OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 10: Inventory
Principles of Accounting, Volume 1: Financial Accounting
Chapter 10: Inventory
Multiple Choice
1. LO 10.1 If a company has four lots of products for sale, purchase 1 (earliest) for $17, purchase
2 (middle) for $15, purchase 3 (middle) for $12, and purchase 4 (latest) for $14, which cost
would be assumed to be sold first using LIFO costing?
A. $17
B. $15
C. $12
D. $14
Solution
D
2. LO 10.1 If a company has three lots of products for sale, purchase 1 (earliest) for $17,
purchase 2 (middle) for $15, purchase 3 (latest) for $12, which of the following statements is
true?
A. This is an inflationary cost pattern.
B. This is a deflationary cost pattern.
C. The next purchase will cost less than $12.
D. None of these statements can be verified.
Solution
B
3. LO 10.1 When inventory items are highly specialized, the best inventory costing method is
________.
A. specific identification
B. first-in, first-out
C. last-in, first-out
D. weighted average
Solution
A
4. LO 10.1 If goods are shipped FOB destination, which of the following is true?
A. Title to the goods will transfer as soon as the goods are shipped.
B. FOB indicates that a price reduction has been applied to the order.
C. The seller must pay the shipping.
D. The seller and the buyer will each pay 50% of the cost.
Solution
C
5. LO 10.1 On which financial statement would the merchandise inventory account appear?
A. balance sheet
B. income statement
C. both balance sheet and income statement
D. neither balance sheet nor income statement
Solution
A
Page 1 of 40
,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 10: Inventory
6. LO 10.1 When would using the FIFO inventory costing method produce higher inventory
account balances than the LIFO method would?
A. inflationary times
B. deflationary times
C. always
D. never
Solution
A
7. LO 10.1 Which accounting rule serves as the primary basis for the lower-of-cost-or-market
methodology for inventory valuation?
A. conservatism
B. consistency
C. optimism
D. pessimism
Solution
A
8. LO 10.1 Which type or types of inventory timing system (periodic or perpetual) requires the
user to record two journal entries every time a sale is made.
A. periodic
B. perpetual
C. both periodic and perpetual
D. neither periodic nor perpetual
Solution
B
9. LO 10.2 Which of these statements is false?
A. If cost of goods sold is incorrect, ending inventory is usually incorrect too.
B. beginning inventory + purchases = cost of goods sold
C. ending inventory + cost of goods sold = goods available for sale
D. goods available for sale – beginning inventory = purchases
Solution
B
10. LO 10.3 Which inventory costing method is almost always done on a perpetual basis?
A. specific identification
B. first-in, first-out
C. last-in, first-out
D. weighted average
Solution
A
11. LO 10.3 Which of the following describes features of a perpetual inventory system?
A. Technology is normally used to record inventory changes.
B. Merchandise bought is recorded as purchases.
C. An adjusting journal entry is required at year end, to match physical counts to the asset
account.
D. Inventory is updated at the end of the period.
Solution
A
Page 2 of 40
,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 10: Inventory
12. LO 10.4 Which of the following financial statements would be impacted by a current-year
ending inventory error, when using a periodic inventory updating system?
A. balance sheet
B. income statement
C. neither statement
D. both statements
Solution
D
13. LO 10.4 Which of the following would cause periodic ending inventory to be overstated?
A. Goods held on consignment are omitted from the physical count.
B. Goods purchased and delivered, but not yet paid for, are included in the physical count.
C. Purchased goods shipped FOB destination and not yet delivered are included in the
physical count.
D. None of the above
Solution
C
14. LO 10.5 Which of the following indicates a positive trend for inventory management?
A. increasing number of days' sales in inventory ratio
B. increasing inventory turnover ratio
C. increasing cost of goods sold
D. increasing sales revenue
Solution
B
Questions
1. LO 10.1 What is meant by the term gross margin?
Solution
Gross margin refers to the net profit from sale of goods. It is calculated by subtracting cost of
goods sold from sales revenue.
2. LO 10.1 Can a business change from one inventory costing method to another any time they
wish? Explain.
Solution
Ideally the inventory costing method remains consistent over time; however, a business can
change its method under certain circumstances. A change in inventory costing method is possible
but must be justified as needed to better reflect results of operations, and it also requires an
explanation in the notes to financial statements. The IRS specifically prohibits use of the LIFO
method, for tax purposes, unless it is also used for financial reporting purposes. Consistency
principle requires application of methods in like manner across multiple periods.
3. LO 10.1 Why do consignment arrangements present a challenge in inventory management?
Explain.
Solution
Consigned goods are owned by the consignor, but the goods are physically present in the
business of the consignee. Care must be taken not to count goods held on consignment in the
company's physical inventory tally.
4. LO 10.1 Explain the difference between the terms FOB destination and FOB shipping point.
Page 3 of 40
, OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 10: Inventory
Solution
FOB destination means that the seller assumes responsibility for costs and retains ownership in
the goods all the way to the destination. FOB shipping point means the seller releases
responsibility for costs, as well as ownership rights, at the time of shipment.
5. LO 10.1 When would a company use the specific identification method of inventory cost
allocation?
Solution
Specific identification works best for highly differentiated goods, large ticket items,
customization, and small lot sizes. In all these cases, it is reasonably easy to keep track of the
actual cost of each item, to be used to offset the sales price, when the goods are sold.
6. LO 10.1 Explain why a company might want to utilize the gross profit method or the retail
inventory method for inventory valuation.
Solution
The gross profit method and the retail inventory method are both estimation tools that use
expected cost markup patterns to calculate the inventory that existed on a certain date. These
methods are often used when there is a problem that limits or prohibits the physical count of
ending inventory. Some examples would be fire, flood, company strike, incomplete records,
records lost, or obvious error in the counts.
7. LO 10.1 Describe the goal of the lower-of-cost-or-market concept.
Solution
LCM sets out to record a conservative value for inventory by ensuring that goods that have
decreased in value since their purchase can be revalued to match their current replacement
market value.
8. LO 10.1 Describe two separate and distinct ways to calculate goods available for sale.
Solution
Goods available for sale is (1) sum of beginning inventory + purchases; or (2) sum of ending
inventory + cost of goods sold.
9. LO 10.3 Describe costing inventory using first-in, first-out. Address the different treatment, if
any, that must be given for periodic and perpetual inventory updating.
Solution
The FIFO method assumes the first units acquired are sold first. On a periodic basis, that means
that ending inventory can be determined by calculating the number of units remaining, and
assuming that the cost of those units is the amount paid for the latest purchase; cost of goods sold
is all inventory cost that is not in the ending inventory. For perpetual, inventory held at the time
of each sale is evaluated and units acquired earliest are costed out against that particular sale.
10. LO 10.3 Describe costing inventory using last-in, first-out. Address the different treatment, if
any, that must be given for periodic and perpetual inventory updating.
Solution
The LIFO method assumes the last units acquired are sold first. On a periodic basis, that means
that ending inventory can be determined by calculating the number of units remaining, and
assuming that the cost of those units is the amount paid for the earliest purchase; cost of goods
sold is all inventory cost that is not in the ending inventory. For perpetual, inventory held at the
time of each sale is evaluated and units acquired most recently are costed out against that
particular sale.
11. LO 10.3 Describe costing inventory using weighted average. Address the different treatment,
if any, that must be given for periodic and perpetual inventory updating.
Page 4 of 40
Chapter 10: Inventory
Principles of Accounting, Volume 1: Financial Accounting
Chapter 10: Inventory
Multiple Choice
1. LO 10.1 If a company has four lots of products for sale, purchase 1 (earliest) for $17, purchase
2 (middle) for $15, purchase 3 (middle) for $12, and purchase 4 (latest) for $14, which cost
would be assumed to be sold first using LIFO costing?
A. $17
B. $15
C. $12
D. $14
Solution
D
2. LO 10.1 If a company has three lots of products for sale, purchase 1 (earliest) for $17,
purchase 2 (middle) for $15, purchase 3 (latest) for $12, which of the following statements is
true?
A. This is an inflationary cost pattern.
B. This is a deflationary cost pattern.
C. The next purchase will cost less than $12.
D. None of these statements can be verified.
Solution
B
3. LO 10.1 When inventory items are highly specialized, the best inventory costing method is
________.
A. specific identification
B. first-in, first-out
C. last-in, first-out
D. weighted average
Solution
A
4. LO 10.1 If goods are shipped FOB destination, which of the following is true?
A. Title to the goods will transfer as soon as the goods are shipped.
B. FOB indicates that a price reduction has been applied to the order.
C. The seller must pay the shipping.
D. The seller and the buyer will each pay 50% of the cost.
Solution
C
5. LO 10.1 On which financial statement would the merchandise inventory account appear?
A. balance sheet
B. income statement
C. both balance sheet and income statement
D. neither balance sheet nor income statement
Solution
A
Page 1 of 40
,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 10: Inventory
6. LO 10.1 When would using the FIFO inventory costing method produce higher inventory
account balances than the LIFO method would?
A. inflationary times
B. deflationary times
C. always
D. never
Solution
A
7. LO 10.1 Which accounting rule serves as the primary basis for the lower-of-cost-or-market
methodology for inventory valuation?
A. conservatism
B. consistency
C. optimism
D. pessimism
Solution
A
8. LO 10.1 Which type or types of inventory timing system (periodic or perpetual) requires the
user to record two journal entries every time a sale is made.
A. periodic
B. perpetual
C. both periodic and perpetual
D. neither periodic nor perpetual
Solution
B
9. LO 10.2 Which of these statements is false?
A. If cost of goods sold is incorrect, ending inventory is usually incorrect too.
B. beginning inventory + purchases = cost of goods sold
C. ending inventory + cost of goods sold = goods available for sale
D. goods available for sale – beginning inventory = purchases
Solution
B
10. LO 10.3 Which inventory costing method is almost always done on a perpetual basis?
A. specific identification
B. first-in, first-out
C. last-in, first-out
D. weighted average
Solution
A
11. LO 10.3 Which of the following describes features of a perpetual inventory system?
A. Technology is normally used to record inventory changes.
B. Merchandise bought is recorded as purchases.
C. An adjusting journal entry is required at year end, to match physical counts to the asset
account.
D. Inventory is updated at the end of the period.
Solution
A
Page 2 of 40
,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 10: Inventory
12. LO 10.4 Which of the following financial statements would be impacted by a current-year
ending inventory error, when using a periodic inventory updating system?
A. balance sheet
B. income statement
C. neither statement
D. both statements
Solution
D
13. LO 10.4 Which of the following would cause periodic ending inventory to be overstated?
A. Goods held on consignment are omitted from the physical count.
B. Goods purchased and delivered, but not yet paid for, are included in the physical count.
C. Purchased goods shipped FOB destination and not yet delivered are included in the
physical count.
D. None of the above
Solution
C
14. LO 10.5 Which of the following indicates a positive trend for inventory management?
A. increasing number of days' sales in inventory ratio
B. increasing inventory turnover ratio
C. increasing cost of goods sold
D. increasing sales revenue
Solution
B
Questions
1. LO 10.1 What is meant by the term gross margin?
Solution
Gross margin refers to the net profit from sale of goods. It is calculated by subtracting cost of
goods sold from sales revenue.
2. LO 10.1 Can a business change from one inventory costing method to another any time they
wish? Explain.
Solution
Ideally the inventory costing method remains consistent over time; however, a business can
change its method under certain circumstances. A change in inventory costing method is possible
but must be justified as needed to better reflect results of operations, and it also requires an
explanation in the notes to financial statements. The IRS specifically prohibits use of the LIFO
method, for tax purposes, unless it is also used for financial reporting purposes. Consistency
principle requires application of methods in like manner across multiple periods.
3. LO 10.1 Why do consignment arrangements present a challenge in inventory management?
Explain.
Solution
Consigned goods are owned by the consignor, but the goods are physically present in the
business of the consignee. Care must be taken not to count goods held on consignment in the
company's physical inventory tally.
4. LO 10.1 Explain the difference between the terms FOB destination and FOB shipping point.
Page 3 of 40
, OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 10: Inventory
Solution
FOB destination means that the seller assumes responsibility for costs and retains ownership in
the goods all the way to the destination. FOB shipping point means the seller releases
responsibility for costs, as well as ownership rights, at the time of shipment.
5. LO 10.1 When would a company use the specific identification method of inventory cost
allocation?
Solution
Specific identification works best for highly differentiated goods, large ticket items,
customization, and small lot sizes. In all these cases, it is reasonably easy to keep track of the
actual cost of each item, to be used to offset the sales price, when the goods are sold.
6. LO 10.1 Explain why a company might want to utilize the gross profit method or the retail
inventory method for inventory valuation.
Solution
The gross profit method and the retail inventory method are both estimation tools that use
expected cost markup patterns to calculate the inventory that existed on a certain date. These
methods are often used when there is a problem that limits or prohibits the physical count of
ending inventory. Some examples would be fire, flood, company strike, incomplete records,
records lost, or obvious error in the counts.
7. LO 10.1 Describe the goal of the lower-of-cost-or-market concept.
Solution
LCM sets out to record a conservative value for inventory by ensuring that goods that have
decreased in value since their purchase can be revalued to match their current replacement
market value.
8. LO 10.1 Describe two separate and distinct ways to calculate goods available for sale.
Solution
Goods available for sale is (1) sum of beginning inventory + purchases; or (2) sum of ending
inventory + cost of goods sold.
9. LO 10.3 Describe costing inventory using first-in, first-out. Address the different treatment, if
any, that must be given for periodic and perpetual inventory updating.
Solution
The FIFO method assumes the first units acquired are sold first. On a periodic basis, that means
that ending inventory can be determined by calculating the number of units remaining, and
assuming that the cost of those units is the amount paid for the latest purchase; cost of goods sold
is all inventory cost that is not in the ending inventory. For perpetual, inventory held at the time
of each sale is evaluated and units acquired earliest are costed out against that particular sale.
10. LO 10.3 Describe costing inventory using last-in, first-out. Address the different treatment, if
any, that must be given for periodic and perpetual inventory updating.
Solution
The LIFO method assumes the last units acquired are sold first. On a periodic basis, that means
that ending inventory can be determined by calculating the number of units remaining, and
assuming that the cost of those units is the amount paid for the earliest purchase; cost of goods
sold is all inventory cost that is not in the ending inventory. For perpetual, inventory held at the
time of each sale is evaluated and units acquired most recently are costed out against that
particular sale.
11. LO 10.3 Describe costing inventory using weighted average. Address the different treatment,
if any, that must be given for periodic and perpetual inventory updating.
Page 4 of 40
