Understanding Inventory Management

1. Inventories affect: a. only the statement of financial position. b. only the income statement. c. both the statement of financial position and the income statement. d. neither the statement of financial position nor the income statement.

• d. only the statement of comprehensive income.

• a. only the statement of cash flows.

• b. only the statement of retained earnings.

• c. both the statement of financial position and the income statement.

2. Merchandise inventory is: a. reported under the classification of Property, Plant, and Equipment on the statement of financial position. b. often reported as a miscellaneous expense on the income statement. c. reported as a current asset on the statement of financial position. d. generally valued at the price for which the goods can be sold.

• c. reported as a current asset on the statement of financial position.

• a. included in long-term liabilities on the balance sheet.

• b. classified as an intangible asset in financial statements.

• d. recorded at historical cost on the income statement.

3. Items not yet placed into production are considered to be: a. raw materials. b. work in process. c. finished goods. d. merchandise inventory.

• g. inventory in transit

• a. raw materials

• f. spare parts

• e. capital goods

4. In a manufacturing business, inventory that is ready for sale is called: a. raw materials inventory. b. work in process inventory. c. finished goods inventory. d. store supplies inventory.

• g. production inventory

• f. obsolete inventory

• e. excess inventory

• c. finished goods inventory

5. The factor which determines whether goods in transit are included in inventory is: a. the shipping terms. b. the type of goods. c. the location of the goods. d. the cost of the goods.

• e. the brand of the goods.

• g. the time of purchase.

• a. the shipping terms.

• f. the quantity of the goods.

6. The cost of goods sold is calculated as: a. beginning inventory + purchases - ending inventory. b. beginning inventory - purchases + ending inventory. c. purchases - beginning inventory + ending inventory. d. ending inventory - purchases + beginning inventory.

• purchases + ending inventory - beginning inventory.

• beginning inventory - ending inventory + purchases.

• a. beginning inventory + purchases - ending inventory.

• ending inventory + purchases - beginning inventory.

7. Which of the following is not a type of inventory? a. raw materials. b. work in process. c. finished goods. d. capital assets.

• d. capital assets

• g. office supplies

• f. packaging materials

• e. spare parts

8. The method of inventory valuation that assumes the oldest inventory items are sold first is called: a. FIFO. b. LIFO. c. weighted average. d. specific identification.

• b. average cost

• a. FIFO

• c. last in, first out

• a. LILO

9. An increase in inventory levels can indicate: a. increased sales. b. decreased sales. c. improved cash flow. d. reduced production costs.

• stable sales volume

• increased production

• higher cash reserves

• b. decreased sales

10. Which financial statement shows the value of inventory at a specific point in time? a. income statement. b. statement of cash flows. c. statement of financial position. d. statement of retained earnings.

• e. statement of comprehensive income

• f. cash flow statement

• g. balance sheet

• c. statement of financial position