ACCT 201 Principles of Financial Accounting
Practice Exam - Chapter 5
Reporting & Analyzing Inventories
Dr. Fred Barbee

Part I: Multiple-Choice Questions
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1. Merchandise inventory includes:
a.  All goods owned by a company and held for sale.
b.  All goods in transit.
c.  All goods on consignment.
d.  Damaged goods only.
e.  All of the above
2. Goods in transit are included in a purchaser's inventory:
a.  At any time in transit.
b.  When the purchaser is responsible for paying freight charges.
c.  When the supplier is responsible for freight charges.
d.  If the goods are shipped FOB destination.
e.  After the half-way point between the buyer and seller.
3. During a period of steadily rising costs, the inventory valuation method that yields the lowest reported net income is:
a.  Specification identification method.
b.  Average cost method.
c.  Weighted-average method.
d.  FIFO method.
e.  LIFO method.
4. If a period-end inventory amount is reported in error, it can cause a misstatement in:
a.  Cost of goods sold
b.  Gross profit
c.  Net income
d.  Current assets
e.  All of the above
5. The understatement of the ending inventory balance causes:
a.  Cost of goods sold to be overstated and net income to be understated.
b.  Cost of goods sold to be overstated and net income to be overstated.
c.  Cost of goods sold to be understated and net income to be understated.
d.  Cost of goods sold to be understated and net income to be overstated.
e.  Cost of goods sold to be overstated and net income to be correct.
6. The inventory turnover ratio:
a.  Is used to analyze profitability.
b.  Is used to measure solvency.
c.  Measures how quickly a company turns over its merchandise inventory.
d.  Validates the acid-test ratio.
e.  Calculation depends on the company's inventory valuation method.
7. Management must confront which of the following considerations when accounting for inventory:
a.  Costing (valuation) method.
b.  Inventory system.
c.  Items to be included and their cost.
d.  Use of lower of cost or market.
e.  All of the above.
8. The inventory valuation method that identifies the invoice cost of each item in ending inventory to determine the cost assigned to that inventory is the:
a.  Weighted-average inventory method.
b.  First-in, First-out method.
c.  Last-in, First-out method.
d.  Specific identification method.
e.  Retail inventory method.
9. A company had the purchases shown below during the current year. On December 31, there were 26 units remaining in ending inventory. These 26 units consisted of 2 from January, 4 from February, 6 from May, 4 from September, and 10 from November. Using the specific identification method, what is the cost of the ending inventory?

January 10 units @ $120
February 20 units @ $130
May 15 units @ $140
September 12 units @ $150
November 10 units @ $160

a.  $3,500
b.  $3,800
c.  $3,960
d.  $3,280
e.  $3,640
10. A company normally sells its product for $20 per unit, which includes a profit margin of 25%. However, the selling price has fallen to $15 per unit. This company's current inventory consists of 200 units purchased at $16 per unit. Replacement cost has now fallen to $13 per unit. Calculate the value of this company's inventory at the lower of cost or market.
a.  $2,550
b.  $2,600
c.  $2,700
d.  $3,000
e.  $3,200

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Part II: Short Problems

Short Problem #1

Evaluate each (separate) inventory error and determine whether it overstates or understates each item.

Inventory Error Cost of Goods Sold Net Income
Understates beginning inventory    
Understates ending inventory    
Overstates beginning inventory    
Overstates ending inventory    

Short Problem #2

A company reported the following data related to its ending inventory::

Product Units Cost Market
849 100 $10 $11
842 75 16 14
847 60 14 13
860 40 16 20

Calculate the lower-of-cost-or-market on the: (a) Inventory as a whole; and (b) Inventory applied separately to each product.

Short Problem #3

A company uses the retail inventory method and has the following information available concerning its most recent accounting period:

At Cost
At Retail
Beginning-of-period inventory
Net Purchases


  1. What is the cost-to-retail ratio using the retail method?
  2. What is the estimated cost of the ending inventory?

Part III: Problems

Smith Company reported the following current-year data for its only product:

Jan. 1 Beginning Inventory
Units @ $10
Mar. 14 Purchase
Units @ $15
Jul. 30 Purchase
Units @ $20
Oct. 26 Purchase
Units @ $25
Units Available  
Cost of Goods Available for Sale  

Smith resold its products at $40 per unit on the following dates:

Jan. 10 Sales
Mar. 15 Sales
Oct. 5 Sales
Total Sales  

Smith uses a perpetual inventory system. Determine the costs assigned to cost of goods sold and ending inventory using (a) FIFO and (b) LIFO. Compute the gross margin for each method.


Last Modified October 4, 2002