Store Management Quiz

The given statement is true. When calculating the cost of an inventory item, it is important to consider not only the invoice price but also any additional costs that are necessary to prepare the item for sale. These additional costs can include transportation fees, storage costs, packaging expenses, and any other incidental costs incurred in order to make the item ready for sale. Therefore, the cost of an inventory item is not limited to just its invoice price, but also includes these added or incidental costs.

In a periodic system, the FIFO (First-In, First-Out) cost flow assumption means that the cost of goods sold is assigned costs from the earliest purchases for the period. This means that the inventory that was purchased first is assumed to be sold first. This assumption is commonly used in accounting to calculate the cost of goods sold and determine the value of ending inventory. It is based on the idea that the items that were purchased first should be sold first, which is often a reasonable assumption in many industries.

The given statement is true. The gross margin is calculated by subtracting the cost of goods sold from the net sales. In this case, $545,000 - $345,000 equals $200,000, which matches the given gross margin. Therefore, the statement is true.

The given statement is true because the terms 2/10, n/30 indicate that the seller is offering a 2% cash discount to the purchaser if the payment is made within 10 days. This means that if the purchaser pays the full amount within the specified time frame, they will receive a discount. However, if the payment is not made within 10 days, the full amount becomes due and must be paid within 30 days.

A debit to Sales Returns and Allowances and a credit to Accounts Receivable indicate that a customer returned merchandise. This is because Sales Returns and Allowances is a contra revenue account that is used to record the reduction in sales due to returned merchandise, while Accounts Receivable is a liability account that represents the amount owed by customers for goods or services purchased on credit. Therefore, when a customer returns merchandise, the sales revenue is reduced (debit to Sales Returns and Allowances) and the amount owed by the customer is also reduced (credit to Accounts Receivable).

A merchandising company earns net income from buying and selling merchandise, buys products from manufacturers and sells to retailers, buys products from manufacturers and sells them to consumers, and reports cost of goods sold on the income statement. Therefore, all of these answers are correct.

The moving weighted average method of inventory valuation is advantageous because it takes into account the prices of goods over a specific period of time, rather than just the current price. This helps to smooth out any sudden price changes and provides a more accurate representation of the overall value of the inventory. By using a weighted average, the method gives higher importance to the most recent prices, which reflects the current market conditions while still considering historical data. This can be beneficial in industries where prices fluctuate frequently, as it provides a more stable and reliable inventory valuation.

The correct answer is False. The adjustment to reflect shrinkage is a debit to Shrinkage Expense and a credit to Inventory. This is because shrinkage represents a loss of inventory, so it is recorded as an expense and decreases the value of the inventory account.

The ending inventory value of $357 suggests that the company used the FIFO (First-In, First-Out) inventory cost flow assumption. This assumption assumes that the first units purchased or produced are the first ones sold, and the ending inventory consists of the most recent purchases. In this case, the 27 units sold on January 27 were likely from the 24 units purchased on January 20 and 3 units from the beginning balance, resulting in an ending inventory value of $357.

The statement is false because the cost of goods sold is only reported on the income statement. It represents the direct costs incurred in producing the goods or services that a company sells. It is subtracted from the revenue to calculate the gross profit. The balance sheet, on the other hand, reports the assets, liabilities, and equity of a company at a specific point in time, and does not include the cost of goods sold.

A business that has inventory items that are ordinarily interchangeable is not required to use the specific identification method of assigning costs to inventory. The specific identification method is used when inventory items are unique or have specific attributes that make them distinguishable from each other. In cases where inventory items are interchangeable, businesses can use other cost flow assumptions such as FIFO (first-in, first-out) or LIFO (last-in, first-out) methods to assign costs to inventory. Therefore, the statement is false.

The merchandise turnover is calculated by dividing the cost of goods sold by the average inventory. In this case, the cost of goods sold is $6,000 million and the average inventory is $2,000 million. Dividing $6,000 million by $2,000 million gives us a merchandise turnover of 3. This means that Toys "R" Us sells its entire inventory three times in a given period.

An inventory error carried forward into the next period can cause misstatements in various financial statements. It can affect the cost of goods sold by either overstating or understating it, leading to inaccurate calculations of gross profit. This, in turn, can impact net income, as gross profit is a component of net income. Therefore, all of the given answers are correct as an inventory error can have implications on cost of goods sold, gross profit, and net income.

Z-Mart purchased $1,800 worth of merchandise on December 5. They returned $200 worth of merchandise on December 7, which reduces the total amount owed to $1,600. On December 8, the company paid the balance in full, taking a 2% discount. To calculate the discounted amount, we multiply $1,600 by 2% (0.02), which gives us $32. This discount is subtracted from the total amount owed, resulting in a payment of $1,600 - $32 = $1,568. Therefore, the correct answer is $1,568.

The merchandise turnover ratio measures how quickly a firm sells its merchandise inventory. It is a financial metric that helps analyze the efficiency of inventory management and sales. A higher merchandise turnover ratio indicates that the company is selling its inventory quickly, which is generally favorable as it minimizes holding costs and maximizes cash flow. On the other hand, a lower ratio suggests slower inventory turnover, which could indicate potential issues such as overstocking or slow sales. Therefore, this ratio is an important tool for assessing the effectiveness of a firm's inventory management and sales strategy.

Errors in inventory valuation can have a significant impact on both current and future periods. If there are errors in valuing inventory, it can lead to incorrect calculations of cost of goods sold, gross profit, and net income for the current period. Additionally, if these errors are not corrected, they can carry forward to future periods, resulting in continued inaccuracies in financial statements. Therefore, errors in inventory valuation can have a lasting effect on records and financial statements beyond just the current period.

The full disclosure principle requires that when a change in inventory cost flow assumption is made, the notes to the statements report the type of change, the justification for the change, and any change in net income due to changes in the inventory cost assumption. Additionally, the full disclosure principle does not require a company to use one cost flow assumption exclusively. Therefore, all of the given answers are correct.

The specific identification method assigns the actual cost of each specific unit to the ending inventory. According to the information given, there were 2 units purchased in January at $120 each, 4 units purchased in February at $130 each, 6 units purchased in May at $140 each, 4 units purchased in September at $150 each, and 10 units purchased in November at $160 each. Therefore, the cost of the ending inventory can be calculated as follows: (2 * $120) + (4 * $130) + (6 * $140) + (4 * $150) + (10 * $160) = $3,800.

The statement is false because the advantage of FIFO (First-In-First-Out) is that it assigns the oldest costs to cost of goods sold, not the most recent costs. This means that the inventory that remains on the balance sheet is valued at the most recent costs, which may better match current market prices.

A perpetual inventory system gives a continuous record of the amount of inventory on hand. This means that the system constantly updates the inventory records to reflect the current stock levels. It allows businesses to have real-time information about their inventory, which helps in managing and controlling stock levels more efficiently. This system is widely used by companies as it provides accurate and up-to-date information, enabling better decision-making regarding inventory management and purchasing.

The cost of goods sold does not include the cost of preparing merchandise for sale. It only represents the cost of buying the merchandise. The cost of preparing the merchandise, such as packaging or assembling, is considered a part of operating expenses. Therefore, the statement that the cost of goods sold represents the cost of buying and preparing merchandise for sale is false.

During a period of steadily falling prices, the inventory cost flow assumption that results in reporting the lowest net income is the "Retail Cost" method. This is because the retail cost method values inventory at its current selling price, which is generally higher than the cost price during a period of falling prices. As a result, the cost of goods sold is higher, leading to lower net income.