2.
This assignment is part of the instructor designated points. A hardcopy must be submitted at the beginning of your class. Late submissions will not be accepted. The assignment is late (1) after the assignment is collected, (2) your professor asks if there are any more submissions, and (3) no one offers a submission. No assignment will be accepted by email or any electronic method. This assignment is due on Wednesday (February 26, 2014). Circle the letter of the best answer. This assignment is worth eight (8) points. GIVING OR RECEIVING ANY ASSISTANCE ON THIS ASSIGNMENT IS
CHEATING.
1. DMG Company sells goods during 2014 for $480,000. DMG had paid $360,000 for the goods sold during 2014. Inventory for DMG was $28,000 on January 1, 2014 and $32,000 on
December 31, 2014. What is the DMG’s days-to-sell ratio for 2014? (round to two decimal places) a. 30.42. b. c.
22.81.
24.83. d. e.
32.30.
24.33.
Inventory Turnover Ratio is Cost of Goods Sold divided by Average Inventory.
Cost of Goods Sold
(Beginning Inventory + Ending Inventory)/2
Days-to-Sell Ratio is:
$360,000
($28,000 + $32,000)
2
$360,000
$30,000
365 days/Inventory Turnover Ratio
365 days/12 = 30.42 days
Correct answer is A.
DMG Company had the following information for 2014:
Net Sales
Inventory, January 1, 2014 $ 40,000
Inventory, December 31, 2014 $ 45,000
Gross Margin (Gross Profit) $150,000
How much inventory did DMG Company purchase (net purchases) during 2014? a. $370,000.
$500,000
= 12
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3. b. c. d.
$355,000.
$348,000.
$341,000.
A multistep income statement would provide the following:
Net Sales
Minus Cost of Goods
Gross Profit (Gross Margin)
$500,000
????????
$150,000
Therefore Cost of Goods Sold must be $350,000 ($500,000 - $150,000 = $350,000).
To compute Cost of Goods Sold you would do the following:
Inventory, January 1, 2014
Plus Net Purchases
Cost of Goods Available for Sale
$40,000
???????
???????
Minus Inventory, December 31, 2014 ($45,000)
Cost of Goods Sold $350,000
Therefore Cost of Goods Available for Sale must be $395,000 ($350,000 + $45,000 = $395,000).
Net Purchases must be $355,000 ($395,000 - $40,000 = $355,000) and the correct answer is B.
Which of the blocks below contains only correct or true statements? a. LIFO does not affect Gross Profit, produces the lowest net income during rising inventory prices, and if used for income tax purposes must be used for book purposes. b. When inventory costs are steadily rising or steadily falling, the weighted average cost method yields a cost of goods sold and gross profit between that produced under FIFO and
LIFO. Income tax expense, cost of goods sold, gross profit, and net income are all affected by the choice of inventory method (i.e., LIFO, FIFO, Weighted-Average, Specific
Identification). c. The most accurate of Inventory methods is LIFO. If inventory costs are falling the FIFO produces the highest net income. LIFO will always produce are higher net income than
FIFO. The most practical inventory method is Specific Identification. d. If the inventory turnover ratio increases, the days-to-sell ratio also increases. If a firm chooses to use FIFO for income tax purposes it must use FIFO for book.
The correct answer is B.
A is not correct. LIFO affects Gross Profit. It does produce the lowest net income during rising inventory prices. If LIFO is used for income tax purposes it must be used for book (LIFO conformity rule).
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4.
5.
C is not correct. The most accurate inventory method is specific identification. If inventory costs are falling FIFO will produce the lowest net income, not the highest. LIFO does not always produce a higher net income than FIFO. If prices are rising LIFO will produce the lowest net income figure of all the inventory methods. There really is no most practical inventory method.
D is not correct. If the inventory turnover increases the days-to-sell ratio will decrease, not increase. A firm using FIFO for income tax purposes may use any inventory method they wish for book. Only LIFO has the requirement that if it is used for income tax purposes it must be used for book.
Which of the following businesses would be least likely to use the specific identification method? a. b.
A custom jewelry shop.
A fine arts dealer. c. d.
A luxury automobile dealership.
A retailer such as Wal-Mart.
D is correct. Specific identification is typically used for high cost, low volume items such as
expensive jewelry, fine art, and luxury automobiles.
Which of the following is most likely to experience an inventory write-down when applying the lower-of-cost-or-market method? a. An airplane manufacturer using a FIFO inventory method. b. A pharmaceutical manufacturer using a Weighted Average inventory method. c. A band-aid retailer using a Specific Identification inventory method. d. A video game retailer using a LIFO inventory method.
D is the correct answer. Video games are novelty items that typically have a short, but very high demand. Then their value goes down. LIFO would have the item on the books at its most recent cost which would also make it susceptible to a retail price decline.
A, B, and C are all less “trendy” than video games. Each uses a method other than LIFO which also makes them less susceptible to a sharp price drop. FIFO is the least affected by a price drop.
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7.
Use the following information to answer the next three (3) questions.
During February of 2014, DMG Company reported the following regarding one of its products.
Date
February 1
February 10
February 12
February 14
February 16
February 24
February 27
February 28
Transaction
Beginning Inventory
Purchase
Sale
Purchase
Sale
Purchase
Sale
Purchase
Units
1,000
500
400
600
500
700
600
400
Unit Cost
$6.00
$6.25
$6.30
$6.40
$6.50
6. DMG Company has a periodic inventory system and uses LIFO (Periodic LIFO). What is cost of goods sold? a. b. c. d. e. f.
$ 9,125.
$ 9,490.
$ 9,600.
$10,385.
$10,495.
$10,860.
C is the answer.
Total sales is 1,500 units (400 + 500 + 600 = 1,500 units). The cost flow is assumed to be:
Sold Inventory Purchased on February 28
Sold Inventory Purchased on February 24
Sold inventory purchased on February 14
Cost of Goods Sold
400 units at $6.50
700 units at $6.40
400 units at $6.30
$2,600
4,480
2,520
$9,600
DMG Company has a perpetual inventory system and uses LIFO (Perpetual LIFO). What is ending inventory? a. b.
$ 9,125.
$ 9,490. c. d.
$ 9,600.
$10,385. e. f.
$10,495.
$10,860.
E is the answer.
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8.
Total sales is 1,500 units (400 + 500 + 600 = 1,500 units). The cost flow is assumed to be:
Sold Inventory Purchased on February 24
Sold Inventory Purchased on February 14
Sold inventory purchased on February 10
Cost of Goods Sold
600 units at $6.40
500 units at $6.30
400 units at $6.25
$3,840
3,150
2,500
$9,490
Inventory Cost Remaining (Ending Inventory):
February 28 purchase
February 24 purchase
February 14 purchase
February 10 purchase
Beginning inventory
Ending Inventory
DMG Company has a perpetual inventory system and uses FIFO (Periodic FIFO). What is cost of goods sold? a. b.
$ 9,125.
$ 9,490. c. d. e. f.
$ 9,600.
$10,385.
$10,495.
$10,860.
A is the answer.
Total sales is 1,500 units (400 + 500 + 600 = 1,500 units). The cost flow is assumed to be:
Sold Beginning Inventory
Sold Inventory Purchased on February 10
Cost of Goods Sold
400 units at $6.50
100 units at $6.40
100 units at $6.30
100 units at $6.25
1,000 units at $6.00
1,700 units
1,000 units at $6.00
500 units at $6.25
$2,600
640
630
625
6,000
$10,495
$6,000
3,125
$9,125
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