandise.

b. Offset against revenue an appropriate cost of goods sold.

c. Minimize income taxes.

d. Maximize the reported amount of net income.

2. Ace Auto Supply uses a perpetual inventory system. On March 10, the company sells two Shelby four-barrel carburetors. Immediately prior to this sale, the perpetual inventory records indicate three of these carburetors on hand, as follows:

With respect to the sale on March 10: (More than one of the following answers may be correct.)

a. If the average-cost method is used, the cost of goods sold is $460.

b. If these carburetors have identification numbers, Ace must use the specific identification method to determine the cost of goods sold.

c. If the company uses LIFO, the cost of goods sold will be $15 higher than if it were using FIFO.

d. If the company uses LIFO, the carburetor remaining in inventory after the sales will be assumed to have cost $220.

3. T-Shirt City uses a periodic inventory system. During the first year of operations, the company made four purchases of a particular product. Each purchase was for 500 units and the prices paid were $9 per unit in the first purchase, $10 per unit in the second purchase, $12 per unit in the third purchase, and $13 per unit in the fourth purchase. At year-end, 650 of these units remained unsold. Compute the cost of goods sold under the FIFO method and LIFO method, respectively.

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a. $13,700 (FIFO) and $16,000 (LIFO).

b. $8,300 (FIFO) and $6,000 (LIFO).

c. $16,000 (FIFO) and $13,700 (LIFO).

d. $6,000 (FIFO) and $8,300 (LIFO).

4. Trendy Department Store uses a perpetual inventory system but adjusts its inventory records at year-end to reflect the results of a complete physical inventory. In the physical inventory taken at the ends of 2014 and 2015, Trendys employees failed to count the merchandise in the stores window displays. The cost of this merchandise amounted to $13,000 at the end of 2014 and $19,000 at the end of 2015. As a result of these errors, the cost of goods sold for 2015 will be:

a. Understated by $19,000.

b. Overstated by $6,000.

c. Understated by $6,000.

d. None of the above.

5. In July 2015, the accountant for Bradford Imports is in the process of preparing financial statements for the quarter ended June 30, 2015. The physical inventory, however, was last taken on June 5, and the accountant must establish the approximate cost at June 30 from the following data:

The gross profit on sales has consistently averaged 40 percent of sales. Using the gross profit method, compute the approximate inventory cost at June 30, 2015.

a. $420,000.

b. $880,000.

c. $480,000.

d. $1,360,000.

6. Allied Products maintains a large inventory. The company has used the LIFO inventory method for many years, during which the purchase costs of its products have risen substantially. (More than one of the following answers may be correct.)

a. Allied would have reported a higher net income in past years if it had been using the average-cost method.

b. Allieds financial statements imply a lower inventory turnover rate than they would if the company were using FIFO.

c. Allied would have paid more income taxes in past years if it had been using the FIFO method.

d. If Allied were to let its inventory fall far below normal levels, the companys gross profit rate would decline.