Inventory and Cost of Goods Sold MCQ Accounting

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About Inventory and Cost of Goods Sold

For merchants, distributors, and manufacturers, inventory is an essential current asset. Product (merchandise) that is ready for sale to clients and raw materials and work-in-progress from a manufacturer are examples of inventory. The cost of a company's inventory is documented and reported on its balance sheet.

Cost of Goods

To remove the cost of a product from inventory and reflect it on the company's income statement, an inventory item must be sold. On the revenue statement, the cost of goods sold is likely to be the largest item. Gross profit is the amount left over after deducting the cost of items sold from total revenue.

Inventory and Cost of Goods

Items in inventory must be sold fast and for more than the cost of the item. In the absence of sales, a company's cash stays in its inventory and cannot be used to pay for the company's expenditures such as wages and salaries, rent, advertising, etc.

Increasing prices for the things business purchases are frequent. This means that even if the firm purchases the same things within its accounting year, the expenses will be different. An organization that finds itself in this predicament must select which of its expenditures should be matched to its sales and which costs should be kept in inventory.

Methods of Inventory valuation

Inventory expenses can be removed and reported as the cost of goods sold using three different cost flow methods:

  • This is also known as FIFO. The oldest inventory expenses are removed and reported on the income statement as the cost of products sold, while the most current costs are kept in inventory.
  • Last in, first-out (LIFO) As part of this cost flow, the most recent inventory costs are shifted to the income statement, while the oldest expenses stay in inventory.
  • Average based on the number of items included in the sample. Using this approach, an average cost per unit is calculated and applied to both the inventory and the sales of individual pieces of merchandise.

Following are some of the multiple choice questions on the Inventory and Cost of Goods Sold with answers that will help the students in developing their knowledge.

Inventory and Cost of Goods Sold MCQ

1. When we bought inventory, we paid $6 each. The current replacement cost is $7 each. How do we value the items on the balance sheet?

  • $6/each
  • $6.50/each
  • $7/each
  • none of the above

2. If we overstate this year's ending inventory, next year's net income will be:

  • Overstated
  • Understated
  • Accurate
  • Can't be determined

3. What is the journal entry for purchasing inventory?

  • Dr Trade payables Cr Inventory
  • Dr Trade receivables Cr Sales revenue
  • Dr Cost of sales Cr Inventory
  • Dr Inventory Cr Trade payables

4. What's best to describe an inventory

  • Non current asset a business owned
  • An asset that is being held in business
  • Assets owned by business with purpose of selling to the customer
  • a service or product of a business

5. T/F: Is GST recorded on the inventory card?

  • True
  • False

6. What type of business 'uses up' and 'expenses' Supplies and Materials?

  • Trading
  • Service

7. Service businesses refer to their main revenue as fees, trading firms refer to their main revenue as..

  • Inventory
  • Sales
  • Stock
  • Income

8. Which of the following is not a benefit of the perpetual inventory system

  • Assists in the re-ordering of inventory
  • Stock losses and gains can be detected
  • Fast and slow moving inventory can be identified
  • employees are kept busy counting inventory

9. The drawing of inventory for personal use would be recorded in

  • the IN column of the inventory card
  • the OUT column of the inventory card
  • would not affect the inventory card
  • none of the above

10. A company ignores a small inventory error. This is the application of which concept/principle?

  • Conservatism
  • Disclosure
  • Materiality
  • Consistency

11. A company goes from LIFO to FIFO, then back to LIFO, then to weighted average. What have they violated?

  • Conservatism
  • Disclosure
  • Materiality
  • Consistency

12. Which inventory costing method is based on actual cost of each particular unit of inventory?

  • Specific cost
  • FIFO
  • LIFO
  • Weighted average

13. Which inventory costing method assigns the cost of the oldest items in inventory to cost of goods sold?

  • Specific cost
  • FIFO
  • LIFO
  • Weighted average

14. Which inventory costing method requires calculation of a new average cost after each purchase?

  • Specific cost
  • FIFO
  • LIFO
  • Weighted average

15. If inventory costs are rising, what's a benefit of using FIFO?

  • Higher net income
  • Lower income taxes
  • Lower ending inventory
  • Quickbooks lets us

16. Which of the following must be recorded at the lower of cost or market value?

  • Notes receivable
  • Merchandise inventory
  • Prepaid insurance
  • Buildings

17. A company has inventory of 60 units at a cost of BD20 each on June 1.On June 3, it purchased 50 units at BD25 each. 70 units are sold on June 5. Using the FIFO periodic inventory method. What is the cost of the 30 units that were sold?

  • 1200
  • 110
  • 1450
  • none of the above

18. An auditor’s tests of controls over the issuance of raw materials to production would most likely include

  • Reconciliation of raw materials and work-in-process perpetual inventory records to general ledger balances.
  • Inquiry of the custodian about the procedures followed when defective materials are received from vendors.
  • Observation that raw materials are stored in secure areas and thatstoreroom security is supervised by a responsible individual.
  • Examination of materials requisitions and reperformance of clientcontrols designed to process and record issuances.

19. Which of the following internal control activities is most likely to address the completeness assertion for inventory?

  • The work-in-process account is periodically reconciled with subsidiary records.
  • Employees responsible for custody of finished goods do not performthe receiving function.
  • Receiving reports are prenumbered and periodically reconciled.
  • There is a separation of duties between payroll department and inventory accounting personnel.

20. What are the methods of inventory valuation?

  • FIFO
  • LIFO
  • AVCO
  • All of above

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