Inventory Quiz

QUESTIONS

1. Product costs are more similar to...

        A) The cost of goods sold

        B) Fixed costs

 

2. A current asset is an economic resource expected to be realized...

        A) Within the next six months

        B) Within next twelve months

 

3. The typical journal entry when recording a sale is...

        A) Debit: Accounts Receivable; Credit: (Sales Revenue)

        B) Debit: Inventory; Credit: (Sales Revenue)

 

4. The direct costs associated with producing a product are...

        A) Expensed in the period incurred

        B) Treated as an asset (inventory) and expensed when the product is sold

 

5. The journal entry to record the loss of inventory is...

        A) Debit: Cost of Goods Sold; Credit: (Inventory)

        B) Debit: Inventory; Credit: (Sales Revenue)

 

6. A loan payment due in thirteen months should show on the balance sheet as a...

        A) Current liability

        B) Noncurrent liability

 

7. The journal entry to record the direct costs of production is...

        A) Debit: Inventory; Credit: (Cash)

        B) Debit: Equipment; Credit: (Cash)

 

8. The cost of skilled labor is more likely to be a...

        A) Product cost

        B) Period cost

 

9. Period costs are...

        A) Attached to the units produced

        B) Expensed in the period incurred

 

10. Product costs are...

        A) Attached to the units produced

        B) Expensed in the period incurred

 

ANSWER KEY:

1A, 2B, 3A, 4B, 5A, 6B, 7A, 8A, 9B, 10A

 

PRACTICE PROBLEMS

1. During the month, a company produces 50,000 units and incurs product costs of $100,000 and period costs of $120,000. What is the effect on the balance sheet?

2. During the month, a company produces 50,000 units and incurs product costs of $100,000 and period costs of $120,000. What is the effect on the income statement?

3. During the month, a company produces 50,000 units and incurs product costs of $100,000 and period costs of $120,000. It sells all of the product in the same month for $10 a unit. What is the effect on the inventory account?

4. During the month, a company produces 50,000 units and incurs product costs of $100,000 and period costs of $120,000. It sells all of the product in the same month for $10 a unit. What is the effect on the income statement?

 

ANSWER KEY:

1: Product costs "attach" themselves to the units produced. The $100,000 in product costs will be put on the balance sheet as an asset—inventory. The company's balance sheet will also show a credit to either cash or accounts payable, depending on how it financed the costs of production.

2. As mentioned above, the $100,000 in product costs will go on the balance sheet as an asset—inventory. The remaining $120,000 of period costs will be expensed in the period incurred; therefore, they will hit the income statement this month in the form of selling, general, and administrative costs.

3. The inventory account would increase by $100,000, but because all of the product is sold in the current month the account would decrease back to $0. The answer is that there would be no effect on the inventory account.

4. The income statement will show revenues of $500,000 ($10 x 50,000), cost of goods sold of $100,000 and selling, general and administrative (SG&A) costs of $120,000. This results in gross profit of $400,000 and net profit of $280,000. This profit will roll back to the balance sheet at the end of the year in the form of retained earnings when the temporary accounts on the income statement are closed out.