INVENTORIES a.

Purchase returns are recorded by debiting

1. Inventories are defined by all of the following,
except
a. Held for sale in the ordinary course of
business.
b. Used in the production or supply of goods
and services for administrative purposes
c. In the process of production for such sale
d. In the form of materials or supplies to be
consumed in the production process or the
rendering of services
2. Inventories encompass all of the following,
except
a. Land and other property not held for sale
b. Finished goods produced
c. Materials and supplies awaiting use in the
production process
d. Merchandise purchased by a retailer
3. Consumable stores or supplies to be consumed
in the production process are reported as
a. Property, plant and equipment
b. Investment property
c. Intangible assets
accounts payable and crediting purchase
returns and allowances.
b. Purchases are recorded as debit to the
inventory account.
c. The entry to record a sale includes a debit to
cost of goods sold and a credit to inventory.
d. After a physical inventory count, inventory is
credited for any missing inventory.
9. In a periodic system, the beginning inventory is
a. Total goods available for sale minus cost of
goods sold
b. Net purchases minus cost of goods sold
c. Net purchases minus ending inventory
d. Total goods available for sale minus net
purchases
10. When the current year’s ending inventor is
overstated
a. The next year’s income is overstated.
b. The current year’s cost of goods sold is
overstated.
c. The current year’s net income is overstated.
d. The current year’s total assets are
understated.

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d. Inventories

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4. A property developer must classify properties current period would result in income of the next
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that it holds for sale in the ordinary course of period being
business are o. a. Correctly stated
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a. Property, plant and equipment b. Understated

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b. Financial asset c. Overstated

c. Investment property d. Either overstated or understated
d. Inventories
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12. A major advantage of the retail inventory method

5. An entry debiting inventory and crediting cost of is that it
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goods sold would be made when a. Hides costs from customers and employees.
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a. Merchandise is returned and the periodic b. Permits entities to avoid taking an annual
inventory method is used. physical inventory.
b. Merchandise is sold and the periodic c. Gives a more accurate measurement of
inventory method is used. inventory than other methods.
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c. Merchandise is returned and the perpetual d. Provides a method for inventory control and
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inventory method is used. facilitates determination of the periodic

d. Merchandise is sold and the perpetual inventory.
inventory method is used.
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13. To produce an inventory valuation which

6. What is the method of accounting for inventory approximates the lower of cost or net realizable
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in which the cost of goods sold is recorded each value using the retail inventory method, the
time a sale is made? computation of the ratio of cost to retail should
a. Planned inventory system a. Include markups and markdowns
b. Perpetual inventory system b. Include markups but not markdowns
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c. Periodic inventory system c. Include markdowns but not markups

d. Professional inventory system d. Ignore both markups and markdowns

7. Which of the following is a characteristic of a
perpetual inventory system?
a. Cost of goods sold is determined as the
amount of purchases less the change in
inventory.
b. Inventory purchases are debited to a
purchases account.
c. Cost of goods sold is recorded with each
sale.
d. Inventory records are not kept for every
item.
14. When the conventional retail inventory method is
used, markdowns are commonly ignored in the
computation of cost to retail ratio because
a. This tends to give a better approximation of
the lower of cost or net realizable value.
b. Markups are also ignored.
c. This tends to result in the showing of a
normal profit margin in a period when no
markdown goods have been sold.
d. There may be no markdowns in a given
year.

15. The retail inventory method would include which

8. Which of the following is not true of the of the following in the calculation of the goods
perpetual
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available for sale at both cost and retail?
a. Markdowns
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 b. Markups d. It may be used by auditors.
c. Purchase returns
d. Freight in 23. Which would not require an estimate of
inventory?
16. If the average retail inventory method is used, a. Interim financial statements are prepared
which of the following calculations would include b. Determination of the ending inventory to be
or exclude net markdowns? reported in the statement of financial
Cost ratio Ending inventory at position at year-end
retail c. Inventory destroyed by typhoon
a. Include Exclude d. Proof of the reasonable accuracy of the
b. Include Include physical count
c. Exclude Exclude
d. Exclude Include 24. If the gross profit rate is based on sales, the cost
of goods sold is computed as
17. The conventional retail method produces an a. Gross sales divided by sales ratio
ending inventory that approximates b. Net sales divided by sales ratio
a. Lower of FIFO cost or net realizable value c. Gross sales times cost ratio
b. Lower of LIFO cost or net realizable value d. Net sales times cost ratio
c. Lower of average cost or net realizable
value 25. If the gross profit is based on cost, the cost of
d. Lower of cost or net realizable value goods sold is computed as
a. Net sales divided by sales ratio
18. Which of the following would cause a decrease b. Net sales times cost ratio
in the cost ratio used in the retail inventory c. Gross sales divided by sales ratio
method? d. Gross sales times cost ratio
a. Higher freight in charges

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b. More employee discounts 26. How is the gross profit method used in relation
c. Lower net markups
er as to inventory valuation?

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d. Higher retail prices a. To provide a FIFO inventory value
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b. To estimate the cost of goods sold
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19. The retail method is based on the assumption c. To verify the accuracy of the perpetual
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that inventory record

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a. Ratio of gross margin to sales is d. To verify the accuracy of the physical

approximately the same each period. inventory
b. Final inventory and the total of goods
available for sale contain the same
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27. Inventories are usually written down to net

proportion of high cost and low cost ratio realizable value
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goods. a. By classification
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c. Proportions of markup and markdown to b. By total

selling price are the same. c. By segment
d. Ratio of cost to retail changes at a constant d. Item by item
rate.
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28. Net realizable value is

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20. Which of the following is not a reason why the a. Estimated selling price
retail inventory method is used widely? b. Estimated selling price less estimated cost
a. To defer income tax liability to complete
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b. To permit the computation of net income c. Estimated selling price less estimated cost
without a physical count of inventory to complete and estimated cost of disposal
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c. For insurance information d. Current replacement cost

d. As a control measure in determining
inventory shortage 29. The cost of inventory shall be measured using
a. Average
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21. The gross profit method of inventory valuation is b. FIFO

invalid when c. LIFO
a. There is a substantial increase in inventory d. Either FIFO or average method
during the year.
b. There is no beginning inventory because it is 30. Inventories shall be measured at
the first year of operation. a. Higher of cost and net realizable value
c. The gross profit percentage applicable to the b. Lower of cost and net realizable value
goods in ending inventory is different from c. Net realizable value
the percentage applicable to goods sold d. Cost
during the period.
d. A portion of inventory is destroyed. 31. Which of the following inventory method reports
most closely the current cost of inventory?
22. Which statement is not valid about gross profit a. Weighted average
method? b. FIFO
a. It may be used to estimate inventory for c. LIFO
annual statements. d. Specific identification
b. It may be used to estimate inventory for
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statements.
c. It is an acceptable accounting procedure.
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 32. Which inventory cost flow assumption would 40. LCNRV of inventory
consistently result in the highest income in a a. Is always either the net realizable value or
period of sustained inflation? cost.
a. Weighted average b. Should always be equal to net realizable
b. FIFO value.
c. LIFO c. May sometimes be less than net realizable
d. Specific identification value.
d. Should always be equal to estimated selling
33. In aa period of falling prices, the use of which price less cost to complete.
inventory cost flow method would typically result
in the highest cost of goods sold?
a. Weighted average
b. FIFO
c. LIFO
d. Specific identification

34. The inventory cost was lower using FIFO than

LIFO. If there is no beginning inventory, what
direction did the cost of purchases move during
the period?
a. Down
b. Up
c. Steady
d. Cannot be determined

35. In a period of rising price, the inventory cost

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allocation method that tends to result in the
lowest reported net income is
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a. Weighted average
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b. Moving average
c. FIFO o.
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d. LIFO
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36. Which inventory cost flow assumption provides

the best measure of earnings, where ”best”
means most appropriate for predicting future
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earnings, when prices have been declining?

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a. FIFO
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b. LIFO
c. Average cost
d. Specific identification
ed d

37. This cost formula assumes that the items of the

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inventory that were purchased or produced first

are sold first and consequently the items
remaining in inventory at the end of the period
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are those most recently purchased or produced.

a. Weighted average
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b. Moving average
c. FIFO
d. LIFO
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38. The weighted average method may be

calculated
I. On a periodic basis.
II. As each shipment is received depending
upon the circumstances of the entity.

a. I only
b. II only
c. Either I or II
d. Neither I nor II

39. The costing of inventory must be deferred until

the end of the reporting period under which of
the following method of inventory valuation?
a. FIFO perpetual
b. Weighted average
c. LIFO perpetual
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average

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