Quiz B Inventory Valuation Marks 05

Q: Choose the Best Answer for each of the following Questions:

1. In a perpetual inventory system, two entries are normally made to record each sales
transaction. The purpose of these entries is best described as follows:
a) One entry recognizes the sales revenue and the other recognizes the cost of goods
sold.
b) One entry records the purchase of merchandise and the other records the sale.
c) One entry records the cost of goods sold and the other reduces the balance in
inventory account.
d) One entry updates the subsidiary ledger and the other updates the general ledger.
2. In a period of rising prices, a company is most likely to use the FIFO method of pricing
inventory if:
a) Each item in the inventory is unique.
b) Management wants the same unit cost assigned to items sold and items remaining in
inventory.
c) Management’s primary objective is to minimize income taxes.
d) Management wants the company’s income statement to indicate the highest possible
amounts of gross profit and net income.
3. Which of the following is not affected by the inventory valuation method used by a
business?
a) Amounts owed for income taxes.
b) Cost of merchandise sold.
c) Amounts paid to acquire merchandise.
d) Net income of the business.
4. With respect to the valuation of inventory and measurement of the cost of goods sold,
the principle of consistency means that the same method should be applied:
a) In successive accounting periods.
b) By all companies in a given industry.
c) To all products in the inventory.
d) In financial statements and income tax returns.
5. Goods in transit between the buyer and the seller belong to:
a) The seller.
b) The buyer.
c) The freight company.
d) The answer depends upon whether the goods were shipped F.O.B. shipping point or
F.O.B. destination.
 Use the following data for questions 6 through 8.

At the end of last year. The Hobby Hut had merchandise costing $210,000 in inventory.
During January of the current year, the company purchased merchandise costing
$93000, and sold merchandise, which it had purchased at a total cost of $81,000. Hobby
Hut uses a periodic inventory system.

6. Refer to the above data. The total amount debited to the Inventory account during
January was:
a) $0.
b) $81,000.
c) $93,000.
d) $210,000.
7. Refer to the above data. The balance in the Inventory account at January 31, was:
a) $93,000.
b) $210,000.
c) $222,000.
d) $303,000.
8. Refer to the above data. The amount of goods transferred from the Inventory account to
the Cost of Goods Sold account during January was:
a) $0.
b) $81,000.
c) $93,000.
d) $129,000.
9. On Saturday, June 30, Dalton Stereo sold merchandise to Tom Reed on account. The sales
price was $4200, and the cost of goods sold was $3100. The sales revenue was recorded
immediately, but the entry recording the cost of goods sold was dated Monday, July 2. As
a result, net income for June was:
a) Overstated by $4200.
b) Overstated by $3100.
c) Overstated by $1100.
d) Not affected, but the net income for July is understated.
10. During January, Ali Corporation had sales of $200,000 and a cost of goods available for
sale of $400,000. The company earns a gross profit rate of 40%. Using gross profit method,
the estimated inventory at January 31 amounts to:
a) $80,000. b) $280,000. c) $120,000. d) $320,000.
---------------Best of Luck--------------