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Chapter 07

Reporting and Interpreting Cost of Goods Sold and Inventory

True / False Questions

1. The use of raw materials in the manufacturing process is reported as an operating expense on
the income statement.

True False

2. Manufactured goods transferred out of work in process are reported as finished goods on the
balance sheet.

True False

3. Inventory inspection costs are reported as operating expenses on the income statement.

True False

4. Direct material costs are a component of the cost of the work-in process inventory.

True False

7-1
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5. A decrease in the merchandise inventory account occurs when units of inventory purchased are
greater than units of goods sold.

True False

6. Goods available for sale are allocated to both ending inventory and cost of goods sold.

True False

7. The LIFO inventory method will result in the lowest gross profit in comparison with the FIFO
method when unit costs are decreasing.

True False

8. The FIFO inventory method will result in the lowest net income in comparison with the LIFO
method when costs are decreasing.

True False

9. A company can use the LIFO inventory method for income tax purposes and the FIFO inventory
method for financial reporting purposes during a given year.

True False

10. A grocery store probably would use the specific identification inventory costing method for most of
the items in its inventory.

True False

11. The FIFO inventory method allocates the earliest inventory purchase costs to ending inventory.

True False

12. The LIFO inventory method allocates the oldest inventory purchase costs to cost of goods sold.

True False

13. During periods of decreasing unit costs, use of the LIFO inventory method will result in a higher
amount of ending inventory than will the use of the FIFO inventory method.

True False

14. During periods of increasing unit costs, the LIFO inventory method will result in a higher inventory
amount on the balance sheet and a lower net income than will the FIFO inventory method.

True False

7-2
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15. During periods of increasing unit costs, the LIFO inventory method results in lower income taxes.

True False

16. During periods of decreasing unit costs, use of the FIFO inventory method results in lower gross
profit than would use of the LIFO method.

True False

17. The lower of cost or market (LCM) rule is used due to the conservatism constraint, and therefore
an inventory calculation may result in a departure from the historical cost principle.

True False

18. The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a
decrease in both ending inventory and cost of goods sold.

True False

19. The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a
debit to cost of goods sold and a credit to inventory.

True False

20. The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a
credit to cost of goods sold and a debit to inventory.

True False

21. Inventory turnover is calculated as cost of goods sold divided by average inventory.

True False

22. Inventory turnover under LIFO is greater than inventory turnover under FIFO when unit costs are
increasing.

True False

23. The average days to sell inventory decreases as inventory turnover increases.

True False

24. An increase in inventory is subtracted from net income when determining cash flow from
operating activities.

True False

7-3
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25. An increase in accounts payable is added to net income when determining cash flows from
operating activities.

True False

26. When there is a $3,000,000 decrease in inventory and a $2,000,000 decrease in accounts
payable, cash flow from operating activities increases by $1,000,000.

True False

27. The LIFO Reserve represents the excess of FIFO inventory costs over LIFO inventory costs.

True False

28. In a period of increasing costs, the LIFO Reserve would be deducted from the ending inventory
under LIFO costing to convert it to ending inventory under FIFO costing.

True False

29. An understatement of ending inventory results in an overstatement of net income.

True False

30. In the year of an overstatement of ending inventory, cost of goods sold will be understated and
net income will be overstated.

True False

31. An overstatement of the 2013 ending inventory results in an understatement of net income during
2014.

True False

32. LIFO liquidation results when a company has a lower level of inventory at the end of the year than
it had at the beginning of the year.

True False

33. An overstatement of the 2013 ending inventory results in an overstatement of stockholders' equity
as of the end of 2014.

True False

34. An overstatement of the 2013 ending inventory results in an overstatement of stockholders' equity
as of the end of 2013.

True False

7-4
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Multiple Choice Questions

35. A company reported the following information for its most recent year of operation: purchases,
$100,000; beginning inventory, $20,000; and cost of goods sold, $110,000. How much was the
company's ending inventory?

A. $10,000.
B. $20,000.
C. $15,000.
D. $30,000.

36. Coleman Company has provided the following information: beginning inventory, $100,000; cost of
goods sold, $450,000; and ending inventory, $80,000. How much were Coleman's inventory
purchases?

A. $450,000.
B. $410,000.
C. $430,000.
D. $420,000.

37. Which of the following statements is incorrect?

A. Ending inventory exceeds beginning inventory when purchases are greater than cost of goods
sold.
B. Cost of goods sold exceeds purchases when ending inventory is less than beginning inventory.
C. Cost of goods available for sale will always be equal to or greater than cost of goods sold.
D. Ending inventory is greater than beginning inventory when purchases are less than cost of
goods sold.

38. Which of the following costs is not included as inventory on the balance sheet?

A. Raw materials to be used in the manufacturing process.

B. Work in process.
C. Finished goods.
D. Freight-out costs for finished goods sent to retailers.

7-5
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