Question Details

Why are inventories included in the computation of net income 


1.	Companies must allocate the cost of all the goods available for sale (or use) between
a.	The cost goods on hands at the beginning of the period as reported on the statement of financial position and the cost of goods acquired or produced during the period.
b.	The cost of goods on hand at the end of the period as reported on the statement of financial position and the cost of goods acquired or produced during the period.
c.	The income statement and the statement of financial position.
d.	All of the choices are correct.

2.	Mineral Makers (MM) Company keeps its inventory records using a perpetual system. At December 31, 2011, the unadjusted balance in the inventory account is $64,000. Through a physical count on December 31, 2011, MM determines that its actual merchandise inventory at year-end is $62,500. Which of the following is true regarding the statement of financial position and the income statement of MM at December 31, 2011?
a.	Inventory is increased and cost of goods sold is decreased by $1,500.
b.	Inventory is decreased and cost of goods sold is increased by $1,500.
c.	Inventory is increased and cost of goods sold is increased by $1,500.
d.	Inventory is decreased and cost of goods sold is decreased by $1,500.

	3.	Tang, Inc. sells collectible jewelry on consignment from various manufacturers. Additionally, Tang sells its own line of specialty jewelry manufactured in-house. On December 31, 2011, during Tang, Inc 's annual inventory count, an inexperienced new staff member included in Tang- ending inventory $350,000 worth of inventory held on consignment from Metcalf Associates. Which of the following is correct regarding the impact of this error on Tang- income statement and statement of financial position at December 31, 2011?
a.	Ending inventory is understated by $350,000.
b.	Retained earnings is overstated by $350,000.
c.	Cost of goods sold is overstated by $350,000.
d.	The financial statements are correctly stated.

	4.	Why are inventories included in the computation of net income ?
a.	To determine cost of goods sold.
b.	To determine sales revenue.
c.	To determine merchandise returns.
d.	Inventories are not included in the computation of net income.

	5.	Which of the following is a characteristic of a perpetual inventory system?
a.	Inventory purchases are debited to a Purchases account.
b.	Inventory records are not kept for every item.
c.	Cost of goods sold is recorded with each sale.
d.	Cost of goods sold is determined as the amount of purchases less the change in inventory.




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